The justice secretary, Chris Grayling, has been forced to cancel the privatisation of three South Yorkshire prisons because of the fraud investigation into the public services company Serco, the leading bidder to run the jails.
Grayling said the fraud investigation had created delay and uncertainty over the future of the three prisons – Hatfield, Moorland and Lindholme – and the outcome of the competition process could not be delayed any further.
“I have therefore decided that the competition for these prisons will cease and that all three prisons will be managed by HM Prison Service,” the justice secretary announced to MPs.
The decision is a fresh blow to Serco, whose chairman admitted to MPs this week that it had been “ethically wrong” to charge the justice ministry millions of pounds for the tagging of offenders when tags had never been fitted or had been removed.
Grayling has said that both Serco and the other company involved in the tagging allegations, G4S, can continue to bid for prison and probation contracts but will not be awarded them unless they are given a clean bill of health. A Serious Fraud Office criminal investigation is now under way.
Serco was named the preferred bidder for the South Yorkshire prison contract in July 2012. City analysts have put the value of running the three jails at £60m a year.
The decision is a setback to Grayling’s prison and probation privatisation programme. The justice secretary insisted the government remained committed to a mixed market for public services, drawing on public, private and voluntary providers. He told MPs that the three jails would now have to meet a new public sector benchmark to reduce costs.
Serco said it understood the “urgent need for change” at the three prisons and that further delays were not in their best interests.
Ed Casey, acting group chief executive, said: “From meetings with the UK government, it is clear that the operational needs of the prisons will be best served by the necessary changes being implemented without further delay.”
The Prison Governors Association (PGA) said it had been pressing Grayling for a decision on the future of the three jails, warning him that further delays were “clearly detrimental” to the wellbeing and morale of staff working there. Prison governors said they had argued the public sector could deliver quality jails at similar costs to those proposed by Serco.
Eoin McClennan Murray, the PGA president, said: “This is great news for the three prisons. It should be seen as recognition of the recent hard work completed in order to modernise and streamline the public sector prison service. The PGA has long held the view, when given the opportunity, that the public sector can continue to deliver a quality service whilst ensuring costs are reduced.”
The shadow justice secretary, Sadiq Khan, described the decision as a “humiliating climbdown which shows the danger of being overreliant on a private monopoly to run vast swaths of the justice system”.