Spending review will benefit some
Nov 22 2010 by Christine Hawdon, The Journal
A MONTH ago Chancellor George Osborne announced the Comprehensive Spending Review in order to reduce public spending by £81bn.
Budgets are to be slashed by up to 40% across Government departments and it is estimated that around 490,000 public sector jobs will be lost over the next four years. Sweeping reforms will be made to the welfare system as well as big changes to social housing.
The stock market’s initial reaction was muted, as the measures were so widely expected.
Overall, we think that the spending review was positive for the support services sector. A number of companies have recently signed a memorandum of understanding with the Government to deliver cost savings on existing contracts.
The Government appears to be sticking to its principle that services paid for by the Government do not necessarily have to be delivered by the Government. This will help pave the way for new contracts to be awarded and opens up opportunities for innovative and cost-effective solutions for delivering public services in the future. Capita, Serco and Carillion may be particular beneficiaries.
Capita is the UK’s market leader in the outsourcing of white collar business processes. It specialises in running non-core back office activities for its clients, ranging from payroll to pensions. Revenues are split roughly 50:50 to the private and public sectors with local government making up the largest part of revenue in the public sector.
It was announced in the spending review that cuts to central Government administration would be around £6bn, double what was originally promised.
The decision to spend an additional £900m on fraud and tax evasion measures to save £5bn per annum is also positive for the group. In addition, the simplification of benefits to one single tax credit is another major opportunity for Capita, although it is likely to face stiff competition from its rival, Serco.
Serco’s track record of contract retention stands at over 90% due to its high levels of reliability and good cost control. Although the company was criticised for its ill-timed letter to some suppliers asking for a retrospective cash rebate, this was quickly retracted.
The company specialises in services such as education, IT, security and business processing. It also runs prisons and detention centres and while the deferment of the building of new private prisons is a slight negative, overall, the 6% cuts in the Home Office and the Ministry of Justice budgets were at the bottom end of expectations.
Under the spending review, the priority given to counter terrorism within the security budget is positive for Serco’s e-Borders contract, while the decision to protect the science budget is likely to boost its nuclear and science divisions. In addition, the transport division will benefit from the increase in subsidy for regulated fares and the approval of two electrification projects for Northern Rail.
Carillion would also appear to be a winner from the spending review. The £2bn increase in infrastructure spending on railways and roads was an unexpected surprise, especially given the company’s forecast of a £600m cut in UK construction spending in the next three years. Carillion could also benefit from the plan to build 150,000 new affordable homes, given its expertise in Army housing. It may also be in the running to build and manage the three new PFI hospitals which have escaped the cuts and be included in the £15bn spend on refurbishing the school estate. This makes up for the cancellation of the Building Schools for the Future programme.
In conclusion, while it is without doubt that the UK is heading for a challenging period, one man’s loss is another’s gain and some areas look well placed to benefit.
:: Christine Hawdon - Christine.hawdon@brewin.co.uk
