Capita

Rachel Reeves Excerpts

Thursday 1st February 2018 Commons Chamber

[Rachel Reeves (Leeds West) (Lab)]

(Urgent Question): To ask the Minister for the Cabinet Office and the Chancellor of the Duchy of Lancaster to make a statement on the risk to public finances and public services as a result of the serious financial concerns at Capita, and on the Government’s contingency plans.

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

I have been asked to comment on the stock market update issued by Capita plc yesterday and its 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 company is in a very different situation. To be clear, this announcement was primarily a balance sheet strengthening exercise, not purely a profit warning. 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. Furthermore, Capita has a very different business model, and if the House will allow me, I will give an update on that.

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 those overseas. By contrast, Capita is primarily a services business, and 92% of its revenues come from within the UK. As Members would expect, we regularly monitor the financial stability of all our strategic suppliers, including Capita. As I said, we do not believe any of them are in a comparable position to Carillion. The measures Capita has announced are designed to strengthen its balance sheet, reduce its pension deficit and invest in core elements of its business. Arguably, those are exactly the measures that could have prevented Carillion from getting into the difficulties it did. Of course, the impact of these measures has been to reduce dividends and shareholder returns in favour of others, so this is further evidence of shareholders and not the taxpayer taking the burden on this.

As I have said, my officials met senior Capita executives yesterday to discuss the impact of the announcement. We continue to work closely with the company to monitor the execution of its plan and to ensure the continued delivery of public services. We continue to engage with all our strategic suppliers and make continuing assessments of our contingency plans, where necessary. It would not be appropriate for me to comment in any further detail on the specifics of those contingency plans, given their commercial sensitivity. But let me reiterate that the priority of this Government, and the reason why we contract with these companies, is to deliver public services, and our priority is the continued delivery of those services. As Members will have seen in respect of the collapse of Carillion, whatever the shortcomings there public services continue to be delivered, and we are confident that public services will continue to be delivered as provided by Capita.

[Rachel Reeves]

I thank the Minister for his response, but I cannot help but conclude that the Government’s thinking on this is both muddled and complacent. He has told us that the situations at Capita and Carillion are completely different, but let us look in more detail at the circumstances of both companies: both have debts of more than £1 billion and pensions deficits in the hundreds of millions; both paid out dividends of more than £1 billion in the past five years; both rely on the public purse for half of their contracts; both were audited by KPMG; and both grew through acquisition and not through organic growth. It seems there are more similarities than differences between these two companies.

I join the Minister in welcoming the decision by the new Capita chief executive officer to face up to some of these problems with a rights issue and the suspension of dividends. But can the Minister honestly say that Capita could not come to the same fate that Carillion did just two weeks ago, that people working for Capita have nothing to fear, and that those saving prudently for a pension with Capita can rely on that pension paying out fully on retirement? Can he say to people who rely on Capita to carry out basic public services, such as the electronic tagging of offenders or the billion-pound contract with the NHS, that they can count on it to fulfil its contractual obligations for the life of those contracts?

I have some specific questions about what happens now. What is the contingency planning? Do the Government have representatives in the business, including a Crown representative? How long have the Government been aware of the problems at Capita, and how many contracts have been issued to it since then? What specific risk assessment have the Government made of other large outsourcing firms? Capita is currently bidding for the Defence Fire Risk Management Organisation contract. Will the Government now review that process and reconsider the decision to outsource that and other services they are currently looking to offload?

Will the Government commit to urgently reviewing what looks like a cosy and complicit relationship between the big accountancy firms, the Financial Reporting Council and the corporates they are supposed to be auditing? Is it not now time to split up the big accountancy firms and stop auditors being paid for other consultancy work at the firms they are supposed to be auditing? Capita has announced a fire sale of assets. Will the Minister confirm that Capita is in consultation with the trade unions and its workforce about redundancies and TUPE arrangements in the event that services are sold off?

Jobs, pensions, small businesses and vital public services now depend on these outsourcing companies, but it is time we rethought the whole strategy for public service provision. How many more warning signs do the Government need?

[Oliver Dowden]

I thank the hon. Lady for her questions. I know she takes a close interest in this important issue. She has raised a large number of questions, and I shall seek to address as many of them as I can. I am pleased that she has acknowledged that Capita is facing up to its problems. Indeed, that creates a contrast with Carillion. She talked about the financial situation of Carillion versus Capita. The chief executive of Capita has faced up to this and strengthened its balance sheet—it has been widely reported that Capita has more than £1 billion on its balance sheet—which shows that the situation is significantly different from that at Carillion and gives us confidence in its ability to continue to deliver services.

The hon. Lady talked about dividends. Again, as a result of this announcement, Capita will not be issuing dividends, which means that money can go back into the pension scheme, allowing £200 million extra to be spent on the company’s core services, rather than dividends. That is evidence that the chief executive has understood the position and is creating a different situation from that which pertained to Carillion. She raised an important point about the major accountancy firms, such as KPMG, involved in this market. The Financial Reporting Council is looking into this matter. We expect to hear from it in about six months, and we will, of course, respond as appropriate. On her question about a Crown representative, I can assure her that there is one in Capita.

I explained in my original answer the role of the Cabinet Office and the Government and the reason that we contract with private companies. The previous Labour Government and other Governments did the same. As has been reported many times, a third of Carillion’s live contracts were agreed by the last Labour Government, a third by the coalition and a third by the current Government. Governments do this to deliver public services. Our role, as a Government, is to ensure the continued delivery of those public services, and the test for me and my colleagues and officials in the Department is this: is the company capable of delivering those public services, and if there is a problem with the company, will those public services continue to be delivered? In respect of Carillion, Members will have seen that all those public services have continued to be delivered, and I am confident that they will continue to be delivered.