G4S was referred to the Serious Fraud Office for a second time in six months on Thursday, underscoring the extent of problems in government outsourcing even as it plans to hand billions of pounds more work to the private sector.
A Ministry of Justice audit of 15 big contracts worth £3.9bn found there were “serious issues” on G4S facilities management work for the British courts. The concerns included “invoicing, delivery and performance reporting”, the government said. It has asked G4S to undertake further steps to demonstrate “corporate renewal”.
The government said it does not have evidence dishonesty had taken place but was referring the matter to the SFO following legal advice.
The announcement came as a blow to G4S and its outsourcing rival Serco, which had hoped for signs that their relationship with Westminster had been repaired. Both companies have been barred from winning new central government contracts since July, when it first emerged they had overcharged the Ministry of Justice by millions of pounds for the electronic monitoring of offenders. This issue has also been referred to the SFO.
G4S and Serco are enmeshed in British government. They carry out £3bn of work a year between them, running everything from welfare-to-work programmes for the unemployed, to prisons and immigration detention centres.
Their role has increased further as the coalition’s enthusiasm for cost-cutting has meant outsourcing is being pursued with a vigour last seen when Margaret Thatcher was in power in the 1980s. The government acknowledged on Thursday that Whitehall officials were struggling to manage these increasingly complex contracts.
In a Cabinet Office report, Bill Crothers, chief procurement officer for the government, said “skills were not strong enough”.
“First, the focus on contracts has lessened significantly after the initial procurement,” he said. “Second, the department has not fully recognised and understood the different risks attached to different types of contracts.”
The turmoil threatens to set back the plans of Chris Grayling, justice minister, to deliver a “rehabilitation revolution” before the next election. G4S and Serco announced on Thursday that they had withdrawn from the competition to run probation services worth £500m a year, expected to go out to tender in January. Their decision will leave a reduced number of credible candidates. A4e, one of the bidders, has already faced fraud allegations over welfare-to-work contracts.
Despite this, shares in Serco rose as much as 8.6 per cent after the government said it would decide in January whether the company was eligible to win new contracts. Joe Brent, analyst at Liberum, the investment bank, said: “the Cabinet Office statement suggests that corporate renewal is likely in January. The government wants strong partners to deliver its ‘more for less’ agenda.”
Serco has agreed to refund the government £68.5m plus VAT for the electronic tagging contracts. It has also agreed to repay £2m in past profits on a prisoner escort contract, after it was found that their staff had been recording prisoners as delivered “ready for court” when they had not been.
Alastair Lyons, chairman of Serco, indicated he was confident of government approval: “We’ve been engaging constructively with the government and that has given rise to the cabinet office itself saying the programme is well advanced,” he said.
But shares in G4S fell 3.6 per cent. The world’s third-largest private sector employer remains locked in talks over the size of its repayments on the electronic tagging contracts. G4S said it had been advised by the MoJ that it did not have any evidence of dishonesty in relation to the court contracts and that it did not expect any financial exposure on the court contracts to be material to the group.
The two companies remain in turmoil as they try to restructure their organisations to appease the government.
The controversy has already led to the departures of Richard Morris, head of UK and Irish operations for G4S, and Chris Hyman, chief executive of Serco. Nick Buckles, the former G4S chief executive, left in May.
But Andrew Haldenby, director of the public services think-tank Reform, suggested the revelations would make contract governance stronger in the long term and support outsourcing. “The sense of crisis around outsourcing is temporary not permanent,” he said. “Once these issues are resolved, the whole market will be much stronger.”
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