Right. Good morning, everybody, and welcome to the Serco 2018 results presentation. My name is Rupert Soames, I'm the Chief Executive. I apologize in advance that we've got quite a complicated presentation because there's a lot of ground to cover and a lot of issues that we want to go through with you. There are still three big points I'd like to make. The first is that these results today mark something of a turning point in our business. We've had four and a half years of hard slog to get to where we are today, but the results for 2018 really do demonstrate, I think, that we are on the road to becoming a more normal company.
A company where OCPs are but a rumor rather than the daily dart, and where we can consider doing things like paying dividends, and where we can have a normal balance sheet, and that the tanker does seem to have turned. Secondly, is that what's going on in the market is quite complicated, and we're going to explain that to you, how we see that working out. The third, though, is although that the overall rate of growth in the market, we think, has dropped from what was 5%-7% back between 2010 and 2014. That slowing down is really quite localized to the U.K. market.
Notwithstanding that drop, our strong order intake in the last two years, with over 100% book-to-bill ratio, then a very strong start to 2019 with our biggest order that we've ever signed, and overall about two and a half billion of order intake, means that I think that we can look through a weaker market. Whereas previously we said that our aspiration was to grow at market level, we think actually from our current order book, and assuming we don't have plagues of frogs or any rebid disasters, we should be able to actually grow faster than the market, both in 2019 and in 2020. Going to the details of the results, you'll see them in front of you. I'm not going to go through every line. The notable thing about revenue was the game of two halves theory.
We had a 6% revenue drop in the first half and a 2.5% revenue increase in the second half. Underlying trading profit up 40% in constant currency, underlying EPS up 55%. The important thing about the order intake is two things. First of all, is over the last two years, 80% of it has come from overseas. Having said that, our biggest order ever was in the U.K. market, which was the asylum seekers contract. In the first six weeks of the year, we have already signed GBP 2.5 billion worth of orders, which takes us to about 85% book-to-bill for 2019 expected revenues. Our acquisitions are performing well. Very pleased, particularly with the acquisition of the Carillion healthcare contracts, and those are now performing well and contributing to profit, as is BTP. Our balance sheet is robust.
It's not only robust, but I think you could quite say it's pretty clean. We are paying our suppliers in 30 days on average, we are being paid by our customers in 29 days on average. There's no working capital financing facilities in between to go and disturb that relationship. We're down, well down the bottom end of our target leverage range. We've got one more year, we think, of cash outflows coming up in 2019 as the OCPs and some exceptional charges work their way through. We did have a positive free cash flow of GBP 29 million in 2018.
In terms of guidance, we'll go through that in more detail, we think now that we're going to be at the top end of our previous range of GBP 95 million-GBP 100 million that we discussed in December, around about GBP 100 million, to which there is GBP 5 million on top for IFRS 16. Actually, the important thing is that we think now we can get to 5% revenue growth in 2019. Looking how that translates itself into profit evolution, the fact is between 2017, the nadir, and 2019, where we expect to be, we're headed for 20% compound growth over those two years. If you take the GBP 24 million difference between the GBP 69 million and the GBP 93 million for FY 2018, there's GBP 4 million of negative ForEx impact, there's GBP 10 million of non-recurring trading items.
Actually means that that progression from 2017 to 2019 is actually smoother than it looks, as I say, is a very respectable 20% compound growth rate, we expect to have continued momentum into 2020. At which point I'm going to hand over to Angus.
Thank you very much, Rupert. Good morning. We'll now go through the finance review. Let's start. Income statement as usual. Revenue stated on IFRS 15 basis, as usual excludes our share of joint venture revenue, whilst the trading profit measures include our share of JV profit after tax. The prior year numbers have been adjusted for IFRS 15, as stated previously, the impact is not significant. Revenue of GBP 2.8 billion is down 3.9% on a reported currency basis and is down 1.7% in constant currency, which comprises a 3.1% organic decline from net contract attrition, partially offset by a 1.4% net contribution from acquisitions, namely BTP in the U.S. and Carillion Health in the U.K.
The adverse currency impacts of GBP 65 million in revenue and GBP 4 million in underlying trading profit, or UTP, arose primarily from the strengthening of sterling against the dollar for an average rate of 1.29 in 2017 to 1.34 in 2018. The key translational sensitivity remains the US dollar, where a $0.05 movement in the 2018 average rate has a full year 2019 impact of some GBP 40 million of revenue and GBP 2.5 million of UTP. You can see a positive adjustment of GBP 23.6 million for the net impact of our items arising from the 2014 contract and balance sheet review. The bulk of this relates to a GBP 12.8 million net release of OCP contract provisions, reflecting our continued progress in working through the remaining balance, as well as the release of non-OCP provisions that we took in 2014, which are no longer required.
We've removed the benefit of these releases from UTP to ensure that we give you an accurate picture of true underlying performance. Despite the reduction in revenue, underlying trading margin improved by 100 basis points to 3.3%, primarily reflecting our continued progress in reducing costs, as well as around GBP 10 million of non-recurring trading benefits, as we discussed in September. G&A costs were GBP 20 million lower year-on-year, reflecting our continued progress in reducing our overhead cost base as we continue to transform our operations. Going forward, the focus will be on managing our labor costs more efficiently, continuing to embed operational excellence, and optimizing procurement, which we're currently in the process of transforming. The revenue decline was most pronounced in the Americas, where organic revenue fell by 5%, largely due to a reduction in volumes on our CMS contract.
I have to say, it was a little disconcerting to hear Rupert use a football analogy a second ago, but it was something of a game of two halves, with first half organic revenue falling by 12%, followed by half 2 increasing by 3%, largely driven by improved volumes and ship modernization and anti-terrorism and force protection contracts. The 4% organic decline in the U.K. and Europe was almost wholly caused by the end of the Glasgow Access contract late in 2017, with the increases and decreases across the rest of the contract portfolio largely offsetting each other. This organic decline was partly offset by the GBP 30 million of revenue from the Carillion Health acquisition during the second half.
In APAC, the GBP 6 million decline in organic revenue was largely caused by prior year contract attrition relating to our loss-making Armidale patrol boats contract, as well as the half 1 impact of the Western Australia prisoner escorting contract. This attrition was largely offset by strong growth in our citizen services business, where we secured several contact center and processing support contracts. These wins resulted in the APAC business growing its organic revenue by 10% in H2, following the 11% decline in H1. The Middle East grew its revenue organically by 1%, largely as a result of securing an airport fire and rescue service contract in Saudi. For the group as a whole, acquisitions provided year-on-year growth of 1.4%, while currency accounted for 2.2% of the total 3.9% fall in reported revenue.
While organic revenue declined year on year, it is encouraging to note that the 6% organic decline in H1 turned to flat in H2, which provides a platform for us to resume revenue growth as we look ahead to 2019 and 2020. UTP for the group of GBP 93 million represents year-on-year headline growth of 34% and 40% in constant currency terms. All the regions saw growth in their underlying profitability, both in reported and constant currency. UTP constant currency growth of 12% in the U.K. and Europe was largely driven by cost savings, including the benefit of consolidating the two U.K. and E divisions into one. This led to an improvement in underlying trading margin from 2.6% to 3%. In the Americas, UTP grew by 30% in constant currency to GBP 46 million.
A strong focus on cost savings and contract efficiencies, combined with the new CMS contract structure, ensured that the impact of lower revenue was offset by improved profitability, leading to an increase in margin from 5.3% to 7.1%. In ASPAC, UTP grew by a constant currency 27%, with trading margin improving 100 basis points to 4.9%. This improvement in margin reflects the impact of the end of a loss-making Armidale patrol boats contract, the impact of our progress in transformation savings, and other cost efficiencies, as well as several non-recurring contractual commercial settlements. UTP in the Middle East grew by 30% to GBP 21.5 million, in large part reflecting the prior year real bidding costs and higher than expected profitability in the previous ME LABS base support contract. Consequently, trading margin in the Middle East improved to 6.3% from 4.9%.
Remember that scope changes in the Middle East in the ME LABS rebid and other contract changes means that profits and margins in 2019 will be substantially reduced. Ongoing cost reduction programs delivered further savings in corporate costs, with a reduction of 4% to GBP 40 million. While GBP 10 million of the improvement in profit related to non-recurring items, the improvement in underlying profit during the year was encouraging and reflects the progress made in reducing the cost base of the business. Since 2015, over GBP 120 million has been taken out of our overheads and activities delivered through shared services. Turning to the bottom of the income statement, the increase in finance costs was largely due to the reduction in the pension scheme credit as a result of the bulk annuity purchase in 2017.
In October 2018, the Intelenet business was sold to Teleperformance, triggering the GBP 37 million repayment of a vendor loan note and consequent exceptional gain in net finance cost to GBP 7.5 million. This will reduce interest income and the unwind of the fair value discount going forward. The blended average cost of our debt in 2018 was lower at 4.7% as compared to 5.2% in 2017. This reflects in part repayments of GBP 30 million of our more expensive private placement debt. This rate benefit was offset by a GBP 50 million increase in average net debt during 2018. I will cover tax and exceptionals in a moment. Underlying diluted EPS grew by 55%, from GBP 0.0336 to GBP 0.0521, reflecting primarily the reported 34% increase in UTP and the lower tax rate.
Statutory reported diluted EPS, which includes non-underlying items and exceptionals, was GBP 0.0599 as compared to a loss of GBP 0.0076 in the prior year. The weighted average number of shares and issue for diluted EPS purposes increased from 1.12 to 1.13 billion. The board is not recommending the payment of a dividend in respect to the 2018 financial year. The board's dividend appraisal considers market outlook, financial performance, cash flow generation, leverage, and what is an appropriate level of dividend cover. Although the board is committed to resuming dividend payments as soon as it judges it prudent to do so, for 2018, we are mindful of the fact that 2019 is the final year of significant cash outflows related to historical OCPs and exceptional costs, which together will mean that net debt is likely to increase again in 2019, albeit modestly.
The board will continue to keep the dividend policy under careful and regular consideration as we progress with completing the transformation and focusing on the growth phase of our strategy. Turning back to tax, the underlying tax cost was GBP 21 million, giving rise to an effective rate of 26%. The underlying effective rate for the year is lower than the 35% of the prior year, due to lower U.K. losses in which we get no tax accounting credit and the reduction in the U.S. federal rate from 35% to 21%. The effective rate remains higher than the blended country corporation tax rates due to the absence of the accounting tax credit for the U.K. and year tax losses.
Given the improving outlook in terms of U.K. profitability, GBP 20 million of deferred tax asset is now recognized, up from GBP 17 million last year, with a further GBP 151 million of contingent tax asset, which we can recognize as the outlook for U.K. profitability further improves. Looking to 2019 and beyond, we expect the effective tax rate to be below 25%. Cash tax paid of GBP 11 million during 2018 was similar to 2017. It is difficult to find anything positive to say about OCPs, but they have provided an effective cash tax shield over the past few years. As we reach the end of most of these loss-making contracts, we will see cash tax increase to more normal levels.
In 2019, we expect cash tax to increase to around GBP 25 million, primarily as a result of higher taxable profits in Australia. Largely due to the reduction in the tax shield from OCPs and the non-repeat impact of a tax repayment in 2018 in North America. In terms of exceptional items, these were a net GBP 22 million in 2018 as compared to GBP 25 million in the prior year. The key element of operating exceptionals related to restructuring costs arising from transformation, which amounted to GBP 32 million and included redundancy and other incremental costs of implementing this phase of the strategy. Among the other operating exceptionals was a GBP 14 million credit related to the reversal of a loan balance arising on a German disposal in 2012, testament to the persistence of our treasurer over several years.
Going the other way is a GBP 10 million exceptional charge relating to the Lloyds Bank High Court ruling on the equalization of Guaranteed Minimum Pension, the cash impact of which will be spread over 10 years. With respect to pensions, we have a pension accounting surplus, and on an actuarial basis, including this GBP 10 million increase, the deficit is only around GBP 25 million. As highlighted earlier, the repayment of the Intelenet loan note resulted in a gain of GBP 7.5 million, which is included as exceptional finance income. The exceptional cash outflow was GBP 40 million, which included GBP 32 million in respective restructuring costs and the final GBP 8 million installment of the DLR pension scheme. We expect restructuring costs to be lower in 2019 at around GBP 20 million, reflecting the advanced stage we've reached in terms of transformation. Turning now to cash flow.
You can see the breakdown of the GBP 25 million free cash flow in free cash inflow. Please note the word inflow, which compares to the GBP 7 million outflow last year. This reflects our improved financial performance in 2018 and is a little better than we projected. Being free cash flow positive is a key step on our road to recovery. The cash flow associated with our onerous contracts was GBP 52 million, some GBP 17 million lower than the prior year, and we expect this number to drop to GBP 40 million-GBP 45 million in 2019, and then to be in the range of GBP 10 million-GBP 15 million in 2020, marking the end of this historical drag in margins and cash. At that point, the remaining OCP balance of some GBP 15 million-GBP 20 million will be a long way from the GBP 447 million cash outflow we faced at the start of 2015.
The working capital outflow in the period was GBP 22 million as compared to GBP 14 million last year. In 2018, as with 2017, we didn't utilize any form of receivables or payables financing. Our billed receivable days, as Rupert said, are 29, and trade payable days are 30. Turning to the bottom half of the cash flow. The other items that contributed to the GBP 47 million increase in net debt to GBP 188 million are highlighted. We completed the acquisition of BTP Systems in the U.S. and the Carillion Health FM contracts, leading to a net acquisition outflow of GBP 31 million. There was also a Forex movement of GBP 22 million, reflecting the impact of the weakening of sterling on our U.S. private placement debt. Daily average net debt for the period was GBP 235 million, GBP 47 million higher than year-end, which is a similar difference to 2017.
Post the covenant adjustments highlighted in the appendix, our net debt to EBITDA leverage is 1.1x, down from 1.4x at the end of 2017, and near the bottom of our target range of 1x-2x, as well as being significantly below a covenant of 3.5x. On an underlying basis, leverage was 1.2x. In December 2018, we completed the GBP 250 million refinancing of our revolving credit facility. This facility is committed for five years and is provided by a group of nine banks on substantially the same terms as our previous facility. We reduced the facility size from GBP 480 million, reflecting the fact that we are within sight of the finishing line in terms of our OCPs, thereby reducing facility costs. In terms of liability stack, we remain in good shape. We have no off-balance sheet debt in the form of receivable or payable financing.
Our pension is an accounting surplus, a small actuarial deficit, and almost half the liability now sitting with an insurance company. Our payables days are in line with government supplier requirements. We have very little cash received in advance in which revenue is being deferred, and our JVs are operational in nature with minimal debt. As usual, we try and pick a couple of topics of interest to cover in this presentation. Whether IFRS 16 and inflation can strictly be viewed as interesting, I will leave it up to you. On we go. IFRS 16, the new accounting standard for leases, is effective from January 1, 2019. Our 2019 guidance is therefore restated for IFRS 16, but it should be noted that the reported result for prior years will not be restated.
This is because we've adopted the modified retrospective approach, which sets the liability on January 1, 2019, with the right-of-use asset being calculated as if it's always been in place. It's worth noting, we haven't cherry-picked. We've used 100% of our leases under this method. From a balance sheet perspective, operating leases come on balance sheet as a right-of-use asset based on the present value of the lease payments, with a corresponding liability to the lessor included in the balance sheet as a lease obligation. Lease payments are apportioned between finance charges and the reduction in the lease obligation. A key consideration of '16 is its impact on bank covenants, because operating lease obligations, which for us will fluctuate significantly, will now be considered as debt for accounting purposes.
To remove this potential volatility, our bank covenants will remain on a pre-IFRS 16 basis, and our net debt guidance for next year also excludes IFRS 16. In thinking about '16, remember that the total reported earnings and associated cash flows are unchanged over the lease term. There is a timing impact on earnings, and the asset depreciation is straight-lined over the lease term, while the interest cost declines through the life of the lease because it's calculated on a reducing balance basis. Compared to the previous accounting methodology for operating leases, where the whole operating lease was treated as an operating expense, operating costs will be lower, which leads to higher trading profit, though there is also the interest element, meaning the interest cost will also be higher. In P&L terms for 2019, IFRS will mean that we stop charging GBP 35 million of operating leases to UTP.
Instead, we will have a depreciation charge on the right-of-use asset of circa GBP 30 million and an associated interest cost of around GBP 5 million. In terms of adjusting our 2019 guidance for IFRS 16, UTP should be increased by around GBP 5 million with a similar GBP 5 million increase in interest cost, meaning no change to earnings per share. Balance sheet-wise, the opening adjustment will bring an opening right-of-use lease asset of some GBP 90 million and a lease liability of GBP 120 million onto the balance sheet. The difference of GBP 30 million, caused partly by the transition methodology and the need to write off the right-of-use assets in OCP contracts, will be taken through retained earnings.
Finally, it should be noted that 2016 will mean that the new AASC contract leases will come on balance sheet later this year, with the COMPASS leases being excluded as they had less than a year to run. Around three-quarters of our revenue is from fixed price contracts. We therefore pay close attention to how we protect ourselves against cost inflation, most particularly wage inflation, as some 70% of our costs are people related. The other quarter of our contracts are a mixture of cost-plus and short-term task orders from framework agreements. In addition, we have a smaller number of contracts where part of our revenue is generated directly from end users. For example, NorthLink Ferries or Edinburgh Cycle Hire, which have more direct mechanisms for passing on cost inflation via fare increases.
Going back to the fixed price contracts, over 90% of them have a significant amount of inflationary protection built in. Most commonly, this is in the form of generic inflationary adjusters such as RPI, RPIX, CPI, or baskets of goods indices. In some instances, we have specific inflation adjusters for labor rates. For example, the London Living Wage for our Barts contract. Where fuel is provided as part of a contract, we typically have specific fuel price adjusters. The only perfect protection against inflationary cost pressure is essentially a cost-plus contract. However, Serco has some significant protection against cost inflation, even though our contracts can be described as fixed in nature. Finally, let's look at the outlook and modeling assumptions. We expect revenue to be in the range of GBP 2.9 billion-GBP 3 billion, with broadly neutral ForEx based on where rates have been recently.
This is against GBP 2.8 billion in 2018 and would be our first year of revenue growth since 2014. This assumes organic growth of 3%-4% and an acquisition contribution of circa 1%, driven by the full year impact of the Carillion health contracts. For UTP, we previously guided to GBP 95 million-GBP 100 million pre-IFRS 16. Given the encouraging start to the year, we expect to be around the top end of that range and then a further GBP 5 million increase in relation to IFRS 16, taking guidance to around GBP 105 million. The recent contract wins in the U.K. and Australia are unlikely to have much impact in profit in 2019 due to transition costs, but will contribute fully in 2020.
In thinking about 2019, one needs to consider the GBP 10 million-GBP 12 million drag in profits from the margin resets of ME Labs and AWE, as well as the GBP 10 million of benefit from non-recurring trading items in 2018. We anticipate that this will be more than offset by growth in a number of our business units, notably U.K. health and ASPAC citizen services, as well as contract cost efficiencies.
However, we always need to bear in mind the broad range of potential outcomes, particularly given the early stage of the year and the sensitivity of profit to even small percentage changes in revenues and costs. We expect net finance costs to be around GBP 20 million, with the increase on the GBP 14 million of 2017 being primarily due to the absence of non-cash credits on the Intelenet loan note and the previously discussed IFRS 16 related increase in interest costs of around GBP 5 million. We expect net debt, excluding the IFRS 16 impact, i.e. covenant net debt, to be around GBP 200 million with covenant leverage between one and 1.5 times. The rest of the guidance is there for your reference, and I'll hand you back to Rupert.
Thank you, Angus. Those of you who've been watching our presentations in the past may look for hints about our morale. You will notice that in our highlights and lowlights stage, which are normally 50% of the acreage for each, the highlights have invaded the space of the lowlights, which is rare. We've had a pretty successful year operationally. There have been some operational challenges. The delivery of sleepers is late. They come into service in the coming weeks. We will get them going on both the Lowland line and the Highland line in time for the summer season this year. The other worrying thing is the sharp rise in prison violence. You'll see this both in the public and the private prisons. They've had a very rough time. The levels of violence have been very serious in the first half.
They have actually been showing some signs of reduction, and some of the initiatives taken by Rory Stewart on crime reduction seem to be having a bit of an effect, and we've just had two or three months now of significantly, well, noticeably lower violence in the prisons. I'm going to talk about the pipeline more in the coming slides. We lost DFRMO, which was a blow in the U.K. We'd been pretty hopeful that we might win that. We also lost two very large contracts in the U.S., SPARS, which was for looking after deep space radar systems, and a kitting contract for the US Navy. We also, right at the end of the year, lost Bahrain Air Traffic Control, which was actually quite a valuable contract in terms of margin. The U.K. environment remains weak.
Again, I'll talk more about that with a slide on that coming up. Also about Brexit, which is causing immense difficulty for the civil service. They already had a lot on in terms of the departments that were suffering significant cuts as a result of government trying to bear down, or at least keep stable government expenditure whilst increasing it on the NHS. The departments like the MOJ and the Home Office having to bear significant cuts, and then on top of that, we're having to deal with Brexit. In terms of highlights, Angus has gone through the trading. I won't reiterate that. It was a year in which we had an upgrade, which is always nice. The 100% book-to-bill is important to us. Whether we'll maintain that going forward, who knows, but certainly we got off to a strong start in 2019.
OCP is ahead of plan. We're actually getting through them for lower costs than we thought, clearly it's been really pleasing to have won the COMPASS asylum seeker contract, which is very significant both for the U.K. business and for the group as a whole. Not only have we won it on significantly better pricing, but we've also won higher market share. We've lost Scotland and Northern Ireland, but we won the much larger Midlands region. We will be looking after about 45% of all the asylum seekers in the U.K. My tributes to our contract teams for having done that. There's another large OCP contract that is up for rebid this year, which is the prisoner escorting contract. In terms of acquisitions, I think that in a classical turnaround, we got into the acquisition theme really quite early.
With both BTP in the U.S., which is a small niche provider of repair services for radars and UHF radios for the Navy, that's going well. It's well embedded in the business. Actually, the Carillion healthcare contracts, which come in quite different shapes, although some very profitable and some not so profitable, the integration of those are now fully integrated into our business, and we're pleased with what we see so far. We've had a lot of engagement with the U.K. government over the last year since the collapse of Carillion, and we're really pleased with the way that's gone. I think Carillion was a turning point in terms that it changed. We'd been telling the government there was a real problem in their supply chain. For a long time, they just kind of thought that was supplier whinging. Suppliers whine to government the whole time.
If you're a minister, it's one of the things you have to get inoculated as an early stage, is supplier whining. Actually, the collapse of Carillion made government concentrate. They engage closely with industry. We engage with them very closely in a joint working party. The result has been an Outsourcing Playbook that was published yesterday, which really does, I think, have the possibility that it will transform greatly for the better the relationship between the U.K. government and its supply chain. In terms of other operational excellences, our employee engagement remains good and stable. We're still very highly focused on our training programs at Oxford. Nearly 300 of our managers have gone through the Serco-Oxford program. We've delivered our transformation savings, particularly in terms of finance, IT, and HR. On an operational level, I think the business has performed better.
There are a couple areas I just want to focus on. The first is order book and pipeline progress. There's a number of things going on here. The headline is that our order book is now GBP 12 billion. Within that, we've gone and restated it for IFRS 15, which has had a couple effects. One is that we've had to take out extensions that we had previously included in the order book, but on the other hand, IFRS 15 mandates that we should include inflation adjustments, and also the way that we treat benchmarking. The net effect of that has been to increase our reported order book under IFRS 15 by about half a billion GBP. We've also had GBP 700 million coming in from the Carillion acquisition, as you know, we had a positive book-to-bill in terms of our order intake.
Our order book is now in good shape. As you know, our pipeline definition is incredibly tight. It is only new business, it is only new business worth over GBP 10 million a year and represents actually only about half of our order intake ever comes from the pipeline. That will clearly drop. It grew to GBP 5.3 billion at the end of December, but is now going to drop as a consequence of getting the AASC and the NGH contracts by about GBP 1.7 billion to about GBP 3.5 billion, and we have then got to rebuild it from there. We have got a strong pipeline of rebids to go and deal with over the coming year. We feel reasonably confident about our order intake in 2019. In terms of OCPs, Angus has talked about it, and all praise to Angus for getting the number right.
It is within 6% of the number we originally thought of, and many of you who knew when we first declared this enormous number back in 2014, that they were either far too small or far too big. They are working through. We are 80% of the way through, and we are about, I think 4%, 6% to the good so far. The point of this slide is to indicate it is not just doing one thing that has made them better. There has been operational things, we have disposed of some. We have got to move some contracts that we have sold to other parties. We have managed our way out of contracts successfully. We have turned them into profitable contracts, and best example of that would be AASC, which was losing us GBP 15 million a year and hopefully turned into a profitable contract. This is a journey that is nearing its end.
In our market backdrop piece, we say in our statement that we have had another look at market growth. When we first looked back at 2014, 2015, when we did our strategy review, we took as our benchmark the weighted average growth of our markets for our mix of business then, which was around about 5%-7% between 2010 and 2014. It is clear that things have changed since then. You may notice in our statement that our favorite strategist, Mike Tyson, as he wisely said, "Everybody has got a plan till you punch them in the mouth." The longer a strategy goes on, the more blows that you have to take, and Brexit has been quite a low blow for the U.K. market.
We went around and took another look at it, and the short answer is that whereas the U.K. was broadly speaking, growing at the same rate as other markets between 2010 and 2014, it is now slowed up. It is probably growing at about 0%-2%, and we think that the average mix is 2%-3%. However, that says that some parts of our markets are actually growing very healthily. The U.S. Naval business is growing pretty strongly. Mark will talk about the Australian business is growing pretty strongly. It is really the U.K. that is not. Within the U.K., we think that we are doing better with the market, if only just on AASC, which is doubling the size of our business.
We're in a situation where we again, having just said that we would perform in line with the market, we think that we're going to perform better than it. The four forces are still alive and kicking and very strong. Growing healthcare costs, rising expectations of quality of service, the need to balance public expenditure, and voters who are willing to go and pay more taxes. The thing that governments need to do, which is the fierce pressure to deliver more and better for less, still remain very strong in our markets around the world. At that point, I'd like to introduce to you Mark Irwin, who runs our business in ASPAC. He joined Serco in 2013, having worked for GE in the U.S. and also for a Chinese state-owned enterprise in China, working for Blackstone. I appointed him to run ASPAC in 2014 when I arrived.
All I can say is that when the saga of Serco's turnaround gets inscribed in the book, Mark will have a leading role in it. He has been the chief elephant herder, having managed to wrangle both Grafton, which was then at the time, our largest-ever order, and now NGHS into the pen. He has handled masterfully the exiting from our largest ACP contract, which was ACPB, the offshore patrol vessels, where we've ended up spending much less than we might have done had Mark not been able to get the customer to agree to re-compete the contract before its natural end. He and I spent many a dark night trying to sort out the mess that was Mount Eden Prison. Mark, over to you.
Rupert, thank you for that kind introduction. Ladies and gentlemen, good morning. It's my privilege to give you just a very brief update on the Asia Pacific business as part of the overall group update on results today. By way of introduction, our ASPAC business currently works across Australia, New Zealand, and Hong Kong, where we serve 22 customers through 32 operational contracts. My team at the beginning of this year is about 8,600 strong, and we expect to end the year closer to about 10,000 because of our contract growth. I'll reflect on FY 2018, but in a bit more detail in a moment. You can see on this slide that we generated around GBP 548 million of revenue last year, the equivalent of AUD 980 million at a margin of 4.9%. We're active across all of Serco's strategic sectors.
Although Australia, as a geography, and justice and immigration as a sector, form the largest part of our current portfolio. Over recent years, the progress in our business has followed the plan that was communicated by Rupert in 2015, where the initial focus was purely on stabilizing the business. We then moved to a transformations phase, where our focus was on improving operational delivery and also improving the competitiveness of our business ahead of us moving to a growth phase. Our results in FY 2018 show that that is exactly how it's manifested in the outcomes for the business.
While our revenues for the year were broadly flat on an Australian dollar basis, as Angus indicated, we had a significant decline in the first half of the year through the attrition of two key contracts, and then offset that by quite a marked turnaround in the second half of the year. That turnaround was driven by growth in the organic part of our immigration services contract through the extension of a number of our existing contracts, and importantly, in commencing new business with new customers in our citizen services business. That business grew by more than 30% in the year on the back of a contract that we started with the Department of Human Services in November 2017, but a contract which more than doubled in terms of its volume in a six-month period.
Building on that success, we were able to take on additional service lines for the department, which included the management of a significant correspondence backlog for them. We showed fairly quickly that through independent verification, we've delivered real productivity to the department, a significant increase in the quality of response to citizens as they've made welfare-based inquiries. With regard to the correspondence work, we cleared 12 months of backlog in just the last three months of 2018. Like the DHS contract, our new business with the National Disability Insurance Agency and the Victoria Police are all first-generation outsourcing. Opportunities that were actually shaped by our citizen services team and where we worked very closely with the agencies to actually target an area of difficulty for them, and then work with them collaboratively on finding an appropriate operational solution.
For the NDIA, this is one of the most ambitious government programs that's been launched by the Australian Government in the past decade. The scheme has this year an GBP 11 billion funding envelope to provide better services to people with disability in the country. The rollout of the program has not been great. We were called in last year to see how we could help, particularly on the provision of information services and inquiry lines to the NDIA. As you can see there, I won't go through all of it, but you can see the comments from Minister Fletcher, which clearly indicates that amongst many other benefits, we helped, for example, to reduce call waiting times from four minutes and 26 seconds to just 28 seconds for people calling in looking for help.
This focus on better agency and citizen outcomes allowed us in 2018 to secure a 100% win rate in pursuing new business in citizen services. More broadly, across our portfolio in the division, strong operational delivery, progress on our transformation savings, as you heard from Angus before, and profitable new business allowed us to increase our profit at the divisional level, 27% on a constant currency basis to GBP 26.8 million and improve our margin to 4.9%. We also reduced our onerous contracts from five to just one remaining contract at the end of last year. We expect to rebid that contract before the end of this first quarter, with the result most likely in Q3 2019. We expect to end 2019, in fact, with no onerous contracts in the ASPAC portfolio. In terms of our contract awards, I referenced DHS and NDIA previously.
The other win we had in citizen services was to build a new platform to manage non-emergency calls for the Victoria Police, as well as providing them with a platform to move from voice to digital in terms of non-emergency citizen inquiries. This contract will become operational in one month's time. We've now completed the build phase and are just going through user acceptance testing. We also won our first deal in Hong Kong in three years to manage, operate, and maintain twin tunnels as part of a major road infrastructure network that is being built on the island. That contract also becomes operational in the middle of this year. Finally, as you heard from Rupert, we have got off to a pretty good start already in 2019.
On the 4th of February, we signed a contract to provide a human resource managed service to the Australian Defence Force as a subcontractor to Bupa. This contract is valued at around GBP 560 million for the initial six years of the contract, but the contract also has an allowable four one-year extensions, possibly giving us a 10-year tenure for that. We're well advanced in the transition of this contract, where we are hiring in excess of 1,000 health and allied care workers, doctors, dentists, psychologists, and other care workers to provide an integrated health service across more than 50 Defence Force bases domestically in Australia, as well as the Butterworth base in Malaysia to over 80,000 ADF members. We're very proud of this work and particularly happy with the partnership that we've been able to form with Bupa.
That contract also becomes operational on the 1st of July this year, as you heard from Angus, we will see a revenue impact in the second half, but we'll see the full-year profit impact in 2020. We exited 2018 with a 33% win rate, although I would point out that we still have approximately half a billion GBP of growth projects that we submitted in 2018, for which we expect the outcomes to be determined in the first half of 2019. We're hopeful that that conversion rate will further improve as we get those results. In addition to effectively transitioning this year, we are obviously now focused on rebuilding our pipeline as well. The pipeline currently stands at about GBP 1 billion.
The portfolio, as you can see in the funnel, is very well-balanced across our sectors, also between the core long cycle businesses that we have and the short cycle business opportunities that we've got in both citizen services and in Hong Kong, where we tend to have much more rapid turnaround due to three-year contract opportunities. The other potential area of volume sensitivity in the ASPAC business is the immigration services contract. In recent years, we've been successful to deliver organic growth in that contract through additional service line requests, and keep the revenue flat despite a decline in the number of detainees.
As you would be aware from recent media, this is a fairly dynamic policy area. We continue to work closely with the Department of Home Affairs and the Australian Border Force to be able to effectively respond to their needs and ensure that we've got an ongoing role in serving the department. Finally, we absolutely enter 2019 with good momentum. We're continuing to pursue efficiencies while making careful and appropriate investments in technology enablement of the business, as well as investments in developing our people. We launched our people strategy in 2018. We've got a very clear plan on how we deliver against our goals for talent acquisition, for retention, and for the development of our people with a very strong emphasis on diversity.
I'm sorry, with a very strong emphasis on diversity and inclusion. Always ensuring that as we grow our employee base, that that is done with an uncompromising commitment to our corporate values. Our transformation work streams for IT, finance, and HR are now largely complete. As Angus said, our labor costs represent somewhere between 60%-70% of our in-contract costs. Our major project this year is to implement a new workforce management platform, and that will begin with the NGHS contract in the second quarter of 2019. We've got quite a bit happening on the transition front as well, where not only for the new contracts that we've recently won, but the Clarence Correctional Facility at Grafton, as well as our major project for the research vessel Nuyina, Australia's new icebreaker. Both of those two key platform projects will become operational in mid-2020.
We are in the final phases of build-up, in anticipation of that. We also have a number of key extensions and rebids that we have to successfully execute this year, including our immigration services contract. The first term of that contract expires in December this year, but there is provision in the contractual framework for two two-year extensions. Again, we're working closely with the department to effect that. We've got a very positive view on how we can diversify our contract portfolio, by pursuing profitable business in our core sectors, by pursuing opportunities in adjacencies to those core sectors, and also by looking at how we can expand our footprint in Southeast Asia, where there is significant infrastructure and service deficits that governments need to address, which we see as presenting us with quite strong mid-term opportunities.
We have a well-positioned business in a highly attractive market, and we are really confident about building on the success of 2018 over the next 12-24 months. Thank you.
Thank you, Mark. I'm just going to skip through the summary and just lead you through a couple of thoughts before we get into our Q&A. As I said at the beginning, we've had strong trading in 2018. We've got a strong outlook based on strong order intake going forward. I think that we've got an unstressed balance sheet, without any googlies within it. I think that we're going to have more opportunities for acquisitions if we can find them, which could be of interest. As would befit a company led by Angus and myself, we are Eeyore-ish. We're cheerful in a miserable sort of way. Now to questions. Yeah, Rory, why don't we start with you?
Morning, it's Rory McKenzie from UBS. Firstly, Angus, after that good cash flow surprise in 2018, can you walk us through the cash flow drags to expect in 2019, in particular, which of those are non-recurring? Secondly, Rupert, at first I worried about the Outsourcing Playbook, as it sounded like the government was moving into equity research and publishing its own documents. After I calmed down, it did actually look quite positive for the sector. Can you talk about how it might operationally change the market? Bid costs, how will the new pilots potentially work? Do you think it will drive out some suppliers from the market? Also, is there anything you wish had or had not been included in that kind of charter?
Well, let me start with the cash flow. I think this year we generated GBP 25 million of free cash flow. We anticipate somewhere in the same region next year. Why is it not very up with the improved profit? Because tax, where with the OCP shield, we're going from GBP 10 million, GBP 11 million a year to sort of GBP 25 million a year, which will be a more representative number as we go forward as the effective rate and the cash tax rate come together. With a bit of working capital outflow with the increase in revenue as we go through the second half. We're committed to spending GBP 10 million on the SPV in Australia as part of the Grafton bid a few years ago. We talked about that. We'll be paying for that this year.
We would expect net debt on a pre-IFRS 16 basis to be around GBP 200 million next year. You take the GBP 10 million of that out, you get to broadly break even, exceptional being about GBP 20 million.
If I talk a little bit about the playbook. Forgive me, it was only published yesterday. Although, of course, we've been working with the government to develop it. We had an idea of what's in it, and we're obviously delighted to see that a substantial part of our four principles are within the playbook. Actually, we couldn't ask for better than the playbook, and particularly since it comes with a pretty comprehensive set of guidance notes. It also, I was talking to Mark about it, one of the things that it does is that this example of how you can really screw up a market and the damage that causes if your suppliers get into real distress.
We will be taking this playbook and the U.K. experience round to other jurisdictions to say, "Actually, this is a better way of doing things." I think the key issue is the proof is in the pudding. There was a guidance note issued way back in 2016 saying, "Thou shalt not go and impose onerous contract conditions on suppliers." That was completely ignored. I think the difference with this one is that this has real political backing. David Lidington himself has committed an awful lot of time and effort to thinking this one, this through, and also John Manzoni, the head of the Civil Service, is very invested in it. I have the permission to refer to them, to two very stubborn ladies who have been behind this process in the Cabinet Office, and they said I can call them that because that's what they are.
They're very determined, very smart, and there is now funding for them to stay in the Cabinet Office working this project through for the next 18 Because it will be critical how well to the extent to which departments just ignore it. I think the omens are good for that. I think that it will, however, take time. There is a progression that we see. If you go and take the AASC contracts, those had some attempt to be more reasoned in the allocation of risk, but not much. The new PECS contracts are being negotiated in a much more balanced way between the parties, and I think that this is part of a process. It will take time. This is an oil tanker that will take. There are procurements in train that do not reflect this. Government's a customer, and we are supplier.
There is going to be an element of spikiness on it. I think that it promises to take out turning it from being a really dangerous environment to being one where actually companies can play. Paul. Microphone's coming.
Thank you. It's Paul Sullivan from Barclays. Firstly, turning to 2020, what's in the 5% organic guidance from a rebid and attrition perspective? In terms of progress towards 5% margins, what are the moving parts and what should we be looking for going into 2020? I've got one on Australia immigration.
In terms of the moving parts, if you look at the rebids we've got to do in 2019, it's GBP 440 million. The key one being, as Mark Irwin talked about, the immigration contract out in Australia. As we go into 2019, we had GBP 5.3 billion in the bid pipeline. That's now GBP 3.6 billion, with the contracts we've won come out. If you look at our new bid win rates, last year, 23%, rebid extension win rate 93%. That is one dynamic. In terms of what's driving that 3%-4% organic growth, we are going to have a half of National Garrison out in Australia. We'll have a quarter of AASC. As we go into 2020, that will annualize. We've also got the Icebreaker contract, which that will be launched and operational. We'll also have half a year of Grafton.
We've got quite a lot of contracts where we know the revenue is going to start. In terms of margin, 100 basis points this year. I think we'll move towards 3.5% as we go through 2019. Hopefully we'll kick on up. We will not get to 5% in 2020, but hopefully we'll begin to move up the hockey stick in terms of that.
On Australia immigration, following the ruling last week, how significant is that, and what are the range of outcomes for the contract if we were to see offshore immigration move onshore?
As you reflected, this is a relatively new change in the legislation, and I think governments and all of the associated agencies are still working through what that can potentially mean. What we do know currently is that the Christmas Island immigration detention facilities will be reopened. The Prime Minister made that statement last week. We have begun to mobilize to bring that into effect. At this stage, it is only to get the facilities operational again and to put in place the provision of basic services. What we are yet to learn from the department is what that means in terms of potential occupancy, a broader range of services or for how long this will continue. It's live, and we're working through it.
At this point, our focus is really how do we demonstrate our agility in responding to the requirements of the department and make sure that as we recommission these facilities, we establish safe and secure facilities and that we're taking care of the people that we are responsible for.
In terms of agility, do you just want to say how many people you mobilized?
Yeah. Christmas Island is already within the scope of the contract that we have. The government put the facility into contingency in October last year. Under the contractual arrangement, we are given 72 hours notice to mobilize. In this case, the place we're mobilizing happens to be 1,400 kilometers offshore, but we still have 72 hours, and we've been able to do that. We had the first staff on island on Friday morning.
Okay. Next question. Ed.
Ed Steele from Citi. Just a question about exceptional charges, please. What's the flow through in 2019 from the exceptional costs incurred in 2018, please? Moving on to the 2019 GBP 20 million exceptional charge, what does that mainly relate, and what do you expect the payback to be? Sort of third part of a three-part question, is that it then for exceptional charges after 2019, please?
Yes. In Serco, you never know. We are now coming towards the end of the transformation program. During 2019, we've got a procurement. We're still working through the transformation on that. We're quite early in that. That'll begin to kick in as the year goes on. We still have some work in IT, and we've got some work in HR. By the end of '19, we're really out of transformation mode, and we're into continuous improvement mode, which is business as usual. The costs associated with that will not come through the exceptional line. For example, workforce management, as Mark said, in Australia, 60%-70% of our people cost, including workforce management, is key. We see that as just a normal course part of the business. In terms of the cash cost, we'd expect that to be about GBP 20 million.
It's always harder to predict cash cost and exceptionals given timing in terms of how programs work. I would have GBP 20 as a cost and about GBP 20 as the exceptional cash outflow.
Just going back to the original part of the question, what's the flow through in 2019 in terms of P&L gain from the 2018 expenses, please? In turn, what do you expect the payback to be from that GBP 20 million in 2019?
Well, the payback, we're going to see more of that in the contract. I would expect that in terms of contractual benefit, we'll get GBP 10 million-GBP 12 million of cost benefit in 2019, and that'll come from a variety of different sources, including procurement, which flows through the contract base. You've been able to track it pound for pound through overhead G&A shared service up to now. Now it comes into contract, and to be quite honest, the ability to track that to the pound, there's so many moving parts, we can't. I would expect GBP 10 million plus. Our payback has been actually pretty good in terms of exceptional since we started. We would expect the further benefits to come through during 2021, 2022. 2021 from what we're going to spend in 2019.
You will see some cost benefit, but increasingly, our hope is that the focus changes to revenue and then getting some leverage on that as we go forward. Can I just answer, Ed Steel, in danger of getting kicked by Angus Cockburn here. In terms of the benefit of that profit progression from 2018 to 2019, remember that the GBP 93 of 2018 has GBP 10 million worth of non-recurring stuff. In terms of if you're trying to get the benefit of getting from the exceptionals moving through, actually on a like for like basis, it's going from GBP 83 to GBP 100.
Yeah. Absolutely.
Got it. Thank you.
We're talking about 10 to 12. Remember on ME Labs AWE, these contract renegotiations have had a GBP 10 million-GBP 12 million-
You've been very clear about all those moving parts.
Yeah.
My question was just based clearly about the exceptionals. Just to be totally clear, the GBP 10 million-GBP 12 million gain in 2019 refers to the flow through from 2018's efforts and the incremental-
A little bit
efforts in 2019.
Yeah.
Got it.
We'll get more flow through in 2020 from 2019.
Thank you very much.
Kean.
Morning. It's Kean Marden from Jefferies. I had a similar question, but regarding fiscal 2020. I suppose, as an analyst with a spreadsheet, we can start adding up a number of positives that potentially impact profitability in fiscal 2020. This is your opportunity, Angus, to try and flag the headwinds to us.
Eeyore is very happy with that question. In 2020, you're going to have a number of moving parts as you go from 2019 to 2020. We've estimated the IFRS 16 impact, an underlying trading profit of GBP 5 million in 2019. Let's say rounded that carries forward into 2020. We're also going to have an AASC in terms of IFRS 16 not in the balance sheet. Could be anything from GBP 200 million to GBP 400 million that's going to come on in terms of assets. We'll know by the end of the year, but somewhere around maybe another GBP 5 million for AASC. I know you managed to put in an incredible number of wins into your numbers early doors. We'll have the annualization, six months of NGHS, where revenue is about just over GBP 90 million, and you'll have nine months of annualization on AASC.
You add on Grafton, you get half a year of that. Icebreaker is always great fun to talk about. It is GBP 15 million. It is smaller, we'll have that kicking in in 2020 as well.
Okay.
That should be crystal clear for you, Kian.
Not quite the answer I was expecting. We know all the positives. They can add up to quite a reasonable number for 2020. That was your chance to flag some negatives, Angus.
I'm coming on to that. Give me a moment. As ever, you've got challenge around rebids because we've got GBP 400 million this year, we've got GBP 300 million in 2020, we've got GBP 400 million in 2021. When you win the extensions, you will get your margin squeezed a little bit. Our order pipeline, one of our big focuses this year will be on rebuilding the pipeline. The pipeline's taken a real hit from NGHS and AASC in the most positive way. We need to get that pipeline moving back up again. What's in the pipeline looks smaller on average than it has done previously. There might have to be a bit more BD investment just given the number of opportunities that are small to medium-sized rather than very large.
This is a business where we've got to be cautious in terms of the outlook. Nobody should get carried away for 2020. The cash flow being positive is great, but this is a long-term journey that we're on. The good thing is it feels like we're now leaving the station.
Yeah.
It is a steam train and not a Shanghai-type rapid express.
Two quick questions on Australia as well, if I may. First of all, is the capacity of Christmas Island similar to the previous site? Has anything changed?
No. In fact, there are three different facilities on the island. Most recently, only one of those was in operation. The last time we had all three was in 2013. No change in the capacity.
Thanks. Are you in a position to update on Arthur Gorrie as well, please?
Yeah. We're waiting. As you may know, the government postponed the decision on Arthur Gorrie while they were undertaking a broader inquiry around corruption in the Queensland prison system more generally. That inquiry was completed and a report published in December. We are now hopeful that sometime in the next several months we will have an outcome on Arthur Gorrie. The existing contract expires at the end of June. We see several drivers here. Hopefully, that will prompt a government decision shortly.
Can I just say something while we're on Australian prisons? One of the things that Mark did really well last year was to take South Queensland Correctional Centre, which was a male prison, and convert it to a female prison. Which is a tricky thing to do. Apparently, prisoners are writing to the state commissioner saying, "We want Serco to stay because our contract is up for rebid in Queensland." I think he runs a pretty good ship on that. Neil.
Yeah. Thank you very much. It's Neil Greatrex from Credit Suisse. I've got three questions as well. The first one, just very straightforwardly on the M&A landscape. Rupert, if you could just give us an update there. Obviously, Interserve has been thrown a lifeline. Does that alter your views about U.K. opportunities versus international? The second question, you rightly point out that obviously there's a lot that goes on beneath the surface on the smaller ticket stuff, the IDIQ work. Just some sense as to what smaller ticket growth is baked into the FY 2019 and 2020 budgets for revenues. The final question, really just sort of following on from what you said about AASC and the potential for off-balance sheet operating leases coming on-balance sheet.
Given that could be quite a material impact on your balance sheet, are you thinking more about looking at those contracts on a ROCE basis? Obviously, it doesn't affect your covenants, but does that alter your thinking about presenting that as a KPI? Thank you.
I'll take the M&A landscape first. I think what you've seen in this last year is that we're able to operate across a number of different markets. In terms of strategically where we would like to grow, I would say both Australia and U.S. defense would be areas that are of interest to us because they're markets that we see that are growing. On the other hand, we are distinctly on what you might call rubble watch in the U.K., in case other stuff comes up, because frankly, that Carillion deal has worked very well for us. It is very important that if companies do get distressed, that the ongoing government contracts are properly performed. We are watchful to see whether there are any opportunities around. I think we're alert to both, but they're in slightly different circumstances.
One is where we're looking to see whether there are any opportunities that arise out of distress. On the other, we're looking for opportunities to further our strategy.
In terms of IDIQ, we'd be looking at this point of the year, still about 15% of our revenue to get. Most of that comes from our defense sector in terms of task orders that come out on a regular basis. It was interesting as we went through last year, first half, as we said, was quiet with the government shutdown. Kicked on in the second half. Government shutdown is not the big impact this year. That momentum in terms of U.S. defense, particularly in terms of Navy, continues. I think we feel reasonably confident that we'll get the IDIQ revenue this year. In terms of returns, that's quite interesting, because we spent a lot of time looking at returns. You look now, if you take our underlying trading profit on average invested capital, we're at about 13.1% pre-tax.
Take a nominal tax rate of, say, 20-odd%, you're at about 10.6% in terms of post-tax return. Against a WACC of, you could argue, we could spend the day arguing, but 8.5%. We're actually in positive territory. What's interesting is there's not much difference in capital productivity. The working capital, as we see, we get paid pretty well. We pay our suppliers pretty well. There's very little CapEx. Been running at circa sort of GBP 30 million, a lot of that being vehicles to support the environmental services or cyber hardening in terms of our IT. Looking at margin isn't a bad way, isn't a bad proxy, actually. We look at both carefully as part of every contract review when we're doing a new bid. Sam.
Morning. Simon Bland from JP Morgan. Got two questions, please. First one is, obviously, about 100 basis points of margin improvement last year. Can you just kind of tie that back to the slide you gave a little while ago on the sort of three buckets up to the 5%-6% of midterm, 5%-6% margins? Where do you think most of that 100 basis points came from last year in terms of cost savings, low margin runoffs and revenue growth? Where might it be? If we look to 2019, 2020, will it come from the same kind of area, or is it going to be a little bit of a transition? The second question is, I guess geographically, it's the U.K. which is slowing down in terms of market growth. I think that's about 40% of your revenue.
Can you just give a feeling on what proportion of your order book in the U.K. is? Is the forward book of business slightly different to what you are operating at the moment? Thanks.
Yeah. In terms of order book, first of all, if we look at the— Now, we have adjusted GBP 1 billion for the IFRS 15, but if you look at the like-for-like number, about GBP 8 billion is in the U.K., about GBP 3 billion is in ASPAC, about just over half a GBP billion is in Middle East, and there is about GBP 1.5 billion in the Americas. You can see that. The GBP 8 billion, GBP 1.5 billion of that in the U.K., well, was AASC. As you now look at the margin, we said there will be three main elements to get us from the 2.3%, where the margin was, up towards the 5%-6%. The first was 50-100 basis points in terms of the OCPs.
As we work through the OCPs, if we do absolutely nothing other than wait for them to come off and we lose them all, you get 50 basis points. That we have ticked off. As you can see from the liability coming down, we have got a chunk of that in 2018. AASC adds maybe 30 basis points to that. We are beginning to move towards what Stuart had as nirvana of 100 basis points from OCPs. PECS is clearly the big one that is still to come that would push us towards the top end. I would anticipate now that if you are asking where are we with AASC, we are probably at 80-85 basis points on that.
The second element was GBP 100-GBP 200 in terms of cost reduction, that's where most of the bounce came this year. We got GBP 20 million of cost savings. You look at G&A, that's what it's down by. Heap of moving parts. That's the net saving. I think we've done a good job on that middle piece of it. The piece that still remains the challenge is the right-hand side, where what we said was we'd expect another 50-100 basis points in terms of getting the impact of revenue growth and getting some leverage on that. That, as I think said to Ed, as from 2020 on, that's what we need to be really focused on as we go forward. Good progress on the first two, the third one, we need to keep winning lots more work, Simon .
I think one of the things, if I may just add on that, on the order book, is remember that in the U.S., we have a lot of these framework contracts and the IDIQ contracts, therefore, actually, the order book is understated. We always expect it to generate more from that in the year than in other parts of the world.
Yes.
Yes. Michael Crawford from Shore Capital Group. Could I just ask about the competitive landscape and in particular, who you regard as credible competitors in the U.K. now, and also in places like the U.S. and Australia? Is the competition more rational than it has been in the U.K.?
Well, shall I take that?
Yes.
In terms of the U.K., it's not who we regard as credible, it's who the government regards as credible, point one. Secondly, is that because bidding is conducted under very strict European rules, they can't run around, say It's a high bar to being not credible in the U.K. I think one of the things in the playbook, I hope, is that the government is going to take more attention to the behavior of people. One of the things that irks us is that the government has introduced green, amber, red for strategic suppliers. There are strategic suppliers in the green section who are palpably not going and following the government guidance on prompt payment. I think that the government is going to get quite a lot stricter on that.
All of our competitors are, of course, naval beasts, and they all fight hard for business. I think there's a difference between fighting hard and just taking on risk that you shouldn't be taking on. I sense that people are more wary of that, and the competitive environment has changed a lot. When AASC, the COMPASS contract, was first bid, the government had to go and take an extra room in the Queen Elizabeth II Conference Centre for the pre-bidders conference. Now what you had is you just only had one new company coming in, which was Mears, coming in as a competitor on that. I think they're seeing that the intensity of competition has reduced. In the U.S., it's such a liquid market. It's always competitive, can be quite localized.
In naval defense, for instance, where very strong on the West Coast, but less strong on the East Coast. You tend to get these quite small geographic markets of individual players. It is so huge, so liquid, it is just like no other business. It happens to be growing at the moment because the Navy has an ambition to grow the Navy to 355 ships. I think one of the things that we don't see here is just how really serious the Americans are at rebuilding the Navy to be because they are very worried about the Chinese threat. They see that as being a threat, and they want a strong Navy to do it. Are we done? Any more questions? Thank you all very much indeed.
It took a long time, but we got there in the end, and we will be available for indiscretions and questions afterwards, of course, as usual.