Serco exits equity stake in company that holds Wiri prison contract, remains as operator

Thursday 16th June 2016

Serco has sold its equity stake in the company that holds the contract to design, build and run Wiri Prison in South Auckland but continues as sub-contractor to operate the facility.

Serco was one of the original shareholders in SecureFuture Wiri, which won the contract for the Auckland South Corrections Facility, a high-security men's prison at Wiri, in 2012 via a public-private partnership (PPP) arrangement. This month, Serco sold its 10 percent stake in SecureFuture to InfraRed Infrastructure, part of London-based InfraRed Capital Partners. The other shareholders are John Laing Investments and the Accident Compensation Corporation.

The exit is among changes in Serco's New Zealand business since the London Stock Exchange-listed company lost its management contract for the Mt Eden Corrections facility, leaving it with the 25-year contract to run Wiri, which opened in May last year. Serco New Zealand's revenue doubled to $64 million in calendar 2015 but costs including a $10 million onerous contract provision associated with the Mt Eden contract and a doubling in its wage bill to $40 million led to a wider loss of about $11 million, from a loss of $2.6 million in 2014.

Serco last year agreed to pay $8 million to Corrections after the department's chief executive Ray Smith invoked a step-in clause in the Crown's contract with Serco, taking back management of Mt Eden. Under the agreement, Serco's involvement was shrunk back to labour supply and other transition services through until the end of the contract in March 2017.

A Serco spokeswoman said it had always been the company's intention to dispose of its equity holding in SecureFuture after the first year of operations and Corrections "was fully aware of this intention to sell through the procurement process". The onerous contract provision for costs associated with the Mt Eden contract "included the direct costs of the step in, indirect costs and disengagement costs arising from the final exit of the contract," she said.

Serco New Zealand's latest annual report shows the company got a $20 million infusion via the issue of 20 million shares to its immediate parent in a transaction approved on May 31 this year. The consideration was settled by an intercompany loan. During 2015, the company got a $13 million loan from its ultimate parent Serco Group Plc with no fixed maturity date. The parent also provided a letter of support saying it would provide more funds if needed to ensure the local unit can continue as a going concern.

"We remain absolutely committed to serving the people of New Zealand, providing services where we can deliver meaningful economic and social outcomes," Serco Asia Pacific chief executive Mark Irwin said in a statement. At the Wiri prison "we remain focused on doing a great job. We have a highly professional team in place and we have made a solid start.”

The government has said there is nothing to stop Serco bidding for more Corrections work.

Last month, the government announced a $355.6 million increase in funding for Corrections over the next four years, $290.6 million of which has been earmarked to cope with a swelling prison population forecast to reach 9,800 by the end of the year. Within that extra funding, an annual $5 million has been set aside to cover the Department of Corrections taking back management of the Mt Eden prison, on top of what it already gets.

The Department of Corrections' expenditure on prison-based custodial services is expected to be about $900 million in the 2017 financial year.

Serco Group Plc runs outsourced public services around the world in numerous sectors, employing 122,000 people in 30 countries, including Australia's mainland and Christmas Island immigration detention centres to house asylum-seekers and illegal migrants arriving by boat and air.

Serco's shares have climbed 13 percent this year on the LSE and last traded at 107.1 pence. The stock is rated a 'hold' based on the consensus of 17 analysts polled by Reuters.

BusinessDesk.co.nz

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