The Government decision to halt the outsourcing of four out of the eight prisons currently in state hands has shocked the outsourcing industry and caused a sector wide selloff. Shares slumped after the government performed a u-turn on its stately procession towards privatisation, cutting in half the number of prisons up for grabs; and analysts believe the change in tack raises questions about the outlook for the industry, the type of contracts available and the pace at which government work will materialise from bid pipelines.
Steve Woolf, support services analyst at Numis thinks the extent to which the Government will outsource is now in doubt, adding: "This decision leads you to question whether the pace of outsourcing and willingness to outsource deeper into existing services is actually there,". His comments come after the Ministry of Justice announced that it was halting the privatisation process for prisons at Coldingley, Durham and Onley saying there was no case for delivering cost reduction or improving the existing prison model at these sites.
Secretary of State for Justice Chris Grayling said he has decided to take a new approach to competition for prison services, adding that he has not ruled out prison-by-prison competitions in the future. Mr Woolf said the new approach looks to be one where prison management stays in public hands while ancillary services such as facilities management and prisoner resettlement are outsourced under payment by performance models.
After the Olympic security fiasco this summer G4S (GFS) had already been frozen out of the bidding process and HMP Wolds, managed by G4S since 1992, will return to public hands. Analysts from Espirito Santo said: "To us, it would suggest that the business has incurred some reputational damage with the Government following the London Olympic contract failure." G4S was one of the biggest fallers in the FTSE 100 and is down 6.3 per cent following the announcement, with fellow bidders Interserve (IRV) down 6.4 per cent, Serco (SRP) down 2.8 per cent and Mitie (MTO) flat.
This has been a painful experience for the would-be private sector contractors who have invested substantial amounts of time and money in the bids. Costs have been worse than expected after the initial announcements were postponed from their summer deadline and bid teams had to be kept on retainers. The opportunity seemed worth the risk as each prison was expected to be worth up to £30m in revenue a year for the 15 year term, well in excess of £1bn for the whole portfolio. Interserve and G4S were not available for comment.
The bidding process for HMP Northumberland, and the South Yorkshire group of HMP Moorland, Hatfield and Lindholme will proceed to the next stage with the bidders reduced to French group Sodexo, Serco and a joint MTC/Amey proposal.
