Catching the government gravy train

The government is introducing policies and initiatives to help mitigate the effects of the current recession – for example, initiating and accelerating spending on social and infrastructure projects. For better-placed concerns, these initiatives offer the prospect of filling some or all of the gaps left by a sharp contraction in private sector business.

 Chancellor Alistair Darling’s announcement of a planned £3 billion fiscal stimulus late last year, housing improvement and other measures, along with prime minister Gordon Brown’s promise to create 100,000 jobs through public works, have focused attention on companies that stand to gain. They range from engineering consultants to environmental experts and repair and maintenance specialists.

Hugh Blackwood, chief executive of Scott Wilson, an engineering consultant with a strong position in the rail, waste and road sectors, recalls a ‘surprisingly euphoric atmosphere’ at a recent party to celebrate engineering and construction group Balfour Beatty’s 100th anniversary. ‘Immediately after the chancellor’s Pre-Budget Statement, we were told to take stuff off the shelf as soon as possible,’ he recalls, including the A46 road programme, ‘which we had prepared but had hitherto had no funding for’.

Blackwood says Scott Wilson, now in line for £9 million over three years from work with Balfour Beatty on the A46 extension scheme newly authorised by transport secretary Geoff Hoon, draws particular comfort from dealing with the Highways Agency: ‘They are the closest to the Treasury and their hand is closest to the tap.’

Feeling the squeeze

Exactly how gushing that tap will prove to be for everyone is a matter of lively debate. The squeeze between a recession-induced fall in state revenues and expensive government commitments to the financial sector and beyond is making the public finances ever tighter, even with Darling and colleagues now promoting ‘quantitative easing’ (printing money).

Recent warnings from construction industry analysts that £2.4 billion of school and hospital building projects could be put on hold – together with road-widening schemes for the M25 and big waste management projects – emphasise the government’s financial dilemma. Coinciding with talk of tightening of credit for social housing schemes from the beleaguered big banks, these developments have naturally made sceptics ask how real the government’s stimulus programme is, or can be.

The answer seems to be that smaller schemes, to which commitments have already been made – as well as those that can claim an environmental edge or that involve catering for industries tightly regulated by government – are most likely to bring home the bacon, rather than grandiose mega-projects. And companies involved in parallel public sector stimulation packages in the USA and elsewhere overseas are also in a position to score.

Public sector potential

Andrew Nussey, analyst at broker KBC Peel Hunt, argues that ‘there is lots of potential’ for the likes of engineering consultant WS Atkins, UK and Europe market leader and eighth largest in the world. The company, which has been building up its strength in regulation-friendly ‘carbon-critical design’, should certainly benefit from however much infrastructure-oriented public spending the UK and other governments decide they can afford.

Commenting that mid-tier and smaller contractors are no longer confining themselves to private sector work but are going in for public sector business, he says that public work is seen as more competitive to win and hence lower margin than private, but, once won, it is more predictable. ‘The private sector offered higher risk but better returns,’ he says.

However, for most players looking for any growth, the private sector is not an option, and will not be for some time to come. ‘The private sector stuff has gone, and there have been redundancies,’ says Blackwood.

One player who is determinedly upbeat is Bob Holt, chief executive of social housing and domiciliary care specialist Mears Group, who says his company’s sector has ‘benefited greatly from the measures already taken’. He insists, ‘We’ve seen no local authority cutbacks – they are committed to substantial growth,’ while Mears is continuing its own expansion by paying up to £12.5 million for property maintenance and management concern 3c.

Philip Fellowes-Prynne, chief executive of water and rail maintenance group May Gurney, draws comfort from indications that most of the planned boost, as it applies to water, will go on maintenance – ‘and that’s us. We don’t do big prestige projects.’ Rather, the company works with local authorities, utilities and other agencies on smaller projects, such as underground cabling for electricity wires. Fellowes-Prynne is pleased to hear that the government says it will encourage many such schemes to be ‘de-mothballed and taken forward’.

May Gurney’s strategy has been to build up long-term maintenance service contracts, and at the end of last year the company boasted a forward order book of £1.25 billion, not including contract extensions of a further £750 million. ‘I think we are in a good place,’ opines Fellowes-Prynne, who adds significantly that, with ‘no debt and adequate cash, we are talking to a few takeover targets and are well placed to make a move’.    

Malcolm Paul, finance director of engineering services and consultancy group WSP, says the company, which derives a third of its revenues directly from government contracts looking after road networks, hospitals and schools, sees ‘no decline in the market’. The company, steered by CEO Chris Cole, is not involved in new-build projects but in asset management, which Paul believes the government is committed to supporting.

WSP is one of several internationally focused companies that are also looking for stimulus from another government, the new US administration of President Obama. Washington has been talking about a package of measures to boost roads, bridges, hospitals and schools, and WSP is already the design engineer at ‘Ground Zero’ in New York.

‘We can move easily from designing fancy skyscrapers to designing hospitals,’ he points out. The company is also the leading road and rail consultant in Sweden, where Paul says the authorities are confident of maintaining their investment programme.

Smaller-scale measures are what appeal to eaga, the ‘green’ energy efficiency concern that floated last year and works with the UK, Welsh and Northern Ireland governments and six utilities to help them meet their official targets for reducing carbon emissions. Spokesman Rik Kendall highlights the government’s intention to add another £150 million to the Warm Front Scheme for home insulation grants for the ‘fuel poor’, for which eaga won the management tender four years ago.

Operating in both construction and facilities management is Interserve, which draws two-thirds of its revenues from the public sector, mainly health and education. The company, which is the UK market leader in the potentially recession-proof field of prison building, could be another beneficiary from government spending plans, says spokesman Giles Scott.

 Interserve also puts together bidding consortia for Private Finance Initiative schemes and seeks to build up ‘niche expertise and enter into framework agreements’. These apply where a client or government has a three- to ten-year programme of projects and after an initial tender picks companies that will be allotted work at later stages of the programme.

According to Scott, Interserve is on the health ‘framework’ with the government and certain companies and has similar agreements with BT and United Utilities. He says the company does not expect government plans to produce a ‘sudden great lump’ in business, but says it is ‘continuing to grow, and it’s nice to know they are not cutting back’.

Piling up orders

Among companies that have been winning business and recruiting people of late is Mouchel Group, a consulting and business services concern whose activities range from providing procurement advice to the National Police Improvement Agency and outsourcing contracts with local authorities to support services for Network Rail and helping establish an electricity regulator in the United

Arab Emirates. Heavily involved in ‘active traffic management projects’ around the country (Including Birmingham’s ‘motorway box’), the company has a £2.1 billion order book and a £2 billion ‘bidding pipeline’.

Chief executive Richard Cuthbert defines the company’s strategy as pursuing ‘long-term managed services and outsourcing contracts, mainly with clients in the UK public sector and industries regulated by governments’. As he explains, ‘most clients in these markets are under pressure to deliver services more effectively and reduce costs’, which is where Mouchel comes in.

Property repair and maintenance group Rok provides a telling illustration of the differing fates of public and private sector business in this sector. The company, which won £875 million of long-term framework agreements last year and increased total expected future revenues by £600 million to £2.3 billion, expects to benefit soon from government spending increases, although, warns chief executive Garvis Snook, ‘there is no sign yet’.

According to Snook, ‘The government is going to increase and bring forward spending into 2009 and 2010 and we don’t expect any impact until the second half of this year.’ Some 30 per cent of the company’s business is in social housing, both new-build and repair and maintenance, with another 15 per cent similarly derived from the educational field.

Meanwhile, Rok’s private sector operations have been through a tough time, despite encouraging developments among insurance clients. Trading volumes fell in the last quarter of 2008 and the company has had to ‘reassess’ revenue expectations for the coming year.

‘We expect spending on social housing and education to stay ahead of inflation,’ comments Snook, who says the company has ‘stabilised’ its recent downturn but still expects the private sector to stay weak. He commends social housing for suffering only ‘limited competition’, with barriers to entry by outsiders provided by the ‘tortuous process of getting onto framework arrangements’.

The shares of most of these companies have taken a pasting since their 2007 highs, as concern over their private sector problems has outweighed appreciation of their public sector potential – whose timing and extent remain in varying degrees uncertain. Lately, however, some have been showing some bounce.

For those who sniff a possible bargain, WS Atkins, May Gurney, Mouchel, WSP and Mears look the safer medium- to long-term bets. Scott Wilson, eaga, Interserve and Rok offer more speculative merits.