The decision by Birmingham City Council and Capita to scrap the Service Birmingham Joint Venture (SBJV) is welcome and overdue. The SBJV has effectively been a long-running vehicle for Capita to extract massive profits from the Council, with little effective challenge – until now.
Council Leader John Clancy had made it clear on taking office in late 2015 that ending the ‘Rolls Royce’ SBJV was a key political priority, and he has pulled it off. That has taken political cojones. Previous administrations ducked the issue even though the SBJV was intensifying the financial pressure faced by the Council.
As I’d repeatedly stressed during the dying days of the Bore supremacy, the SBJV was putting an extra bite in the ‘jaws of doom’ facing the Council. Sadly Sir Albert never quite got it.
The last set of figures available (for the year ending 31 December 2015 – around the time Sir Albert was finally forced out) show a gross profit of £15m on a turnover of £87m. That’s down from 2014, which saw gross profits of £18m on a turnover of just under £100m but still a pretty hefty profit for Capita of £1.25m a month .
And as in previous years, Service Birmingham bought tens of millions of pounds of ‘stuff’ from other Capita group companies, all of which no doubt were making significant profits. So the gross profits figure of £15m is a significant understatement of the true ‘value extraction’ by Capita Group as a whole in 2015, which was over £20m on my back-of-a-spreadsheet calculation.
The £87m spend in 2015 by the Council on the SBJV appears in the latter’s financial statement but doesn’t appear as a single figure in Council’s budget, which confusingly runs on a different year-end. We also don’t know how much of the £87m was capital and how much current spend, and therefore how much pressure was piled on the Council’s year-to-year financial position.
However, we can get an idea of the level of this ongoing pressure from statements by Clancy that scrapping the SBJV “means that Birmingham City Council will have more to spend on frontline services and to deliver key policy priority pledges on inclusive growth, housing and social services”.
He is quoted in the latest Birmingham Post stating that scrapping the SBJV will save £11.5m this year: money that prevents further front line service cuts. This is exactly what many of us having been calling for – for years. There will be further savings down the line.
It had been argued previously that the Council simply couldn’t get out of the SBJV arrangement as cancellation costs were too high. The scale of these costs was censored by Council lawyers who raided the maker pen cupboard in scrubbing out the juiciest bits of the SBJV contract before a ‘redacted’ version was finally put online after sustained public pressure back in 2014.
During the Leadership contest to replace the toppled Bore in late 2015 the SBJV Chair Barry Henley put those costs in the £20m-£30m range. What’s key here is that the Council appears to have forced Capita to agree to waive those costs in agreeing to terminate the SBJV arrangement, saving the Council significant further money.
Why have Capita agreed to this? It probably realised that the alternative was even worse. Clancy had made it clear he was willing to pull the trigger and terminate the whole contract which would have brought much negative publicity for a firm struggling with a share price which has fallen by 45% since September last year on the back of profits warning.
The firm wrote down some £50m of contracts in February and has been forced to cut costs and dispose of assets to make its debt more manageable. Last December, it stated that it would sell its asset services division and a number of smaller parts of the business, in order to shore up its balance sheet.
By agreeing to exit from the SBJV gracefully, Capita can at least now bid for new business with the Council and take some positive publicity from their willingness to be flexible with a Council under financial pressure.
A final point to note is that the new arrangement opens up the prospect for other firms – maybe including local firms like SCC – to bid for Council IT contracts. Capita allude to that in their statement on the SBJV arrangement being dissolved having “commercial restrictions.”
This in turn could save the Council more money down the line and effectively ‘market test’ procurement – again something many of us had been calling for.
So hats off to the Council for pulling this off and saving tens of millions of pounds.
A final point; the Birmingham Post deserves credit here. The editors have allowed those of us critical of the SBJV significant space to examine the latter over several years through blogs and columns. Business editor Graeme Brown has doggedly dug out financial statements and highlighted the ongoing level of profits at SBJV while public affairs editor Neil Elkes has returned to the issue repeatedly. The paper’s journalists have, I feel, played a significant role in terms of local democratic scrutiny. Well done to them.
* Professor David Bailey works at the Aston Business School