August 29, 2013 / 6:57 AM / 4 years ago

CORRECTED-UPDATE 3-Serco vows to fix UK government contract problems

(Corrects in first paragraph to "a quarter" from "almost half" and adds "central" in third paragraph; adds detail on revenue in fourth paragraph)

* Britain reviewing all contracts with Serco

* Police to investigate misreporting in prison escort deal

* Shares in biggest one-day fall in eleven years

* H1 adjusted pretax profit up 10.5 pct to 127.1 mln pounds

* Interim dividend up 17 pct to 3.10 pence

By Neil Maidment

LONDON, Aug 29 (Reuters) - Global outsourcing group Serco promised to fix any wrongdoing by its staff which could put at risk millions of pounds of British government work that makes up a quarter of its revenue.

Serco is facing potential exclusion from future contracts after the government revealed serious faults with its prisoner escort services late on Wednesday.

All its British central government work is already under review, following problems with an electronic tagging contract in July.

The company gets around 45 percent of its revenue from the UK public sector and about 1.2 billion pounds ($1.9 billion), or 25 percent, from contracts with the national government.

Its shares slumped by 11.2 percent on Thursday, their biggest one-day drop for 11 years according to Thomson Reuters data.

The firm's latest contract woes will intensify a debate in Britain over the outsourcing of public services to profit-driven private companies. The tagging scandal has also led to criticism of Serco in the United States where it has won a $1.25 billion contract to help implement new online health insurance exchanges.

"We are working closely with UK government customers ... and will put right any issues that arise from these reviews," Serco Chief Executive Christopher Hyman said in a statement.

A fund manager at an investment house with a small stake in Serco, who declined to be named, said it could take the company a long time to resolve the problems.

"It strikes me that the company is going to get dragged through the mud in the press and by the politicians before this goes away," he said.

"But I also think that there aren't too many other providers out there, particularly ones with spotless reputations," he said referring to Serco rival G4S whose British government contracts are also being reviewed.

On Wednesday, the government asked police to investigate alleged fraudulent behaviour by some Serco staff working on a 285 million pound ($442.77 million) prisoner escorting contract. A government probe had showed some staff recording prisoners as having been delivered ready for court when they were not.

The Justice Ministry will now supervise the contract and has told Serco to strengthen training and audit procedures and overhaul management responsible. If such changes do not satisfy a committee, Serco will be excluded from new work.

In July, an audit found Serco, which runs facilities from Britain's Atomic Weapons Establishment to immigration detention centres in Australia, and G4S had charged for tagging criminals who were either dead, in prison or never tagged in the first place.

The uncertainty over future UK contracts led Cantor Fitzgerald analyst Caroline de La Soujeole to downgrade her rating on Serco from "buy" to "hold."

"Worst-case scenario is the company fails to redress the situation and is frozen out of all new government work - this would put Serco in a dire position," she said. "Although we believe that such a doomsday scenario is unlikely to happen, this cannot be fully discounted at this stage."

Hyman said there was no evidence of any corporate, as opposed to individual, wrongdoing regarding the prisoner misreporting and that it was confident of meeting the Justice Ministry's demands.

"We've given most of our careers trying to build a business built on values so when something like this happens it's deeply saddening," Hyman told Reuters. "I believe we will work to bring this back in a very short space of time."

Serco's contract problems took the shine off solid financial results, with adjusted pretax profit for the six months to June 30 up 10.5 percent to 127.1 million pounds.

Adjusted revenue rose 11.8 percent to 2.55 billion pounds, boosted by record contract wins in 2012.

However, the group said higher bid costs on new work pulled its adjusted operating margin down 23 basis points to 5.7 percent and that for 2013 the margin would be flat or slightly down on the 6.4 percent achieved in 2012.

$1 = 0.6437 British pounds Additional reporting by Sinead Cruise; Editing by Erica Billingham and David Holmes

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