Open Gates - Tony Gates of Carillion (Roads and bridges special report)

Three years after heading up Carillion’s health PFI business in Canada, Tony Gates has returned to the UK to head up the group’s new roads business. He talks to Ross Pearman about what the future holds for Carillion in the roads market following the £313m acquisition of Mowlem.

Swapping the Rockies for the white cliffs of Dover, and Maple Syrup for Lyons Golden Syrup would be a huge decision for many.

However, for Tony Gates, managing director of the newly-formed Carillion Roads division, the opportunity to leave the company's health PFI business in Canada to return to the UK and drive forward Carillion's foray into the roads market after scooping up Mowlem in February was "too tempting an offer".

"It was an easy sell for me when they approached me about it", says Gates. I had spent a lot of time in the roads market, working on schemes such as on the M40, before I was offered the chance in Canada. I believe I have helped drive Carillion's highways maintenance market from around £30m per annum, to the £177m figure it is today.

"By taking up this new role I feel I can bring a clear focus and leadership qualities to a brand new business which didn't exist before. My focus: how you take a business forward by moving industry forward. I believe that having working so closely with clients and politicians in Canada, I can work with clients here to see what makes them tick and to look at promoting even better methods of procurement."

 To some people, Gates' position might be seen as an enviable one; likened to the glee felt by the manager of Chelsea Football Club when its Russian owner walked into the club's reception area on his first day waving a blank cheque book.

Minus the blank cheque book, since his appointment on 2 May Gates has taken on a newly-formed business unit in Carillion Roads, which comprises all of Carillion's most prized possessions; its Highways Agency (HA) interest in both highways maintenance and early contractor involvement schemes (ECIs).

On top of this, Carillion Roads has already doubled its order books by inheriting three early contractor involvement schemes (ECIs) worth £350m (see table below) an area in which Carillion was very keen to increase its prominence prior to Mowlem's acquisition. To round it off, the administrative headache of integrating hundreds of staff into his division, following such a high-profile acquisition, has been minimised due to the fact that only 20 project staff were transferred over to the unit as the schemes were in the pre-construction phase.

Future prospects

So already on a sure footing, what does Gates feel about future prospects for Carillion in the roads market?

"The strategic-fit analysis that we carried out prior to the acquisition of Mowlem showed that it fitted Carillion perfectly, almost to 99%. There was only one area of duplication on building work for Morrison supermarkets," explains Gates.

"On roads it meant that we now had a strong share in the ECI market, which is somewhere we had not been as strong as we would have liked. We now have a 16% by value share of the HA major projects market, which puts us in the mid-table position. We want to be higher, of course.

"In the past, our attentions had been turned to maintenance, which we are very strong in, and we churn out £100m per annum for the HA on maintenance areas 5, 8 and 12. In the local highways maintenance market we churn out about £50m per annum. In contrast, Mowlem was not involved in highways maintenance at all, which makes this a nice fit."

Gates denied there were any issues with any of Mowlems highways contracts, despite £90m in write-downs for other Mowlem contracts such as the Dublin Port Tunnel and Exeter Schools PFI contracts.

While wiping Mowlems slate clean, Carillion has sent out a strong message that it will not go for lump-sum civil engineering contracts.

"The ECI schemes we took on were very much in their infancy and at post-construction phase," says Gates. "However, what we did recognise when we took over Mowlem was how quickly it had grasped the ECI model. The only negative thing we found was that the people within Mowlem had been bruised by the financial instability in the company and they needed some reassurances from us. I believe we have given them that."

Gates could also find nothing to support industry suggestions that Mowlem just went for any roads project going to keep order books bulging. They have secured a lot of work, which doesnt seem to suggest it had been overstretching itself.

Significant opportunities

Going through the new combined orderbook for highways (see table), Gates does seem to make sense when he talks about the opportunities Carillion now has after absorbing Mowlem.

Without the acquisition, Gates believes it would have taken "one or two years" at best to reach the growth it has achieved now in terms of roads contracts and increased bid potential through extra resources.

"The growth timeline may have been even longer in other parts of Carillion," he adds. !The biggest constraint is getting the right people."

In its new home Carillion Roads sits alongside Mowlems old regional civils division, which has now been called Carillion Regional, and is headed up by Mowlem's former civils managing director Peter Clay.

Carillion Roads is one of the 15 business units that make up the Carillion Infrastructure Services and International division, headed up by Roger Robinson.

This, according to Gates, provides much "greater synergy" and adds more value to the group.

"For example, on our MAC (managing agent contractor) contracts we would have had to subcontract out any works up to £1m," says Gates. "Now we can pass the works on to the regional teams, which means that more of the value comes back to the company."

Service provision

Gates adds that the single service provision now on offer, which works in opposition to the "silo mentality" operated by some main contractors, offers greater assurances to its present and future clients.

"We now target clients just once as Carillion is able to provide all expertise. Once we have determined what is required for the particular contract, it will then be passed on to the relevant Carillion team. There is no internal competition for workloads in Carillion."

Looking to his future strategy, Gates outlines four areas of attack, although he is reluctant to set out growth targets.

The first of these are HA and local authority ECI contracts.

"It is easier to target HA work as there is a work stream of schemes planned, with about 10 schemes due to come on line. We will look to bid for three or four as we want to keep our pipeline maintained. However, you don't want to stretch our resources and bid costs."

The same rules apply for local authority ECIs, although Gates admits that it is harder to predict workload levels coming out of councils.

"The picture is not as clear with councils as with the HA, he explains. At the moment, we have two local ECI schemes, which we have decided to keep within the regional business because of the strength of Mowlem's teams regionally.

"That position might change in the future and local ECI schemes could come into Carillion Roads. There is fluidity with this."

The second area of interest is HA maintenance.

Although declining to confirm whether Carillion would be going for the HA's £500m Area 10 MAC, the only maintenance scheme being tendered this year, [in fact, since the interview, Carillion has been shortlisted] Gates wants Carillion to get at least one more contract to add to its current portfolio; it currently holds about 10% of the HA market £1bn per annum spend on maintenance.

On the issue of the HA's often quoted concerns on contractor market share, believed to be 25% of a company's turnover, Gates believes that the Mowlem acquisition has not impeded Carillion's chances.

"We are still winning work and we have heard nothing from the HA to the contrary," he adds.

To set matters straight, Gates reveals that the HA had been very happy with the Mowlem acquisition and the only assurances it wanted was that it would be interfacing with the same individuals on projects that it had worked with before to ensure consistency. "We have no plans to change that," he adds.

Local authority maintenance

The third area for Carillion's strategy is local authority maintenance, with Gates looking to add to the groups current contracts in Warwickshire, Wolverhampton, Surrey and Bristol.

"The local authority maintenance market has the potential to be a large market, which works out at 750m a year, but the work streams are inconsistent as no one council follows the approach of another," explains Gates.

"We are now finding that schemes are getting longer in length and at the moment there are only two or three schemes, at a peak, available each year.

"However, on the positive side, there is a large area of works for our regional civil business, which is strong in civils work such as structures. This comes back to the adding-value approach."

The final area of attack for Carillion is framework contracts. These include technology framework contracts for the HA, such as providing construction infrastructure or telecoms components, as well as value engineering and design-led contracts for local authorities.

Looking forward, Gates believes the "surface has only been scratched" by the combined efforts now being offered by the new business units.

He makes a brief reference to the PPP market on roads, where councils will be looking for total service provision from the private sector.

"I cant go into details, as it is still early days, but the £500m Cardiff PPP, which Mowlem is preferred bidder on, opens up a lot of opportunities for us in our new form."

On the subject of PPPs and PFIs, Gates remains bullish of Carillions chances in the bidding for the HA's 25-year, £4.5bn M25 DBFO, and adds that although the company didn't go for the £2.2bn Birmingham City Council highways PFI, which surprised many as it was on Carillions doorstep, he wouldn't rule out bidding for any similar schemes as and when they crop up.

"We have to put all our bid options through the board, where they are assessed accordingly. In no way is funding restricted as Carillion is a cash positive company. However, we can't go for schemes that don't offer a good return. That goes for any part of the business. Although not maybe on the scale of the Chelsea revolution, it would be true to say that following Mowlem's multi-million pound arrival in the dressing room, Gates and his team have high aspirations for their new line-up.

Carillion's roads portfolio in the UK

PFIs (where Carillion holds equity)

• £100m A55 Llanfair to Holyhead
• £82m A249 Iwade to Queenborough improvement, just opened nearly two months early

HA ECIs budget figures include other HA costs (ie not just construction)

• £174m M6 extension Carlisle to Guards Mill currently entering Phase 2, completion Q1 2009
• £112m A57/A628 Mottram to Tintwistle currently in Phase1, public inquiry scheduled for early next year
• £48m A5117/A530 Deeside Park junction improvements currently in Phase 1, scheduled to start Phase 2 September 2006, completion Q4 2008
• £10m M25 junction 28/A12 Brook Street improvements currently in Phase 1, scheduled to start Phase 2 early 2007, completion Q4 2007
• £429m M1 widening junctions 10 to 13, plus A5/M1 Link (in JV with Costain), currently in Phase 1, scheduled to start on site with Phase 2 in Q4 2008, completion Q3 2011

Current Frameworks

• HA Technology Framework (2002 to 2007)

Local authority ECIs budget figures include other costs (ie not just construction)

• £20m Rugby Western Relief Road, currently in Phase1, scheduled to start Q1 2007
• £56m A391 Cornwall, currently in Phase 1, preparing for PI
• £12m Brierley Hill Parallel Route for Sandwell & Dudley, currently in Phase 1 scheduled to start Q1 2007

HA road maintenance (100m per annum including Carillions share of JVs)

• Area 5 term-maintenace contract (2001 to 2007)
• Area 8 MAC (as CarillionURS) (2001 to 2008)
• Area 12 MAC (as CarillionWSP) (2003 to 2008+)
• M40 DBFO O&M
• A249 DBFO O&M

Local authority roads maintenance (£45m per)

• Warwickshire County Council (2004 to 2011)
• Bristol (2000 to 2008)
• Surrey County Council (2003 to 2008+)
• Wolverhampton City Council (2005 to 2012)

[Contract Journal, 26 July 2006, pp. 22-23)