Capita’s Service Birmingham profits bonanza
Birmingham Post 3 October 2013
Last year Birmingham City Council paid Capita on balance £126m for ICT, billing and ‘business transformation’ (the latter delivering low hanging fruit – hardly rocket science).
I’ve been saying for some time that this over-bloated contract has been costing us £120m a year. I take no pleasure in saying, sadly, that I was spot on. Earlier forecasts anticipated annual costs of just £55million, the schools ICT service aside.
And £55million is anyway far too much.
Service Birmingham made £26m in gross profits last year. Remember those were anyway profits after a whole range of stuff had been purchased – with a big mark-up no doubt – from 15 Capita Group firms for £54m. They each will also be making a profit to feed back into Capita group. So the £26m gross profit is the tip of the value-extraction iceberg.
And of the £8m dividend paid last year, nearly all of it went to Capita PLC anyway, again as I have stressed before.
In fact over 98% 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.
Cllr John Clancy has said that this is a ‘Rolls-Royce’ contract that we can’t afford. He’s wrong, actually.
It’s a titanium plated Bugatti Veyron contract worthy of a guest spot on Top Gear. I can visualise one of their presenters hyperbolically drooling over it; ‘it goes from nought to £126m in the blink of an eye (or 365 days)…’
What’s absolutely clear is that Birmingham City Council is haemorrhaging cash on these huge contracts. So why hasn’t this one been cancelled?
Well, the contract is sadly not in the public domain. Surely it must now be put under public scrutiny. I cannot believe that there is not an exit clause in this contract; Mike Whitby and colleagues (who signed the deal) must surely have inserted one?
There will of course be a price attached to that. But even if the exit fee is £20m or £30m tops, this would be a price worth paying to take control of the contract and bring it back in house.
A stripped down and pared back ICT and billing service could then be contracted out to local small firms at a fraction of the cost. This would keep money recirculating in the local economy and at the same time save the Council big money.
The incoming Labour Council should have cancelled the contract on arrival in office. With an estimated exit fee of £30m in year one, and an annual cost of £30m for a pared down localised service, that saves £60m in the first year. That rises to £90m in year two as no more exit fees are needed, and so on.
Cumulated in the style of Albert Bore’s ‘Jaws of Doom’, that could stack up to £510m by 2018 (note that Albert Bore extended the period of his Jaws of Doom by a year from 2017 to 2018 in the last outing, thereby upping the overall Jaws figure further). And even on a more conservative estimate of £60m a year in savings, that still adds up to £330m cumulative after initial exit costs.
This means that essentially 40% to 60% of the so-called £825m ‘Jaws of Doom’ are in fact what I have repeatedly called the ‘Claws of Doom’ – the money haemorrhaging to Capita (and that’s before we look at Amey and other contracts).
This is actually a considerable understatement as we are ignoring the fact that Albert Bore’s supposed £825m Jaws start back in 2010 in his Temple of Doom flight of fancy.
But the key point is that Birmingham City Council is spending around 10% of its entire controllable budget on the contract with Capita. Is this really how our city should be allocating resources?
If the ICT spend of the council can be cut by £60m and then £90m annually until 2018, and significant cuts to other big business contracts can be made, then the Claws of Doom can be prised off the Council and front-line services may not need to take such an immediate hit in the imminent service reviews.
Quite why the Labour-led Council did not immediately get hold of this contract last year and pare it right down remains the big unanswered question.
‘Take control’ is my message to the Council.
Update: Paul Dale in his Chamberlain Files piece today states that he understands that the Capita contract can be cancelled at will on less than two months’ notice.