Although the savage cuts to local government budgets announced this week might mean your bins spill aimlessly onto the street and the village library becomes a derelict haven for youth vandalism, there could be a silver lining for investors.
Outsourcers and consultants are likely to benefit as they try to make the sprawling local government machine more efficient. You might have to travel further to borrow the latest Dan Brown page-turner from your not-so-local library, but hopefully, you'll receive a tasty long-term return on your investments.
That's because Communities Secretary Eric Pickles' cuts are front-loaded, with the formula grant from central government coffers reduced by 9.9 per cent next year and 7.3 per cent the following year. Crucially, Mr Pickles was quoted as recommending that authorities share chief executives, back-office systems and increase procurement efficiency.
This urgency of rhetoric will doubtless spur the management of large outsourcers such as Capita and Serco to get their foot in the door early. It will also be encouraging for those with more niche operations, such as social housing repairs and maintenance provider, Mears. Capita estimated at the start of this year that just 30 local authorities had signed major outsourcing deals for back-office management, out of a total of 468. Since then, a few councils, such as Suffolk, have indicated they will outsource 90 per cent of work over the next 10 years. Many more are now likely to follow.
After a torrid 2010 that saw a hiatus of deal-making due to uncertain government budgets, as well as fighting talk from the Cabinet Office on suppliers' margins, this Localism Bill could mark a turning point for outsourcers and facilities management groups exposed to the sector. These companies saw a de-rating of 8.6 per cent in 2010, according to broker Peel Hunt, while the overall support services arena saw a re-rating of 16 per cent.
Serco was the only winner among the outsourcers, seeing a 14 per cent re-rating, which could be due to group's greater international exposure compared with Capita and Babcock. But we think Babcock's transformational VT deal will mean the shares make ground in 2011, while Mouchel's high local government exposure and strong de-rating in 2010 compared with other consultants, might mean its shares also have a good year.