A chill northern wind has been blowing through the support services sector ever since Edinburgh City Council threw out a £170m outsourcing deal, only days after
Shares across the sector have fallen on concerns that this is a sign of things to come. Since 20 January, Mitie shares are down 4 per cent, Interserve is 6 per cent lower and Serco down 1.3 per cent, all while the FTSE 100 remained largely flat. It wasn’t supposed to be this way: as David Cameron unveiled the Open Public Services White Paper and announced in July last year that he was opening up the public sector to private sector competition, a steady stream of work was a done deal. Well, it seems that somebody forgot to send the memo up to Scotland.
But the industry is not panicking yet. Martyn Hart, chairman of the National Outsourcing Association, said: “This is a political decision by SNP and Labour councillors and it doesn’t affect the outlook for outsourcing.” All the seats on Edinburgh City Council are up for election on 3 May, so the decision to keep 2,000 jobs in house will win precious political capital; especially after the shambles of the tram scheme. This project was supposed to cost £375m and be completed this February, but costs have ballooned to more than £770m and it will not be ready until 2014, leaving Edinburgh with an estimated £100m funding hole.
Robert Morton, head of support services at broker Investec, added: “Local government in the UK still has to find 20-30 per cent savings in its budgets. Outsourcing is not a case of if, but when.”
It looks like this one-off case probably won't have ramifications for the wider sector. Mitie’s trading update this week confirmed revenue and earnings are in line with expectations, and they have a strong order book and sales pipeline. Outsourcer Babcock also announced that trading is in line with expectations. Its order book and bid pipeline stand at £12bn and £10bn respectively. We have been generally positive on the sector and retain our buy recommendations on