Brexit risks and mitigation

Serco Group plc – Annual report – 31 December 2018

Industry: support services

Principal Risks and Uncertainties (extract)
Review of principal risks and wider horizon scanning Our Executive Committee reviews the principal risks facing the Group, taking into consideration the various Divisional risk registers and any emerging risks that would threaten the execution of Serco’s strategy, business model, future performance, solvency and liquidity.

We also assess our external and internal environment to anticipate both risks and opportunities and to increase our ability to pre-empt, convert or exploit them. Material risks are covered at the GRC meetings. This year, emerging risks specifically included reviews on:
– The changes in perception for outsourcing and changes in government, inflation, other external cost pressures and Brexit.

We make specific reference below to the UK’s proposed withdrawal from the European Union (“Brexit”) and our current assessment of its impact on Serco.

We recognise that significant uncertainty will remain until any Brexit proposal is fully agreed and understood, and as such our understanding of potential risks and impacts are being regularly reviewed and assessed. We have, for example, reviewed the potential impact of Brexit, including adverse economic consequences, on our existing contract base, workforce, bidding activities and supply chain. Reiterating our CEO’s comment in last year’s Annual Report, we do not believe that Serco will be materially affected by the UK withdrawing from the European Union. This is based on the following key points:

• For our UK and EU contracts, operations are generally delivered locally in-country and are not critically dependant on a cross-border supply chain or workforce.
• By operating many contracts, Serco has a natural hedge from material Brexit risks that may therefore arise on a limited number of contracts only.
• Many of our existing contracts have provisions which allow for inflationary adjustments to fees charged by us.
• A ‘hard’ Brexit without a transition period and/or an orderly withdrawal may cause regulatory and compliance uncertainty on some limited UK contracts that require performance under EU regulation, bodies and/or standards; however, we believe such uncertainties will be addressed under proposed new UK regulations following any withdrawal.
• Tariffs will only affect a small number of UK contracts that require imported goods that cannot be procured locally.
• For our European business, Serco conducts business through locally established companies in EU states and by way of a branch of Serco Limited which allows Serco to continue to operate subject to the freedoms and rules of the Internal Market.
• Public procurement and bidding processes will remain broadly unaffected as local laws will continue to apply post-Brexit.
• We recognise that Brexit may delay existing public sector outsourcing contracts and/or reduce pipeline opportunities while the UK Government and the Civil Service focus on implementing Brexit withdrawal.
• We are not critically reliant on our workforce having to travel extensively between the EU and UK, or the need to source EU workers on UK contracts – any such requirements that do arise will raise a manageable administrative workload only.
• We are conducting a critical supply chain review, and to date we are broadly comfortable with our key UK suppliers’ ability to maintain the provision of goods and services on key UK contracts.