Spending cuts pose recovery risk

by Graeme Davies

2 July 2009

WSo, the worst of the recession is almost over. At least that is the opinion of some, and many think we are certainly approaching the nadir in terms of the economic slowdown. And thus far many FM companies, especially those with significant outsourcing businesses, appear to have avoided the worst. But there could still be some pain to come if recent news from the sector is anything to go by.

Consultants and outsourcing specialists have generally been thought to be resilient to the worst of the downturn but a recent profit warning from Mouchel, the maintenance and outsourcing specialist, raised concerns that we could yet see problems for sector participants. True, Mouchel has its own unique issues such as problems in its rail and Middle Eastern operations, but those many companies who continually reference their hefty long-term order books as evidence of their resilience may be shifting a little uneasily in their seats following Mouchel’s stumble.

Indeed some analysts and commentators in the sector have suggested that Mouchel’s situation could echo the slow crumbling of the Alfred McAlpine business, which was eventually sold off to Carillion in 2007 after running into trouble.

Disappointing outcomes to public sector contracts have long been a major risk in the sector and with public spending set to come under severe pressure in the years to come some of the monster order books currently being touted around the sector could eventually end up being compromised. This is the biggest risk to reputations in the sector in the longer term, but one problem highlighted by Mouchel could hit sentiment in the shorter term: that of the Middle East conundrum.

Many companies, especially consultants, have built significant businesses in the Middle East on the back of the oil-fuelled property boom there. But the global economic downturn has hit the region harder than most and many companies, Mouchel among them, are reporting increasing difficulty in collecting fees due to them from clients. In May, the Association for Consultancy and Engineering estimated that £400 million of fees from projects in the United Arab Emirates alone remained unpaid with WSP, Mouchel, Atkins and Bovis among those struggling to recoup monies owed to them. As many such projects are government-backed, the difficulty in obtaining payments is particularly worrying as such contracts should, theoretically, be as safe as they come. So, even those companies relying on diversification into fast-growing economies for some buffer from economic woes closer to home are being bitten by the downturn.

By no means do the problems reported by Mouchel signify a trend which will spread through the sector but they should serve as a warning to those who believe the FM sector can sail through the recession with little to worry about. Cuts to public spending and the ripple effect this will have across the sector as more companies chase less business will produce more casualties along the way. The recession may be bottoming out but it won’t be plain sailing for anyone even when the recovery comes.

Graeme Davies writes for Investors Chronicle