Agenda item

The annual report and financial statements of Babcock 4S (formally VT4S) for the year ended 31 March 2012 and the unaudited half year report and financial statements for period ended 30 September 2012 are presented to the Audit & Governance Committee.

Declarations of interest:

There were none.

Officers:

Michelle DeBeer, Finance Manager at Babcock 4S

Amanda Fisher, Managing Director at Babcock 4S

Steve West, Finance Director at Babcock 4S

PJ Wilkinson, Assistant Director for Schools & Learning

Key points raised during the discussion:

1.    Members noted that funds could be moved around for liquidity purposes and asked whether there was audit control on this.  The Finance Director explained that cash that sits within Babcock 4S’s (4S) remit stays within the 4S bank account and was not moved without Board approval.

2.    The Committee requested further information about £10million which was loaned within the Babcock Group.  The Finance Director advised that during 2011 a project had been championed by Peter Martin (then Cabinet Member for Children & Learning) to look at how spare cash could be invested.  It was eventually put on a one year loan with Babcock Treasury at a 1.5% business rate.  The loan commenced on 1 February 2012 and would be repaid on 31 January 2013.  Members probed for more information about the security around this arrangement and the Finance Director explained that there was no formal legal charge over it, however, the actual cash was situated in a sister company within his control. 

3.    Members asked for more information about the risks facing the organisation moving forward.  The Finance Director explained that the current economic climate and the increasing pressure on government budgets remained the biggest risk.  As Surrey was in the middle of its Medium Term Financial Plan (MTFP), 4S had taken a £4million cut to the main service delivery agreement – the Managing Director advised that this had been the biggest risk in terms of the delivery of the Surrey contract. 

4.    It was noted that 4S generated surplus cash and Members asked whether Surrey could take a reduction in receipts over the following months.  The Managing Director explained that the Board had had long debates about the surplus cash, including consideration of whether it could be loaned to Surrey County Council, but this course of action was deemed inappropriate.  The Finance Director advised that much of that cash within the business was from customers who paid in advance such as Surrey schools. 

5.    It was confirmed that Susie Kemp (Assistant Chief Executive) had recently replaced Julie Fisher (Strategic Director for Change & Efficiency) as the Council’s representative on the 4S Board. 

6.    Members noted that the financial statements showed that there was £6million cash at the end of the year and asked why the £2.1million in the profit and loss account had not been distributed as dividends.  The Finance Director explained that paying the dividend had been debated at the last Board meeting.  He reported that policy dictated that 90% of profits generated were paid as dividends within 6 months after the financial year had finished.  The FRS17 basis for valuing the pension fund deficit in the accounts had been reviewed – although this had reduced the estimated deficit, the deficit was still too high to be able to pay out the full dividend.  However, a dividend would be paid that was not greater than the balance on the P&L account.

7.    It was noted that in the 2011/12 accounting year 4S had started to pay some of the agreed pension deficit. 

8.    Members suggested that if 4S were generating more profit than expected they should work together with the Council to share dividends with those who took the initial risk.  The Assistant Director for Schools & Learning explained that when the partnership had been set up the economic situation was not as challenging as the current climate.  Since 2008, the financial regime had been much tighter and it had been more important than ever to think about priorities.  Changing priorities would be carefully considered during the budget setting process.  When looking at the future with 4S, the original purposes of the partnership would be considered, but the strategic aim would continue to be to spread excellence through Surrey schools.

9.    The Managing reported that Surrey had been given a budget £100,000 to find innovative ways of delivering service.  Following a recent meeting between the Surrey County Council Chief Executive, representative on the 4S Board, the divisional Managing Director and the Managing Director, a joint venture was agreed to try and deliver more with less.  It was noted that in the previous year the focus had been on schools that were on the verge of requiring intervention.  There had been some great success by pushing the limited funding to support poorly performing schools with the aim of fulfilling the long-term educational plan that every school would be a ‘good’ school by 2017.  The Managing Director felt that Surrey, 4S and Surrey schools were working together in a strong partnership.  The Assistant Director for Schools & Learning advised that he worked with 4S officers on a daily basis, but remained a critical friend of the relationship so that he could evaluate it. 

10.  In terms of redundancy costs, Members queried what impact restructuring had on the service provided.  The Finance Director advised that the restructure was necessary due to cuts to the Surrey County Council contract.  The level of staffing was revised to meet the Council’s requirement in terms of educational outputs.  The Managing Director explained this had been done in consultation with partners. 

11.  It was confirmed that the Council accounted for approximately 60% of business.

12.  Members asked whether costs had been cut enough to support lower levels of turnover.  The Finance Director advised that from an accounting perspective they recognised revenue based on delivery.  For schools this was on a ‘school days’ basis and consultancy days on a work ‘completed’ basis.  With the loss of two contracts and the cuts to the Surrey contracts, as well as the difficulties in terms of growth of facilities with schools, the Finance Director confirmed that added some pressure. 

13.  With reference to related party disclosures, Members queried how Babcock International came to be dealing with the Council.  The Finance Director explained that there were a number of work streams such as payroll and IT that were provided on a corporate/central level.  The Assistant Director for Schools & Learning advised that he dealt essentially only with Babcock 4S and not with Babcock or any other subsidiaries. 

Actions/Further information to be provided:

None.

RESOLVED:

The Committee noted the report.

Committee next steps:

The Committee to receive a further update in 6 months.