The outlook for outsourcing

Candour doesn’t always pay, it would appear. Kier’s share price has tumbled by some 20% since it cautioned investors that construction margins were coming under pressure and that a widely anticipated swell of outsourcing by public authorities was currently more like a trickle. The former point will come as no surprise to anyone who has followed the sector; the latter contrasts somewhat with heady projections by the group’s more strident peers.

Kier has a reputation for being on the “glass half empty” end of the spectrum when it comes to trading statements. Paragraph two of its 23 February results ends: “Conditions continue to be difficult in UK construction and we are inevitably seeing greater pressure on margins. In services, public sector outsourcing opportunities are taking longer to come to market and are often reduced in scale, which means the financial effect of any outsourcing is not likely to be recognised until 2014.”

The trend has been slow, patchy, and even the most privately-leaning councils have demanded their pound, or rather, millions of pounds of flesh

That is rather more upfront, literally, than those peers that see their cups not just half full, but overflowing. It is always an amusing exercise with the construction and support sectors’ flakier companies to see how far one has to dig into the 7am stock market release to uncover the coded profit warning. Without naming names, the recent results season appeared to provide at least one classic of the genre.

Warning signs include the benchmark profit before tax and earnings per share being well down, or even omitted from, a statement’s opening bullet points. Selective timing of the order book - choosing a later date from the accounting period end if that has marked a fallow period - is another. Outlook statements that focus on the rosy “mid-term” opportunities rather than the grim six or 12 months ahead are a frequent fixture.

But for several of the leading support services and service-y construction groups, the prospects for outsourcing still look rosy. Most have prophesised a new era of outsourcing opportunities since the incoming coalition government first heralded the age of public sector austerity. Numerous analysts in the broader support services sector appear to have swallowed this line and have been blithely predicting that councils up and down the land would form an orderly queue to hand over billions of pounds of work to radically more efficient private providers.

They don’t appear to have taken into account politics. The trend is under way, but in many cases it has been slow, patchy and even the most privately-leaning councils have demanded their pound, or rather, millions of pounds of flesh.

Some councils, though, are downright ideologically opposed to outsourcing. Others are just chaotic. Some are both. It might be something in the water, but when “Edinburgh” and “construction” are mentioned in the same breath, the word “farce” is rarely far behind, be it in reference to city council projects like the risible progress of the capital’s tram or the building of the Scottish parliament.

Whether local or national, there is nothing the average politician likes more than cutting the tape on a shining new leisure centre

More recently, the city’s forays into outsourcing look like keeping to form. A Carillion-Capita JV was in the final shortlist of two against a Mitie-led consortium for a £300m facilities management contract over 10 years. Carillion and Capita have both said they had got the nod from the council. It then awarded it to Mitie … and subsequently decided to retain it in-house. A similar fiasco seems to have unfolded when it awarded a similarly sized waste contract to Enterprise.

It is possible that Kier’s relative jaundice about prospects for outsourcing over the next couple of years have been influenced by its experience in Edinburgh (it bid on the waste contract). Maybe the group has been over-cautious, but equally possible is that its peers have failed to face reality.

Paradoxically, public construction, although much reduced, is still being commissioned, despite predictions that physical projects would suffer while services were being outsourced en masse. This could also be explained by politics. Whether local or national, there is nothing the average politician likes more than cutting the tape on a shining new leisure centre. Keeping services in-house, though, can at least give the impression of protecting local jobs.

The National Infrastructure Plan, although targeting lots of private investment, is projected by ministers to be worth £250bn. It may be telling that Carillion, which guards its support services classification zealously, has recently suggested expanding its UK construction operations, having consciously shrunk them in recent years.

Alastair Stewart is a building and construction analyst at Collins Stewart