Public Accounts Committee - Minutes of EvidenceHC 777

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Oral Evidence

Taken before the Committee of Public Accounts

on Wednesday 20 November 2013

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Stephen Barclay

Guto Bebb

Jackie Doyle-Price

Chris Heaton-Harris

Meg Hillier

Mr Stewart Jackson

Fiona Mactaggart

Austin Mitchell

Nick Smith

Ian Swales

Justin Tomlinson


Amyas Morse, Comptroller and Auditor General, Gabrielle Cohen, Assistant Auditor General, Keith Davis, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.


The role of major contractors in the delivery of public services (HC 810)

The Ministry of Justice’s electronic monitoring contracts (HC 737)

Examination of Witnesses

Witnesses: Ashley Almanza, Chief Executive, G4S, Paul Pindar, Chief Executive, Capita, Alastair Lyons, Chairman, Serco, and Ursula Morgenstern, Regional CEO UK and Ireland, Atos, gave evidence.

Q1 Chair: Welcome and thank you for coming. Clearly we have a lot to get through today, so the Committee would be really grateful if you could keep answers pithy, short and direct. Then we will have a constructive session.

I will start by saying that this is not a session in which we are trying to pass a verdict on whether it is good or bad for Government to contract out public services. There will be a variety of views around the table. We are not here to look at that at all. What we are about is starting to ensure that there is proper accountability for the taxpayer’s pound, and starting to ask some value-for-money questions about private contractors delivering public services, particularly in an environment where you are going to play a growing role in the delivery of those services. I see this as the first in a number of engagements. It is about beginning to understand the landscape and the key issues we all need to grapple with.

I will ask you first to give us briefly the extent of the public services you cover. Can you describe the range of public services for which you have contracts in the UK? Starting with you, Paul, will you go through as quickly as you can on that one? Just give us the range so that everybody understands.

Paul Pindar: Thank you for the introduction. To give you some metrics to put it into perspective, the total amount of money we receive from the UK public sector is in the region of £1.1 billion. Around £500 million of that is from central Government. We do a very broad span of white-collar outsourcing activities, ranging from running IT operations, HR functions, finance functions and essentially anything that replicates the white-collar element of the back office of a public sector organisation. Those would be the areas we would be interested in operating in.

Q2 Chair: Give us about eight or 10 examples. I know them because I have bothered to look it up. Just go through.

Paul Pindar: Okay. I will give you a few things. We run a contract for the Department for Work and Pensions that is called Cipher,1 where we are responsible and accountable for managing all the contractors that operate within DWP. The benefit that brings to DWP is that we can get harmonisation of conditions from the contractors. By aggregating them we can help save DWP a lot of money and, indeed, we have. We have saved them something like £25 million.

Q3 Chair: Just name them. I am trying to get a feel for the areas you cover, the sort of service.

Paul Pindar: We will be working in the Department of Energy and Climate Change and will be helping with the project managing of the roll-out of the smart metering campaign over the next six years. We work with people such as the Home Office. For example, we are running the disclosure and barring service. We run more mundane or basic activities such as payroll operations for people such as MyCSP. Will that do?

Q4 Chair: Good, brilliant. Mr Almanza.

Ashley Almanza: We have about £700 million of revenue from Government. Most of that-about £570 million-is from central Government. Our biggest customer is the Ministry of Justice, where we provide electronic tagging, prisons, secure facilities. We also provide secure facilities management in other settings such as courts and tribunals around the country. Most of our work is focused in the area of security as you would expect. We also provide services for DWP such as facilities management but also on the welfare-to-work programme.

Q5 Chair: Thank you. Mr Lyons.

Alastair Lyons: At Serco we have around £1.8 billion of UK public sector turnover, of which our central Government turnover is about £1.2 billion. We focus on areas of justice and defence, transport and health services. Within justice, we run prisons, we do electronic tagging, we help with the Youth Justice Board, we run immigration and detention centres. In defence, we run some army and air force bases. We do RAF Cranwell. We are a third share in the Atomic Weapons Establishment. On transport, we run docklands light railway and we are responsible for Boris bikes in London. In health, we work with a number of community health care areas.

Q6 Chair: And Ms Morgenstern.

Ursula Morgenstern: At Atos, we have about £700 million from central Government. About two thirds of that will be in the technology space and about a third in the business process outsourcing area. The two contracts that have been covered are the DWP’s benefits assessments and the back office operations for National Savings and Investments. In the technology space, the biggest client is the Ministry of Justice, where we run the desk jobs and IT infrastructure. A lot of the work for the Department for Transport, the Vehicle and Operator Services Agency and the Highways Agency is again running the technology. We have other contracts with the Department for Culture, Media and Sport, the Department for International Development and the Foreign and Commonwealth Office, mostly in the technology space.

Q7 Chair: Thank you. I now want to ask another question and again a shortish answer would be very helpful. In your view, with the masses of contracts that you have, what should Government do to become a better client? I will start with you, Mr Almanza.

Ashley Almanza: Principally, Government should continue to do what they have been doing. From our vantage point, engagement with Government has become more formal and procurement with the procurement arm of Government-

Q8 Chair: Do you think it is working well?

Ashley Almanza: On the whole, I think it is. There are some obvious exceptions.

Q9 Chair: What I am interested in-and one of the reasons why we are here-is that your business with the public sector has massively grown, by about 500% in the last decade, give or take. It is a massive, massive expansion and with present Government policy, that is likely to increase, so it really matters to the taxpayer that we get best value for that. There are a growing number of examples-no doubt we will come to them in the hearing-where there is a question mark over whether all of you provide best value. What should we be doing? I am getting you to put the onus back on Government, not on us the Committee. What should Government be doing to eke better value so the taxpayer does not get ripped off? A real, honest response to that would be very helpful.

Ashley Almanza: Would you like me to begin?

Chair: Yes, keep going, apart from telling us that we are all wonderful, which we know.

Ashley Almanza: Government have increased the level of competition to supply.

Q10 Chair: Where?

Ashley Almanza: We are happy to talk about that. From our vantage point, competition has increased. Competition is ferocious. The relationship is more formal and procurement has become a lot more sophisticated. The contracts include much greater rigour around performance indicators and so on. So continuing to increase the capability within Government to let and manage contracts is the right thing to do and I would expect to see more of that.

Alastair Lyons: What Government have begun doing, particularly over the last few years, is to pull together the various parts of Government so that there is a single interface at Cabinet Office between Government and the supplier. There is then a point in Government that understands the whole of the relationship with that supplier, across a multitude of Departments. That leads to a more informed customer and therefore a more effective customer. There should be continuation of transparency: requiring transparency from ourselves as suppliers to Government, so that there is a continuation of the move to open-book accounting and a much greater dialogue between Government and ourselves as the supplier, across all levels. For example, we are now inviting Government to appoint a director to the supervisory board of the new UK central government division, which we are forming.

Equally we would like departmental forums, where we sit down with Government, with full disclosure of our key performance indicators, so that they as a customer are as informed as we are about what is going on with our contracts.

Q11 Chair: A totally open-book contract, including financial information on all your contracts?

Alastair Lyons: Yes. We have already had 80% of our contracts on open book, as was in the NAO Report.

Q12 Chair: You have very few, Mr Almanza.

Ashley Almanza: According to the data here and the way we respond to the question, that would seem to be the case. On the other hand, you will have seen also in the NAO Report that we provided all the information that was asked of us on those contracts, whether or not it was open-book and like Mr Lyons we would have no problem.

Q13 Chair: You would have no problem with total open-book contracts?

Paul Pindar: No, we have no problem whatsoever. I don’t know if you want to go back to your first question.

Q14 Chair: Actually, to be fair, I was going to go to Ms Morgenstern first and then come back to you on that. Sorry-I interrupted you, Mr Lyons. Was there anything else you wanted to add there?

Alastair Lyons: No, that’s fine.

Ursula Morgenstern: Coming back to the original question you asked-how can Government be a better client?-from my perspective there is still a variety of skills in the Departments. I think what would be helpful would be, how can you encourage sharing of best practice. There are some Departments that are very good in contract management or in the procurement process, and how you share that best practice more effectively across Departments would be, I think, something to investigate. In looking at the Report, one of the areas that I was also looking at is how can you, for example, learn from local government into central Government. If you are looking at what is happening in central Government at the moment, there is increased business process outsourcing, which has already happened in the local government space. How can you actually learn from local Government into central Government?

Q15 Chair: Where is the best for Atos?

Ursula Morgenstern: For us, the best client, who has proven to be very good in the sense of partnership, but is no means soft, is actually National Savings and Investments. They ran a very strong re-procurement with strong terms and conditions which I might be able to refer to later on again, but on the other hand it is a partnership and when problems occur, there is joint working together to solve the issue for the end client. In a lot of cases, of course, while the Department is our direct client, it is delivering to the British taxpayer and sometimes it also includes other Departments. Again how that can be improved is one of the areas, from my experience, where best practice would be welcome.

Q16 Mr Bacon: You said that there is a variety of skills in the Departments. One might take that to mean that there are some people who can swim and some who can dance, but I don’t think that is what you meant. Did you mean that there is a variety of levels of competence?

Ursula Morgenstern: Yes, thank you very much for correcting me.

Q17 Mr Bacon: There is high competence and low competence. Is that what you were saying?

Ursula Morgenstern: Yes. There are people who have high skill levels and others where, due to the history of the Departments, the skill levels might not be-people might not be as experienced from a commercial contract management perspective.

Q18 Mr Bacon: Have you ever turned down a contract or the offer of a contract because you thought the client side was not skilled enough?

Ursula Morgenstern: With hindsight-

Q19 Mr Bacon: No, I mean at the time. I don’t mean afterwards thinking, "Why on earth did we do this?"

Ursula Morgenstern: We will look at the terms and conditions and-

Q20 Mr Bacon: So you are always prepared to take the money?

Ursula Morgenstern: No.

Q21 Mr Bacon: So you have turned down something?

Ursula Morgenstern: We will not bid for work, we will be selective in bidding because we will assess whether we can do the work.

Q22 Mr Bacon: My question was, have you ever turned down work because you thought the client side was not skilled enough?

Ursula Morgenstern: It is not possible to just turn up. We have to go through a formal procurement process so the moment we will make that decision is when we start to bid. As Government procurement can be quite dear, we will make that selection early on in the bid process.

Q23 Chair: Has anybody turned down a job?

Paul Pindar: Yes.

Q24 Chair: What did you turn down?

Paul Pindar: We turned down a local government job, not a central Government job. Actually it wasn’t because we didn’t think they were competent, it was because a 10-year contract is a long-term relationship. I would completely agree with Ursula’s comments. It needs to be a happy relationship, and we were concerned that the tone of the relationship was wrong. We want to work in partnership where people actually get on in a harmonious way with a common objective. We turned down a £107 million contract when we were the preferred bidder because we did not believe that the 10-year relationship was going to be happy.

Q25 Chair: Finally, open-book contracts.

Ursula Morgenstern: I have no problems with transparency. We provide our information regularly to the Cabinet Office. One of the questions I have is-how do you ensure transparency with the whole competitive field? This is just four of us and as we have heard at the beginning, two thirds of our business is in the technology space, so my question is, no problem with transparency, but how do you ensure it is a level playing field for all of us?

Q26 Chair: Well that is for Government to ensure. I am going to come to you, Mr Pindar. Does anybody object to having the NAO access the accounts that you have-the contracts that you have, so that it can look from the point of view of the taxpayer to see that the taxpayer’s interests are protected and we get value for money? Do any of you object to that?

Paul Pindar indicated dissent.

Ashley Almanza indicated dissent.

Alastair Lyons indicated dissent.

Q27 Chair: Right. We might make progress on this. At the moment, the Prime Minister has not conceded it to us; he might now change his mind. Mr Pindar, you can answer. Then I have a list: Justin, Austin, Ian, Meg, Nick.

Paul Pindar: I was going to tackle your question in two ways. You very kindly tackled the question of what Government could do better and I was also going to say, in the spirit of partnership, what we could do better.

In terms of the list of the three things I would be requiring if I were in your shoes, I think you should require open-book accounting. The simple principle for that is that if you are a contractor-as I believe all of us are-that wants to do a good job and make a reasonable return but not to profiteer, there is no conceivable reason why you would not agree to open-book accounting.

The second thing that I think you should think about is having the power to put third-party auditors in on any contract at any time. Again, if you have nothing to hide, why wouldn’t you be prepared to do that? Certainly from Capita’s perspective, we would be quite happy to do that. One of the key things we need to address at the moment is the matter of trust. As we collectively know, probably there are issues where trust has been breached and anything we can do to rebuild that would be helpful.

There is a third thing that we can do as an industry, which again from Capita’s perspective we would be very happy to do and is a far more imaginative and creative solution to the issue of companies making too much money. I get concerned when I hear people having a debate about the amount of margin that businesses like us make, because actually our margin is a by-product of efficiency. What you do not want to do is say, "Well, we don’t want you earning a margin over x," because all you are doing is disincentivising us from generating efficiency. The better way of rewarding it is to say, "Let’s agree what is a reasonable margin and then, above and beyond that, let’s share that margin with the client." Then, what you immediately do is create a continuity of interest between Government and ourselves that means that the more efficiency we can generate, the more the taxpayer will benefit. We have done that now in a number of instances.

Q28 Chair: Where have you done that?

Paul Pindar: We have done that, for example, at Birmingham city council. We have also done it with the BBC on TV Licensing, where we have driven out huge efficiencies in that operation and we have done that in tandem with the client. Those are the three things that I was going to list that we can do with Government to make their lives easier.

I think there are things that Government could do for us. Again, one of the themes that comes out of what I thought was a superb Report from the NAO was the theme of trying to encourage more SMEs to come into our market, because the market is much narrower than it ought to be in reality. One of the things that we need to do for SMEs is to make life easier for them. That means that we need to shorten the procurement process, make it simpler and make it cheaper. Anything we can do around the procurement process would help.

Richard Bacon made a comment about the level of competence. I would probably address it in a different way; that is to say, I do not think we have senior enough people involved in the procurement process on the Government side. We are actually putting a lot of people on the task, but they tend to be too junior. I think Government would score heavily if they assigned more senior people.

The third point I was going to make, which is a cultural point and a hard one to do, is that we need to create an environment within the employment of civil servants where we instil confidence in taking a risk and reduce the fear of taking a risk. Some of these things are complex arrangements where it is possible to save the taxpayer a lot of money, but sometimes things go wrong. We have had examples of where things go wrong. A great example is Applied Language Solutions: the language service for the Ministry of Justice. I have actually got a lot of respect for the Ministry of Justice taking the decision they did, because they have saved the taxpayer a lot of money, but there is clearly fear that when things go wrong, that will prejudice against their career. I think we need to find-

Q29 Chair: I would quarrel with your thinking that they saved money. They have not given us a proper calculation that looks at the extra money we have had to spend on services when interpreters were not provided.

Paul Pindar: That was point three.

Chair: There has not been a calculation of that figure and until we get that, we do not know. They might just have managed their staff better, including their interpreters, and that might just have saved money.

Paul Pindar: Point four: I understand why Francis Maude did it, but when the coalition came into power, one of the first things they did, because they were trying to shock the system into saving money, was a blanket ban on consultants. I completely understand the psychology behind that, because at that time the UK balance sheet was in a pretty awful state. I think we need to release that a little bit, because the thing that consultants really provide, apart from confidence, is expertise. Therefore, without spending very much money, more initiatives could get under way just by selective use of consultants. I think the blanket ban idea should now be released and we should be a little bit more selective.

The fifth thing I was going to say-again this is a kind of plea for my industry as a whole-is about requests for information. Our business serves nine sectors and the sector that asks for more information than anybody by an absolute mile is central Government. We don’t mind providing information as long as it is relevant and has a value. But it is very expensive to produce lots of information and one of the reasons why SMEs will not engage with central Government is just the sheer cost of doing so. Again, we would ask clients to be very thoughtful about what they ask for. We will be open book. We will be helpful, but please don’t ask for things that have no value.

Chair: Now I have a list of Committee members who want to ask questions. I am going to keep questions short and then come back again later.

Q30 Justin Tomlinson: I spent 10 years as a local authority councillor. The drive from the last Government was for us to get as many services as possible out into the private sector to drive through efficiencies. I want you to comment on this and then I have a suggestion as to how this could be addressed and I want you to tell me whether I am barking up the wrong tree.

The challenge is that you are all experts at doing these bespoke, one-off contracts. You arrive at the table with a reasonable knowledge of what you need to do. It was always a one-off stand-alone for a local authority with no expertise. They would have an officer, who would often not necessarily be equipped or experienced enough to do this and all too often would not last the process. So you would get halfway through the contract negotiations and then they would go off to be paid more money somewhere else. Then you had a fresh set of eyes who did not really know all those things. Therefore local authorities would often make mistakes and they can be very expensive, inefficient mistakes.

First, is that typical? Secondly, I get the point about consultants. It always surprised me that the Government did not have a team of experts that, in effect, audited and supported local authorities and other organisations to make sure they were doing the right thing. Each local authority was doing maybe one or two of those for the first and only time. Yet if there was the pooled talent, centrally, seeing what was working in different areas, I think that could have made a huge difference.

Alastair Lyons: Just picking up one of your points, I think there is a duty upon us, as providers to the public sector, to be transparent in all respects. That transparency includes if we are, either going through a bid process or during the contract, coming across something where clearly it does not appear to be well understood by the government purchaser on the other side, then we have a responsibility, ethically, to make that clear to the government purchaser at the appropriate level of seniority. A particular example here would be change notices, where you have bid a contract, you have won the contract, you are in a contract for a period, but something needs to change and therefore you are, for that purpose, a monopoly supplier. So I think there is a responsibility for us to provide that transparency, which then eases that issue.

Q31 Justin Tomlinson: But my initial point was this: is there the expertise, particularly in local authorities where they are perhaps only doing one or two contracts, and is there consistency-are those key officers who are doing the contract negotiations there throughout the process? If the answer is no, should not the Government perhaps have that team of experts who can come and say, "Well, collectively we have had sight of 500"-or whatever-"of these local authority contracts"? I get transparency, but I ran a business, and when you are doing a deal, it is a meeting of equal minds and you will always then come up with a fair deal.

I don’t blame you because you are experts in your area, because this is what you do and this is the purpose of what you do, whereas these local authorities are doing one or two contracts and they are coming to it fresh. I have a feeling that we were not the only authority where the key officers changed and we were not empowered.

Paul Pindar: I have to say that our experience has been better than that. In the vast majority of instances we felt that the officers negotiating on a local government side a) had been pretty competent; b) have lived through the process of the negotiation, and c), very importantly, have lived with it thereafter. My only nervousness about your suggestion is this. I can understand the appeal of bringing in an outside group of experts to advise, but the trouble with that is that they then have all the embedded knowledge in their head and then disappear somewhere else. The advantage of having a local government officer to do it is, 1) they have the accountability of living with the decision, and 2) they have that embedded knowledge.

I actually think local government, as a rule, is a pretty good procurer.

Fiona Mactaggart: Really?

Paul Pindar: Yes, probably, because they have been doing it since 1988 through compulsory competitive tendering. They are more experienced. They drive a harder bargain.

Q32 Mr Bacon: Is local government better at sharing best practice than central Government?

Paul Pindar: Again, the view would probably be yes. One of the reasons for that is because local government is a more homogeneous body. There are 400 local authorities, and although they all view themselves as being different, a lot of them do kind of the same things and there is a network where they share. If you look at central Government, where there are 20-odd very different bodies, there is less sharing.

Chair: We will stick to transparency before we move on because I think it is a big issue.

Q33 Meg Hillier: You talk about transparency and open-book accounting with the client, in this case the Government Department or local authority. I was very interested that you, Ms Morgenstern, talked about the British taxpayer being the ultimate client and there are a lot of users that you are serving.

Ursula Morgenstern: Yes.

Q34 Meg Hillier: I remember-it is perhaps a bit unfair to raise this-the housing benefit issues in London. You smile with recognition but it was not much fun for the people involved. I recognise that there were problems on both sides; there was not a smart client, but providers were not doing a good job there either. That was a fiasco and there was no openness there at all.

Paul Pindar: It was 15 years ago.

Q35 Meg Hillier: I know, but I am using it as an example because we all live with the scars of it. The ultimate consumer did not really know what was going on then; it was complete confusion. Is that better now? I do not think it is generally better, but what could be done to make Government procure you so that you are more open with the ultimate client? Or should it be Government that is being more open?

Paul Pindar: I can’t resist responding to that on the basis that you raised our sins of 15 years ago. Point one is that your point is fair: point two is that everyone in this industry matures over time. The way that the industry as a whole has matured means that people have different practices.

Chair: Okay, let’s stick to the transparency. I accept that it is 15 years ago, but I think we probably all have more recent examples.

Q36 Meg Hillier: My point is about the response to the client, the taxpayer.

Paul Pindar: The simple-

Chair: Can I bring in Ms Morgenstern, because she has not had a chance on this one? Just to divvy it up a bit.

Ursula Morgenstern: I think that the Department actually need to sit down at the beginning, or even throughout the contract, and think through what they want to say. We normally give the information to the Department and if that is clear from the very beginning, you can start to collect the data. Sometimes, to work it backwards is difficult if it has not been collected. All of us will give the information as defined and required by the client-and we often give more-and then it is really the Department which can decide how they will publish it. That thinking needs to take place at the very beginning.

Coming back to the question that was raised regarding how you can learn from a procurement, you often need to get in early before the solution is designed and before the procurement goes out. In the private sector, if you have a chance to go in early and help to design a solution, then you can use repetitive components. That will make it easier to deliver and cheaper to buy. That is early on in the procurement and that is where the Government need to really think through what they need and what they want from this client.

Q37 Nick Smith: I just want to pick up on Mr Almanza’s commentary. When asked about the Government as a client, you pretty much gave a "steady as she goes" response. I wondered if you thought that the Ministry of Justice’s capacity was good to effectively monitor your companies’ contracts?

Ashley Almanza: To clarify my response, what I was trying to say was that the trend that you see in the way that the Government are managing contracts is, in my view, a positive trend to take. As Mr Pindar commented, this is an evolutionary process and the contracts that we are entering into today are vastly different to the early contracts. There is much greater granularity around performance, there are regular reviews of performance, including by the Ministry of Justice, as you mentioned.

To go to Ms Hillier’s comment, it is in the hands of the client, the customer. When the contract is let it is completely at the option of the customer to say, "This is the information that we will require on a regular basis. These are the incentives for out-performing and these are the penalties for failing to perform."

Q38 Chair: I think we want to come back to the tagging contract; we have a separate paper on that and I was going to come to it.

Ashley Almanza: I was talking more generally.

Chair: Yes, but I think the tagging contract gives a bit of a lie to what you have just said. Let us stick to transparency if we can. Richard.

Mr Bacon: Thank you, because I would otherwise immediately respond to something that was said that reminded me of another of Capita’s sins from 12 years ago.

Chair: Don’t.

Q39 Mr Bacon: I won’t.

I was listening to what Mr Pindar said, and to what Mr Lyons said a minute ago about openness. Mr Pindar said that there should be "third-party auditors…on any contract at any time"-it is a "matter of trust". There are issues around that, and given that some of you have criminal investigations pending against people because of the activities of some of your employees, that is not surprising. Mr Lyons said that providers to the public sector have a "duty…to be transparent in all respects." The way you say that sounds so encouraging that one might be forgiven for thinking that we had already reached the broad sunlit uplands where things are now much better than they used to be and we can all sit back and relax.

But I was looking through PwC’s "Forensic review of the reported performance information of the Out of Hours service provided by Serco Group plc" to the Cornwall and Isles of Scilly primary care trust. We as a Committee got it only yesterday afternoon. PricewaterhouseCoopers finished the work on it back in April and it was sent to the NHS in September, so it has been knocking around somewhere for almost two months, but not with us. I have now just seen-we were sent this yesterday-Serco’s rebuttal of the areas where PwC says it was not given full access. There is an argument going on here, in these two documents, about whether or not you have been transparent in all respects, which, if you were being transparent in all respects, manifestly could not be taking place. So you are not there yet, are you, Mr Lyons?

Alastair Lyons: I think as far as Cornwall is concerned, the forensic report relates to data from 12 months ago. A huge amount has been done on Cornwall since then-indeed, since your own Committee had a hearing on Cornwall earlier this year. As a company, we were deeply saddened and very sorry for what went on in Cornwall; it should never have happened, and we have been focused on actually changing those circumstances in Cornwall so that now we are delivering the required standards of care, we have required standards of staffing, as were shown by the Care Quality Commission in July-

Q40 Mr Bacon: May I stop you? That is all good stuff-all motherhood and apple pie-but the question is about transparency. You said that there is a duty to be transparent in all respects. In this report, dated September 2013-although yes, looking at information from 2012-PricewaterhouseCoopers said: "We would have expected a more extensive email review exercise to have been conducted to determine who within Serco knew of the misreporting at the time, other than the employees directly responsible. We would also have expected more detailed records to be kept of the investigative work undertaken." That does not sound to me like a forensic reviewer that was able to do all of its job, because it was not able to get access to all the information.

I notice that in your reply, one of the arguments you pray in aid is patient confidentiality, but surely to goodness, when you are dealing with a forensic reviewer that is inside the curtain, it does not necessarily follow that everything the forensic reviewer looks at will be exposed to the light of the whole world, but you have to be able to show the forensic reviewer everything, don’t you? As Mr Pindar said, ultimately this is a matter of trust. There are various companies, like yours and others, that have, to a considerable extent, undermined by their own actions taxpayers’ trust in them, so you have got to work very hard to sort this. This does not tell me that you have got there yet.

Alastair Lyons: The rebuttal which we have put in is not a rebuttal denying the statements that PwC have made; it is with regard to certain specific issues which they have raised. As far as we were concerned, we were prepared to be totally open with regard to e-mails and information. We are, though, within the bounds of the PCT-the commissioning body here-as regards what we can or cannot put out.

Q41 Chair: But hang on a minute, Mr Lyons. The PwC report actually says, in the sentence before the passage that Richard quoted: "We are unable to comment on the effectiveness of the conduct of the investigation"-that is your own internal investigation-"as it was not Serco’s practice to retain detailed records of its investigation". So there are all these allegations flying around, you do an investigation, quite properly, but you then destroy the evidence and you are "unable to share…information with us". That is not transparent, when you are trying to learn, in this instance, from what went wrong to try and put it right next time.

Alastair Lyons: Madam Chairman, we have gone back to PwC and said that we have that information. It is retained and in the reply that we have made, we have denied the statement that PwC made. I have questioned my team personally, having read that, because I could not understand it and it was completely against everything that I believe our business does. They turned round to me and said, "We refute the statement that PwC made." We have taken it up with PwC, but it has maintained the statement in the report.

Q42 Mr Bacon: So Mr and Mrs Taxpayer paid a lot of money through the NHS for PwC to commission the report, but at the end of it we are still arguing about the facts. You can see from our point of view, as scrutineers of value for the taxpayer, that that is wholly unsatisfactory. I understand that there is another issue, because the report is addressed to NHS Cornwall and Isles of Scilly PCT, which ceased to exist during the course of the investigation that led to the review.

Alastair Lyons: Exactly.

Q43 Mr Bacon: So I can understand from PwC’s point of view how difficult it must have been to get sensible instructions from a client that was in the process of evaporating. I will go back to my earlier question about the extent to which the client side is responsible for many of these failures, which, having represented the consulting industry for a while 20 years ago, I know often to be true. There is still the central question: in light of all these arguments and spats and your previous record, why should taxpayers trust your company?

Alastair Lyons: First, we have been open throughout the course of these investigations, which have taken place this year. We have said to the various bodies that have mounted investigations that we will have a completely open book and will work and co-operate with them fully. Secondly, a whole series of reviews are taking place, including in the Ministry of Justice and the Cabinet Office, into the other things that we do. We do an awful lot of other things besides the particular issues that have arisen this year that sadden me, shock me and which I am deeply sorry about. They have happened, however, and I need to ensure that they do not happen again. It is those actions that we are taking that are the main reason why the taxpayer can have confidence that you can deal with Serco, confident that Serco will deliver value for money. We will be transparent in our dealings with Government, in exactly the sorts of things that I have talked about up to now.

Q44 Mr Bacon: You are making the best fist of this that you can. You seem like a sensible, straightforward, trustworthy sort of person.

Alastair Lyons: Thank you.

Mr Bacon: But the fact remains that this is a report from a reputable big four firm and you and they are disagreeing about the fact. It is in the light of that that I am asking the question about how the taxpayer can trust you. You have not even yet got to a shared understanding of the facts with PwC.

Alastair Lyons: Can I mention what we have a shared understanding about?

Q45 Mr Bacon: It is what you do not have a shared understanding of that worries me, because that is where the distrust rises from.

Alastair Lyons: It is PwC’s recommendations that we will accept in full, if the commissioning body accepts them. We have absolutely no reservations about any of those recommendations. I do not know why we cannot agree on the facts. I know that we have done an extensive e-mail review, and I know what that e-mail review showed. I know that we have the detailed records and I do not know why PwC does not think that we do. I will gladly take the point away and have another conversation with PwC.

Q46 Chair: Let me share another instance of Serco transparency, because are still on that issue. This is not about what you did or did not charge on the tagging contract, but is another aspect of it.

We talked about the profits that you make on your contract and, looking at the PwC report, they do not look unreasonable, on the whole. Then, if you start digging into Serco’s position, there is a company called Serco Geografix whose operating profits jumped between 2001 and 2011. That company’s sole customer is Serco Ltd, which is the company, I think, that had the tagging contract. It seems to me from reading it that you were charging an arm and a leg for the hardware-the tags that they put around people-and putting it into Serco Geografix’s accounts. You were therefore not being transparent, but hiding it from the actual costs to Serco Ltd-the company that the Government did business with. You pretended to the taxpayer that the profit you were making on the contract was not unreasonable, when in fact it was excessive. A Policy Exchange report-I think it was Policy Exchange-showed that the costs were 60% higher in the UK than they were in Florida.

We will come later to what you did and did not do for the tagging contract, but for this contract the lack of transparency led to excess profit. To the taxpayer, that feels like a rip-off.

Alastair Lyons: That contract, Madam Chairman, was let in 2005. I believe, although I cannot say for certain because I have only been chairman since 2010, that the basis of the interaction between Geografix and the main contract was known by the MOJ customer. I know that the new electronic monitoring contracts that are currently being let have split the supplier-

Q47 Chair: We are talking about the existing contract and transparency.

Alastair Lyons: If the situation was not transparent when it was let in 2005, were it to arise now with Serco being run as it is, it certainly would not happen that such a material part of the overall arrangement would not be completely transparent to the customer.

Q48 Chair: So what you are really saying is, "We ripped you off in the past, but we won’t do so in the future."

Alastair Lyons: I don’t believe that we did rip the taxpayer off. I think, as I have said, that it was totally transparent.

Q49 Nick Smith: Do you think it was profiteering, as Mr Pindar said earlier?

Alastair Lyons: I don’t believe it was profiteering, no.

Q50 Jackie Doyle-Price: Or do you think that there was inadequate contract negotiation by the Department at the time, and everyone has learned since then?

Alastair Lyons: I would have to hypothesise, but clearly contract management has changed materially since 2005.

Amyas Morse: I have a very quick point in support of transparency. It is about your capacity to control what is happening in the groups. The groups are growing very fast and you have extremely rambling group structures because a lot of the growth is by acquisition. You said yourself that what you are trying to do is at the centre. The real question is, have you actually got the capacity to be in control of what is happening in the multitude of subsidiaries down below? I know you have probably got controls around profitable operation. But when we are invited to place confidence in a group, the question is, have you got controls that give central management the assurance that what they are saying, which sounds fine, is actually being carried out through the group? That is a pretty important question for us to ask.

Alastair Lyons: From the perspective of Serco, the controls that one has in the organisation are dependent on the management structures, the expanse of control within those management structures, and then the reporting, which comes through the organisation against key performance indicators and performance standards. Senior levels of management, including the board, are then able to understand what is happening in each part of the organisation, so there is clear identification if problems arise. On the one hand, you have your structures of reporting and your information. But you also need to have your lines of assurance in place-quality assurance at the first line within the operations, risk management to identify and flag up potential issues, and internal audit to examine whether the line 1 and line 2 defences are working properly. It is perfectly possible for a broad, complex organisation to have strong controls. We identified in the comprehensive reviews that we have been doing this year that there is a consequence to those issues arising. There are areas where we can strengthen our controls. We have a basic framework of control, and we need to build significantly on it.

Amyas Morse: Do you really think that you have that in place at your rate of growth? Do you really think that you have a reliable control structure at the rate of growth of your group? Do you really believe that you can rely on it?

Alastair Lyons: As I said, I think there is quite a lot that we need to add to our control structure, in order to bring it up to the level of, as you say, the current development of the group. That is what we are now putting in place.

Q51 Chair: I think that is sure. Come in on that. We are still on transparency, guys. I have got you all down. Mr Almanza, come in, and then I am going to go to Austin and then Steve on transparency.

Ashley Almanza: Thank you. May I respond to the previous question? I think it must be obvious that historically we have not had all the controls that we have needed in place. There are too many examples in here, the industry, and I would certainly say our company, where we haven’t controlled the situation adequately. I think one of the strengths of the approach that is increasingly being taken by-I am talking principally about central Government because our role in local government is quite small-is that it facilitates greater control at contract level. That is where the control needs to be, because that is where things go wrong. We are not there yet, and as a company in the past five months I and colleagues are on record saying that we need to invest and make changes. We are doing that, but in the meantime, the client, in the form of the Government-recognising that the ultimate client is the taxpayer-can also contribute to that and is doing that by being more vigilant about performance on contract.

Q52 Austin Mitchell: I think the nub of the argument here is that to replace public monopoly with an oligopoly-that is to say, a small handful of big organisations like yourself, which are big enough to dominate the bidding and then, when they are incumbent, are too big to be replaced-the requirement from a public point of view is that the taxpayer, the Government and the National Audit Office know more about what is going on.

You all held your hands up when the Chair asked if you had co-operated. You have co-operated and the National Audit Office agrees that you have co-operated. But still it has not been able to audit elements of the business deemed by you to be commercially confidential. In an effective audit, doesn’t the National Audit Office need to be able to follow public money wherever it is going and to know about your pricing structures-what functions are charged to what sections of the organisation? You might be manipulating profits from one section to another. Doesn’t it need to be able to do a more thorough audit than it has been able to do? That would replace the need to have particular audits, like this one from PricewaterhouseCoopers, on one particular section. Doesn’t that work need to be done by the National Audit Office for all of you?

Ashley Almanza: If I may respond, I think the National Audit Office is uniquely placed to audit commercially sensitive information, because I think that private providers would have complete trust in the National Audit Office to protect commercially sensitive information, while still auditing as much as they want. I think, and I stand to be corrected here, that there is no problem in providing commercially sensitive information to the National Audit Office, if that is what is required.

Q53 Austin Mitchell: You have not provided them in this instance.

Chair: No, to be absolutely fair, we think that this is great progress. Certainly, Richard and I chatting here think this is great progress. You haven’t provided it because of the terms of your contracts with the Departments. What we need is for Government to accept-I have raised this issue with the Prime Minister on, I think, three separate occasions-that as part of the monitoring of the contracts where private providers are providing public services there ought to be open access to those contracts by the NAO. If you guys are happy with that, we have two sides of the argument together. We may then be able to persuade the Government that this is a good idea and in the taxpayers’ interest. I hope that that is where we end up.

Ashley Almanza: Briefly, Mr Morse could clarify here, but I believe, Mr Mitchell, that we have provided all the information that has been requested over and above what was contractually required.

Q54 Chair: You have been very co-operative with them on this, but any contract that you have with any bit of Government-the National Audit Office, and therefore reporting to us, does not have access. I am right in that, Amyas?

Amyas Morse: Yes. Also, just to put on the record, for this Report, G4S gave us absolutely full access. They were the ones who gave us that. I am not complaining, just stating, because this was voluntary co-operation, but we did not have the same level of access from all the companies. Some said that there were bits of information that they did not feel they could share.

Keith Davis: That’s right. We did not have quite that same level of access. We got a great level of access; in some cases it was a little bit more summarised.

Q55 Chair: From the four sitting in front of us today?

Keith Davis: In some cases we did not get full access to non-open book contracts, for example, and there were reasons for that.

Austin Mitchell: We can’t follow public money wherever it goes because there are areas that are deemed to be commercially confidential.

Chair: Not for the NAO.

Austin Mitchell: The NAO.

Q56 Stephen Barclay: Mr Almanza, do you always see the Department’s business case? On the contracts to which you provide services, would you always see the Department’s business case?

Ashley Almanza: I don’t believe we would. I am not 100% certain of that. By that I mean, when central Government let contracts to private sector providers one of the constant reference points they have for the alternative is public sector provision. I don’t think in all cases we are able to see the business case from the Government’s point of view.

Q57 Stephen Barclay: There may be small elements that would be redacted. But in terms of understanding the needs of the client, would it not help you and supplier innovation to understand the rationale behind it?

Ashley Almanza: Yes, it would.

Q58 Stephen Barclay: It would. Would it be welcome if you were to be given access to the business case?

Ashley Almanza: Again, just to clarify. There is a great deal of information exchange for us to understand the customer’s needs, but the economics is what I was referring to.

Q59 Stephen Barclay: Sure. Does the Department see your business improvement plans?

Ashley Almanza: Do you mean for the company as a whole or for individual contracts?

Q60 Stephen Barclay: I am just going on when you are telling shareholders about business improvement plans to strengthen margins in 2014-15, is that the sort of information that the Department would see?

Ashley Almanza: Well, that comment was obviously in relation to a global business, most of which is not Government business. In the case of individual contracts with UK Government, in many of the newer contracts we are required to share with the customer-that is, the Government-improvements in our business performance, and in some of those contracts there are gain share clauses. I think that was a point that Paul was making earlier. There is an incentive then to find savings, knowing that the client and the service provider share those on a 50-50 basis for example.

Q61 Stephen Barclay: But savings may be achieved simply through displacing cost. To what extent would penalties in a contract reflect the true cost to a Department?

Ashley Almanza: I am afraid I don’t follow the question.

Q62 Stephen Barclay: A contract might say that you have got to get prisoners to court, and if you don’t do so you are fined. To what extent does the fine reflect the cost of the loss of court time, the cost of the lawyers, the true cost to the Department?

Ashley Almanza: I do not know the answer to that, but I know that the penalties on some of the contracts make the contracts loss-making, so they are not trivial.

Q63 Stephen Barclay: This example is from Scotland so it may be slightly different due to devolution. G4S was fined in 2012 £335,000 for nearly 22,000 occasions, which seems about £15 a go. I don’t know what the cost is of losing court for a day. I think an Old Bailey study 10 years ago suggested it was £110 a minute. It is clearly going to be significant. This is what I am trying to understand. You can have a contract that says you have got to do X-the activity-but if the penalty does not reflect the true cost to the Department because the penalty clause is very limited then you are skewing the basis on which the service is being tendered. I am trying to establish whether the penalty clause-where you do not do what you say you are going to do-reflects the true cost.

Ashley Almanza: I do not know the answer to that. Again, I would say that the penalties in the contract are prescribed by the customer and they are typically not trivial.

Q64 Stephen Barclay: Well, perhaps Capita could help. Another cause of court adjournment and court time being wasted is translators not being available or speaking the required language. The Evening Standard reported what it called a "risible" fine of £2,200 for a series of failures on the ALS contract. Can you help us as to what penalties reflect true cost?

Paul Pindar: I am certainly happy to help. The first thing to say is to take the instance of what would have happened if a service had not been outsourced-because the ALS service had not been outsourced. Financial information did not exist on what the performance actually was and there were certainly very many instances of translators not appearing in court. So it is important to recognise that the sheer process of outsourcing itself provides information and accountability.

Q65 Stephen Barclay: Sure, so when you are negotiating those prices, you are negotiating them in a vacuum of data. Is that what you are saying?

Paul Pindar: Sometimes you do not have the required quality of data that you would like.

Q66 Stephen Barclay: So it is difficult for the Department then to price it accurately?

Paul Pindar: It is difficult for everybody to price it accurately. The second thing I would say is that, if you take Ashley’s comments before, there needs to be a balance. If we are trying to create an effective market where public and private sector work together for the benefit of the taxpayer, then if you levy such heavy sanctions on the private sector contractor that it drives him into a position where the contract simply has no viability, then you actually end up killing the market. In the instance that Ashley gave you, his response was that he could not tell you exactly what the penalties were, but it drove the contract into losses. As soon as you get to a point where the service credit regime drives the contract into losses, it is fair to say that there is a pretty heavy sanction for that supplier already.

Q67 Chair: You didn’t lose any money on that contract.

Paul Pindar: On ALS? That was the third point that I was coming to.

Q68 Stephen Barclay: That was not a heavy sanction.

Paul Pindar: No, let me finish please. We lost a huge amount of money on the ALS contract, but again the important point is-

Q69 Chair: You were not fined.

Paul Pindar: No, but there is a significant difference here. You should not naturally assume that the way of motivating a private sector partner is simply to hit them with the threat of service credits or fines. The far bigger driver to the vast majority of private sector providers, of which we are one, is the reputational desire to do a good job. To come back to Margaret Hodge’s point, on the ALS contract-which we did not sign, but inherited as part of an acquisition-we realised pretty quickly that it was in difficulty. We went back to the MOJ and Capita literally threw money at that service to make sure that we could get a high level of performance as quickly as we could.

So we were not fined. The service credit regime that was written into the contract was nothing like as onerous as the losses that we suffered. During that period we suffered losses of £6 million to £8 million. If you talk to the guys in the MOJ, the comment that they would make is that they had a huge amount of respect for the fact that, first, we did not walk away because we did not sign the contract, secondly, we stepped up and did the right thing and invested heavily. If you look back over the performance of that contract over the last 12 months, you can see that there has been systematic improvement. That performance is now at its highest level in the history of the contract; and the cost to the taxpayer of the translators provided to courts is far lower than it was before the service was outsourced. I say that in the spirit of balance. Do not assume that service credits are actually what drive the right behaviour. They do not always.

Chair: I have a lot of people waiting, Steve. We were on transparency and I allowed you to deviate from it quite a lot. May I come back to you, otherwise it would be unfair?

Ian Swales: You might want to stop me here, because I wanted to go back to the issue of-

Chair: I brought you in because you asked earlier.

Q70 Ian Swales: I am sorry. I had to leave the room: a local crisis. We spoke about competition and I suppose transparency relates to this. One of you said at the start that Government procurement is getting more sophisticated and formal. How do you react to the charge that this is in your interests, because it keeps a lot of other people out and the overhead for getting involved in Government contracts is a huge disincentive?

Ursula Morgenstern: We on our side also do not necessarily welcome protracted procurements. There are often multi-million pounds of costs and we need to be careful about what we can bid for. Especially in the last four years since the financial crisis, we have seen competition increasing significantly, to the extent that we are all selecting very carefully what we go for. Just to give you an example, at a recent business process outsourcing from a Government Department, there were 30 technology companies and 60 other companies trying to assess whether to go for that bid. So at the moment the competition definitely does not feel restricted, but very ferocious.

Q71 Ian Swales: Actually it was you who said the bidding costs are quite high. You said that earlier and I think you have just said it again. So if you are going for a contract, let’s say £50 million, how much does your company think they have to spend on the bidding process? I know each contract will be different, but just an order of magnitude.

Ursula Morgenstern: We normally would look at 1% to 2% of the contract value.

Q72 Chair: And the rest of you? I think that is an interesting figure, Ian, to get from everybody. What percentage do you spend on bidding?

Alastair Lyons: As a non-executive chairman, I wouldn’t have that number. My chief executive colleagues would have that.

Paul Pindar: I completely agree with that.

Q73 Chair: Can you write to us with a number, Mr Lyons?

Alastair Lyons: Yes, I will certainly.

Q74 Chair: And the other two? Let’s just take the other two.

Paul Pindar: I think Ursula’s estimate is pretty spot on, 1% to 2% of bid value and I think your point is right.

Q75 Ian Swales: It is an important factor, because ultimately the taxpayer is paying those costs because you are bound to put them into the value of the contract.

Can I just ask one other question and then I will pass back to the Chair. Have any of you knowingly bid for a contract at a loss-in other words a loss leader?

Ursula Morgenstern: No.

Q76 Ian Swales: For wider reasons, that you might have a calculation that longer term you are going to make money some other way?

Alastair Lyons: Not to my knowledge.

Chair: I must stop Mr Lyons because I think with a number of the health contracts-we are coming back to another of yours-you come in at a very low price and then find you can’t run it at that cost. I think that is one of the generic issues that comes out of this-that you undercut, come in, then you find it is too difficult to deliver within cost.

Q77 Ian Swales: I was going to come back to that. So, the other two, have you ever knowingly gone in at a loss?

Ashley Almanza: I don’t believe so.

Q78 Ian Swales: Going back to the point that the Chair just made, one of the figures mentions the initial value of the contracts and the amount that ends up getting paid. What proportion of the contracts that you take on from Government end up being renegotiated or resulting in a higher value than you originally won the contract for? Can you give us a rough proportion?

Paul Pindar: I haven’t answered your first question yet. Your key word was "knowingly". The odd mistake, but we never ever knowingly bid for contracts at a loss, because a house rule is that every contract has to be self-sustaining. The vast majority of our contracts have not had significant change in them since we negotiated them, although you will sometimes find that the revenue value of a contract will increase and it will increase for three reasons. First is inflation, when you see the fact that a contract value is 10 years higher than the contract that you signed earlier-the contracts are RPI-indexed so you should expect to see them go up. Secondly because there has been a change in volume. Some contracts are volume related and therefore if there is higher activity, they will go up. Thirdly, there may be change of scope. One of the things about running a contract is that you learn a lot during the process and therefore in the course of a conversation with a client you can often go back and say there is a better way of doing this.

Q79 Ian Swales: And the others?

Ashley Almanza: Yes, I would give a similar answer to Paul. In the vast majority, no; there have been re-negotiations where we have been called in by central Government and asked to reduce our prices. The other thing is the volume point. It comes down to what the customer wants up front. Sometimes the customer wants us to take volume risk and on other occasions they don’t. When we take that volume risk, then typically the value of the contract can be higher than you expect at the start. It can also be lower.

Q80 Ian Swales: I think one concern I would certainly have and we have had examples of it, is what you might call the aircraft carrier syndrome. If you have already built half the aircraft carrier, it is quite difficult to say, "No, actually we are not accepting this contract escalation," because it is a complete gun to the head situation. On defence procurement, of course, people win the contract and then we typically end up paying double and beyond the original contract. Are you saying that, with the contracts that you take out, the public sector retains the right level of flexibility to get out of the contract again?

Ursula Morgenstern: I think you can get out of a contract if you want to. We see that in the private sector. Do we see that to a vast extent in the public sector? Probably not. But how do you design your contract from the very beginning? The volume question was raised. One of our contracts went up. We are paid by transaction so if the transactions go up-in that sense, it is just a feature of the contractual mechanism where we are taking on risk because the volumes can go down as well. So there is the question: how do you, as an awarding Department, want to design your risk- reward system back to the contractor?

Q81 Ian Swales: My final question. One of the things that we hear around the Committee table is "We get into difficulties". To be fair, it is usually IT projects, and I do not think any of you major on IT projects, but we find the public sector having to pay a lot of money to get rid of an underperforming contractor. How many times have you been awarded a contract, got part-way through it and then the public sector has effectively fired you? How many times has that happened within the period of the contract?

Chair: Anybody had a contract actually stopped?

Alastair Lyons: No, I am not aware of that.

Ursula Morgenstern: There will be individual project issues where, again, it is a question of how do we go and fix them. Coming back to your point, and as Mr Pindar pointed out, fixing it is often where the penalty, or the costs, really lie. That is where there is a comparison to service penalties. I would say that it is individual projects but not big contracts.

Q82 Ian Swales: With G4S, we have the Olympic security issue. I think that even then you technically did not lose the contract. You had to effectively pay for a whole different way of doing it, but it was still your contract. Am I right?

Ashley Almanza: There were two parts to the contract: the Olympics and the Paralympics. We delivered 80% of the security on the Olympics and paid £88 million to the taxpayer. On the Paralympics, we fulfilled the contract.

Q83 Ian Swales: And have you ever lost a contract in your organisation part-way through?

Paul Pindar: No.

Q84 Mr Bacon: Individual learning accounts-that was terminating in December 2001.

Paul Pindar: If it was, I cannot recall it, to be frank with you.

Mr Bacon: The police were called in so the whole thing really hit the buffers quite fast and I think I am right in saying that the contract was terminated.

Q85 Chair: I am going to pick up one thing that Ian said and it is an Atos point. On page 23, figure 6 and page 24, figure 8, you make a lot of money on just increasing the contract value; 46% of the revenue comes from just increasing the contract value. This is not vey good competition. Over the page, two thirds comes from the contract value having increased.

Ursula Morgenstern: There is one main contract which is sitting behind that number. That is National Savings and Investments, which when it was originally outsourced to Siemens-

Q86 Chair: Why do we have to add so much to the contract value without competition?

Ursula Morgenstern: Because it is payment by transaction, so funds-managed. For NS&I, I think it was initially, in 1998, £60 billion funds-managed and now it is over £102 billion-funds managed and that is good news.

Q87 Chair: Do we get any economies of scale when we add more contracts in? Or is it the lower rate that you agreed?

Ursula Morgenstern: Actually, I must admit that I do not know the contract details to that extent. When the supply chain conversations started with the Cabinet Office, one of the requests was actually that NS&I would take on further work because it is relatively low cost per transaction and therefore, in that sense, helps to reduce taxpayers’ money.

Q88 Ian Swales: Can we use that as an example of something else which I think is mentioned in the Report, which is essentially the way you get locked in. How long is the NS&I contract for?

Ursula Morgenstern: It was recompeted just this summer, after what I would say was a fairly tough competition. Yes, we retained that contract, but again we have a very good reputation of delivery and we are providing a further £400 million of tax savings over the next period.

Q89 Nick Smith: Do you have a view on what for Government would be a good length of time for a contract? Governments change, IT changes, and new competitors come in and out. What is the right time for a contract in the round, or is that too simplistic?

Paul Pindar: It is a bit simplistic because it depends entirely on what you are being asked to do. When you are trying to create a very significant step change reduction in cost, usually the way you do that is by investing a lot of money up front, so it is quite possible to be investing tens of millions of pounds with a view to dropping a cost base. In those situations it is very unlikely that the contract would be viable, certainly if it was less than five years; seven years would probably be a better term typically. If you have a more vanilla contract or a simpler contract to deliver, which does not require a huge up-front investment, then three to five years would be normal. Unfortunately, at the risk of laying into the IT guys again, our industry has been tainted with some of the practices of the big IT players. People have got involved in very large projects which have had a long period of time and then the clients have been locked in. With the kind of things we do as a team, that is probably less of a risk.

Q90 Fiona Mactaggart: I want to come in on contracts and when they end and so on. I draw your attention to figure 6 in the NAO Report-this is a question for you, Ms Morgenstern. It points out that most of the contracts-around two thirds to three quarters-that the companies in front of us acquire go through a full competitive process. It is different for Atos, which seems to have contract extension in 46% of cases.

Ursula Morgenstern: It is two contracts-the value of those two contracts. One is the NS&I contract, which I just mentioned, and this figure comes from before the recompetition, which happened this summer; the other one was the Ministry of Justice. These two contracts alone explain that number. Two thirds of our business at the moment is in the technology space.

Q91 Fiona Mactaggart: I wanted to ask about a specific contract that has been in the news today in the Daily Mirror. It is talking about the contract you have for advising the DWP about DLA and personal independence payments. I have seen a memorandum circulating in the DWP saying that the Atos service will, for the time being, be on a revised basis. Is that because the contract is over?

Ursula Morgenstern: I am glad that you brought that up. I have not seen the memo myself. The contract came to a natural end at the end of March. Atos would never withdraw from front-line services so we continue to provide that service to the Department on a short-term basis, while the Department is reconsidering its requirements, and we will continue to do so until the new benefit comes in, because the personal independence payment will replace the DLA benefit and we will then continue to work with the Department on that matter.

Q92 Fiona Mactaggart: I understand that. We know that the DWP has not let a substitute contract to anyone else, but what are you actually doing? It seems to me that this is a big issue, in this area of the private sector doing public sector contracts. I am not saying it is your fault; it seems to me that it is probably the fault of Government, but if there is no clear process when a contract ends and they are just hoping that you are going to carry on doing things through good will, which is what it sounds like, what happens when you choose not to continue to do stuff?

Ursula Morgenstern: Again, the Department asked for short-term extensions and we will continue to supply those short-term extensions to the Department as long as it is required.

Q93 Fiona Mactaggart: Is that month by month? What isn’t being done?

Ursula Morgenstern: It is a contract that we have had for a very long time. We have been in the benefits arena since 1998 and we will continue to do the face-to-face benefit assessments for DLA that we have done for years. So this is a contract at its end of term.

Q94 Fiona Mactaggart: But part of the contract was advising decision makers when there is an appeal. The memorandum that I have seen says that in children’s cases that will continue, in something called SR cases that will continue, but in all others the people in the Department are advised to find out information from voluntary organisations, Google, and so on. That seems very strange.

Ursula Morgenstern: I really cannot comment on the memorandum; I have not seen it.

Q95 Fiona Mactaggart: But you can tell us what you are not doing.

Ursula Morgenstern: We are continuing to do the face-to-face assessments.

Q96 Fiona Mactaggart: For everything? Are you continuing to do everything that you used to do?

Ursula Morgenstern: At the moment, I don’t want to say. I cannot answer it in that complete statement, but I am certain that we will continue to do the face-to-face assessment. I am happy to come back to you with a specific answer to your question.

Q97 Fiona Mactaggart: That would be helpful. In a way, we have been trying to get into an issue of transparency. I am not saying that you are not being transparent, but where a service has traditionally been provided by a private sector provider, and then the contract concludes and nothing seems to be provided in the gap, the challenge for me is: what is our role to ensure that our constituents continue to get the services they require?

Ursula Morgenstern: I am happy to provide you with the details of what may have changed. Again, at the moment, my understanding is that we are continuing to deliver the service we have delivered in the past. I will make sure that I get that additional information to you.

Q98 Meg Hillier: Can I just pursue this briefly before I go on to a couple of quick-fire questions? How are you being paid for this extension of contract?

Ursula Morgenstern: Again, it is a continuation of the terms we had.

Q99 Meg Hillier: So you are not being paid any more because the contract has ended?

Ursula Morgenstern: No.

Q100 Meg Hillier: Will there be a period of notice that the Government has to give you?

Ursula Morgenstern: It normally has to give us a period of notice.

Q101 Meg Hillier: Do you know what that period of notice is?

Ursula Morgenstern: For this contract, I cannot tell you.

Q102 Meg Hillier: Could you write and tell us that as well?

Ursula Morgenstern: Again, I can get that to you.

Q103 Meg Hillier: On transparency, I have some quick questions for each of you. How common is it for a client to ask you to identify the pay rate for the staff you are employing, and is that changing? If I could get a quick answer from each of you, that would be great.

Ursula Morgenstern: Could you define that?

Q104 Meg Hillier: The hourly pay. In London there is a living wage campaign, and obviously you have to pay the national minimum wage at least. There is a lot of discussion. A number of councils, for example, as one of the clients, talk with the Government about setting a minimum wage rate. Obviously, if some of you are paying just the minimum wage and some of you want to pay more, you potentially have an unlevel playing field.

Ursula Morgenstern: I must say that I have never been asked by a Government Department whether we are a living wage employer. We are just adjusting our London living wage.

Q105 Meg Hillier: So you have never been asked?

Ursula Morgenstern: Again, I need to be cautious when I make that statement.

Chair: Meg, is this really relevant?

Meg Hillier: It is about transparency. I have one question about record-keeping as well.

Chair: Go on, but I don’t see how it is relevant.

Q106 Meg Hillier: Well, perhaps everyone else can just answer.

Alastair Lyons: Again, my understanding is that we are not generally asked that question within the competitive process.

Ashley Almanza: It is mixed. Sometimes we are asked.

Paul Pindar: We are not generally asked.

Q107 Meg Hillier: Okay. That is helpful. On the transparency issue more generally, how long do you keep records for in your organisations and is it ever a contractual requirement that you must keep records for a certain period of time?

Ursula Morgenstern: Again, I would not have the details on the specific contracts, but of course we would keep records at least for the contract length. If they are financial or legal documents, there will be longer obligations.

Alastair Lyons: Again, typically that would be specified in each individual contract.

Q108 Meg Hillier: So it is the client that decides, not you.

Alastair Lyons: As I understand it.

Q109 Meg Hillier: Okay. Mr Almanza?

Ashley Almanza: There will be a statutory requirement that we would comply with, but if the contract required us to hold them for a longer period, we would do that.

Paul Pindar: Same answer.

Meg Hillier: Thank you.

Q110 Nick Smith: I want to pick up on some PR that G4S put out yesterday, Mr Almanza. It comes back to this business of contracts. I want to know how any right-minded person could think it appropriate for G4S to consider itself to be contractually entitled to bill for monitoring services when equipment had not been fitted or after it had been removed. How did that happen?

Ashley Almanza: I need to deal separately with the reasons why the company at that stage thought it was contractually entitled to bill in both those circumstances.

On the first case of billing before the equipment was fitted, I will make a couple of comments. Earlier generation contracts allowed you to bill on receipt of the order, rather than on fitting the equipment. That had changed by the time this contract came along. There was some dialogue between the company and the customer, and the company said that billing would start on the day after an attempted induction. Induction, as you will understand, is when you visit the subject on the first occasion to say, "This is what is going to happen, this is how it is going to work," and so on. The company believed that the customer had accepted that-that was back in 2009-and continued to bill on that basis. When this surfaced in April or May, we started to look into it. We brought in independent-

Q111 Nick Smith: May I interrupt you? You said it was discovered in 2009. Did the Government contractor, the Ministry of Justice, raise it with you, or did you realise what had happened internally?

Ashley Almanza: No, I believe what happened was that the MOJ asked a series of questions-"When are you billing and when are you stopping?" I believe the answer was along the lines of, "We bill the day after an attempted induction, and we cease billing on receipt of a revocation order." An order should be received from an appropriate authority, such as a prison governor or the police, or it could be a court order. We keep the case active and keep billing until we get a revocation order. That was the practice then, and the company believed it was correct.

In June I brought in Linklaters to perform an independent review. I had a meeting with Linklaters on Monday evening, and we made an announcement yesterday. We have accepted Linklaters’ findings, although its review is still ongoing. Its view is that there was dialogue with the customer, the company and the managers. It sincerely believed that it was in accordance with the contract and it had been agreed with the customer. However, as we announced, I think it is unacceptable to bill before equipment is fitted and to keep billing after it has been removed.

Q112 Nick Smith: You have given us quite a technical answer, and you say now that you realise the difference between right and wrong, but I can’t really understand why you didn’t work out what was right and what was wrong in 2009.

Ashley Almanza: If you are asking me personally-

Q113 Nick Smith: The company.

Ashley Almanza: As I say, I think it was a judgment that was flawed. It was just a flawed judgment. I don’t think we did correctly tell the difference between right and wrong. We got it wrong.

Q114 Chair: Do you agree with that, Mr Lyons?

Alastair Lyons: Completely. As far as we and our board are concerned, managers in our UK division may have genuinely interpreted the contract that way, but that is not the point. It was never right to bill when we were not doing work in respect of that billing. It was ethically wrong. It is one of the signs that we need to have an attitudinal change within our business. The business and its 122,000 people around the world should never feel that because they have commercial objectives to achieve they should compromise on what is right or on dealing fairly and transparently with the customer.

Q115 Chair: I can’t work it out. If you hadn’t been caught on some of the people who were either out of jail, dead or whatever, you would have carried on charging until the year 3000, according to the way you system is run, Mr Lyons.

Alastair Lyons: Again, I repeat that it was totally wrong. As far as we are concerned that might have been a contractual interpretation or what the lawyers might argue, but that still does not make it right.

Q116 Chair: Okay. Mr Almanza, given that you overcharged the taxpayer literally millions and millions and millions of pounds, what does that say about your systems of governance and control?

Ashley Almanza: The first thing I would say is that I apologised to the Secretary of State and I should apologise to this Committee and the taxpayer on behalf of our company. We did not have the systems in place that we needed to have. This was one of the examples I referred to in response to Mr Morse’s question earlier. Too much was left to a small number of individuals and we did not have appropriate checks and balances in place. That is changing now as we speak.

Q117 Chair: Why on earth could this not have been detected? That’s for both of you, really. I find it astounding that it was detected only when the retendering process started. Somebody must have realised. Have you sacked a whole load of people on the back of this?

Alastair Lyons: Exactly as you say, Madam Chairman, internal transparency is as important as external transparency. The understanding within management layers of what is actually happening and getting that moved through. We have a lot of work that we are currently doing in order to improve that transparency, so as to get that reporting up. It is also a case of having in place the controls, checks, risk management and internal audit. If somebody does do something wrong, which is always possible in that work force, it is detected early, action is taken and lessons are learned.

Q118 Justin Tomlinson: Hang on. The Chair just talked about transparency, so has somebody been sacked for what has happened?

Alastair Lyons: There have been disciplinary investigations into the electronic monitoring contract. As you are aware, that is also subject to a Serious Fraud Office investigation. The SFO has asked us not potentially to compromise its investigation by our own at the moment.

Q119 Stephen Barclay: If this was the culture, how many other instances have you now found from your more recent investigations?

Alastair Lyons: As you know, there are reviews going on by the Ministry of Justice and the Cabinet Office and there have not been any instances of material issues on other contracts that have been raised to my knowledge out of those.

Q120 Chair: Have you found overcharging on other contracts?

Alastair Lyons: No, we haven’t, Madam Chairman.

Q121 Chair: Have you?

Ashley Almanza: No.

Q122 Chair: Have you found undercharging anywhere?

Ashley Almanza: Not to my knowledge.

Q123 Ian Swales: Did any of the individuals concerned have a personal financial incentive under your rewards system?

Ashley Almanza: One of the things we asked Linklaters to do was to focus on why these decisions were made. Is there any evidence of wrongdoing? Or is it a case of poor judgment-sincerely held but flawed judgment? We have pushed Linklaters quite hard on that. Linklaters came to a board meeting and they will report directly to the board on the matter. We challenged quite hard their analysis and thinking. They have been really steadfast on this. It was a sincerely held but flawed judgment.

Q124 Ian Swales: To answer the question I asked: did the people concerned, the decision makers, have a personal financial reward as a result of declaring this extra business, in effect? It is yes or no.

Ashley Almanza: The answer is not directly, but indirectly of course they would have benefited from reporting higher profits in their business unit.

Q125 Ian Swales: And that would affect their bonuses-to get that absolutely clear.

Ashley Almanza: It would have.

Q126 Ian Swales: Is that true for your company, too?

Alastair Lyons: Yes.

Q127 Chair: May I ask a quick question, after which Nick wants to come back? Are you both prepared to pay the money that the MOJ has had to dole out on the PwC report?

Alastair Lyons: From the beginning, Madam Chairman, we have said that we will repay what we owe and we will repay the costs which arise to the taxpayer as a consequence of this happening.

Amyas Morse: As a question of balance, looking at your business model, which is based on retaining business, growing business in the long term as a way of generating shareholder value, these incidents are enormously destructive of shareholder value, aren’t they? Is that true?

Alastair Lyons: Absolutely.

Amyas Morse: Can you give me an idea of how much value it has taken off your stock?

Alastair Lyons: Certainly. Since this first arose in July of this year, our company has lost over a third of its total value. That is around £1.3 billion.

Amyas Morse: So really it is very much in your interests to have these controls in place and not have these incidents occurring.

Alastair Lyons: It is totally in our interests-absolutely, completely.

Ashley Almanza: It is hard to attribute but there has undoubtedly been a loss of value in the company.

Chair: We are glad MOJ can send you the bill for the PwC report.

Q128 Nick Smith: Clearly, there has been massive reputational damage here. Mr Lyons, earlier you denied profiteering. Was there profiteering in this example?

Alastair Lyons: No, there was not. It was the genuine view of our management that that was the way in which it was intended to be billed under this contract. As I said, and I’ll say it again, it was a wrong judgment. It was an inappropriate decision to make against the ethical code that we have as a company.

Q129 Chair: But do you accept that it wasn’t what the customer intended? It might have been your management view, but the customer, that is the MOJ, never intended for you to be paid; the people who were, you know, dead or were not-

Alastair Lyons: Absolutely.

Q130 Chair: That is pretty extraordinary.

Q131 Meg Hillier: Both of you have long-standing contracts. This contract was a long-standing contract with the same client, even though he had changed department. How did things get to this point? You said in the NAO Report that you shared information with the client. How did it get to such a breakdown? You talked about partnering earlier. What went wrong?

Alastair Lyons: I am not sure that there was a breakdown as you say. As the NAO itself stated in its Report, we have said to the NAO that we were open about this, throughout the period of contract, to the Ministry in terms of the way in which we were billing. That still doesn’t make it correct. The issue grew over the period of the contract as a consequence of the change to the number of open bail orders which were granted, and also, as I understand it, the split of responsibility within the justice system between the courts, who had the authority to close the orders, and the Ministry of Justice, which was actually doing the tagging. The number of open bail orders increased significantly over that period of 2009 and 2010, so it grew as an issue.

I don’t think that growth was visible to the customer. Again, we take responsibility there. We should have made it visible to the customer. It is back to what I said about transparency. We should have gone to the customer and said that there is an increasing divergence between the numbers for whom we have orders, which is what we bill on-as you know because we talk about it-and the number of people we are actively monitoring. We did not do that, and it is for that failure that we have disciplined people in our organisation; not for being dishonest, but for making the wrong judgment about what they should talk to their customer about.

Q132 Meg Hillier: I didn’t want Mr Almanza to come in on that. Isn’t it dishonest if you get a charge for installing equipment, for monitoring equipment and for removal if, when you remove it, you get a payment for that, and you are still charging for monitoring? That cannot be honest under any contractual grounds.

Ashley Almanza: Clearly it was wrong and unacceptable. You asked what went wrong. I think nobody stood back from the detail. There was a dialogue going on at a technical level saying, "We start billing the day after an attempted induction visit." Remember, historically it would be on receipt of orders, so even earlier. So I think there was an element of organisational conditioning around this. Nobody stood back and said, "Over time, what does this mean for the client? What is the overall impact?" In my view, that is where it went wrong.

If one focused on the technical detail of the contract, I think it was perfectly possible for a reasonable person who had been working there for a long time to call it either way and we called it the wrong way.

Q133 Meg Hillier: It was the oversight of a team that had got used to working in a certain way.

Ashley Almanza: Precisely.

Q134 Meg Hillier: So a governance issue?

Ashley Almanza: Precisely.

Q135 Mr Jackson: I thought you’d forgotten about me. I think this is the first question that is not about transparency. If we look at page 25 of the Report, I would like to ask a few questions about small businesses. Obviously, one of the strong arguments from the Government prayed in aid of engagement of private sector contractors for public services is the macro-economic effect of Government money trickling down into small and medium-sized enterprises and the social value and the advantages of cumulatively managing quite long supply chains that involve SMEs. Yet there is quite a disparity among the four of you in the revenue that you are able to disburse to SMEs, given that the Government’s aspiration is 25% of the contracts. The worst is Serco, at 3%, and the best is Capita, at 33%. What concrete proposals are you putting forward to observe that mandate, that social contract, from Government to pass on work to small businesses? Are Serco and Atos concerned that you are very low on those figures in the Report?

Alastair Lyons: Perhaps I will kick off, as I am bottom of the class on this one. It very much depends on the nature of the contract.

Mr Jackson: I thought you would say that.

Alastair Lyons: That is not in any way seeking to duck the question. If you take something like the Work programme, 70% of all the contract value for that went into small businesses, because the way we delivered the Work programme was through non-governmental organisations and small businesses, working on the ground with people. It was us acting as an integrator, rather than as a provider.

Q136 Mr Bacon: And the risk transferor, so that the little local charity or SME would get the risk as well and you in the middle would take a cut?

Alastair Lyons: No, absolutely not. As the integrator we take responsibility for that delivery, so if an SME lets us down, it is us with our neck on the block, not them.

Q137 Mr Bacon: There was a question mark there, because that was what A4e were doing. They were definitely transferring risk, but you are categorically saying that you weren’t?

Alastair Lyons: No.

Chair: Even in the Work programme?

Alastair Lyons: I do not believe that we were transferring risk in the Work programme. I will gladly check my facts, Madam Chairman.

Q138 Mr Jackson: In fairness, it is a more complex picture. Obviously, as we learned earlier, you take the reputational damage, even if you subcontracted to SMEs. Please continue, Mr Lyons.

Alastair Lyons: I was going to draw the parallel between that and, say, the Atomic Weapons Establishment, where clearly it is impossible for us to subcontract to SMEs. Or take Northern Rail, where you are a provider of a mainstream service and therefore have to have all that tightly within your own controls and governance structure. If you take that number of 3%, the latest quarter’s number for us is 7%. That excludes our joint ventures with AWE and Northern Rail and if you add that in, it is 12%. Add charities on top it is 17%, so it is nowhere near as low a number as that.

In terms of the drift of your question, because we are an integrator and believe in seeking to deliver services which are directly relevant in the particular communities, it would be our first port of call to go to small organisations to do that, rather than our last.

Q139 Mr Jackson: Ms Morgenstern, you are next on the naughty step.

Ursula Morgenstern: Yes, I am. From my perspective we have 2,200 suppliers and working with an ecosystem is part of our DNA. I look at long-term relationships. I started my life at a small software start-up and it is how I came to the UK. What I have learned from that part of my career is that a big integrator can really help me to get access to the market and to finance. It is also a relationship that needs to be nurtured. For me, success is when I can see that some of our small companies are not falling into your category any more because they have grown with us. For me, it is about long-term success.

Q140 Mr Jackson: Sorry, you are making a cogent point, but one of the criticisms of all of you is that integration can often mean that you line up these tasty businesses to gobble them up. That is one of the criticisms. You get that critical mass from the Government contract, then you can acquire those companies.

Ursula Morgenstern: Again, we have acquired only one small company here in the UK. That aside, coming back to why I think long-term partnership is so important, there are also the bidding costs to be raised. I need to make sure that I have a partner that is part of my solution. My team understands how to bid, mostly in our case with small technology companies, to turn them into a solution again and again, so they do not have to put up their costs or sit there for 12 months and dedicate a person to us. That is why I think long-term partnership is, for me, the main criterion, so I go for making sure that, when we commit, that is a long-term success story. That helps with a number of issues that have been raised before, to allow them to compete in that market.

One of the questions raised was: how can it be made easier for small companies to compete? Often, the terms and conditions and, as you raised, the service penalties cannot be borne by companies of that size; that would put their existence at risk. We have seen that in the personal independence payments contract. At the moment, the assessments take double the time assumed, so we are paying them double the money we are getting from Government, because that is the only way they can gain the experience and get up to speed. There are some real benefits we can give the smaller companies, but how would you make it easier for them to work directly with Government? You have to look at the terms and conditions.

Q141 Mr Jackson: So is that balance between social value and shareholder value a function of your corporate social responsibility? From the lessons of the supermarkets, they do not give a monkey’s about the small suppliers; they squeeze them as hard as they can. I wonder what pressure there is for all of you to do that to your smaller suppliers.

Ursula Morgenstern: First of all, we pay them on time, if that was the question.

Mr Jackson: Good.

Ursula Morgenstern: For me, it is differentiation. The reason why I like working with small companies is that they bring differentiation and innovation. That is how I can differentiate: if I have a really great small software partner or technologies partner, that gives me differentiation. For me, that is why we are doing it. And, yes, having come from that environment, I would never not pay a partner of that size as I know that they need to pay their staff and they might not have the credit line.

Q142 Mr Jackson: Can we ask the virtuous duo-they are not that virtuous; everything is relative-what their views are?

Ashley Almanza: Continuing in order. It is a complex question; we have made increasing use of SMEs. It has been a mixed experience. It comes down to risk transfer and capability versus the requirements of the contract. On some contracts we have got it wrong and we have held the risk because, to the point made earlier, the SME has not had the capacity to absorb the risk, then we had to step in when the SME was not able to deliver and we have borne the cost of that. So I think we are finding our way through this at the moment.

Q143 Chair: Let me ask you the same question. The one we looked at where the Government really wanted SMEs was the Work programme. Both of you have Work programme contracts and all the evidence we had was that the risk was entirely transferred to the local voluntary provider who had been doing welfare to work advice for ever and ever, and you had none of the risk: you just took the top 10%.

Ashley Almanza: I will answer for our company. We are the prime contractor and ultimately we bear the liability with the customer. In the case of welfare to work, actually the partnership has been quite successful, and that has been a function of the capability. We have used, and paid, not-for-profit organisations, for example, and they are highly capable. They have been able to take that risk on and manage it. But the financial risk remains with us, ultimately, and that is complex.

If I may-just a final point-when we think about the social value here, we employ 45,000 people in the UK. Our margins mean that of the £1.7 billion of revenue, in excess of 90% is spent in the UK, most of that through payroll and suppliers. When we think about SMEs and outsourcing, we are also making a choice about whether to give our people employment, or someone else employment. The calculation is complex.

Paul Pindar: Ours is a really simple answer. We have company policy where we try to achieve the Government target of 25%. We are probably luckier than my three colleagues, because the nature of the things we do makes it easier, so I am not sitting here being virtuous; it is just easier. As an example, we are heavily involved in training. Training is an industry where there are a lot of one-man, two-man and small enterprises, so we give a lot of work out into the training arena.

My colleague’s comment is exactly right: you have to work on the basis that you’ve got financial risk, because the reality is that we do bear the financial risk. We have reputational risk, because if they do not deliver it is our neck that is on the block, and we have delivery risk. You have to balance those, and you have to know the people who you are working with. By and large, it has been a pretty successful experience for us.

Q144 Jackie Doyle-Price: We have heard some encouraging stuff today, and I thank you for engaging with the Committee so openly and frankly. But I have a very serious concern that what we are seeing is the emergence of public sector monopolies. That could still result in good outcomes for taxpayers because frankly, I believe that the Government are pretty rubbish at delivering such things, so the more we diversify, the better. But the degree to which it can be delivered effectively and with good value for the taxpayer ultimately depends on a smart customer, and certainly in the contracts that the Committee has looked at, we have seen some very poor examples of contract management. It is fair to say, as some of you have alluded to, that there is something of a journey on this and there are changes, but it becomes almost like a hydra-you get good practices in one part but not in another. Looking at the model of your business, it is very public sector driven, but you all have some private sector contracts. Is that correct?

Paul Pindar: The private sector is the biggest sector for us.

Q145 Chair: But you are mainly UK. That is the difference.

Paul Pindar: Yes.

Q146 Jackie Doyle-Price: Are there any lessons that you can share with us in terms of how much more effective private sector customers are than Government Departments at negotiating contracts with you?

Ashley Almanza: Again, most of our business is private sector-I am new to this firm, but looking at the history-and I think that the difference 10 years ago would have been much greater between private and public sector. If you look at what the Cabinet Office is doing to share best practice and to bring people in from the outside who have worked as procurement officers and procurement managers in the private sector, it is definitely having an effect. I think in some areas the Government has been quite innovative and has used its buying power in a way that many of our private customers cannot because they do not have the scale. We have some very large private customers who use their buying power, but by and large we have a very diversified private sector portfolio. Whereas Government is increasingly using its consolidated buying power to get better terms from the marketplace.

Q147 Jackie Doyle-Price: Typically, are the contract lengths that you sign with private sector customers longer, shorter or equivalent to those you sign with Government?

Ashley Almanza: Again, it very much depends on the nature of the contract. If it is a big capital investment up front, it is typically a long-term contract, which applies whether it is private sector or public sector. So it is driven more by the nature of the business than private/public.

Q148 Jackie Doyle-Price: Does anyone have anything else to add?

Alastair Lyons: On the way in which the Government is procuring, I would add that the Cabinet Office now has the Crown representatives. If we were dealing with a private sector customer of the same scale, they would probably have more than one person devoted full time to managing the relationship with us, rather than, as is currently the case, a part-time responsibility in the middle of a host of other responsibilities that that individual also has. Again, it is part of the journey that the public sector is on, but that is a particular point that I would pull out.

Ursula Morgenstern: One difference I would note is that, once we are in a long contract, in the private sector it is probably easier to renegotiate because sometimes you find that circumstances have changed, either on the supply or the client side. There is probably a less rigorous structure due to the procurement rules in the private sector, so it is easier to say, "Okay, let’s change because this doesn’t make sense any more." Of course, with public procurement that is much more challenging.

Q149 Jackie Doyle-Price: Because the taxpayer will continue to pay, basically.

Ursula Morgenstern: That is one of the differences.

Q150 Jackie Doyle-Price: Mr Pindar, most of my questions are now directed at you, so it would be helpful if you want to share some observations. I was struck by what you said about the fact that, quite often, contracts are managed at a junior level. That is consistent with what Mr Lyons has just said, in the sense that you have a relationship manager who is totally responsible. One thing that we keep seeing over and over again when looking at such things is that the senior responsible owners of a contract change too frequently. Quite often, their tasks are delegated, which enables accounting officers to come to this Committee and hide behind the fact that work has been done by junior officials and evade accountability. You highlighted the fact that local authorities tend to be better at negotiating contracts. Do the projects that are managed by local authorities tend to be run by chief executives or senior directors? Is that more consistent with longer-term relationship management?

Paul Pindar: You have hit the nail on the head. If you balance the public and private sector-there are examples of where private sector comparisons are not outstanding as well, so the Government should not beat themselves up too much. If I look at the biggest contracts that we have signed in the private sector, almost invariably the chief executive or the finance director is pretty intrinsically involved, certainly in the latter stages. Equally, looking at our local government relationships, we will be pretty close to the chief executive and to the director of finance. If you carry that across into central Government, we tend to be dealing with a lower level of seniority.

Coming back to the point about transparency and expertise, I know that this will sound virtuous, but we would much rather be dealing with somebody who is really sharp and clever and able to make a decision, because we genuinely have no wish to try to be smart and to turn over a customer; we just want an educated conversation to get a good contract and to get it done quickly. Too much time is spent with people at a low level who do not have the expertise or the confidence, which is an important word, actually to push on and get stuff done.

Q151 Jackie Doyle-Price: So you end up with a risk-averse negotiation that ends up focusing on process rather than actual outcomes.

Paul Pindar: And it takes a lot of time.

Coming back to the SME point, which is a good one, the best thing that you guys could do to encourage more SMEs into this marketplace is to make it easier for them to do business with central Government and to simplify and shorten the process.

Q152 Jackie Doyle-Price: That is cultural.

On commercial confidentiality, I get the impression that the machine hides behind this to cover up their mistakes. Do any of you have examples of where you have taken the reputational hit for something that has gone wrong? That is probably difficult for you to answer. Do you feel that you occasionally take more of the flak when there have actually been issues with the contracts?

Paul Pindar: It is occasionally part of the terms of the job.

Q153 Jackie Doyle-Price: Would you all share that opinion?

Ursula Morgenstern, Alastair Lyons and Ashley Almanza indicated assent.

Q154 Jackie Doyle-Price: My final point is about something that you raised, Mr Pindar. I liked your suggestion of sharing your proceeds of efficiency. What I see there is almost a virtuous circle in incentivising good performance. Defining performances on the basis of real outcomes incentivises you as providers, but the taxpayer obviously gains as well. Are there any examples of contracts that you have negotiated-obviously not necessarily with central Government-where you have had that written into the contract?

Paul Pindar: There is a whole variety of outcome-based contracts that are done on a win-win basis. To give you an illustration, we have just signed a large contract with O2, the telecoms company, and we have contractually guaranteed to take 30% out of their cost base and to improve customer service and the way that the customer looks at and relates to them, but the biggest gain share is actually to work with them in a way that gives better customer satisfaction and then they sell more to the customers. If they sell more, we share in some of the proceeds of that. It is about getting a continuity of interest in terms of how the contract is structured.

Q155 Jackie Doyle-Price: And that is going to be more effective than having the Government providing a service that is standard and not responsive?

Paul Pindar: indicated assent.

Q156 Mr Bacon: Mr Pindar, on what you just said about the seniority that Jackie was referring to a moment ago, I have lost count of the number of times that I have heard people say that about the relationship between the chief executive and the finance director on the client side in the private sector, but not in the public. Do you have examples of dealing with the civil service, but dealing with nobody in the senior civil service? In the InterCity West Coast franchising not a single member of the project team was a member of the senior civil service, at the top five layers. How low do you end up dealing with people, so to speak, when you would prefer to have somebody sharper, brighter and more senior who could make a decision?

Paul Pindar: I would probably need a bit of notice to think about the question, but I have to say, from our perspective, we almost view that as part of our qualification as to what to bid for, because there are probably more opportunities to bid for than we are capable of responding to. One thing that we look at, as a bidder, is that if we do not believe we are going to get that senior level of engagement, we simply will not bid.

Q157 Mr Bacon: Okay. I was looking at the individual learning account report. This was probably way before your time, but we as a Committee looked at it many years ago. It was a web-based adult learning scheme that was great in theory and rubbish in practice, and lots of money was lost. One conclusion in our Report at the time was that Capita could have done more to insist that its concerns about risks of fraud and the necessary controls were taken seriously, but it had felt restricted by the lack of a place on the project board. Capita had asked for a place on the project board and this was denied, which meant that it felt it had to implement the contract exactly as it was, and execute the decisions of the Department, rather than, in the words of our Report, "working together to develop and operate the scheme."

One of our recommendations out of this fiasco was-I should like everyone to comment on this, because I want to know what has changed, if anything-that, "All departments should ensure that private sector partners are integrated effectively into project management arrangements, and that partners can escalate concerns to senior staff, including the Accounting Officer." In other words, the Permanent Secretary. Is that, in your experience in central Government, now universally true or not?

Paul Pindar: Better, not perfect.

Q158 Mr Bacon: On a scale of one to 100, where are we, and 100 is where we should be? Where are we?

Paul Pindar: 75.

Q159 Mr Bacon: Mr Almanza?

Ashley Almanza: I probably agree with that assessment. It is not universal. We typically bid on large contracts and so senior people are involved. There are regular meetings, typically monthly-not always monthly.

Q160 Mr Bacon: But can you escalate where you need to?

Ashley Almanza: Yes, I think, generally, if we need to escalate, we can.

Q161 Mr Bacon: Mr Lyons?

Alastair Lyons: This is exactly why we have asked Government to establish with us departmental forums in each Department, where our senior person sits down with their senior person, across the range of contracts we do, so as to have these issues escalated.

Q162 Mr Bacon: Miss Morgenstern?

Ursula Morgenstern: In the vast majority, we will have access to senior people, which we can escalate to. Again, that is where the Cabinet Office and the Crown Representative have become helpful, because if that does not work-if the normal escalation channel in a Department does not work-we can raise it with a Crown Representative. Having that person as a single point of contact in all situations is helpful.

Q163 Mr Bacon: The others did not answer this point, but on a scale of one to 100, where do the other people think we are, roughly?

Ursula Morgenstern: I must say that I struggled with giving exact numbers, so I would probably be between 60 and 70.

Q164 Mr Bacon: Okay. Mr Lyons, about the same?

Alastair Lyons: indicated assent.

Q165 Mr Bacon: Mr Lyons, I think it was you who mentioned contract management. I thought Mr Barclay was going to come in on the point about PFI contracts. I think the number is 12%-isn’t it, Steve?-which get locked in a cupboard and ignored by the client side.

Stephen Barclay: We were looking at hospital PFIs, where 12% do not have anyone full time-

Mr Bacon: A significant number, and it rang a horrible bell. I think the point you were making was that, when you are dealing with the private sector the contract is much more actively managed; not only is it more senior, but it is much more actively managed on the client side. Certainly, in PFI that has not always been the case, at all.

In these more conventional non-PFI contracts-but, none the less, contracts-how much do you find that the client side is not actively managing the contract, so that there is nobody at home answering the phone, as it were? Is that an issue?

Alastair Lyons: Again, I will have to speak at one stage removed, as a chairman rather than as a chief executive, but certainly from my site visits-I do an awful lot of site visiting-and the interaction I have with our management, on the vast majority of our contracts there is direct client side management involved in that. There is a question as to whether it is managing at the right level-as to whether it is too detailed-rather than being elevated one, to actually look at what this contract is delivering overall against its requirements.

Ashley Almanza: Our experience is different, I would say. On long-term contracts we have regular contact with senior people on the client side.

Q166 Mr Bacon: Okay. Mr Pindar, on Army recruitment, can you tell us by what percentage the number of people attending Army interviews and selection tests to become Regular soldiers has fallen since Capita took over running it?

Paul Pindar: I do not know the precise answer to that, but it will be significant.

Q167 Mr Bacon: The Daily Telegraph, in early October, reported that it was a 35% fall. Does that sound about right?

Paul Pindar: It could well be, yes.

Q168 Mr Bacon: And significantly higher than that for would-be officers-nearly 50%?

My concern has been particularly prompted by a constituent who is a retired commanding officer of an Army unit. He used to run his own recruitment. He has a son who is serving in the Army now and another son who wants to serve in the Army. Ever since the first part of this year-since April or May-this other son who does not yet serve in the Army has been trying to. The litany that I had described to me of the attempts to have a form of dialogue with the recruitment system that you run would make "The Gas Man Cometh" look like a tea party. It goes on and on and on. I won’t bore you with it, except to say that they were told on one day that the event was on, then a phone call was made to tell them it was cancelled and they said, "No, we have been phoned to say it was on." They ended up being sent to various different places around the country. Six or seven months later, this poor young man turns up to a recruitment centre, where he had literally "returned to go", so to speak, and the recruiting corporal says to him, "Ah, hello George, you must be on phase one training by now," to which he replies, "No, I haven’t even started yet."

There has been a lot of press on this-it is quite obviously a shambles and it is having a serious effect on the Army, to the point where Army officers are coming out publicly and being quoted in the press. So, would you turn to that relevant page of your brief and read what it says?

Paul Pindar: No, no, I won’t go to the brief, and I know you guys love using words like "shambles" because it is a nice emotive term.

Q169 Mr Bacon: Only because of the way it was- Actually, I think this has been a very fruitful dialogue for the most part and we have avoided colourful language, but I only used it because that is how it was described to me.

Paul Pindar: First and foremost, I think it is probably best to work off data that extrapolate from more than a sample of one. I apologise for the fact that this individual has not had a good experience.

Q170 Mr Bacon: I was not only working off a sample of one. The sample of one is what drew it to my attention-I am aware of the dangers of working off anecdote-but I then did some research on the subject and it wasn’t from the sample of one that I got the figure of 35%, and there has been a lot of attention paid to this recently.

Chair: Let me help you with a few figures. In the three months to June, 367 Territorial Army recruits were enlisted against a target of 1,432.

Mr Bacon: I was talking about Regulars, by the way.

Chair: Okay. The predication against an overall in-year target is only 50%. If you look at Regulars, 3,259 hopefuls attended Army selection interview days, compared with 5,042 the previous year. For officers the decline was steeper. Only 195 were sent for selection interviews, compared with 379 the year before. People signing up online were simply getting lost in the system.

Mr Bacon: That is what happened to my constituent’s son-he was lost in the system.

Paul Pindar: Okay, so let’s take a step back. The Army recruitment process was outsourced. Capita was the successful bidder. As a consequence of the outsourcing, the taxpayer has saved 50% of the cost of what recruitment was before. So to put that into context for you, Army recruitment-

Q171 Chair: I hate to stop you there, but my understanding is that 1,000 soldiers who were supposed to be taken off recruitment and be able to spend their time on the front line have now had to be transferred back to recruitment because you are not performing to the contract. That is my understanding.

Paul Pindar: Your understanding is incorrect and if you will let me answer the question-

Q172 Chair: It is incorrect to what extent?

Paul Pindar: It certainly isn’t anything like 1,000.

Q173 Chair: What is it? You can’t say it has cost less if soldiers who were previously- Maybe you will give us the correct figure that you have got.

Paul Pindar: We were awarded the Army recruitment contract and as a consequence of that the taxpayer has saved 50%. To put that into numbers, the service that was costing £100 million a year is now being provided for less than £50 million a year. If I give you the circumstances under which-

Q174 Chair: That is not true.

Paul Pindar: It is true. If we give you the circumstances under which Capita took over-these are not excuses because I am going to go on and tell you what we are now doing. The circumstances that we took over were, first, we had a strongly improving economic situation in this country and if you look at employment statistics, it is a far harder situation to recruit into the Army when the economy is recovering. That has been one disadvantage. Secondly, and I am not being flippant saying this, we also have a disadvantage that we have no wars on. Soldiers like to join the Army when there is something for them to do. Again, you can pull faces at me, but it is factually true. Thirdly, and again I am not doing this to apportion blame, we were to be provided with a working IT system to help us with recruitment when we started. The IT system that we were to be given had not actually been delivered. We had gone into a contract that made the assumption that that infrastructure was in place, and it was not.

Q175 Mr Bacon: I have a big sign-I am not making this up-above my office door in Westminster and another in Norfolk, and they both say the same thing, "Never assume". What due diligence did you do before going ahead with this to establish that the putative IT system, if I can call it that, was a real one?

Paul Pindar: You can do as much due diligence as you like on an IT system-

Q176 Mr Bacon: You can go and look at it and see if it is running and working, surely.

Paul Pindar: Which we did do due diligence. We also received a lot of assurances regarding what the condition of that system would be, but the fact remains that those assurances were not seen through. There has been an independent report that has been written looking at Capita’s role in Army recruitment and I would be very happy for that report to be provided to you. I would not use the word "exonerated", but I would say that Capita has been given a pretty clean bill of health in the contribution that we have made. The most important thing to say in all of this, however, is the future and not what has happened in the past.

Q177 Mr Bacon: It is important that you have got all of that on the record because in most of these cases, there is a lot more to come out than has necessarily yet come out. It sounds to me like the client side has got some answering to do as well, and doubtless we will want to hear more about that in due course, but what about people being lost in the system? This is some fairly basic administrative stuff. We fought the second world war before most of, if not all, the IT that currently exists had been invented, and all the recruitment-and it was millions of people, not an Army of 80,000-was done with card indexes, letters and snail mail. Why is the basic stuff of people being lost in the system being allowed to happen?

Paul Pindar: I have just given you the reason why it has been allowed to happen, and that is that the IT infrastructure that we were expecting to inherit has not been there.

Q178 Mr Bacon: But for the numbers that you are talking about, could you not have done it with a PC, a spreadsheet, a quill pen and a postage stamp?

Paul Pindar: I’m afraid that the world has moved on a little bit from that. We are talking about tens of thousands of applicants.

Q179 Chair: You are not talking about tens of thousands. In the first four months of the Capita contract, 3,259 hopefuls attended Army selections compared with 5,000. Again, for officers, where the decline was steeper, 195 were sent for selection interviews compared with 379. This is not hundreds of thousands.

Paul Pindar: Those statistics are very interesting, but they do not actually say the number of people that have approached us with an initial enquiry. We receive literally hundreds of calls a day and people trying to access the internet. Those might be the people that ultimately sign up, but they are a small proportion of those people who express an initial interest.

Q180 Mr Bacon: Was the spec for the contract that you were invited to tender for-you mentioned that there was a big cost saving from £100 million to £50 million-one where the MOD said to you, "We want you to do this and here’s how we want you to do it. We want a web-based solution so that it will save money," or did they just say, "We want you to do this and we want it to cost x amount less, so tell us how you are going to do it."? How did it work?

Paul Pindar: It was a process that we actually worked on with the MOD for two and a half years. It was a collaborative process where we designed the solution, worked with the MOD, and we took their feedback at various stages through the process. It was one where the MOD were fully aware of what we were doing and we designed with them.

Q181 Chair: Can I ask you a number of questions? You said that there aren’t 1,000 soldiers working on this contract now. How many are there?

Paul Pindar: I don’t have that number at my fingertips today.

Q182 Mr Bacon: Can you get it for us?

Paul Pindar: We can certainly get it for you.

Q183 Chair: Well, the figure I have here is that Capita says 1,000 and MOD says 900, so it is surprising you don’t assert that. I have two other questions on this. The original contract was £40 million a year and that was before the decision was taken to increase the number of Army Reserve soldiers. How much has your contract gone up by to cover that?

Paul Pindar: It will be a fairly modest amount, but again I do not have that number at my fingertips.

Q184 Chair: Will you let us have that figure?

Paul Pindar: Yes, we can do that.

Q185 Chair: Can I ask what penalties there are in place if you fail to deliver the recruitment target numbers?

Paul Pindar: Again, I do not know exactly what the penalties are, but our expectation is that we will not fail over the long term.

Q186 Mr Bacon: What do you call long term?

Paul Pindar: What we have done in response to the situation is, rather than work and blame other people for failing to deliver what they have done, we have gone back to the MOD. I have personally met with Philip Hammond, and we have explained to him an alternative plan where Capita is now going to take responsibility for the IT infrastructure, which is not actually our responsibility. We are also now building a web-based service from scratch. That will go live in January. We are expecting that the recruitment numbers will increase very sharply. The reason for that is because we are taking responsibility for making sure that it is a success; we are not sitting back and blaming other people for the things that they have not done.

Q187 Chair: Have you incurred any penalties so far-financial penalties?

Paul Pindar: Whether they are financial penalties or not, the contract is not performing in the way that it was anticipated to perform, because we are actually doing far more than we were originally anticipating that we would do. Again, in the spirit of working in partnership with the Army, for example, we have committed millions of additional pounds to the marketing campaign, to ensure that we create more activity and get as many of the recruits through the door as we possibly can.

Q188 Mr Bacon: You mentioned that you have been working closely with the MOD for two and a half years. That was started when, up until when?

Paul Pindar: The contract would have gone live-

Mr Bacon: In March this year.

Paul Pindar: Yes, in March this year.

Mr Bacon: So two or two and a half years prior to that.

Paul Pindar: Correct. That two and a half years was when the initial discussions took place about the outsourcing of the Army recruitment.

Q189 Mr Bacon: It just sounds surprising if that is the length of time you were working closely with the MOD on this-that, collectively, together, you have managed to come up with something that has produced startlingly poor results. You are now having to rescue it, by the sounds of it. It does not sound like a model at all. In the meantime, my constituent is still wandering around in the ether unattended to and, from what I have learned this afternoon, he might not be interested any more-you may have lost quite a lot of people.

Paul Pindar: If you would like your constituent to e-mail me, we will make sure that he is very far from the ether and that he is well looked after.

Mr Bacon: Thank you.

Q190 Austin Mitchell: I wonder if you are not all too big. With your scale now, you really are the new oligopoly. You have grown like Topsy over the past decade. You are covering too wide and multifarious an area, from Boris bikes and Grimsby schools to prisons or whatever-anywhere you can make a bob or two.

This wide coverage of issues-the scale-must mean, to me, that the structures are not adequately controlled from the centre. The centre does not always know what is going on in an organisation that is so big in scale and so wide ranging. That is a weakness when it comes to accountability and ensuring that we get the best possible terms out of contracts.

Alastair Lyons: The two do not need to go together. The fact that you have a large, diverse organisation does not mean that it has to be a poorly controlled organisation. The challenge for my business, being a large, diverse organisation, is that we do have in place the control structures, which provide that visibility and assurance, to ensure that if there is an early issue, it is detected early and acted on.

We had an independent review done of our systems of control by one of the big four accounting firms over the course of the past three or four months, since those issues transpired. The accountants told us, "Yes, you have got a good basis as a framework, but there is a lot that you can build on-on what you have-in order to provide exactly that level of control and transparency." That is what we now need to do.

Q191 Austin Mitchell: But you yourself have got so many directorships and chairmanships, I am surprised that you even find time to go to the Serco offices-with so many responsibilities.

Alastair Lyons: I assure you that I am spending a lot of time at Serco offices at the moment. But it is not important what I do as a non-executive chairman; what is important is what our executive management do-that we have the right people, with the right spans of control.

One of the reasons why we have split our UK division into two-a UK Central Government division and a "wider public sector" division-is so that we can concentrate that focus, particularly in UK Central Government, so that we have a team that directly face off against the Crown Representative to provide exactly that visibility and transparency that you are talking about.

Q192 Austin Mitchell: Does that go for the others? Mr Pindar, does it go for you?

Paul Pindar: All these things are a range of issues around the culture within the organisation-the processes, the structure, the quality of the people and the leaders you have. We have 62,000 people in the group and, from our perspective, we think that we have a flat structure between people at the top of the organisation and people at lower levels. I feel comfortable that the board of Capita is-

Q193 Austin Mitchell: You are satisfied that you have sufficient central control?

Paul Pindar: I am very satisfied that we sufficient central control for a business of our size, yes.

Q194 Mr Jackson: This is a genuinely good and positive Report. Although there have been some spectacular errors and mistakes, such as translation and interpretation for the Ministry of Justice, generally the contracting out of public services to the private sector has been a success and there is, to an extent, cross-party support for it. I have a general question: where do you see this going next, looking forward, in terms of what you will bid for?

For instance, at Peterborough prison now we have a social impact bond that is pulling together non-state players to tackle rehabilitation and to try to prevent recidivism among prisoners. Given your track record, what sort of interest do you have in being involved in that kind of project-quite a chunky, long-term project, without quick wins? Are you minded to offer your support with the voluntary sector in that sort of thing?

I have to declare that I am a big fan of Peterborough prison, which I think has been a great success as a private prison. Are long-term, difficult areas like rehabilitation of offenders the kind you are going to get into?

Alastair Lyons: It is not so much a case of getting into them.

Mr Jackson: Well, to continue or consolidate, then.

Alastair Lyons: We are already in that work. Doncaster prison, which we have responsibility for, was let on a payment-by-results basis. We work with voluntary service organisations, exactly as you say, and are working with two leading charities, Turning Point and Catch22, in order to rehabilitate offenders.

A material part of our revenue is dependent on our success in preventing offenders from reoffending: they have not to reoffend for six months after they leave prison. It is interesting that Doncaster is the lowest cost male prison in the UK, so you can be innovative and seek to deliver against very important social objectives while meeting the Government’s cost objectives.

Q195 Mr Jackson: But do you scrub your face financially doing that? That is my question.

Alastair Lyons: Sorry?

Mr Jackson: Does it scrub its face financially for you? Reputationally it is good for you-that is all very well and I accept that-but does it make any money? That is what your shareholders will be interested in.

Alastair Lyons: Absolutely, yes. We have to deliver a return to our shareholders and that contract is delivering the level of margin that it was bid on.

Q196 Mr Jackson: Does anyone else have a view on these issues?

Ashley Almanza: Yes. We are in the business already and we would like to continue to be in that business. Whether by our own means or by bringing in the voluntary sector, providing purposeful work for prisoners, for example, is part of rehabilitation and that brings financial reward anyway, because you tend to have a more stable establishment and so can perform better against your KPIs under the contract. So it is financially coherent as well as socially desirable.

Q197 Mr Jackson: Will you be bidding for the short sentence offender rehabilitation?

Ashley Almanza: We have not made a decision on that yet.

Q198 Meg Hillier: That brings me to something that concerns this Committee. You are all big enough to bid for pretty much any Government contract. You have the expertise to do that, but some of the SMEs that some of you work with simply couldn’t even reach that threshold, even with G-Cloud and so on. When you bid, how important is it that you already know the business and have in-house expertise?

Ursula Morgenstern: From our side it is one of the key qualification criteria-do we have that expertise? It is a very competitive landscape. There are four of us here today, but there are many more competitors out there. You really need to show that you have a differentiator and you understand the business.

Q199 Meg Hillier: Do you think that makes a difference and that Government are more likely to give you the contract if you understand the business already?

Ursula Morgenstern: That goes for both the private and the public sector. You need to demonstrate that you understand the business and that you have an area of expertise and a solution that is not only value for money but stands out as well. That goes for the private and the public sector.

Q200 Meg Hillier: Mr Lyons, or any of the others, have you bid for contracts for which you did not have any experience?

Alastair Lyons: We have certainly in the past taken on contracts where we had not previously done that type of work. Before we do that we seek to bring in expertise to the company to ensure that we know what we are bidding for and how we go about delivering the targets within that particular contract. With a lot of contracts, obviously, you take the technical expertise with the contract, because you are taking it out from, say, the public service. We did not have 5,000 nuclear scientists when we moved into that line of work. But it is important that you are an informed purchaser of services.

Ashley Almanza: It is crucial that we have that already existing capability that is being transferred across. In some cases recently, we have looked at partnering with other providers to ensure that together we have the capability.

Q201 Meg Hillier: You mean bidding together rather than buying them in afterwards.

Ashley Almanza: Yes, correct.

Q202 Meg Hillier: Mr Pindar?

Paul Pindar: Exactly the same answer.

Q203 Meg Hillier: You didn’t know much about hiring interpreters when you took that on, did you? But I think we will come back to that next week.

Health commissioners have told us that they worry about legal action if they do not tender a health contract. Some of you work in health. One contractor-Serco, I think-told us that if health commissioners decided not to tender a contract in their remit, they would not take legal action or sue. If you were not asked to tender for a big health contract, would you want to take legal action against the commissioners?

Paul Pindar: From our perspective, never. We are not a litigious organisation. If you get to the point where you have to sue a customer to do something you probably don’t want them as a customer. It’s not the greatest way.

Q204 Meg Hillier: So, never. That is on the public record. That is very helpful.

Paul Pindar: It is not the greatest basis for a relationship.

Q205 Meg Hillier: They are all frozen with fear about lawyers. Maybe we could get the others to go one by one, saying the same.

Ashley Almanza: We assume generally-and I take your caution from earlier about assuming things-that customers obey the law. I agree totally with Paul that suing a customer before you have even done any business does not seem like a winning formula.

Mr Bacon: We had a Deputy Prime Minister who used to hit electors.

Q206 Chair: I just need to cover a few issues that we have not covered. The first goes back to the tagging issue, where you held up your hands. Can I take it, on the back of that, that if similar issues come to light over the next year or so it will be fair to conclude that it will then become a responsibility of group senior management? In this instance you did not know, but in future you will.

Alastair Lyons: Absolutely.

Ashley Almanza: It already is.

Q207 Chair: Okay, thank you. Can I now deal with an issue about transparency? We have talked helpfully with you about open book accounting and access by the NAO. What are your views on FOI provisions?

Alastair Lyons: From our perspective, we would be completely happy to co-operate with FOI being extended to our own contracts.

Paul Pindar: We already comply. Provided we are not doing anything that offends our client-which ultimately we would need to check-but apart from that we already comply.

Ashley Almanza: I have a similar answer. It tends to work that we go to the client. I don’t know of any cases where we have not been able to provide information.

Q208 Chair: To put it into context, MPs put in questions and are often told they can’t have a reply because of commercial confidentiality.

Ashley Almanza: I don’t have the full history, but generally what I have seen is that we reply saying that we are happy to comply, that we need our client’s permission and we are seeking that permission. Then we go to the client.

Q209 Chair: So you are saying it is an issue for the Departments.

Ashley Almanza: We have to go back. Under the contract, we have to go back to the customer.

Q210 Chair: We had real trouble with DWP. Ms Morgenstern.

Ursula Morgenstern: We normally work with the DWP because that is the contract where we come across freedom of information requests and it is normally going via the Department.

Chair: Okay.

Q211 Mr Bacon: On the subject of the use of the words "commercial confidentiality", we have found this often for years. It is the Departments that are saying it. An investigative journalist who writes about the computer industry and consultancy once said to me years ago that, in his experience of talking to suppliers, they were far less concerned about commercial confidentiality than might be supposed. Everyone knows everyone else in the industry and people have a rough idea of each other’s margins, and anyway people are circulating around from company to company every few years.

It is mainly the Departments that are concerned about it and they are certainly the ones we hear it from. Mr Pindar, you were nodding. From what we have heard today, is that a fair characterisation? You generally are less concerned about commercial confidentiality in the way that it is being prayed in aid by the Departments-not by you-than might be supposed.

Ashley Almanza: I would express a more cautious view than Paul’s. I would say that we would be totally comfortable with, for example, the NAO having all our commercially confidential information. We would feel less comfortable about our competitors having, by whatever means, access to that information.

Q212 Chair: I think we understand that. Quite often it is used as an excuse. There are obviously some things that impact on competition, but quite often there are some pretty straightforward issues that we raise as Members of Parliament and we just do not get an answer. Commercial confidentiality is plead in aid.

Q213 Mr Bacon: It is prayed in aid in circumstances where it does not seem that plausible.

Q214 Chair: It is obvious where it would affect your competitiveness.

Alastair Lyons: I don’t think I have anything to add to what has been said before.

Q215 Chair: May I ask about two other areas? Have all of you got former senior civil servants working with you? I am thinking of a case of someone from DWP who went to Serco: Alan Cave. Do you recruit a lot from former senior civil servants?

Alastair Lyons: We do, yes. Indeed, a large part of our business is made up of civil and armed forces personnel.

Q216 Chair: I know there are people who have come over on TUPE, but what I am interested in is the cadre of people who do the bidding for the contracts.

Alastair Lyons: We certainly recruit individuals who have an understanding of what our customer is looking for on contracts, in terms of where the scope of the objectives of that contract is moving to, as part of giving us the basis to be an informed supplier.

Q217 Chair: We have the same issue when we look at tax matters. We want a healthy exchange of views from people working in the big accountancy firms, but sometimes individuals can use information that they have garnered and won, particularly in Government, to gain advantage in the private sector organisation for which they are working. How do you ensure that that does not happen?

Alastair Lyons: Typically, there are controls within Government with regard to senior civil servants moving out, and there is a transparency as to what that individual who is working with us has previously worked on. So between what the Government themselves do and what we do, one would seek to control that area.

Ashley Almanza: More than 90% of our business is non-Government. Obviously we do not exclude former Government employees from the recruitment pool.

Q218 Chair: And ex-Ministers?

Ashley Almanza: I am not aware of any.

Chair: I am. I think you have one on your board.

Meg Hillier: Who?

Ashley Almanza: I am not aware of one. I would have to think carefully about that, but anyway, we do not exclude them. If they are prohibited, then-yes.

Q219 Chair: Have you got any ex-Ministers knowingly on your board? I think you have got one, actually. I think you had better go and check it.

Alastair Lyons: We don’t.

Q220 Chair: May I ask about tax? I have two more questions. One is tax. I am sorry to come in at the end, but I wanted to cover all areas. To all of you, the contracts that we have talked about today are funded by the taxpayer. Therefore I think there is a particular onus on you to pay your fair share of corporation tax on the profits you make from the economic activity you undertake here in this jurisdiction. From the information in the Report, neither G4S nor Atos in 2012 paid any corporation tax.

Ursula Morgenstern: We made, I think, 3% profit before tax. Essentially we did not then qualify for corporation tax. We made significant contributions to the pension funds of our staff.

Q221 Chair: We are just interested in corporation tax. We often hear people say that they pay other taxes.

Ursula Morgenstern: We have significant pension obligations: 70% of them are defined-salary schemes from ex-civil service, and from our perspective, this will continue for the next few years.

Chair: I accept that point.

Q222 Mr Bacon: On that point, when people are TUPE-ed across to any of your organisations from the civil service, then the pension obligations come with them, basically?

Ursula Morgenstern: Yes. And they of course are defined-salary pension schemes.

Q223 Chair: Ms Morgenstern, figure 19 says does indeed talk about the deficit on pension schemes, but it also talks about the use of allowances for capital investment. That is where we see a lot of ways in which people take their profits from one tax jurisdiction to another.

Ursula Morgenstern: And we don’t do that. These are investments back into the UK. We put all our commercial activity here. We tax all our commercial activity here. For example, we invested in further capacity in Scotland; we took on staff from RAF Kinloss when it was closing down to set up new sites in Scotland. We were investing further in our data centres here in the country. We were investing in some of the public sector contracts which are payment by results. That investment is part of-

Q224 Chair: I will tell you what I would be interested in. I had calculated you had a 5% profit level. It looked to me at a 5% profit level as if you could be paying around £33 million tax. I accept that is at 5% and you are paying less corporation tax. It is a crude calculation. You are paying less.

Chris Heaton-Harris: I am wringing my hands.

Chair: In terms of transparency, it is something that really drives people wild. If their money is being used to provide you with business, and therefore profit, it is completely and utterly beholden on you to act within the spirit as well as the letter of the law and pay your fare share of corporation tax.

Ursula Morgenstern: Which I fully agree with and when corporation tax is due we will pay it. But again, from my perspective, we will need to fund the pensions of our staff; we need to invest in continued businesses in this country; we have 10,000 staff and we need to keep them. We need to make sure that we can provide them with employment.

Q225 Chair: I understand all that, but I am particularly interested in what is written in our Report. I accept the issue about having to deal with the liability on pension schemes. There is also the issue of carrying forward tax losses. I would be interested in a note from you on that and I would be interested in how you are using capital allowances. It is certainly our experience in a hearing we had only a couple of weeks ago that that is something that tends to get exploited.

Ursula Morgenstern: We are very straightforward, so we can send you that information.

Q226 Chair: Okay. Would you provide us with a note? Mr Almanza, the same is true for you. You are not paying any corporation tax?

Ashley Almanza: We pay corporation tax when we have taxable profits. We pay corporation tax around the world, and we pay it by jurisdiction where we have taxable profits.

Q227 Chair: I understand that. This is why I talk about the spirit as well as the letter of the law. If I look again at what is said in this Report about how you get to the position where you do not pay corporation tax, there are again mechanisms that we all too often see. One is interest deductions on group borrowings-that is a mechanism that people like Starbucks use; statutory tax reliefs on specific items, such as capital investment, that is also used; and the utilisation of tax losses.

Ashley Almanza: I regard all of those as fair and they are scrutinised by HMRC. I know that you are principally interested in corporation tax, however I agree with you that what the taxpayer wants to see is that all the companies are paying what is due, and what is due under the law. I will make one final point. Last year we made £70 million profit worldwide. In the UK we paid £426 million of tax in total. Regardless of what the tax is, that went into the Treasury’s coffers.

Q228 Chair: I know, but there is a duty. We all pay lots of tax: our VAT, our council tax, every other sort of tax. May I ask one final question? Were you all trained before you came to today’s hearing? Did you receive training, Mr Pindar? Did you, Mr Almanza?

Ashley Almanza: I took advice from inside and outside, but I wasn’t trained.

Q229 Chair: You took advice. You didn’t pay for training?

Ashley Almanza: No.

Q230 Chair: All these guys that are around offering you their services? I thought I would offer them to you, take the proceeds and give them to a charity. Mr Lyons, did you have training?

Alastair Lyons: Similarly, I had some sessions with our PR advisers and our legal advisers.

Q231 Chair: When you talk about advisers, are those outside advisers that help you with your relations with Parliament?

Alastair Lyons: No, not at all. They are corporate advisers who do those areas for us in every aspect of our business.

Q232 Chair: So they are outside companies?

Alastair Lyons: They are outside companies, but they are not specifically parliamentary-focused.

Q233 Chair: No, they are outside companies, so you paid them for that advice.

Alastair Lyons: Yes.

Q234 Chair: Did you pay some outside advisers for advice?

Paul Pindar: Who are you looking at?

Chair: Both of you.

Paul Pindar: The answer is no.1 I am just wondering whether you think we should have done.

Mr Bacon: You can just buy my book; it’s only £11.99.

Q235 Chair: I was going to give it with a donation to the charity. What about you, Ms Morgenstern?

Ursula Morgenstern: I definitely was well briefed by our team, but also by the companies we are using in the PR arena. It is my first time and this is a very important meeting. I took any help I could get.

Q236 Chair: And did you have to pay for it?

Ursula Morgenstern: We have long-term contracts with the companies, so not specifically.

Q237 Chair: This has been a really positive session. We see this as an important area of our work. I will just say what I said at the beginning: this is about our being able to follow the taxpayer’s pound to ensure both value for money and probity for the taxpayer. I see it as the beginning of a continuing conversation. I really appreciate the fact that you all voluntarily co-operated with the NAO to enable this session to take place. Thank you.

[1] Note by witness: Please note that while originally let by DWP, the Cipher contract as detailed in the NAO study links these revenues exclusively to DWP. In practice, nearly all departments use and pay for services under the framework contract to access the savings and other benefits.

[1] Note by witness: Mr Pindar was inadvertently wrong in making this response. Six hours of external research and advice was received and paid for by the team briefing him.

Prepared 13th March 2014