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Profits soar at council-funded Service Birmingham

Calls for contract to be scrapped after Capita-led company sees pre-tax profits pass £21million

Service Birmingham
The Service Birmingham contract covers IT, call centre and payroll departments

Councillors and MPs have called for the city’s contract with outsourcing firm Service Birmingham to be scrapped after its profits soared by 52 per cent.

The Capita-led company made £58,400-a-day pre-tax profits last year – despite the city council’s finances struggling under the weight of cuts.

The firm saw pre-tax profits last year of £21.3 million – up from £14 million during the previous 12 months.

Accounts filed with Companies House this week also showed a rise in income, dividends and a £54 million bill for goods and services bought from Capita.

This has led to calls for the council to tear up the contract and offer the work, which includes IT, call centre and pay roll, to city firms.

City MP Khalid Mahmood said the contract was “unjustifiable” amid hundreds of council jobs being axed in a £102 million two-year savings plan.

The Post breaks the news on the same day it emerged that libraries and youth centres in the city are under threat from a council bid to cut its budget by a further £50 million.

Mr Mahmood (Lab Perry Barr) said: “I don’t think it is acceptable, particularly in these days where a lot of people are having to make sacrifices and a lot of council employees are being made redundant.

“To have these surpluses these days is not justifiable. This could go towards safeguarding jobs and facilities in the council.

“At a time we are having to sell off sports and leisure facilities across the city, we really must look at this expenditure, as I don’t think it is justifiable.

“The best thing we can do is get out of this contract and use this money for the people of Birmingham rather than a big company.”

The accounts show that the turnover of Service Birmingham – a joint venture partnership between Capita and the council, which owns 32 per cent – rose from £121.6 million to £123.5 million last year.

Meanwhile dividends taken out of the business rose by £500,000 to £8 million.

The value of goods and services sold to Birmingham City Council across the year rose from £132.7 million in 2011 to £146 million in 2012 – £400,000 a day.

Service Birmingham did, however, purchase £20.1 million worth of services from the council across the year and made £3.6 million worth of charitable donations.

City councillor John Clancy said the latest accounts showed the city had crossed a threshold of £1 billion paid through the contract, and called for it to be scrapped.

Coun Clancy (Lab Quinton) said: “This is a Rolls-Royce contract which is beyond our means.

"While the rest of us have been struggling, this contract has thrived to the benefit of Capita. We can’t pay £11 million per month out for this service. This should have been the first cut we made.

“We have to bite the bullet and cancel the contract now at will. Get the work done by local businesses. We should have done it long ago. Any costs of exit rolled into a new contract could still save hundreds of millions of pounds in the future.”

Service Birmingham has previously come under fire from its chairman, Labour city councillor Barry Henley, a computer expert who was appointed to the post in May, for costly contracts.

Cllr Henley, a longstanding critic of Service Birmingham’s performance, disclosed that a 17 per cent mark-up even applied to updating software “for which they are already paid for support in the original contract”.

New accounts for the company, which employed 804 people in the city last year, 26 fewer than the previous year, show it is paying £5.3 million tax to the Treasury.

Now Coun Clancy has called for the details of the contract to be made public.

He added: “We’ve now paid over £1 billion for a contract we can’t afford.

“In times of austerity and massive service cutbacks, we are still paying out net invoices of £126 million a year to Service Birmingham and half of that goes direct to Capita PLC and 28 of its associated companies.

“Then 98 per cent of the profits of Service Birmingham have gone direct to Capita in £45 million in dividends. The other shareholders, the citizens of Birmingham, get next to nothing from the profits out of their shares.

Birmingham Post columnist David Bailey, professor of industrial strategy at Aston Business School, said too much of the city’s money was going to Capita amid a backdrop of cuts costing people their livelihoods.

He said: “I’ve been saying for some time that this over-bloated contract has been costing us £120 million a year.

“I take no pleasure in saying, sadly, that I was spot on. Earlier forecasts anticipated annual costs of just £55 million, the schools ICT service aside. And £55 million is far too much anyway.

“Service Birmingham made £26 million in gross profits last year. Remember those were profits after a whole range of stuff had been purchased anyway – with a big mark-up no doubt – from 15 Capita Group firms for £54 million. They will also each be making a profit to feed back into Capita group.

So the £26 million gross profit is the tip of the value-extraction iceberg. And of the £8 million dividend paid last year, nearly all of it went to Capita PLC anyway.

“In fact, over £98 million goes to Capita. Ironically, there was never an expectation that any profits would be made at this stage of the contract.

“This shows what a hugely lucrative money-making machine this has become for Capita. And we’re all paying for it.”

The Service Birmingham contract is currently under review as the council seeks to bridge funding gaps.

A Service Birmingham spokesman said: “We are committed to working in partnership with the council to reduce costs and improve services for the people of Birmingham.”

• David Bailey: It's a bloated contract. Why hasn't it been cancelled?

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