Marillion - Promo-Photo Collection 08

So Carillion has gone bankrupt. The interesting thing is why.

When I first saw the news I misread the headline and supposed the – rather tedious – 1980s ‘new prog’ rock band Marillion had gone under. That seemed like good news to me.  My God: that hair.

Sadly, it was Carillion, a British construction and services company. That was not so good – 43,000 people (20,000 of them in the UK) earned their living from them.

There has been a predictable amount of hand wringing. First – understandably – because of the jobs. Second, because the pension scheme appears to be underfunded. Third, because of the catastrophic knock on effect on hundreds of innocent and hapless sub-contractors.

Then there is the question of whether – as a beneficiary of state largesse in the form of huge contracts for hospitals, roads and the like – the government is responsible. Were Carillion really a private company? Etc.

But the question that bothered me was this: how did they manage to bankrupt themselves despite the flood of contracts?

An old friend and colleague (made cynical by decades of seeing the worst craziness of the financial system from the inside) explained it to me thus:

“…you have a business that puts 30 year deals on the books (in competition) and convinces its accountants that the NPV of the costs is less than the NPV of the revenues (based on the appearance in the future of some magical technology that makes fixing railways less manual presumably) and reports profits as a result (paying its top executives well, naturally). If it appears your previous assumptions were a bit off, you simply print more deals to keep everyone happy.”

Of course, when you start to have contracts that do not pay as well as predicted and – in addition – you have chunky-monkey debt levels you get a nice little implosion.

Layers of contracts; NPV’ed profits; massive debts; eventual catastrophe – where have seen this before?

Well, first of all we saw it during the late, unlamented banking crisis (ten year anniversary coming up).

But I think a closer analogy might be the collapse of Enron. Carillion is like Enron with diggers.

Hopefully the analogy is restricted to overly ambitious growth and loads of leverage.  Because if it extends to dodgy accounting and to gaily whirring shredding machines, this story might just be starting.

Watch this space.