Bosses lose £17m to balance books

BESIEGED construction group Carillion's decision to change the way it makes up its books has cost directors a potential £17m windfall. And it has heaped more embarrassment on the Government and its much-vaunted scheme to run public services with private money.

The former Tarmac group saw its share price tumble last week after it was forced to scrap an accounting method that flattered profits. The move came amid growing concerns among investors over the way companies account for Government contracts through private finance initiatives (PFI) and public private partnerships (PPP).

New rules mean that the costs of mounting a bid - successful or not - must be booked to the profit-and-loss account. They can run into millions of pounds. Carillion did this on contracts it failed to win. But it capitalised - or deferred - the cost of those that were successful.

The effect of the change will wipe £12m off the company's profits over the next two years. It also means that bosses will almost certainly lose their entitlement to a pay bonanza. In the case of non-executive chairman Sir Neville Simms, that means losing up to £3m.

Under the controversial scheme, directors would have collected a top payout if Carillion's share price averaged 275p in the six weeks to the end of August. No other targets were attached to the deal.

But just days before the start of the timetable, the shares were standing at 142p, having peaked at 227p in May.

Chief executive John McDonough, who is not in the pay scheme, described the accounting changes as 'frustrating, both for us and our shareholders'.

Carillion is the latest contracting company to adopt more conservative accounting practices as calls for greater transparency increase in the wake of the Enron and WorldCom scandals. Shares in

Amey, a major PFI contractor led by Brian Staples, hit a four-year low last week after it warned that profits would be hit by delays in signing PPP contracts to run part of the London Underground.

Its shares have been in freefall since it announced it would write off bid costs as and when they arose, rather than deferring them when it was named as preferred bidder. Capita, another big PFI contractor, is also under pressure to clarify its accounting policies. The outsourcing group, criticised by Home Office Minister Lord Falconer over its handling of a £400m contract to run the criminal records bureau, tried on Friday to reassure investors that all was well, promising a full statement on July 25.

But unless investor confidence is quickly restored, Capita's status in the FTSE 100 is under threat.

Though other PFI contractors are under scrutiny, including Serco, W. S. Atkins and Jarvis, Chancellor Gordon Brown is expected to reaffirm commitment to the principle in his spending review.

PFI and PPP contracts offer investors the prospect of strong earnings growth backed by longterm contracts.

But particularly after the Government's decision to take Railtrack-back into semi-nationalised ownership, investors are becoming wary of the political risks associated with such deals. For example, delays in finalising the part-privatisation of London's Tube network will cost Amey £1m a month after the deadline passed a fortnight ago.