Opinion

Last updated: 5th Nov 2010

The private sector now provides public services in the UK to the tune of about 5.5% of GDP, which now puts it ahead of the USA and only just behind Australia and Sweden. The growth in the UK public services industry has soared in the last ten years and is now worth c. £80 billion annually (40% of government expenditure on public services) and includes anything from waste collection, welfare-to-work, IT infrastructure provision and healthcare services. It is therefore no surprise that Catalyst has advised on a range of deals involving companies operating in these areas. We are now poised however for a new reality in the sector.

Last month the government published its Comprehensive Spending Review (CSR), which seeks to save some £83 billion across all public spending from defence to welfare. A number of government departments are bracing themselves for spending cuts in excess of 25%. This level of parsimony is unprecedented and therefore trying to forecast the exact implications for our private sector clients supplying public services is a little challenging at present.

Some things are clear. Many capital projects are being cut or ceased altogether, so any provider which would ordinarily provide services to support new infrastructure, whether a new hospital, prison or waste treatment facility, will not now have that income stream. Competition to provide services will intensify over the next three years as more companies (and in-house government departments) fight for fewer contracts. I expect that enforced outsourcing will be relaxed and private providers will be under much more cost and effectiveness scrutiny. Practices such as the amortisation of start up costs in the pricing of a contract may be eliminated. For example, the introduction of independent sector treatment centres (ISTC) for routine surgical procedures by the previous Labour government were on average seen to be 11% more costly than the NHS could have provided as they included start-up costs. The private sector will need to up its game by trimming these costs.

There is however plenty of room still for more private provision. Whilst work and pensions procures 50% of their services privately, departments such as HM Revenue & Customs (tax collection) is less than 20% and much less than the average of 40%. DEFRA, the department for the environment, food and rural affairs is not far behind HMRC and could be a new focus area for the private sector outsourcers.

Generally in markets which undergo such tectonic shifts we see increased levels of M&A, some enforced by the need to consolidate and some opportunistic. We fully expect at Catalyst to capitalise on these trends and build on our recent success across the sector.

Mark Wilson
Partner
Catalyst Corporate Finance