In light of severe government spending cuts, Serco, which carries out a host of government contracts running prisons, schools and nuclear facilities wrote to its biggest 193 suppliers to demand a 2.5 percent retrospective cash rebate on contracts held within the 2010 calendar year.
Serco released a statement on Monday, 1 November retracting the letter and apologizing to its main suppliers following speculation that the government is furious about Serco demanding rebates. The government is yet to comment.
“Serco yesterday reaffirmed to the Cabinet Office that Serco's most recent offer of savings to the UK Government will not result in any of the Government's cost saving programme being passed on to our suppliers,” said Serco in a statement.
“More recently we have also been working with the Cabinet Office as part of their efficiency programme, which has involved discussions with our leading suppliers. As a result our plans evolved and we decided not to seek or accept any contributions from our suppliers, who had recently received letters asking for rebates.
“As a company that values our relationships with all our supply chain partners, large and small, we deeply regret this action and apologize unreservedly to them for the concern that this has caused. We are now communicating this to our supply chain partners and retracting the letters,” it concluded.
Serco operates a number of public sector contracts on behalf of the government and local authorities.
These include running four prisons including Doncaster, the maintenance of a number of RAF bases including Brize Norton, and the operation of London's Docklands Light Railway.
Shares in the firm were down 4.6 percent in afternoon trading on the London Stock Exchange, making it the biggest faller on the FTSE 100 index, according to the BBC.
A number of Serco's suppliers had reportedly complained about the demands for rebate payments and believed that the letter sent out appeared to suggest that future contracts were at stake.
Its finance director Andrew Jenner wrote: "I am asking you to offer us a rebate of 2.5 percent (exclusive of VAT) on Serco's full-year spend with you for the 2010 calendar year in the form of a credit note.
"Like the government, we are looking to determine who our real partners are that we can rely upon.
"Your response will no doubt indicate your commitment to our partnership, but will also be something I will seriously consider in our working relationship as Serco continues to grow."
According to press reports, the letter is understood to have angered Cabinet Office Minister Francis Maude because the Government had agreed with Serco that the cuts would come from its own profit margins, rather than those of its suppliers and sub-contractors.
The Government plans to save £800 million from central procurement contracts this year.
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Edited by Ellie Duncan