£16.1 million Capital Investment - Is the picture any more transparent?

As you may have read, the Barnet Bloggers sent an open letter to Councillors on Friday asking specifically about the mysterious £16.1 million of capital investment that was originally going to be paid by Capita and which has now been paid by the Council.  Yesterday evening Mr Naylor, the Councils Chief Operating Officer sent a response to us at the request of Councillors Rams and Thomas. The Barnet Bloggers are publishing his response in full, followed by further comments and questions to address some of the issues we feel are left unresolved by his reply:

Dear Mr Dishman, Mr Dix, Ms Musgrove and Mr Tichborne

I refer to your open letter to Councillors dated 8th November 2013.

Cllrs Thomas and Rams have asked me to respond, as your letter raises a number of technical matters that I am well placed to explain. In so doing I hope to put your minds, and those of the many readers of your respective blogs, to rest.

I’m afraid that you have misunderstood the purpose of the publicly published DPR of the 5th August 2013 and as a result have made a number of incorrect inferences about changes to the business model agreed by Cabinet on the 6th December 2012. You will recall that this was the publicly agreed and published key decision which authorised payments to Capita of £320m over the coming ten years. There has been no subsequent change to the business model, no change in Capita’s investment commitments and no change or reversal in policy. The plan remains as it did on the 6th December 2012.

DPR 5th August 2013 did not authorise any payment to Capita.

Starting with the DPR of the 5th August 2013, the purpose of this decision was to authorise the inclusion of Capita’s investment in IT and other infrastructure assets into the Councils capital programme. In this regard we are bound by a range of technical accounting standards. In summary, if assets are to be used by the Council, irrespective of who has paid for them or who controls their day to day use (in this instance Capita) then those assets need to be recorded on the Council’s balance sheet. In order for them to be included in the Council’s balance sheet, they first need to appear in the Council’s capital programme – hence the need for the DPR.

I would draw your attention to paragraphs 5.2, 5.3 and 5.4 and the report recommendation at paragraph 10.1.

As you can see, very clearly, this DPR does not concern itself with ‘the authorisation of a payment to Capita’ or the ‘approval of a payment to Capita’ or as your letter puts it ‘the sanctioning of a payment to Capita’. In fact the DPR had nothing what so ever to do with authorising any payment to Capita, it was simply a technical enabling decision to include Capita’s forthcoming investment into our capital programme. Evidently this needed to take place before the contract was signed, but after the judicial review outcome was known which was why it was agreed when it was. There would have been no point including Capita’s potential investment in the Council’s capital programme while ever that eventuality was in doubt.

In short, it’s a red-herring to connect the DPR of 5th August 2013 with any decisions about payments to Capita.

The key decision to agree expenditure with Capita was the cabinet decision on the 6th December 2012.

In your letter, you collectively assert that Capita is no longer making the investment in the Council’s IT infrastructure, but instead that the investment is coming from Council reserves. You consider this to be: contrary to the business model approved; by Cabinet in December 2012 and contrary to public pronouncements about the benefits of the contract made at the time and subsequently. I can assure that none of these assertions are correct.

• The business model agreed by Cabinet established that the Council would pay Capita £320m over the coming 10 years. In simple terms, for this sum the Council would: achieve a very considerable saving on the prevailing cost of the CSG services -£320m over ten years compared to the in-house cost of £390m;

•  receive investment of £16.1 million in IT and other necessary back office infrastructure; and

•  receive service performance equal to or better than that currently delivered by the Council.

This overall business model remains unchanged by payments to Capita since the contract was signed.
Payments of the agreed £320m to Capita have been profiled over the ten year contract to maximise savings and service improvements to the Council. In particular, in the first year of the contract, to reduce the cost of capital in Capita’s contract price, £16.1m of the overall £320m was paid on contract award. This is not an additional contribution; it is within the £320m contract sum. Doing so has saved the Council – not Capita – an additional £0.8m. This sum contributed to the additional savings set out in section 9.4 of the published public Cabinet report of November 4th.

All decisions about the profile of payments have been made in accordance with the Council’s publicly published financial regulations.

• For the avoidance of doubt, the profile of payments to Capita have had:No impact on the Council’s reserves. The investments referred to in the business model continue to be made from within the £320m agreed contract sum. Council Reserves have therefore not been used to fund the investment. Reserves have not gone down by £16.1 million. Tax payers are not now paying for something that they thought was being paid for from the contract price and Capita aren’t receiving additional amounts of investment from the Council. In fact as a result of the profiling of payments, tax payers benefit from additional savings.

•  No impact on the Council’s balance sheet. The IT and other infrastructure assets that Capita will be purchasing will be recognised as capital assets on the Council’s balance sheet. As stated above, this is the correct accounting treatment for the assets in these circumstances. It is for this reason, and this reason only, that the intended purchase of IT and other infrastructure assets by Capita are captured in the Council’s Capital Programme. Mr Dix has written to me and other colleagues in the Council about the accounting treatment of these assets and I will respond to him separately in due course.

• For these reasons it is incorrect to state, as you do so in your letter, that “Capita failed to make the promised capital funding…. that in August, in a complete reversal of policy, the Leader sanctioned the payment to Capita of £16.1 million of taxpayers’ money held in the Authorities reserves, in order to cover the cost of the capital investment”. To reiterate this is because:Capita are making the promised investment within the £320m contract sum. In other words the Council/taxpayers will pay Capita £320m over the next ten years. Taxpayers are not paying £16.1m in addition to this amount;

• The Leader did not sanction a payment of £16.1 million, the relevant Key decision to sanction payments to Capita was the one taken by Cabinet on the 6th December 2012; and

•  There has been no use of Council reserves to ‘fund this investment’.

There is no change to the original business case.

The original business case set out that one of the benefits of an outsourced option would be that a private sector partner could afford to include capital investment in their overall bid price in a manner that the Council, acting alone could not. For the reasons set out above, this is exactly what has been achieved and it is what is happening. To suggest otherwise is misleading.

As an aside, I don’t recognise your collective point about capped procurement savings. The publicly published contract commits Capita to guarantee the procurement savings already identified by officers in the medium term financial plan. The contract includes a payment by results provision for procurement savings that are identified and delivered by Capita over and above those included within the guarantee – where this is agreed in advance by the Council as the most commercially sensible way to proceed. The contract does not bind the Council to use Capita to deliver procurement savings. Accordingly, in the future, we can make a case by case judgement based on what is most commercially opportune for the Council.

In conclusion, I can advise that there has been no change in policy, and no radical change to the terms of the business model agreed by Cabinet on 6th December 2012. Likewise, there has been no decision to use Reserves for a capital investment payment to Capita other than that set out in the agreed £320m contract sum agreed by Cabinet on 6th December 2012. As all payments to Capita have fallen within the contract price agreed by cabinet I cannot share your conclusion that there has been any breach of council regulations.

I would be very happy to meet with you to discuss the contents of this letter in more detail. Indeed I am due to meet Mr Dishman and Mr Dix next week to discuss a range of other matters and would very happily add this issue to that agenda. By way of this letter, I extend a similar invitation to Ms Musgrove and Mr Tichborne.

In the spirit of openness and transparency, and given that you have all written extensively about these matters on your popular blogs, please could I ask you to publish my response letter in full.

Yours sincerely
 
Chris Naylor
Chief Operating Officer

The Barnet bloggers have responded to the points made with the following statement:


Response: 

In December 2012 the Cabinet report which authorised this contract was quite clear when it said: 


“Capita’s proposal also includes (within the financial offer described above) approximately £15.3m revenue investment in areas such as information technology (computer hardware and software), and customer services. This investment not only enables Capita to deliver the transformation it is proposing, but also avoids the Council having to find money in the future to fund replacement technology for systems that are at or nearing the end of their useful life”. 

It went on to say:

 “if the Council chose not to complete this procurement, it would have to:

 • attempt to replicate the investment, technology and other solutions being proposed by Capita in order to drive out the future savings required” 

In September 2013 Barnet paid Capita £15.2 million which Mr Naylor described as follows:

 “Of the total £320m, £16m of this is paid up-front for the capital investment. The remainder of the service charges are paid quarterly in advance. The reason for making an up-front payment to Capita for capital investment, and for payment of service charges quarterly in advance is that the Council’s “cost of money” – i.e. the amount that it pays for access to cash, is considerably cheaper than Capita’s. The Council has internal reserves, and access to the Public Works Loan Board funding which is closely aligned to the Bank of England base rate. So the up-front capital contribution and quarterly in advance payment reduce the overall cost of the contract to the taxpayer. 

In August, the Council made £10.5m payment to Capita which represented the balance of the capital contribution for investment in the services, and £4.7m in respect of the service charge.”

The council have made a decision to fund the investment instead of Capita and from Mr Naylor’s response in October there is a very clear inference that this would come from reserves or borrowing. 

At the audit Committee of 23rd October the council stated: 

 “The council agreed to fund the capital costs up front because the council benefits from a lower interest rates which keeps the overall cost of funding CSG as low as possible. The assets are Capita’s, but Capita is obligated to provide them back to the council upon contract termination for at no further cost” - again implying borrowing or lost interest on reserves. 

Mr Naylor says in his letter of 11 November 2013 that:

 “there has been no change in policy, and no radical change to the terms of the business model agreed by Cabinet on 6th December 2012”. 

Based on the above this would appear to be untrue. 

The Cabinet report of December 2012 was very clear when it said that: 

 “As dialogue has now closed, the Regulations permit that the Council may only request a bidder to clarify, specify or fine tune a tender, but further detailed negotiation is no longer permitted.” 

 Relieving Capita of the obligation to fund £16.1 million of capital investment which impacts the cost of the contract by £800,000 does not appear to fit these criteria. 

Clarification is needed over the specific issue of the origin of the funding source used by the authority to support the £16.1 million.

Mr Naylor asserts in his response that this was not from reserves, yet in his earlier statement he refers to ‘internal reserves’ and the ‘Public Works Loan Board funding’. Was the funding from reserves, or not? Was the funding borrowed, and if so, how much, and does not such an action contradict the position taken by Cabinet member Robert Rams in criticising opposition proposals to borrow money for capital investment? 

Why have our councillors remained so reluctant to address the questions publicly, and why has the Leader of the Council remained silent on an issue of such public concern? 

There are further unanswered questions about the authorisation signed by Leader Richard Cornelius on August 5th. 

Why is a decision, which is not a decision, listed as a ‘non key decision’? Why are there no background papers listed for this document? 

What exactly are the ‘international financial reporting standards’ to which the document refers? 

If this authorisation was merely a technicality, why was it necessary for the Leader to approve it, rather than a senior officer acting under delegated powers? 

Were the backbench Conservative members aware that the funding of the capital investment was not in fact an ‘upfront’ payment from Capita, but to be undertaken by the council? If they were, why have so many statements been made seeming to imply the contrary? 

Is the truth that although the method of funding the investment this way was arranged between Barnet and Capita, for reasons of political sensitivity the Conservative administration has failed properly to explain this to backbench members or the residents of this borough? 

Is it fair to suggest, as the Labour leader Alison Moore commented at last week’s Cabinet meeting, that the way in which the funding has been arranged would appear to involve a ‘sleight of hand’, and is this really compliant with the principles of transparency, accountability and open government, and the duty to protect the best interests of the residents and tax payers of this borough? 

It is clear that there are still many serious outstanding questions left unresolved and for this reason we repeat our call for an immediate investigation into the issue so as to ensure that our elected representatives are fulfilling their roles in the proper scrutiny of the actions of this council.