My Lords, with the leave of the House, I shall repeat in the form of a Statement the Answer given earlier today by the Parliamentary Secretary to the Cabinet Office to an Urgent Question in the other place.
“Mr Speaker, I welcome the opportunity to come to the House to update it on Capita’s announcement yesterday. This covered its 2017 full-year results, the launch of a £701 million rights issue and an update on its transformation programme. As I have said repeatedly, private companies can answer for themselves but the Government’s priority is the continued delivery of public services. As we demonstrated with respect to Carillion, we have continued to deliver public services without interruption.
The House will recall I came here in February when Capita initially announced the rights issue; Capita confirmed yesterday that it is proceeding in line with that previous announcement. The House may be interested to know that Capita announced in its statement yesterday that its underlying profit before tax was £383 million for 2017, in line with market expectation. It made a contribution of £21 million to reducing its pensions deficit and as a result of this announcement the share price rose by more than 10% on the day.
Capita’s board and auditors have confirmed that the company will continue to have adequate financial resources to deliver on its obligations, supported by its rights issue and other steps designed to strengthen its business. The rights issue is underwritten and the required shareholder vote will take place in early May. The management has confirmed that the key shareholders fully support its plan. In addition, the company has suspended dividends until it begins to generate positive cash flow. It expects to generate at least £200 million in free cash flow in 2020. The impact of this has been to reduce dividends and shareholder returns in favour of other stakeholders. This is evidence of shareholders, not the taxpayer, taking the burden.
I understand that noble Lords remain concerned about outsourcing companies following Carillion’s liquidation. However, Capita has a different business model and a different financial situation from Carillion. It is not a construction business and has minimal involvement in PFIs. 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 measures may have prevented Carillion getting into the difficulties that it did. It remains the case, as I said when I came to the House in February, that neither Capita nor any other strategic supplier is in the same position as Carillion, but I would like to reassure the House that officials in my department continue to engage regularly with all strategic suppliers. It is in the taxpayer’s interest to have a well-financed and stable group of key suppliers, so we welcome the moves that the company is making”.
My Lords, I am grateful to the Minister for repeating that Answer. I think that this is the third occasion on which he has come to the House to discuss these issues, twice in relation to Carillion and now in relation to Capita. It is striking that from the Government’s point of view, Capita is one of the limited number of companies which are privileged to have large government contracts, yet it is interesting to note that the boss of Capita admitted today that the company has no long-term strategy at all. That, to say the least, is a little worrying.
I would also say to the noble Lord that Capita’s record is, at best, patchy. When I mention the messed-up management of the dental register which left hundreds of dentists standing idle, its failure to maintain the Primary Care Support England service which supervises GP and patient records, and failing on the Army recruitment contract, one questions why this Government in particular are so wedded to giving yet more contracts to this company and similar ones. I hear what he has said about Capita being a different model and having a different structure from Carillion, and he said that shareholders will be taking the burden, but I still think I am right to ask him what contingency plans Ministers have put in place to deal with possible defaults on these contracts. Also, can he confirm that improvement plans have been agreed with Capita since its string of profit warnings and yesterday’s financial statement?
The noble Lord said that it is of strategic importance for the Government to have, I think by implication, contracts with a limited number of providers. However, the other side of the coin is that if we have a domino effect—first Carillion, then Capita—a huge swathe of government contracts will be put at risk. Is it right that so much government work should be put in the hands of a very limited number of companies? I would also like to ask whether he agrees that this excludes SMEs from many prime contracts. They have to subcontract with these principal contractors, but we know what happened with Carillion. Carillion was a very late payer and as a result, many SMEs went bust due to its collapse. What is the Government’s approach to SMEs and can we ensure that they get a fair crack of the whip?
I am grateful to the noble Lord, Lord Hunt, for his questions. I will try to answer all of them. On the question of a strategic approach, he will know that a new chairman, Ian Powell, was appointed last year and a new chief executive, Jon Lewis, in December. Jon Lewis has made it clear that he is in the process of putting together what he calls a “transformation programme”. Yesterday’s announcement was part of that process. The market’s response shows that it now has confidence in the new leadership team at Capita.
The noble Lord then asked why the Government are wedded to Capita. I have looked at the major central government contracts that have been awarded to Capita: 20% were awarded by the last Labour Government, just over 50% by the coalition Government and the balance by the current Government. So, it is not the case that we are more wedded than previous Administrations to the concept of using private providers and outsourcing contracts to get the best value for money. Appropriate contingency plans are in place for each contract. They depend on the nature of the contract—that is, whether others could immediately take over if there was a problem. Major contracts have terms that give contracting authorities the freedom to act in the event of supplier failure, including financial distress. I assure the noble Lord that appropriate contingency plans are in place for these contracts.
Turning to the noble Lord’s question about small providers and SMEs, the Government are anxious to break up these large contracts wherever possible to enable more SMEs to bid for them. During the Easter Recess, the Minister announced a whole raft of measures designed to boost opportunities for small businesses to gain government work. He is right to point out how important SMEs are. They provide 16 million jobs in this country and we are committed to ensuring that they are treated fairly by large suppliers. The Government have a target of HMG spend on SMEs. It was 25% but is now 33%, so I think we are at one on that issue.
On paying subcontractors promptly, Capita is currently paying 80% of invoice value to SMEs within 30 days and has plans to raise that to a higher percentage. I hope that deals with the thrust of the noble Lord’s questions.
My Lords, are the Government considering an overall review of the privatisation and outsourcing process? This is not just about Carillion and Capita. I have been reading about the problems that Serco has been going through and the recovery programme that it is now undertaking. I have been reading a little about the problems that G4S has had over the past few years in delivering some of the services it promised. There seems to be an underlying problem of large and diverse outsourcing companies, which are extremely good at drawing up contracts, managing to crowd out SMEs.
When I was a Minister, I remember being told that SMEs lose out because they are not as good at preparing contracts and spending the money in presenting them—so they end up as the subcontractors—and that we are therefore facing an oligopoly of diverse, major companies that successive Governments have allowed to grow, as the Minister said. What can be done to encourage more SMEs to become prime contractors? If I may say so, allowing more local authorities to take responsibility would help a great deal because more local suppliers would then be able to do so. The centralisation of these diverse outsourcing companies means that decisions are taken in London and small outsourcing companies in Leeds, Manchester and elsewhere end up as subcontractors. That is very bad for local enterprise. Are the Government now considering an overview of the sector and considering that competition policy needs to be rather more active here?
I have one final comment. I am very conscious that there is a problem of oligopoly in a number of sectors, with accountancy being a major example. Do we not need now to break up some of these oligopolies?
There is nothing ideological about this. Governments of all persuasions have found that outsourcing certain activities enables them to focus on the key functions of government. A recent survey by the CBI showed that overall there was a saving of roughly 11% by going through the process of outsourcing activities, engaging competitive markets and awarding the contract to the contractor best able to meet the objectives.
I entirely agree with what the noble Lord said about SMEs. I think there is a contract with HMRC which, when it came to an end, we broke down into component parts. As I said in response to the noble Lord, an additional measure that we have taken is that, when a main contractor is slow in paying the subcontractors, that main contractor will be deleted from the opportunity to bid for future contracts. That is a good example of the steps that we are taking.
Subcontractors will have greater access to buying authorities to report payment performances, and suppliers will have to advertise subcontracting opportunities on the Contracts Finder website. Without repeating what I said a moment ago, we have a target of driving up from 25% to 33% the percentage of government spend with SMEs on these major contracts.
My Lords, can the Minister confirm that, as Capita refreshes itself and restructures, the Government will be totally intolerant of any attempt to reduce the standard of services for which Capita has contracted? If Capita attempts so to do, will the Government prioritise finding new contractors to undertake those services, including SMEs?
The Government will hold Capita, and indeed other suppliers, to the terms of their contract and take appropriate steps if those terms are ever broken.
My Lords, would it be helpful if the House were reminded of what the Companion says about procedure on Urgent Questions? They are treated as Private Notice Questions, which in turn are treated as similar to normal Oral Questions. In particular, the answers and supplementary questions on a Private Notice Question must be brief to allow as many people as possible to come in.
If that was a rebuke to me, I am glad. I plead guilty, and I am sure that will have been noted. I will be as quick as I can with the responses to the following Urgent Question.