Serco Group Annual Report 2002

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FY2002 Annual Report · Serco Group

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A N N U A L R E V I E W & A C C O U N T S

S E R C O G R O U P P L C

2 0 0 2

Q
&
A

Serco Group plc – our mission:

“to stay at the forefront of the outsourcing revolution

in our chosen markets through the commitment,

innovation and calibre of our people, the quality of

our management processes and the strength of our

corporate culture and values”

Contents

F I N A N C I A L A N D O P E R AT I N G H I G H L I G H T S

W H AT S O RT O F B U S I N E S S A R E W E ?

Company profile

W H AT K I N D O F A Y E A R H AV E W E H A D ?

Chairman’s statement

W H AT D O T H E N U M B E R S M E A N ?

Financial review

W H AT H AV E W E B E E N D O I N G A N D W H E R E ?

Business review

W H E R E D O W E O P E R AT E ?

Our global operations

Inside story: European Space Agency IT and Great Southern Railway

W H AT A R E O U R O P P O RT U N I T I E S F O R G R O W T H ?

Our markets, and how we’re addressing them

Inside story: Docklands Light Railway

W H E R E D O W E S TA N D O N P F I s ?

Our strategy for PFIs, and how we account for them

Inside story: Joint Service Command & Staff College and

Norfolk & Norwich University Hospital

H O W D O W E R U N O U R B U S I N E S S ?

Our management structure and system

Inside story: National Crime Squad

H O W D O W E M A N A G E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ?

How we manage risks and balance responsibilities

Inside story: Warship Support Agency

H O W D O W E D E V E L O P O U R P E O P L E ?

Management training and development

Inside story: Institute of Directors

C A N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ?

Our culture and values

Inside story: Walsall Metropolitan Borough Council

A N N U A L A C C O U N T S

I N V E S T O R A N D S H A R E H O L D E R I N F O R M AT I O N

145

Financial & operating highlights

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T U R N OV E R £m
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I n c l u d i n g j o i n t ve n t u re s

l d i

TURNOVER

PROFIT BEFORE TAX – pre-goodwill

EARNINGS PER SHARE – pre-goodwill

DIVIDEND PER SHARE

P RO F I T £m
B e fo re a m o r t i s a t i o n o f g o o dw i l l

2002

Restated
2001*

£1,325.9m

£1,141.2m

£57.0m

9.58p

2.08p

£45.2m

8.25p

1.86p

up 16.2%

up 26.3%

up 16.1%

up 11.8%

* The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002.

Serco delivers 15th successive year of double-digit growth

Excellent organic growth

– 64% of turnover growth from existing contract base

Robust cash performance
– 75% of EBITDA converted to cash

Continued success in winning contracts

– Contract wins totalling £1.2bn

– 122 new contracts awarded

– A further 180 contracts successfully rebid or extended, maintaining our 90% success rate

– In January 2003 we won our largest-ever contract award: a 15-year extension to the Atomic Weapons Establishment contract,

adding over £1bn to our forward order book

Substantial range of future opportunities
– Currently addressing a further £12bn of opportunities

Continuing high visibility of revenues

– 91% of 2003 turnover secured

– Order book stands at £7.1bn

WHAT SORT
of
BUSINESS
ARE we?

Our core products are the skills and processes for organisational design and change management.
We are focused on the public sector – which represents 90% of our business – and have a strong
public service ethos. In partnership with our customers and staff we aim to enhance service levels
and operational efficiency by shortening decision-making chains, reducing bureaucracy and achieving
continuous improvement.

We apply our skills in an extraordinarily diverse range of fields. We run world-class scientific
establishments and railways, maintain offices and spacecraft, manage schools, prisons and motorway
systems, test military assets and control air traffic. In every case, our job is to make our customers’
operations more efficient. We can do this by managing existing facilities, projects and systems. Or we
can create entirely new facilities – raising finance, designing and procuring them, then operating them.

Serco is one of the world’s largest outsourcing businesses, operating in Europe, the Middle East, Asia
Pacific and North America. Nearly a third of our turnover comes from outside the UK.

W H AT S O RT O F B U S I N E S S A R E W E ?

A growth business

• Broader exposure to growth opportunities – we can direct

Since flotation in 1988 we’ve averaged over 20% annual

funds and people into those that offer the best returns.

growth in both sales and profits. And we’ve achieved this

largely by organic growth rather than by acquisition.

• Better risk management – downturns in individual

A predictable business

markets and geographies can be offset by growth in

others, and we can use our established skills to drive

Our future earnings and cash flows are highly visible. Our

business performance while developing new skills for

contracts run typically for 5-10 years, and in practice our high

emerging markets.

renewal rate means they can last for decades. Our forward order

book currently stretches to 2028. The income from our contracts

• Better product development – we develop competencies

is highly dependable: some 90% comes from governments and

and centres of excellence around the world, and share best

international agencies, the rest from major corporations.

practice across the whole portfolio.

A diverse business

A versatile business

Our contracts are spread across many countries worldwide

Our management processes are designed to exploit the

and a remarkable range of activities. This diversity brings

benefits of diversity. We’ve developed the Serco Management

three key benefits:

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88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

TURNOVER £m
Inc luding joint ventures

System as a common framework for all our contracts, in

An innovative business

whatever field of activity. It allows contract managers a

We don’t see change as a one-off exercise: we focus on

high degree of autonomy while maintaining consistency

continuously adding value to customers’ operations over

of culture, values and standards – and provides an effective

time. So we’re never content with the status quo. The

mechanism for monitoring and control. The Serco Best

relentless pursuit of constant improvement is part of our

Practice Centre and Serco Our World intranet ensure that

culture – and underpins our success rate of over 90% on

every contract has access to what we learn.

contract rebids and extensions.

A change business

An entrepreneurial business

Our core task is to manage positive change within

One way to manage an outsourcing contract is to focus

organisations, making them more efficient and improving

on cost cuts. From the bid stage onwards, we take a more

the service they deliver. Serco’s management processes are

rounded view: if it was a business, how would we improve

specifically designed to help plan and manage change. We

it? Can we extend our range of services? Can we increase

instil customer focus, reduce bureaucracy, encourage staff

sales? Could we develop new revenue streams? What if we

to take on broader roles – and have well-developed

put in some investment? That’s how our contract managers

techniques for measuring progress.

are trained and empowered to think. It’s what enables them

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88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

P RO F I T £m
B e fo re a m o r t i s a t i o n o f g o o dw i l l

Over the last 15 years the group has achieved compound average
annual growth in excess of 23% in turnover and profit. The majority
of this growth has been through additions to our contract portfolio
with little impact through acquisitions.

* The 2001 accounts have been restated after adoption of UITF 34 Pre-contract

costs in 2002.

W H AT S O RT O F B U S I N E S S A R E W E ?

to keep adding value, constantly improving our performance.

An ethical and transparent business

It’s also why a significant proportion of our new business

We deliver public services, and we change the way people

in any year comes from broadening the scope of existing

work. In both capacities we touch people’s lives and we

contracts: if we show customers what we can do, they often

recognise our responsibility to act ethically and sensitively.

invite us to do more.

Our culture is open and collaborative: we aim to form

productive partnerships with both staff and customers.

A public service business

We recognise our responsibilities to investors, too: we aim

As our national and local government customers would

to communicate clearly and transparently with them and to

expect, we have a strong public service ethos. This is not

account for our performance straightforwardly.

the same as a public sector ethos: we believe passionately

that private sector companies bring distinct benefits to the

A socially engaged business

task of delivering public services. In the words of the recent

We also recognise our role in the wider community. We do not

UK Confederation of British Industry (CBI) Statement of

believe Serco can or should stand apart from the societies in

Intent on public private partnerships, which we helped to

which it operates: we aim to engage positively with local

formulate, a public service ethos revolves around ‘customer

communities and to minimise our impact on the environment.

service, a sense of duty, fairness, openness and accountability’.

Accountability for corporate social responsibility at a local

level is part of every contract manager’s job.

what kind
of a year
H AV E w e
HAD?

Serco has delivered another impressive performance – our 15th successive year of strong and profitable
growth. In addition we have already secured 91% of our planned revenue for 2003 and 80% of our
planned revenue for 2004.

Our markets remain buoyant. Our forward order book continues to grow and, at £7.1bn, is roughly
5.5 times last year’s turnover. We are currently addressing a further £12bn of opportunities across a
range and scale of activities that ensures we can continue to bid selectively.

Our portfolio approach to a wide range of public sector markets has provided a strong platform during
this period of difficult global economic conditions. We remain confident of achieving double-digit
growth both this year and over the longer term.

CHAIRMAN’S STATEMENT

W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T

I am delighted to report another excellent performance – our
15th successive year of strong and profitable growth.
Turnover was up 16.2% and pre-tax profits rose 26.3% before
goodwill, maintaining our record of consistently high growth.
In delivering this growth we have continued to convert a high

proportion of profits into cash while funding the working

after goodwill amortisation. There were no exceptional items

in 2002.

Earnings per share rose 16.1% to 9.58p before goodwill and

10.4% to 7.66p after goodwill.

capital required to bid successfully and implement new

Cash generation remains robust, with 75.1% of group EBITDA

business activities and contracts. This is a very satisfying

(Earnings Before Interest, Tax, Depreciation and Goodwill

result for a year that proved unsettling for the support

Amortisation) converted into cash.

services sector in the UK.

Our vigorous organic growth reflects Serco’s key strengths:

new shares in March. This was partly to refinance the

our long term contract base, ability to enhance customers’

September 2001 acquisition of AEA Technology’s nuclear

operations continuously, and long experience of delivering

consulting business – now successfully integrated into

outsourced public services across a wide range of markets.

Serco Assurance – and partly to strengthen the balance

We have a well-diversified portfolio, rigorous risk management

sheet to facilitate future growth. Since flotation in 1988

processes integrated with the way we do business, and a

Serco has raised new equity totalling £161m – less than our

We raised £117.4m through an international placing of

selective approach to bidding.

acquisition costs of £180m over the same period. Apart from

this, we have funded our growth from under £50m to over

Contract wins during the year totalled £1.2bn. We won 122

£1.3bn annual sales entirely from internally-generated

new contracts, achieving our target of winning over half of new

cash flow.

bids. In addition, we were awarded 180 rebids or extensions

to existing contracts, maintaining our success rate of over

More sophisticated forms of contract inevitably mean more

90% in this area.

Financial performance

complex financial statements. In response, we have introduced

Financial Review sections to our annual and interim results

announcements and continue to extend our commentary on

Turnover grew 16.2% to £1.3bn. Pre-tax profits were up 26.3%

relevant aspects of accounting and corporate governance. To

to £57m before goodwill amortisation and by 22.2% to £48.9m

help investors better understand our Private Finance Initiative

2002 turnover £1,325.9m

£28.4m
£37.7m

£118.6m

Acquisitions

New awards

£1,141.2m

Increases in scope of existing contracts

2001 turnover

2 0 0 2 T U R N OV E R G ROW T H
I n c l u d i n g j o i n t ve n t u re s

(PFI) projects we have also published Our Approach to PFIs.

The year was characterised by strong organic growth built

The latest edition, updated in September 2002, is available
on our website at www.serco.com or on request.

Dividend

on solid foundations: a track record of effectiveness that

attracts and convinces new customers, strategic alliances

with partners who enhance our capability and credibility,

and an approach to working with customers that encourages

The recommended final dividend of 1.44p per share gives

partnerships, extensions and broadening of relationships.

a cumulative dividend for the year of 2.08p – an increase

As in the past, a significant part of our turnover growth has

of 11.8% over 2001. It is proposed that the dividend will be

come from add-ons and extensions to existing contracts.

paid on 13 May 2003 to shareholders on the register on

28 February 2003 (record date).

Pensions

Major contract awards in 2002 included an innovative

partnership with the UK’s Ministry of Defence (MOD)

Warship Support Agency to manage the Devonport,

The recent poor performance of the equity markets has
impacted the group’s defined benefit pension schemes.
A valuation at 31 December 2002 has identified a net deficit

Portsmouth and Clyde marine services contract. This three-

year partnership, worth up to £110m, builds on an earlier

contract we have had since 1996. We also won a partnership

of £73.6m in accordance with FRS 17 on our defined benefit

contract to provide communications and information

schemes. This will result in additional funding and an

technology services to the Defence Scientific and Technical

additional profit and loss charge of £9m per annum.

Laboratory, worth some £10m annually for up to eight years.

Notwithstanding this increase in contributions, we

remain on course to achieve good growth going forward.

As a member of the Paradigm Secure Communications team,

Operational performance

which was selected in February 2002 as preferred bidder

to provide and operate Skynet 5 global military satellite

Our business is made up of five distinct areas: defence

communications services, Serco will be providing network

(which accounted for 27% of 2002 sales), transport (27%),

and facilities management. This is the largest UK MOD PFI

civil government (27%), science (9%) and private sector

to date, potentially worth some £220m to Serco over 15

clients (10%). Within these sectors, revenues from PFI

years, and good progress continues to be made towards

contracts accounted for 12% of total sales.

contract signature.

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BASIC EARNINGS PER SHARE
Before amortisation of goodwill

* Restated to reflect the capitalisation issue on 5 April 2000.

† Restated after the adoption of UITF Abstract 34 in 2002.

DIVIDEND PER SHARE

W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T

As in any year there were a few disappointments – principally

a 15-year extension to the contract under which we manage

our unsuccessful bid to manage the Army Training Estate

the UK’s Atomic Weapons Establishment (AWE) in partnership

and Essex County Council’s decision not to pursue the

with Lockheed Martin and British Nuclear Fuels (BNFL). The

outsourcing of educational services. But disappointment over

contract will now run until 2025, adding over £1bn to our

the Essex decision was tempered by continuing growth for

forward order book.

our education business in Walsall: the local council transferred

a further 300 staff to us, tripling the value of our contract to
£100m over the remaining 51⁄2 years. This followed a very
favourable review of our performance by Ofsted, the

Our stature as a light rail operator continues to grow. For

an unprecedented second year running we won the UK Rail

Operator of the Year award, recognising our operational

education regulator, which led to a decision to transfer

excellence and innovative customer service on London’s

the majority of Walsall’s Local Education Authority activities

Docklands Light Railway (DLR). We intend to build on our

to Serco.

achievements with the DLR, Manchester Metrolink and

Copenhagen Metro by selectively addressing additional rail

This was one of many cases where strong performance was

operating opportunities. We have formed a joint venture with

rewarded with substantial contract extensions. Others included

NedRailways, the international arm of Dutch national rail

the National Crime Squad, which more than doubled the size

operator Nederlandse Spoorwegen, to pursue some of these.

of our partnership contract to support its IT operations and

to design and develop its Intelligence Management System.

In the UK our strategy is to build on our contract base and

In the US, the Federal Aviation Administration significantly

to expand into new areas. While continuing to grow in our

broadened our role: we are already one of its largest private

traditional markets, we seek out contracts that require greater

providers of air traffic control services, and it has now awarded

managerial or technological sophistication, with structures

us a contract to provide weather observation services.

that focus on outputs rather than specified inputs. We

The largest addition of all – indeed, the largest contract ever

to deliver sustained long term benefits both to the public and

awarded to the group – was announced in January this year:

to our investors. They and their associated service contracts

continue to bid for selected PFIs and expect our PFI projects

Preferred bidder

Extension and rebids

Order book

91%
7%

11%

73%

80%
6%

18%

56%

62%
5%

22%

35%

2003

2004

2005

N EA R TE R M CON FI RM ED OR D E R BO O K
A S A T F EB RU A RY 2003

Percentage of planned revenue for the year.

will provide an income stream to supplement our revenues

This enables us to sharpen our focus on contracts offering

from traditional contracts. Under the auspices of the CBI public

superior growth, margins and cash generation, and may

services strategy board, we have joined other public service

lead to minor divestments of certain activities.

providers in a programme to promote better understanding of

the benefits of public private partnerships. This aims to

Risk management

stress their importance and effectiveness in obtaining value

One of the keys to Serco’s consistently robust performance

for money and diversity in public service delivery.

is its management system and control framework. Our

operations are diversified across some 600 contracts and

Our commitment to international diversification – with 30%

a range of business sectors. Few contracts represent more

of our current business turnover overseas – is one of the

than 2% of our turnover and the largest represents only 7%.

factors that differentiates us in our sector. But the sheer

scale of opportunities open to us in the UK means that we

The high degree of autonomy that we give to our contract

have to be selective. In Europe we see particular opportunities

managers is balanced by rigorous monitoring and unobtrusive

in Italy and Germany, and are making encouraging progress

but effective controls. In 2001 we set up our Corporate

in both. In the Middle East our activities and profile continue

Assurance Group (CAG) to integrate our approach to assessing

to develop well. In Asia Pacific we are focusing principally on

business risks and improving controls, and to ensure that

Australia and New Zealand, where state governments continue

we safeguard the interests of shareholders, customers, staff

to develop policies on public private partnerships. In North

and the wider community. Reporting directly to the Board,

America we see public private partnerships emerging in both

CAG is proving a valuable asset in risk management.

the US and Canada: these countries potentially represent a

major long term market for our skills and experience.

Corporate social responsibility

To concentrate management and financial resources on

living predominantly by delivering public services. We need

the most promising opportunities and markets at home and

to demonstrate a public service ethos, as a pre-requisite of

abroad, we continue to review our business portfolio.

our partnership with public sector customers.

Although Serco is a private sector business, we earn our

Total forward order book £7.1bn

£2.8bn

£2.3bn

£2.0bn

2003-2005

2006-2010

2011-2028

LONG TERM ORDER BOO K AS
AT FE BR UARY 2003

W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T

We take our corporate social responsibility (CSR) seriously.

We have formed a number of ‘working partnerships’ with unions

Under our corporate governance framework every contract

at contract level and are investigating further opportunities.

manager is directly accountable for CSR performance. We

have established a global network of CSR champions to raise

To support and sustain our growth, we attach great importance

general awareness and support initiatives that range from

to training and developing our managers. During the year the

developing an alternative water supply for Goose Bay residents

Serco Best Practice Centre provided courses and workshops

in Canada to collecting tonnes of stationery for schools and

around the world, and our global intranet played an important

orphanages in Kabul. We continue to refine our approach and

role by giving people access to training and development

are currently developing a new structure for charitable giving.

online. In a ground-breaking partnership with the UK’s

This is designed to support initiatives by our contracts and

Institute of Directors (IoD) we have developed a joint

individual employees, direct resources towards the communities
where we work and recognise the personal commitment of

IoD/Serco Certificate in Company Direction assessed and

recognised by the IoD. The first 19 Serco managers were

Serco people.

People

awarded the qualification during the year.

Outlook

Serco’s continuing success comes from the outstanding

The committed future income streams from our contracts give

dedication of our people and their personal identification

us the assurance of highly visible revenues and profits. At the

with what they do. In a MORI survey of a cross section of

time of writing we have already secured 91% of our planned

staff, 95% regarded their work as ‘more than just a job’.

revenue for 2003 and 80% of our planned revenue for 2004.

Other positive indications – given our drive for continuous

improvement and evolution to meet customer needs – were

Our forward order book continues to grow. On 31 December

that around three quarters said they understood workplace

it stood at £6.1bn, and it now stands at £7.1bn – roughly 5.5

objectives and the need for change, and two thirds actively

times last year’s turnover. We are currently addressing over

supported the change process. We are grateful for all our

£12bn of opportunities and our markets are buoyant. Both

people’s energy, enthusiasm and imagination – which add

at home and abroad, opportunities are emerging at a rate

value both to our business and to our customers’

which continues to allow us to bid selectively.

operations.

We continue to build constructive relationships with trade

has provided a strong growth platform during this period of

unions. In the UK we support the Partnership Institute

difficult global economic conditions. We remain confident of

launched by the Trades Union Congress (TUC) to foster

achieving double-digit growth both this year and over the

co-operative relationships between employers and unions.

longer term.

Our portfolio approach to a wide range of public sector markets

W H AT d o
the
NUMBERS
MEAN?

This year’s results show a business that’s growing well and increasingly profitable. Turnover
increased by 16.2% and pre-tax profit before goodwill amortisation was up 26.3%. Earnings per
share rose by 16.1%. Cash flow performance was robust. We converted 136% of operating profit and
75% of Group EBITDA into cash.

FINANCIAL REVIEW

W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W

PROFIT AND LOSS ACCOUNT

1.5 Tax

2002 was another year of strong performance which is

representing an effective tax rate of 34.0% (2001 – 32.5%).

further analysed in figure 1 opposite.

The increase in the effective rate is largely as a result of an

increased year on year level of goodwill amortisation.

The tax charge for 2002 was £16.6m (2001 – £13.0m),

1.1 Turnover

Total turnover increased by 16.2% to £1,325.9m. This includes

1.6 Earnings per share

a contribution of £43.3m (2001 – £12.1m) from Serco Assurance

Taking into account the above and the increased capital

(formerly the nuclear consulting division of AEA Technology),

base resulting from the equity placing in March, earnings

which was acquired in September 2001.

per share before goodwill amortisation grew by 16.1% to

1.2 Gross profit

Gross profit of £150m increased by 20.9% and represents

DIVIDENDS

a return on group turnover of 13.7% (2001 – 13.6%).

9.58p.

1.3 Pre-tax profit

The proposed final dividend of 1.44p per share gives a

cumulative dividend for 2002 of 2.08p, an 11.8% increase

Pre-tax profit before goodwill amortisation increased 26.3%

on 2001.

to £57m.

1.4 Underlying pre-tax profit

SHARE PLACEMENT

There were no exceptional items in 2002. In order to allow

In March £117.4m (net of fees) was successfully raised through

comparison of the year on year results, the growth in

an international bookbuilt placing of 39.5m new shares

underlying pre-tax profit is shown in figure 2 opposite.

representing 9.9% of Serco’s issued share capital. This enabled

Underlying pre-tax profit grew 20.1% to £54.9m. Underlying

Balance Sheet to be strengthened to facilitate future growth.

the Serco Assurance acquisition finance to be repaid and the

profits are stated after:

• A £2.1m (2001 – £0.5m) contribution from Serco Assurance

Since flotation in 1988 Serco has raised new equity

• A prior year adjustment of £1.2m in 2001 made on the

totalling £161m, roughly equivalent to our acquisition costs

adoption of Urgent Issue Task Force (UITF) Abstract 34 in

of £180m over the same period. Apart from this, we have

2002; this is explained in greater detail in Bid costs

funded our growth from under £50m to over £1.3bn of

• A net contribution in 2001 of £0.2m from three one-off items.

annual sales entirely from internally generated resources.

2002
£m

1,325.9
1,097.3
228.6
150.0
(112.8)
–
23.9
(4.1)

57.0
(8.1)

48.9
(16.6)

32.3

34%
421.8m
9.58p
7.66p

2002
£m

57.0
(2.1)
–
–

54.9

Restated*
2001
£m

1,141.2
913.7
227.5
124.0
(97.6)
5.2
18.7
(5.1)

45.2
(5.1)

40.1
(13.0)

27.1

32.5%
389.6m
8.25p
6.94p

Restated*
2001
£m

45.2
(0.5)
1.2
(0.2)

45.7

Change
%

16.2

20.9

26.3

16.1

Change
%

26.3

20.1

FIGURE 1 PROFIT AND LOSS ACCOUNT

Total turnover

Group turnover
Joint venture turnover

Gross profit
Other administrative expenses
Exceptional items
Joint venture profit
Group interest

Profit before goodwill and tax
Goodwill

Profit before tax
Tax

Profit after tax

Effective tax rate
Average number of shares
Earnings per share before goodwill
Earnings per share after goodwill

FIGURE 2 UNDERLYING PRE-TAX PROFIT

Reported pre-tax profit before goodwill amortisation
2001 Acquisition: Serco Assurance
Prior year adjustment: UITF Abstract 34
Net one-off items

Underlying pre-tax profit before goodwill amortisation

* The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002 (see Bid costs on page 19 for more information).

W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W

FIGURE 3 CASH FLOW

Operating profit before one-off items
Non-cash items – Depreciation and goodwill

Group EBITDA
Working capital movement

Operating cash flows before one-off items
Pension payment
Exceptional items
Dividends from joint ventures
Interest and taxation
Capital expenditure
Disposals of tangible assets
Other items

Free cash flow
Acquisitions/disposals
Share issues
Other financing
Dividends paid

Net cash flow

Closing cash/(overdraft)
Long term loans
Other loans and finance leases

Recourse net cash/(debt)

2002
£m

29.1
23.6

52.7
(13.1)

39.6
(15.5)
–
11.1
(11.9)
(23.6)
8.1
1.9

9.7
(10.3)
117.9
(3.8)
(8.3)

105.2

69.4
(47.4)
(15.7)

6.3

Restated*

2001
£m

21.3
18.3

39.6
(13.9)

25.7
–
6.1
9.6
(12.0)
(17.6)
4.6
(7.5)

8.9
(73.6)
2.0
(11.9)
(6.7)

(81.3)

(35.8)
(45.6)
(12.1)

(93.5)

* The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002 (see Bid costs on page 19 for more information).

CASH FLOW

Dividends received from joint ventures during 2002 of £11.1m

(2001 – £9.6m) represents a 67% (2001 – 76%) conversion of

During the year there was a net cash inflow of £105.2m.

profit of joint ventures, after tax, into cash.

This inflow was after a one-off payment of £15.5m into the

Serco Pension and Life Assurance Scheme in February and

4.3 Capital expenditure

includes £117.4m from a share placing in March. This cash

Capital expenditure, excluding investment in PFI SPCs,

inflow contributed to the reduction in Group net debt/funds,

for the year was £23.6m (2001 – £17.6m). As a proportion

excluding non-recourse PFI debt, from £(93.5)m to £6.3m

of Group turnover this expenditure represents 2% and has

respectively, as detailed in figure 3 opposite.

remained at a similar level to previous years.

4.1 Operating cash flow before one-off items

4.4 Net debt

Operating cash flow, before one-off items, was up 54% to

In addition to the recourse debt shown in figure 3, the Group

£39.6m (2001 – £25.7m), which converts 136% (2001 – 121%)

has a non-recourse loan to fund the construction of the Traffic

of our operating profit into cash.

Control Centre (see Private Finance Initiatives on page 18).

At the end of 2002 this loan was £29.7m (2001 – £14.1m).

We believe that, as operating profit is calculated after

Non-recourse debt is excluded from the Group’s banking facility

deducting goodwill and depreciation, the appropriate measure

covenants but is presented as a liability in the Group’s

for operating cash flow performance is the conversion of Group

Balance Sheet.

EBITDA before one-off items into operating cash flows. For

2002 this was 75.1% (2001 – 64.9%).

PENSIONS

The working capital movement reflects the strong level of

In 2002, two of Serco’s pension schemes were accounted for

organic growth shown by the Group in 2002 and equates to

as defined benefit schemes.

approximately one month’s incremental turnover, reflecting

the typical invoicing cycle of our contracts.

The total 2002 pension charge for Serco was £29.1m

4.2 Joint ventures

Serco has two types of joint ventures: those which represent

(2001 – £19.5m), with the two UK defined benefit schemes

having a cost of £12.5m (2001 – £9.3m).

traditional operating contracts, such as the Atomic Weapons

FRS 17 Retirement Benefits was issued in November 2000

Establishment (AWE) and Premier Custodial Group (PCG);

to replace SSAP 24 for accounting periods ending on or after

and those reflecting Serco’s equity stakes of up to 50% in

22 June 2003. In July 2002 the Accounting Standards Board

PFI Special Purpose Companies (SPCs).

delayed the introduction of FRS 17 until 2005, following an

W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W

announcement by the International Accounting Standards

6.2 PFI profile

Board that it would also issue a new standard.

For 2002 PFIs contributed £154m to turnover and £17.7m to

For 2002 we have continued to apply the transitional rules

and £6.4m of the profit related to the operating contracts, and

and disclosures. FRS 17 requires the market value of assets

£43.6m of the turnover and £11.3m of the profit to Serco’s share

profit before tax for the year, of which £110.4m of the turnover

and liabilities for defined benefit schemes to be calculated

of the SPCs.

and included in the Balance Sheet. At 31 December 2002

we estimate there was a net deficit of £73.6m in relation

6.3 SPC funding

to the defined benefit schemes and an asset base of

SPC funding is via long term loans which are non-recourse

approximately £294.4m, whilst the Minimum Funding

to Serco.

Rate (MFR) funding level was 100%. Long term company

contribution rates will increase by approximately £9m per

• Our share of non-recourse debt of joint venture SPCs at the

annum from 2003.

end of 2002 is £206.7m. This is included as a liability

within investments in joint ventures on our Balance Sheet.

In February 2003 we merged Serco’s two defined benefit

pension schemes to achieve cost and investment efficiencies.

• Traffic Information Services (TIS) Limited is the first SPC

To assist this process £15.5m was injected into the Serco Pension

where Serco has chosen to own 100% of the equity. This

and Life Assurance Scheme in February 2002 to achieve a

SPC has the contract to deliver the Traffic Control Centre

similar funding level for both schemes. The investment profile

contract. A non-recourse loan of £29.7m to fund the asset,

of the merged scheme will be kept under continuous review to

currently in the course of construction, is included in long

match the asset and liability profiles.

term creditors in the Balance Sheet. Construction completion

is anticipated in early 2004, when the non-recourse loan

PRIVATE FINANCE INITIATIVES

will equate to approximately £60m.

6.1 Disclosure

• In June 2002 the lenders to the Joint Services Command

The document Our Approach to PFIs, which was originally

and Staff College PFI agreed to change the terms of the

issued in 2001, was updated in September 2002 and provides a

senior debt. This transaction had no effect on profit but

summary of our accounting for PFIs. It is available on our
website www.serco.com or on request.

allowed £6.7m of cash to be paid from the SPC to Serco

by way of dividend and loan.

REVIEW OF JOINT VENTURE ACCOUNTING AND

DEFERRED TAXATION

CONTROLS

In March 2002, in recognition of the perceived uncertainties

issued in December 2000 for accounting periods ended on or

arising from certain joint venture accounting practices in

after 23 January 2002. FRS 19 requires full provision to be

the US, the Board undertook a specific review, including

made for deferred tax assets and liabilities arising from timing

asking Deloitte & Touche to undertake an independent

differences between the recognition of gains and losses in the

review of our accounting procedures and internal controls

financial statements and their recognition in a tax computation.

Financial Reporting Standard (FRS) 19 Deferred Taxation was

over our joint ventures. This review confirms the Board’s

view that all our joint ventures exist for genuine commercial

The tax charge for the year has been calculated in accordance

reasons, are correctly accounted for and that our controls

with FRS 19. The adoption of FRS 19 has not had a material

and disclosures are appropriate.

effect on the tax charge, as the Group did not have a material

level of unprovided deferred tax liabilities or unrecognised

BID COSTS

deferred tax assets.

UITF Abstract 34 Pre-contract costs was issued in May 2002 for
accounting periods ending on or after 22 June 2002. UITF
Abstract 34 requires all bid costs to be expensed up to the
point where award of a contract is ‘virtually certain’. Bid costs
incurred after this point may be capitalised. At 31 December
2001 we had £1.2m of bid costs capitalised in relation to

10 TREASURY POLICIES

10.1 Treasury management

The Group’s tax and treasury function is responsible for

managing the Group’s exposure to financial risk. It operates

within policies approved and reviewed by the Board, which

contracts for which we had not reached preferred bidder

include controls on the use of financial instruments. The

status. Applying the Abstract has resulted in a small prior
year adjustment to treat these capitalised costs as expensed
in 2001. Having made this adjustment, our accounting policies
now fully comply with UITF Abstract 34.

Group reviews the credit quality of counterparties and

limits individual aggregate credit exposures accordingly.

W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W

10.2 Liquidity management

The Group does not hedge the sterling equivalent of the net

The Group funds its operations through bilateral bank credit

assets of its overseas operations on the grounds that the

facilities and a long term US Private Placement of loan notes

market value of these businesses does not represent a

(‘the US Notes’). Borrowings under the bank facilities are

significant proportion of the market value of the Group and

floating rate, unsecured obligations with covenants and

because foreign exchange differences are unlikely to have a

obligations typical of these types of arrangements.

material effect on the consolidated net asset value of the Group.

At the end of 2002 committed bank credit facilities totalled

The US Notes were issued in US dollars but the principal

£50m, a further £111m annually renewable uncommitted

obligation has been swapped into sterling consistent with the

bank facilities were undrawn. The committed bank facilities

risk profile set out above.

mature in November 2005. The US Notes mature in December

2007.

10.4 Interest rate risk

10.3 Foreign exchange risk

The Group’s exposure to interest rate fluctuations on its

borrowings and deposits is selectively managed, using interest

Due to the nature of the Group’s business, which in general

rate swaps. The element of the US Notes that has not been

does not involve a significant amount of cross-border trade,

swapped into floating rates is considered to offer adequate

the Group is not exposed to material foreign currency

protection from interest rate fluctuations in the current

transaction risk, as sales and costs are approximately

market and given the Group’s current low level of net debt.

matched within overseas operations.

All shorter term debt is maintained at floating rates of interest.

WHAT have
w e B E E N
doing and
WHERE?

In addition to maintaining our 90% rebid win rate, during the year we continued to extend our
capabilities, winning new contracts and forming new partnerships across our principal markets in
defence, transport, civil government, science and the private sector. We maintained strong growth in
the UK, made good headway in our priority markets in Europe and the Middle East, broadened our
base in North America, and consolidated our position in Asia Pacific.

One of our greatest business strengths is our diversity – we apply our management skills across
a broad range of activities and geographic markets around the world.

BUSINESS REVIEW

W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W

In the following pages we review the year’s activities

top award for industrial safety performance at the site. The

by sector and provide an overview of our operations and

extension, until 2025, brings the total contract value for Serco

markets worldwide.

DEFENCE

to over £1.7bn and will enable AWE to raise external capital

if required for investment to continue developing the site as a

world-class scientific facility with safety at the heart of its

Defence, our longest-established market, accounted for 27%

mission. Meanwhile, investments at AWE during the year

of sales in 2002.

included installation of the UK’s most powerful computer,

which has cut program run time from two months to 15

Defence and security activity has increased in all our regions.

minutes for some applications.

In the UK the Chancellor’s 2002 Comprehensive Spending

Review will raise defence spending by £3.5bn to £32.8bn in

In February 2002 the Paradigm Secure Communications

2005/06 – the largest planned real-terms increase in 20 years.

team was selected as preferred bidder for the largest

defence PFI to date – to provide Skynet 5 global military

Serco is a major provider of services to the UK Ministry of

satellite communications services to the UK armed forces.

Defence (MOD), which has been in the forefront of developing

Serco will provide network and facilities management

cost-effective ways to outsource defence support activities.

services including spacecraft and network operations,

We are encouraged by the Defence Logistics Organisation’s

network maintenance, training, supply management and

declared intention of moving from ‘provider to decider’ on

through-life buildings and facilities maintenance under

delivery of services, and expect MOD spending on outsourcing

a contract potentially worth £220m to us over 15 years.

to double, reaching £6.5bn by 2010. We are also a leading

Our team has already commenced the implementation of our

provider of services to the Australian and New Zealand forces.

phase-in plan and good progress continues to be made

towards contract award.

Our strategy is to retain and expand our existing business,

leveraging our core capabilities into new but related areas

The Warship Support Agency signed a partnering

and selected major bid opportunities. We currently hold over

agreement with our Serco Denholm joint venture – 90%

£2.5bn worth of defence contracts and see no shortage of

owned by Serco – to manage the Devonport, Portsmouth

future opportunities.

and Clyde marine services contract. This three-year

partnership, worth up to £110m, builds on an earlier

The defence sector accounted for our largest-ever business

contract awarded in 1996. The aim is to reduce overall

win at the start of this year. In January 2003 the MOD agreed

costs by generating new solutions for long term provision

a 15-year extension to our contract for managing the Atomic

of marine services.

Weapons Establishment (AWE) in partnership with Lockheed

Martin and BNFL. Since we began the original 10-year

Our strength in IT seat management at scientific and

contract in 2000 we have delivered all milestones on time,

secure sites helped us win a five-year contract with the

surpassed 13 out of 16 performance targets and won the UK’s

Defence Scientific and Technical Laboratory. We will

provide communications and information services to this

international VVIPs and senior military and political

agency, which currently has over 3,000 staff at sites across

visitors. The award decision is a strong endorsement

the UK. The contract has options for three one-year

of our performance at Northolt.

extensions and additional scope, which together could

take the value from a baseline £30m to as much as £80m.

In joint venture with SKE Support Services we successfully

We successfully strengthened our position in services

provide transport services at Wright-Patterson Air Force

rebid our contract to maintain over 400 vehicles and

to electronic warfare operations, with an MOD contract

Base in Ohio.

to provide multi-activity services to the Electronic Warfare

Tactics Range at RAF Spadeadam. And in a competitive

In Germany we are continuing to maintain our good

rebid we won a further five-year contract from NATO to

relationship with the Bundeswehr – Germany’s ministry of

provide engineering services to its Multi-service Electronic

defence. Early in 2002 the secretary of defence opened the

Warfare Support Group at Yeovilton. This is the latest

first of two IT training centres that we equipped and are

extension to a contract we first won in 1984 and

now operating under a three-year €8.1m contract. The

competitively rebid in 1998.

centres have already trained some 3,000 soldiers and

civilians, achieving above-average results in externally-

At HMND Clyde we began a partnership with Babcock

assessed examinations. This pilot project has helped to

Naval Services who now operate the site. Under a five-

convince officials of the benefits of involving the private

year contract worth £26m we will provide a one-stop

sector in non-core Bundeswehr activity, and a third centre

shop for estate management services.

has recently been opened in Bonn.

We won three important MOD rebids with a total

Meanwhile, we have won two new German defence IT

operational value of over £30m. At RAF Halton we have

contracts – to help introduce a pilot resource management

a wide-ranging contract that extends through general

system for the Material Support Command and develop

engineering and management of the armoury to cleaning

integrated quality assurance for the Army Logistics

and media services. On Ascension Island we provide a

Information System. And we are bidding to provide training

comprehensive range of engineering, supply and support

support services at the Armoured Training Centre in Munster

functions for the RAF. At Wattisham Station, where we

– the Panzertruppenschule.

provide air traffic services, maintenance and helicopter

simulator services to the Army Air Corps, the new contract

Among a number of contract extensions in Australia we

gives us a broader role including airfield management.

added a further year, worth over AUS$10.5m, to the manpower

At RAF Northolt, where we provide technical services,

engineers, technicians, aviation logistics specialists and

we expanded our contract to include the Visiting Aircraft

managers to the Royal Australian Air Force at bases across

Servicing Section – which routinely handles royalty,

the country.

and personnel service contract under which we provide

W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W

TRANSPORT

We won several rebids to maintain urban traffic management

The transport sector has been a strong source of growth for

and control systems and national motorway communications

us in recent years, primarily in the UK and Australia. In 2002

systems in England, Scotland and Northern Ireland. We are

it accounted for 27% of sales.

now the market leader in maintaining technology on the

English motorways, with contracts covering over half the

Governments around the world are continuing to invest

system. We also re-secured the contract to sell, through our

in technology and services for ‘joined-up’ transport systems

Swansea-based telesales operation, Select Registrations on

that balance different modes of travel and make better use

behalf of the Driver and Vehicle Licensing Agency.

of public transport. The UK government plans to increase

transport spending by 12% annually in real terms, to reach

Our PFI to establish the Highways Agency’s Traffic Control

£11.6bn in 2005/06, and we have continued to win new

Centre continues to make good progress. Construction of the

and extended contracts supporting its integrated

control centre itself was completed on time and on budget, and

transport policy.

the fit-out, roll-out of roadside equipment and systems testing

are all well underway. As part of this contract, we have been

Information is the key to transport integration, and during

operating the Midlands Driver Information System since

the year we secured a contract with the BBC to provide its

January 2002, which has released a valuable police resource.

national and regional travel information services covering all

road, rail, air and sea networks. Our broadcast service centre

We operate London’s Docklands Light Railway (DLR) and

began operations in January 2003 and we are now working

the Metrolink light rail system in Manchester, where we

to develop new travel information services using the internet,

helped keep the city moving during the 2002 Commonwealth

interactive TV, mobile phones and digital radio.

Games by running more frequent services over longer hours

to meet increased demand. At the 2002 National Rail Awards,

On the roads we secured the contract to equip the UK’s

Serco Docklands won the Best Rail Operator award for an

first toll motorway, the 27-mile M6 Toll Road, with a £4m

unprecedented second year running. As operator of the DLR,

communications and traffic management system. It is due to

which carried 44m passengers last year, we have earned

open in late 2003. The phase-in of a new contract to maintain

a reputation for innovation in passenger service and

equipment on the motorways in the south east of England

information. “Few railway businesses have such an impact

was completed on time to start services in February 2003.

on community life,” said the judges.

Early in 2003 Glasgow City Council awarded us an initial
11⁄2-year contract to supply and install a fully integrated
system for management and operation of buses running

We remain at the cutting edge of providing solutions to

complex technical problems for our customers. We have

on Quality Bus Corridors in the city. The system will include

been working with Network Rail (effectively the successor

technology for vehicle location, fleet management and real-

to Railtrack) under an £11m contract to develop a new-

time passenger information. Once it is installed we will be

generation track measuring vehicle to inspect the UK’s main

contracted to maintain it for at least five years.

lines on a two-weekly cycle. The ability to measure and

monitor track condition at high speed within normal train

This is currently bidding for the Wales and Borders and

operating patterns will have considerable benefits on

Merseyrail Electrics franchises.

heavily-used rail routes. The New Measurement Train enters

service this spring and two additional monitoring vehicles

The first phase of the Copenhagen Metro was completed on

will be added later.

time and formally opened by the Queen of Denmark in October.

We are leading the joint venture that operates the system,

Network Rail has also given us two short term contract

under a contract worth over DKK500m. The automated,

extensions. A £7.5m 15-month extension continues our

driverless light rail system initially serves an 11-station,

infrastructure-monitoring contract until April 2003, and

13.9km route with some 180 staff, rising eventually to 300

a £4m four-month extension to our multi-purpose vehicles

as we open extensions. Passenger numbers are expected

contract will cover this year’s weedspraying season – during

to rise from 60,000 to 120,000 a day by May 2003.

which we will treat about 18,000 miles of track.

Our Cardiff Call Centre, which provides rail passenger

on traffic management, we successfully rebid our contract

information, became the first business in Wales to achieve

to manage, operate and maintain the Aberdeen Tunnel.

In Hong Kong, where our transport work is focused

NVQ Centre of Excellence status for in-house training. And

in January 2003, at the Welsh Contact Centre Awards, Serco

won both the Best Training Initiative and the e-commerce

Most Innovative Use of Technology awards.

In Australia we further enhanced our tourism business for
Great Southern Railway by establishing the groundwork
to extend The Ghan train service to Darwin from late 2003.

In Perth, where we successfully rebid our public transport

Our rail testing business continues to broaden its

information call centre contract, we were also selected as

capabilities to become a one-stop shop for testing and

preferred bidder to provide facilities management of bus-

engineering acceptance of rail vehicles. During the year

related infrastructure.

it received accreditation from Railway Safety as a Vehicle

Acceptance Body.

In the US we have extended our relationship with the

Federal Aviation Administration (FAA) to include weather

In joint venture partnership with SNC Lavalin, we are one

observation as well as air traffic control (ATC) services. The

of two consortia currently bidding for the Phase 3 network

FAA has awarded us a five-year contract to operate weather

expansion of the Manchester Metrolink – a 25-year concession.

observation stations at seven medium to large airports, with

The concession will design, build, operate and maintain at

five more to follow in January 2004.

least three new extensions to the network while also operating

and maintaining the existing system. And in support of our

In the Middle East we successfully rebid our contract with

plans to bid for selected UK rail franchises, we have formed

the United Arab Emirates – held since 1986 – to provide ATC

a joint venture with NedRailways, the international arm of

and engineering services at the Emirates Area Control Centre

the Dutch national rail operator, Nederlandse Spoorwegen.

in Abu Dhabi.

W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W

Further growth in our airport business will come from an

boost if the UK adopts proposals for weekend and night-time

investment in South Africa signed in November. Our 50:50

prison sentences enabling offenders to retain normal

joint venture with Equity Alliance has acquired a 51% interest

employment.

in Apron Services Pty, a government-owned airline ground

handling company supporting three international and three

In 2001 we stepped in at short notice to support a critical

domestic airports in South Africa. It has contracts with 53

national intelligence system serving the UK’s 66 police forces

airlines. This investment of £4m will provide an opportunity

and other agencies. Our response proved effective, and

to develop our services in civil aviation and a platform for

in 2002 we were awarded a five-year contract to maintain

exploring other market opportunities in South Africa.

and support the system.

CIVIL GOVERNMENT

Building on our growing reputation for services to police

This is our most rapidly-evolving market, with opportunities

forces, we won a contract from Merseyside Police to provide

emerging in sectors such as justice, education and healthcare

and support its new command and control system. The pilot

where outsourcing is relatively new. In 2002, civil government

system went live very successfully in November and full

contracts (excluding the transport and science sectors, which

operations will begin in March 2003. Other forces for whom

are reported as separate segments) accounted for 27% of sales.

we operate command and control systems include the

Justice

Hampshire and Isle of Wight Constabulary – which has

now appointed us to support the system with a full business

Our activity in this field is currently focused on the UK,

continuity and disaster recovery solution.

where the criminal justice budget for England and Wales

is £14.7bn this year, rising to £18.3bn over three years.

We are the UK market leader in providing road safety

We estimate our current addressable market at about

cameras. During the year we won contracts to supply and

£1.3bn, covering intelligence, operational support,

install over 300 additional camera locations in Lancashire

demand management and technology services. There is

and West Yorkshire.

major potential for working with police forces in England

and Wales to identify non-core activities that can be

Our development work continues on the National Crime

outsourced, allowing operational staff to concentrate

Squad (NCS) Operations and Intelligence Management

on policing and investigation.

The custodial market continues to expand – opportunities

include prison PFI tenders, secure training centres for

juvenile offenders and development of new immigration

System and we have delivered the first modules, including

the Evidence Management System. We have added several

enhancements to the original contract. These include opening
and managing a new 39,000ft2 seized assets store, introducing
a secure knowledge management system and providing the IT

accommodation centres over the next five years. Electronic

and communications infrastructure for the newly-formed

tagging and monitoring of offenders is a current and rapidly-

Immigration Crime Teams. We will provide support services

growing non-custodial market which could receive a further

to these teams in line with the main NCS contract.

Premier Custodial Group (PCG) continues to perform well.

In April 2002, Ofsted commended our service quality in

The business now comprises five prisons, one secure training

Walsall and our progress in restructuring and redefining

centre, one immigration detention centre and court escort

school support services. After reviewing the remaining services

and electronic tagging activities. There have been some

provided by the LEA, Ofsted recommended that these, too,

performance issues at HMP Ashfield Young Offenders

Institution, which we are working through and are well on

the way to being resolved.

As previously reported we are pursuing through the courts

a contractual right to acquire full control of PCG following

our partner’s merger with Group 4 Falck: the court’s decision

is expected in the middle of this year.

Education

should be outsourced. The result was a threefold expansion
of our contract from September: over the remaining 51⁄2 years
it will be worth some £100m to us. A further 300 Walsall

Council staff transferred to Serco in January this year.

Ofsted has also recognised the significant progress made
by our educational partnership with Bradford Council.
The performance targets set by the contract are demanding
and there is much work still to do before we can meet them

all. But already government figures show above-average

In the UK, this market has expanded and evolved rapidly

improvement in Bradford schools since we arrived and in

over the past year. Opportunities for working in partnership

the primary school league tables Bradford is the third most

with local education authorities (LEAs) continue to emerge.

improved LEA in the country.

Over the longer term we believe schools will gain increasing

autonomy to purchase the services currently provided or

Outside the UK, our activities in the education sector include

bought by LEAs. The education budget for England will rise

managing and maintaining school and university facilities

by 6% a year in real terms to reach £58bn over three years –

in Australia and Sweden. Last year we won a new contract

when spending per pupil will be 50% higher in real terms

to provide facilities management, teaching assistants and

than in 1997. We have been developing an extended range

administrative support to a new 1,200-pupil secondary

of services for schools to enhance our market position. Our

school in Hong Kong which opened in September.

turnover in education is currently over £75m a year and in

the UK we are one of the sector’s leading service providers.

Our strategic focus on organic growth means that when we

Our education business is not only with LEAs. In April,

rather than capacity. The acquisition in 2000 of Quality

for example, we retained and expanded a contract worth

Assurance Associates in the UK – the basis for our fast-growing

over £3m a year to inspect more than 200 schools annually

education business – was a case in point. In December 2002

for the UK education inspectorate, Ofsted.

we acquired CCM Software Services for an initial consideration

make acquisitions we tend to buy complementary capabilities

Our progress in Walsall, where we have provided services to

scheduling, resource allocation and finance systems that

129 schools on behalf of the LEA since 2001, has demonstrated

complement our existing school management and improvement

how our effective management drives strong organic growth.

products to make a unique integrated toolkit. Its customers

of £8.6m. CCM produces, maintains, updates and operates

W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W

include a rapidly growing number of schools, universities

recognised by the Hong Kong government, which rewarded

and colleges and nearly all the secondary schools in Ireland.

us with a prestigious Caring Company award.

This year we have launched Serco Learning, which brings

Other public services

the CCM products together with our existing portfolio of

In addition to the principal areas described above we also

virtual learning environment, leadership training and

provide a wide range of other services – both behind the

consultancy products. Together, these put us in a unique

scenes and in direct contact with the public.

position to work with schools on all areas of development.

Health

In the UK we won a 10-year rebid and expansion of our

environmental services contract with Canterbury City

The majority of our activity is currently in the UK, where we

Council, worth £53m. The new contract represents a deeper

are involved in two of the first wave of hospital PFIs – Norfolk

level of partnership with the council – and includes operating

and Norwich University Hospital and Wishaw General Hospital,

the call centre which is the customer’s first point of contact,

both now operational. New UK markets are emerging in

taking 50,000 calls a year on a wide range of council services.

information technology and clinical service provision as well as

a variety of support service partnerships. Outside the UK we

Our local council services business made further headway in

provide hospital support services in Hong Kong and Australia.

January 2003, when we won Woking Borough Council’s ground

maintenance and street cleaning services. Subject to contract,

In June we broadened our capabilities by acquiring SDC

we will work from a dedicated depot in the Woking area, with

Consulting, a leading provider of strategic consultancy

contract management and support from our existing operation

services to NHS customers. This enables us to grow into both

in Winchester. This partnership contract is expected to be worth

existing and emerging health markets by developing a new

at least £25m over 10 years, with additional revenue depending

solutions business that combines a strengthened consultancy

on the service and extension options that the borough exercises.

and advisory practice with participation in clinical and non-

clinical support service partnerships. The government has

In Belgium three contracts further strengthened our

recognised our capabilities by making Serco one of only eight

relationships with major European institutions. The European

private companies approved to support underperforming NHS

Commission (EC), already an established IT customer, awarded

trusts identified in the NHS franchise programme – a role

us a new contract to provide IT support. The European

similar to the one we are playing with local education

Parliament chose us to provide IT services to its members

authorities.

and their offices in both Brussels and Strasbourg. We also

successfully rebid our ‘complete life cycle’ computer services

Our track record at three hospitals in Hong Kong won us

contract with the EC’s Directorate General for Regional Policy.

contracts to provide cleaning and non-clinical services at two

more: the Tseung Kwan O Hospital and the busy 1,265-bed

In New Zealand, Wellington City Council awarded us a contract

United Christian Hospital. During the year our efforts were

to provide planned and responsive maintenance services for

over 30 buildings ranging from high profile council offices,

SCIENCE

museums and libraries to retail and office buildings. Our

Management of government scientific undertakings

developing relationship with Manukau City Council has earned

is a relatively recent but fast-emerging sector, in which

us an additional contract each year since 1999. In 2002 we won

Serco was an early entrant and has established a strong

two further contracts to maintain its playgrounds, structures

competitive position. Our science contracts now account

and asset management of buildings, bringing total annual

for 9% of sales. We aim to be recognised by governments

revenue from the city to over NZ$7.6m. Impressed by our

around the world as one of the best private sector partners

track record, Rodney District Council awarded us a NZ$17.2m

for the management of scientific organisations, programmes

five-year contract to manage parks, reserves and coastal areas.

and consulting services.

In Australia we successfully rebid our property management

UK government investment in science, engineering and

contract, worth AUS$22.2m over five years, covering all the

technology (SET) supports innovation and competitiveness

justice buildings in Perth and all education buildings in

in the economy, as well as defence, health, safety and

south Perth.

environmental management. Government SET expenditure

is increasing and we expect it to exceed £8bn in 2003/04.

Hong Kong is planning a sophisticated meter system covering

all its on-street parking. This will use reloadable smartcard

In the UK we have demonstrated our capabilities in managing

technology compatible with the island’s Octopus transport

highly complex science-based organisations such as the

and cash transaction card. Our joint venture with Wilson

National Physical Laboratory (NPL) under partnership contracts

Parking will design, install and maintain the system using

with government – delivering services that range from prize-

dual language technology that we have developed, under a

winning international research to support for small business.

seven-year contract worth almost HK$87.9m. In Singapore

We have also built a strong position in nuclear safety and

we have carved out a niche with the government as a provider

aim to support government in its management of nuclear

of accommodation management services. Last year we gained

liabilities: government spending in this area under a long

a further contract, as managing agent for 411 housing units.

term programme is estimated to be over £30bn. We believe

our UK experience provides a model that can be applied

In the US we extended our contract in San Francisco to install

in other countries as they involve the private sector in

and manage over 25,000 parking meters, to run for

delivering public science services.

a further five years. All our US government contracts begin

and end with an environmental baseline study, which we

In the run-up to a rebid at NPL, our contract has been

can provide in-house through Serco Environmental Services.

further extended – taking our original five-year contract

We also market these services externally, and recently won

into its eighth year. Together with Laing, our construction

a contract – indemnified by the Canadian government – to

partner, we are currently developing world-class new science

conduct a major baseline study on the largest non-commercial

facilities at NPL. After some early setbacks, construction is

bulk fuel storage tank farm in North America.

now well advanced and we are working closely with the

W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W

Department of Trade and Industry and Laing to resolve all

Our existing business consists mainly of multi-service

outstanding issues. Meanwhile, we have launched major new

facilities management contracts for blue-chip clients.

national facilities, including a centre to secure accuracy in

Microsoft, for example, recently added five years to our

radiation therapy for cancer sufferers and a laboratory

facilities management contract covering its seven properties

developing innovative measurement techniques for bioscience.

in Ireland. It also awarded a one-year contract for support

services, with a view to integrating it with the remaining

Serco Assurance (formerly the nuclear consulting division of

four years of the facilities management contract.

AEA Technology) has substantially augmented our offering in

nuclear safety. Now integrated with our science business,

We increased the scope of our work with Ilford – one of

it is performing in line with expectations and generating

the world’s leading photographic imaging businesses –

new opportunities.

by taking over the field force of specialist technicians

that supports its equipment across Europe and the US.

In May Serco Assurance won a new contract to support the

This gave us the opportunity to develop a new Asset and

BNFL Magnox Reactor Services Organisation with a range

Equipment Services (AES) business. In August 2002 we

of technical services, in a consortium led by Mitsui Babcock.

finalised agreement with Imation, one of the leaders in

The consortium will provide 85% of the external technical

removable data storage, to transfer its field services and

support to the organisation’s six operating Magnox nuclear

field technician staff to our AES business in Germany and

power stations; this is the first time such a contract has

the Netherlands. Together, these contracts have given us

been let in the UK civil nuclear industry. The value to Serco

a stable platform for addressing the field service market

will be about £10m over three years, with a possible two-

and possibly creating further opportunities elsewhere in

year extension.

the world.

More recent projects have included testing superalloys for

In the Middle East, our new Serco Gulf joint venture

ALSTOM Power in Sweden, environmental studies for a low-

won a 10-year contract to deliver engineering and other

level radioactive effluent pipeline, simulation studies of

support services to the Dubai Ports, Customs and Free Zone

corrosion in Magnox boilers, specialist computer modelling work

Corporation at Jebel Ali, Port Rashid and other locations

for the Swedish radioactive waste disposal agency and a variety

in Dubai. This is a ground-breaking contract that should

of environmental protection projects. Contract extensions

provide a springboard to other government contracts

included two three-year contracts from the UK MOD to provide

in this expanding marketplace – initially in Dubai and

research and support services aimed at detecting and managing

eventually in the rest of the United Arab Emirates

battlefield radioactivity hazards. We also extended a contract

and other Gulf countries.

with Network Rail under which we are developing asset

management information technology, which we have already

We continued to grow our relationship with BHP Steel

applied to London Underground and Yorkshire Electricity.

in Australia, building on our original protective and

PRIVATE SECTOR

emergency services contract at its Port Kembla steelworks.

Last year we added fire and transport services, and

The private sector accounted for 10% of sales in 2002.

are now responsible for fire equipment inspection

Because of the scope available to us in the public sector,

and maintenance and personnel transport movement

this market has not been a primary focus so far, but it

at all BHP Steel operations in the Illawarra region

does provide opportunities which we address selectively.

of New South Wales.

WHERE
DO WE
operate?

Our operations are widely distributed across selected markets in the UK, continental Europe, the
Middle East, Asia Pacific and North America. The range of our activities varies from region to region.
We are finding increasing opportunities to transfer expertise.

W H E R E D O W E O P E R AT E ?

United Kingdom

SALES 2002: £930.5m – up 17%

The UK provides some 70% of our business and remains an

• Transport: We have built strong positions in both road

exciting market for us. Our expertise and proven track record,

and rail transport; for example, we are national Rail

combined with a receptive marketplace, enable us to continue

Operator of the Year and a market leader in fields as

innovating to develop value for money solutions for both

diverse as road traffic management systems, passenger

government and industry across a wide range of activities.

information and rail infrastructure maintenance. We are

Key sectors

currently building the Highways Agency’s new Traffic

Control Centre for England. We operate complete rail

• Defence: Since we began maintaining the Ballistic Missile

franchises for the Docklands Light Railway and

Early Warning System site at RAF Fylingdales in 1964, we

Manchester Metrolink, maintain railway property and

have built a business that now encompasses UK contracts

infrastructure including nearly 1,800km of track, provide

ranging from helicopter simulator training to managing,

rail passenger information services from our Cardiff

with our partners, the Atomic Weapons Establishment.

Call Centre and undertake infrastructure and rolling

We are a market leader in task management, operational

stock testing.

and logistic support to the UK armed services.

• Civil government: We have over 25 years’ experience in

and technology since the original Fylingdales radar

delivering public services – across a range of activities that

contract. Today we manage scientific establishments

now spans justice, education, health and local authority

including the National Physical Laboratory and are

services. We are in the forefront of the trend towards private

also the UK’s largest provider of nuclear safety and

provision of public services through ever more sophisticated

performance services.

and output-oriented contracts.

• Science and technology: We have had our roots in science

Defence 27%

Transport 27%

Civil government 27%

Science 9%

Private sector 10%

2002 Total turnover £1,325.9m
Including joint ventures

Defence 29%

Transport 25%

Civil government 27%

Science 8%

Private sector 11%

2001 Total turnover £1,141.2m
Including joint ventures

SECTOR SEGMEN TAL ANALYSIS – TOTAL GROUP

Continental Europe and Middle East

SALES 2002: £170.6m – up 22%

From our roots in IT support contracts in Italy, Belgium and

• IT support: This was our original core activity in Europe

the Netherlands, through our defence and government services

and remains a growth area. We now provide support to the

business in Germany to our aeronautical and airport technical

IT infrastructure of the European Commission, serving users

services expertise in the Middle East, we have an increasingly

in four countries. Other customers include the European

diverse business.

Key sectors

Space Agency (ESA), European Parliament and Italian

regional and central government.

• Defence: Our involvement in the defence sector on the

• Science and technology: We first worked for ESA in the

European mainland is relatively new, but we have established

1970s and have become one of the agency’s major suppliers

increasingly important relationships with the German

– providing a range of spacecraft engineering, scientific,

ministry of defence and the Dutch navy.

IT, project management and support services at sites

across Europe. Other customers include the European

• Civil government: Our services to local and national

Particle Physics Laboratory, CERN, close to Geneva.

governments extend from buildings management to a range

of technical services including development of safety cases

• Air traffic services: We began providing airport services

for nuclear facilities.

• Transport: We are extending our light rail and traffic

including air traffic control (ATC) in Bahrain in the 1940s.
Now we have contracts for primary air traffic services across
the region – including ATC, engineering, meteorological

management expertise into continental Europe and have had

services, aeronautical information services, ATC training

particular success in Scandinavia. We operate the newly-

and aviation systems development.

opened Copenhagen Metro and Stockholm’s Central Technical

System, which facilitates traffic management and the

dissemination of traffic and travel information for the region.

UK 70%

Europe and Middle East 13%

Asia Pacific 12%

North America 5%

2002 Total turnover £1,325.9m
Including joint ventures

UK 70%

Europe and Middle East 12%

Asia Pacific 12%

North America 6%

2001 Total turnover £1,141.2m
Including joint ventures

GEOGRAPHIC SEGMENTAL ANALYS IS – TOTAL GROUP

W H E R E D O W E O P E R AT E ?

Asia Pacific

North America

SALES 2002: £155.1m – up 9%

SALES 2002: £69.9m – up 7%

As well as large, broadly based operations in Australia and

Having entered the North American market in 1993, we have

New Zealand we have operations in Hong Kong and a foothold

steadily built businesses in the US, Canada and Bermuda.

in Singapore.

Key sectors

We provide a broad range of services in the federal, state and

local government sectors, concentrating on air traffic control

operations and management, managed fleet services, and

• Defence: We are a major player in defence support in

multi-activity base operations for the defence forces.

Australia and New Zealand. In Australia we provide 50%

of all garrison support services and our port service contract

Key sectors

for the navy is seen as a case study for future public private

• Defence: We provide a wide range of base support services.

partnerships. In New Zealand we are the largest service

For example, at Wright-Patterson US Air Force Base we

provider to the forces. Looking ahead, we aim to build on

provide vehicle operations and maintenance for a community

our highly successful defence maritime services joint venture

of 23,000 and thousands more visitors each year. In Canada

with P&O.

we have a full multi-activity contract employing over 300

staff for the Department of National Defence at Goose Bay.

• Civil government: Our services include maintaining buildings

and open spaces, warehousing and distribution, hospital

• Civil government: We are growing our business with state

support and water and wastewater services. Major contracts

and local governments across a wide range of services. For

include providing civil, mechanical and electrical engineering

example, we undertake parking management, enforcement

services to City West Water in Melbourne, covering some

and meter collection services, manage municipal vehicle

260,000 properties including Victoria’s largest petrochemical

fleets, conduct environmental studies and operate leisure

and manufacturing facilities.

facilities such as the multi award-winning ecological visitor

• Transport: In Australia we operate bus services, manage

and maintain road infrastructure, build and support traffic

• Transport: We are a leading private air traffic control

management systems and manage airports. We own Great

operator across the US, where we now operate 58 ATC

Southern Railway, which we have restored to profit since

towers. We also provide meteorology and other services

we bought it from the Australian government. In Hong Kong

at civil and military airports in the US, Canada and

we have a number of road tunnel and parking management

Bermuda. Vehicle fleet maintenance is a growth activity

centre at Hopewell Rocks in Canada.

contracts.

for us in several sectors, particularly defence, utilities

and civil government. In Seminole County, Florida,

• Health: We provide support services to a growing number

we manage over 1,600 county vehicles and items

of hospitals in Hong Kong and Australia.

of municipal equipment.

I N S I D E S T O R Y

WHERE
DO WE
operate?

Wherever we operate, we apply the same skills and processes

for managing change and maintaining continuous improvement. These skills and processes

can be successfully brought to bear on virtually any kind of contract or activity – as these

two very different examples demonstrate. In Australia, we used them to transform a rail
business rapidly after acquiring ownership – while in Europe we’ve used them to evolve

and develop our IT services to the European Space Agency over more than two decades
of technological change…

Exceeding expectations – in six languages
European Space Agency IT

We’ve been providing technical services support to the European Space Agency (ESA) for over 20
years – since we were part of RCA. Our activities today include spacecraft engineering and scientific
research projects. They also include activities that may not be rocket science, but are no less
important to the organisation’s effectiveness – such as supporting ESA’s 3,500 computer users.

e won our first ESA computer

In 1999 we began our first service level agreement

experienced call agents operating a multilingual

operations contract in 1980, when

(SLA) contract for ESA, providing a range of IT

service desk in Frascati, Italy, and there’s a

computing was all about mainframes:

services. We determined how best to deliver the

permanent force of technicians and engineers at

our operators worked in computer rooms and

services, then successfully tendered against other

nine of the 15 sites. In addition to the base services

network centres at ESA’s four major sites in

bidders’ solutions.

Holland, Germany, Italy and France.

defined in the SLA, we provide a wide range of

additional services from system management and

Four years on, this approach has exceeded

database administration, to graphic design.

Over time, computers changed beyond all

the agency’s expectations. Applying our ‘IT seat

recognition, yet service contracts stayed much

management’ approach, we now support 3,500

The contract has proved an important and

the same. They specified the number of people

ESA users at 15 sites in nine countries – as well

innovative step for both ESA and Serco. Its flexibility

we should supply, and the hours they should

as 5,000 external users of ESA applications.

has been a boon for such a diverse user population

work. Working this way, we provided a reliable

– which ranges from scientists and engineers to

service and our role at ESA grew. Now our

We’ve built a pan-European operation providing

administrative staff. With user satisfaction running

contractual relationship has taken a significant

desktop support, network management, email

at over 98.5% we’re exceeding our contractual

step forward. A few years ago the agency

and document management with libraries and

service targets. ESA recognised this achievement

moved away from specifying the detailed inputs

databases, and applications infrastructure support.

by extending the original three-year contract by

to the contract; instead, it defines the outputs it

We design and install systems, maintain them,

a further two years. And to confirm our quality

needs and looks for best value and innovation in

help people use them, and resolve any problems

credentials, our ESA team achieved ISO 9001-

delivering them.

that arise. For first-line support we have 23

2000 accreditation in 2002.

WHERE
DO WE
operate?

Turning the trains around
Great Southern Railway

Five years ago, the Australian national passenger railway service
was losing around AUS$25m a year. Today, it’s a profitable business.
And it already has over 11,000 people lining up for its latest service –
which doesn’t even launch until late 2003.

e acquired the operation from the

renamed it Great Southern Railway (GSR). We

Australian government in 1997 as part

refurbished the carriages and the service to

of a consortium, buying out our

turn an Indian Pacific or The Ghan journey into

partners in 1999. We’ve built it into a world-class

a real travel experience. We created a range of

tourism business operating three long-distance

products, from the budget-priced Red Kangaroo

services. The Indian Pacific spans the continent

Class to the premium Gold Kangaroo Service

from east to west, linking Sydney and Perth. The

and prestige heritage carriages.

Overland links Adelaide and Melbourne, while The

Ghan runs from Adelaide to Alice Springs – and on

We expanded sales distribution across the

to Darwin from late 2003, to complete a north-

world, appointing GSR sales managers in

south route across the continent.

the UK and US. And we made Indian Pacific

The turnaround was based on rethinking the

own Trainways packaged holiday operation –

business from a marketing point of view. We

now one of Australia’s fastest-growing holiday

and The Ghan journeys the centrepiece of our

programmes. GSR retail outlets in Melbourne,

Adelaide and Sydney support a wide network

of travel agents and our own international

call centre.

The result has been a dramatic growth in sales,

with passenger revenue up 39% since we took

over the business. Despite the aftermath of

September 11 and the Bali bombing, GSR

again achieved record sales in 2002. Growth

will be further stimulated this year by the

opening of the Alice Springs-Darwin link,

allowing The Ghan to become a coast-to-coast

service. Over 11,000 people have already joined

the Top End Club to gain priority access to

tickets on the new route in its first 12 months

of operation. In just a few years we’ve

transformed a burden on the taxpayer into an

internationally acclaimed, customer-focused

and profitable business.

“with user satisfaction running at over
98.5% we’re exceeding our contractual
service targets.”

what
ARE OUR
opportunities
for
growth?

At present we are focusing on selected opportunities in the UK, Italy and Germany, North America,
the Middle East, Australia and New Zealand. Given the scale of our addressable market and the
diversity of sectors in which we are active, we have developed clear criteria for determining specific
focus areas. The criteria we’ve developed for selecting key targets in a worldwide marketplace will
shape the way Serco evolves in the future.

The market for outsourced public services is expanding worldwide. In a marketplace that is so large
and growing so fast we have to be highly selective in the opportunities we choose to pursue. Our strategy
is to maintain a balanced portfolio of businesses, ensuring an appropriate mix of new opportunities
and strong organic growth to maintain our success in the future.

W H AT A R E O U R O P P O RT U N I T I E S F O R G ROW T H ?

Our vision

more opportunities than ever for developing long term

Our vision is to become the leading global outsourcing

relationships with our customers to deliver complex

company. To achieve this, we are pursuing and helping to

outcomes. The government’s Comprehensive Spending Review

shape multi-activity service contract opportunities with

will take annual spending by government departments from

governments around the world as they seek to harness

£240bn in 2002 to £301bn in 2005/06 – a 25% uplift in three

commercial expertise and private finance to manage public

years. Coupled with the stated aim of improving public

services better and more efficiently.

services, this presents us with a wealth of opportunity over

Key geographic markets

the next few years. The principal beneficiaries will be the

justice, education, health and defence sectors in which we

Around the world the public and budgetary pressure on

have tremendous strengths and significant experience. We

governments to improve service delivery and cost efficiency

fully support the government’s reform agenda and continue

is ever-growing. As a result, more and more of our key

to enhance our core skills and capabilities in organisational

geographic markets are looking to the private sector for

change and the transformation of public service delivery.

support. To maximise our growth potential we are not only

responding to conditions in the most favourable markets, but

While aiming to enhance our reputation for trusted,

working in partnership with government bodies to create new

consistent service delivery, we also intend to be recognised

opportunities based on long term relationships. The relative

as a reliable strategic partner for government in the design,

attractiveness and development rate of these opportunities

build and implementation of world-class public services.

will vary from one geographical market to another.

United Kingdom

Because our customers are now looking for support at earlier

stages in the development of sophisticated contract models,

The UK remains our core market and continues to demand

we are establishing a new public sector strategic consultancy

innovation in the delivery of public services: we are seeing

service. This integrates our existing capability with a newly

Australia/
New Zealand

High

Low

g
n
i
c
r
u
o
s
t
u
o
f
o
e
e
r
g
e
D

North
America

Europe Japan

Annual growth rate

GROWTH IN PUBLIC EXP END ITURE

Source: EIU Country forecasts, inflation adjusted; Europe based on
Germany, France, Italy and Spain.Ł

Size of the boxes represents total government expenditure 2002 (US$bn).

formed team to support clients as they develop strategies for

and our portfolio of contracts with a number of European

organisational reform, transformation of public service

agencies gives us additional capability and credibility. In

delivery and creation of cost-effective supporting infrastructure.

Germany, significant steps are being made in the education,

It will deliver sustainable value by establishing long term

defence and transport sectors. In Italy, the outsourcing of

relationships based on realistic organisational process

non-core government services is now the norm. In the Middle

and fiscal designs and achievable business transformation

East, our solid contract base in aerospace and air traffic

planning. By applying its expertise not only in the UK but

services is providing a platform for diversification and

worldwide, it will benefit our reputation and operations

growth – as evidenced by our recent contract to deliver

throughout the group.

engineering and other support services to the Dubai Ports,

Customs and Free Zone Corporation.

The consultancy team will be backed by specialist programme

delivery units drawn from within Serco to provide practical

Asia Pacific

solutions that meet requirements for change and operational

The Australian defence outsourcing market – in which

performance improvement, information management,

we are a market leader – is maturing, but a programme of

infrastructure regeneration and project management.

defence and civil PFIs is beginning to emerge as Australian

states come under increasing budgetary pressure. The New

Continental Europe and Middle East

Zealand government has begun to pursue public private

The diverse European markets in which we operate are

partnerships in transportation and to look at wider

evolving rapidly. Financial, political and social imperatives

applications for private finance. In Japan, pressure for

are driving governments towards new models for the delivery

reform of public finances has led to the introduction of PFI-

of public services, requiring greater private sector involvement

driven opportunities. We continue to monitor these markets

in both funding and providing services. Germany and Italy

closely: our strategy is to focus on selected opportunities

are key markets where we are well positioned for growth –

where our experience will have the greatest impact.

Mature

Developing

Embryonic

Development curve

UK
Italy
Australia/US
Western Europe

Time

MARKET DEVELOPMENT

Relative position of key markets on the development curve.

W H AT A R E O U R O P P O RT U N I T I E S F O R G ROW T H ?

North America

Selecting and balancing opportunity

The US government has recently announced a major reform

A core part of our strategy is to maintain not only a wide

of procurement policy. Over the next two years federal

geographic presence but also a broad base of core skills

agencies will have to open up 50% of their activities to private

and expertise. This diversity protects us against downturns

sector competition, and this will rise eventually to 100%. This

in individual markets, and balances maturity in one with the

directive will effectively market-test over 800,000 government

growth of another. It means we can draw on a wide portfolio

posts. In 2002 the US government spent over US$80bn on

of management competencies and core skills that enable us

services, including information technology, base operations

to compete effectively for the most demanding contracts. And

and engineering services, and we expect annual growth of

it also exposes us to more growth opportunities than we can

at least 12% in the federal sector. Major growth will be seen

possibly pursue – so an important function of our annual

in the Departments of Defense and Homeland Security, where

planning is to select the right opportunities.

the combined 2003 budget is likely to exceed $400bn and

further significant growth is expected over the coming years.

Our selection processes are rigorous and designed to help

In Canada federal, provincial and municipal governments are

us balance the portfolio, maintain our focus on opportunities

using public private partnerships to solve budgetary gaps

most likely to deliver success and provide the best return

and to improve public services, particularly in the health

to shareholders. Our confidence in our growth planning and

and transportation sectors. British Columbia (BC) has created

forecasting is founded on the ability to make considered

a new central agency, Partnerships BC, to drive this process.

decisions about each opportunity, be it a new market entry

North America remains the world’s largest outsourcing market

or a single contract, based on robust assessments of the

and so demands careful and constant attention from us.

financial and strategic benefits.

I N S I D E S T O R Y

what
ARE OUR
opportunities
for
growth?

One area where we see clear opportunities for growth is rail
transport. In the UK, Scandinavia and Australia we’re building an impressive track record –
and demonstrating a variety of options for reducing the cost of public transport to the

taxpayer. London’s award-winning Docklands Light Railway (DLR) is a case in point…

what
ARE OUR
opportunities
for
growth?

Best in Britain – twice running
Docklands Light Railway

An urban metro isn’t just a piece of transport infrastructure. It’s part of the way people live. It’s how
they go to work, how they get to the shops, how they have a night out. If you want to run it properly,
you have to engage with the way people run their lives.

That’s what the National Rail Awards judges had in mind when they named us Best UK Rail
Operator last year, for the second year running. They didn’t just commend our service intervals or
the cleanliness of our trains. "The DLR is as much part of East London as Bow Bells," they said.

%
6
9
0
9

%
3
6
6
8

%
6
6
2
9

%
4
0
2
9

ive years ago, when we took over the

One key to our success is the close partnership

franchise, that certainly wasn’t the case.

with our customer, Docklands Light Railway Ltd.

Since then we’ve stepped-up service

This ensures the effective use of resources to deliver

frequency and capacity. We’ve cut delays by 70%

the best possible services to the travelling public.

and vehicle failures by 40% to beat the franchise

target of 96% reliability. And because people

The second factor is the way we’ve built the DLR

know they can trust the service, they use it more.

into the life of the community. First we made it

The number of passengers has more than

frequent and reliable. Then we made sure everyone

doubled, from 20m to over 44m.

knew about it, by taking real-time train information

Being able to run our own show is an advantage.

innovations have included displaying train arrival

out of the stations and into the community. Our

C USTOMER SATISFACTI ON

We’re responsible for the whole business, including

countdowns in public buildings and office lifts

operation and maintenance of the trains, structures,

around individual stations, and making accurate

tracks and automatic signalling. We’ve also been

arrival information instantly available on the

able to increase non-core revenue through

internet and mobile phones.

innovations in areas such as advertising, retail and

promotions – increasing the value of the franchise

and ultimately reducing the public cost of supporting

DLR services.

We’ve also built strong links with local

Behind the scenes we’ve supported crucial

organisations, from schools to businesses and

infrastructure investment; for example, by

charities. We provide free travel for some local

integrating a second-generation computer-based

primary schools, community groups and special

signalling system. And our public face has been

needs organisations. We support vital local

enhanced by multi-skilled staff who have the

initiatives such as an ethnic community centre, a

training and empowerment to deliver friendly

toddler care centre, a children’s hospice and a drop-

and helpful service.

in centre for the unemployed. We sponsor the

Women in Docklands business networking

That combination of qualities – in people,

organisation and the Round The Island Road Race

technology and communication – is what’s made

for charity. You can see school children’s art on

the delivery of the DLR service special. This was

2
4
4

2
1
4

8
5
3

2
0
3

3
6
2

9
9
1

8
6
1

5
4
1

DLR trains, the Salvation Army making weekly

reflected by the London Transport Users Committee

HOW PASSENGER NUMBERS HAVE GROWN

collections on DLR concourses, and secondary

in its 2001/02 annual report: “[The DLR] continued

school teams in DLR-sponsored football kit. In

to achieve a level of service reliability, and of user

Since Serco took over in 1997 passenger numbers
have doubled to 44.2m.

these and many other ways we’ve woven the DLR

satisfaction, that London’s other public transport

into the fabric of community life.

operators could only dream of.”

“DLR continued to achieve a level
of service reliability, and of user
satisfaction, that London’s other
public transport operators could
only dream of.”

3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:05 Page 43

where DO
WE
stand
on PFIs?

We’re enthusiastic participants in the Private Finance Initiative (PFI). We’ve been involved in PFIs
since 1995 and believe they can benefit investors and taxpayers alike. In early 2003 the National Audit
Office reported that government ‘has obtained a much higher degree of price certainty and timely
delivery of good quality build assets’ with PFI than under traditional methods of procurement. And
the benefits extend far beyond the construction phase. Throughout the life of their operating contracts,
PFIs are about diversity, culture change and innovation in the delivery of specified service outputs.

3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 44

W H E R E D O W E S TA N D O N P F I s ?

PFIs fit well with our ability to deliver sophisticated service

efficient procurement and value for money than with

contracts based on long term relationships. The concept

traditional methods – and innovation and diversity in service

is gathering momentum internationally, and we’ll continue

delivery. Integrating design and service elements from project

to bid selectively for PFIs that meet our business criteria.

inception should lead to better operational facilities and

But PFI is just one of the many successful models for public

more accurately targeted investment. Uncertainties are

private partnership in which we’re involved. We expect PFIs

reduced because the delays and cost overruns, so often

to be a valuable component in our balanced portfolio of

associated with public procurement, should be cut or

contracts, but by no means a dominant one – at present,

eliminated by better project definition and financial control.

they account for about 12% of our business.

Risks are transferred from the taxpayer to contractors, who

What’s so good about PFIs?

in line with the risk profile, and through contracts for building

are appropriately rewarded through returns on their investment

PFIs were launched by the UK government in 1992. The basic

and operating the assets.

principle is that public authorities contract-out not only the

operation of major capital assets but also the creation of the

How do they fit with our strategy?

assets themselves – combining financing, design, construction

In strategy terms, we see PFIs essentially as a means to

and operation into a single contract package.

an end – the end being sophisticated, long term operating

In principle, PFIs offer a ‘win-win’ result. Government and

PFIs have a part to play in a portfolio diversified across

taxpayers should enjoy early access to new assets, more

many different sectors, geographies and contract models.

contracts. Operating contracts are our core business, and

3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 45

We have been involved in 13 PFIs to date. Our total committed

PFIs and good relationships with experienced partners. We were

investment in them is £21m, of which we had actually invested

in on the ground floor and we’ve developed the appropriate

£12.4m at 31 December 2002. They have only recently started

skills. As a result we can address new opportunities selectively

to contribute to group profitability as the first projects have

and bid judiciously – anticipating potential pitfalls such as high

moved into the operational phase. In 2002, PFIs contributed

bid costs and delays, and factoring them into our calculations.

in total £154m to turnover (12% of the total).

To manage our PFI investments we have established a

the goods – but we are already building a successful track

dedicated investment division, Serco Capital. This functions

record that speaks for itself. Over the next few years we hope

independently from the operating divisions so that we can

to leverage that record internationally as other countries follow

price and manage operating and investment returns separately.

the UK’s example in developing their own PFI programmes.

We fully recognise that PFIs are only profitable if you deliver

What makes them good for Serco?

What returns do we get on our PFI investments?

Every PFI project is different: there’s an onus on bidding

The Special Purpose Company (SPC) set up to run the project

companies to assess the costs and risks accurately and

earns fees from the customer: in turn it pays dividends on

to secure appropriate terms.

our equity in the SPC and interest on any subordinated debt

Some contractors have expressed disappointment with PFIs. Our

lending will vary according to the perceived risk profile, but

enthusiasm for the model is based on extensive experience of

are currently 15-20% on capital invested.

we lend to it. After-tax returns anticipated on equity and

Government customer

Banks
Banks

Senior debt

Principal & interest

Special purpose
company

Subordinated debt & equity

Service company 50%
Service company 50%

Dividends, principal
& interest

Asset provider 50%
Asset provider 50%

Operating contract

Construction contract

Service company
Service company

Asset provider
Asset provider

IT solution
Catering
Security

Potential subcontracts

TYPI CA L PF I S TR UC TU RE

Most PFIs involve the creation of a SPC into which the participants
invest their risk capital. The structure and equity shares will vary to
suit the project, but this is how a typical SPC would look. The arrows
indicate cash flows.

The SPC raises senior debt funding from the capital markets which is
non-recourse to its shareholders. In other words, this debt does not
represent a risk to the shareholding companies.

3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 46

W H E R E D O W E S TA N D O N P F I s ?

What returns do we get on the operating contracts?

Any other benefits?

We’re keen to invest in PFI projects where the risk and

In some cases, there are opportunities to share in other

cash flow profiles are acceptable. But our primary objective

sources of income; for example, at the Traffic Control Centre

is to gain the associated long term operating contracts,

we will sell traffic information to commercial organisations

which increase the visibility of our future revenues and

providing traffic information services.

cash flows and enhance our order book position. In general

we seek to minimise our investment outlay in relation to

Once the construction stage is complete, the reduction in risk

the size of the operating contract.

may provide an opportunity to make a one-off capital gain

from refinancing. It is our policy to share any such gains

As the service contractor we derive sales and margin on

with the customer.

the operating contract in the same way as with non-PFI

contracts. The return will be in proportion to the levels

Full details of the way we approach, manage and account for

of risk on each project and will generally be higher than

PFIs are given in the report Our Approach to PFIs, available

our average margin on sales.

at www.serco.com or on request.

PFI PROJECTS

Project

Joint Services Command and Staff College

Serco
equity
stake

50%

Medium Support Helicopter Aircrew Training Facility

National Physical Laboratory

Traffic Control Centre

Manchester Metrolink

Norfolk & Norwich University Hospital

Wishaw General Hospital

HMP Dovegate*

HMP Kilmarnock*

HMP Lowdham Grange*

HMP YOI Ashfield*

Hassockfield Secure Training Centre*

50%

100%

26%

–

50%

Serco
equity
investment
£m

Serco
subordinated
debt
investment
£m

Start of
operating
contract

Value of
operating
contract†
£m

Duration
of operating
contract
(years)

2.9

0.2

2.2

3.4

0.2

0.1

–

5.2

1.7

1.6

–

0.7

2.8

Aug 2000

168

Oct 1997

Jan 2002

Jan 2004

May 1997

Aug 2001

May 2001

Aug 2001

Apr 1999

Feb 1998

Oct 1999

Sep 1999

130

153

270

300

175

TOTAL

9.7

11.3

Our interest in another PFI, the Defence Helicopter Flying School, has been sold.
* Operating contracts within joint ventures.
† Excluding inflation increases and contract extensions.

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page 47

I N S I D E S T O R Y
where DO
WE
stand
on PFIs?
are now in the operational phase and generating revenue for us under long term service

Since 1995 we’ve embarked on 13 PFI projects – of which 11

contracts. They’re working well for us, and for our customers – as evidenced by these

two examples…

Heading
range left
to margin

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS9

where DO
WE
stand
on PFIs?

‘A textbook PFI’ say auditors
Joint Services Command & Staff College

The Joint Services Command & Staff College (JSCSC) is emerging as a model PFI. It has won praise
from the public spending watchdog, and also from the people who use it. Many visitors actually
write to tell us how impressed they are – sometimes to their great surprise. One colonel told us
we had “converted a dinosaur into a disciple of PFI”.

he JSCSC replaced three separate services

debt capital – our equity investment in the

housing, training support, mess accommodation

colleges at Greenwich, Camberley and

joint venture was just £2.9m. The construction

and such elaborate IT systems.

Bracknell. It now carries out all

was subcontracted to Laing. After a two-year

command and staff training for the UK armed

construction phase Serco took over the site in

The audio visual (AV) system is one of the

forces, from junior to advanced and higher

August 2000. We’re now running it under a

largest integrated presentation and AV facilities

levels, as well as for officers from some 50

28-year facilities and task management contract

ever built in the UK. The IT network – serving

countries worldwide.

employing 345 people and currently worth

military, academic and administrative offices,

It’s a large complex that cost £120m to create.

around £8m a year.

eight major lecture theatres and 67 syndicate

rooms – supports not only conventional

Standing on a 100-acre site, it includes some

Making a success of the venture was important

applications but also battlefield communications,

45,000m2 of floor space, 290 family houses

for Serco, and also for the whole PFI concept.

wargaming and other military activities. The

and a range of sports facilities.

When the JSCSC entered its operational phase

War Studies department alone has a Dean and

It was built by a joint venture owned by Serco

Even in the defence sector – a pioneer in this

London, and we run the world’s second largest

and Equion, and funded largely by non-recourse

field – no previous PFI had combined education,

war studies library.

it was one of the most ambitious PFIs to date.

36 lecturers subcontracted from Kings College

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS10

Flying start for a 30-year partners
Norfolk & Norwich University Hospital

The new Norfolk & Norwich University Hospital was completed 20 weeks
replacing one that was originally built in 1771, that may not seem so muc
key benefits that PFIs can achieve.

he £229m first phase was England’s

hospital was designed in partnership with the

largest PFI hospital project – a 953-bed

Trust but built by Octagon Healthcare – a special

complex begun in January 1998 and

purpose company uniting Serco, 3i, Barclays,

completed within budget in summer 2001. With

Innisfree Partners and Laing. It was financed by its

3,500 rooms and over 100,000m2 of floor space,

five shareholders and a consortium of 18 banks.

it replaced two older hospitals on a single 63-acre

greenfield site. The landscaped grounds include

2,300 parking spaces and 65,000 trees and shrubs.

Octagon has now begun a 30-year partnership

with the Trust to provide non-clinical services

including building and ground maintenance,

The aim was to let the Norfolk & Norwich

catering, car park management, portering, IT,

University Hospital NHS Trust concentrate on its

security, cleaning, laundry, waste disposal and

core activity of delivering healthcare. So the new

telephones. We’re providing all these services

Crucially for a pioneering PFI, the JSCSC has

been a widely recognised success. It has delivered

the expected benefits on time and on budget.

After due scrutiny, the National Audit Office

declared it a ‘textbook example’ of how a PFI

should work. And our operating contract team

have maintained a culture of success; for example,

they won full certification to the ISO 9000 quality

management standard in just seven months – five

months ahead of the contractual requirement.

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS11

ership

eks ahead of schedule. When you’re
much, but speedy delivery is one of the

under a contract to Octagon, currently valued

wards with 144 beds has been completed

at £12m a year.

Talking to the Financial Times Anna Dugdale,

the Trust’s Director of Resources, described the

working relationship with Serco as excellent.

"We’re open and honest about our business

needs and they’re open and honest about theirs.

We try to meet halfway across the table.”

The transfer to the new building took just

seven weeks. A second phase adding two

ahead of schedule. And the Trust has achieved

not only the highest Patient Environmental

Action Team rating but also teaching hospital

status. So the complex is now the Norfolk &

Norwich University Hospital – and an object

lesson in healthcare PFIs.

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS12

College is “a textbook PFI”
say auditors

“crucially for a pioneering PFI, the
JSCSC has been a widely recognised
success. It has delivered the expected
benefits on time and on budget.”

3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page 48

how do we
RUN OUR
business?

a?a

Serco is one business with a single vision, strategy and values. But it consists of over 600 separate
contracts – each operated with a high degree of autonomy, as if it were a business in its own right.
In other words, we aim for the best of both worlds: coherent direction at the centre and customer
focus at the contract level, supported by a framework of effective controls. To achieve that, we’ve
developed a unique management structure and methodology.

H OW D O W E RU N O U R B U S I N E S S ?

Our structure devolves decision-making

responsibility for the company’s activities and protecting

Our fundamental aims are to focus on customers’

the interests of shareholders and relevant stakeholders.

requirements, grow the business judiciously and respond

effectively to changing market conditions. We need

The Global Management Board includes some Group

to do these things while ensuring that we protect the

Board members, the divisional chief executives and other

interests of shareholders, investors, our people and

key senior executives. It meets quarterly as the forum for

the communities we work in. And we need a system

decisions that influence the direction of the business and

that works across a business that’s technically diverse

reviews performance, strategy and governance in the

and geographically spread.

business divisions. It exercises leadership in directing

the company to achieve its strategic objectives. Key

To achieve customer focus, we want to make decisions as

members of this board form a smaller Executive Team

close to the point of delivery as possible. So we devolve

that meets monthly to monitor and progress key aspects

management responsibility – while providing clear

of the operational business.

direction about our objectives and values, and a common

set of business controls. This means decisions, tasks and

Beneath the Global Management Board, Serco is

responsibilities can be undertaken by the people best

organised into business divisions running a number

placed to do so within a framework that’s fully

of operating companies that deliver services to sector-

understood.

specific customers under more than 600 contracts

(diagram below). These management layers, right up to

At the top of the organisation, the Group Board sets

Group Board level, are tightly interconnected by giving

strategy and objectives, taking legal and regulatory

dual responsibilities to key managers at each level:

Accountability

Control

Monitoring

Reporting

Policy

Group
Board

Standards

GMB

Systems

Business divisions

Formal

delegation

Compliance

Audit

Review

Procedures

Operating companies

Instructions

Contracts

Management systems

Structure

SERCO GROUP MANAGEMENT STRUCTURE

The group structure devolves decision-making downwards towards
our customers, while the Serco Management System ensures an
upward line of accountability and control to the Group Board. Layers
are tightly interlinked by key managers with dual responsibilities.

• Chief executives of business divisions hold specific

So we give each contract its own board, including ‘non-

responsibilities for their divisions and share responsibility

executives’ from elsewhere in the group. This helps to replicate

with the Global Management Board for group performance

the group’s governance processes throughout the organisation.

in line with the strategy they have formulated and agreed

It also enables us to share technical and management expertise

with the Group Board. Each division sets its own strategy

across the group and give contract management teams a

for contributing to the achievement of group objectives and

catalyst for innovation, continuing service improvement and

is managed by its own board.

contract review. The contract board takes a strategic role –

reviewing and evaluating opportunities, strengths, weaknesses

• Managing directors of operating companies hold specific

and risks, and feeding back into group strategy generation. It

responsibilities for their companies and also share

also has an important assurance and corporate governance role.

responsibility with the chief executive and senior

management team of their business division for divisional

Our system ensures accountability

performance.

We have developed and refined the Serco Management System

over many years to provide a framework for all our activities.

• Contract managers have specific responsibilities for their

It spells out the rights and obligations of managers at all

contract and also share responsibility for their operating

levels, so that the organisation can behave consistently

company’s performance with its management team.

across its global portfolio of contracts while maintaining

its business diversity and devolved management style.

We want contract management teams to run their operations

like businesses, addressing customer needs and opportunities

Each business division is responsible for operating within

responsively and entrepreneurially.

the framework defined by the management system.

Business
drivers

M
a
r
k
e
t
/

R
e
g
u
l
a
t
o
r
s
/
I

n
v
e
s
t
o
r
s
/

C
o
m
m
u
n
i
t
i
e
s

T
h
e

b
u
s
i

n
e
s
s

w
e
w
a
n
t

t
o

r
u
n

CULTURES AND VALUES
How we behave

Vision and strategy

Operating structure and
principles

Policies

Core process
Direct, develop, deliver,
support, assure

Where we want
to go and how to
get there

How we want to manage
the business

Best practice/guidance

How we make it happen

R
u
n
n
n
g
t
h
e
b
u
s
i
n
e
s
s

Outcomes

GOVERNANCE/ASSURANCE/RISK

What we stand for

TH E SER CO MANAGEMEN T SYS TEM

H OW D O W E RU N O U R B U S I N E S S ?

They do this by establishing and operating appropriate

• ‘Running the business’ is the responsibility of

systems, processes and procedures to apply group policy

the Global Management Board and reflected in the

and monitor their compliance with it.

business divisions’ operational strategies. It is defined

by the group operating structure, principles and core

The Serco Management System is built around two

processes that explain ‘how we make things happen’.

principal elements:

These provide a business framework setting the

boundaries and expectations placed on each business

• ‘The business we want to run’ is formulated by the Global

division, and a common set of processes for each

Management Board, decided on by the Executive Team and

business to adapt and apply.

interpreted within the group vision and strategy. It sets the

shared values defining the ‘individual’ behaviours expected

from every employee and the shared operating principles

defining the ‘corporate’ behaviours of every Serco business.

These elements reflect external influences including market

pressures, regulatory demands and the expectations of

investors and the communities with which we interact.

I N S I D E S T O R Y
how do we
RUN OUR
business?

With an increasing number of customers we’re developing

the traditional contractual relationship into something far more flexible and collaborative.

These ‘partnership’ contracts are all about responsiveness, innovation and being fast on

our feet. They don’t lend themselves to being run from a distant head office. They work
because of the empowerment our management system delegates to individual contract

teams – the people working on the spot. Here’s an example, where our responsiveness
has more than doubled the size of our role in a little over two years…

how do we
RUN OUR
business?

Partners in crimefighting
National Crime Squad

As crime grows more sophisticated, so do the agencies pitted against it. The National
Crime Squad (NCS) was formed in 1998 to fight organised crime on a national and
international level. Rather than reactively investigating crimes, it directly targets
the people involved in organised crime. That means working dynamically
and flexibly, making fast and productive use of every scrap of intelligence.
The demands the NCS makes on its IT and communications are exceptional
and fast-evolving. So outsourcing these activities required rather more
than a conventional support contract.

nstead, the NCS formed a strategic

– for example, when we restructured its

partnership with Serco. There’s a formal

mobile phone contract, saving the NCS

agreement underpinning the relationship

around £750,000 over 10 years.

– but it doesn’t stipulate fixed inputs or outputs.

It’s a flexible framework for a close, co-operative

Since September 2000 we’ve

working relationship that won’t get overtaken by

developed the partnership

events or wrongfooted when the goalposts move.

flexibly and professionally

to deliver reliable and secure

Fighting organised crime is an unpredictable

services to some 1,330 officers

business: our shared aim is to meet the squad’s

and 420 support staff at more than

business objectives as they evolve, using new

30 low-profile locations around the UK.

ideas and technologies as they emerge. What’s

At the start we identified 11 major projects.

important on a day to day basis is mutual trust

This has already grown to 57 – including

and a shared determination to get results. Within

support for the formation of a high-tech crime

the partnership structure we’re able to make best

unit, an immigration crime team and a central

use of the expertise on both sides, sharing jointly-

intelligence unit, and development of a secure

developed intellectual property and financial gains

image analysis system and database.

The relationship allows

business objectives and develop the customer

us and NCS to vary our roles

relationship, while keeping tabs on performance

and responsibilities: we work as a

and reporting back to the centre so that the

single team, and incentives are structured

group maintains effective financial controls.

to encourage innovation on both sides. We also

have the opportunity to enhance the contract by

It works for us, and it works for the customer.

initiating new services that broaden its scope and

As the NCS stated in its last annual report:

add value for both Serco and the NCS.

“Serco provides us with significant help in

developing vital support services… A thorough

You can’t run a contract like this by remote

post-implementation review concluded that the

control. It works because we have an

contract was delivering value for money and that

organisation that’s able to devolve

much more has been achieved than would have

responsibility to the contract manager.

been the case if the partnership had not been

He has the empowerment, the

in place.”

training and the tools to make

decisions on the spot – finding

the best ways to meet NCS

HOW do WE
manage our
of a
responsibilities
B U S I N E S S
TO
stakeholders?
A R E W E ?

a?a
?W H AT K I N D

Our strategy and values don’t exist in isolation. They’re shaped by the way we understand and balance
the interests and expectations of our stakeholders. If you want to do this effectively and responsibly,
you can’t do it piecemeal. So we set up a Corporate Assurance Group to oversee all aspects of our
responsibilities to stakeholders – from managing risk to safeguarding the environment.

H OW D O W E M A NAG E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ?

Who are our stakeholders?

we aim to stimulate internal awareness of issues raised,

As the size and diversity of our business grows, so does

encourage responsive action and change, and report

the number of interested parties. But they generally fall

progress back to the relevant stakeholders.

into one of six groups:

• Shareholders

• Customers

• Our people and their representatives

• Business partners and suppliers

• Neighbours and local communities

• Regulators and legislators.

Balancing stakeholder interests

Corporate governance and internal control

The Board has identified a set of key business processes

for which it shares responsibility with senior managers

throughout the group. These processes and their associated

internal controls are regularly reviewed by the Audit

Committee and internal auditors, who report back

to the Board.

We’re committed to dealing fairly with all stakeholders,

The Corporate Assurance Group (CAG) gives us a one-stop

not just shareholders or customers. Alongside making a

shop for addressing the interests of all stakeholders in an

profit – which ensures our continuing viability – we aim

integrated way. It ensures that:

to deliver value to all these groups in a socially responsible

• Our policies and management systems reflect the cultural

and environmentally sustainable manner.

and ethical values we’ve adopted

We’re realistic. We know we can’t please all these people

• We protect the safety and wellbeing of staff,

all the time. But we recognise our responsibility to strike

customers, the wider community and the

a broadly acceptable balance.

environment

• We comply with national laws and regulations

Open and candid dialogue with stakeholders is one of

• We protect the value and integrity of our reputation,

the foundations of our management style. To build on it,

products, services and tangible and intellectual assets.

• We identify risks and manage them proactively

The CAG’s work includes helping our operating businesses

The group directors take ultimate responsibility for

to maintain effective and efficient business processes,

health and safety, delegated through the divisional

giving advice and guidance on assurance matters, and

chief executives and directors, who ensure effective

raising awareness and understanding through education

implementation of health and safety policy through

and training. It reports to the Group Board quarterly or

documented management systems.

more frequently if need be, advising on policy and ways

of achieving best assurance practice throughout the

We give staff appropriate – and regularly updated –

organisation.

Risk management

training to protect their own and others’ health and

safety. Each division also provides occupational health

and welfare support.

We define risk as the possibility of failure to achieve

key business goals; and we define these goals in relation

Community

to our stakeholders’ objectives. Taking and managing risk

Our approach to corporate social responsibility (CSR)

is a central part of our business, and balancing risks and

delegates responsibility for community involvement

opportunities is a key management responsibility. We have

through the business divisions to individual contract

robust processes for identifying, analysing and managing

managers. It aims to encourage staff at all levels to

risks and minimising the impact of undesired and

engage with local community initiatives, and channels

unexpected events. All parts of the business have

support from the company through staff volunteers. Each

appropriate risk and crisis management plans that

business division develops and maintains processes for

meet defined policy standards.

Safety management

applying the community involvement aspects of our CSR

model, setting targets and reviewing performance for each

operating company and contract. Some examples of our

As well as taking care of our staff, we also have to protect

community and environmental initiatives are listed on

customers and the public in many of our activities.

pages 70-72.

Action change progress

People

Shareholders

CSR FOCUS

Community

Environment

Safety

Risks

Quality

Security

Customers

SERCO GROUP PLC

Our people

Policy

Business partners
and suppliers

STAKEHOLDERS

Community

Regulators and
legislators

Monitor report review

A N INT EGRATED APPROACH

We aim to keep all stakeholder groups in the loop, and to
address all stakeholder-related issues in an integrated way.

H OW D O W E M A NAG E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ?

Environment

trade unions, government departments and others. The

Everyone in Serco is responsible for minimising our impact

project team’s findings were published in December, in

on the environment. We aim to reduce environmental harm,

a 68-page report containing 45 detailed recommendations.

minimise use of energy and other resources, and apply

sustainable development principles. Each business division

is responsible for developing management systems to meet

group environmental policy and relevant statutory or

The report can be seen on the consultation website at
www.pascalea.com, where AWE has undertaken to publish
its response by the end of March 2003.

regulatory requirements. All divisions conduct regular

Quality

reviews to update their understanding of their environmental

Quality matters – in the services and products we supply

risks and impacts.

to customers, and in our internal processes. Our management

systems enable us to assess and manage quality, and deliver

Individual contracts may also engage with stakeholders

continual improvement. We obtain external quality

at local level to help them determine goals and priorities.

certification where appropriate.

At the Atomic Weapons Establishment (AWE), for example,

we set up an independent consultation exercise led by a

Security and asset protection

firm of environmental consultants working with Lancaster

One of management’s major responsibilities is the security

University. During 2002 the programme sought stakeholders’

of Serco and its customers, staff and assets, including

views through a variety of channels including public

intangibles such as intellectual property. Our risk management

meetings, a website and a series of workshops involving

process includes measures to review and protect these assets,

regulators, local Chambers of Commerce, heritage and

address the implications of interruption to business and

conservation groups, anti-nuclear groups, employees,

ensure appropriate insurance cover.

I N S I D E S T O R Y
HOW do WE
manage our
responsibilities
TO
stakeholders?
Because we see customers as stakeholders, our relationships
don’t stand still. Our marine services contract with the Warship Support Agency (WSA)
has evolved from a conventional structure to a partnership that will help shape future
procurement policy. But what hasn’t changed is our concern for the wellbeing of other
stakeholders – employees and neighbouring communities…

Providing services responsively –
and responsibly
Warship Support Agency

Our Serco Denholm joint venture provides a wide range of waterborne port services for the WSA
at Devonport, Portsmouth and on the Clyde. We operate and maintain some 140 Ministry of
Defence (MOD) vessels including tugs, passenger vessels, torpedo recovery and minelaying vessels
and a variety of fuel, ammunition, stores and tank cleaning lighters. Originally we operated these
vessels under MOD regulations. Now, after bringing them up to Lloyds Classification Society
maintenance standards, we charter them from the MOD and operate them under Marine Safety
Agency rules.

ll our customers have expressed great

The contract also requires a sensitive and

the organisation. Regular internal audits provide

satisfaction with our service since we

responsible approach to the wellbeing of other

assurance to management at all levels. A

won the original contract in 1996. The

stakeholders – our own employees, MOD

centralised information reporting system provides

new £110m three-year contract, negotiated

personnel and neighbouring communities – as

a vehicle for problem solving and spreads best

between August and November 2002, will take

we transport fuel and explosives in the marine

practice rapidly across all parts of the operation.

our service into its tenth year. But the new

environment.

contract is fundamentally different. It’s designed

Management reviews at contract and support

office levels provide the structure for setting

to prepare the way for a future public private

Our safety management system integrates

objectives and implementing new initiatives for

partnership and PFI procurement programme and

operational maritime safety, occupational safety

improvement.

involves us in developing an innovative partnering

and health and environmental protection along

arrangement with the WSA.

with quality management principles. It addresses

both marine and onshore legislation, meets the

Over the next three years we’ll be working closely

Code for ship safety and pollution prevention,

with the WSA – in consultation with employees

and is certified to ISO 9001-2000 by Lloyds

and their representatives – to devise radical new

ways of providing the MOD with marine services

that will reduce costs over the long term. Our

It’s based on stringent hazard identification and

ability to establish this kind of relationship reflects

risk assessment processes, and underpinned by

the way customers trust Serco to balance the

comprehensive training programmes for all staff

long term interests of stakeholders and seek

at the three ports. Everyone is involved in safety,

genuine win-win solutions.

and communication flows freely throughout

HOW do WE
manage our
responsibilities
TO
stakeholders?

“our safety management system integrates
operational maritime safety, occupational
safety and health and environmental
protection along with quality management
principles.”

HOW do WE
DEVELOP
of a
O U R
B U S I N E S S
people?
A R E W E ?
a

?a
?W H AT K I N D

We have only two kinds of product: our processes and our people. To achieve our business goals we
want to excel on both counts. Needless to say, we’ve developed systematic processes for developing our
people. We encourage them to learn and grow throughout their careers. Because we constantly gain
new people as we phase-in new contracts, we’ve devised ways of helping them assimilate our values
and buy into the unique Serco culture. And because we have such a diverse portfolio of contracts,
our training and development processes are designed to produce managers who are versatile,
flexible and inventive.

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FINAL APPROVAL. The text has been placed here to show you the position where the

is not the FINISHED COPY.

H OW D O W E D E V E L O P O U R P E O P L E ?

Instilling the values

Whatever the method, the key criterion is relevance: can

Change management is one of our core capabilities, and

people apply their newly acquired skills back at work?

we constantly refine our processes for inspiring culture

Hence our enthusiasm for linking performance reviews and

change as we phase-in new contracts.

learning activity. Research in 2002 found that the majority

of people who attended our training workshops used their

We do this through the Serco Best Practice Centre (SBPC),

newly acquired skills back at work within a very short time,

which works not only with our own businesses but also

and that their attendance at the workshop was part of a

with their partners. At Wishaw General Hospital, for example,

wider development plan. We encourage contract managers

we worked with the local management team on workshops

to work with their management teams on devolving

designed to embed the Serco culture and values. This helped

responsibility and developing their own successors:

the new organisation to get off to a successful start and meet

individual learning is a crucial part of this process.

some exceptional performance targets. In the Middle East

recently, the SBPC staged workshops with a prospective joint

As Serco becomes increasingly global, distance learning is

venture partner so we could share insights into each other’s

likely to become more important. We’re currently investing

businesses and processes. This enabled us to develop a novel

in solutions that will enable us to deploy and track learning in

business solution based on a clear understanding of our

geographically diverse locations – enabling us to reach all our

differing capabilities.

people, everywhere. Combined with effective diagnostic tools,

including performance appraisal and development centres,

With new contracts, we can begin winning hearts and minds

this will ensure we deliver learning solutions that meet

even before the phase-in starts. During 2002 we developed

today’s business needs and help us anticipate future needs.

a Serco Orientation CD-Rom to help people gain a firmer

grasp of what we are and how we work – particularly if

Learning to lead

they’re about to join Serco under a new contract phase-in.

One such forward-looking solution is the senior management

It can be sent anywhere, and early feedback suggests that it’s

Combining the best available external expertise with our own

a successful way to start building relationships and helping

experience and capability, the programme is underpinned by

people to see where they fit in, what we can achieve together

external assessment that may lead to Chartered Director status.

programme we’ve developed with the Institute of Directors (IoD).

and how they can contribute within the Serco culture.

Gaining the skills

Initiatives like this reflect our desire to provide the combination

of personal and business capability that makes great business

Distance-learning, using CD-Roms or our intranet, is just

leadership. In a business like ours, with its relatively flat

one of many channels we use, from highly structured training

hierarchy and high degree of autonomy at contract management

environments to broader based learning on the job. We aim to

level, it’s essential to help our managers acquire real leadership

identify and use the most effective method for the individual,

ability and inspire it in others. We continue to develop tools

the business and the skills being taught.

to help all our teams identify potential and develop capability.

I N S I D E S T O R Y
HOW do WE
DEVELOP
O U R
people?

On all our contracts, continuous improvement is part of the

package. We constantly ask ourselves: "Is there a better way to do this? Or should we

be doing something else instead?” We’re passionate about innovation, and always willing

to work with quality partners who can enhance our capability. It’s an approach that works
well for our customers – and equally well when we apply it internally. In the past year,

it’s helped to transform the way we develop our future top managers…

HOW do WE
DEVELOP
O U R
people?

Directors in the pipeline
Institute of Directors

Nobody in Serco is too senior to need training. In a fast-changing world,
we believe lifelong learning is a business necessity. Towards the end of
2001, we reviewed the various options for developing our current and
future senior managers and decided we needed something new. The
result was a unique programme we’ve developed with the Institute
of Directors (IoD).

y combining the best external capability
with our internal expertise and external
assessment we believe we’ve come up

with a programme that provides excellence,
rigour – and relevance to our unusual corporate
structure, culture and management system.

It consists of three sections. In the first, delegates
study and discuss the role of the company and
the director, and relevant aspects of law, strategic
business direction and finance. This is followed by
an exam leading to the IoD/Serco Certificate in
Company Direction.

Initially we’ve provided the programme in the UK
only, but we’ve been working with the IoD on a
version for European colleagues and are planning
further international variants.

Serco is the first UK-listed company to develop
such a programme, and IoD Chairman Christopher
Beale has been impressed by our determination
to set a benchmark in top management
development. "It’s been a very exciting time," he
says. "The results have been extremely positive
and it’s been great to work so closely with such a
forward-thinking organisation."

The second section covers marketing strategy,
human resources, leading change and board
decision-making. A second exam leads to the
IoD/Serco Diploma in Company Direction. The
final section can lead to becoming a Chartered
Director. This requires candidates to demonstrate
relevant experience and pass an interview with
the IoD.

So far, 19 of our senior managers have passed
the Certificate programme in two groups and 15
have gone on to study for the Diploma. The third
Certificate group and first Diploma group will get
their examination results in June.

Getting the programme up and running has taken
considerable investment of company resources and
personal time by committed individuals. But it
sends out a clear signal both inside and outside
the business that we’re a meritocracy intent on
establishing a pipeline of management talent
leading all the way to the boardroom. We believe
we’re already beginning to reap the rewards in
management motivation, business performance,
differentiation and competitive advantage.

“The quality of the lecturers was really high and they brought a wide range of external experiences into their programme

content. Having an externally recognised awarding body does make a difference: you know you have to reach a national

standard, not just an internal benchmark. I found the whole experience intellectually demanding, challenging but really

enjoyable.” LUCY ADAMS, CHANGE DIRECTOR, SERCO RAIL

Assessment

High potential person
identified to attend
IoD / Serco company
direction programme

Active two-way review
process undertaken
to create personal
development plans
linked to an
annual appraisal

Appropriate candidates
selected to participate
in programme

January

February

March

Serco / IoD programme modules

Role of company
board and directors

Strategic business
direction

Finance for non-finance
directors

June

Results

Revision day and exam

Io D TIMELINE

“The course has dramatically enhanced my understanding of why it’s so important to

embrace change to constantly enhance the company’s competitive position. It’s boosted

my confidence and I’m now providing better leadership of my division. What’s more, I

think this confidence boost has also brought out improvement in my management team’s

performance.” DAMIAN McHALE, DIVISIONAL DIRECTOR, TRANSPORT SYSTEMS

Next page: “The strategic business direction and finance modules made me ask some

difficult questions about the way I manage and lead and the way I measure performance.

The combination of Serco and IoD was good. Networking with other Serco people was

valuable and provided the opportunity to apply the course material directly to Serco –

while the IoD gave the course standing outside Serco.” DR MARTYN SENÉ, HEAD OF

CENTRE FOR ACOUSTICS & IONISING RADIATION, NATIONAL PHYSICAL LABORATORY

can a private
S E C T O R
of a
company have
B U S I N E S S
a public service
E T H O S ?
A R E W E ?
a

?a
?W H AT K I N D

Delivering public services has always been our business. We began in the 1960s by providing technical
maintenance services, but since then we’ve moved from the backroom to the forefront of service
delivery. We’re now running people’s buses and trains, managing their hospitals and helping to
educate their children. That requires a special kind of relationship with our customers. We need
to understand their values. We need to make ‘partnership’ something more than a slogan. We need
to deliver private sector efficiency with a public service ethos. Our business depends on it.

appear. The real copy has been typed separately and will not be set until it has received

text will appear and how much area it takes up on the page. What you are reading now

WHAT YOU ARE READING now is not the finished copy. The copy you are now reading

is set out to show you the TYPEFACE AND THE TYPESIZE in which the real copy will

FINAL APPROVAL. The text has been placed here to show you the position where the

is not the FINISHED COPY.

CA N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ?

Public service is 90% of our business. If we couldn’t

We believe in safety first

convince our customers that we understand what public

We work in fields such as education, healthcare, justice,

service is all about, we wouldn’t still be here. And we’ll

transport, defence and science. Inevitably, many of our

only succeed in the future if we and our employees

activities involve a responsibility for the safety of the

continue to deliver not only high-quality services and

public as well as our staff. And because we take a long

value for money, but also the values and passions that

view, we don’t see a conflict between safety and profits:

motivate public sector managers.

We believe in accountability

ultimately, a responsible approach to safety is the only

way to safeguard profits. In fields from food hygiene to

nuclear safety, governments trust us not just to maintain

Public sector agencies are spending taxpayers’ money.

existing standards but to improve on them. Last year,

They demand a high level of performance assessment

for example, our rail division launched a collaborative

and accountability. We’ve always welcomed this

investigation with the Institute for Occupational

heightened scrutiny because it focuses everyone’s

Ergonomics at the University of Nottingham to study track

attention on customer satisfaction. We’re happy

workers and identify the factors influencing safety culture

to work with open books, as we do with a number

and working behaviour. The findings have been welcomed

of existing clients.

by staff, union representatives and Network Rail alike,

and action plans are being developed to address the

The public expects those involved in delivering public

issues raised.

services to have high ethical standards. As well as

applying our code of ethics, we foster the kind of climate

We believe in people

that ensures it’s observed. The culture is open, people

Public sector customers expect us to treat our employees

communicate freely and there are clear channels for

fairly and equitably. In the complicated business of

voicing concerns.

taking-over and change-managing hundreds of different

These are just some examples of community initiatives from our

education, we launched a worldwide appeal for stationery. With the

CSR programme:

Huntington, West Virginia, US

aid of the British Forces, over two tonnes of stationery were

distributed to schools and refugee camps in and around Kabul.

Serco is involved in a programme that helps local people get back

RAF Northolt, UK

into employment by providing work experience. Of the 13 interns who

Our team at Northolt developed a training and lifelong learning

have worked with Serco on the programme to date, including five last

programme for ramp handlers. Serco Aerospace Training Unit at

year, seven have gone on to full-time employment with us. Our contract

RNAS Yeovilton, which developed the initial generic course for new

manager is now a member of the Goodwill Business Advisory Board

employees at RAF Brize Norton and Northolt, is now the National

Council.

Vocational Qualification (NVQ) co-ordination centre. In conjunction

with on-job training and assessment, we train people to NVQ Level 2,

Serco Group (HK) Limited, Hong Kong

helping them develop specialist skills linked to their area of work.

Our Hong Kong hospital contracts provide job opportunities for

people with disabilities, employing them on the same terms and

Goose Bay, Canada

conditions as other members of staff. This won us a prestigious

We identified a need in the local community for an alternative clean

Caring Company award from the Hong Kong Government.

water supply. We’re working with the Canadian Government to

develop a new supply, and it’s expected to be complete in Spring 2003.

Afghanistan Stationery Appeal, UK

We’re also providing a scholarship to the College of the North Atlantic

After Serco employees from Rollestone working with the British Military

and helping fund a programme that raises high school students’

in Afghanistan saw that local children lacked the basic tools for their

awareness of business and its needs.

public service teams, we couldn’t claim it’s always been

fostering partnership and trust in every relationship. Not

plain sailing. Or that we never make mistakes. But we

just because that’s a good thing to do, but because our

do have generally excellent relations with staff and their

competitive edge depends on attracting, developing and

unions. We’re involved in the TUC’s Partnership Initiative,

motivating the best people. We train and develop our people

which fosters closer relationships between employers

as well as we can. We empower our people to do what it

and unions.

takes to deliver noticeably superior service.

We welcomed the UK’s Transfer of Undertakings Protection

We believe in social responsibility

of Employment (TUPE) regulations when they were first

Apart from our responsibilities to staff and customers,

introduced, and when we take over staff under a new contract

we recognise our wider social obligations. We try to interact

we’ve earned a reputation for acting decently and responsibly,

beneficially with everyone who’s affected by our operations.

avoiding non-voluntary redundancies except as a last resort.

We believe that responsiveness to all our stakeholders’

When we take over public sector contracts we often inherit

customer satisfaction, greater commitment on the part of

complexity in terms and conditions of employment. Wherever

employees, and an enhanced reputation in the community

interests creates greater business success – through improved

possible our preferred approach is to sit down and talk to

at large.

employees themselves, or their representatives, and develop

terms and conditions to make them relevant and appropriate

Doing business with honesty, integrity, openness and

to today’s business circumstances.

professionalism means applying the same standards in our

dealings with the wider community. Our approach to Corporate

We operate in many countries, jurisdictions and cultures.

Social Responsibility (CSR) takes account of our diversity and

But wherever we work we apply the same principles of equal

devolved structure and ensures that wherever in the world

opportunity, honouring the rights of the individual and

we work we apply the same standards and values.

Ray Friel Centre, Ontario, Canada

Frankston, Victoria, Australia

Our team at the Ray Friel recreational centre supports the non-profit

We sponsored and co-designed Frankston Framed, an event that gave

making Cumberland Resource Centre (CRC) by donating free activities

young photographers an opportunity to capture life in their

and programmes to families in its shelters. On selected dates we also

community on camera. The project involved the whole community in

donate all revenue from wave swim admissions to the CRC, host local

recording life from the beach to the ballet school.

food drives, offer any members of the community free access to the

facility and donate non-perishable food.

Serco Schrobenhausen, Germany

Joint Services Command and Staff College, Shrivenham, UK

where companies in the community introduce local students and

In 2002 we participated in a regular information exchange event

We provide scholarships for English language courses to the wives of

graduates to the commercial world.

international officers attending courses at the college. This helps them

integrate with the local community at Shrivenham.

Corporate Assurance Group, Hampshire, UK

RAF Donna Nook, Lincolnshire, UK

conference in the UK. In partnership with Future Forests, a UK-based

Serco staff regularly help manage thousands of grey seals that colonise

the weapons range in the winter, often assisting in the capture and

environmental organisation, CAG calculated the CO2 created by
participants travelling to the conference and offset it by planting

release of injured seals and abandoned pups. RAF Donna Nook is the

55 fruit trees in one of the poorest regions of Mexico.

first MOD property to be designated as a National Nature Reserve.

In October 2002 our Corporate Assurance Group (CAG) held its annual

CA N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ?

Each business division has processes and procedures for

over the long term. They’re also about being willing to pick up

applying our CSR model, setting targets and reviewing

a challenge. When we went into education, we didn’t look for

performance in every operating company and contract. A global

soft options. We took on two of the UK’s toughest areas, in

network of CSR Champions manages the application of our CSR

Walsall and Bradford. By rising to the challenge we’ve built a

process, regularly reviewing and reporting on its effectiveness.

marketable track record and earned valuable commendations

from Ofsted, community stakeholders and our customers.

And every contract manager has responsibility for community

involvement – not just through taking part in local initiatives

We believe in delivering more

but through the way the contract itself is run. Hence the

We want our customers to see us as partners in achieving the

judges’ comments in naming us Rail Operator of the Year for

outcomes they want. And as our 90% success rate in contract

the Docklands Light Railway: “Few railway businesses have

extensions and renewals suggests, we don’t just meet their

such an impact on community life, proving that the journey

expectations. We raise them. We aim to keep adding value

can be much more than a means to an end.”

throughout the life of a contract, through constant innovation.

We believe in the long term

The next improvement may come from one big change, or

from attention to a dozen little details. But we’ll continue

Partnerships aren’t about making a quick profit and moving

to ask ourselves how we can do things even better: that’s

on. They’re about building trust and mutual benefit that lasts

part of our culture.

School of Army Aviation, Middle Wallop, UK

Serco Best Practice Centre, Hampshire, UK

Work experience in the Serco-operated air traffic control (ATC) tower

The SBPC is helping Woking College to redevelop its internet site.

is popular with local schools. Demand has been so great that we’ve

The new site will provide information that’s more pertinent to students

developed a package which provides real training and gives an

and will have special access features for disabled groups.

insight into a career in ATC.

Atomic Weapons Establishment (AWE), Berkshire, UK

Serco Metrolink has piloted a school mentoring programme where

Our joint venture at AWE has a very active community programme.

members of staff are trained with Bolton and Bury Education

One scheme helps 50 local schools to promote scientific and

Partnership to mentor 12-16 year olds.

Serco Metrolink, Manchester, UK

technological excellence. Each school is linked to a member of AWE

staff who has a particular interest in that school: for example, as a

parent or school governor.

I N S I D E S T O R Y
can a private
S E C T O R
company have
a public service
E T H O S ?

On the face of it, we have a conventional business relationship

with Walsall Metropolitan Borough Council. As supplier, we have a contract to deliver

educational support and management services. But through that contract our

responsibilities extend to the wider Walsall community. We’re supporting headteachers
at the borough’s 129 schools… teachers… boards of governors… 51,000 pupils and

adult learners… parents. The fact is, we’re serving an entire population – and need to
act accordingly.

can a private
S E C T O R
company have
a public service
E T H O S ?

Working with a community of customers
Walsall Metropolitan Borough Council

To support Walsall’s schools effectively, we can bring our business skills to bear in many ways –
improving administration, finance and asset management. We can introduce new ideas in time
management, staff support and measurement of results that enhance a school’s effectiveness.
We have a duty to be bold, challenge the status quo and add real value. But we’ll only truly succeed
if we build meaningful partnerships with all our customers. And ultimately that means everyone
in the community with an interest in education.

ur education operation in Walsall

school supporting staff. So we’ve increased

a local primary school. It’s not off-limits to teachers

began in July 2001, with a School

communication channels using the internet, emails,

or pupils – in fact, we’re helping the children to

Improvement and Strategic Management

a telephone help desk, headteacher breakfast

take care of our garden as part of a nature project.

contract. This involved taking over some 100

briefings and weekly drop-in management surgeries.

people from the existing Local Education Authority

This joined-up approach helped win praise from

(LEA). In December 2002 we took on most of the

We’re strengthening schools’ links with business

Ofsted for our work in Walsall. In turn, Ofsted’s

rest of the LEA’s functions, along with another

and community organisations such as the Walsall

recommendation has led to a substantial expansion

300 staff.

Lifelong Learning Alliance, the Black Country

of our role there – and greatly strengthens our

School Improvement Partnership, the Learning

hand as we bid for education contracts elsewhere.

With their help, our broad goal is to make

and Skills Council, the Children and Young

Clear evidence that, for a public service business,

Walsall a first-class education and learning

People’s Strategic Partnership and Connexions.

community involvement is an integral element

community. We want to raise aspirations and

in achieving commercial success.

achievement, and increase social cohesion and

We’ve joined individuals in the local community

inclusion through our policies and service delivery.

and agencies such as the police and social services

To do this effectively, we’re steadily extending

in an initiative to reduce truancy and juvenile linked

our links into the wider community.

crime. Over 12 months it achieved both objectives

To anchor these efforts firmly in the day to

day reality of our schools, we need excellent

And we’ve made sure we don’t work in an ivory

communication with and between teachers and

tower. Our main office in Walsall is attached to

and earned Jubilee medals for all participants.

With thanks to: Blakenall Heath Junior School, Brownhills Community Technology College and New Invention Infants School.

“for a public service business, community
involvement is an integral element in
achieving commercial success.”

Serco group plc
A N N U A L
accounts
2 0 0 2

Directors, Secretary and Advisers

Chairman

Kevin Beeston

Directors

Ralph Hodge CBE*
Christopher Hyman
Andrew Jenner
Rhidian Jones†
DeAnne Julius CBE*
Iestyn Williams

Secretary

Julia Cavanagh

Registered Office

Dolphin House
Windmill Road
Sunbury-on-Thames
Middlesex TW16 7HT

Auditors

Deloitte & Touche
Chartered Accountants
London

Principal Bankers

Barclays Bank plc
54 Lombard Street
London EC3P 3AH

Investment Bankers

The Royal Bank of Scotland plc
135 Bishopsgate
London EC2M 3UR

Lazard Brothers & Co Ltd
21 Moorfields
London EC2P 2HT

Morgan Stanley & Co Ltd
25 Cabot Square
Canary Wharf
London E14 4QA

Stockbrockers

Cazenove & Co Ltd
12 Tokenhouse Yard
London EC2R 7AN

Merrill Lynch International
Merrill Lynch Financial Centre
2 King Edward Street
London EC1A 1HQ

Solicitors

Allen & Overy
One New Change
London EC4M 9QQ

Registrar

Lloyds TSB Registrars
The Causeway
Worthing
West Sussex BN99 6DA

* Non-Executive Director
† Senior Non-Executive Director

Corporate Governance Report

Introduction
The Board of Serco Group plc (the “Company”) is committed to achieving high standards of corporate governance, integrity and
business ethics for all its activities around the world. The Company supports the principles of good governance and code of best
practice as appended to the Listing Rules of the Financial Services Authority (the “Combined Code”). This report sets out how the
Company applies the Combined Code. Reference has also been made to the Higgs’ Review of the Role and Effectiveness of Non-
Executive Directors (the “Higgs Review”) and the Smith Report on Audit Committees Combined Code Guidance (the “Smith Report”)
where appropriate.

The Board and its Directors
The Board currently comprises seven Directors: Kevin Beeston, Ralph Hodge, Christopher Hyman, Andrew Jenner, Rhidian Jones,
DeAnne Julius and Iestyn Williams. Excluding the Chairman, the Board comprises an equal number of Executive and Non-Executive
Directors. The Company continues to believe in the need for a full time Executive Chairman who is responsible for the effective
operation of the Board, oversight of corporate governance and assurance activities and the Company’s relationship with the City
and key stakeholders. This role is distinct from that of the Chief Executive who focuses on the operational strategy and delivery
of the business. The Directors’ profiles are set out on pages 85 to 88.

The Board continues to believe that the Non-Executive Directors are independent of management and free from any business
or other relationship which could materially interfere with the exercise of their independent judgement. They bring a wide range
of experience to the Board including international business operations, strategy and economics. The senior Non-Executive Director
is Rhidian Jones. Rhidian has met with shareholders in the past, upon request, and continues to be available to do so as required.
Rhidian has expressed his desire to retire from the Board at the end of April 2004 when his current term of appointment expires.
The Company is currently seeking a fourth Non-Executive Director and is proposing to commence the search for an additional
Non-Executive Director with relevant financial experience to replace Rhidian as Chairman of the Audit Committee on his retirement.
The Non-Executive Directors meet on an informal basis during the year without the presence of the Executive Directors.

During the year the Board met six times at varying locations, and took the opportunity to combine the formal business of the
Company with site visits and divisional presentations and discussions. There is a formal schedule of matters reserved for the Board
including the responsibility for leading and directing the affairs of the Group. During the year a strategy conference was held,
hosted by the Chairman, and attended by the Board and 20 key senior managers of the Group. The Chairman has held individual
meetings with the Directors to evaluate the performance of the Board and identify any areas for review. His report will be
presented to the Board in February 2003.

All Directors have access to the Company Secretary and independent professional advice at the Company’s expense. The Company
Secretary has the responsibility for ensuring that Board procedures are followed. The appointment and removal of the Company
Secretary is one of the matters reserved for the Board. The Company Secretary is also Secretary to all the Board Committees. The
information provided to the Board is reviewed by the Chairman and the Company Secretary on a regular basis, to ensure that it
remains appropriate and adequate and enables the Directors to discharge their duties.

In accordance with the Company’s Articles of Association, one third of the Board are required to retire by rotation each year so that
over a three year period all Directors will have retired from the Board and faced re-election.

Board Committees
The Board has delegated authority to a number of committees to deal with matters in accordance with written terms of reference.
The terms of reference are reviewed annually. It is proposed that once a fourth Non-Executive Director has been appointed the
Non-Executive Directors will not be required to sit on every Committee. The Chairmen of the Board committees attend the Annual
General Meeting to answer questions from shareholders.

C O R P O R AT E G OV E R NA N C E R E P O RT

Board Committees (continued)

Global Management Board
The Board has delegated responsibility for the day to day management of the business to the Global Management Board (“GMB”).
The GMB meets formally on a quarterly basis and more frequently if required. Matters discussed by the GMB which require formal
approval are submitted to the Approvals and Allotment Committee details of which are provided below. Further details relating to
the ongoing management of the business can be found in the section ‘How do we run our business?’ provided in the Annual Review
section of the Annual Review and Accounts.

Audit Committee
The Audit Committee, which comprises the three Non-Executive Directors and is chaired by Rhidian Jones, met twice during the
year. At the meetings, attended by the internal and external auditors and by invitation the Finance Director, matters relating to the
integrity of the financial statements of the Company, the accounting policies adopted, significant financial reporting judgements
made and the role of the internal auditors were discussed. Discussions were also held regarding the business risk auditing
activities undertaken by the Company’s internal audit providers, Grant Thornton and Pannell Kerr Forster. The members of the
Committee have access to the Company’s auditors without the presence of the Executive Directors. During the year, the Committee
has reviewed the independence, objectivity and effectiveness of the external auditors, their terms of engagement and remuneration,
and has also approved a policy with regard to the engagement of external auditors in the provision of non-audit services. The
Company has identified alternative providers of non-audit services. The members of the Committee receive updates on accounting
standards and generally accepted accounting principles on a quarterly basis as part of the Finance Director’s report to the Board,
and also on a half yearly basis from the external auditors.

Remuneration Committee
The Remuneration Committee comprises the three Non-Executive Directors and is chaired by Ralph Hodge. The Committee
met five times during the year to deal with matters relating to remuneration and undertook a comprehensive review of the
Executive Directors remuneration. The details of the Company’s remuneration policies and the results of the review are detailed
in the Remuneration Report on pages 90 to 99. Remuneration of senior executives in the Company is considered and approved by
the Remuneration Committee of the GMB, which comprises the Executive Chairman, Chief Executive and Chief Operating Officer
and is advised by the Human Resource & Change Director. In the event that any member of the GMB Remuneration Committee
is conflicted by the business to be discussed, his place may be taken in that instance by another member of the GMB.

Training Committee
The Training Committee comprises Iestyn Williams, its Chairman, Christopher Hyman and the three Non-Executive Directors. It
meets once per year to consider the training needs of all Directors and the Company Secretary. The induction programme for new
Directors provides a comprehensive familiarisation programme including the role of the Board and its Committees, the Company’s
corporate governance framework and latest financial statements, together with site visits and meetings with senior management
around the Group. The induction programme and the individual development needs of the Executive Directors, in relation to their
new roles, were reviewed by the Committee during the year. All Directors and the Company Secretary are encouraged to attend
relevant training courses at the Company’s expense.

Nomination Committee
The Nomination Committee comprises Kevin Beeston and the three Non-Executive Directors. The Company believes that the
Executive Chairman should remain as the Chairman of the Committee in order to discharge his responsibility for the effective
functioning of the Board. The Committee meets to discuss proposed changes to and development of the Board, but has also carried
out a review of succession planning for the Directors. A similar review is also being undertaken for senior executives by members
of the GMB. The members of the Committee consult with other members of the Board prior to submitting final recommendations
for approval by the whole Board.

Approvals and Allotment Committee
This Committee meets as required and comprises the Executive Directors, the Chief Operating Officer and Strategic Development
Director, with any two Executive Directors forming a quorum. The business of the Committee is varied and ranges from bid
approval to approval to release share options. Matters requiring formal approval following consideration by the GMB can also be
approved by this Committee.

The Company and its Shareholders
The Board remains committed to ongoing dialogue with its institutional and private shareholders. This year has seen the continuation
of the Company’s programme of site visits and strategy presentations attended by institutional investors and analysts designed
to facilitate a greater understanding of the Company. As part of the review of Executive Directors’ remuneration undertaken by the
Remuneration Committee, Ralph Hodge sought the opinion of the six largest shareholders (representing 35% of the share register)
and the ABI prior to making a recommendation for approval by the Board and shareholders at the forthcoming Annual General
Meeting. The senior Non-Executive Director is also available to shareholders on request.

Formal presentations are made to institutional investors and brokers’ analysts after the release of the interim and final results.
Individual requests for meetings have been satisfied by the Executive Chairman and the Finance Director, although the other
Directors are available as required.

During the year the Company increased its on-line communication with a web cast of the interim results presentation and an on-
line interview with the Executive Chairman on its website www.serco.com. It is proposed that a web cast will be repeated for the
final results presentation. During the year the Company has also introduced a programme of quarterly trading updates in line with
best practice and the recommendations of the Financial Services and Markets Act.

The principal methods of communication with private investors remains the News Announcements, Interim Report, the Annual
Review and Accounts, the Annual Review and Summary Financial Statement, the Annual General Meeting and the Company’s
website www.serco.com.

Internal Control and Risk Management
The Company has a well-established and embedded system of internal control, including financial, operational and compliance
controls and risk management designed to safeguard shareholders’ investments and the Company’s assets and reputation. Whilst
the Board has overall responsibility for the Company’s system of internal control and for reviewing its effectiveness, it is the role
of management to implement the policies on risk and control. The Group’s risk management process identifies the key risks facing
each business and reports to the Board on how those risks are being managed. The Board confirms that this process has been in
place for the year under review and up to the date of approval of the Annual Report. These processes are reviewed annually by
the Board and conform to the guidance set out in Internal Control: Guidance for Directors on the Combined Code (the “Turnbull
Report”). Such a system however can only be designed to mitigate, rather than eliminate, the risk of failure to achieve business
objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss.

The Company has a full time Risk Director who is a member of the Corporate Assurance Group (“CAG”). CAG was formed in 2001
with specific responsibility to oversee and review the internal control and risk management policies, procedures and management
framework within the Group and to develop guidance, training material and management training to ensure the current and future
needs of the business are met.

CAG sponsors three specialist groups:
• An Assurance Network, chaired by the Assurance Director, and comprising senior assurance representatives from across the

Group. During the year this network met four times to review Company policy and procedures and the development, integration
and dissemination of the Serco Management System that defines how the Company operates.

• A Risk Oversight Group, chaired by the Risk Director, comprising assurance representatives from across the Group, met twice

during the year to discuss the Group risk register and key risk controls. This group provides additional assurance in relation to
the system of internal control and risk management and enhances the Board’s ability to discharge its responsibilities in relation
to internal control.

• An Aviation Oversight Group, chaired by the Aviation Safety Director and comprising the aviation safety representatives from
across the Group met twice during the year. This group has been responsible for the implementation of the aviation safety
management system across the Group, and for transferring best practice across the world.

Following a review of rail safety undertaken during 2001 and chaired by Ralph Hodge, a Rail Safety Oversight Group commenced
operations during the year. It is proposed that a formal group holding regular meetings is established during 2003.

C O R P O R AT E G OV E R NA N C E R E P O RT

Internal Control and Risk Management (continued)
During the year CAG hosted a conference attended by almost 100 assurance representatives from around the world. Presentations
were received from internal and external speakers, including the Executive Chairman and Senior Non-Executive Director, on varying
aspects of assurance and attendees took the opportunity to network and discuss best practice during informal sessions held as
part of the meeting.

A further explanation of the role of CAG can be found in the Annual Review and Accounts section ‘How do we manage our
responsibilities to stakeholders?’

During the year the Serco Management System, including the Company’s risk management standard, was rolled out across the
business. The business divisions and their operating companies are following processes and procedures to implement the system,
including the risk management standard, in ways that are appropriate to the type of business being undertaken. Divisional Chief
Executives and company Managing Directors have the responsibility and authority to implement the system and monitor its operation
within their businesses. As part of this process CAG has reviewed and revised all company policies. These policies were authorised
by the Board in December. Supporting company standards and guidance have also been produced.

The risk management process requires that at each level in the organisation risk registers are maintained that identify the key
risks, the probability of those risks occurring, their potential impact and the actions being taken to mitigate the risks. Risks are
ranked using a scoring system across the business. Risk registers are maintained at a contract, company, divisional and Group
level and are reviewed at least quarterly and more frequently as required. The Group risk register identifies the key risks facing
the business including risks that are managed directly at a Group level. The Group risk register is updated regularly and discussed
at quarterly Board meetings. Each Group risk is assigned an owner at Board level.

While operational risk can never be eliminated, the Company endeavours to minimise the impact by ensuring that appropriate
infrastructure, controls, systems, staff and processes are in place. Some of the key management controls are set out below:
• The principles of clear delegation of authority and segregation of duties are fully reflected in the Company’s operating

processes;

• Comprehensive process development and business acquisition review programmes have been established to ensure that our
services and products meet customer expectations, performance criteria, operational effectiveness, regulatory requirements,
investment returns and profitability;

• Sound project management and change implementation disciplines are applied to all major development projects including new

contract phase-ins, acquisitions, new technology applications, change programmes and other major initiatives;

• The commitment and capability of staff is critical for the effective management of operational risk. Ongoing training and career

development constantly improve the skills of our workforce. Selective recruitment, succession planning and other human
resource policies and practices are in place to ensure that staff skills are aligned with the needs of the organisation;

• Safety management systems in the Company’s aviation, rail, defence, nuclear and marine businesses have been addressed by the
appointment of safety specialists for each area who report directly to the Board and are charged with maintaining and further
developing the very high standards of safety expected in these industries. Occupational health, safety and environmental
protection are addressed by qualified and experienced staff in each business unit;

• The operational risk framework tracks key risk indicators. These include analysis of business planning and variance, customer
satisfaction and retention data, staff turnover and satisfaction levels, occupational health and safety incidents and error and
exception reporting;

• The Company maintains insurance policies to provide protection from losses arising from circumstances such as damage

or destruction of physical assets, theft and legal liability for third party loss. The adequacy of the insurance cover is reviewed
at regular intervals.

During 2002, Grant Thornton and Pannell Kerr Forster, the Company’s internal auditors, had their term extended for a further
three years. As part of the continually evolving approach to business risk auditing the Company has developed, in association
with Grant Thornton, a risk matrix designed to profile relative risk across the contracts and support functions of the Group,
thereby ensuring that the audit focus is retained in the key risk areas as well as a more general approach to the rest of the
business. Both Grant Thornton and Pannell Kerr Forster reported to the Audit Committee during the year.

Internal Control and Risk Management (continued)
In addition to contracts held in Serco’s name, the Group has material investments in a number of joint ventures and associated
companies. Where these investments are not wholly managed by Serco, the Group can influence, but not control, management practices.
Serco representatives within these companies ensure that the processes and procedures for identifying and managing risk are
appropriate for the business and that internal controls exist and are regularly monitored. Employees from the Company’s joint
ventures are invited to participate in the risk oversight group and were invited to attend the CAG conference held in October 2002.

Going Concern
The Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the Annual Review and
Accounts.

Compliance during 2002
With the exception of contractual notice periods for the Executive Directors, the Company has fully complied throughout the year
with the provisions stated in Section 1 of the Combined Code.

Contractual Notice Periods
As detailed in the Remuneration Report, a number of recommendations have been made for shareholder consideration in relation
to Executive Directors’ remuneration. Following approval of the relevant resolutions at the forthcoming Annual General Meeting,
the Executive Directors’ service contracts will be amended to incorporate the changes. At this time the notice period for all
Executive Directors will be reduced from 24 to 12 months in line with the notice period operational for those directors appointed
after 1 January 2002.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Dolphin House
Windmill Road
Sunbury-on-Thames
Middlesex
TW16 7HT

19 February 2003

Report of the Directors

Annual Review and Accounts
The Directors of the Company have pleasure in presenting the Annual Review and Accounts of the Group for the year ended
31 December 2002.

Activities
The Company is a holding Company, which operates via its subsidiaries and its joint ventures to provide facilities management,
systems engineering and equity investment management.

The review of the business for the year ended 31 December 2002 can be found in the Business Review on pages 21 to 30.

Share Capital
The authorised and issued share capital of the Company, together with the details of shares issued during the year, are shown
in Note 21 of the Accounts.

Dividends and Transfers to Reserves
An interim dividend of 0.64p (2001 – 0.57p) per Ordinary Share was paid on 11 October 2002. The Directors recommend a final dividend
of 1.44p (2001 – 1.29p) per Ordinary Share, which if approved by the Annual General Meeting, will be paid on 13 May 2003, to those
shareholders on the register at the close of business on 28 February 2003. After dividends, retained profits of £22,861,000 will be
transferred to reserves.

Substantial Shareholdings
At close of business on 18 February 2003 (being the latest practical date prior to the signing of the Report of the Directors),
the Company had received notifications of the following substantial interests representing over 3% of the issued capital:

Legal & General Group plc – 3.84%
Morley Fund Management Limited – 4.99%

In the case of non-material interests representing 10% or more of the issued share capital, the Company had received the following
notification:

Merrill Lynch Investment Managers Limited – 10.85%

Changes to the Board
The current Directors of the Company are listed on page 76 and their profiles are provided on pages 85 and 88.

As detailed in the 2001 Annual Review and Accounts, Richard White retired as Executive Chairman following the Annual General
Meeting on 3 May 2002. Kevin Beeston was appointed Executive Chairman, Christopher Hyman was appointed Chief Executive and
Andrew Jenner was appointed Finance Director. In accordance with the Company’s Articles of Association, Andrew Jenner will be
subject to election by shareholders at the forthcoming Annual General Meeting.

Directors’ Interests
With the exception of the Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment, there were
no contracts in which any Director has an interest.

Details of the Directors’ interests in the Ordinary Shares and options over the Ordinary Shares of the Company are set out in the
Remuneration Report on pages 94 to 96.

Annual General Meeting
The sixteenth Annual General Meeting of the Company will be held at the Queen Elizabeth II Conference Centre, London on 6 May
2003 at 11.00am.

The Notice of the Annual General Meeting, together with relevant notes and proxy card are circulated with this document.

Employment Policies
The Board is committed to maintaining a working environment where staff are individually valued and recognised.

The Group is committed to ensuring equal opportunity, honouring the rights of the individual and fostering partnership and trust
in every working relationship. We maintain a safe working environment that provides appropriate remuneration and benefits,
training, personal development and compliance with employment laws and regulations of the countries within which we operate.
The Group recognises the United Nations Universal Declaration of Human Rights and implements appropriate policies and
processes to meet the requirements of the declaration.

The Group remains proud of its record of managing employee relations and continues to believe that the structures of individual
and collective consultation and negotiation are best developed at a local level. Over the years the Group has demonstrated that
working with trade unions and creating effective partnerships allows improvements to be delivered in business performance as
well as terms and conditions of employment. Where employees choose not to belong to a trade union, employee communication
forums such as works councils exist to ensure involvement of staff within the business.

The Board understands its responsibility to encourage and assist in the employment, training, promotion and personal career
development of all employees without prejudice. Included within the Annual Review is a section entitled ‘How do we develop our
people?’ which provides an insight into the work of the Best Practice Centre and its development of an Institute of Directors
programme within the United Kingdom.

The Group gives proper consideration to applications for employment received from the disabled and offers employment when
suitable opportunities arise. If employees become disabled during their service with the Group, wherever practicable, arrangements
are made to continue their employment and training.

Participation by staff in the success of the Group is encouraged by the availability of share save schemes, and a share option
scheme for senior staff which effectively aligns their interests with those of shareholders by requiring that performance criteria
are achieved prior to exercise.

Health, Safety and Environmental Policies
The Group recognises and accepts its responsibility for health, safety and the environment (“H,S&E”). A full time Company H,S&E
Adviser, a member of the Corporate Assurance Group (“CAG”), is responsible for the development and monitoring of H,S&E policies,
procedures and control systems and reports to the Board via the Executive Chairman. The Executive Chairman is the director
responsible for H,S&E matters on behalf of the Board. H,S&E is also formally reported to the Global Management Board on
a quarterly basis as part of the Corporate Assurance Report.

The Group is committed to maintaining a safe and healthy working environment in all places that the Company operates, for our
staff, our customers, members of the public and any other third party. The Group recognises that it is everyone’s responsibility for
reducing injury and illness at work. Equally the Group is committed to the protection of the environment, recognising everyone’s
responsibility for minimising the impact that we have on it. This commitment extends to all our activities, wherever they take
place, which have the potential to adversely affect the environment. The Group aims to reduce environmental harm, minimise the
use of energy and other resources and ensure that the principles of sustainable development are operated throughout the range
of activities in which we are engaged.

R E P O RT O F T H E D I R E C T O R S

Health, Safety and Environmental Policies (continued)
CAG is supported by dedicated H,S&E teams in each business unit, either in contracts or the support office, which provide advice
and support on H,S&E issues. All employees share responsibility for continuously improving the Company’s performance in relation
to H,S&E management.

Regular H,S&E meetings are held and representatives from the business units attended the CAG Conference held in October 2002.
In order to maintain a high level of H,S&E awareness, great emphasis is placed on training both in relation to specific H,S&E
matters but also in the overall context of assurance within the Company.

To ensure compliance with all relevant legislation and Company standards as detailed in the Serco Management System, there is
a comprehensive audit system. Detailed audit reports are produced, best practice is shared, corrective action identified if relevant
and remedial action promptly implemented. In addition the business units are frequently audited by regulatory authorities.

Creditor Payment Policies
The Company requires each of its business units to negotiate and agree terms and conditions for payment for the supply of capital
and revenue items just as keenly as they negotiate prices and other commercial matters. Suppliers are made aware of the terms
and the way in which disputes are to be settled. Payment is then made in accordance with those terms.

The Group’s average creditor payment terms in 2002 were 29 days (2001 – 27 days); Company 29 days (2001 – 34 days).

Donations
Charitable donations totalling £94,859 (2001 – £116,000) were made during the year. In addition there were a number of community
initiatives and support provided in kind to charitable and voluntary organisations made by contract and support office staff.

During the year the Company made no political donations and intends to continue this policy.

The Political Parties and Referendums Act 2000 (the “Act”) became effective in December 2000 and requires companies to obtain
shareholder approval before incurring European Union (“EU”) political expenditure. The Group may need, as part of its business,
to contact politicians and political parties within the EU on a non-partisan basis in order to make them aware of industry views,
technology and trends. As the Act defines EU political organisations and political expenditure widely, the Directors are proposing
to seek shareholder authority to incur such expenditure at its Annual General Meeting in May 2003.

Auditors
Deloitte & Touche have expressed their willingness to continue in office as auditors and a resolution to re-appoint them will
be proposed at the forthcoming Annual General Meeting.

Directors’ Profiles

Kevin Stanley Beeston FCMA (40) Executive Chairman
Kevin joined Serco in 1985 and has since held a number of financial and commercial roles. He was Finance Director of the Group
from 1996 to 1999 and Chief Executive from 1999 to 2002. He was appointed Executive Chairman in May 2002. He is a member
of the CBI’s President’s Committee and Deputy Chairman of the CBI’s Public Services Strategy Board.

Ralph Noel Hodge CBE BEng (Hons) (68) Non-Executive Director
Ralph is Chairman of the Water Research Council, and a Non-Executive of British Ceramic Tiles and ORC (Inc). He was previously
Non-Executive Chairman of Enron Europe Limited, Chief Executive of ICI Chemicals and Polymers and a Non-Executive Director
of the Halifax Building Society. He was appointed to the Board of Serco on 5 April 1999, and is Chairman of the Board’s
Remuneration Committee.

Christopher Rajendran Hyman CA (SA) (39) Chief Executive
Christopher joined Serco in 1994 as Finance Director for Serco Europe, the division specialising in providing services to European
government agencies. He was appointed Group Company Secretary with additional responsibility for corporate finance in 1996.
He was appointed Finance Director of the Group in April 1999. In 2000 Christopher was given additional responsibility as Chief
Executive of a new Serco division, Serco Global Projects and has been instrumental in developing new processes and capabilities
at the leading edge of the Group’s activities. He was appointed Chief Executive in May 2002.

Andrew Mark Jenner ACA (34) Finance Director
Andrew joined Serco in 1996 as Group Financial Controller, having previously worked for Unilever. He was appointed Corporate
Finance Director with additional responsibility for Treasury activities in 1999. He was appointed Finance Director of the Group
in May 2002. Andrew has primary responsibility along with the Executive Chairman for the Company’s relationship with
shareholders and the City.

Rhidian Huw Brynmor Jones MA FCIS FCMI (59) Senior Non-Executive Director
Rhidian is an experienced corporate finance lawyer and was Head of the Corporate Department of solicitors Nabarro Nathanson
until retiring from that firm in May last year. He is also a Non-Executive Director of Britannia, the UK’s second largest building
society, and a policy adviser on company law to ICSA. Before training as a solicitor at Herbert Smith he worked in commerce and
industry, including seven years in a senior finance and property role at Granada. He was appointed a Serco Non-Executive Director
in 1996, having previously served on the Board from 1987 to 1994. He is Chairman of the Board’s Audit Committee.

R E P O RT O F T H E D I R E C T O R S

From left to right:

Kevin Beeston

DeAnne Julius

Christopher Hyman

Andrew Jenner

Ralph Hodge

Rhidian Jones

Julia Cavanagh
(Company Secretary)

Iestyn Williams

With thanks to Rushall JMI School, Walsall.

R E P O RT O F T H E D I R E C T O R S

Directors’ Profiles (continued)

DeAnne Shirley Julius CBE PhD (Econ) (53) Non-Executive Director
DeAnne sits on the Court of the Bank of England, having been a member of its Monetary Policy Committee from its formation
in 1997 until June 2001. Previously she held senior strategy positions with British Airways and Royal Dutch Shell. Before moving
to the UK from America, DeAnne spent seven years with the World Bank developing infrastructure projects in Asia and Africa.
She is a Non-Executive Director of Lloyds TSB, BP, Roche and was appointed to the Board of Serco on 29 October 2001.

Iestyn Milton Williams BA (51) Executive Director
Iestyn joined RCA in 1978 and became Director of Personnel six years later. After the management buyout in 1987 he became
Personnel Director of Serco. In 1995 he was involved in building the business in Asia Pacific and later spent two years as Chairman
of Serco North America before returning to the UK in 1998. Since then he has spent his time developing new business, first in the
expansion of the Group’s activities in Europe, and for the last two years leading the Group’s entry into the education sector. Iestyn
is also a Non-Executive Director of Law at Work Ltd and Dolphin Schools Ltd.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Dolphin House
Windmill Road
Sunbury-on-Thames
Middlesex
TW16 7HT

19 February 2003

Directors’ Responsibilities

Company Law requires the Directors to prepare Accounts and Notes for each financial year, which give a true and fair view of the
state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that
period. In preparing those Accounts and Notes the Directors are required to:

• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable and prudent; and
• State whether applicable accounting standards have been followed.

The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to ensure that the Accounts and Notes comply with the
Companies Act 1985. They are also responsible for the Company’s system of internal control, for safeguarding the assets of the
Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Dolphin House
Windmill Road
Sunbury-on-Thames
Middlesex
TW16 7HT

19 February 2003

Remuneration Report

Introduction
During the year the Remuneration Committee (the “Committee”) commissioned a review of Executive Directors’ remuneration,
the first external benchmarking exercise undertaken since 1999, and the first review of base salary levels since September 2000.
The recommendations of the review which are included in detail in the Remuneration Report detailed below are based on a
remuneration philosophy grounded in the following four principles: total rewards should be market competitive; incentive plans
should be used to reinforce a high performance culture; the interests of Directors and shareholders should be aligned as far as
reasonably possible, and the reward structure should be easily understood by all. In revising the remuneration framework the
Committee consulted with the Company’s six largest institutional investors, representing approximately 35% of the shareholder
base, and the ABI before making its recommendations.

The following report details the remuneration policy, the actual remuneration of the Directors of the Company for the year ended
31 December 2002 and the proposed changes to elements of the remuneration framework to be introduced during 2003, as determined
by the Committee and adopted by the Board. In preparing this report consideration has been given to the provisions set out in
Schedule B of the Combined Code and the new requirements for the disclosure of Directors’ remuneration under the Directors’
Remuneration Report Regulations 2002. Reference has also been made to the Higgs Review where it is deemed appropriate.

Composition and Terms of Reference of the Remuneration Committee
The Committee is comprised of all three Non-Executive Directors; Ralph Hodge (Chairman), Rhidian Jones and DeAnne Julius.
It operates in accordance with written terms of reference which are determined by the Board and takes into account best practice
and the requirements of the Combined Code. The Executive Chairman and Human Resource & Change Director may attend the
meetings of the Committee by invitation.

Advisers to the Remuneration Committee
During the year, the Committee has been advised by Neil Hayward, Human Resource & Change Director and Mercer Human Resource
Consulting (“Mercer”) who were appointed by the Committee following a competitive tendering process. Advice has been sought
from Mercer on matters surrounding remuneration policy and philosophy, benchmarking exercises for both individual Executive
Directors and remuneration packages based on current market trends. Support was also provided in relation to the consultation
exercise with the major institutional investors. Advice on legislation and best practice in this area has also been provided by the
Company’s legal advisers Allen & Overy.

Remuneration Policy and Practice
The members of the Committee met five times during the year to consider matters relating to the remuneration of Executive
Directors as well as the terms and conditions of their service with the Company. Recommendations to the Board following the
extensive review process were made within a framework based on the four key principles detailed above.

Executive Directors remuneration comprises a combination of short and long term rewards as explained below and then detailed
on pages 94 to 99. All aspects of Executive Directors’ remuneration are performance related with the exception of base salary,
pensions and life assurance.

i) Salaries and Benefits

Base Salary
Salary changes were introduced in September 2002 following the remuneration review to reflect market conditions, and take
account of a pay freeze agreed by Executive Directors since September 2000. Base salaries were increased by 10% for full time
Executive Directors and will be reviewed annually in September on an ongoing basis. During the year Iestyn Williams elected
to work part time (three days per week) and the reduction in his base salary is a direct reflection of that decision.

Remuneration Policy and Practice (continued)

i) Salaries and Benefits (continued)

Bonus Schemes
Following the remuneration review, the Committee has recommended to the Board that the Company introduce a deferred bonus
scheme for full time Executive Directors with effect from 2003. The maximum value of this bonus will be 40% of base salary and
will be awarded on the basis that the Company achieves earnings per share growth before FRS 10 (Goodwill Amortisation) (“EPS”)
of RPI +10% in that financial year. The bonus will reduce to 20% on a straight-line basis for EPS growth in excess of RPI +5%. No
payment will be made if EPS growth falls below that level. Participants can elect to defer, for three financial years, up to 100%
of the bonus earned to purchase shares in the Company. The shares purchased will be matched by the Company if stretching
performance targets are met. Achievement of the performance criteria will be measured by comparing Serco’s total shareholder
return (“TSR”) to that of the constituent companies in the FTSE 350 over the three year period. No matching will occur for below
median performance, matching will be made on a one for two basis for median performance increasing to a one for one
matching for top quartile performance. An explanation of TSR and the use of the FTSE 350 as a comparator group is provided below.

Approval to implement this plan will be sought from shareholders at the Company’s Annual General Meeting.

Following discussions with Mercer, the Remuneration Committee approved an interim cash only bonus plan for the financial
year 2002 for full time Executive Directors which will provide a maximum benefit of 50% of salary dependent on EPS growth.
If EPS growth is below 10% none of the bonus will be available, at 10%, 25% bonus will be available increasing on a straight-line
basis for EPS growth between 10% and 15%, with a maximum bonus available for growth of more than 15%. This bonus will be
determined following sign off of the 2002 Annual Review and Accounts by the external auditors. The Executive Directors have
agreed to use 50% of any net bonus received to purchase shares at market value in the Company. It is proposed to replace this
scheme with the deferred bonus scheme following shareholder approval at the Annual General Meeting in May 2003.

TSR and the FTSE 350
The Committee has recommended the introduction of TSR as a performance measure in the light of current practice and
following the consultation process with institutional investors. TSR is defined as the return shareholders would receive if they
held a notional number of shares, and received dividends on those shares over a three year time period. It measures the
percentage growth in the company’s share price together with the value of any dividends paid, assuming that the dividends are
re-invested into the company’s shares. TSR performance is being measured against the FTSE 350 as the Company has been
unable to identify a large or appropriate enough peer group against which to compare its performance more directly, and at
present the Company is positioned in the middle of the FTSE 350. The relevance of measuring performance against this group of
companies will be reviewed on a regular basis by the Committee.

ii) Share Based Incentives

Long term share based incentives are awarded to Executive Directors under the Serco Group plc 1996 Long Term Incentive
Scheme (as amended on 5 April 2000) (the “LTIS”) and the Serco Group plc 1998 Executive Option Plan (the “EOP”). The performance
conditions relating to each of the schemes is set out below.

Long Term Incentive Scheme (“LTIS”)
Awards made under the LTIS, which are structured as options with a zero exercise price, may be exercised after the third
anniversary of grant. Awards made to Executive Directors are calculated at 64% of salary at the time of grant. For awards made
in relation to performance periods commencing up to and including 1 January 2002, the extent to which an award vests (and
therefore becomes exercisable) is measured by reference to growth in the Company’s EPS over the performance period of three
financial years.

Full vesting will only occur if the cumulative EPS growth is at least 64%. Awards will partially vest where the cumulative EPS
growth is at least 35% and will continue to vest on a straight-line basis for each percentage increase in EPS growth over the
three year period until full vesting is achieved at a cumulative growth rate of 64%. EPS was initially selected as the appropriate
performance criteria for the scheme as it is visible, easily understood and audited on an annual basis.

R E M U N E R AT I O N R E P O RT

Remuneration Policy and Practice (continued)

ii) Share Based Incentives (continued)

Following the remuneration review, the Committee has recommended for approval by shareholders at the forthcoming Annual
General Meeting, a revision to the performance criteria under which the LTIS currently operates. It is proposed that for future
awards made under the LTIS, achievement of the performance criteria will be measured by comparing Serco’s TSR to that of the
constituent companies in the FTSE 350. No awards will vest for below median performance, 40% will vest for median
performance, increasing on a straight-line basis to full vesting for top quartile performance. A justification of the selection of
TSR and use of the FTSE 350 as a comparator group together with an explanation of the terms is provided above.

Except in exceptional circumstances, awards are made to employees prior to the commencement of the performance period to
which they relate.

Executive Option Plan (“EOP”)
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a
financial performance target over three years. Grants made to Executive Directors are based on 100% of salary as at 31 December
prior to grant. For grants made in relation to performance periods commencing up to and including 1 January 2002 the extent
to which an option vests (and therefore becomes exercisable) is measured by reference to the growth in the Company’s EPS.
If the compound annual growth in EPS is less than 10%, none of the options may be exercised. If the compound annual growth
in EPS is more than 15%, all of the options may be exercised. Where compound annual growth is between 10% and 15%, a proportion
of the options may be exercised. EPS was initially selected as the appropriate performance criteria for the scheme as it is visible,
easily understood and audited on an annual basis.

The Committee has recommended for approval by shareholders a revision to the performance criteria under which the EOP
currently operates. It is proposed that for options granted for performance periods commencing 1 January 2003 or later,
achievement of the performance criteria will be measured by reference to the Company’s growth in EPS relative to RPI. If the
compound annual growth in EPS is less than RPI +5%, none of the options may be exercised. If compound annual growth in
EPS is more than RPI +10%, all the options may be exercised. Where compound growth is between RPI +5% and RPI +10%,
a proportion of the options may be exercised. The decision to measure compound EPS growth against an RPI index rather than
by reference to a peer group of companies was made, as no group of a suitable size or composition could be identified. The
decision to retain EPS as the relevant performance measure for this scheme was based on two factors; firstly this scheme
applies broadly within the Company to over 800 senior staff and therefore simplicity and visibility is important; and secondly
it is considered by the Committee to be an appropriate performance measure with a degree of balance against the TSR measures
applied in other aspects of remuneration design.

iii)Pensions and Life Assurance

The Executive Directors receive pension and life assurance benefits consistent with those provided by other leading companies.
The details of the defined benefit schemes operated by the Group are set out in Note 31 to the Accounts. In the event of death
in service, each scheme provides for a lump sum payment as well as a dependants’ pension.

iv) Service Contracts and Compensation

Each Executive Director has a rolling service contract with the Company and these service contracts will be available for
inspection prior to the start and after the Company’s Annual General Meeting. Following approval of the shareholder resolutions
in relation to Executive Remuneration, the service contracts will be amended to reflect the revised conditions. The service
contracts will also be amended to reflect a reduction in notice period from 24 months to 12 months, thereby bringing all
Executive Directors’ notice periods in line. Executive Directors appointed since 1 January 2002 already operate with a one year
notice period. This change will rectify the one area of non-compliance by the Company in relation to the current Combined Code.

Remuneration Policy and Practice (continued)

iv) Service Contracts and Compensation (continued)

Compensation for early termination of a service contract is not currently addressed in the contracts. The Committee considers
and determines the level of compensation on a case by case basis, taking into account the circumstances surrounding termination
and the individual’s responsibility to mitigate loss. Under the new service agreements being proposed for Executive Directors
following the Annual General Meeting, the Company reserves the right to make a payment in lieu of notice. In addition, where a
Director leaves the Company following a change of control, either because he is dismissed or he elects to leave on notice, he will
receive a payment equivalent to one year’s remuneration. The service agreements do not provide for termination payments to be
made in any other circumstances.

There have been no payments made during the year in relation to compensation for loss of office.

A summary of contract details relating to each director who served during the year is provided below:

Name of Director

Executive Directors:
K S Beeston
C R Hyman
A M Jenner
I M Williams
R D White
Non-Executive Directors:
R N Hodge
R H B Jones
D S Julius

Date of contract/
letter of appointment

Unexpired term and
notice period at 31 December 2002

29 March 1996
1 April 1999
3 May 2002
1 April 1999
29 March 1996

Refer to note a) below
Refer to note a) below
Rolling contract with 12 month notice period
Refer to note a) below
None

5 April 2000
1 September 2002
29 October 2001

3 months unexpired at 31 December 2002, now extended to 4 April 2004
16 months
22 months

Notes:
a) Executive Directors have a rolling contract with a 24 month notice period which will be reduced to 12 months following

approval of the shareholder resolutions at the Annual General Meeting in May 2003.

b) Compensation to Executive Directors for early termination of a service contract is not currently addressed in the contracts.

The Committee considers and determines the level of compensation on a case by case basis.

c) Non-Executive Directors have a three month notice period and no compensation or other benefits are payable on early

termination.

Non-Executive Directors
The Non-Executive Directors of the Company are appointed for a three year term, and that appointment may be terminated
on three months written notice. Renewal of appointments are not automatic, and Non-Executive Directors are required to retire
and stand for re-election in accordance with the Company’s Articles of Association.

As at 31 December 2002, the Non-Executive Directors of the Company have no personal financial interest in the matters
determined by the Committee, no potential conflicts of interest arising from cross-directorships and no involvement in the
day to day running of the Group.

The fees and terms of engagement of Non-Executive Directors are reviewed on an annual basis and approved by the Board.
Following the publication of the Higgs Review, the Board will consider the recommendation to make additional payments to
Chairmen of the Board Committees. The Board does not believe that the partial payment of fees in shares is appropriate and
will therefore continue to make cash only payments. Non-Executive Directors’ fees are not performance related.

R E M U N E R AT I O N R E P O RT

1 Salaries and Benefits

The total salaries, fees and benefits paid to or receivable by each person who served as a Director at any time during the year,
are as follows:

Names

K S Beeston
R N Hodge
C R Hyman
A M Jenner
R H B Jones
D S Julius
R D White
I M Williams

TOTAL

Total basic
salary
£

361,667
–
344,732
136,694
–
–
119,487
210,000

1,172,580

Fees
£

–
37,125
–
–
30,125
30,125
–
–

97,375

Bonuses
£

192,500
–
242,500
115,500
–
–
–
–

550,500

Total estimated Total remuneration
excluding pensions
2002
£

value of any other
non-cash benefits
£

Total remuneration
excluding pensions
2001
£

1,286
–
1,029
686
–
–
2,310
1,286

6,597

555,453
37,125
588,261
252,880
30,125
30,125
121,797
211,286

351,239
38,500
300,992
–
27,500
4,718
352,433
303,886

1,827,052

1 , 3 7 9 , 2 6 8

Notes:
On 3 May 2002 A M Jenner was appointed as Finance Director and R D White retired as Executive Chairman.
With effect from April 2002, I M Williams has worked for the Company on a part time basis.
In addition to the 2002 bonus, C R Hyman received a discretionary bonus during the year.
R N Hodge received fees of £7,000 in relation to additional days worked as chairman of an internal rail safety committee.
Section 1 is subject to audit by Deloitte & Touche.

2 Directors’ Shareholdings

The Directors’ interests in the shares of the Company were as follows:

K S Beeston
R N Hodge
C R Hyman
R H B Jones
A M Jenner
D S Julius
I M Williams

* at date of appointment

Ordinary Shares of 2p each fully paid
1 January 2002

Ordinary Shares of 2p each fully paid
31 December 2002

98,713
2,010
21,382
46,500

1,722 *

–
2,387,323

106,520
2,010
29,394
55,000
9,529
5,000
2,387,323

3 Share Based Incentives

The total share options granted to each person who has served as a Director of the Company at any time in the financial year
are as follows:

i) Serco Group plc 1996 Long Term Incentive Scheme (“LTIS”)

The total share options granted under the LTIS to such Directors are as follows:

Number of
shares under
option at
1 January 2002
(or, if later,
the date of
appointment
as Director)

3 Yr Award
3 Yr Award
3 Yr Award
–
3 Yr Award
3 Yr Award
3 Yr Award
–
–
–
3 Yr Award
3 Yr Award
3 Yr Award
3 Yr Award
3 Yr Award
3 Yr Award

38,736
51,885*
54,676*
–
32,868
44,474*
46,865*
–
–
–
48,516
51,885*
48,172
32,868
44,474*
46,865*

Number of
shares under
option at
31 December
2002 (or,
if earlier,
cessation
date as
Director)

Granted
during
period

Lapsed
Exercised unexercised
during
period

during
period

Exercise
price
£

Market
price
at grant
£

Value
realised on
exercise
£

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

38,736
51,885
54,676
–
32,868
44,474
46,865
–
–
–
48,516†
51,885†
48,172†
32,868
44,474
46,865

Nil
Nil
Nil
–
Nil
Nil
Nil
–
–
–
Nil
Nil
Nil
Nil
Nil
Nil

4.26
4.90
4.65
–
4.26
4.90
4.65
–
–
–
4.26
4.90
4.65
4.26
4.90
4.65

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

Date
exercisable

31.12.02
31.12.03
31.12.04
–
31.12.02
31.12.03
31.12.04
–
–
–
31.12.02
31.12.03
31.12.04
31.12.02
31.12.03
31.12.04

Date of
expiry of
option

04.04.10
23.11.10
15.11.11
–
04.04.10
23.11.10
15.11.11
–
–
–
04.04.10
23.11.10
15.11.11
04.04.10
23.11.10
15.11.11

K S Beeston

R N Hodge
C R Hyman

A M Jenner
R H B Jones
D S Julius
R D White

I M Williams

* Approximately 13.5% of the options granted under the LTIS represent supplementary options, granted for the sole purpose
of compensating participants for agreeing to bear the Company’s liability to employers’ National Insurance Contributions
upon the exercise of the underlying LTIS options.

† At date of retirement from the Board

The Scheme is an unapproved scheme for Inland Revenue purposes.

No payment was made for the grant of the awards, no awards have had terms varied during the period, and no awards have
been exercised by the Directors since the end of the financial year.

The performance criteria to which the exercise of awards under the LTIS is conditional are as set out on pages 91 and 92.

For each share under an LTIS option that is unexpired at the end of the financial year, the market price at the end of the
financial year was £1.53 and the highest and lowest market prices during the financial year were £4.00 and £1.325 respectively.

R E M U N E R AT I O N R E P O RT

3 Share Based Incentives (continued)

ii) Serco Group plc 1998 Executive Option Plan (“EOP”)

The total share options granted under the EOP to such Directors are as follows:

Number of
shares under
option at
1 January 2002
(or, if later,
the date of
appointment
as Director)

Lapsed
Granted Exercised unexercised
during
during
period
period

during
period

K S Beeston

R N Hodge
C R Hyman

A M Jenner

R H B Jones
D S Julius
R D White

I M Williams

Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
–
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Approved
Approved
Unapproved
Unapproved
Unapproved
Unapproved
–
–
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved

13,788
68,922
76,734
58,764
91,321*
–
–
13,788
25,290
40,812
49,830
78,275*
–
4,134‡
8,574‡
7,422‡
12,336‡
18,524‡*

–
–
–
13,788
119,448
123,612
73,572
91,321*
13,788
78,990
86,076
49,830
78,275*
–

–
–
–
–
–
152,035*
–
–
–
–
–
–
130,316*
–
–
–
–
–
78,189*
–
–
–
–
–
–
–
–
–
–
–
–
130,316*

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

Balance
at 31
December
2002 (or,
if earlier,
cessation
date as
Director)

13,788
68,922
76,734
58,764
91,321
152,035
–
13,788
25,290
40,812
49,830
78,275
130,316
4,134
8,574
7,422
12,336
18,524
78,189
–
–
13,788†
119,448†
123,612†
73,572†
91,321†
13,788
78,990
86,076
49,830
78,275
130,316

Market
price on
exercise
date
£

Exercise
price
£

Value
realised on
exercise
£

Date from
which
exercisable

Date of
expiry of
option

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

2.18
2.18
2.45
4.26
4.35
2.64
–
2.18
2.18
2.45
4.26
4.35
2.64
2.18
2.45
2.45
4.26
4.35
2.64
–
–
2.18
2.18
2.45
4.26
4.35
2.18
2.18
2.45
4.26
4.35
2.64

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05
–
21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05
21.05.01
01.04.02
01.04.02
05.04.03
28.03.04
03.05.05
–
–
21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05

20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09
–
20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09
20.05.08
31.03.09
31.03.06
04.04.07
27.03.08
02.05.09
–
–
20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09

* Approximately 13.5% of the options granted as unapproved options under the EOP represent supplementary options,
granted for the sole purpose of compensating participants for agreeing to bear the Company’s liability to employers’
National Insurance Contributions upon the exercise of the underlying unapproved options.

† At date of retirement from the Board
‡ At date of appointment

3 Share Based Incentives (continued)

ii) Serco Group plc 1998 Executive Option Plan (continued)

The Scheme is an approved scheme for Inland Revenue purposes but has an unapproved schedule.

No payment was made for the grant of the options, no options have had terms varied during the period, and no options have
been exercised by the Directors since the end of the financial year.

The performance criteria to which the exercise of options under the EOP is conditional are as set out on page 92.

For each share under an EOP option that is unexpired at the end of the financial year, the market price at the end of the
financial year was £1.53 and the highest and lowest market prices during the financial year were £4.00 and £1.325
respectively.

Section 3 is subject to audit by Deloitte & Touche.

4 Performance Graph – Serco five year TSR vs FTSE 350 index

350%

300%

250%

200%

150%

100%

50%

-50%

Jan 98

Dec 98

Dec 99

Dec 00

Dec 01

Dec 02

C UM U L AT I V E T S R P E R F O RM A N C E

Serco

FTSE 350 index

Provided by Mercer Human Resource Consulting.

This graph demonstrates the performance of Serco’s total shareholder return (“TSR”) in relation to the FTSE 350 index over the
past five years.

As detailed earlier, TSR is defined as the return shareholders would receive if they held a notional number of shares, and
received dividends on those shares over a period of time. It measures the percentage growth in the company’s share price
together with the value of any dividends paid, assuming that the dividends are re-invested into the company’s shares.

R E M U N E R AT I O N R E P O RT

5 Pensions

The Directors receive pension and life assurance benefits consistent with those provided by other leading companies. The details
of the defined benefit schemes operated by the Group are set out in Note 31. In the event of death in service, each scheme provides
for a lump sum payment as well as a dependants’ pension.

The accrued pension benefits of all Directors under defined benefit scheme are as follows:

Transfer value
of accrued
benefits as at
31 December
2002
£

Transfer value
of accrued
benefits as at
31 December
2001
£

539,342
100,212
11,025
2,532,643
1,141,718

449,414
84,132
–
1,581,562
1,009,305

Increase in
transfer value
between 2001
report and
31 December
2002
£

72,622
1,568
2,446
942,425
122,107

Gross increase
in accrued
pension during
the year
£

Increase
in accrued
pension during
the year, net
of inflation
£

18,429
3,495
2,430
14,680
13,270

16,956
3,265
2,430
11,873
11,246

Value of
net increase
in accrual
over the year
£

Total accrued
pension at
year end
£ p.a.

86,139
4,723
2,446
137,195
107,721

105,073
17,010
2,430
179,772
132,322

K S Beeston
C R Hyman
A M Jenner
R D White
I M Williams

Notes to pension benefits:

a) The total accrued pension shown is that which would be paid annually on retirement, based on service to the end of this

year, or date of retirement in the case of R D White. The increase in accrued pension during the year is shown both as a gross
increase and excluding any increase in inflation.

b) Transfer values have been calculated in accordance with version 1.5 of the Guidance Note GN11 issued by the actuarial

profession. The difference between the transfer values at the beginning and end of the year includes the effect of fluctuations
in the transfer value due to factors beyond the control of the Company and the Directors, such as stock market movements.
It is calculated after deducting Directors’ contributions.

c) The value of the net increase in accrual represents the incremental value to the director of his service during the year,

calculated on the assumption that his service terminated at the year-end. It is based on the accrued pension increase net
of inflation after deducting the Director’s contribution.

d) Members have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are

included in the above table.

e) Transfer values disclosed do not represent the sum paid or payable to the individual Director. Instead, they represent

a potential liability of the pension scheme.

f) In the case of R D White, who retired on 5 July 2002, the increase in transfer value between 2001 and the year-end is a result
of the different actuarial valuation approach for a retired member as opposed to an active member, and as the result of his
benefits having to be restricted by Inland Revenue limits. These effects have been accentuated as a result of
R D White having retired before age 60.

5 Pensions (continued)

g) C R Hyman also benefits from a defined contribution arrangement to which the Company contributes 15% of remuneration
in excess of the Permitted Maximum under the Inland Revenue approved Scheme. Company contributions paid under this
arrangement during the year amounted to £33,247.

Section 5 is subject to audit by Deloitte & Touche.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Dolphin House
Windmill Road
Sunbury-on-Thames
Middlesex
TW16 7HT

19 February 2003

100

Independent Auditors’ Report to the Members of Serco Group plc

We have audited the financial statements of Serco Group plc for the year ended 31 December 2002 which comprise the profit and
loss account, the balance sheets, the cash flow statement, the statement of total recognised gains and losses and the related notes
1 to 32. These financial statements have been prepared under the accounting policies set out therein. We have also audited the
information in the part of the Directors’ Remuneration Report that is described as having been audited.

This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions
we have formed.

Respective responsibilities of Directors and Auditors
As described in the statement of Directors’ Responsibilities, the Company’s Directors are responsible for the preparation of the
financial statements in accordance with applicable United Kingdom law and accounting standards. They are also responsible
for the preparation of the other information contained in the annual report including the Directors’ Remuneration Report. Our
responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report described as having been
audited in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements
and the part of the Directors’ Remuneration Report described as having been audited have been properly prepared in accordance
with the Companies Act 1985. We also report to you if, in our opinion, the Report of the Directors is not consistent with the
financial statements, if the Company has not kept proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with
the Company and other members of the Group is not disclosed.

We review whether the Corporate Governance Statement reflects the Company’s compliance with the seven provisions of the
Combined Code specified for our review by the Listing Rules of the Financial Services Authority and we report if it does not.
We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an
opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.

We read the Report of the Directors and the other information contained in the Annual Report for the above year as described
in the contents section including the unaudited part of the Directors’ Remuneration Report and consider the implications for
our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

101

Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part
of the Directors’ Remuneration Report described as having been audited. It also includes an assessment of the significant estimates
and judgements made by the Directors in the preparation of the financial statements and of whether the accounting policies are
appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’
Remuneration Report described as having been audited are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the
financial statements and the part of the Directors’ Remuneration Report described as having been audited.

Opinion
In our opinion:
• the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2002

and of the profit of the Group for the year then ended; and

• the financial statements and the part of the Directors’ Remuneration Report described as having been audited have been properly

prepared in accordance with the Companies Act 1985.

Deloitte & Touche
Chartered Accountants and Registered Auditors
London

19 February 2003

Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to
achieve this, and in particular whether any changes may have occurred to the financial information since first published. These
matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area.

Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in
other jurisdictions.

102

Consolidated Profit and Loss Account

For the year ended 31 December 2002

2002
Group
£’000

2002
Joint
Ventures
£’000

2002
Total
£’000

Restated
2001
Group
£’000

Note

Restated
2001
Joint
Ventures
£’000

Restated
2001
Total
£’000

TURNOVER: GROUP AND SHARE OF JOINT

VENTURES - CONTINUING OPERATIONS
Less: Share of joint ventures

Group turnover
Cost of sales

GROSS PROFIT
Administrative expenses

Amortisation of intangible assets
Other administrative expenses

Exceptional item: Unsuccessful NATS acquisition

Operating profit-continuing operations
Exceptional item: GSR refinancing
Share of operating profit in joint ventures
Interest receivable

Group
Share of joint ventures

Interest payable and similar charges

Group
Share of joint ventures

PROFIT ON ORDINARY ACTIVITIES

BEFORE TAXATION
Taxation on profit on ordinary activities

PROFIT ON ORDINARY ACTIVITIES

AFTER TAXATION
Dividends

RETAINED PROFIT FOR THE FINANCIAL YEAR

EARNINGS PER SHARE (“EPS”) PER

ORDINARY SHARE OF 2P EACH
Basic EPS, after amortisation of goodwill
Basic EPS, before amortisation of goodwill
Diluted EPS, after amortisation of goodwill
Diluted EPS, before amortisation of goodwill

2 3

1,097,278
–

228,670
(228,670)

1,325,948
(228,670)

913,693
–

227,510
(227,510)

1,141,203
(227,510)

–
–

–
–
–
–
–

1,097,278
(947,313)

149,965
(120,862)
(8,098)
(112,764)
–

1,097,278
(947,313)

149,965
(120,862)
(8,098)
(112,764)
–

29,103
–
–
1,422
1,422
–
(5,486)
(5,486)
–

–
–
21,883
16,894
–
16,894
(14,875)
–
(14,875)

25,039

23,902

29,103
–
21,883
18,316
1,422
16,894
(20,361)
(5,486)
(14,875)

48,941
(16,639)

32,302
(9,441)

22,861

7.66p
9.58p
7.63p
9.54p

913,693
(789,686)

124,007
(102,753)
(5,123)
(97,630)
(10,187)

11,067
15,356
–
2,207
2,207
–
(7,299)
(7,299)
–

–
–

–
–
–
–
–

–
–
17,374
17,102
–
17,102
(15,768)
–
(15,768)

21,331

18,708

913,693
(789,686)

124,007
(102,753)
(5,123)
(97,630)
(10,187)

11,067
15,356
17,374
19,309
2,207
17,102
(23,067)
(7,299)
(15,768)

40,039
(13,012)

27,027
(7,265)

19,762

6.94p
8.25p
6.91p
8.22p

The basis of preparation of this statement and the effect of the prior year restatement is set out in Note 1.

103

Restated
2001
£’000

141,170
48,724
30,510
322,338
(291,828)
18,983

Note

2002
£’000

147,473
62,479
35,883
317,831
(281,948)
18,207

264,042

239,387

38,744
220,042
108,932
71,774

439,492

2,386
74,377
93,843
136,766
6,184

313,556

125,936

389,978
87,588
34,533

267,857

8,697
190,791
143
68,226

267,857

35,838
199,705
76,105
34,812

346,460

70,647
58,034
100,621
128,629
5,026

362,957

(16,497)

222,890
68,570
25,249

129,071

7,903
73,656
143
47,369

129,071

Consolidated Balance Sheet

At 31 December 2002

FIXED ASSETS
Intangible assets
Tangible assets
Investments in joint ventures
Share of gross assets
Share of gross liabilities

Investment in own shares

CURRENT ASSETS
Stocks
Debtors: Amounts due within one year
Debtors: Amounts due after more than one year
Cash at bank and in hand

CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Bank loans and overdrafts
Trade creditors
Other creditors including taxation and social security
Accruals and deferred income
Proposed dividend

NET CURRENT ASSETS/(LIABILITIES)

TOTAL ASSETS LESS CURRENT LIABILITIES
Creditors: Amounts falling due after more than one year
Provisions for liabilities and charges

NET ASSETS

CAPITAL AND RESERVES
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account

EQUITY SHAREHOLDERS’ FUNDS

These Accounts and Notes were approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board:

Kevin Beeston Executive Chairman

Andrew Jenner Finance Director

104

Company Balance Sheet

At 31 December 2002

FIXED ASSETS
Tangible assets
Investments in subsidiaries

CURRENT ASSETS
Amounts owed by subsidiary companies due after more than one year
Debtors: Amounts due within one year
Debtors: Amounts due after more than one year
Cash at bank and in hand

CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Bank loans and overdrafts
Trade creditors
Other creditors including taxation and social security
Accruals and deferred income
Proposed dividend

NET CURRENT ASSETS

TOTAL ASSETS LESS CURRENT LIABILITIES
Creditors: Amounts falling due after more than one year
Provisions for liabilities and charges

NET ASSETS

CAPITAL AND RESERVES
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account

EQUITY SHAREHOLDERS’ FUNDS

Note

2002
£’000

2001
£’000

2,309
141,418

143,727

111,426
21,669
1,297
17,753

152,145

–
1,066
688
6,395
6,184

14,333

137,812

281,539
43,784
335

237,420

8,697
190,791
143
37,789

237,420

1,682
35,598

37,280

148,183
14,820
–
–

163,003

30,245
757
1,077
5,098
5,026

42,203

120,800

158,080
41,420
–

116,660

7,903
73,656
143
34,958

116,660

These Accounts and Notes were approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board:

Kevin Beeston Executive Chairman

Andrew Jenner Finance Director

105

Consolidated Cash Flow Statement

For the year ended 31 December 2002

Note

Operating profit before cost of unsuccessful NATS acquisition
Exceptional item: Cost of unsuccessful NATS acquisition

Operating profit
Depreciation and amortisation of goodwill
Net increase in working capital
One-off pension fund contribution

NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE
Expenditure on PFI asset under construction*

Net cash inflow from operating activities after PFI asset expenditure

Dividends received from joint ventures

RETURNS ON INVESTMENT AND SERVICING OF FINANCE
Interest received
Interest paid

Net cash outflow from returns on investments and servicing of finance

TAXATION
Tax paid

CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible and intangible fixed assets
Sale of tangible fixed assets
Exceptional item: GSR refinancing
Security deposit on PFI asset under construction
Net cashflows with joint ventures
Purchase of own shares

Net cash outflow from capital expenditure and financial investment

ACQUISITIONS AND DISPOSALS
Acquisitions
Net cash acquired with acquisitions
Subscription for shares in joint ventures
Proceeds on disposal of joint ventures

Net cash outflow from acquisitions and disposals

EQUITY DIVIDENDS PAID
Dividends paid

Net cash outflow from equity dividends paid

Net cash outflow before financing

FINANCING
Issue of Ordinary Share Capital
Debt due within one year: (Decrease)/increase in other loans
Debt due beyond one year: Increase in:

Other loans
Non-recourse debt financing PFI asset *
Capital element of finance lease repayments

Net cash inflow from financing

Increase/(decrease) in cash

Balance at 1 January

BALANCE AT 31 DECEMBER

*PFI asset under construction financed by non-recourse loan

2002
£’000

29,103
–

29,103
23,632
(13,124)
(15,500)

24,111
(14,950)

9,161

11,095

1,223
(7,362)

(6,139)

Restated
2001
£’000

21,254
(10,187)

11,067
18,283
(13,866)
–

15,484
(13,733)

1,751

9,645

578
(6,182)

(5,604)

(5,738)

(6,417)

(23,596)
8,125
–
–
1,235
–

(14,236)

(11,353)
397
(370)
1,030

(10,296)

(8,283)

(17,626)
4,569
16,343
(6,000)
(1,945)
(9,964)

(14,623)

(77,106)
3,558
(38)
–

(73,586)

(6,664)

(24,436)

(95,498)

117,929
(300)
15,624
24
15,600
(3,594)

129,659

105,223

(35,835)

69,388

2,001
100
14,850
750
14,100
(2,785)

14,166

(81,332)

45,497

(35,835)

106

Consolidated Statement of Total Recognised Gains and Losses

For the year ended 31 December 2002

Profit on ordinary activities after taxation

Currency translation differences on foreign currency net investments

Total recognised gains and losses for the year

Prior year adjustment (see Note 1)

Total gains and losses recognised since last annual report and financial statements

Restated
2001
£’000

27,027

(1,917)

25,110

2002
£’000

32,302

(1,911)

30,391

(806)

29,585

107

Notes to the Accounts

For the year ended 31 December 2002

1 Accounting policies

These Accounts have been prepared in accordance with applicable UK accounting standards, and the particular accounting
policies adopted are detailed below. These have all been applied consistently with the exception of bid costs which is explained
in the restatement below.

Accounting convention
These Accounts have been prepared under the historical cost convention.

Basis of consolidation
The Group Accounts consolidate the Accounts of the Company and its subsidiaries, and equity accounts for its share of joint
ventures made up to 31 December of each year, for the periods they are owned by Serco Group plc.

Restatement
The 2001 Accounts have been restated to reflect the impact of the Urgent Issues Task Force Abstract 34 (“UITF 34”) – Pre-Contract
Costs; eliminating £1,193,000 of bid costs, previously disclosed within debtors, and the associated tax effect of £387,000. The impact
of this adjustment in the 2002 Accounts is a reduction in amortisation of bid costs of £400,000.

The Profit and Loss Account has been restated to reclassify ‘Other operating costs relating to joint ventures’ within ‘Other
administrative expenses’.

Accounting for PFI Contracts
Within Public Private Partnership (“PPP”) projects (including Private Finance Initiative (“PFI”) projects), where the concession
agreement transfers limited risks and rewards associated with ownership to the contractor, the costs incurred during the period
of initial asset construction, as a direct consequence of financing, designing and constructing the asset, are shown as ‘assets in the
course of construction’ within current assets. On completion of the asset construction phase the asset is transferred to debtors as
‘amounts receivable under PPP contracts’.

Revenues received from the customer are apportioned between capital repayments and operating revenue. The ‘finance income’
element of the capital repayment is shown within interest receivable.

Serco has one Special Purpose Company – Traffic Information Services (TIS) Limited, where the results are fully consolidated. All
other SPCs are classified as joint ventures and accounted for using the gross equity method.

Pension costs: Defined benefit schemes
Retirement benefits to employees of Group companies, except in Germany, are funded by contributions from Group companies and
employees. Payments are made to trust funds which are financially separate from the Group in accordance with periodic calculations
by consulting actuaries. The expected cost to the Group of providing defined benefit pensions is charged to the Profit and Loss
Account so as to spread the cost of pensions over the average service lives of employees in the schemes, in such a way that the cost
is a substantially level percentage of payroll cost, with experience surpluses and deficits being amortised on a straight-line basis.

In Germany retirement benefits to employees are accrued for by Serco GmbH & Co.KG. The expected cost to the Company for
providing defined benefit pensions is calculated in accordance with periodic valuations by consulting actuaries.

108

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

1 Accounting policies (continued)

Pension costs: Defined contribution schemes
Contributions for the year in respect of defined contribution schemes are charged to the Profit and Loss Account. Differences
between charges accruing during the year and cash payments are included as either accruals or prepayments in the Balance Sheet.

The Group has adopted the transitional disclosure requirements of Financial Reporting Standard 17 (“FRS 17”) – Retirement
Benefits. For further information see Note 31.

Turnover
Turnover represents net sales of goods and services to third parties together with investment related income.

Goodwill
Goodwill arising on acquisitions is capitalised in the Consolidated Balance Sheet in accordance with Financial Reporting Standard
10 (“FRS 10”) – Goodwill and Intangible Assets. Amortisation of goodwill is provided on a straight-line basis over a period of 20 years,
which, in the opinion of the Directors is a period not exceeding the economic useful life of the asset.

Current Tax
Current tax, including UK Corporation Tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax
rates and laws that have been enacted or substantially enacted at the Balance Sheet date.

Fixed asset investments: Subsidiaries
Investments held as fixed assets are stated at cost less provision for any impairment in value.

Fixed asset investments: Joint ventures
In the consolidated Accounts, investments in joint ventures are accounted for using the gross equity method of accounting
in accordance with Financial Reporting Standard 9 (“FRS 9”) – Associates and Joint Ventures.

The Group Consolidated Profit and Loss Account includes the Group’s share of joint ventures’ operating profits and interest, and
the attributable taxation. In the Consolidated Balance Sheet, the Group’s share of the net assets of its joint ventures, which includes
several PFIs, is included under the heading ‘investments in joint ventures’. The share of net assets is split between gross assets and
gross liabilities.

Fixed asset investment: Own shares
Investment in own shares represents shares in Serco Group plc held by the Serco Group plc 1998 Employee Share Ownership Trust
(the “Trust”). The dividends on these shares have been waived. Investment in own shares is stated at cost less provision for impairment.

The Trust is a discretionary trust for the benefit of the employees, and shares are held to satisfy the Group’s liabilities to
employees for share options and long term incentive plans. The net cost to the Group of these schemes is charged to the Profit
and Loss Account over the performance period during which the benefits are earned by employees.

Leases
Assets obtained under finance leases are capitalised at their fair value on acquisition and depreciated over the shorter of their
estimated useful lives or lease term. The finance charges are allocated over the period of the lease in proportion to the capital
element outstanding. Rentals on assets under operating leases are charged to the Profit and Loss Account in equal annual amounts.

109

1 Accounting policies (continued)

Depreciation
Depreciation is provided on a straight-line basis at rates which, in the opinion of the Directors, reduce the assets to their residual
value over their estimated useful lives.

The principal annual rates used are:
Freehold buildings
Short leasehold building improvements
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment

2.5%
The higher of 10% or rate produced by lease term
15% – 20%
18% – 50%
10%
20% – 33%
The higher of the rate produced by either lease term or useful life

Stocks
Stocks are stated at the lower of cost and net realisable value. Cost includes an appropriate proportion of direct material and labour.

Long term contracts
Long term contract balances represent costs incurred on specific contracts, net of amounts transferred to cost of sales in respect
of work recorded as turnover by reference to the value of the work carried out to date. No profit is recognised until the contract
has advanced to a stage where the total profit can be assessed with reasonable certainty. Advance payments are included in
creditors to the extent that they exceed the related work in progress.

Pre-contract costs
All bid costs are expensed through the Profit and Loss Account up to the point where contract award is virtually certain in accordance
with UITF 34. Bid costs incurred after this point are then capitalised within debtors. On contract award these bid costs are amortised
through the Profit and Loss Account on a straight-line basis over the contract period.

Deferred taxation
The charge for taxation takes account of taxation deferred because of differences between the timing of recognition of certain
items for taxation purposes and for accounting purposes. Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the Balance Sheet date where the transactions or events that give rise to an obligation to pay more
or less tax in the future have occurred by the Balance Sheet date. A deferred tax asset is recognised only when it is considered
more likely than not that it will be recovered.

Deferred tax is recognised on a non-discounted basis using tax rates in force at the Balance Sheet date. Financial Reporting
Standard 19 (“FRS 19”) – Deferred Tax has been adopted for the first time in these financial statements and there is no material
effect on the comparative figures.

Basis of translation of foreign currencies
Transactions of UK companies denominated in foreign currencies are translated into Sterling at the rate ruling at the date of the
transaction. Amounts receivable and payable in foreign currencies at the Balance Sheet date are translated at the rates ruling at that
date and any differences arising are taken to the Profit and Loss Account.

The Accounts of overseas subsidiary companies and associated undertakings are translated into Sterling at the closing rates of
exchange at the Balance Sheet date and any difference arising from the translation of the opening net investment and matched long
term foreign currency borrowings is taken directly to reserves. The Profit and Loss Account is translated using average exchange rates.

110

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

2 Segmental Report

Classes of Business

2002

TURNOVER
Civil Government
Defence
Transport
Science
Private sector

TOTAL

PROFIT BEFORE TAXATION AND OTHER COSTS
Civil Government
Defence
Transport
Science
Private sector

TOTAL

OTHER COSTS
Common costs
Amortisation of intangible assets
Net interest – Group
Net interest – Joint ventures

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION

NET ASSETS
Civil Government
Defence
Transport
Science
Private sector

TOTAL

Unallocated assets

TOTAL

Group
£’000

267,127
228,579
347,815
115,603
138,154

Joint
Ventures
£’000

89,220
134,654
4,796
–
–

Total
£’000

356,347
363,233
352,611
115,603
138,154

1,097,278

228,670

1,325,948

17,796
13,259
15,126
9,845
6,909

62,935

5,287
15,956
640
–
–

21,883

23,083
29,215
15,766
9,845
6,909

84,818

(25,734)
(8,098)
(4,064)
2,019

48,941

43,269
53,400
45,716
69,771
31,679

243,835

24,022

267,857

111

Group
£’000

202,605
218,001
275,888
87,404
129,795

913,693

13,271
11,312
14,179
4,907
6,778

50,447

Joint
Ventures
£’000

107,917
115,349
4,244
–
–

Restated
Total
£’000

310,522
333,350
280,132
87,404
129,795

227,510

1,141,203

5,169
11,996
209
–
–

17,374

18,440
23,308
14,388
4,907
6,778

67,821

(24,070)
(10,187)
15,356
(5,123)
(5,092)
1,334

40,039

33,517
36,282
27,044
903
14,246

111,992

17,079

129,071

2 Segmental Report (continued)

Classes of Business

2001

TURNOVER
Civil Government
Defence
Transport
Science
Private sector

TOTAL

PROFIT BEFORE TAXATION AND OTHER COSTS
Civil Government
Defence
Transport
Science
Private sector

TOTAL

OTHER COSTS
Common costs
Exceptional item: Cost of unsuccessful NATS acquisition
Exceptional item: GSR refinancing
Amortisation of intangible assets
Net interest: Group
Net interest: Joint ventures

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION

NET ASSETS
Civil Government
Defence
Transport
Science
Private sector

TOTAL

Unallocated assets

TOTAL

112

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

2 Segmental Report (continued)

Geographical segments

2002

TURNOVER
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

PROFIT BEFORE TAXATION AND OTHER COSTS
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

OTHER COSTS
Common costs
Amortisation of intangible assets
Net interest: Group
Net interest: Joint ventures

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION

NET ASSETS
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

Unallocated assets

TOTAL

Group
£’000

752,247
163,218
116,671
65,142

Joint
Ventures
£’000

178,207
7,341
38,406
4,716

Total
£’000

930,454
170,559
155,077
69,858

1,097,278

228,670

1,325,948

35,065
12,895
9,503
5,472

62,935

19,029
625
1,750
479

21,883

54,094
13,520
11,253
5,951

84,818

(25,734)
(8,098)
(4,064)
2,019

48,941

142,821
43,951
40,057
17,006

243,835

24,022

267,857

Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different.

113

Group
£’000

618,559
130,608
103,414
61,112

913,693

26,988
10,041
8,597
4,821

50,447

Joint
Ventures
£’000

175,641
8,876
38,588
4,405

Restated
Total
£’000

794,200
139,484
142,002
65,517

227,510

1,141,203

14,068
720
1,871
715

17,374

41,056
10,761
10,468
5,536

67,821

(24,070)
(10,187)
15,356
(5,123)
(5,092)
1,334

40,039

64,563
9,278
30,919
7,232

111,992

17,079

129,071

2 Segmental Report (continued)

Geographical segments

2001

TURNOVER
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

PROFIT BEFORE TAXATION AND OTHER COSTS
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

OTHER COSTS
Common costs
Exceptional item: Cost of unsuccessful NATS acquisition
Exceptional item: GSR refinancing
Amortisation of intangible assets
Net interest: Group
Net interest: Joint ventures

PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION

NET ASSETS
United Kingdom
Rest of Europe and Middle East
Asia Pacific
North America

TOTAL

Unallocated assets

TOTAL

Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different.

114

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

3 Information regarding Directors and Employees

a) Directors’ remuneration:

Fees as Directors
Other emoluments

Total remuneration excluding pensions

The prior year comparative includes Directors who did not serve in 2002.

b) Employee costs including Directors:

Wages and salaries
Social security costs
Other pension costs (Note 31)
Long Term Incentive Scheme costs

c) Number of persons employed by Serco Group plc and its subsidiaries
Average number of persons employed in the provision of services:
Civil Government
Defence
Transport
Science
Private sector
Non-specific

4 Interest receivable

Short term deposits
Loans to joint ventures

Total Group
Share of joint venture interest

2002
£’000

97
1,730

1,827

2001
£’000

83
1,319

1,402

2002
£’000

2001
£’000

444,693
36,713
29,096
776

511,278

399,447
36,376
19,544
661

456,028

2002

2001

7,138
6,251
4,442
1,665
2,999
202

6,738
6,491
4,653
1,460
2,445
116

22,697

21,903

2002
£’000

818
604

1,422
16,894

18,316

2001
£’000

1,484
723

2,207
17,102

19,309

5 Interest payable and similar charges

Bank loans and overdrafts
Share of joint venture interest

6 Profit on ordinary activities before taxation

Profit on ordinary activities before taxation is after charging:
Rentals under operating leases:

Land and buildings
Plant and machinery

Depreciation on tangible assets:

Owned
Held under finance leases

Finance lease interest on operational assets
Amortisation of goodwill and intangible assets
Auditors’ remuneration:
Deloitte & Touche
Other auditors

Other fees paid to Deloitte & Touche:

Bid support
Tax
Other

Other fees paid to other accountancy firms:

Internal audit
Other

115

2002
£’000

5,486
14,875

20,361

2001
£’000

7,299
15,768

23,067

2002
£’000

2001
£’000

12,599
20,686

12,307
3,227
721
8,098

514
175

1,170
490
595

152
555

11,790
17,586

10,861
2,299
454
5,123

444
125

659
544
432

183
391

116

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

7 Taxation on profit on ordinary activities

The taxation charge on the profit for the year is made up as follows:
United Kingdom Corporation Tax
Double tax relief
Overseas taxation:

Operating income
Exceptional item: GSR refinancing

Deferred taxation
Adjustment in respect of prior years:
United Kingdom Corporation Tax
Overseas taxation
Deferred taxation

Share of joint ventures’ taxation charge

2002
£’000

1,654
–

1,950
–
4,120

(750)
(37)
2,375
7,327

Restated
2001
£’000

3,010
(349)

2,777
1,219
(504)

292
–
501
6,066

16,639

13,012

The current tax recognised for the year is higher than the United Kingdom corporation tax rate of 30%. The main reasons for this
are set out below:

Profit on ordinary activities before taxation multiplied by the UK Corporation Tax rate of 30%

Effect on the reported tax charge of:
Expenses not deductible for tax purposes (primarily goodwill amortisation)
Tax allowances in excess of depreciation
Other short term timing differences
Unrelieved tax losses and higher tax rates on overseas earnings
Tax exempt income and the effect of the use of unrecognised tax losses
Tax incentives including Tonnage Tax and Research & Development Tax Credits

Current tax charge for the year
Deferred tax
Adjustment in respect of prior years

Taxation on profit on ordinary activities

2002
£’000

14,682

3,463
(1,828)
(1,953)
255
(634)
(3,054)

10,931
6,495
(787)

16,639

Restated
2001
£’000

12,012

4,450
(2,610)
(2,109)
2,458
(519)
(959)

12,723
(3)
292

13,012

117

8 Dividends

Interim dividend of 0.64p per share on 429,260,960 Ordinary Shares (2001 – 0.57p on 392,551,903
Ordinary Shares) of 2p each fully paid – paid 11 October 2002
Proposed final dividend of 1.44p per share on 429,448,207 Ordinary Shares (2001 – 1.29p on
389,613,782 Ordinary Shares) of 2p each fully paid – proposed payment on 13 May 2003

2001 final dividend of 1.29p on 39,547,465 shares issued between
31 December 2001 and 13 March 2002 (record date)
2000 final dividend of 1.13p on 50,212 shares relating to shares issued between
31 December 2000 and 6 April 2001 (record date)

2002
£’000

2,747

6,184

8,931

510

–

2001
£’000

2,238

5,026

7,264

–

9,441

7,265

A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust.

9 Earnings per Ordinary Share

Basic and diluted earnings per Ordinary Share after goodwill have been calculated in accordance with Financial Reporting
Standard 14 (“FRS 14”) – Earnings Per Share. Earnings per share is shown both before and after goodwill to assist in the
understanding of the impact of FRS 10 on the Group Accounts.

The calculation of basic earnings per Ordinary Share after goodwill is based on profits of £32,302,000 for the year ended 31 December
2002 (2001 restated – £27,027,000) and the weighted average number of 421,813,107 (2001 – 389,552,980) Ordinary Shares of 2p each
in issue during the year.

The calculation of basic earnings per Ordinary Share before goodwill is based on profits of £40,400,000 (adjusted for the effect
of goodwill amortisation of £8,098,000) for the year ended 31 December 2002 (2001 restated – £32,150,000 adjusted for the effect of
goodwill amortisation of £5,123,000) and the weighted average number of 421,813,107 (2001 – 389,552,980) Ordinary Shares of 2p each
in issue during the year.

The calculation of diluted earnings per Ordinary Share after goodwill is based on profits of £32,302,000 for the year ended 31 December
2002 (2001 restated – £27,027,000) and the weighted average number of 423,288,423 (2001 – 391,115,673) Ordinary Shares of 2p each
assuming that the options are all exercised.

The calculation of diluted earnings per Ordinary Share before goodwill is based on profits of £40,400,000 (adjusted for the effect
of goodwill amortisation of £8,098,000) for the year ended 31 December 2002 (2001 restated – £32,150,000 adjusted for the effect of
goodwill amortisation of £5,123,000) and the weighted average number of 423,288,423 (2001 – 391,115,673) Ordinary Shares of 2p each
assuming that the options are all exercised.

118

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

10 Intangible assets

Cost:
At 1 January 2002
Additions during the year
Adjustments to goodwill capitalised on acquisitions prior to 1 January 2002

AT 31 DECEMBER 2002

Accumulated amortisation:
At 1 January 2002
Charge for the year

AT 31 DECEMBER 2002

Net book value:
AT 31 DECEMBER 2002

At 31 December 2001

Goodwill
£’000

152,889
13,029
(403)

165,515

11,719
7,777

19,496

Other
£’000

–
1,775
–

1,775

–
321

321

Group
Total
£’000

152,889
14,804
(403)

167,290

11,719
8,098

19,817

146,019

141,170

1,454

–

147,473

141,170

Other intangible assets comprise a £1,775,000 premium for the acquisition of two, five-year, licences and are amortised over the licence life.

11 Tangible assets

Group

Cost:
At 1 January 2002
Subsidiaries acquired
Transfer from asset held for resale
Capital expenditure
Disposals
Foreign exchange differences

AT 31 DECEMBER 2002

Accumulated depreciation:
At 1 January 2002
Subsidiaries acquired
Provided during the year
Disposals
Foreign exchange differences

AT 31 DECEMBER 2002

Net book value:
AT 31 DECEMBER 2002

At 31 December 2001

Freehold
land and
buildings
£’000

Short
leasehold
building
improvements
£’000

Machinery,
motor
vehicles,
furniture and
equipment
£’000

7,567
–
5,532
63
(5,535)
405

8,032

2,234
–
181
–
143

2,558

5,474

5,333

10,128
–
–
3,749
(214)
73

13,736

4,074
–
1,153
(175)
17

5,069

8,667

6,054

Total
£’000

115,541
838
5,532
29,431
(11,548)
2,394

142,188

66,817
483
15,534
(4,633)
1,508

79,709

97,846
838
–
25,619
(5,799)
1,916

120,420

60,509
483
14,200
(4,458)
1,348

72,082

48,338

37,337

62,479

48,724

The cost of assets held by the Group under finance leases at 31 December 2002 was £24,977,000 (2001 – £18,905,000). The accumulated
depreciation provided for those assets at 31 December 2002 was £9,168,000 (2001 – £6,903,000).

119

Short
leasehold
building
improvements
£’000

Machinery,
motor
vehicles,
furniture and
equipment
£’000

1,117
1,161
(1,049)
36
–

1,265

355
365
(323)
151
–

548

717

762

2,624
2,329
(1,897)
1,054
(27)

4,083

1,704
1,398
(1,160)
566
(17)

2,491

1,592

920

Total
£’000

3,741
3,490
(2,946)
1,090
(27)

5,348

2,059
1,763
(1,483)
717
(17)

3,039

2,309

1,682

11 Tangible assets (continued)

Company

Cost:
At 1 January 2002
Transfers from subsidiary undertakings
Transfers to subsidiary undertakings
Capital expenditure
Disposals

AT 31 DECEMBER 2002

Accumulated depreciation:
At 1 January 2002
Transfers from subsidiary undertakings
Transfers to subsidiary undertakings
Provided during the year
Disposals

AT 31 DECEMBER 2002

Net book value:
AT 31 DECEMBER 2002

At 31 December 2001

The cost of assets held by the Company under finance leases at 31 December 2002 was £872,000 (2001 – £Nil). The accumulated
depreciation provided for those assets at 31 December 2002 was £71,307 (2001 – £Nil).

12 Investments held as fixed assets

a) Shares in subsidiary companies at cost:

At 1 January 2002
Transfer of investments from Group companies
Transfer of investments to Group companies
Equity subscriptions for shares in Group companies
Redemption of Serco Australia Pty Ltd preference shares

AT 31 DECEMBER 2002

Company
£’000

35,598
115,890
(29,437)
22,908
(3,541)

141,418

120

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

12 Investments held as fixed assets (continued)

b) Group investments in joint ventures:

At 1 January 2002
Dividends receivable
Acquisitions
Disposals
Foreign exchange translation difference
Share of profits after tax

AT 31 DECEMBER 2002

Investment in own shares:
At 1 January 2002
Amortisation

AT 31 DECEMBER 2002

Group
£’000

30,510
(11,095)
370
(139)
(338)
16,575

35,883

Group
£’000

18,983
(776)

18,207

Investment in own shares represents 5,414,630 (2001 – 5,557,033) shares in Serco Group plc held by the Employee Share Ownership
Trust (the “Trust”) equal to 1.25% of current allotted share capital (2001 – 1.4%). The market value of shares held by the Trust at
31 December 2002 was £8,284,384 (2001 – £20,283,170). 142,403 shares were allotted during the year, all of which were at nil
value (2001 – 52,308, of which 9,864 were allotted at £4.26 and 42,444 at nil value).

d) Joint ventures:

The Group’s share of its joint ventures is summarised as follows:

Turnover
Profit before tax
Tax

Fixed assets
Current assets

Liabilities due within one year
Liabilities due after more than one year

Net assets

* Atomic Weapons Establishment Management Ltd
† Premier Custodial Group Ltd

AWE*
£’000

91,386
7,801
(1,832)

–
21,861

21,861

17,660
1,066

18,726

3,135

PCG†
£’000

52,504
4,993
(2,070)

2,288
124,266

126,554

17,518
94,446

111,964

14,590

Other
£’000

84,780
11,108
(3,425)

31,278
138,138

169,416

27,313
123,945

151,258

18,158

2002
Total
£’000

228,670
23,902
(7,327)

33,566
284,265

317,831

62,491
219,457

281,948

35,883

2001
Total
£’000

227,510
18,708
(6,066)

54,147
268,191

322,338

62,817
229,011

291,828

30,510

Adjustments have been made to joint venture results to ensure they are consistent with Group accounting policies.

121

12 Investments held as fixed assets (continued)

e) A list of the principal undertakings of Serco Group plc is shown in Note 32. All the subsidiaries of the Group have been consolidated.

f) At 31 December 2002, Group companies had branches in Abu Dhabi, Bahrain, Chile, Dubai, Korea, Ras Al Khaimah, Saudi Arabia,

Sharjah and Switzerland.

g) The subsidiaries of Serco Group plc and its joint venture undertakings are primarily engaged in the provision of services with

the exception of Serco Investments Limited and certain other holding companies, which manage equity investments.

h) Acquisitions:

All acquisitions made during the year have been accounted for using the acquisition method of accounting. The goodwill arising
on all acquisitions made in the year is being amortised over a period of 20 years.

i) CCM Software Services Limited

All the issued share capital of CCM Software Services Limited was acquired by Serco International Limited on 3 December
2002 for cash consideration of £8,647,000 and deferred cash consideration, contingent on achievement of certain financial
targets post acquisition, valued at £2,068,000. Acquisition costs of £515,000 were incurred.

The fair value of net assets acquired was £631,000 after taking account of adjustments of £448,000 required to recognise
obligations for which no liability had been booked at the date of acquisition.

The goodwill arising on consolidation is £10,599,000.

ii) Other acquisitions

The issued share capital of Euromedic Ltd and the assets and liabilities of SDC, a partnership, were acquired by Serco
Holdings Ltd on 13 March 2002 and 31 May 2002 respectively for a total cash consideration of £2,088,000 and deferred cash
consideration, contingent on achievement of certain financial targets post acquisition, valued at £223,000. Acquisition costs
of £103,000 were incurred.

The fair values of assets and liabilities acquired are considered to be the same as their book values. The total goodwill
arising on consolidation is £2,430,000.

13 Stocks

Service spares
Long term contract balances

Group
2002
£’000

10,065
28,679

38,744

Group
2001
£’000

10,093
25,745

35,838

122

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

14 Debtors

a) Amounts due within one year:

Amounts recoverable on contracts
Other debtors
Prepayments and accrued income
Amounts owed by joint ventures
Building held for re-sale

b) Amounts due after more than one year:
Amounts recoverable on contracts
Other debtors
Pensions prepayment (Note 31)
Amounts owed by joint ventures
PFI asset in the course of construction*

TOTAL DEBTORS

Group
2002
£’000

168,820
18,425
30,131
2,666
–

220,042

Group
2002
£’000

18,412
16,297
28,350
12,033
33,840

108,932

328,974

Restated
Group
2001
£’000

150,342
21,224
19,148
4,257
4,734

199,705

Restated
Group
2001
£’000

11,847
14,131
26,460
9,567
14,100

76,105

Company
2002
£’000

Company
2001
£’000

–
21,089
580
–
–

21,669

–
14,747
73
–
–

14,820

Company
2002
£’000

Company
2001
£’000

–
1,297
–
–
–

1,297

–
–
–
–
–

–

275,810

22,966

14,820

Included in amounts recoverable on contracts is £7,978,000 (2001 – £14,710,000) in respect of items procured on behalf of customers.
This is offset by an amount of £8,792,000 (2001 – £12,038,000) in trade creditors and an amount of £945,000 (2001 – £1,611,000)
in accruals.

* The impact on the Group Accounts of the PFI asset in the course of construction in relation to the Traffic Control Centre

contract is summarised as follows:

Balances in relation to asset in course of construction:
PFI asset in the course of construction excluding capitalised interest
Interest included in PFI asset in the course of construction

Total PFI asset in the course of construction
Cash
Other debtors
Accruals and deferred income

Funded by:
Non-recourse loan
Profits retained within Special Purpose Company

Balance at
1 January
2002
£’000

Movement
during
the year
£’000

Balance at
31 December
2002
£’000

13,733
367

14,100
–
–
–

14,100

(14,100)
–

(14,100)

18,355
1,385

19,740
270
1,447
(4,852)

16,605

(15,600)
(1,005)

(16,605)

32,088
1,752

33,840
270
1,447
(4,852)

30,705

(29,700)
(1,005)

(30,705)

123

15 Other creditors including taxation and social security

Obligations under finance leases
Corporation Tax
Other taxes and social security costs
Other creditors
Amounts owed to joint ventures
Other loans

16 Creditors: Amounts falling due after more than one year

a) Bank loans and overdrafts

Obligations under finance leases
Other loans

Total loans
Less: amounts included in creditors falling due within one year

Amounts falling due after more than one year

b) Analysis of loan repayments due:

Bank loans and overdrafts:
Within one year or on demand

Obligations under finance leases:
Within one year or on demand
Between one and two years
Between two and five years
After five years

Other loans:
Within one year or on demand
Between one and two years
Between two and five years

Non-recourse debt to fund PFI asset
Other

After five years

Non-recourse debt to fund PFI asset
Other

Group
2002
£’000

4,836
2,195
31,432
38,034
16,974
372

93,843

Group
2002
£’000

2,386
15,291
77,505

95,182
7,594

87,588

Group
2002
£’000

Group
2001
£’000

2,557
4,418
30,464
47,689
14,864
629

100,621

Group
2001
£’000

70,647
11,385
60,371

142,403
73,833

68,570

Company
2002
£’000

Company
2001
£’000

267
–
304
117
–
–

688

Company
2002
£’000

–
792
43,259

44,051
267

43,784

–
–
631
446
–
–

1,077

Company
2001
£’000

30,245
–
41,420

71,665
30,245

41,420

Group
2001
£’000

Company
2002
£’000

Company
2001
£’000

2,386

70,647

–

30,245

4,836
4,667
4,291
1,497

372
1,687
70,735
25,200
45,535
4,711
4,500
211

95,182

2,557
2,543
3,826
2,459

629
1,618
14,681
14,100
581
43,443
–
43,443

142,403

267
525
–
–

–
–
43,259
–
43,259
–
–
–

44,051

–
–
–
–

–
–
–
–
–
41,420
–
41,420

71,665

c) Finance lease obligations are secured by retention of title to the relevant assets.

124

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

17 Treasury policies and risk management

The principal risks arising from the Group’s financing activities are interest rate risk and foreign currency risk. Treasury operations
are conducted within a framework of policies set and reviewed by the Board. There has been no material change during the year
or since the year end to the major financial risks faced by the Group or the Group’s approach to the management of these risks.

As permitted by Financial Reporting Standard 13 (“FRS 13”) – Derivatives and other Financial Instruments: Disclosures short term
debtors and non interest bearing short term creditors and loans from joint ventures have been excluded from the following
disclosures other than the disclosure of the currency profile of financial assets and liabilities.

The fundamental purpose of interest rate and foreign currency financial instruments entered into is to hedge monetary assets and
liabilities, the details of which are set out below.

Interest rate risk
The Group borrows at both fixed and floating rates of interest. The Group’s exposure to interest rate fluctuations on its long term
borrowings is managed by using interest rate swaps and forward rate agreements. At 31 December 2002, after taking account of
interest rate swaps, the proportion of the Group’s fixed rate borrowings was 66.6% (2001 – 33.3%).

Foreign currency risk
The Group’s policy is not to hedge the net assets of overseas subsidiaries as they represent a small proportion of the market value
of the Group and because exchange rate fluctuations thereon are unlikely to have a material effect on the consolidated net asset
value of the Group.

Business units are required to hedge their material trading transactions (sales and purchases in currencies other than their
functional currency) by using forward contracts. There were no material debtors or creditors as at 31 December 2002 with
unhedged transactional exposure.

Financial assets and liabilities

i) Assets

31 December 2002

Cash and short term deposits

Long term interest-bearing loans
to joint ventures
Other long term debtors

TOTAL LONG TERM ASSETS

31 December 2001

Cash and short term deposits

Long term interest-bearing loans
to joint ventures
Other long term debtors

Total long term assets

Sterling
£’000

43,024

8,009
87,918

95,927

Sterling
£’000

12,782

8,817
64,564

73,381

Euro
£’000

Australian
Dollar
£’000

13,468

2,009

–
7,285

7,285

Euro
£’000

4,024
1,696

5,720

Australian
Dollar
£’000

11,282

2,450

–
–

–

750
1,363

2,113

US
Dollar
£’000

2,868

–
–

–

US
Dollar
£’000

5,670

–
611

611

Other
currencies
£’000

Total
£’000

10,405

71,774

–
–

–

Other
currencies
£’000

12,033
96,899

108,932

Total
£’000

2,628

34,812

–
–

–

9,567
66,538

76,105

Included in the above is £4,095,000 (2001 – £4,117,000) of loans to joint ventures which carry a fixed interest rate of 13.0% for
a weighted average period of 13 years (2001 – 14 years). All other interest-bearing assets are held at floating rates of interest.
Of total short term debtors 79% (2001 – 93%) is denominated in Sterling.

125

17 Treasury policies and risk management (continued)

ii) Liabilities

31 December 2002

Sterling
Australian Dollar
US Dollar
Euro

TOTAL

31 December 2001

Sterling
Australian Dollar
US Dollar
Euro

Total

Total
liabilities
£’000

Floating rate
liabilities
£’000

Fixed rate
liabilities
£’000

44,586
3,075
46,885
636

95,182

14,886
3,075
13,182
636

31,779

29,700
–
33,703
–

63,403

Total
liabilities
£’000

Floating rate
liabilities
£’000

Fixed rate
liabilities
£’000

98,077
2,451
41,420
455

142,403

83,977
2,451
8,038
455

94,921

14,100
–
33,382
–

47,482

Fixed Rate Liabilities

Weighted Weighted average
time for which
rate is fixed
Years

average
interest rate
%

5.46
–
7.33
–

3
–
5
–

Fixed Rate Liabilities

Weighted Weighted average
time for which
rate is fixed
Years

average
interest rate
%

5.46
–
7.34
–

3
–
6
–

Of total short term creditors 80% (2001 – 81%) is denominated in Sterling.

The maturity of the Group’s financial liabilities at 31 December 2002 and 31 December 2001:

31 December 2002

Sterling
Australian Dollar
US Dollar
Euro

TOTAL

31 December 2001

Sterling
Australian Dollar
US Dollar
Euro

Total

Maturing
within one year
£’000

Maturing
between one
and two years
£’000

Maturing
between two
and five years
£’000

Maturing
after more
than five years
£’000

4,105
768
2,085
636

7,594

3,884
1,255
1,215
–

6,354

30,677
829
43,520
–

75,026

5,920
223
65
–

6,208

Maturing
within one year
£’000

Maturing
between one
and two years
£’000

Maturing
between two
and five years
£’000

Maturing
after more
than five years
£’000

72,677
701
–
455

73,833

3,216
945
–
–

4,161

17,777
730
–
–

18,507

4,407
75
41,420
–

45,902

Total
£’000

44,586
3,075
46,885
636

95,182

Total
£’000

98,077
2,451
41,420
455

142,403

126

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

17 Treasury policies and risk management (continued)

iii) Fair Values

The book value and fair value of the Group’s financial assets and liabilities at 31 December 2002 and 31 December 2001 were:

ASSETS
Cash and short term deposits

Long term loans to joint ventures
Other long term debtors
Derivatives held to manage currency and interest rate risk

TOTAL

LIABILITIES
Long term borrowing:
Sterling
Australian Dollar
US Dollar

TOTAL

Short term borrowing:
Sterling
Australian Dollar
US Dollar
Euro

TOTAL

2002
Book value
£’000

2002
Fair value
£’000

2001
Book value
£’000

2001
Fair value
£’000

71,774

12,033
96,899
–

71,774

12,033
96,899
1,716

108,932

110,648

40,481
2,307
44,800

87,588

4,105
768
2,085
636

7,594

40,481
2,307
49,091

91,879

4,105
768
2,085
636

7,594

34,812

9,567
66,538
–

76,105

25,400
1,750
41,420

68,570

72,677
701
–
455

73,833

34,812

9,567
66,538
4,492

80,597

25,400
1,750
48,991

76,141

72,677
701
–
455

73,833

Foreign currency assets which are hedged using forward foreign exchange contracts are translated at the contracted rates.
The fair value of other foreign currency contracts, interest rate swaps, and the US$70,000,000 loan notes, have been determined
by reference to prices available from the markets on which the instruments involved are traded.

Gains and losses on hedges
Changes in the fair value of financial instruments used as hedges are not recognised until the hedged position matures. There
was an unrecognised gain of £1,716,000 (2001 – gain of £4,492,000) on hedges as at 31 December 2002. The unrecognised gain
is not expected to be recognised in the Profit and Loss Account in the next period.

Borrowing facilities
The Group had committed bank credit facilities of £50,000,000 at 31 December 2002. The Group also had annually renewable
uncommitted bank facilities totalling £111,000,000, all of which were undrawn at 31 December 2002.

127

18 Provisions for liabilities and charges

Group

Pensions provision
Deferred taxation

Company

Deferred tax

19 Deferred taxation

Restated
Balance
1 January
2002
£’000

23,003
2,246

25,249

Balance
1 January
2002
£’000

–

The amounts of deferred taxation provided in the accounts are:
Tax allowances in excess of depreciation
Overseas timing differences
Other timing differences

Potential amounts of deferred taxation for which no credit has been taken:
Overseas timing differences

20 Reconciliation of movements in shareholders’ funds

Profit on ordinary activities after taxation
Dividends

Currency translation differences on foreign currency net investments
New capital subscribed
Exercise of share scheme options

Net increase in shareholders’ funds

Opening shareholders’ funds as previously stated
Prior year adjustment

Opening shareholders’ funds as restated

Closing shareholders’ funds as restated

Utilised
£’000

(463)
–

(463)

Utilised
£’000

–

Group
2002
£’000

2,650
1,967
4,108

8,725

(2,767)

Charged to
the profit and
loss account
£’000

Foreign
exchange
differences
£’000

Balance
31 December
2002
£’000

1,663
6,495

8,158

1,605
(16)

1,589

25,808
8,725

34,533

Charged to
the profit and
loss account
£’000

Foreign
exchange
differences
£’000

Balance
31 December
2002
£’000

335

–

335

Restated
Group
2001
£’000

332
692
1,222

2,246

(3,224)

Company
2002
£’000

Company
2001
£’000

(77)
–
412

335

–

2002
£’000

32,302
(9,441)

22,861
(1,911)
117,929
(93)

138,786

129,877
(806)

129,071

267,857

–
–
–

–

Restated
2001
£’000

27,027
(7,265)

19,762
(1,917)
3,561
(1,260)

20,146

108,925
–

108,925

129,071

128

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

21 Called up share capital

a) Authorised 550,000,000 (2001 – 550,000,000) Ordinary Shares of 2p each

2002
£’000

2001
£’000

11,000

2002
£’000

2001
£’000

b) Called up, allotted and fully paid:

434,862,837 (2001 – 395,170,815) Ordinary Shares of 2p each

8,697

7,903

c) Ordinary Shares of 2p each allotted in the year:

During the year 289,581 Ordinary Shares of 2p each were allotted to the holders of options or their personal representatives.

Of these, 147,178 were allotted using newly issued shares, 2,628 were allotted at £2.0208*, 104,796 at £2.175, 38,706 at £2.45*,
and 1,048 at £3.81.

The remaining 142,403 were allotted at nil value using shares purchased in the market and held in trust.

In addition to the above, 39,500,000 Ordinary Shares of 2p each were allotted under a share placement on 12 March 2002
at £3.05. 44,844 Ordinary Shares of 2p each were also allotted on 19 December 2002 as deferred consideration relating to the
acquisition of Serco QAA (formerly Quality Assurance Associates Limited) made in December 2000.

*Restated to reflect the capitalisation issue on 5 April 2000.

d) Options in respect of Ordinary Shares of 2p each:

ii)

iii)

In January 1996, 1,210,392 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1996 Long Term Incentive Scheme’. At 31 December 2002 no options remain.

In January 1997, 1,439,622 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1996 Long Term Incentive Scheme’. At 31 December 2002 there remained 54,000 options which are
exercisable at nil value in accordance with the rules of the Scheme.

3,341,346 options in respect of Ordinary Shares of 2p each were granted in May and September 1998 in accordance with
the rules of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 2002 there remained 1,606,259 options
which are exercisable at a price of £2.175 each and 10,830 at £2.0208* each in accordance with the rules of the Scheme.

iv) On 1 April 1999, 3,461,664 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 2002 there remained 2,385,474 options which are
exercisable at a price of £2.45 each in accordance with the rules of the Scheme.

On 31 March 2000, 4,511,988 options in respect of Ordinary Shares of 2p each were granted as part of the 1996 Sharesave
Scheme. 2,577,092 options were held by employees on 31 December 2002. The options are exercisable at any time between
1 May 2003 and 31 October 2003 at a price of £3.81 each in accordance with the rules of the Scheme.

vi) On 5 April 2000, 2,524,836 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 2002 there remained 2,368,224 options which are
exercisable at a price of £4.2542* each in accordance with the rules of the Scheme.

129

21 Called up share capital (continued)

d) Options in respect of Ordinary Shares of 2p each: (continued)

vii) On 5 April 2000, 219,900 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the
‘1996 Serco Group plc Long Term Incentive Scheme as amended by the Company on 5 April 2000’. At 31 December 2002
there remained 148,236 options which are exercisable at a nil value in accordance with the rules of the Scheme.

viii) 37,677 options in respect of Ordinary Shares of 2p each were granted in August and November 2000, in accordance with
the rules of the ‘Serco Group plc 1998 Executive Option Plan’. As at 31 December 2002 there remained 26,268 options
which are exercisable at a price of £5.825 and 8,878 options which are exercisable at a price of £4.90 each in accordance
with the rules of the scheme.

ix) On 24 November 2000, 259,351 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules

of the ‘1996 Serco Group plc Long Term Incentive Scheme as amended by the Company on 5 April 2000’. At 31 December
2002 there remained 188,169 options which are exercisable at nil value in accordance with the rules of the Scheme.

On 20 March 2001, 2,851,962 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1998 Executive Option Plan’. As at 31 December 2002 there remained 2,700,200 options which are
exercisable at a price of £4.07 each in accordance with the rules of the Scheme.

xi) On 27 March 2001, 603,144 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group plc 1998 Executive Option Plan’. As at 31 December 2002 there remained 600,838 options which are
exercisable at a price of £4.35 each in accordance with the rules of the Scheme.

xii) On 16 November 2001, 248,374 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules

of the ‘1996 Serco Group plc Long Term Incentive Scheme as amended by the Company on 5 April 2000’. At 31 December
2002 there remained 200,202 options which are exercisable at nil value in accordance with the rules of the Scheme.

xiii) On 3 May 2002, 5,986,743 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules

of the ‘Serco Group plc 1998 Executive Option Plan’. As at 31 December 2002 there remained 5,914,886 options which are
exercisable at a price of £2.64 each in accordance with the rules of the Scheme.

xiv) On 3 May 2002, 55,600 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the

‘1996 Serco Group plc Long Term Incentive Scheme as amended by the Company on 5 April 2000’. At 31 December 2002
no options had been exercised or lapsed. These options have been granted in respect of a three year performance period
starting 1 January 2002 and are exercisable at a nil value in accordance with the rules of the Scheme.

xv) On 6 September 2002, 5,428,691 options in respect of Ordinary Shares of 2p each were granted in accordance with the

rules of the ‘Serco Group plc 1998 Executive Option Plan’. As at 31 December 2002 there remained 5,327,309 options which
are exercisable at a price of £1.645 each in accordance with the rules of the Scheme.

*Restated to reflect the capitalisation issue on 5 April 2000.

e) The market price of Serco Group plc Ordinary Shares of 2p each as at 31 December 2002 was £1.53. The market prices of these

shares ranged from £4.00 to £1.325 during the year.

130

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

22 Share premium account

Group and Company

Balance at 1 January 2002
Deferred consideration relating to the acquisition of Serco QAA Limited
Share premium on issue of shares upon exercise of options
Share placement (net of £3,041,000 expenses)

BALANCE AT 31 DECEMBER 2002

23 Profit and loss account

Group
At 31 December as previously stated
Prior year adjustment

Balance at 1 January 2002 as restated
Retained profit transferred to reserves
Currency translation differences on foreign currency net investments
Exercise of share option schemes

BALANCE AT 31 DECEMBER 2002

£’000

73,656
69
422
116,644

190,791

£’000

48,175
(806)

47,369
22,861
(1,911)
(93)

68,226

The Profit and Loss Account includes a goodwill charge of £41,578,000 under the accounting policy applicable prior to the
implementation of FRS 10.

Company
As permitted by Section 230 of the Companies Act 1985, the Profit and Loss Account of the Parent Company is not presented as
part of these accounts. The consolidated profit for the financial year includes the Parent Company profit of £14,219,000, which
includes dividends of £24,874,000 received from subsidiary companies.

A final ordinary dividend of £6,184,000 is proposed, which together with the interim dividend of £2,747,000 and the payment
in relation to the 2001 final dividend caused by the movement in the number of shares in issue of £510,000, leaves a profit
of £4,778,000 which has been added to reserves brought forward of £34,958,000. This, along with a foreign exchange charge
of £1,947,000, results in reserves carried forward of £37,789,000.

131

24 Reconciliation of operating profit to net cash inflow from operating activities

Operating profit before cost of unsuccessful NATS acquisition
Exceptional item: Cost of unsuccessful NATS acquisition

Operating profit
Depreciation
Amortisation of goodwill and intangible fixed assets
Profit on sale of tangible fixed assets
Increase in stocks
Increase in debtors
Increase in creditors
Increase/(decrease) in provisions
One off pension fund contribution

NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE
Expenditure on PFI asset in the course of construction

Net cash inflow from operating activities after PFI asset expenditure

2002
£’000

29,103
–

29,103
15,534
8,098
(1,948)
(2,906)
(41,870)
30,795
2,805
(15,500)

24,111
(14,950)

9,161

Restated
2001
£’000

21,254
(10,187)

11,067
13,160
5,123
(1,236)
(8,932)
(56,223)
53,578
(1,053)
–

15,484
(13,733)

1,751

25 Analysis of net debt

Cash at bank and in hand
Overdrafts

Cash net of overdrafts
Other loans due after more than one year
Other loans due within one year
Finance leases

Recourse net cash
Non-recourse debt to fund PFI asset

Net debt

Balance
1 January
2002
£’000

34,812
(70,647)

(35,835)
(45,642)
(629)
(11,385)

(93,491)
(14,100)

Cash
flow
£’000

36,962
68,261

105,223
(24)
300
3,594

109,093
(15,600)

(107,591)

93,493

Other
non-cash
changes
£’000

Balance 31
December
2002
£’000

–
–

–
(1,767)
(43)
(7,500)

(9,310)
–

(9,310)

71,774
(2,386)

69,388
(47,433)
(372)
(15,291)

6,292
(29,700)

(23,408)

132

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

26 Reconciliation of increase/(decrease) in cash to movement in net debt

Increase/(decrease) in cash
Cash inflow from non-recourse debt financing PFI asset
Cash outflow from debt and lease financing

Change in net debt resulting from cash flows
Non cash changes from other debt and lease financing

Movement in net debt in the year
Net debt at 1 January

Net debt at 31 December

2002
£’000

105,223
(15,600)
3,870

93,493
(9,310)

84,183
(107,591)

2001
£’000

(81,332)
(14,100)
1,935

(93,497)
(10,089)

(103,586)
(4,005)

(23,408)

(107,591)

27 Major non-cash transactions

During the year the Group entered into finance lease arrangements in respect of assets with a total capital value at the inception
of the leases of £7,610,000 (2001 – £10,089,000).

During the year £93,000 (2001 – £1,260,000) has been charged to the profit and loss reserve in respect of shares issued under employee
share incentive schemes.

Other non-cash movements with respect to other loans relate to foreign exchange.

28 Contingent liabilities

The Group has given indemnities in respect of overseas credit facilities and lease payments amounting to £7,426,000 (2001 – £7,590,000).

In addition to this, the Group has given indemnities in respect of performance guarantees, letters of credit and import duty
guarantees issued on its behalf in the ordinary course of business, which are not expected to result in any material financial loss.

29 Capital and other commitments

Capital expenditure contracted but not provided

Group
2002
£’000

8,595

Group
2001
£’000

1,244

Company
2002
£’000

–

Company
2001
£’000

–

There is a commitment of £30 million in relation to the Traffic Control Centre PFI asset under construction, which will be funded
by non-recourse bank debt.

During the year ending 31 December 2003 the Group is to make the following payments in respect of operating leases:

Leases which expire:
Within one year
Between one and five years
After five years

Land and buildings
£’000

Other
£’000

1,965
7,015
4,464

13,444

4,199
16,690
4,264

25,153

133

30 Related parties

Directors
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and
Directors’ liability insurance.

Joint ventures
The following material transactions took place between the Group and its joint ventures during 2002:

Net loans during the year
Net trading
Royalties and management fees receivable
Dividends receivable

The following receivable balances relating to joint ventures were included in the Group Balance Sheet:

Amounts due within one year:
Loans
Trading balance
Royalties and management fees

Amounts due after more than one year:
Loans

The following payable balances relating to joint ventures were included in the Group Balance Sheet:

Amounts payable within one year:
Loans
Trading balance

Details of Group investments in joint ventures and other principal undertakings are given in Note 32.

2002
£’000

1,797
1,800
2,302
11,095

16,994

2002
£’000

2,140
287
239

2,666

12,033

2001
£’000

2,131
2,671
2,448
9,645

16,895

2001
£’000

–
342
3,915

4,257

9,567

2002
£’000

2001
£’000

16,974
–

16,974

14,165
699

14,864

134

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

31 Pension schemes

The Group has continued to account for pensions in accordance with SSAP 24. Full adoption of the requirements of FRS 17 -
Retirement Benefits will not be mandatory for the Group until the year ended 31 December 2005. The transitional disclosures
required by FRS 17 are set out in Part (B) of this note which shows the Group’s pension deficit in accordance with FRS 17
at 31 December 2002 was £73.6 million (2001 – £3.6 million) on an asset base of £294.4 million (2001 – £298.4 million).

A) SSAP 24 Disclosure

The net pension charge in accordance with SSAP 24 for the year ended 31 December 2002 was £29,096,000 (2001 – £19,544,000).
The Group operates or is a member of a number of pension schemes as follows:

a) Serco Pension and Life Assurance Scheme (“SPLAS”)

This is a pre-funded defined benefit scheme.

The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding
on a projected salary basis.

The latest formal valuation of the scheme was carried out as at 6 April 1999. The figures included in the accounts are based
on a formal valuation, which is currently being carried out as at 6 April 2002. During 2002 there has been a fall in general stock
market values and a bulk transfer was received from the AEA Technology Pension Scheme. The figures in the Profit and Loss
Account and the Balance Sheet prepayment have been determined in accordance with the requirements of SSAP 24. The average
contribution rate is currently 18% for the scheme.

The projected unit method was adopted for the actuarial valuation of the Scheme for accounting purposes. The main actuarial
assumptions used to value liabilities are:

Investment yield
Salary growth
Price inflation
Pension increases

7.0% p.a. (5.5% post retirement)
3.75% p.a.
2.5% p.a.
2.5% p.a.

The Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £145,881,000
at 6 April 1999. Liabilities for this purpose are calculated using the basis for determining individual cash equivalents for
active members and deferred pensioners and by estimating the cost of purchasing annuity policies for pensioners.

The actuarial value of the assets represented 81% of the ongoing liabilities of the Scheme. Variations from the normal costs
are amortised for accounting purposes over a fifteen year period as a constant monetary amount.

Employer pension contributions paid into the Scheme during the year were £12,300,000 (2001 – £9,760,000), of which £500,000
related to special contributions in respect of a discretionary increase to pensions in payment awarded during the year
(2001 – £652,000) and £600,000 of contributions in respect of augmentations (2001 – £810,000). A £15,000,000 contribution
which was included in accruals and prepayments at 31 December 2001 was paid in February 2002.

At 31 December 2002 a prepayment of £17,450,000 (2001 – £17,360,000) in respect of the Scheme was included in the
Balance Sheet. £12,210,000 was charged to the Profit and Loss Account in respect of the Scheme (2001 – £8,950,000).

135

31 Pension schemes (continued)

A) SSAP 24 Disclosure (continued)

b) The Serco-IAL Pension Scheme

This is a pre-funded defined benefit scheme.

The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding
on a projected salary basis.

Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last
such review being carried out as at 31 March 2001. On the assumptions adopted for accounting purposes and based on a
market value of assets of £104,037,000 at 31 March 2001, the actuarial value of the assets represented 110% of the ongoing
past service liabilities of the Scheme as at that date. The current contribution rate is 17.8% for the Scheme.

For accounting purposes, the projected unit method has been adopted and the main actuarial assumptions used to value
liabilities are:

Investment return
Salary growth (excluding salary scale)
Pension increases

6.0% p.a.
4.5% p.a.
2.5% p.a.

The past service surplus in excess of the prepayment as at 31 March 2001 is being amortised for accounting purposes over
a nine year period at a constant monetary amount.

Employer pension contributions paid into the Scheme during the year were £2,125,000 (2001 – £1,738,000).

An amount of £325,000 (2001 – £300,000) has been charged to the 2002 Profit and Loss Account in respect of the Scheme and
a prepayment of £10,900,000 (2001 – £9,100,000) has been included in the Balance Sheet as at 31 December 2002.

c) Serco GmbH & Co.KG Pension arrangement

The German pension arrangement comprises two elements; an unfunded defined benefit arrangement and an unfunded
hybrid scheme.

Actuarial assessments covering liabilities are carried out by independent qualified actuaries, with the last such review
being carried out as at 23 December 1999 and updated as at 31 December 2002 by a qualified independent actuary.

The projected unit method was adopted for the actuarial valuation of the arrangement. The main actuarial assumptions
used in the valuation for accounting purposes were:

Discount rate
Salary growth
Price inflation

6.0% p.a.
3.0% p.a.
1.0% p.a.

The Profit and Loss charge for the year was £1,663,000 (2001 – £130,000) and a provision of £25,808,000 (2001 – £23,003,000)
has been included in the Balance Sheet as at 31 December 2002 of which £20,271,000 (2001 – £17,466,000) relates to the hybrid
element of the Scheme and £5,537,000 to the defined benefit element of the Scheme.

136

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

31 Pension schemes (continued)

A) SSAP 24 Disclosure (continued)

d) Serco Superannuation Fund

The defined benefit element of the Scheme was established in Australia on 1 April 1993 to provide equivalent benefits for
members transferring from the AWA Defence Industries Superannuation Fund, a defined benefit scheme.

Actuarial assessments covering expenses and contributions relating to the defined benefit element of the Scheme are carried
out by independent qualified actuaries, with the last such valuation being carried out as at 31 December 2000. The attained
age method was used for the actuarial valuation of the Scheme as at 31 December 2000. This method was chosen to produce
a level employer contribution rate as a proportion of members’ salaries over the expected future working lives of the existing
members, as the defined benefit element of the Scheme was closed to new members with effect from 1 April 1993.

The main actuarial assumptions used in the actuarial valuation for accounting purposes were:

Average long term interest rate (net of investments
and administration expenses and investment tax)
Average long term allowance for salary increases

8.0% p.a.
5.5% p.a.

The defined benefit element of the Scheme was assessed to be fully funded on a current funding level based on a market
value of assets of £1,385,000 (A$3,938,000) at 31 December 2000 with a ratio of market value of assets to current funding
level liabilities of 107%.

The actuarial value of assets of the defined benefit element of the Scheme represented 115% of its ongoing liabilities
at 31 December 2000. The pension cost calculated under the attained age method will amortise the above surplus over the
expected future working lives of the existing members which have an average value of 11 years.

Employer pension contributions paid into the Scheme and charged to the 2002 Profit and Loss Account relating to the defined
benefit element of the Scheme were £257,000 (2001 – £104,000).

e) The NPL Management Limited Pension Scheme

This is a pre-funded defined benefit scheme. The Company accounts for this scheme as a defined contribution scheme since
at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs
and no asset or liability is shown on the Balance Sheet.

Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the
last such review being carried out as at 5 April 2001. The funding policy is to contribute such variable amounts as will
achieve 100% funding on a projected unit basis.

The average contribution rate is currently 20.8% for the scheme.

The main actuarial assumptions proposed in the valuation were:

Investment return
Salary growth
Price inflation
Pension increases

6.50% p.a. (5.0% for current pensioners)
4.25% p.a. (plus promotional scale)
2.25% p.a.
2.25% p.a.

The market value of assets represented 93% of the ongoing liabilities of the Scheme.

Employer pension contributions charged to the 2002 Profit and Loss Account were £1,903,000 (2001 – £1,634,000).

137

31 Pension schemes (continued)

A) SSAP 24 Disclosure (continued)

f) The Serco Shared Cost Section of the Railways Pension Scheme

Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, the last
such review being carried out as at 31 December 2001. The funding policy is to contribute such variable amounts as will
achieve 100% funding on a projected unit basis.

The main actuarial assumptions used in the valuation were:

Investment return
Salary growth
Price inflation
Pension increases

6.3% p.a.
4.0% p.a. (plus promotional scale)
2.5% p.a.
2.5% p.a.

The actuarial value of assets represented 117% of the ongoing liabilities of the Scheme. The current contribution rate
is 7.5%.

Employer pension contributions charged to the 2002 Profit and Loss Account during the year were £715,000
(2001 – £634,000).

g) Serco Metrolink Pension Scheme

This is a pre-funded defined benefit scheme. The Company accounts for this scheme as a defined contribution scheme
as at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs
and no asset or liability is shown on the Balance Sheet.

Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, the last
such review being carried out as at 31 August 2001. The funding policy is to contribute such variable amounts as will
achieve 100% funding on a projected unit basis.

The main actuarial assumptions used in the valuation were:

Investment return
Salary growth
Price inflation
Pension increases

6.5% p.a.
4.4% p.a.
2.4% p.a.
2.4% p.a.

The actuarial value of assets represented 82% of the ongoing liabilities of the Scheme. The current contribution rate is 8.2%.

Employer pension contributions charged to the 2002 Profit and Loss Account were £244,000 (2001 – £225,000).

138

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

31 Pension schemes (continued)

A) SSAP 24 Disclosure (continued)

h) Docklands Light Railway Pension Scheme

This is a pre-funded defined benefit scheme with Docklands Light Railway Limited being the principal employer. Serco
accounts for this scheme as a defined contribution scheme, since at re-bid any surplus or deficit would transfer to the next
contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the Balance Sheet.

Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the
last such review being carried out at 1 April 2001. The funding policy is to contribute such variable amounts as will achieve
100% funding on a projected unit basis. The main actuarial assumptions used in the valuation this year were:

Investment return
Salary growth
Pension increases
Dividend yield

7.0% p.a.
5.0% p.a. (including promotional scale)
3.0% p.a.
2.75% p.a.

The actuarial value of assets represented 96% of the ongoing liabilities of the Scheme. The current contribution rate is 15.2%.

Employer pension contributions charged to the 2002 Profit and Loss Account were £1,378,000 (2001 – £1,181,000).

i) Other defined contribution schemes

The Group paid employer contributions of £10,401,000 (2001 – £6,386,000) into UK and Australian defined contribution
schemes and foreign state pension schemes.

B) FRS 17 Disclosure

The disclosures required under the transitional arrangements within FRS 17 have been based on the most recent full actuarial
valuations of the Serco Pension and Life Assurance Scheme as at 6 April 1999 and the Serco-IAL Scheme as at 31 March 2001,
updated to 31 December 2002 by independent qualified actuaries.

If the amounts had been recognised in the financial statements the net assets and the Profit and Loss Account would be as follows:

Net assets excluding net, SSAP 24, pension assets
Net pension liability under FRS 17

Net assets including pension liabilities under FRS 17

Profit and loss reserve
Reversal of SSAP 24 prepayments, net of deferred taxation

(Deficit) in relation to SPLAS scheme, net of deferred taxation
(Deficit)/surplus in relation to Serco-IAL scheme, net of deferred taxation

Total pension deficit

Profit and loss reserve adjusted

2002
£’000

248,012
(73,601)

Restated
2001
£’000

110,549
(3,614)

174,411

106,935

2002
£’000

68,226
(19,845)

48,381
(62,427)
(11,174)

(73,601)

(25,220)

Restated
2001
£’000

47,369
(18,522)

28,847
(5,740)
2,126

(3,614)

25,233

31 Pension schemes (continued)

B) FRS 17 Disclosure (continued)

a) Serco Pension and Life Assurance Scheme (“SPLAS”)

The financial assumptions used were:

Rate of increase in salaries
Rate of increase in deferred pensions
Rate of increase in pensions in payment
Discount rate
Inflation assumption

The Scheme’s assets and the expected rates of return as at 31 December 2002 were:

Equities
AA corporate bonds
Gilts
Cash and other

Total market value of assets
Present value of scheme liabilities

Deficit in the Scheme
Related deferred tax asset

Net pension liability

2002
% p.a.

7.00
5.47
4.50
4.00

2002
£’000

134,319
17,252
28,264
–

179,835
(269,017)

(89,182)
26,755

(62,427)

2002
% p.a.

3.85
2.25
2.25
5.47
2.35

2001
% p.a.

7.25
5.83
5.00
4.00

The amount chargeable under FRS 17 to operating profit for the year ended 31 December 2002 would have been:

Service cost
Past service cost

Total operating charge

Analysis of the net return on the pension scheme for the year ended 31 December 2002:

Expected return on pension scheme assets
Interest on pension liabilities

Net return

139

2001
% p.a.

4.00
2.25
2.25
5.83
2.50

2001
£’000

119,600
15,500
21,000
15,800

171,900
(180,100)

(8,200)
2,460

(5,740)

£’000

11,391
1,100

12,491

£’000

12,872
(12,664)

208

140

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

31 Pension schemes (continued)

B) FRS 17 Disclosure (continued)

a) Serco Pension and Life Assurance Scheme (“SPLAS”) (continued)

Analysis of amount recognisable in Statement of Total Recognised Gains and Losses (“STRGL”) for the year ended
31 December 2002:

Actual return less expected return on assets
Experience gains and losses on liabilities
Changes in assumptions

Actuarial loss recognised in STRGL

Movement in deficit during the year:

Deficit in scheme at 31 December 2001
Movement in year:
Current service cost
Contributions
Past service costs
Net return on assets
Actuarial loss

Deficit in scheme at 31 December 2002

History of experience gains and losses:

Difference between expected and actual return on scheme assets
Percentage of scheme assets

Experience gains and losses on scheme liabilities
Percentage of scheme liabilities

Total amount recognised in STRGL
Percentage of scheme liabilities

£’000

(56,996)
(20,013)
(3,990)

(80,999)

£’000

(8,200)

(11,391)
12,300
(1,100)
208
(80,999)

(89,182)

2002
£’000

(56,996)
31.7%

(20,013)
7.4%

(80,999)
30.1%

31 Pension schemes (continued)

B) FRS 17 Disclosure (continued)

b) The Serco-IAL Pension Scheme

The financial assumptions used were:

Rate of increase in salaries
Rate of increase in pensions

– RPI
– LPI
– discretionary

Discount rate
Inflation assumption

The Scheme’s assets and the expected rates of return as at 31 December 2002 were:

Equities
UK bonds
Property
Cash and other assets
Annuity policies

Total market value of assets
Present value of scheme liabilities

(Deficit)/surplus in the Scheme
Related deferred tax asset/(liability)

Net pension (liability)/asset

2002
% p.a.

7.00
4.82
6.24
4.50
5.47

2002
£’000

49,483
28,758
7,690
908
27,798

114,637
(130,600)

(15,963)
4,789

(11,174)

2002
% p.a.

3.85

2.35
2.25
2.25
5.47
2.35

2001
% p.a.

7.25
5.18
6.54
4.00
5.83

The amount chargeable under FRS 17 to operating profit for the year ended 31 December 2002 would have been:

Service cost
Past service cost

Total operating charge

Analysis of the net return on the pension scheme for the year ended 31 December 2002:

Expected return on pension scheme assets
Interest on pension liabilities

Net return

141

2001
% p.a.

4.00

2.50
2.25
2.25
5.83
2.50

2001
£’000

59,694
31,336
7,329
78
28,100

126,537
(123,500)

3,037
(911)

2,126

£’000

2,300
–

2,300

£’000

7,900
(7,000)

900

142

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

31 Pension schemes (continued)

B) FRS 17 Disclosure (continued)

b) The Serco-IAL Pension Scheme (continued)

Analysis of amount recognisable in STRGL for the year ended 31 December 2002:

Actual return less expected return on assets
Experience gains and losses on liabilities
Changes in assumptions

Actuarial loss recognised in STRGL

Movement in surplus during the year:

Surplus in scheme at 31 December 2001
Movement in year:
Current service cost
Contributions
Past service costs
Net return on assets
Actuarial loss

Deficit in scheme at 31 December 2002

History of experience gains and losses:

Difference between expected and actual return on scheme assets
Percentage of scheme assets

Experience gains and losses on scheme liabilities
Percentage of scheme liabilities

Total amount recognised in STRGL
Percentage of scheme liabilities

£’000

(16,100)
700
(4,300)

(19,700)

£’000

3,037

(2,300)
2,100
–
900
(19,700)

(15,963)

2002
£’000

(16,100)
14.0%

700
0.5%

(19,700)
15.1%

c) The Balance Sheet position for all of the other Group Pension Schemes is materially the same in accordance with FRS 17

as for SSAP 24.

143

32 List of principal undertakings

The companies listed below are, in the opinion of the Directors, the principal undertakings of Serco Group plc. The percentage
of equity capital directly or indirectly held by Serco Group plc is shown. The voting rights are the same as the percentage holding.
The companies are incorporated and principally operate in the countries stated below.

Principal subsidiaries

United Kingdom

Rest of Europe
Belgium
Denmark
France
Germany

Ireland

Italy
Guernsey
Luxembourg
The Netherlands
Spain
Sweden
Switzerland

Asia Pacific
Australia

New Zealand
Hong Kong

Other
Canada
USA

Serco Limited
Serco-Denholm Limited
Serco Europe Limited
Serco-IAL Limited
Serco Railtest Limited
Serco Systems Limited
NPL Management Limited
Serco Docklands Limited
Rakmulti Technology Limited
Serco QAA Limited
Traffic Information Services (TIS) Limited

Serco Belgium S.A.
Metro Service A/S
Serco France Sarl
Serco International GmbH
Serco Services GmbH
Serco Services Ireland Limited
CCM Software Services Ltd
Serco s.r.l
Serco Insurance Company Limited
Serco Facilities Management S.A.
Serco Facilities Management BV
Serco Gestion de Negocias SL
Serco Sverige AB
Serco Facilities Management S.A.

Serco Group Pty Limited
Serco Australia Pty Limited
Great Southern Railway Limited
Serco Group NZ Limited
Serco Group (Hong Kong) Limited

Serco Facilities Management, Inc.
Serco Group, Inc.
Serco, Inc.
Serco Management Services, Inc. (Delaware)
Barton ATC, Inc.
Serco Management Services, Inc. (Tennessee)
JL Associates, Inc.

100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
67%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%

144

N OT E S T O T H E AC C O U N T S

For the year ended 31 December 2002

32 List of principal undertakings (continued)

Joint venture undertakings

United Kingdom

Asia Pacific
Australia

New Zealand

Other
USA
Bahrain
Bermuda
Cyprus
Dubai
Saudi Arabia
Singapore
Turkey

Premier Custodial Group Limited
Kilmarnock Prison Services Limited
Lowdham Grange Prison Services Limited
Medomsley Holdings Limited
Pucklechurch Custodial Services Limited
Moreton Prison Services Limited
Serco Gulf Engineering Limited
Defence Management Watchfield Limited
Laser (Teddington) II Limited
Altram (Manchester) Limited
Serco-Denholm Shipping Company Limited
AWE Management Limited

Defence Maritime Services Pty Limited
Serco Sodexho Defence Services Pty Limited
Serco Sodexho Defence Services Limited

Serco – SKE
Aeradio Technical Services WLL
BAS-Serco Limited
Serco Kalisperas
International Aeradio (Emirates) LLC
Key Communications Development Co Limited
Serco Guthrie Pte Ltd
Elektronik Sistemier Destek Sanavi ve Ticaret AS

50%
50%
50%
50%
50%
50%
50%
50%
50%
26%
50%
33%

50%
50%
50%

50%
49%
40%
50%
49%
49%
50%
51%

Full details of related undertakings will be attached to the Company’s Annual Return to be filed with the Registrar of Companies.

145

Investor and Shareholder Information

Registrar
The Company’s registrar is Lloyds TSB Registrars. They maintain our register of members and make the payment of dividends to
our shareholders. Their address is:

Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA, UK
T +44 (0)870 600 3970
F +44 (0)870 600 3980

The Lloyds TSB Registrars shareholder website is at www.shareview.co.uk (the “shareview website”).

Shares in issue
At 31 December 2002 there were 434,862,837 Serco Group plc Ordinary 2p Shares in issue.

Dividend mandate
Dividends can be paid directly into shareholders’ bank or building society accounts. If you want to take advantage of this facility,
please complete the dividend mandate form attached to your dividend cheque, or contact our registrar by post or by fax.

The form is also available by visiting the shareview website.

Dividend re-investment plan
The Serco dividend re-investment plan (“DRIP”) gives shareholders the chance to re-invest their dividends in Serco Group plc
shares instead of receiving cash.

If you participate in the scheme, your cash dividend will be paid directly to the registrar. The administrator will calculate the
number of shares to which you are entitled and buy them on the stock market. Participants’ share purchases are aggregated, so the
dealing costs are relatively low; shares are then distributed to the participants.

To register, you simply have to complete a form and send it to our registrar. For further information about the DRIP please contact
the registrar directly or look under the home page section on the shareview website.

146

Investor and Shareholder Information (continued)

Electronic mailing
Where the law allows, you can now choose not to receive a paper copy of the documentation we send out. Instead we can send you
an email notification every time a new shareholder document is posted on our site. This will include annual and interim reports
and other shareholder communications. You can then view the document(s) on our website at www.serco.com.

To receive documents electronically you will need to register online with our registrar on its shareview website. This is a secure,
straight forward online service operated free of charge by Lloyds TSB.

Postal share dealing services
Serco has arranged with Cazenove & Co Ltd a simple, low-cost method of buying and selling its shares by post, where shares are
bought and sold on the day Cazenove receives instructions by post. For a dealing form, please contact the postal dealing
department at Cazenove.

Cazenove & Co Ltd, 12 Tokenhouse Yard, London, EC2R 7AN, UK
T +44 (0)20 7606 1768

The terms and conditions for this service are found on the last page of the form.

Unsolicited mail
We are legally obliged, whenever requested, to provide copies of our shareholder register to any third parties, so from time to time
you may receive unsolicited mail. You can limit the amount of unsolicited mail you receive by contacting:

The Mailing Preference Service, Freepost 22, London, W1E 7EZ, UK

Change of registered office
On 7 May 2003 the registered office will move to:

Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY, UK

Serco group plc
S U M M A R Y
financial
STATEMENT
2 0 0 2

Summary Financial Statement

Introduction
The Summary Financial Statement has been produced to allow readers of the accounts an overview of the financial affairs of Serco
Group plc and its subsidiaries (the “Group”), through the principal financial statements, without the need to refer to the more detailed
Annual Review and Accounts. This Summary Financial Statement is only a summary of the Annual Review and Accounts, which
contain the full annual accounts, other statutory information and the full Report of the Directors.

This Summary Financial Statement does not contain sufficient information to allow as full an understanding of the results and
state of affairs of the Group as is provided by the full Annual Review and Accounts.

Shareholders have the right to receive, free of charge, a copy of the Annual Review and Accounts from the Company’s Registered Office.

Shareholders who wish to receive, free of charge, full Annual Review and Accounts in place of the Summary Financial Statement for
all future years, should write to the Company at the Registered Office.

Summary Directors’ Report
The Directors have pleasure in presenting this Summary Financial Statement for the year ended 31 December 2002.

Results and dividends
The profit before tax on ordinary activities for the year ended 31 December 2002 was £48,941,000 (2001 Restated – £40,039,000).

An interim dividend of 0.64p per Ordinary Share was paid on 11 October 2002 (2001 – 0.57p). The Directors recommend a final
dividend of 1.44p (2001 – 1.29p) per Ordinary Share which, if approved at the Annual General Meeting, will be paid on 13 May 2003,
to those shareholders on the register at the close of business on 28 February 2003.

Restatement
The 2001 accounts have been restated to reflect the impact of the Urgent Issues Task Force Abstract 34 (“UITF 34”) – Pre-Contract
Costs eliminating £1,193,000 of bid costs, previously disclosed within debtors, and the associated tax effect of £387,000. The impact
of this adjustment in the 2002 accounts is a reduction in amortisation of bid costs of £400,000.

The Profit and Loss Account has been restated to reclassify ‘Other operating costs relating to joint ventures’ within ‘Other
administration expenses’.

Business review and future activities
The 2002 business review is set out on pages 21 to 30.

Directors
The following Directors served during 2002:
Kevin Beeston
Ralph Hodge (Non-Executive)
Christopher Hyman
Andrew Jenner (appointed 3 May 2002)
Rhidian Jones (Senior Independent Non-Executive)
DeAnne Julius (Non-Executive)
Richard White (resigned 3 May 2002)
Iestyn Williams

The total emoluments of Directors, excluding pensions, for the year ended 31 December 2002 were £1,827,000 (2001 – £1,402,000).
The prior year comparative includes Directors who did not serve in 2002.

Summary Directors’ Remuneration Report
During the year the Remuneration Committee (the “Committee”) commissioned a review of Executive Directors’ remuneration,
the first external benchmarking exercise undertaken since 1999, and the first review of base salary levels since September 2000.

The recommendations of the review, which are included in detail in the Remuneration Report section of the Annual Review and
Accounts, are based on a remuneration philosophy grounded in the following four principles: total rewards should be market
competitive; incentive plans should be used to reinforce a high performance culture; the interests of Directors and shareholders
should be aligned as far as reasonably possible; and the reward structure should be easily understood by all.

In revising the remuneration framework the Committee consulted with the Company’s six largest institutional investors,
representing approximately 35% of the shareholder base, and the ABI, before making its recommendations.

Executive Directors’ remuneration comprises the following:

Base salary – which was reviewed in September 2002;

Annual Bonus – Full time Executive Directors will be entitled to receive a one off cash bonus up to 50% of salary depending on the
earnings per share pre FRS 10 (Goodwill amortisation) (“EPS”) growth of the Company during the 2002 financial year. The Company
is expecting to introduce a deferred bonus scheme in 2003 following shareholder approval at the forthcoming Annual General
Meeting. The maximum payment under this plan will be 40% depending on EPS growth relative to RPI. Participants can elect
to defer, for three financial years, up to 100% of the bonus earned to purchase shares in the Company. Shares purchased will
be matched by the Company, if stretching performance targets comparing the Company’s total shareholder return (“TSR”) growth
versus the FTSE 350 are met;

Long Term Incentive Plan – Awards made under this plan are structured as options with a zero exercise price and may be
exercised after the third year of grant. For awards made up to and including 1 January 2002 the performance criteria is measured
by reference to EPS growth. Following shareholder approval, for awards made after this date, performance will be measured by
reference to the Company’s TSR growth versus the FTSE 350 over the three year period. The awards are granted at 64% of salary at
the date of grant;

Executive Option Plan – Options granted under this scheme can be exercised after the third anniversary of grant. For grants made
up to and including 1 January 2002 the performance criteria is measured by absolute growth in EPS over the performance period.
Following shareholder approval, for grants made after this date, performance will be measured by reference to EPS growth
compared to RPI over the three year period;

Pensions and Life Assurance – The Executive Directors receive pension and life assurance benefits consistent with those provided
by other leading companies.

All aspects of Executive Directors’ remuneration are performance related with the exception of base salary, pensions and
life assurance.

S U M M A RY F I NA N C I A L S TAT E M E N T

Summary Directors’ Remuneration Report (continued)

Performance Graph – Serco five year TSR vs FTSE 350 index

350%

300%

250%

200%

150%

100%

50%

-50%

Jan 98

Dec 98

Dec 99

Dec 00

Dec 01

Dec 02

C UM U L AT I V E T S R P E R F O RM A N C E

Serco

FTSE 350 index

Provided by Mercer Human Resource Consulting.

This graph demonstrates the performance of Serco’s TSR in relation to the FTSE 350 index over the past five years.

TSR is defined as the return shareholders would receive if they held a notional number of shares, and received dividends on those
shares over a period of time. It measures the percentage growth in the company’s share price together with the value of any
dividends paid, assuming that the dividends are reinvested into the company’s shares.

Auditors
The Auditors’ Report on the Annual Review and Accounts of the Company and Group for the year ended 31 December 2002 was
unqualified and did not contain a statement under either Section 237(2) or 237(3) of the Companies Act 1985.

Independent auditors’ statement to the members of Serco Group plc
We have examined the Summary Financial Statement which comprises the summary directors’ report, profit and loss account,
balance sheet, cash flow statement and summary directors’ remuneration report.

This report is made solely to the Company’s members, as a body, in accordance with section 251 of the Companies Act 1985.
Our work has been undertaken so that we might state to the Company’s members those matters we are required to state to them
in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, for our audit report,
or for the opinions we have formed.

Respective Responsibilities of Directors and Auditors
The Directors are responsible for preparing the Summary Financial Statement in accordance with applicable United Kingdom law.
Our responsibility is to report to you our opinion on the consistency of the Summary Financial Statement with the full annual accounts,
the Report of the Directors and the Directors’ Remuneration Report, and its compliance with the relevant requirements of section
251 of the Companies Act 1985 and the regulations made thereunder. We also read the other information contained in the Summary
Financial Statement as described in the contents section, and consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the Summary Financial Statement.

Basis of opinion
We conducted our work in accordance with bulletin 1999/6 The Auditors’ Statement on the Summary Financial Statement issued
by the United Kingdom Auditing Practices Board.

Opinion
In our opinion, the Summary Financial Statement is consistent with the full Annual Accounts, the Report of the Directors and the
Directors’ Remuneration Report of Serco Group plc for the year ended 31 December 2002 and Companies Act 1985, and the
regulations made thereunder.

Deloitte & Touche
Chartered Accountants and Registered Auditors
London

19 February 2003

Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in
other jurisdictions.

S U M M A RY F I NA N C I A L S TAT E M E N T

Consolidated Profit and Loss Account

For the year ended 31 December 2002

TURNOVER: GROUP AND SHARE OF JOINT

VENTURES - CONTINUING OPERATIONS
Less: Share of joint ventures

Group turnover
Cost of sales

GROSS PROFIT
Administrative expenses

Amortisation of intangible assets
Other administrative expenses

Exceptional item: Unsuccessful NATS acquisition

Operating profit-continuing operations
Exceptional item: GSR refinancing
Share of operating profit in joint ventures
Interest receivable

Group
Share of joint ventures

Interest payable and similar charges

Group
Share of joint ventures

PROFIT ON ORDINARY ACTIVITIES

BEFORE TAXATION
Taxation on profit on ordinary activities

PROFIT ON ORDINARY ACTIVITIES

AFTER TAXATION
Dividends

RETAINED PROFIT FOR THE FINANCIAL YEAR

EARNINGS PER SHARE (“EPS”) PER

ORDINARY SHARE OF 2P EACH
Basic EPS, after amortisation of goodwill
Basic EPS, before amortisation of goodwill
Diluted EPS, after amortisation of goodwill
Diluted EPS, before amortisation of goodwill

2002
Group
£’000

2002
Joint
Ventures
£’000

2002
Total
£’000

Restated
2001
Group
£’000

Restated
2001
Joint
Ventures
£’000

Restated
2001
Total
£’000

1,097,278
–

228,670
(228,670)

1,325,948
(228,670)

913,693
–

227,510
(227,510)

1,141,203
(227,510)

–
–

–
–
–
–
–

1,097,278
(947,313)

149,965
(120,862)
(8,098)
(112,764)
–

1,097,278
(947,313)

149,965
(120,862)
(8,098)
(112,764)
–

29,103
–
–
1,422
1,422
–
(5,486)
(5,486)
–

–
–
21,883
16,894
–
16,894
(14,875)
–
(14,875)

25,039

23,902

29,103
–
21,883
18,316
1,422
16,894
(20,361)
(5,486)
(14,875)

48,941
(16,639)

32,302
(9,441)

22,861

7.66p
9.58p
7.63p
9.54p

913,693
(789,686)

124,007
(102,753)
(5,123)
(97,630)
(10,187)

11,067
15,356
–
2,207
2,207
–
(7,299)
(7,299)
–

–
–

–
–
–
–
–

–
–
17,374
17,102
–
17,102
(15,768)
–
(15,768)

21,331

18,708

913,693
(789,686)

124,007
(102,753)
(5,123)
(97,630)
(10,187)

11,067
15,356
17,374
19,309
2,207
17,102
(23,067)
(7,299)
(15,768)

40,039
(13,012)

27,027
(7,265)

19,762

6.94p
8.25p
6.91p
8.22p

The results for 2001 have been restated on the basis set out in the Summary Directors’ Report.

Consolidated Balance Sheet

At 31 December 2002

FIXED ASSETS
Intangible assets
Tangible assets
Investments in joint ventures
Share of gross assets
Share of gross liabilities

Investment in own shares

CURRENT ASSETS
Stocks
Debtors: Amounts due within one year
Debtors: Amounts due after more than one year
Cash at bank and in hand

CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Bank loans and overdrafts
Trade creditors
Other creditors including taxation and social security
Accruals and deferred income
Proposed dividend

NET CURRENT ASSETS/(LIABILITIES)

TOTAL ASSETS LESS CURRENT LIABILITIES
Creditors: Amounts falling due after more than one year
Provisions for liabilities and charges

NET ASSETS

CAPITAL AND RESERVES
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account

EQUITY SHAREHOLDERS’ FUNDS

2002
£’000

147,473
62,479
35,883
317,831
(281,948)
18,207

Restated
2001
£’000

141,170
48,724
30,510
322,338
(291,828)
18,983

264,042

239,387

38,744
220,042
108,932
71,774

439,492

2,386
74,377
93,843
136,766
6,184

313,556

125,936

389,978
87,588
34,533

267,857

8,697
190,791
143
68,226

267,857

35,838
199,705
76,105
34,812

346,460

70,647
58,034
100,621
128,629
5,026

362,957

(16,497)

222,890
68,570
25,249

129,071

7,903
73,656
143
47,369

129,071

This Summary Financial Statement was approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board:

Kevin Beeston Executive Chairman

Andrew Jenner Finance Director

S U M M A RY F I NA N C I A L S TAT E M E N T

Consolidated Cash Flow Statement

For the year ended 31 December 2002

Operating profit before cost of unsuccessful NATS acquisition
Exceptional item: Cost of unsuccessful NATS acquisition

Operating profit
Depreciation and amortisation of goodwill
Net increase in working capital
One-off pension fund contribution

NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE
Expenditure on PFI asset under construction*

Net cash inflow from operating activities after PFI asset expenditure

Dividends received from joint ventures

RETURNS ON INVESTMENT AND SERVICING OF FINANCE
Interest received
Interest paid

Net cash outflow from returns on investments and servicing of finance

TAXATION
Tax paid

Net cash outflow from capital expenditure and financial investment

ACQUISITIONS AND DISPOSALS
Acquisitions
Net cash acquired with acquisitions
Subscription for shares in joint ventures
Proceeds on disposal of joint ventures

Net cash outflow from acquisitions and disposals

EQUITY DIVIDENDS PAID
Dividends paid

Net cash outflow from equity dividends paid

Net cash outflow before financing

FINANCING
Issue of Ordinary Share Capital
Debt due within one year: (Decrease)/increase in other loans
Debt due beyond one year: Increase in:

Other loans
Non-recourse debt financing PFI asset*

Capital element of finance lease repayments

Net cash inflow from financing

Increase/(decrease) in cash

Balance at 1 January

BALANCE AT 31 DECEMBER

*PFI asset under construction financed by non-recourse loan

2002
£’000

29,103
–

29,103
23,632
(13,124)
(15,500)

24,111
(14,950)

9,161

11,095

1,223
(7,362)

(6,139)

Restated
2001
£’000

21,254
(10,187)

11,067
18,283
(13,866)
–

15,484
(13,733)

1,751

9,645

578
(6,182)

(5,604)

(5,738)

(6,417)

(23,596)
8,125
–
–
1,235
–

(14,236)

(11,353)
397
(370)
1,030

(10,296)

(8,283)

(17,626)
4,569
16,343
(6,000)
(1,945)
(9,964)

(14,623)

(77,106)
3,558
(38)
–

(73,586)

(6,664)

(24,436)

(95,498)

117,929
(300)
15,624
24
15,600
(3,594)

129,659

105,223

(35,835)

69,388

2,001
100
14,850
750
14,100
(2,785)

14,166

(81,332)

45,497

(35,835)

Directors’ Profiles

Kevin Stanley Beeston FCMA (40)
Executive Chairman
Kevin joined Serco in 1985 and has since held a number of
financial and commercial roles. He was Finance Director of
the Group from 1996 to 1999 and Chief Executive from 1999
to 2002. He was appointed Executive Chairman in May 2002.
He is a member of the CBI’s President’s Committee and Deputy
Chairman of the CBI’s Public Services Strategy Board.

Ralph Noel Hodge CBE BEng (Hons) (68)
Non-Executive Director
Ralph is Chairman of the Water Research Council, and a
Non-Executive of British Ceramic Tiles and ORC (Inc). He
was previously Non-Executive Chairman of Enron Europe
Limited, Chief Executive of ICI Chemicals and Polymers and
a Non-Executive Director of the Halifax Building Society. He
was appointed to the Board of Serco on 5 April 1999, and is
Chairman of the Board’s Remuneration Committee.

Christopher Rajendran Hyman CA (SA) (39)
Chief Executive
Christopher joined Serco in 1994 as Finance Director for Serco
Europe, the division specialising in providing services to
European government agencies. He was appointed Group
Company Secretary with additional responsibility for corporate
finance in 1996. He was appointed Finance Director of the
Group in April 1999. In 2000 Christopher was given additional
responsibility as Chief Executive of a new Serco division, Serco
Global Projects and has been instrumental in developing new
processes and capabilities at the leading edge of the Group’s
activities. He was appointed Chief Executive in May 2002.

Andrew Mark Jenner ACA (34)
Finance Director
Andrew joined Serco in 1996 as Group Financial Controller,
having previously worked for Unilever. He was appointed
Corporate Finance Director with additional responsibility for
Treasury activities in 1999. He was appointed Finance Director
of the Group in May 2002. Andrew has primary responsibility
along with the Executive Chairman for the Company’s
relationship with shareholders and the City.

Rhidian Huw Brynmor Jones MA FCIS FCMI (59)
Senior Non-Executive Director
Rhidian is an experienced corporate finance lawyer and
was Head of the Corporate Department of solicitors Nabarro
Nathanson until retiring from that firm in May last year. He
is also a Non-Executive Director of Britannia, the UK’s second
largest building society, and a policy adviser on company law
to ICSA. Before training as a solicitor at Herbert Smith he
worked in commerce and industry, including seven years in
a senior finance and property role at Granada. He was appointed
a Serco Non-Executive Director in 1996, having previously
served on the Board from 1987 to 1994. He is Chairman of the
Board’s Audit Committee.

DeAnne Shirley Julius CBE PhD (Econ) (53)
Non-Executive Director
DeAnne sits on the Court of the Bank of England, having been
a member of its Monetary Policy Committee from its formation
in 1997 until June 2001. Previously she held senior strategy
positions with British Airways and Royal Dutch Shell. Before
moving to the UK from America, DeAnne spent seven years
with the World Bank developing infrastructure projects in
Asia and Africa. She is a Non-Executive Director of Lloyds
TSB, BP, Roche and was appointed to the Board of Serco
on 29 October 2001.

Iestyn Milton Williams BA (51)
Executive Director
Iestyn joined RCA in 1978 and became Director of Personnel
six years later. After the management buyout in 1987 he became
Personnel Director of Serco. In 1995 he was involved in building
the business in Asia Pacific and later spent two years as
Chairman of Serco North America before returning to the UK
in 1998. Since then he has spent his time developing new
business, first in the expansion of the Group’s activities in
Europe, and for the last two years leading the Group’s entry
into the education sector. Iestyn is also a Non-Executive
Director of Law at Work Ltd and Dolphin Schools Ltd.

S U M M A RY F I NA N C I A L S TAT E M E N T

From left to right:

Kevin Beeston

DeAnne Julius

Christopher Hyman

Andrew Jenner

Ralph Hodge

Rhidian Jones

Julia Cavanagh
(Company Secretary)

Iestyn Williams

With thanks to Rushall JMI School, Walsall.

Investor and Shareholder Information

Registrar
The Company’s registrar is Lloyds TSB Registrars.
They maintain our register of members and make the
payment of dividends to our shareholders. Their address is:

Lloyds TSB Registrars, The Causeway, Worthing, West Sussex,
BN99 6DA, UK
T +44 (0)870 600 3970
F +44 (0)870 600 3980

The Lloyds TSB Registrars shareholder website is at
www.shareview.co.uk (the “shareview website”).

Shares in issue
At 31 December 2002 there were 434,862,837 Serco Group plc
Ordinary 2p Shares in issue.

Dividend mandate
Dividends can be paid directly into shareholders’ bank
or building society accounts. If you want to take advantage
of this facility, please complete the dividend mandate form
attached to your dividend cheque, or contact our registrar
by post or by fax.

Electronic mailing
Where the law allows, you can now choose not to receive a
paper copy of the documentation we send out. Instead we can
send you an email notification every time a new shareholder
document is posted on our site. This will include annual and
interim reports and other shareholder communications. You
can then view the document(s) on our website at www.serco.com.

To receive documents electronically you will need to register
online with our registrar on its shareview website. This is a
secure, straight forward online service operated free of charge
by Lloyds TSB.

Postal share dealing services
Serco has arranged with Cazenove & Co Ltd a simple, low-cost
method of buying and selling its shares by post, where shares
are bought and sold on the day Cazenove receives instructions
by post. For a dealing form, please contact the postal dealing
department at Cazenove.

Cazenove & Co Ltd, 12 Tokenhouse Yard, London,
EC2R 7AN, UK
T +44 (0)20 7606 1768

The form is also available by visiting the shareview website.

The terms and conditions for this service are found on the last
page of the form.

Dividend re-investment plan
The Serco dividend re-investment plan (“DRIP”) gives
shareholders the chance to re-invest their dividends
in Serco Group plc shares instead of receiving cash.

If you participate in the scheme, your cash dividend will
be paid directly to the registrar. The administrator will
calculate the number of shares to which you are entitled and
buy them on the stock market. Participants’ share purchases
are aggregated, so the dealing costs are relatively low; shares
are then distributed to the participants.

To register, you simply have to complete a form and send
it to our registrar. For further information about the DRIP
please contact the registrar directly or look under the home
page section on the shareview website.

Unsolicited mail
We are legally obliged, whenever requested, to provide copies
of our shareholder register to any third parties, so from time to
time you may receive unsolicited mail. You can limit the
amount of unsolicited mail you receive by contacting:

The Mailing Preference Service, Freepost 22, London,
W1E 7EZ, UK

Change of registered office
On 7 May 2003 the registered office will move to:

Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, RG27 9UY, UK

26 February

Ex dividend date

28 February

Record Date

17 March

Accounts published

17 April

Last day for DRIP election

2003 Calendar of events

6 May

Annual General Meeting

13 May

Proposed final dividend

payment

September

Proposed announcement

of interim results

October

Proposed payment

of interim dividend

Artwork and Production: Serco Media & Design

Design: Pocknell

Print: Butler and Tanner

Serco Group plc

Dolphin House

Windmill Road

Sunbury-on-Thames

Middlesex TW16 7HT

United Kingdom

T +44 (0)1932 755900

F +44 (0)1932 755854

Serco Group Pty Limited

Level 10

90 Arthur Street

North Sydney

NSW 2060

Australia

T +61 (0)2 9964 9733

F +61 (0)2 9964 9924

Serco Group, Inc.
20 E Clementon Road
Suite 102 South
Gibbsboro
New Jersey 08026
United States

T +1 856 346 8800
F +1 856 346 8463

Serco Group plc is a company
registered in England and Wales
No. 2048608