Interserve

Oliver Dowden Excerpts

Monday 18th March 2019 Commons Chamber

[Christian Matheson (City of Chester) (Lab)]

(Urgent Question): To ask the Minister for the Cabinet Office if he will make a statement on the major Government supplier Interserve entering administration.

[The Parliamentary Secretary, Cabinet Office (Oliver Dowden)]

I have been asked to respond on behalf of my colleague, the Minister for the Cabinet Office and Chancellor of the Duchy of Lancaster.

As I have said repeatedly to the House, the Government are not responsible for decisions taken by companies in the private sector. What the Government are responsible for is the continued delivery of public services, and I assure the House that has happened in this case. Schools continue to be cleaned, roads continue to be repaired and improved, and services in Government buildings continue to run as normal.

I reassure hon. Members that nothing in Interserve’s refinancing will affect the delivery of public services. No staff have lost jobs and no pensions have been affected. The company has executed a contingency plan that it had prudently developed in case shareholders rejected the proposed refinancing deal. This was a pre-agreed transaction, known as a “pre-pack” administration. Hundreds of pre-pack administrations are performed every year, including by well-known companies. It is a well-established and normal process, typically used when a shareholder is blocking a business’s restructuring.

To be clear, the operating companies responsible for the delivery of all Interserve’s services, public and private, have remained wholly unaffected. As a result of shareholders failing to reach agreement on the proposed refinancing, the parent company—Interserve plc—was put into administration. The operating companies, the companies that actually deliver the services, were then almost immediately purchased by a new company, Interserve Group Ltd.

This new company has been considerably strengthened. It now has a much stronger balance sheet, £110 million of additional cash and a greatly reduced debt burden. It is in taxpayers’ interest to have a well-financed and stable group of suppliers, so this has been a positive outcome for the company’s customers, supply chain and employees.

I am clear on the benefits of outsourcing. Working with the private sector allows us to access expertise and economies of scale that can help us to deliver more innovative public services at better value for the taxpayer. As I have said before, this Government are driven by what works, not by political dogma, and the evidence is clear. Research shows that outsourcing delivers savings of between 20% and 30% compared with bringing services in-house.

However, we recognise there is more we can do to improve how we outsource. We have learned from the collapse of Carillion, and we are implementing changes to our procurement and commercial processes, as the Chancellor of the Duchy of Lancaster and I have set out in several speeches. For example, we have published “The Outsourcing Playbook”, which was developed with industry and outlines a range of measures designed to ensure that outsourcing projects succeed.

We are now asking suppliers of critical contracts to provide detailed information to help to mitigate any risk to service delivery in the rare event of corporate failure. These “living wills” are now being piloted by five strategic suppliers, including Interserve. We are taking action on prompt payment, including excluding suppliers from Government procurement if they cannot demonstrate prompt payment to their supply chain. We are also taking steps on embedding social value in Government procurement, and I launched the consultation last week.

These sensible and prudent steps will help us to ensure that we get procurement right first time, that we identify and remedy financial risks to Government services and that we manage taxpayers’ money in a way that achieves the best value for money. Indeed, the fact we had ongoing engagement with Interserve throughout this process, through our Crown representatives and the Government commercial function, demonstrates the strength of the Government’s approach to managing our strategic suppliers.

Once again, although the corporate structure of Interserve changed on Friday, I reassure all hon. Members that public service delivery remains wholly unchanged. No jobs have been lost, no pensions have been affected and no services have been disrupted.

[Christian Matheson]

Mr Deputy Speaker, would you pass on my thanks to Mr Speaker for granting this urgent question?

The slow-motion car crash that is the Interserve crisis seems finally to have come to a dreadful conclusion. Let us first remember the company’s 45,000 employees and hundreds of small subcontractors living with uncertainty today. In June 2018 the Cabinet Office gave Interserve a red rating, which indicates:

“Significant material concerns for Cabinet Office Commercial Relationships Board to consider High Risk designation.”

That followed profit warnings issued over the previous year. Despite this, Interserve continued to receive public sector contracts worth hundreds of millions of pounds, including from central Government—a situation remarkably similar to the problems with Carillion just over a year ago. According to the GMB union, the largest of those contracts is worth £66.7 million and was awarded by the Foreign and Commonwealth Office in August.

What checks did the Government make to ensure the contracts they were signing were being given to a company capable of delivering them? Can the Minister also confirm reports that his Department drew up secret plans to nationalise some of these contracts—in other words, to take them back in-house—should Interserve fail? Incidentally, we would support such plans in principle. If such plans were drawn up, why did contracts continue to be awarded to a company that Ministers knew was struggling and was possibly unable to fulfil them?

Will Ministers now activate those plans? If not, what steps will the Government take to ensure continuity of services, especially if parts of Interserve’s business are sold off? Among many other things, Interserve builds motorway junctions, provides maintenance on military bases and runs probation services—badly in the last case, even by the Government’s own admission.

Does the Minister agree this company has simply been hoovering up contracts willy-nilly, regardless of expertise and clearly without regard to the financial implications of such a strategy? Does he agree that Ministers have allowed this to happen based on a false economy of impossible contract prices that, as in the case of Carillion, brought down the whole company and much more around it? Does the Minister accept that the Government’s policy of focusing on just a few major contractors owned by big financial institutions has not only squeezed smaller UK businesses from the scene, but driven the risk to an unacceptable level, at great cost to the taxpayer? The Conservatives’ claim that outsourcing provides value for money has again been shown up for the ideological baloney that it really is. Finally, will the Minister confirm that the Government are looking at all major suppliers to ensure that their finances and ability to deliver contracts are watertight? After Carillion, and now Interserve, the public are entitled to ask who is next.

[Oliver Dowden]

I thank the hon. Gentleman for his questions. As he knows, I have great respect for him, but he rather overstates the case in respect of Interserve. Let me go through some of the points he raised. First, he asked whether checks were performed on the company before contracts were awarded. Yes, of course those checks were performed.

Rather than trading rhetoric around, let us look at the facts. Interserve issued a profit warning in September 2017, after which no major central Government contracts were awarded to Interserve until it completed its refinancing in April 2018. Since that refinancing, two such contracts have been awarded: one in August 2018 for facilities management for the Foreign and Commonwealth Office in Europe, where Interserve was the incumbent supplier, so it was essentially a continuation of that service; and secondly, a contract with Highways England was awarded in September 2018 for a £12 million bridge over the A63. Of course, contracts are being awarded across the wider public sector but, in respect of the contracts awarded by central Government and for which Ministers are responsible, those are the major contracts that were awarded in the relevant period.

The hon. Gentleman asked whether we will nationalise the company. The point here—indeed, the point about all the contingency—is that there is no need to invoke the contingency. Contingency is used if a company collapses —if it goes into liquidation—whereas in this case the companies that deliver services for the Government are entirely unaffected. All that has changed is the ownership by the parent company. Indeed, what has changed is that the company has got stronger—it has £100 million more on its balance sheets and fewer debts because of the restructuring—so there is absolutely no need to invoke the contingency preparation.

The hon. Gentleman talked about a few major companies winning Government contracts; let me tell him the figures: more than 5,000 companies bid for and win Government contracts. We have set a demanding target of a third of all business going to small and medium-sized enterprises.

If the hon. Gentleman is worried about contracts going to Interserve, perhaps he should speak to a few of his colleagues. For example, a £10 million contract was awarded to Interserve in June 2018—by Labour-run Southwark Council. Perhaps the hon. Gentleman could have a word with Labour-run Wales, which awarded a contract to Interserve just in December.

I really have to say to the hon. Gentleman that at this time when employers, suppliers and public service workers are seeking calm heads and reassurance, we are absolutely clear that they are completely reassured. I would have thought the hon. Gentleman would have done better.

[Sir Bernard Jenkin (Harwich and North Essex) (Con)]

Does my hon. Friend recall the inquiry and report by the Public Administration and Constitutional Affairs Committee, which I chair, on the collapse of Carillion? We found that in this sector there was a habit of companies taking on far too much risk without sufficient compensation from contractors, and we found over-optimism on the behalf of Government that they could transfer risk at unrealistic prices. Is this not another example of a company that is paying that price? Should we not be more optimistic that the company has been put into a pre-pack administration in a much more responsible fashion, with lenders taking a much more responsible view? Is there not also a lesson that shareholders must accept that this is not a sector that lends itself to high risk and high return? We do not want to trust our public services to such a risky model.

[Oliver Dowden]

I thank my hon. Friend for his question; as a former member of his Committee I know about his considerable expertise in this field. Indeed, the expertise provided by his Committee helped to frame the Government’s response post-Carillion. For example, that is why I launched the outsourcing playbook a couple of weeks ago. It deals with exactly this point, and is a guide to how Departments should allocate risk as between the Government and the private sector.

My hon. Friend is absolutely right about the overall approach that should be taken. I have been clear, as has my right hon. Friend the Chancellor of the Duchy of Lancaster, that outsourcing companies that provide services to the Government should expect reasonable but not excessive rates of return. Through the programme of reforms we have introduced, we are moving towards a new model for outsourcing.

[Tommy Sheppard (Edinburgh East) (SNP)]

The Minister puts a brave face on things and tries to spin well but the truth is that, first with Carillion and now with Interserve, the collapse of these major multinational multi-service companies seriously damages the entire credibility of the Government’s outsourcing procedures and policies. If I understood correctly, he confirmed that contracts were awarded to Interserve last year, after it was known that the company was crippled with debt and facing imminent collapse and restructuring. If that is the case, I seriously suggest that the procedures for the protection of public money in this context are not adequate, and his Department ought to look into revising them.

Will the Minister give an assurance that no further contracts or spending will be lodged with the group that has taken over the Interserve contracts from this day forward? Will he put in place procedures such that any other companies facing imminent collapse are taken off the tender shortlist and contracts are not awarded to them?

We are all mindful of the fact that a no-deal Brexit has not yet been taken off the table. It may still be the case that, in the weeks and months ahead, the Government are scurrying around trying to find private contractors to undertake large amounts of work at short notice. What assurance can the Minister give the House that, if that is the case, the procedures will be more robust than they were in this case, to make sure that public money is protected?

[Oliver Dowden]

I will take as a compliment the hon. Gentleman’s opening remarks saying that I have spun this well. I have not spun it well; I have set out the facts, which are that the situation for the companies delivering the services in question remains wholly unchanged as a result of the change in the parental ownership structure.

The hon. Gentleman asked about the contracts that the Government have awarded, and I have already set out that position. Again, if he thinks it is irresponsible to be awarding contracts to Interserve, I suggest he has a word with his colleagues in Scotland, where Interserve has been winning contracts left, right and centre. In fact, it is even protecting the pandas at Edinburgh zoo through an outsourcing contract. Back in November, the Scottish Government awarded a contract, saying it would

“deliver benefits for the North Ayrshire communities as well as long-distance road users upon completion”.

Who was that contract awarded to? Interserve.

[Mark Pritchard (The Wrekin) (Con)]

Although I do not believe in nationalisation—save for, perhaps, the Brexit process—and although this is not the same as Carillion, I say gently to the Minister that this is a near miss for jobs, investment and the whole credibility of outsourcing. Is this not potentially another case of greedy capitalism—I speak as a Conservative MP—giving capitalism a bad name, rather than considerate capitalism? Will the Minister enlighten the House as to what has happened since Carillion’s collapse and the so-called stress testing, with the unit in the Treasury and the unit in the Cabinet Office, to ensure that this does not happen again? Following on from what the hon. Member for Edinburgh East (Tommy Sheppard) quite rightly said, what else are the Government doing to try to prevent this from happening again?

[Oliver Dowden]

Let me restate this point. My hon. Friend raised the issue of whether this situation was a near miss, as compared with Carillion. The situation with Carillion was very different: it had problems across all its contract base and issues with its management, which are currently being explored. In this case, there is a specific issue in relation to some of the energy for waste contracts, which are being dealt with. The company sought to refinance to strengthen its balance sheet. It failed to do that because of the position taken, some might say, by some greedy capitalists, in respect of some of the hedge funds that owned shares in the company and refused to consent to its restructuring. None the less, it has gone through a pre-pack, and as a result its position has strengthened considerably. It has £100 million more on the balance sheet and it has reduced its debts considerably.

My hon. Friend is right to challenge the Government on what wider lessons we have learned. It is precisely why we engaged in a tremendous exercise of consultation, engagement and reform. For example, we spent more than 1,400 hours gathering evidence and, as a result of that, we have announced extensive changes through the new playbook.

[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

We can get into the weeds, but the big picture is that only a handful of civil servants in the Minister’s Department actually know in detail at any point what might or might not be happening with a company’s balance sheet. Earlier, the Minister talked about local government, but it is not privy to that information. Indeed, the Minister is not privy to that information. Is not the big risk that things can be happening with very little or no real scrutiny? The public is in the dark, the Minister is in the dark, and certainly other public service purchasers are in the dark, and is that not one of the big problems?

[Oliver Dowden]

I take this opportunity to reassure the hon. Lady and the House that I am most certainly not in the dark about the position of our strategic suppliers. Almost every week I meet the senior officials she referred to in order to understand the situations of our strategic suppliers. Moreover, I regularly meet the Crown Representatives who, as she knows, are responsible for managing the strategic suppliers on behalf of the Government.

[Bob Blackman (Harrow East) (Con)]

I thank my hon. Friend for the answers that he is giving. Clearly, there are big advantages both on costs and quality of service provided by outsourcing, but does he not agree that some of these conglomerates that provide a whole spread of different outsourced services are disadvantaging the small and medium-sized enterprises that could otherwise gain these contracts directly? Clearly, with this restructuring, they could miss out. When restructuring happens, someone loses out. Should the Government not now be considering a wider spread of smaller contracts so that SMEs can properly compete against the conglomerates?

[Oliver Dowden]

As ever, my hon. Friend raises a very important point. He is absolutely right that, post-Carillion, we must ensure that we strengthen the supply chain. One of the ways in which we do that is through increased diversity, particularly by enabling small and medium-sized enterprises to bid and win Government contracts. That is why we have reduced complex pre-qualification questionnaires, why we have set a very demanding target of 33% of all contracts going to SMEs and why, in November, I announced proposals to ensure that strategic suppliers who did not pay their subcontractors on time would face exclusion from winning Government contracts.

[Rachel Reeves (Leeds West) (Lab)]

The Minister spoke as though just a couple of bad mistakes were made at Interserve, but the truth is that this company had gross borrowings of £850 million and an operating profit last year of just £93 million, owing to a whole series of bad mistakes. When my Select Committee did our inquiry into the collapse of Carillion, we warned that it was unlikely to be a one-off and that the whole model, the whole system, was broken. As with Carillion before, the vultures are circling this firm, earning tens of millions of pounds. A total of £90 million was paid out in the past 12 months to advisers—EY, now acting as the administrator; Rothschild, which is advising Interserve; and Grant Thornton, which is bringing in money as well. Why not let the hospitals, the schools, the local authorities and others take these contracts back in-house and manage them in-house in future rather than have this failed contracting-out model? Rather than paying out millions of pounds to advisers, this money should be invested instead in the crucial public services on which we all rely.

[Oliver Dowden]

I have a great deal of respect for the hon. Lady and I know that she has considerable expertise in this field. It is precisely for that reason that in reforming the process of outsourcing—the so-called playbook, the decisions that the Government go through in deciding how and whether to outsource—we now consider whether it is better to bring services in-house or to outsource them. There is a lot of evidence to show that outsourcing brings genuine efficiency savings and genuine innovation—the evidence shows that it can be between 20% and 30%. She castigates me for my description of the situation in respect of Interserve. It is very different from Carillion. There is one major problem for Interserve and that is in respect of the energy for waste contracts. I would much rather that Interserve had dealt with that itself and not been forced into a pre-pack administration. Unfortunately, the shareholders did not consent to that, but the net effect of all of this is that the company is strengthened. It has £100 million more in cash and has considerably reduced debt.

[Alex Chalk (Cheltenham) (Con)]

One of the key lessons that emerged from the collapse of Carillion was that small companies that were acting as subcontractors were left dangerously exposed by unethical and over-lengthy payment terms. Can the Minister confirm that no subcontractors, whether in my constituency or elsewhere, have been adversely affected in this case? Will he update the House on what he is doing to ensure that these big companies cannot continue to act unethically in this way, but should play by the rules?

[Oliver Dowden]

As ever, my hon. Friend is absolutely right. First, straight off the bat, I can give suppliers in his constituency that assurance. There is absolutely no change in the status of the credit rights of those suppliers who are providing services, as the operating companies remain unaffected; it is the ownership that has changed. He rightly raises the point about supply chain finance. That is a major issue. I have twice already brought in strategic suppliers and reminded them of the importance of paying their subcontractors on time, and we are backing that up with action. In November, we announced a prompt payment initiative to ensure that, in future, if they fail to pay their suppliers on time, they will be excluded from Government contracts.

[Chris Stephens (Glasgow South West) (SNP)]

I refer to my entry in the Register of Members’ Financial Interests and to my position as chair of the Public and Commercial Services Union parliamentary group. May I correct the Minister on two things? First, the Foreign and Commonwealth Office contract was not renewed in August 2018—that was when the bid was accepted. Can he confirm that the actual renewal date of that contract was December 2018 and can he perhaps explain the four-month delay? Was it because of Interserve’s financial position? Secondly, he said that jobs are protected. Will he therefore explain why the Interserve FCO contract plans to make five employees redundant on Friday and issue them with redundancy notices? I really seek an assurance from the Minister that pay, jobs, pensions and employment terms and conditions are protected for Interserve employees delivering public services?

--- Later in debate ---

[Oliver Dowden]

I thank the hon. Gentleman for both of those questions. Let me deal with each in turn. Interserve will make decisions as to employment and other things on an ongoing basis. Nothing has changed between Friday and now; none of those job changes will be as a result of this change in the corporate structure, as the operating companies are wholly unaffected. Clearly, I cannot, from this Dispatch Box, give commitments on the future employment decisions of a private company going forward, but I can assure him that none of those will arise from this change in the corporate structure. He made a point—a pedantic but an important one—in relation to a contract being accepted. Essentially, that happens when the relevant Department, the Foreign Office, has signed the contract, because, at that point, it is legally obliged to enter into it and deliver on it. There may be a gap between the contract being agreed and it actually being entered into. That is the point at which the assessment is undertaken, which was in August.

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

When Carillion collapsed, 30,000 small businesses lost, on average, £141,000. For one business in my constituency, the figure was over £176,000. I appreciate that it is not exactly the same, but may I urge the Minister to look at my Bill for project bank accounts, which would have protected the small businesses that lost that money in Carillion? Project bank accounts would also protect businesses that must be worried about their future in Interserve, and other companies, and would ensure that late payments are prevented.

[Oliver Dowden]

I welcome the hon. Lady’s acknowledgement that this situation is different to Carillion. She rightly raises the point about project bank accounts, and I know that she has been a strong campaigner on that issue. I agree that there is an important role for project bank accounts to play, particularly in the construction supply chain. That is why last year I hosted a roundtable at the Department for Business, Energy and Industrial Strategy with suppliers to understand their experience of project bank accounts and to consider how we can use them more widely across the public sector.

[Laura Smith (Crewe and Nantwich) (Lab)]

Interserve is the second giant probation privateer to collapse in less than a month, despite hundreds of millions of pounds in bail-outs. Will the Minister explain why the Government are planning to repeat the mistakes of the past and re-let probation contracts on an even larger scale? Is it not time to call a halt to the process and bring these services back in-house?

[Oliver Dowden]

The Ministry of Justice, in consultation with the Cabinet Office, the Treasury and others, is looking at the approach to probation contracts. It has already made announcements and will be making further ones. The new playbook sets out the approach that we should take to outsourcing Government contracts, and looks at questions such as the balance of risk, whether a contract would best be provided by the Government or an outsourcer, and the balance between the amount done by the Government and the amount done by the outsourcer. Those exact tests will be applied in the next stage of probation contracts.

[Jamie Stone (Caithness, Sutherland and Easter Ross) (LD)]

Thinking about the defence of our country, Interserve is doing great work for our armed forces in bases such as the Falklands, Ascension Island and elsewhere. As the Minister said, the trouble has largely been caused by the activities of two hedge funds—sheer speculation. What measures or reforms might the Government consider to prevent these activities from getting in the way of our vital national security?

[Oliver Dowden]

I understand the hon. Gentleman’s frustration with the behaviour of some of the hedge funds concerned, and their failure to agree to this refinancing. However, I reassure him that there will be no change to the delivery of any contracts that Interserve carries out, including the ones that he listed. Those services are being delivered in exactly the same way today as they were on Friday; there has been no change in jobs, no changes in pensions and no change in the delivery of those services.

[Emma Hardy (Kingston upon Hull West and Hessle) (Lab)]

Interserve has the contract for the long-awaited bridge across the A63 in my constituency, and Highways England is doing everything it can to ensure that work continues as normal. I am giving the Minister the opportunity to offer me and the people of Hull the reassurances and guarantees that we need, because we will not be very happy if there are any delays to the bridge, after waiting 20 years to have one. Will the Minister offer guarantees that as Interserve goes through administration, there will be no delays to the building of the bridge, no delays to the payment of the people working on the bridge, and no delays to payment of local subcontractors?

[Oliver Dowden]

Once again, I remind the House that that contract was awarded in September 2018 by Highways England. I absolutely assure the hon. Lady that there will be no change in the delivery of these services by Interserve as a result of the change in the corporate structure. Clearly, I cannot guarantee the whole schedule of the building works and so on, but I can 100% assure her that no change will arise as a result of this change in the corporate structure, because the operating company remains completely unaffected; it is just the ownership that has changed.

[Mike Amesbury (Weaver Vale) (Lab)]

I am afraid that some of the Minister’s answers will come back to haunt the Government in the not-too-distant future. Some 45,000 jobs are at stake—£2 billion-worth of public sector contracts. Is it not about time to get the referee on the pitch and bring the contracts in-house?

[Oliver Dowden]

I am acutely conscious of the jobs that are at stake, which is why I welcome this refinancing. It means that there is £100 million extra cash in the company and there are lower debts. I can reassure every one of the employees that their jobs and pensions are not at risk as a result of the restructuring, and neither is the service delivery.

[David Hanson (Delyn) (Lab)]

The community rehabilitation company Working Links collapsed a few weeks ago, and the assessment by the Government through the National Audit Office was that £467 million-worth of additional costs had to be met. Now that eight of the 21 community rehabilitation companies are changing their ownership and management, what assessment has the Minister made of additional costs to the Ministry of Justice for probation CRCs?

[Oliver Dowden]

Once again, I reassure the right hon. Gentleman that there will be no additional costs in respect of those contracts as a result of the corporate restructuring, as the company delivering the contracts remains wholly unchanged.

[Dr David Drew (Stroud) (Lab/Co-op)]

On the back of the collapse of Carillion, I was told by someone who works in the business of two other companies that they would go the same way in due course. They said that the second company to go that way would be Interserve; I will not mention the third. What due diligence did the Government carry out on the implications for other service companies? If it was known in the industry, why was it not known by the Government?

[Oliver Dowden]

As I have said repeatedly from this Dispatch Box, the Government undertake appropriate contingency planning in respect of all our strategic suppliers. We have not had to invoke that contingency with Interserve because the companies delivering those services remain wholly unchanged; no jobs are lost, no pensions are affected and no services are disrupted.

[Jim Shannon (Strangford) (DUP)]

When Carillion went down, lots of jobs were lost and projects were put on hold, and confidence was badly dented. At that time, we were informed that steps were being taken to ensure that the situation would not happen again. Only a matter of months later, Interserve has experienced difficulties, and yet again the general public are losing confidence. It seems that outsourcing has become a gamble. Could the Minister outline steps to restore confidence? Is he satisfied that Interserve’s financial position has been secured, and what discussions have taken place with other companies to check and monitor that no other big companies are facing major financial problems?

--- Later in debate ---

[Oliver Dowden]

As I have said, I would rather that this corporate restructuring had happened in a smoother way. It has happened through a pre-pack process, but as a result, the companies actually delivering the public services are unchanged; it is their ownership that has changed. I reassure the hon. Gentleman that all the contracts currently being delivered by Interserve will continue to be delivered and will be unaffected, because their specific corporate ownership has not changed. Jobs will not be lost as a result and pensions will not be affected. Indeed, the company’s balance sheet is strengthened.

[Chris Stephens]

On a point of order, Mr Deputy Speaker. The Minister has said on two occasions that no Interserve employees would lose their jobs, but there has been an acknowledgement that five redundancy notices will be issued on Friday. I would suggest that those statements are incompatible. Can you advise me on how the Minister can correct the record about jobs being lost, and is there any other way in which Members can lobby the Foreign and Commonwealth Office to ensure that those five employees are not served with a redundancy notice on Friday?