Birmingham City Council sacrifices profits to stop jobs going to IndiaPosted: January 23, 2012
The cost of the Service Birmingham offshoring row has become clear as it emerged that city council leaders have agreed to forgo at least £2 million in a profit-sharing scheme with their private sector IT providers in return for an agreement not to export jobs to India.
Under the terms of a £1 billion contract with Capita-led Service Birmingham, the council could have expected to pocket regular cash dividends.
But a bitter political row, which culminated in an order to Service Birmingham from the city’s Conservative-Liberal Democrat coalition to scrap a plan to offshore 55 jobs to Capita’s Mumbai headquarters, will have costly repercussions.
The cash Service Birmingham expected to save through employing staff in India rather than Birmingham, just over £12 million, will have to be made good by the council.
Members of the Finance Scrutiny Committee were told that the council would not take any share dividend for the next two years, at a cost of £2.1 million. It is unclear how the rest of the £12 million shortfall will be found between 2014 and 2021, when the Service Birmingham contract to provide the council’s IT services is due to expire.
When Capita announced the offshoring proposal in 2010, it said it had been forced to cut costs after council leaders negotiated a £135 million cut in the cost of the Service Birmingham contract.
Although cabinet members agreed the revised contract, with a report clearly stating that offshoring was likely to take place, deputy council leader Paul Tilsley hastily ordered a U-turn when the exporting of jobs during a recession provoked a public backlash.
Sir Albert Bore, leader of the opposition Labour group, who is likely to become council leader after the May local elections and will inherit the Service Birmingham issue, accused officials of using “accountancy gobbledegook” to disguise the true impact of the offshoring debacle.
Sir Albert (Lab Ladywood) said: “We are having the wool pulled over our eyes. We are paying for a politically inept decision taken by the cabinet, which went through unopposed, with no one questioning it.
“The financial consequences are now coming home to roost. The council is having to forgo a £2 million dividend in order to compensate Capita for loss of profits.”
Labour has been highly critical of Service Birmingham’s performance in running the council call centre and improving the local authority’s IT services and will probably seek to renegotiate the contract if the party takes power in May.
Further details about the true financial cost of the offshoring row emerged amid concerns about the extent of council borrowing, which stands at £2.5 billion and has doubled since 2004 when the Conservative-Liberal Democrat administration came into office.
The figure will rise to £3 billion in March when the council has to borrow a further £342 million as a result of the Government’s decision to scrap the housing subsidy system. However, the council will no longer have to make annual payments to the Government from the Housing Revenue Account, which should generate enough extra cash to cover interest payments on the £342 million.
The steady rise in borrowing is the result of spending on an extensive housing improvement programme, investment in new computer systems and capital projects including the New Street Station refurbishment and construction of a new civic library in Centenary Square.
The council’s debt remains well within the Government’s Prudential Borrowing limit and has been described as “modest” by credit rating agencies Moody’s and Standard and Poor’s.
However, Moody’s, which awarded the council the highest possible triple A credit rating, warned that any further substantial increase in borrowing could lead to a downgrade,
Council finance bosses say a downgrade is unlikely, pointing out that 38 per cent of city debt is financed through Government grant and 36 per cent is paid for by self-financing investment. Only 26 per cent has to be met directly by council tax payers. By 2013-14, almost £35 from each council tax bill will have to go to pay off debt.
- Birmingham given AAA credit rating (telegraph.co.uk)
- £1 billion contract criticised (birminghampost.net)