Lamebert here: Love the name, “Capita,” as in “head count.” Why the heck not go the whole nine yards and brand as “Body Shop”? Or, I suppose, following Carrillon, Capita. Or “Body Shoppe.”
By Don Quijones, Spain, UK, & Mexico, editor at Wolf Street. Originally published at Wolf Street.
Since the sudden downfall of the British infrastructure giant Carillion two weeks ago, investors’ nerves in London are frayed. And short-sellers, scanning the horizon for their next prey, seem to have found it.
Its name is Capita. It is one of the UK government’s biggest outsourcing firms with contracts to provide services to government entities, such as NHS cleaning, school dinners, and prison maintenance. It has 70,000 employees in the UK, Europe, South Africa, and India.
On Wednesday, its shares tumbled 47.5% to a 15-year low after its new CEO, Jon Lewis, slashed profit forecasts, announced plans to tap the capital market for £700 million, and suspended a dividend that was worth more than £200 million to shareholders last year.
On Thursday, the rout continued , with shares dropping a further 13%. On Friday, shares bounced off a tiny 2.3% to close at 162.3 pence, down 77% from June 2017 and down 88% from July 2015.
In a desperate bid to calm market nerves at the height of Wednesday’s rout, the UK government released a statement insisting that Capita was “not another Carillion.”
But Whatever the Government Might Say, There Is a Striking Resemblance Between the Two Companies:
Like Carillion, Capita is massively dependent on government contracts. In the last two years alone it was awarded 226 public sector contracts — 10 times more than Carillion — making it the biggest supplier of local government services in the country, according to public sector data provider Tussel.
Like Carillion, Capita is massively in debt, with an estimated £1.1 billion of funds outstanding. And like Carillion, it’s been exceptionally generous with its dividend policy in recent years. So did it, as Carillion is accused of doing, borrow money and sell-off assets in order to pay its dividends, in direct contravention of UK law?
Like Carillion, Capita has a pension shortfall, estimated to be around £380 millioin, but, as happened with Carillion, it could grow in the coming days as the full extent of its long-term liabilities becomes clear.
Capita also shares the same auditor as Carillion, KPMG, whose alleged role in cloaking Carillion’s financial reality is already under investigation by two parliamentary inquiries.
There Are Also Important Differences Between Capita and Carillion, Not All Good.
On the positive side, unlike Carlillion, Capita has over £1 billion of cash on its balance sheet. And Capita doesn’t have high-risk high-cost construction projects bleeding it dry.
But Capita is hemorrhaging funds at a startling rate. And it has been losing important business contracts, partly as a result of the political uncertainty over Brexit. Whether Capita gets through the immediate storm it faces will depend largely on its ability to raise £700 million from shareholders, for which it claims it already has full “standby underwriting” — but this undertaking has gotten immensely more difficult after the crash of its shares.
If it fails, the implications for the UK government could be huge. It already has to take over many of Carillion’s sprawling public service operations, which will no doubt be funded by an expansion of public debt, while concerns are growing about the gaping deficits at UK pension funds, estimated to be worth a combined £210 billion. If Capita were also to collapse, the sheer scale and scope of its operations would make it even more complicated to replace. As the UK Independent reports, Capita doesn’t just provide some services, it runs entire councils:
Created from humble beginnings in 1984 as a for-profit consultancy arm of the Chartered Institute of Public Finance and Accountancy (CIPFA) – Capita became the Vampire Squid of business process outsourcing, its money grabbing tentacles extending through every layer of Government, from pensions, to council finance, from parking and congestion charges to NHS GP primary care support, funeral services, and even the privatised food safety agency.
If the financial situation becomes untenable at Capita, not only would the government have to mobilize a herculean effort to ensure the firm’s sprawling, diffuse web of services continue to be delivered; it could also have serious knock-on effects for other outsourcing firms such as Serco and Interserve, both of which have their own share of problems.
In the last 12 months, Serco’s stock has fallen 40% and is down 78% from July 2013. Shares of Interserve, which is already on a watch list, plunged 25% over the past two days, 35% over the past two weeks, and 88% from June 2015. In the event that Capita’s turnaround plan fails, contagion could spread throughout the teetering sector, at which point the viability of the UK’s public-private service model could even be threatened. For the country’s already slowing economy, the timing could not be worse. By Don Quijones.
Has the Carillion collapse triggered the “Next Arthur Andersen?” No, the “Final Four” audit firms are “too big to replace.” Read… Fallout from Carillion Collapse Hits KPMG
Given the invention of the PC spreadsheet and conventional cash-flow analysis, I see no reason for auditors to miss the smell of badly managed enterprises. Yes, I hope that this isn’t another Arthur Andersen. Even in small organizations, the disruption of normal operations has no excuse due to funds shortages.
“Public-Private” Partnerships strike again? Regarding outsourcing in general, I have seen it in my working life in both industry and academics. Costs are reduced for the outsourcer, on paper. But the contractor exploits its workers by shaving pay (with scant benefits) to the bone, which is morally on the outsourcer. Then, the “new” employees either have no institutional memory or loyalty, or cease to care if they were “transferred,” because they have been downgraded and degraded. Costs creep back up unseen, followed by eventual very expensive maintenance or other service failures…lather, rinse, repeat.
But it creates a temporary windfall that justifies a big bonus! You’re not thinking straight! There could be an asteroid tomorrow, ants are foolish, grasshoppers rule!
This would seem to be an optimal moment to end the process of outsourcing public works. Is there any never in the UK for this? I’ll let the UK readership chime in on that count.
I’m guessing “never” was intended to be “nerve.” An interestingly humorous Freudian slip?
It takes nerve to say ‘Never say never’.
I believe it’s included in Corbyn’s plans for a Labour government…
“Government needs to be run like a business.” Which one? Enron?
Trump Taj Mahal in Atlantic City is the preferred model. Enron had criminal convictions. Taj Mahal is just normal business incompetence which is much preferred as that is just typical business animal spirits (like locker room talk videos).
And difficult citizens will simply be…uh…downsized?
What to do with a populace the business managers no longer wants around??
rich people who are grass fed and organic provide a better product, just sayin/s
Sometimes lessons have to be learned the hard way. The biggest threat to Capitalism is capitalists.
Finance is the economic circulation system and as such is a necessary public function, much like government itself. There was a time when government was entirely private and it was called monarchy. Unfortunately for the monarchists, they lost sight of the fact they existed to serve a public function. Banks and finance seem to be reaching a similar point.
Interesting account from 2005 here which I found among the comments on Mr. Richter’s site, which details New Labour’s contribution to this mess, including a list of those who bought the party & a history of the LP. Some of this Adam Curtis has already lifted the lid on in documentary form & perhaps he will if still allowed, future the present version in hindsight – wolves in sheep’s clothing.
I failed to add this particular section from the above :
Posted March 22, 2006
I would argue that Rod Aldridge and Capita are to Tony Blair what Herman Brown and Brown & Root (Halliburton) was to Lyndon Johnson.
Until Tony Blair came to power Capita was a little-known IT firm with a £112 million turnover relying heavily on contracts with local authorities. This included Brighton Council. The council leader, Steve Bassam, was given a peerage by Blair soon after he was elected in 1997. The following year Lord Bassam joined Capita as a consultant.
This was a shrewd move as Bassam introduced Aldridge to Blair. Aldridge, who went to school in Brighton, got on very well with Blair and soon began donating money to New Labour (he had been a supporter of the Conservative Party before 1997).
Over the last ten years Aldridge has won contracts to administer the following:
Supplying BBC licences (£500m)
Child Trusts Funds (£430m)
Criminal Records Bureau (£400m)
London Congestion Charge Scheme (£280m)
Department of Education Literacy and Numeracy Strategies (£177m)
Miners’ Liability Claims (£145m)
Online Services for Department of Work and Pensions (£118m)
Connexions Discount Card (£100m)
BBC jobs in Northern Ireland (£100m)
Department of Work and Pensions Records Management (£70m)
Teachers’ Pensions (£62m)
Individual Learning Account Scheme (£55m)
Department of Education Maintenance Allowance (£49m)
TFL Congestion Charge Scheme (£31m)
Driving Standards Agency (£22m)
Healthcare for Civil Servants (£12m)
Management Support for LEAs (£0.4m)
Recruitment for Customs and Excise (£0.3m)
Despite being fined for a string of high-profile blunders, Capita (nicknamed Crapita) has been chosen to provide virtually every public sector contract it bids for.
In return Aldridge has given £2m to support City Academies and given a £1m loan to New Labour (he is now demanding it back because he has not been given a peerage).
That is not bad for a man who has obtained £2.6bn in government contracts and has a personal fortune of £73m.
One man one vote or one pound one vote-the eternal question.
Thanks for that list as it was very instructive. I realized from it that this was not outsourcing at work – this was a government jobs program for business people. I wonder how much it is true of most outsourcing. Government should be doing those jobs but being cynical I thought that being outsourced, that each of these firms could kick back money to political parties in the form of donations which could never happen if instead they were government departments. It seems too to be a widely-accepted myth that the commercial world runs things better than the government.
Anybody remember the London 2012 Olympics security fiasco? G4S got the contract, management fees rose from £7.3m to £60m, they made few preparations to put a proper security force together, and then bailed just before the Olympics leaving the Government to have to send in troops to fill that critical gap. Yeah, the commercial world really knows how to get things done. Both Carillion and Capita seem to woven from the same whole cloth. Maybe time to drop these highly paid middle men and bring these functions back under government departments again – either that or start sending people to hard time prison fro financial fraud like this.
Nicely done, nicely done!!!!
Calling TINA….emergency clean up in the outsourcing dept. Calling TINA!
The big problem of outsourcing is that quite quickly the customer becomes dependent on the supplier, rather than the other way round. If you can’t actually run the business of your department without an outside contractor supplying, maintaining and operating your IT systems, for example, then it’s effectively impossible to change the supplier. And since the whole idea of outsourcing is to reduce staff, you get rid of your own experts in a given area, who usually go to work for the outsourced provider, and are then rented back to you for considerably more money. This only works as long as the provider keeps going. Since you no longer have the capability to do the work yourself, then if anything goes wrong with the supplier you are (family-blogged). That looks to be the way UK is heading.
Thank you, David, and well said, especially your last sentence.
True Blue, i.e. Tory, Buckinghamshire has outsourced many of it services, including adoption, fostering and transport for vulnerable minors.
A recent audit of social services found that over a hundred children in care are unaccounted for. Many adoptive and foster parents have not been checked for criminal activity.
GEO Amey, a parasite that grew out of construction like Carillion, sub-contracted its school bus service to a taxi firm run by locals and immigrants of Pakistani origin. Said taxi firm has employees in prison or on the run for grooming children and paedophilia. Said firm’s management owns the local Tory and Liberal parties, overseen by a full time “community organiser”, formerly a techie at UBS, and has provided a couple of mayors this century.
And Trump as Obama before him wants Public Private Partnership to fix the infrastructure. What can go wrong… will go wrong.
well known in UK as Crapita
Thank you for the reninder, GM.
The alarm was raised by Crapita’s employees a long time before the City and MSM took notice.
Crapita provides mortgage servicing to HSBC. It used to for Deutsche Bank’s UK mortgage business.
or anyone with a Private Eye subscription!
Vampire Squid is an apt description. To big and well connected to fail.
Formed in 1984, hmmm, I believe Maggie Thatcher was prime minister back then. Let’s call it the “privatising giant,” not the “outsourcing giant.” This is what happens when the government turns over essential services to private sector (no doubt well-connected) firms with little or no oversight.
Here’s another form of privatization in the US of A. Isn’t it time to end this obeisance to the ideology of privatization?
All of this makes one wonder about Veolia, another huge service outsourcing company that has their fingers in everything.
You are right to wonder about Veolia. The firm was no stranger to creative accounting before being spun out of Jean-Marie Messier’s Vivendi, one of the reasons for Messier’s defenestration.
One wonders about Bouygues, too, which has started supping at the same trough in the UK and Mauritius.
yes, very pertinent example. The way these creatures were formed from dissolved organs of the state especially but not exclusively in France (GDF-Suez [yes, as in Canal!]/Vivendi/Engie/Veolia etc etc etc) reminds me of nothing so much as the carve-up of the notional public domain of the ex-USSR under Yeltsin/the usual consultants.
Lots of inaccuracies and legerdemains here. First, you have duplicates: the Suez-GDF joint venture is none other than Engie and Veolia is the same firm as Vivendi Environment (old name), spun off from the Générale des Eaux.
Second, both Suez and the CGE are ancient firms, going back to the 1850s, and were always private.
Lastly there is a long history in France. also going back to to the XIXth century, of subcontracting water services to private contractors such as the CGE or the Lyonnaise des Eaux (ancestor of Suez), which on the whole has worked pretty well.
So, no, this does not parallel the russian situation, except perhaps for the sale of GDF (majority-owned by the state) to Suez but then gas and oil companies are private almost everywhere in the developed world, so GDF was an anomaly.
PS: I despise PPP as much as the next man but let us not mix up everything. National situations do differ.
This whole mess tells me that lots of services outsourced are better kept in house. It saves the workers a lot of trouble. No doubt the public will have to pay the costs in this case …. again.
PPPs are an abomination that don’t do as well in most cases as fully public funded options.
Ah, the joys of privatization. However, there’s another basic difference between the two companies: Carillion, based in construction, made more sense. Intermittent tasks, like construction or building war toys, actually make some sense to contract out. They’re also risky to manage, and Carillion may have run into the dis-economies of scale.
What doesn’t make sense to contract is the everyday business of government, and it’s clear that that’s what “Crapita” (see, I read the comments) does. (It’s not an accident that it started in IT, which is more like construction.) If they fail – and NC does have a track record here – it’s because, again, they couldn’t handle the scale. That’s what the civil service is for: not terribly efficient, but reliable.
But precisely because they’re carrying out the daily business of government, replacing them SHOULD not be so difficult. There are people doing those jobs (more or less – the comments, again) and being paid; how hard could it be to just hire them, en masse, in the civil service? And since privatisation is really just a way to spend more for the same task, it would save money, as well. Cut out the middle man.
Of course, the real barrier is political: a Tory government. However, once May finishes botching Brexit, Corbyn will probably be in charge. Hopefully the timing will work out.
What companies are similarly at risk in the US?
Oops! Make that Friedmanite Accolytes…..
Ah, so it would seem, the “Great Collapse” has finally begun. I’m already quite poor, financially speaking, so this will be all schadenfreud for me. Fire up some newly legal weed – I don’t drink – and we’re off to the races. I love metaphors.
I’m concentrating on learning as many foreign languages as I can, for free thanks to the internet, and that is what I’ll be doing while TSHTF.
Thanks so much for this post. NC continues to be head and shoulders above the rest with their discriminating eye for what makes our world go around.
I don’t believe construction should be intermittent. It should be continuous, in order to continuously employ skilled construction workers, instead of laying them off, then scrabbling around offering high spot rates to replace the workers who’ve gone elsewhere or changed to new careers in the interim. This periodic rush to find construction workers is what fuels the myth of the highly-paid bricklayer, and the myth of the “labor shortage” that must be relieved by immigrant builders.
This is why construction, especially social housing, should be in government, and non-stop. What better time to borrow money and employ builders than during an economic downturn, even though that’s exactly when private construction firms stop operating?
The plural of anecdote is not data. but CalPERS new board member Margie Brown is a government construction manager for schools. She seems to have been plenty busy in her pre-CalPERS career. And you would think building and maintaining roads and bridges would not be an intermittent task.
In the Netherlands, social housing policy is specifically designed to be counter-cyclical for precisely the reason you say (see page 16 of that link). Allowing boom bust cycles in the construction industry is enormously destructive as it leads to the regular loss of skills and knowhow. One reason that Ireland has found it hard to take advantage of the economic upturn in the past few years is that austerity policies destroyed the domestic construction industry – quite literally driving it away to Canada and Australia, so when demand returned for houses and offices, there was nobody around with the skills to build them. The result was massive building cost inflation in a very short time.
I am confused. Both of these politically well connected businesses with guaranteed government contracts in a fairly good, or at profitable, economy went, or are about to go, bust because why?
I understand that there is excessive debt but why is that so? It sounds like a mafia buy and loot. Just on a massive scale. The mob buys a business or the owner pays off his loanshark with it, excessive inventory is overpaid and “lost”, loans taken, exorbitant pay, and it’s pillaged until bankruptcy. But that’s usually done on a corner store or bar, and not on an international corporation.
It sounds like those mob guys have been watching private equity funds operate…
“The bust-out” is the term the Mafia has for it. What happens when you bust out an entire country? The post-communist Soviet dis-union is an example. Lots of prematurely dying peasants for a decade, a handful of rich oligarchs afterward. I wonder what that would look like when templated onto the UK population. The Haves and the Chav-Nots…
It is indeed one of the relatively unasked questions. I think the simple answer seems to be that the companies overextended themselves in their search for ‘growth’ and were caught out when austerity meant that many of their more lucrative smaller contracts were not renewed.
While outsourcing is generally a lousy idea, one big advantage of it for public bodies is that when cutbacks are needed, it is often simplest to simply not renew an existing contract for a non-core service rather than seek internal cuts. Back in the 1990’s I had dealings with a public authority in the Midlands in the UK and when anticipated grants weren’t recieved by the local council (or if they were met with an unexpected shortfall), they would simply sit on contract extensions for the next financial year. If a supplier had geared up in anticipation of winning a number of these contracts they could find themelves very financially embarrassed in a very short period of time – there was rarely if ever any warning.