Agenda item

The draft annual report and financial statements of Babcock 4S (formally VT4S) for the year ended 31 March 2013 are presented to the Audit & Governance Committee.

(Following the original publication of the agenda, the signed Annual Report and Financial Statements of Babcock 4S were provided to the Committee and are attached).

Declarations of Interest:

None.

Witnesses:

Steve West, Finance Director (Babcock 4S)

Amanda Fisher, Managing Director (Babcock 4S)

Michelle DeBeer, Finance Manager (Babcock 4S)

Julie Stockdale, Strategic Lead for School Commissioning, Schools & Learning Service

Key Points Raised During the Discussion:

1.    The Finance Director (Babcock 4S) introduced the report, highlighting  significant changes from the previous year: two significant contracts had ended in March 2012 while a new Joint Venture company with Devon County Council had been established on 1 April 2012.  As this was not contracted through Babcock 4S, a royalty of £400,000 into 4S was arranged for 2013.  This was listed as profit rather than revenue.

2.    Members requested clarification of Director’s remuneration.  The Finance Director (Babcock 4S) stated that three of the Directors were from Babcock 4S and one, Susie Kemp, was an employee of Surrey County Council.  None of the directors charged into the company for their time. 

3.    Members queried the risk associated with the contingent liabilities outlined in the report.  The Finance Director (Babcock 4S) assured the Committee that there was benefit to Surrey County Council and Babcock S for the company to participate in Babcock International Group PLC bank facilities through lower interest and servicing charges.

4.    The Finance Director (Babcock 4S) confirmed that Surrey County Council was complying with its credit terms.

5.    In response to a question, the Finance Director (Babcock 4S) explained that the Teachers’ Pension Scheme does not have a balance sheet.  Surrey County Council has the same difficulty in identifying its share of the scheme assets and liabilities on a consistent and reasonable basis.

6.    Members queried where, with the introduction of Academy schools, did responsibility for school performance lie.  The Managing Director (Babcock 4S) responded that neither the Conservative or the Labour parties had been able to answer that satisfactorily.  However there is a political mandate to improve outcomes for children and young people and it was expected that local authorities would retain intervention powers. 

7.    The Managing Director (Babcock 4S) confirmed that Babcock 4S was audited every year and reports on its performance on a monthly basis.  The company was open and transparent about what it has to achieve and its performance.  It was subject to questioning by the Council’s overview and scrutiny committees.  The Finance Director (Babcock 4S) explained that there was a statutory basis for providing the information in the Accounts.  However, it was not in the company’s commercial interest to over-disclose.

8.    In response to questions about the impact of schools achieving academy status on trading with Babcock 4S, the Managing Director confirmed that relationships with Surrey schools was good.  98% of Surrey schools bought back services from Babcock 4S and this rate had increased as schools had achieved academy status.  Intervention with Academy schools had not yet been tested in Surrey.  The Strategic Lead for School Commissioning confirmed that Surrey County Council is also maintaining strong relationships with schools that have converted to academy status via their forums etc.

9.    The Committee discussed scrutiny of Babcock 4S performance.  A Member confirmed that the Cabinet had scrutinised the Devon County Council Joint Venture when it was being set up.

10.  A Member queried the increased profits and asked if the royalties for Surrey County Council would have been the same if a separate commercial vehicle had not been created.  The Finance Director (Babcock 4S) explained that the cost of bidding for the Joint Venture contract and therefore the risk on the success of the bid had been borne by Babcock 4S.  After one year of operations, the Babcock 4S share of the profits was £259,000 after tax.  Another Member pointed out that Devon had wanted a standalone organisation and not to be a subsidiary of the Surrey Joint Venture.

11.  Members queried whether the income received from Surrey County Council (listed under Note 24) was entirely from the Council or if the sum combines income from the Council and from the Academy Schools.  The Finance Director (Babcock 4S) stated that the sum of £15m encompassed a number of contracts including with schools, which are billed through the Surrey arrangement.

12.  Revenue from Babcock Education and Skills Ltd fed directly into Babcock 4S.  This includes the revenue from the Waltham Forest and Lewisham contracts.  The Waltham Forest contract ended this year.

13.  In response to a query about head count and redundancy costs, the Finance Manager (Babcock 4S) explained that the ending of the Waltham Forest and Connexions contracts broadly accounted for the headcount reduction.  Waltham Forest was discontinuing non-statutory elements of their contract.  Redundancy costs were listed in the 2011/12 accounts.  Babcock 4S previously agreed with Surrey County Council to make an annual redundancy provision for non-statutory services.

14.  The Chairman asked whether the expansion of Babcock 4S had any financial benefits for Surrey County Council.  The Finance Manager (Babcock 4S) informed the Committee that benefits to Surrey County Council from the Devon Joint Venture was two-fold.  Firstly, there was the royalty payment of £400,000.  Secondly, by scaling up the business outside Surrey, further investment could be made in innovation.  The Managing Director (Babcock 4S) informed the Committee savings to Surrey County Council had been quantified in 2009 as £11.3m through efficiencies.

15.  The Chairman asked how Babcock 4S deals with whistle blowing through schools.  The Managing Director (Babcock 4S) replied that Babcock 4S services have access to the Council’s whistle blowing service.  Training is provided on financial whistle blowing and two sections of the Finance Manual includes information on whistle blowing.  All services understand what needs to happen if there is case of whistle blowing.

Actions/Further Information to be Provided:

None

Resolved:

That the Babcock 4S Ltd Annual Report and Financial Statements for the year ended 31 March 2013 be noted.

Next Steps:

The Audit & Governance Committee to continue to review Babcock 4S Limited’s financial statements when available.