The need to cut the nation's increasing debt burden will lead to a rush in outsourcing of back-office public services and drive excellent growth opportunities for companies in the support services sector, according to
Co-operative Asset Management.
Paul McGinnis, Head of Research, at The Co-operative Asset Management believes that regardless of which political party wins the forthcoming election, tackling the country's budget deficit will top its agenda and generate outsourcing of public services on an unprecedented scale - providing an opportunity for investors.
Other factors that Co-operative Asset Management says highlight the huge public sector opportunity available to the support services companies include:
- Recent Office of National Statistics (ONS) statistics revealed a drop in public sector productivity in the decade from 1997 of 3.4 per cent, despite rising investment in public services. This compares to a 20 per cent productivity increase in the private sector during the same period.
- The Government currently spends an estimated £620bn annually maintaining public services, which is predicted to top £700bn by April 2011. A further £164bn is spent by Local Authorities of which only 13 per cent of total spend is currently outsourced.
- Outsourcers contract on the basis they will maintain, and even improve service levels, whilst delivering cost savings of up to 30 per cent. This provides an unprecedented opportunity for the Government to maintain politically sensitive public services whilst positively addressing the state of the Government finances.
- As economic growth is unlikely to come from consumer and government spending in the near term, fiscal tightening will need to be driven from cost savings.
"With the Government under huge pressure to reduce public sector debt, outsourcing back-office functions provides an opportunity to make significant savings without having to cut vital front line public services,” said Paul McGinnis.
"Government has committed to reducing the country's record post-war borrowing of £178 billion by half within four years, a challenge in itself, but comes at a time when tax receipts are at low levels due to the recession.
"Swift action is necessary and we believe those outsourcers with a diverse business model and already strong relationships with Government bodies have most to gain. Serco and Mitie are two companies in the sector that are particularly well placed."
However, the
Co-operative Asset Management warns investors there are also risks to the sector, which means stocks must be selected carefully.
"Major public finance projects will be impacted with existing schemes being scaled back and new initiatives will be in short supply,” McGinnis added.
“Companies that are able to improve the efficiency of existing operations and that have little exposure to these big projects will benefit most".
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