Britain to outsource more criminal probation work

(Adds further details and background)

By Li-mei Hoang

LONDON, Oct 29 (Reuters) - Britain named preferred bidders on Wednesday for 21 criminal probation service contracts worth a total of around 450 million pounds ($725 million) a year, with firms chosen including Interserve (LSE: IRV.L - news) , Sodexo and GEO Group.

Those chosen, which include some private firms, charities and social enterprise groups, will be responsible for running the bulk of Britain's rehabilitation centres for around 200,000 low and medium-risk offenders, which includes overseeing community orders and supervising unpaid work.

The National Audit Office estimates that re-offending costs the UK economy between 9.5 and 13 billion pounds each year.

"This announcement brings together the best of the public, private and voluntary sectors to set up our battle against reoffending and to bring innovative new ways of working with offenders," said Justice Secretary Chris Grayling.

Capita (LSE: CPI.L - news) , one of Britain's biggest outsourcers, did not win any of the contracts it applied for, while Sodexo, the French group whose Justice Services division already runs five prisons in the UK, was provisionally awarded six contracts in partnership with the offenders rehabilitation charity NACRO.

Interserve, which has been chosen for five contracts as part of a partnership with social enterprise firm 3SC and charities Addaction, P3 and Shelter, said that the collective value of its contracts is expected to be worth around 600 million pounds over seven years.

Meanwhile Spanish group Ferrovial's British subsidiary Amey has been picked for two contracts as part of a consortium which also includes four charities.

The part privatisation of the National Probation Service marks a significant move by Britain's government, contracting out 70 percent of the work to private companies and the voluntary sector, the largest level of outsourcing of probation services in the world.

The Ministry of Justice said the successful bidders, which includes 16 charities and voluntary organisations, four probation staff mutuals and seven companies, will only be paid in full if reoffending rates fall.

Work is expected to commence early next year.

Outsourcing giants G4S (LSE: GFS.L - news) and Serco were banned from bidding for the work, having been stripped of government contracts to tag criminals last year, after being found to have charged for tagging criminals who were dead, in prison or never tagged.

Shares (Berlin: DI6.BE - news) in Interserve were up 3.7 percent at 617 pence after the news, while shares in Capita were down 6.1 percent by 1557 GMT. Sodexo's shares were up 0.8 percent at 75 euros.

"Today's award of rehabilitation services contracts is a material positive for Interserve but a disappointment for the other stocks under our coverage," said Liberum analysts, who have a "buy" rating on the stock.

"The contracts are not without risks ... we expect no profit contribution in the first year. However, the margins should trend towards 10 percent as the contract matures, there will be a significant boost to order books and it diversifies the revenue mix of the winners," they added. (1 US dollar = 0.6205 British pounds) (Editing by Neil Maidment and Greg Mahlich)