Oral answer (Lords) on Interserve - Mar 20

To ask Her Majesty’s Government what changes they are considering to the outsourcing of public services as a result of Interserve entering into administration.

My Lords, nothing in Interserve’s refinancing will affect the delivery of public services. No staff have lost jobs and no pensions have been affected. The company has executed a contingency plan it had prudently developed in case the shareholders rejected the proposed refinancing deal. However, we have already announced changes to how we outsource; these are captured in the Outsourcing Playbook, which outlines a range of measures designed to ensure that outsourcing projects succeed.

I am glad the Government are investing in playbooks—I am not sure what sort of play is intended. It seems to be time for an overall review. Can the Minister confirm that of the 29 strategic suppliers the Government list for outsourcing, five have now run into severe financial difficulties, and that in several cases, as with Interserve, US hedge funds shorting the shares have contributed to that, putting British public services in peril? Can he confirm also that Interserve was a general supplier of probation services, the updating of sewers, waste management, bus station refurbishment, hospital cleaning and security, motorway repairs and the like, and that the record therefore—as with probation services, of which it was the largest supplier—suggests that its expertise is relatively limited?

On the first point raised by the noble Lord, it is important to understand that what happened to Interserve was totally different from what happened to Carillion, for example. Carillion went bust. Pensioners took a hit. Creditors took a hit. People lost their jobs and there was discontinuity in services. None of that happened with Interserve. It was done with the approval of the pension trustees and the lenders, who wrote off the debt and put £100 million in. There was no discontinuity in services and nobody lost their job. That is important to understand.

The noble Lord asked whether we would have a general review. I announced that we have learned from past lessons; the document to which I just referred has 11 key policy areas in which we can come to better decisions and create a healthier outsourcing market.

The noble Lord is right that Interserve has a general portfolio—it protects the pandas in Edinburgh Zoo. The issue of probation services goes far wider than Interserve, as the noble Lord will know; the MoJ has announced a review of community rehabilitation services, with a view to improving outcomes and better integrating public sector, private sector and third sector providers.

My Lords, the annual revenues of Interserve were £2.9 billion, two-thirds of which it got from the public sector. The debt holders got this business for approximately £600 million, and will undoubtedly sell off its profitable parts for more than they were owed. However, the unsecured creditors have been left fighting over £600,000. Were the Government part of that deal? How much was owed to these creditors? Why do the Government think that that amount of money is safe? These people will lose lots of money and many of them are small or medium-sized businesses.

There is no reason why trade creditors of Interserve should lose any money. The hit was taken by the shareholders and the lenders who wrote off their debt and converted it into equity. The subsidiary companies providing goods and services to the public and private sectors are wholly unaffected by what has happened to the parent company, which has simply changed ownership. The creditors of the subsidiary companies are in exactly the same position as they were before the transaction over the weekend.

My Lords, I will pick up that issue. This is a pre-pack administration, is it not? In a pre-pack, the people who lose out are the trade creditors and the people who survive are the owners of the original company, who walk away with a new company unencumbered by the debts its previous creditors allowed. How can the Minister defend that? As my noble friend said, this involves thousands of SMEs, which will lose jobs and supply of cash, and be worse off. The Government reviewed this whole process in 2014. They accepted the recommendation of the Graham review to take powers in the Small Business, Enterprise and Employment Act 2015 to make sure that pre-packs were properly regulated. What is the progress on that?

On the first point, it is important to understand that Interserve was in two halves. The subsidiary companies provided services to the public and private sectors, looking outwards towards the market, whereas the parent company looked backwards at the shareholders and the banks that were lending it money. What happened over the weekend was that the parent company went into administration and immediately, as the noble Lord said, went into a pre-pack and is now owned, in effect, by the lenders. It is the banks of those lenders, not the trade creditors, which are out of pocket as a result of the transaction.

I will write to the noble Lord on the second question, because it affects another department.

My Lords, the Minister shows great calm, as usual, on these issues. In fact, this squabble was played out across the City pages for weeks. The players in that squabble were the banks, the bondholders and the hedge funds. The Government had no part in that. The fact that Interserve lives to continue is nothing to do with the Government, it is the fortune of what happened out there—it was luck.

The Minister talks about a playbook. How does that playbook affect retrospectively all the services that the companies currently carry out? It is all very well looking forward to future services, but it is services today that were let many years ago that are still threatened by this kind of problem.

The Government keep all the contracts under review. We have developed arrangements with all the major contractors. We have continuity arrangements known as living wills should there be, by any chance, any corporate failure. As I announced, looking forward, there will be a number of policy changes to ensure that better decisions are taken in future. We believe it is important to have a robust outsourcing market. The fact that Interserve has survived means that we still have a larger number of suppliers in this market than would have been the case had it gone out of business.

Would my noble friend the Minister agree that perhaps there is a lesson in procurement here? Taking the lowest bid in a tender process is not necessarily the best long-term value for money.

I entirely agree. The Government want to get the right mix of quality and effectiveness at the lowest possible price over the lifetime of the contract. There is certainly flexibility in our current rules to ensure that a higher-quality bid is successful even though it may cost more than other bids.