Oral answer (Lords) on Interserve: Provision of Public Services - Dec 12

To ask Her Majesty’s Government what assessment they have made of Interserve’s financial situation and the impact this may have on the provision of public services.

My Lords, the funding arrangements of Interserve are the responsibility of the company and its directors. The Cabinet Office has regular discussions with the company’s management and monitors the financial health of all government strategic suppliers. The company successfully raised new debt facilities earlier this year and plans further restructuring to strengthen its balance sheet and financial robustness.

I thank the Minister for his reply, but the monitoring does not seem to work, because this is happening too many times. As well as infrastructure, Interserve does welfare to work, probation, home care and hospital work—all important services—yet because of its financial structure, like many other public service companies, it has become a speculative vehicle for hedge funds and private equity. How will the Government rectify that? Will they give it more work to keep it afloat or sink it by taking the work away? How will they ensure that these essential services continue?

As I said, the Government are in regular contact with Interserve to monitor its performance. Not only does the Cabinet Office have overall responsibility for monitoring the health of the company, but individual government departments that have contracts with Interserve have a dialogue with it about those specific contracts. The noble Lord may have seen the statement which the Cabinet Office issued a few days ago:

“The Cabinet Office has expressed full support for the work the company is doing to implement”,

its “long-term recovery plan”. It is worth making the point that Interserve is very different from Carillion. Interserve is now taking the action that Carillion ought to have taken—to restructure its balance sheet and improve its robustness—and, unlike Carillion, it does not need new money. It needs to turn debt into equity. It is not accurate to make a direct comparison between the two companies.

My Lords, in a meeting in the Cabinet Office in the spring, I specifically asked David Lidington about Interserve. Since then, there have been a number of warning signals. Ministers may be talking to Interserve, but are they talking to the companies that support Interserve by delivering its services to people? If they did, they would hear from Rudi Klein, the chief executive of the Specialist Engineering Contractors’ Group, who is advising its members not to work for Interserve. The Minister’s response seems very relaxed in the light of what is actually going on. What contingencies are the Government taking in the event that Interserve is unable to deliver services?

On the first point, I made inquiries to Interserve about the suppliers: 90% are paid within 60 days or less. The Government have now insisted that, where they place new contracts with suppliers, there is a contingency plan to take effect if and when that contract runs into difficulties. Interserve, along with four other companies, is piloting this new arrangement, which was introduced post the problems with Carillion.

Does the Minister agree that one of the real problems is that more than 20% of government procurement now goes to a small number of strategic suppliers, a figure that has doubled since 2013? The top three suppliers are all having financial problems. After Carillion, a new system was introduced, which I think the Minister was referring to; rather surreally, it is called “living wills”. Has this been completed for Interserve—he mentioned a pilot—and can he reassure the House that no new contracts will be offered to Interserve until such time as the miracle of the new company emerges, and that public services delivered by Interserve will be continued without the cost penalty of £148 million which occurred after Carillion?

The noble Lord is quite right. On 11 November, the Chancellor of the Duchy of Lancaster made a speech to the BSA outlining new arrangements. The noble Lord referred to some of them; we prefer to call them resolution plans rather than living wills. We have recently announced plans for all suppliers to draw up resolution plans in the unlikely event of a business failure, to ensure continuity of services and, where necessary, to enable another provider or the Government themselves to step in. Interserve has volunteered to lead the way as one of the first suppliers to design one of these resolution plans.

My Lords, in view of the substantial difficulties that major outsourcers are now going through, do the Government have a view on the minimum number of major outsourcing companies they need to maintain a competitive market for government outsourcing of public services?

The noble Lord raises a good point. We want to promote a healthy and diverse marketplace for public services so that not only the Government but local authorities and, indeed, the private sector can access these companies. For that to happen, we need to ensure that the existing ones have a robust financial regime. We are also trying to break down some of the very large contracts into smaller items so that smaller suppliers, who cannot bid for the major contracts, can bid for contracts that have been disaggregated. I hope this in turn will help to build up the marketplace that both he and I want.