What can they do for FM?
As the build-up to the general election grips the nation, Graeme Davies examines the impact of the main party’s proposals and reveals how outsourcing is likely to continue to shape the immediate future of FM.
by Graeme Davies
The forthcoming general election will be dominated by one key theme, the economy, and the ways in which the main parties intend to tackle the yawning budget deficit over the life of the next parliament. The budget deficit, forecast at £178bn for the end of this fiscal year, is so huge that efforts to tackle it will affect every corner of the public sector and with it ?the money government has available to spend on public services and also the manner in which that money is spent.
Over the past 13 years, the FM sector has been one of the chief beneficiaries as huge sums have been poured into renewing the infrastructure of the public sector and the delivery of services. Much of this has been achieved by harnessing the private sector’s ability to deliver such projects and services through Private Finance Initiatives and Public Private Partnerships.
While there have been some high profile problems with PFI and PPP, there have also been many projects delivered successfully and efficiently.
But uncertainty is now the name of the game. The main problem, just weeks before a possible election, is the current lack of concrete detail from any political party over how they actually intend to attack the deficit but what is certain is that it will have to be a combination of tax rises and reduced public spending plus the fabled efficiency savings that any incoming administration always claims it can achieve.
While some in the FM sector may be concerned at the potential for public spending cuts eating into their order books, there is a growing feeling that one of the key ways in which any incoming government is going to cut its own financial obligations is through further outsourcing of public sector. There will, of course, be winners and losers but a great deal of work could be coming the private sector’s way and those who have prepared suitably — by diversifying away from capital intensive construction projects into delivery of services — could still thrive.
Indeed, several FM providers have begun to talk of the coming outsourcing bonanza during the recent results season. Capita suggested that the UK could cut public spending by more than the £130bn called for by the Confederation of British Industry. Carillion chief executive John McDonough said: “The thing we are looking forward to is the squeeze on revenue that will lead to a lot of outsourcing, to get more for less.” Serco chief executive Christopher Hyman also referred to public sector outsourcing as a key growth opportunity and City analysts Numis Securities said: “At some point post-election there will be a notable increase in demand for outsourcing services by the public sector, and investors will turn their attention to outsourcers.”
Labour
Alistair Darling has already pledged to halve the £178bn of debt within four years with two thirds expected to come from spending cuts. Labour is determined not to put the brakes on public spending too soon and risk choking off the recovery. But it is likely that large public projects will be heavily scrutinised and more emphasis will be placed on maintaining services rather than splurging on new hospitals, motorways and other capital projects.
Emphasis will be placed on efficiency and better delivery of services which could well benefit outsourcers as more public sector service delivery and also back office work is pressed into private sector hands. Labour is targeting £12bn of efficiency savings.
The government has set up Infrastructure UK, a body to deal with the backlog caused to the infrastructure pipeline by the credit crunch. It is believed to be looking at setting up an infrastructure fund or bank to fund projects, an idea which has also been floated by the Conservatives and Liberal Democrats.
As yet the detail of how much Labour intends to outsource and in what form it will do so remains thin on the ground, but the government is already considering selling off or outsourcing parts of its mammoth property estate and rumours also suggest the coming years could see large swathes of government ‘back office’ functions outsourced as well as delivery of services at a local level. There is even the possibility that government business process outsourcing functions could be packaged together and hived off in a possible stock market flotation.
Conservatives
The initial tough love rhetoric of David Cameron and George Osborne has been tempered as the reality of the UK’s weak economic recovery has hit home. The Conservatives still intend to hold an emergency budget within the first 50 days of an administration but in the short term the focus is more likely to be on cutting benefits and certain services and slashing administrative costs rather than immediately hitting service delivery. But over the longer term the Conservatives are thought likely to cut back more heavily on public services and to outsource possibly even more than their Labour rivals.
The Conservatives propose setting up an Office of Financial Management led by a Head of Government Finance, proposed to be former chief economic adviser to the Treasury Sir Alan Budd, which is aimed at getting a rapid grip on the public finances. The Conservatives have criticised PPP and PFI with George Osborne calling PPP “the worst of both worlds” and saying: “We need a new approach to PPP that’s transparent and puts value for taxpayers’ money first.” Overall, there is little difference between the aspirations of both major parties on deficit reduction and timescale but their methods of achieving the reduction may differ.
In terms of direct effect on outsourcing FM companies, the Conservatives are likely to be less rigid in terms of procurement and regulation and more interested in true free market principles like value for money, something that may suit many FM employers.
The figures
£178bn — The forecast budget deficit for this year
£1.2trn — The total public debt
12.8% – The percentage of GDP the budget deficit is forecast to represent
£130bn — Cuts in public spending urged by the Confederation of British Industry
£42bn — Public sector annual expenditure on construction
£680bn — current annual government spending
£80bn — current amount of government spending outsourced
Liberal Democrats
Traditionally sidelined when it comes to the main event, the Liberal Democrats, along with other minority parties, could suddenly find themselves wielding increasing influence over the direction the UK takes in the short term at least. The Liberal Democrats possess possibly the most respected politician around in terms of economic insight in the form of Vince Cable, and in the event of a hung parliament Cable could find himself in demand.
The party appears ready to temper some of its previous policies such as abolishment of university tuition fees and a pledge to provide free personal care to the over-65s in favour of economic expediency. It wants easy wins such as the abolishment of Regional Development Agencies as part of a longer term plan to slash £15bn from public spending, a bigger target than either of the two main parties although potentially achieved more slowly.
Cable has also signalled his intention to devolve more infrastructure spending to the regions: “The public administration has been over-centralised. The Liberal Democrats would decentralise British local government and support infrastructure development in the regions.”
Current public expenditure totals around £780bn a year in the UK, of which only £80bn is outsourced, and this figure is likely to rise sharply under whoever forms the next government as the fiscal deficit is wrestled under control. PFI and PPP are likely to remain key planks for delivery of major public projects but such projects are likely to be fewer in number.
But the prospect of an uplift in outsourcing of public sector services looks increasingly likely, something many FM companies have been positioning themselves to take advantage of over recent months. The coming years promise an age of austerity for the UK as a whole but for certain sectors of the economy significant opportunities will remain.
The industry view
It is certainly not doom and gloom within the FM industry. Richard Beamish, chief executive of Asset Skills, the sector skills council for the industry, is positive: “In general there is quite a lot of optimism about. The view is positive whichever party is in power.” He points out that whoever takes power after May’s election will be focused on cutting costs and outsourcing to the private sector is one of the key ways of achieving this.
But it will not necessarily be easy pickings for the sector. “Budgets are going to be cut. Margins may be tightening. FM companies are already running at margins of 3 per cent or lower and government is going to try to get even more value for money and there are bound to be some squeezes. Smaller companies get more uptight about this,” Mr Beamish says.
And FM companies need to remain at the top of their game to benefit in a period when there will continue to be winners and losers. Retaining and promoting the relevant skills will remain paramount with 34 per cent of FM companies investing in training with new skills in areas such as energy performance and management likely to come to the fore as government targets better environmental performance.
About the author
Graeme Davies writes for Investors Chronicle
