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David Bailey: Service Birmingham's £63,000-a-day Dividend Bombshell

The financial details of the deal between Birmingham City Council and Capita in the form of Service Birmingham (SB) remain shrouded in secrecy.

Capita

Despite a heavily redacted contract being put on line earlier this year after sustained public pressure from campaigners, the full details of the deal between Birmingham City Council and Capita in the form of Service Birmingham (SB) remain shrouded in secrecy.

Only now, for example, are we able to find out how much the council spent on the Capita deal in 2013 – nine months after the end of SB’s 2013 financial year - in the form of accounts filed at Companies House. Those accounts, though, make for interesting reading.

Overall Council spend in 2013 on SB came in at over £100m. That’s far too much again, notwithstanding the laudable efforts of SB Chair Cllr Barry Henley to pare costs down from an even more appalling £120m+ the year before. 

But buried away in the detail is nothing less than a bombshell in the form of how much was paid by SB to Capita last year in the form of dividends. That Capita dividend take-away was a whopping £23m in 2013. That’s £440,000-a-week or £63,000-a-day just in dividend payments.

Yes, you read that correctly; of the £102m spent on SB by Birmingham City Council in 2013, Capita pocketed £23m in dividends. You and I paid them.

If that wasn’t bad enough, taxes paid to the exchequer in 2013 were another £5m. So that’s £28m that went out of the council in 2013 that could have been avoided if Service Birmingham had been scrapped.

That’s over half a million (£539K) a week drained from the Council coffers. It’s what really puts the bite in Sir Albert’s ‘Jaws of Doom’.

Then there’s the little matter of SB buying stuff from other capita companies at a cost of £50m in 2013 – with another tidy profit therein for Capita likely to have run into the tens of millions.

So the reported SB profits figures don’t really reflect the real amount of money that Capita managed to extract from Birmingham City Council via the SB vehicle in 2013.

Over the last few years, the Council’s argument for sticking with the flawed SB deal has nosedived from the deal’s supposed ‘value added’ to the argument that cancellation fees are simply too high. ‘We can’t cancel anyway’ whimpers the Council, which has recently brought the call centre element of the deal back in house.

But the killer facts from the 2013 SB accounts smash the Council’s pretence. If the contract had been cancelled in 2012 at my estimated cancellation cost of £25m, then there would actually have been a net in-year financial benefit for the Council given the £28m saved (the council refuses to reveal the cancellation figure, but has never challenged me on my estimates).

So much for the argument that the cancellation costs were too high. The ‘Rolls-Royce’ SB service could then have been stripped down to an essential level with potentially much greater further savings year on year.

There are some important wider lessons from recent experience for how outsourcing contracts in the public sector are set up. Firstly, contracts shouldn’t be so large that public sector expertise gets hollowed out to the point that it becomes dependent on the private firm.

Secondly contract termination fees need to be kept to a minimum and the contract needs to be regularly market tested. Thirdly, real ‘key performance indicators’ need to be in place that hold the private firm to account properly, with effective scrutiny, transparency and accountability.

More broadly, all too often the public sector simply doesn’t have the expertise to design, monitor and enforce the contracts that govern the relationship with the private sector.  Public bodies everywhere – including councils across the region – need to bear these lessons in mind.

All of this is even more argument for market testing the SB contract, as the council is about to do with waste collection. That could, I reckon, save the Council another £100-£200m over the life of the contract.

Sadly, the Council don’t seem willing to market test the recently revised SB deal with Capita. Meanwhile, in 2013 Capita laughed all the way to the bank with a dividend pot of £23m.  

* Professor David Bailey works at the Aston Business School in Birmingham.

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