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Canada relatively unscathed by Carillion demise, say experts

Don Wall
Canada relatively unscathed by Carillion demise, say experts

Industry stakeholders say the Canadian construction sector is being spared deepfelt consequences from the collapse of U.K.-based construction giant Carillion PLC.

A combination of factors is said to be mitigating the Canadian fallout so far, including the fact Carillion Canada has a distinct corporate identity from its U.K. counterpart and thus the announced liquidation of Carillion PLC on Jan. 15 is not having an immediate impact on the Canadian firm’s employees and contracts. Also, the firm’s demise was long forecast so its partners in Canada have already been taking steps to realign their affairs.

“I don’t think any of this is a great surprise,” said Clive Thurston, president of the Ontario General Contractors Association. “Information I have from our members that have been partners with them on projects is that they have been in talks with the Canadian arm for some time on how to deal with the situation when it happens.

“All in all, it is a disappointment, it certainly hurts the industry, but it is something we have been preparing for and I don’t see any reason to panic.

“Companies go down, it happens.”

Carillion PLC had announced last July it was in financial trouble and it had issued a statement saying it intended to sell its Canadian operation. Carillion PLC was forced go into liquidation in the U.K. after failing to reach a restructuring deal with its lenders. The announcement prompted a political storm in the U.K., where Carillion holds some 450 government service contracts.

 

Our employees, subcontractors and suppliers in Canada continue to be paid,

— Jody Johnstone

Carillion Canada

 

Carillion and its divisions employ 43,000 around the world. Carillion Canada announced its arrival as a major Canadian player with the purchase of Vanbots Construction in 2008 and today it employs 6,000, with strength in the construction and transmission sectors but mainly, and increasingly, in maintenance and support services including highway maintenance.

Carillion Canada has sales of approximately $1 billion annually in Canada and has been involved in 10 public-private partnerships (P3) projects in Canada according to the Canadian Union of Public Employees (CUPE) website. In Ontario, it currently is part of four teams that have alternative financing and procurement (AFP) contracts with Infrastructure Ontario.

Carillion Canada spokesperson Jody Johnstone issued a statement that said, “Carillion’s Canadian operations are not in liquidation and continue uninterrupted.

“Our employees, subcontractors and suppliers in Canada continue to be paid and we remain committed to delivering safe, quality services for our clients. Our Canadian leadership is currently assessing the situation and working with stakeholders to ensure continuity of operations.”

Johnstone confirmed, “Carillion Canada is a separate corporate entity from Carillion PLC.”

Thurston and other stakeholders have suggested this could mean an orderly sale of Carillion Canada’s assets moving forward.

Thurston said the consensus seemed to be the Carillion PLC demise was an isolated case and not indicative of future financial troubles in the domestic construction sector.

Noted opponents of P3s such as CUPE, Ontario NDP Leader Andrea Horwath and University of Waterloo professor Heather Whiteside all commented the liquidation highlighted the flaws of the P3 system.

Whiteside said, “Given that Carillion is typically a core member of Canadian P3 private partner project companies, any and all assets held by private partners may also be threatened by Carillion’s bankruptcy, as may be the integrity of related P3 contracts and sub-contracts.”

Infrastructure Ontario (IO) president and CEO Ehren Cory refuted the argument, saying, “The AFP model is designed to protect taxpayers in situations like this.”

Cory said in the specific instance of Carillion Canada, they only play a subcontracting maintenance role on the four IO projects they are involved in.

He said IO had communicated with the leaders of projects involving Carillion Canada to ensure continuity of service.

“We were talking closely to the three hospitals and the other building where they are doing maintenance to make sure that their services remain continuous and so far we have had no issues operationally,” said Cory.

He said IO has numerous safeguards built into its procurement model to ensure its AFP projects are not jeopardized when there is weakness in one link. As one example, he said, contracts are with project-co leaders, not with individual team members, so the project-co entity always bears responsibility for contract delivery.

“When you look at this systemically, we are asking ourselves, is our contract with the project company, the team, robust enough in submission to make sure they have mutual accountability and we feel really good about that,” Cory said.

Private lenders are on the hook to step in and fill any shortfall, he said, and contracts are performance-based with IO holding back a significant amount of money. If there is a need to rectify a shortfall, it is those funds that would be used, he explained.

The request for qualifications (RFQ) phase of procurement is where potential teams are tested rigorously.

“That is what our RFQ is designed for, it is to shortlist teams that have the technical and financial capacity to deliver projects of this scale,” Cory explained.

“We have a thorough financial due diligence at that stage on their financial levels. They have to get letter from banks, commitment levels.

“And there is a second screen at the RFP stage. For them to submit a bid, they have to have committed financing. So at that point they and their lenders are putting their money where their mouth is.”

The Daily Commercial News will continue to follow this story as more developments come forward.

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