Recession looms as public sector shrinks

9 February 2012

by Graeme Davies

The UK economy appears to be on the brink of dipping back into recession if the latest Gross Domestic Product (GDP) figures are to be believed. In the final quarter of last year, GDP shrank by 0.2 per cent according to first estimates and, if anecdotal evidence from the early weeks of 2012 is any sort of barometer, the first quarter of this year could see economic growth equally subdued – and two consecutive quarters of negative growth signal a technical recession.

With our nearest trading partners in Europe under the cosh and wider global growth showing signs of slowing, the UK has found itself backed into a corner. With austerity measures putting the public sector’s contribution to the economy under pressure, there are precious few reasons to be optimistic.

Indeed, the policy cupboard looks particularly bare with the government insistent on its course of shrinking the public sector in an effort to reduce our hefty budget deficit. True, the Bank of England may well unleash yet another wave of quantitative easing, possibly as early as the first week of February. But this may not be enough given that the latest round of money printing has failed to ignite economic growth.

It has long been said that FM companies are not particularly reliant on significant economic growth, given that they can thrive by providing cost-effective solutions to cash-strapped customers looking to use their assets more efficiently. And the shrinking of the public sector is also pushing business in the direction of the likes of Serco, which successfully rebid for a raft of contracts from the Royal Air Force, where budgets are under pressure.

Other recent trading statements from the likes of Mears Group and Interserve have been solid enough. Also, Babcock International recently announced three contract wins, while Mitie has teamed up with the incumbent Prison Service to bid for contracts to manage a total of nine prisons over a 15-year period.

All this suggests government outsourcing will continue to be an area of growth, even if the private sector is subdued.

Outsourcing U-turn
But public sector outsourcing is proving to be not without its troubles and there are hints in some areas of possible retrenchment, which could scupper the hope that outsourcing will be a one-way street. The most recent example of this came in Edinburgh, where Mitie announced it had been chosen as preferred bidder for a £170m, seven-year FM contract with the City Council – only to see it rescinded within a matter of weeks as councillors voted the proposals down.

The volte-face contained worrying portents for an industry that has been widely considered to be able to deliver better value than incumbent public sector operations. Despite an estimated £51.5 million saving over the seven years of the contract, deputy council leader Steve Cardownie said: “At the end of the day, having looked at the private sector bid versus the public sector comparator, we felt there was not sufficient advantage in going for the private sector bid.”

It is difficult to know whether this decision was one of political expediency or genuinely judged on value. But it suggests that public sector providers are getting their act together in terms of improved efficiency and value for money. It also indicates that the private sector is going to have to continue running hard to maintain its progress in these increasingly tough times.

Graeme Davies writes for Investors Chronicle