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LONDON (Reuters) - Three UK prisons due to be run by embattled outsourcing group Serco, which is currently under criminal investigation, will now be kept in public sector hands, Britain's justice minister said on Friday.
Serco was named the only remaining bidder for the deal to run the South Yorkshire group of prisons in July, but Chris Grayling said delay and uncertainty caused by an ongoing review into the firm meant the jails would now be run by HM Prison Service.
The contract would probably have been worth around 20 to 30 million pounds annually for 15 years, said Serco.
The move, along with the exit of Serco's UK & Europe head Jeremy Stafford on Thursday, comes as the firm tries to win back the trust of its biggest customer, the British government.
Serco is currently under six investigations, including one by the Serious Fraud Office, after a torrid six months which has seen it lose its Chief Executive Chris Hyman and almost a third of its market value.
The firm was told in August it would have to show sufficient corporate change before it could win new government work following accusations of fraud on a prisoner escort contract.
The minister, who launched a separate review into Serco and rival G4S' existing work after they overcharged on an electronic tagging deal, said on Tuesday he wanted the firms to emerge "renewed and stronger" from the process and vowed to continue outsourcing.
"We are also continuing to make good progress across the various audits, reviews and our proposed corporate renewal programme within the timing previously communicated by Government," Serco's acting group CEO Ed Casey said on Friday.
Shore Capital analyst Robin Speakman said the prison announcement showed that ultimately, ministers could decide on politically acceptable alternatives to outsourcing.
"In the UK, across local and central government, we also still worry about politicians' willingness to commit to Serco, fearing personal reputational damage (should a contract go wrong in the future, or worse, new historical issues emerge), particularly ahead of a UK general election," he said.
He added that even if Serco and G4S get the all-clear from reviews, which are due before Christmas, the firms could then face delays from electioneering in the run up to the 2015 general election and the 2014 vote on Scottish independence.
"The window of opportunity from G4S and Serco being allowed back into the fold could be quite short next year," he said.
Reporting by Christine Murray; Editing by Neil Maidment and Mark Potter