Dark days for outsourcers

AYEAr on from the collapse of Carillion, and the outsourcing sector is deep in crisis. Interserve, which makes around 70pc of its income from the British government, is the latest domino to fall.

Its efforts to put together a lifeboat with its banks are already under fire from a New York hedge fund, Coltrane, its largest shareholder which stands to lose its shirt.

But the problems in the sector, which has been hit by profit warnings, plunging share prices, high debt and fat cat pay scandals, extend much further than one angry American investor. outsourcing firms are a Cinderella industry but are vital to the whole economy, providing all sorts of essential public services from building hospitals to housing asylum seekers.

They account for tens of thousands of jobs and pensions and are responsible for billions of pounds of taxpayers’ money. The UK has been one of the most enthusiastic adopters of farming out essential government works and services to the private sector. The theory was that companies such as G4S, Capita, Serco and mitie would be more efficient and provide services at a lower cost.

In reality, much of the industry is in the mire. Billions of pounds have been wiped off the values of listed companies.

Shares in G4S have halved since 2015. At Kier, they are down by two-thirds since 2014 and at Capita, they have dropped 85pc since 2015. At mitie they have fallen around 60pc from a high in 2014. Serco, which is on a recovery path, is an exception, with shares up by more than a third in 12 months.

Companies have already tapped up shareholders for hundreds of millions of pounds and there are likely to be more attempts to raise additional capital.

To say this is likely to go down badly with shareholders is an understatement. Capita’s £700m rights issue last year was illreceived by some and a capital-raising by Keir just before Christmas flopped badly.

SENIor

insiders say there is something of a liquidity crunch, as some firms are facing a squeeze on bank lending. Banks are wary of being burned again.

And, due to the uncertainty around Brexit, some European players are reluctant to lend more to UK companies full stop. many of the current difficulties date back several years. most of the companies have relatively new bosses such as rupert Soames at Serco and Sir Ian Powell at Capita, parachuted in with a mandate to clean up the mess.

The causes? Aggressive accounting policies where profits on long-term contracts were booked years before the money was expected to arrive, if it ever does. Weak and half-blind auditors. The obsessive pursuit of short-term revenues at whatever cost.

Suffice it to say, parts of the sector look like accidents waiting to happen.

The Government is not likely to rush into bank-style bailouts for any that do go to the wall – ministers want shareholders and lenders to be on the hook, not the taxpayer. measures for ‘living wills’ so companies can be wound down in an orderly way if they fail, with a minimum of disruption to public services, are in train but are untested.

With Brexit looming, the country urgently needs to upgrade infrastructure if the economy is going to flourish. Executives should be very mindful that the morass is a boon to Jeremy Corbyn who would like nothing more than to nationalise the lot.