MoneyWeek Issue 497

Hidden nasties

30 July 2010 / Issue 497

What the bank stress tests didn’t tell us

PLUS:

  • Profit from China's rare earth metals squeeze
  • Buy this cheap video games giant
  • Channel 5's controversial new owner

Excerpt

Austerians versus Keynesians

I was at the park with my daughters the other day, and got talking to another dad. He worked in recruitment, supplying IT workers to the public sector. “It’s been a gravy train these past few years,” he sighed wistfully. “But things are getting tougher now.”

This will be no surprise to investors in firms providing services to the public sector. In recent weeks we’ve seen profit warnings from the likes of telecoms group Cable & Wireless Worldwide (CWW), while social housing maintenance firm Connaught saw its share price dive as it warned it would breach its banking covenants.

It’s bad news for shareholders in the sector. But it’s fantastic for taxpayers. I’ve never been convinced by the argument that spending cuts would be a ‘bonanza’ for private firms. First, it assumes work will be outsourced rather than delayed or even abandoned. More importantly, if money’s tighter, then outsourcers will be forced to offer better terms. Good thing too.

A report by Compass Management Consulting last month reckoned that poor procurement has resulted in the public sector paying 40%-plus over market rates for IT services in the past five years. According to Procurement Leaders magazine, £6bn could be saved on the annual £14bn the government spend on IT “without affecting front-line services”. And as The Guardian’s Nils Pratley noted, CWW’s profit warning showed it had made £20m profit on just £50m in public-sector revenues – a staggering profit margin.

• Read the full editor’s letter here: Austerians versus Keynesians