The fall of Paris

The Jarvis story has entered construction folklore.

It’s a dramatic rags-to-riches-to-rags story: a suave Iranian by the name of Paris Moayedi takes over a relatively minor construction firm worth £3.6m in 1994 and turns it into a £1bn hegemon in rail and PFI schools. The fall of Jarvis begins in 2002, when seven people are killed in a train derailment at Potters Bar in Hertfordshire. The crash was caused by a fault in a piece of track for which it was responsible. Jarvis’ reputation plunges and by the end of 2003, Moayedi resigns. Soon after, problem construction contracts are revealed, profit warnings issued and businesses sold. At one point the share price plunges to barely 3p – in the late 1990s it was around 650p. From great heights it nearly falls off the brink. It is only in September 2005, when shareholder approval is given for a financial restructuring that includes a debt-for-equity swap with creditors, that Jarvis starts to be taken seriously again.

But the full, behind-the-scenes story has not been told until now: how in 2002 and 2003 the main and operational boards scrambled around to shore up the company’s finances and polish its tarnished image. This is a story that includes secret financial projects to improve the cash position, with splendid names such as Jupiter, Samson and Delilah; Caribbean excursions; rashly issued public statements on Potters Bar that looked callous and calculated; an internal public relations team that targets senior government ministers to help improve its image; arguments over bonus payments; advice that banks should be warned about potential breaches of covenant; board-level spats over the philosophy of the business; and the meeting meeting that led to the downfall of Moayedi. It also shows the inherent dangers for contractors bidding on PFI refurbishment contracts.

It’s an intriguing story, but also an important one. In early 2002, Jarvis was seen as a respectable company responsible for maintaining a fifth of the country’s rail network – 4000 miles of track – and for more than 100 schools. In reality, however, the company was starting a long fight for survival.

2001/02: Build-up to Potters Bar

To the outside world, things were going swimmingly. Jarvis was bagging contracts left, right and centre and more than doubling its interim profit to £17.7m. Within the company, the mood was a little different. “In the six months prior to Potters Bar, a realisation set in at just how bad the construction division was,” says a Jarvis source. “It was bleeding us dry.”

The market knew that Jarvis had been phenomenally successful in the PFI market in 2000 and 2001, winning 19 major contracts including schools work in Wirral, Kirklees, Liverpool and Brighton and a £25m hospital for Whittington NHS trust in north London. The number of PFI contracts the company held had grown from six before 2000 to 25 by the end of 2001. Staff numbers increased fivefold as a result and because construction was complete on some schools, which were moving to the more labour-intensive operational phase.

People within Jarvis soon realised that six of the new schools contracts were going to prove problematic. They had been underpriced. This was because they included large chunks of refurbishment work. Bids had been based on either estate surveys provided by local authorities that were two to three years out-of-date or on Jarvis’ own surveys, which only took a sample of the schools and projected the state of the rest of the buildings. “There was a huge risk taken on the condition of the existing estates,” says one Jarvis source on the local authorities’ surveys. “There was too little due diligence,” says another source on its own surveys.

These deficiencies meant Jarvis had to fork out extra cash updating its designs for the schools. This was at a time when the company already had to find more money to pay its growing workforce.

Jarvis needed to stem the losses so in early 2002 it privately looked at a rights issue. It is understood that it hoped to raise about £50m by going to the market. The trouble was that to raise the cash, the company would have to show a working capital statement and these figures would include cash outflow for the coming three years. The statement would therefore indicate that the £50m raised would be directly sunk into the company’s construction losses and, moreover, that Jarvis would not be using the money to fund further expansion. It would be shoring up the previous year’s growth drive. The move was looking unlikely.

Mid-2002: The rail crash

The rights issue went completely off the radar on 10 May 2002 when the Potters Bar tragedy occurred. As the share price fell, so did the amount of cash it could raise from the market: if a company has 100 million shares valued at £3 and wants to raise £30m it only needs to issue 10 million new shares; if its price falls to £1 it must issue 30 million new shares, which could easily result in the company’s ownership changing hands.

Publicly, though, the problem was Jarvis’ reputation. It had been the leading light in rail maintenance and track renewals. After the privatisation of British Rail in the mid-1990s, Moayedi had bought NIMCO, British Rail’s maintenance and renewals business, and two other maintenance companies, Fastline Group and Relayfast. Friends and rivals alike described the purchases – particularly NIMCO – as Moayedi’s “masterstroke”.

The rail division would no longer shine with the same gloss after the seven deaths were found to be the fault of a length of track maintained by Jarvis. The perception was that Jarvis hadn’t done its job properly. Moayedi was 30 minutes into a flight to his holiday home in the Cayman Islands when the train derailed. He was planning to visit his ill sister, who was convalescing at his holiday home. He caught the first available flight back to London about 48 hours later.

Jarvis released a statement upon Moayedi’s return. In it Jarvis stated that “sabotage could not be discounted”. But to many in the media, this looked like a heartless company trying to pass the buck. To make matters worse, Detective Superintendent Paul Crowther, the senior investigating officer at the British Transport Police, later commented: “There is not a shred of concrete evidence of sabotage or vandalism here.”

Jarvis raised the best part of £46m through refinancing, but they ran out of things to refinance

Source close to Jarvis deals

Jarvis’ response to the derailment might have looked calculated, but it was the result of a frenzied board meeting held within two hours of Moayedi’s return to the UK. In the words of an attendee, it was “fraught with trauma and tension”. To this day, Moayedi is known to regret making the statement, yet privately he seems to have genuinely believed that sabotage was the likely cause. In late May 2002, he told colleagues that an “unauthorised adjustment” – meaning sabotage – was the derailment’s probable cause.

Media hostility meant the boss would have to keep his opinions to himself, but privately Jarvis had reviewed photographic evidence taken within 24 hours of the crash and was convinced that sabotage was a very real possibility. The company even contacted the British Transport Police and Mike Weightman, head of the Health and Safety Executive’s Potters Bar investigation board, in May and June, asking them to pursue the sabotage theory.

Whatever the company’s belief, it realised that it had got its PR strategy wrong. Building has learned that in July 2002, chief operating officer Kevin Hyde set up the Potters Bar issues management team. Two of its principal aims were to reduce media coverage and brief people who might be sympathetic to help influence the perception of the company. Hyde’s team wrote to transport secretary Alistair Darling, met transport minister John Spellar and talked over the phone with chief secretary to the treasury, Paul Boateng.

Not that the team had much impact – Jarvis’ reputation was at rock bottom. In September, Stephen Pollock-Hill, the chairman of the Hertfordshire region of the Institute of Directors, said in a monthly newsletter that Jarvis had made record losses and given bonuses to its bosses, and confused Potters Bar with the earlier Hatfield crash. All the claims were incorrect, so Jarvis got its lawyers involved and received a retraction, but the damage was done.

2002/03: Reputation

On the surface, Jarvis was still trying to smile, announcing a 17% increase in pre-tax profit for the six months to 30 September 2002. Yet in that same month, senior figures noted that the company’s PFI work was suffering financial shortfalls as a result of schools delays.

There was little new PFI work to cover the shortfall: in the wake of Potters Bar, Jarvis’ success rate plummeted for 18 months. Only four projects were won in 2003, two of which were later rescinded. This lack of wins could be dangerous for any company, but the impact on Jarvis was greater than was recognised at the time because of its aggressive business model. When a company wins a PFI contract, it receives what is known as a “development margin”. This is cash paid upfront, amounting to, say, 5% of the value of the contract. Usually, this cash would be spread throughout the 25- to 30-year life of a PFI contract, as a company would have a unified PFI division. Jarvis was broken up into bid, build and facilities management teams. The lack of co-ordination meant it was simply spent straightaway, and was therefore not in the bank to help cover any of the contract’s cash problems in the future.

Another problem was that the development margin is meant to cover the bid costs for the project won, plus two PFI projects that a company has probably failed to snaffle: a one-in-three bid/win ratio is fairly typical. In 2001, Jarvis’ strike rate was so high it had the costs of few failed bids to cover, meaning the development margin money was rolling in and could instead help mask the losses that it had started to incur. But with so few new contracts being won in late 2002, there was little development margin cash to disguise the losses. “The high strike rate,” says a senior Jarvis source from the time, “was flattering the company’s finances.”

From a position of frenzied activity – it is understood that Jarvis had even considered approaching architect Aukett so that it could have an in-house design team – it was looking at a situation that was gradually slipping out of control. Senior figures started ruing business strategies and tactics that were years old, such as the £170m purchase of the Streamline road maintenance business in 1998. A source close to Moayedi says he believed Jarvis had paid £30m-40m over-the-top for it.

Early to mid-2003: Project Jupiter

To the outside world, 2003 was always going to look like a busy year for Jarvis, as it prepared to start work on a £1.8bn London Underground public-private partnership as part of the Tubelines consortium. But behind closed doors, the company was working even more furiously to plug its cash problems. It went on a massive refinancing drive. Typically, contractors refinance a PFI project once it is well into the operational phase – when the job can be shown to be a less risky asset and therefore secure better loan rates from banks. But Jarvis needed that refinancing cash as soon as possible, even if it meant not getting the best deals. It was refinancing some contracts before construction was even finished. A source close to the deals claims: “Jarvis raised the best part of £46m through refinancing in 2003, but they ran out of things to refinance.”

And so Jarvis’ accountants started work on Project Jupiter. The company likes these codenames: one proposed project with Marconi was entitled Project Mast. Jupiter dusted off the rights issue proposal from the previous year. Although it had little left to refinance, the company believed it had already raised just about enough cash to cover its losses in construction. But the losses kept coming. “The working capital statement showed that £50m would never have been enough to cover outflow. It would have just been used up – losses were much worse than that,” the source adds. The share price was also fluctuating wildly, making it difficult to predict just how many shares it would have to issue to raise any cash.

Seemingly not ones to give up, Jarvis executives took one last look at a rights issue in the summer of 2003, just after the share price had hit a peak for the year of about 370p. It was codenamed Project Jupiter II. Jarvis hoped to go to the market by 9 September to raise cash by 30 September, the last day of its interim reporting period. The date was important, as it would mean that the company’s cash position would look healthier when it announced those results. However, the share price was falling back towards 300p and the working capital statement was looking no better.

Rumours of delays on PFI schools were starting to circulate but Jarvis’ problems were much more serious than outsiders suspected: financial consultants advised the company to consider approaching its banks to warn them of potential breaches of covenant by 30 September. Moayedi disagreed, arguing that any discussions with banks could easily be leaked. This would damage Jarvis’ share price, plus the company had been separately advised that it did not have to warn the banks if it felt it could avoid a breach, which it subsequently did.

Autumn 2003: Strife in the boardroom

The boardroom started to divide; one battle was over whether Jarvis should pay bonuses

Sources say the company gave up on the initial plan for Jupiter II within three to four weeks of work starting on it. Instead, Jupiter II turned into a proposal to sell-off major assets. The man behind the idea was Hyde, who had replaced Moayedi as chief executive in May. Moayedi had become chairman, succeeding Lord McGowan, who had died that month.

Like any company, Jarvis always presented a united front, but Hyde’s proposals started to divide the boardroom. Hyde wanted to see 13 non-core businesses sold and cut running costs, thereby raising £130m. The sales would include its road products division and half its stake in the Tubelines London Underground consortium. Running-cost savings would include reducing mobile phone use and cutting the number of company credit card holders by up to a half. An alternative suggestion, which was dismissed, was to sell the rail division and become a PFI investment business.

It seems clear that this was an alien style of business to Moayedi. Although he thought the sale of the roads business could boost Jarvis, he essentially disagreed with Hyde, arguing that the company’s growth had been a result of venturing into new markets rather than tying itself to just a few core businesses. Hyde told colleagues that he wanted to “turn the tap off” venture spending.

Moayedi hated being chairman. Everyone who knows him says the same thing: “He likes to be the hands-on boss.” Hyde had the opposite problem – his senior staff still regarded Moayedi as the boss.

Tensions grew on 16 September when Jarvis publicly accepted responsibility for a derailment at King’s Cross – there were no injuries but timetables had to be torn up. A smug press felt Jarvis was finally taking responsibility for its actions. In fact, Hyde had decided Jarvis should avoid the PR problems it experienced with Potters Bar and accept responsibility straight away.

The problem was, no blame had been formally established – it turned out that the incident wasn’t Jarvis’ fault. Moayedi, who was on holiday when it occurred, is understood to have fumed to colleagues on his return that the concession was “premature” and was yet another example of the company’s “inadequacy in respect of PR issues”. One former colleague recalls: “Moayedi was pretty irritated when he came back.”

The boardroom was starting to divide; one battle was over whether Jarvis should pay bonuses for the period relating to Potters Bar. Jarvis’ chairman at the time of the crash and McGowan’s predecessor, Colin Skellett, made a statement shortly after indicating that Jarvis would not pay out until the company had been cleared of negligence. Others, such as Steven Norris, a non-executive director and former Tory transport minister, argued that no obvious liability had been established, so the payments should be made. Those against the idea won the argument in 2003, but the payments were made a year later, to a wave of negative publicity.

Late 2003: End game

While operational heads were coming up with more secret projects – Samson, Delilah, Romeo – to help buttress the long-term financial aims of Jupiter II, two of the main figures, Hyde and Norris, were locked in battle with the third, Moayedi.

On 30 October, the City was busy making its final forecasts for Jarvis’ results on 25 November. What it didn’t know was that a boardroom coup was taking place that very afternoon. It is understood that Norris met his fellow non-executives for lunch, ostensibly to talk about the company’s finances. Then, over coffee, Norris dropped the bombshell: Moayedi had to go and the executive directors shared this view. Reluctantly, his fellow non-executives agreed. Some time in early November, Norris told Moayedi – who would have retired the following year anyway – that he should resign. Norris was his obvious successor.

There was one barrier to Norris’ appointment: he was standing as the Conservative candidate for mayor of London in 2004. As Jarvis was involved in the Tube PPP, it was an obvious conflict of interest if he won and a high-profile political campaign would drag Jarvis back into the media spotlight. Apparently, Hyde was asked if he felt comfortable with this position. He said he was, although Norris was installed as “interim” chairman and would only become permanent if he lost the mayoral election.

The appointment was ratified at a 5.30pm board meeting the evening before Jarvis’ interim results on 25 November. Nearly two years of desperate attempts to salvage the company from disastrous contracts and PR fiascos had cost Moayedi his head.

The resignation also seemed to confirm rumours of the company's financial problems. It would be another two months before Jarvis would finally start telling the world just how badly it was faring: in January 2004, it released a profit warning stating that its accommodation services division would take a £12m hit. For two years Jarvis had ridden the roller coaster, but this had been in private. For the next two years it was to suffer the twists and turns in the public eye: there were further profit warnings; Norris would lose the mayoral election; Hyde would finally come out with a version of Jupiter II in July 2004; director after director would resign – including Hyde – until new chief executive Alan Lovell would come in and finally stabilise Jarvis, facing up to the £304m debt that had built up, by swapping it with its creditors for equity stakes in a slimmed down, refocused company.

Moayedi has faded from public view and tries to keep out of the media spotlight. Always an enigmatic figure, he has snapped up a few small companies, such as Oxfordshire-based waste treatment firm Tectronics and a shell company called Glintock from a former Jarvis colleague, Harvey Bard. He still works from his swish office in Sackville Street in central London, and retains his enthusiasm for curry and champagne.

For the past two years the public has been able to keep close watch on the Jarvis as it fell from grace and then started the long process of picking itself up again. But for the previous two years the full story of Jarvis’ plight was known to only a few, until now.

Moayedi and Jarvis declined to comment for this article.