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UPDATE 2-G4S told to present overhaul plan after new fraud referral

Christine Murray
Thursday, 19 Dec 2013 | 9:23 AM ET

* Justice ministry identifies two more problem contracts

* G4S told to provide corporate renewal plan

* Serco has agreed to repay 68.5 mln stg

* Both companies still suspended from new govt contracts

LONDON, Dec 19 (Reuters) - Britain has told outsourcing company G4S to overhaul its business after announcing on Thursday that two additional government contracts would be investigated by the country's fraud office.

G4S and rival Serco are already facing a criminal investigation by the Serious Fraud Office after an audit showed that they had charged the British taxpayer for tagging criminals who were not being monitored, were still in prison or were even dead.

In an update on multiple reviews prompted by the scandal, Britain's Ministry of Justice (MoJ) identified two new problem contracts for facilities management in the courts system.

The MoJ said the deals contain serious issues relating to invoicing, delivery and performance reporting, adding that it does not have evidence of dishonesty by the companies.

The referral is the latest headache for an embattled industry that took on pariah status in Britain after G4S failed to provide enough guards for last year's London Olympics, forcing organisers to call in the army.

G4S now has to present a "corporate renewal plan", as Serco was asked to do in August after problems were found on a prisoner escort contract.

BIDDING DECISION DELAYED

The government also delayed its decision on when G4S and Serco will be able to bid for future work. Both have been suspended from signing government contracts since July.

Serco will have to wait until January for a decision, but no timeframe was given for G4S.

G4S did not comment on the delay but issued a statement saying that, from the information available, it does not expect any material financial impact from the additional contract investigations.

Serco, meanwhile, was upbeat on its prospects for future contracts. A company statement said it believes that its proposals in its corporate renewal plan are "sufficient to restore the confidence of its Government customer, allowing Serco's inclusion for all new and future work".

Thursday's government update said that Serco had agreed to refund 68.5 million pounds ($110 million) on its tagging contract, but that it has yet to reach an agreement with G4S.

Shares in G4S lost as much as 3 percent after the announcement, topping the list of FTSE 100 fallers, while Serco was set for its best session since July, gaining 5 percent by 1352 GMT.

Government enthusiasm for contracting out services has been a boon for outsourcing companies since the 1980s, with Serco and rival outsourcer Capita achieving double-digit annual revenue increases until 2010.

But debate now centres on whether Britain is too reliant on a small group of big companies to run services from prisons to hospitals - a question raised by the government auditor last month.

FOOT IN THE DOOR?

Serco, which runs services from London's light railway to the maintainence of nuclear weapons, lost its chief executive and restructured its European operations as part of its bid to win back the trust of its biggest customer.

"Over the past few months Serco has engaged constructively with government, setting out a corporate renewal plan that is now well advanced," the government said on Thursday.

Serco said in a statement that it had signed a deal with the justice ministry to expand the HMP Thames prison it runs for the government.

"That kind of suggests that Serco is at least partially back in the door," Numis analyst Mike Murphy said.

G4S gains about 10 percent of its 7.3 billion pounds ($11.97 billion) of annual revenue from Britain's central government, from which Serco makes about a quarter of its 4.9 billion pound revenue.

A Cabinet Office review of the 28 biggest contracts held by G4S and Serco with all departments other than the Ministry of Justice found no further evidence of deliberate overcharging.

The government also said that the two companies have withdrawn from the competition to be a lead provider of the new probation services contracts, estimated to be worth around 500 million pounds in total, though it left open the possibility of them playing a supporting role.