Carillion’s collapse – not much damage to the UK airport business, or is there?

The UK’s second largest construction company went into liquidation in the week commencing 15-Jan-2018 with debts and pension liabilities totalling in the order of GBP1.5 billion or more.

Carillion is probably better known for facilities management and construction services in other sectors, often contracting through maligned methods such as the private finance initiative. PFI offers the opportunity to cash-strapped municipalities or firms to have built new infrastructure which they lease from the principal, repaying capital and abundant interest over a fixed period and committing to sometimes punitive service contracts. It is frequently overlooked though that such infrastructure might not even get built at all without PFI.

Carillion’s exposure in the transport sector is quite high. Having already completed ‘High Speed 1’, the rail line from London to the Channel Tunnel in 2007, it was set to work on two sections of HS2 (London to the Midlands and North of England) in a joint venture, with the main construction work to start this year or next.

In the airport sector Carillion worked on London Heathrow’s Terminal 5, which was completed in 2011. However, latterly its exposure was limited to a GBP80 million contract from the airport in 2014 to provide facilities management services and maintenance for Terminals 3 and 5. The contract was due to run until Mar-2019. These services will continue during the period of liquidation while alternative arrangements are made for the long-term.

It is in Manchester where the big questions arise. Airport City Manchester is a GBP800 million expansion of Manchester Airport that is under construction, intended to stimulate the local economy by creating on-site logistics, manufacturing, office and leisure facilities.  It is the first such example of an airport city in the UK with construction undertaken by a joint venture of Beijing Construction Engineering Group (BCEG) and Carillion.

Much of the investment is coming from BCEG, one of the largest single investments in Britain from China. It arose out of a MoU on infrastructure co-operation signed in 2011 and endorsed by the visit of President Xi Jinping in 2015. It is the first major infrastructure project in the UK with the involvement of a Chinese company in the form of equity investment. It includes a GBP130m ‘China Cluster’ – providing a base for Chinese businesses arriving in the UK.

Presently, the Airport City management is taking a cautious line. The Chief Executive of MAG (Manchester Airport Group) Property said, “the Airport City Joint Venture is focused on working with our investors and occupiers in the planned next phase of delivery to ensure that their requirements continue to be met…. the current construction of the Airport City development is being undertaken by Beijing Construction Engineering Group International and is not affected by the issues at Carillion.”

But of course. Carillion’s expertise as a facilities manager would have come later. Interestingly, the Carillion page on the Airport City’s website (‘Meet the Team’) has been taken down. That suggests that Carillion staff will not have a continuing role to play as it still will have in some other public sector projects such as hospitals (MAG is 64.5% owned by the City of Manchester and other local municipalities and 35.5% by Australia’s IFM Investors).

The airport’s main task now is to attract another company to fill the void, one that is prepared to commit to the same degree. And, to assuage the concerns of BCEG and IFM. The latter really came on board on the expectation that MAG could win the bid for the additional runway in southeast England (at Stansted Airport which it owns). It didn’t.

In fact Manchester as a whole will get a bashing as a result of Carillion’s demise with projects such as Angel Gardens, one of the UK’s largest build-to-rent residential projects and major office developments such as First Street left in limbo.