Capita

Thursday 1st February 2018 Lords Chamber

Statement

12:23

[Lord Young of Cookham (Con)]

My Lords, with the leave of the House, I shall now repeat in the form of a Statement the Answer given by the Cabinet Office Minister, Oliver Dowden, to an Urgent Question in the other place. The Statement is as follows:

“Mr Speaker, I have been asked to comment on the stock market update issued by Capita plc yesterday and its potential impact on the delivery of public services. I completely understand that this is a matter of significant interest to many in the House, following the recent failure of Carillion, but I can assure Members that this is a different situation.

To be clear, this announcement was primarily a balance-sheet strengthening exercise, not purely a profit warning, and, indeed, as has been widely reported, the company has significant cash reserves on its balance sheet. We do not believe that Capita is in any way in a comparable position to Carillion. Further, Capita has a different business model.

The issues that led to the insolvency of Carillion will come out in due course, but our current assessment is that they primarily flowed from difficulties in construction contracts, including overseas. In contrast, Capita primarily is a services business and 92% of Capita’s revenues come from the UK. We regularly monitor the financial stability of all our strategic suppliers, including Capita. As I have said, we do not believe that any of them are in a comparable position to Carillion. The measures that Capita has announced are designed to strengthen its balance sheet, reduce its pensions deficit and invest in core elements of its business. Arguably, these are measures that may have prevented Carillion from getting into the difficulties that it did. Of course, the impact of this has been to reduce dividends and shareholder returns in favour of others: evidence of shareholders—not the taxpayer—taking the burden.

My officials met with senior executives of Capita yesterday to discuss the impact of the announcement. We continue to work closely with the company to monitor the execution of its plan, and, of course, to ensure the continued delivery of public services. We continue to engage with all of our strategic suppliers and make continuing assessments as appropriate as well as contingency plans where necessary. It would not be appropriate to discuss in any further detail contingency plans associated with particular contracts due to issues of commercial sensitivity.

The priority of the Government is the continued delivery of public services. This is exactly what we achieved with Carillion. In respect of the collapse of Carillion, there has been minimal disruption to the provision of public services following its liquidation. We are continuing to make sure that public services continue to be delivered and that has happened”.

12:26

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am grateful to the Minister for repeating the Answer. Clearly, this is a matter of concern in the light of the failure of Carillion. The Minister said that the Government do not believe that any of their strategic suppliers are in a comparable position, including Capita. I wonder whether he can tell me what risk assessments have been undertaken and whether the Government will publish their criteria? Can he also say which contracts the Government are in the process of considering granting to Capita and its offshoots at the moment? Has a Crown representative been appointed to the board of Capita?

I understand that Capita was given 154 contracts last year, and that only last week, in the light of the Carillion collapse, contracts were being brokered to Capita, even though the firm is clearly facing challenges. That given, is the Minister really assured that the current outsourcing programme and restriction, essentially, of contracts to a very small number of companies does not deserve a fundamental review? Can he give assurances about the workforce? Is he confident of the viability of Capita’s pension scheme? He will know that Capita runs a lot of public sector pension schemes, including Teachers Assurance; I remind the House that my wife is a teacher. Are the Government confident that, in the event of Capita failing, the pension schemes that it runs will not be affected?

Finally, I want to ask the Minister about the impact on SMEs—and I should declare that my stepson and brother-in-law both run SMEs that contract for government contracts. The Minister will know that many SMEs were badly affected by Carillion’s collapse. I looked at the study published by the NAO last year. It showed that, partly because of the cuts in departments’ commercial capacity, but more generally because departments would prefer to contract with a limited number of large suppliers, SMEs will essentially get contracts only as part of a supply chain managed by the prime contractor. Given that SMEs can be particularly vulnerable in those circumstances, I wonder whether the Government felt that they responded adequately to the NAO report and whether they are changing their procurement practices.

[Lord Young of Cookham]

I am grateful to the noble Lord for his questions.

There are two levels of risk assessment. One is at the point at which a particular contract is let. A risk assessment that is obviously proportionate to that contract is made at that point, making sure, for example, that there are adequate cash reserves to see the contract through. Then, at a slightly broader level, one monitors continuously the broad health of the company concerned. On that point, there is a Crown representative in Capita and has been throughout the period in question.

In a moment, I will come on to the question of diversity of supply. On pensions, we do not believe that there is a risk to the pension funds that are administered by Capita. We think that that is perfectly safe. On Capita’s own pension scheme, its deficit in June 2017, I think, was £381 million. A triennial review is going on. The outcome is widely anticipated to be a lower deficit. Part of the announcement yesterday was on further resources being put into the pension fund.

The important issue that the noble Lord raises on trying to broaden the base of contractors that work for the Government is a priority. We have a target of allocating I think 30% of public sector contracts to SMEs. Work is ongoing. There is a good question as to whether work that is subcontracted by a major contractor to smaller contractors scores or whether the smaller contractor should be, as it were, the prime contractor. This work is ongoing, but we take the point. We want to see a greater proportion of work going to SMEs.

On SMEs, Capita’s record on prompt payment is quite good. Capita generally paid 70% to 90% of all subcontractors within 30 days. It has introduced a new payment system and aims to pay 100% of subcontractors within 30 days. I hope that that will be of some reassurance.

On the comparison with Carillion, I tried to make the point at the beginning that the steps that Capita announced yesterday were perhaps steps that Carillion should have announced earlier. They were designed to strengthen the balance sheet, reduce dividends and make sure that the fate that befell Carillion does not happen to Capita. Of course, Carillion was exposed to some major construction contracts. Capita’s business model is quite different. If I have not answered all the noble Lord’s questions I will drop him a line.

[Lord Adonis (Lab)]

My Lords, does the noble Lord think it appropriate that Capita is paying any dividends, given the huge stress that it is currently under? Will he tell your Lordships whether the Crown representative, who is currently on the board of Capita, has been continuously in post for the last 12 months?

[Lord Young of Cookham]

On the first question, I understand that dividends have been suspended. That was part of the announcement. That, together with the rights issue of some £700 million, will mean that there will be some additional £900 million available in cash to the company. I will write to the noble Lord. I have asked about the Crown representative. I was assured that one had been in place. I will drop him a line on the specific question of 12 months, but there has been, and indeed is, a Crown representative on the board.

[Baroness Kramer (LD)]

My Lords, I hope that the Government will understand that they now have a very strong warning sign from both the Carillion and Capita events that they have been concentrating their outsourcing on far too small a group of companies, but also companies that, partly through their concentration, are too complex not just to manage, but to audit, or for the analysts or the credit rating agencies to get a grip on them. Will the Government strengthen the assessment capability for central and local government, and other parts of the public sector, so that they can comprehend the risk far more accurately at the prequalification stage, when contracts are to be let, and during the period of supervision? Picking up on diversification, which is certainly crucial to small entities, does he understand that diversification in and of itself is necessary to break the systemic risk that comes with overconcentration?

[Lord Young of Cookham]

On the noble Baroness’s first point about it being too complex, I believe that the chief executive officer himself, Jon Lewis, said yesterday that it is too complex and he wants to streamline it, hence the asset disposal and the streamlining of the operation.

I know that more personnel have been recruited within the Cabinet Office to beef up the Government’s capacity to supervise these contracts. I take on board the point that the noble Baroness made about making sure the Government have the resources to monitor the contracts we have placed with private sector companies.

We are at one on her final point. We would like to reduce the concentration of these big contracts to a small number of companies. We would like to broaden the base and see more companies bidding for these contracts and winning them.

[The Viscount Thurso (LD)]

My Lords, further to the answer that the Minister has already given about SMEs, now that we know the risks of a small number of contracts with some very big companies, will he accept that it is the procurement process that drives people to tier 1 contractors? Will the Government look at improving the procurement process so that SMEs have a better chance to get contracts?

[Lord Young of Cookham]

I agree entirely with the point that the noble Viscount has just made. If we are to hit our 30% target, we will indeed have to look at the procurement process in order to ensure that smaller companies are able to bid for and win these contracts.

[Lord Mackay of Clashfern (Con)]

In construction contracts, is a guarantee given by an insurance company or some other sufficient guarantor for the performance of contractual arrangements?

[Lord Young of Cookham]

I will need to write to my noble and learned friend on that. Basically, the Government pay for work that has been undertaken, so we do not pay in advance. Before a contract is let, though, detailed questions are asked about the financial ability of the company to carry out the contract. Whether they are actually underwritten and guaranteed by an insurance company is a more detailed question, the answer to which is not in my folder.