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Serco Faces Fraud Probe

Nov. 4, 2013 - 03:45AM   |  
By ANDREW CHUTER   |   Comments
A radar array is seen at RAF Flyingdales.
A radar array is seen at RAF Flyingdales. ()
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LONDON — The problems facing support services contractor Serco mounted Nov. 4 when Britain’s Serious Fraud Office (SFO) said it was opening a criminal investigation into electronic monitoring contracts run by the company for the Ministry of Justice here. A second contractor, G4S, is also to be investigated.

The decision could raise new questions about Serco’s position on three major British Ministry of Defence contracts the company is competing for involving key reforms of procurement and infrastructure management, and a deal to support the Royal Air Force’s anti-ballistic warning system at its base at Fylingdales, North East England.

A block on contract awards to Serco had already been imposed pending the completion of a review by the Cabinet Office into allegations the company had been charging the government for the electronic tagging of criminals who were in prison, dead or had never been the subject of a tagging order.

That review is expected to be complete by the end of this month. The company has also been given until the end of November to demonstrate it is transforming its business practices or face being frozen out of further government outsourcing competitions.

Under the current limitations imposed by government, Serco can bid and be selected for defense deals with the MoD but cannot actually sign a contract ahead of the Cabinet Office findings. There is no evidence to date that defense contracts have been the subject of any wrongdoing.

In a statement, the MoD did not address whether the SFO decision might impact on future business, saying only it was “following Cabinet Office guidelines on contracting with Serco. Until the Cabinet Office led review is complete, it is too early to comment on the affect on our future business with them.”

A spokesman for Serco said there was “no change” to the present position, despite the SFO move.

Figures provided by the MoD showed the department spends over £500 million (US $796 million) a year with Serco on support activities ranging from the Royal Navy laundry service to aircraft maintenance. It also has the existing contract to support the Fylingdales site, although that is up for renewal.

One of Britain’s largest support services groups, Serco has total annual revenues of $7.5 billion and includes a US operation that employs around 10,000 people with sales of $1.2 billion.

Serco was one of three bidders to submit proposals to the MoD Oct. 17 in a competition to become the private sector business partner managing military infrastructure. The contest is in its final stages.

A decision on a strategic business partner for the Defence Infrastructure Organisation (DIO) is not expected until early next year.

The DIO, which manages everything from naval bases to troops accommodation and catering, is looking for a private sector partner to improve the skills and efficiency of its £3.3 billion a year operation.

The deal is set to run for 10 years and could be worth up to £400 million ($640 million) to the winning bidder.

Consortia led by Serco, Telereal Trillium and Capita originally submitted proposals in June and the new submissions delivered this week are a further refining of the bid.

Prior to that, though, Serco faces a decision by the MoD on whether it will retain its position as the service supplier at the Royal Air Force Fylingdales missile detection and early warning base.

Serco is competing with Babcock as it attempts to hold on to a contract it has held for years providing 24-hour maintenance, operational, engineering and logistics support to the base, which is a key part of the UK and US ballistic missile defense screen.

Contract selection is expected by the end of the year.

But most industry and government officials here will be watching whether the SFO decision has any impact on the already controversial move by the government to possibly hand over the management of the MoD’s Defence Support & Equipment organisation to the private sector in a government-owned contractor-operated (GoCo) operation.

Serco is part of a team led by CHM2 Hill trying to secure the deal. Atkins is the other team member. A consortium led by Bechtel, which is partnering with Serco in the DIO bid, is providing the only competition after a URS/KBR team withdrew.

A competition between the two US-led consortia to secure the deal is underway even though the government has yet to make up its mind whether it will proceed with the GoCo option or adopt another scheme based on a more effective version of the current DE&S organization known as DE&S Plus.

A decision on how to proceed with reforming the £14 billion a year procurement and support effort is expected soon.

Media reports last month suggested the GoCo scheme was starting to unravel because the CHM2 Hill team may have to withdraw, or find another partners, due to Serco being embroiled in the tagging scandal. Having a single bidder for such a controversial scheme would be untenable, said industry executives.

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