James Moore: Now the Government’s outsourcing responsibility for contractor debacle

Outlook

The National Audit Office’s two reports into the contracting-out of state services aren’t exactly going to shake the sector’s big players to their cores.

In the wake of the recent scandal involving accusations of overcharging by Serco and G4S, combined with numerous previous foul-ups, you might think the industry was due a zinger. The NAO doesn’t quite deliver one. Its tomes are lengthy, and discursive, and sometimes have the air of a concerned but benevolent schoolteacher telling Humphrey from the civil service and Harry from the contractor that they could perhaps see their way to doing a bit better.

It does fire salvos against a lack of transparency over contractors’ roles, the rewards they make and the way they perform. It also worries that contracts are overly concentrated in the hands of a few big players and even uses the phrase “too big to fail” about them. Now where have we heard that before?

Other issues raised are the profits made by the contractors, whether they are justified, and how on earth they might be measured given the opacity of their financial statements. The NAO further frets about lax controls, and suggests that some Government departments aren’t really on top of things when it comes to drawing up contracts, and managing them.

Given what we have seen, the term “some” is questionable. One of the chief problems with the way these contracts are set out is the overwhelming importance attached to cost. The quality of service offered to taxpayers, and a consideration of whether the cheapest bidder will be any good, appear to come a distant second.

There is an ideological imperative at work here; an assumption that the private sector will do things better regardless. This isn’t necessarily so. The horrible mess that the Serious Fraud Office is picking its way through over offender tagging, and even the NAO’s reports, may lead to better management in the short to medium term.

But fundamental reform of a process that lacks any public confidence? That might still take another two or three fiascos to get going. Leave it to Margaret Hodge, the doughty chairman of the House of Commons Public Accounts Committee who prodded the NAO into action, to get to the heart of the matter. In outsourcing services, the Government has sought to outsource its responsibility for them. That needs to end.

Funds beware: The activists are getting more active

 Nice for Royal Mail that the children have been quiet since creating a fuss over its shares. By that, I mean Christopher Hohn’s Children’s Investment Fund, which became the Mail’s biggest private shareholder shortly after the much-ballyhooed privatisation.

At least Britain’s postal service operator isn’t alone. Mr Hohn and his kind are a growing presence on the shareholder registers of a growing number of companies. A report from Linklaters, the law firm, says the number of institutions globally with a stated “activist” strategy has more than doubled in the past decade.

They’ve moved out from their heartland of financial services, and they’re making an impact. A good thing?  That’s debatable. Their activities can have a positive impact on businesses with lazy and self-serving boards. But they’re often out for a quick buck by stripping companies of their cash reserves through forcing share buybacks or getting them to indulge in “financial engineering”. An example of the latter was forcing companies to sell and lease back property portfolios. It was once quite fashionable but the long-term results weren’t always good-looking.

The report, unsurprisingly, urges boards to gear up and get ready. Sound advice. But longer-term shareholders should also take note. The activists have done well because more traditional fund managers have been lamentably poor when it comes to governance and engagement. If these absentee landlords aren’t careful, they may find their houses getting burgled and burned.

A bumpy ride for investors  on the low-cost airlines

 After the shadows cast over the sector by Ryanair’s second profit warning, Flybe cheered the City yesterday by reporting that it’s back in (the) black.

Unfortunately there was a sting in the tail: another 500 UK jobs are to go. Tough luck on the workforce, who have already seen a large number of their colleagues pushed out of the door. Without the cuts, we won’t be viable, says Saad Hammad, the new chief executive, who argues that shrinking the company is the only way it for it to grow long term. 

He may even be right. Unite is going to scrutinise his business plans to see if it can save any members, while pilots want the Government to reduce Air Passenger Duty, which disproportionately impacts on smaller, low-cost outfits such as Flybe.

That may be a pipe dream for a Government that’s short of cash, and short of imagination. Just ask the retailers who’d like to open new shops but can’t because they’ll be asked to pay more in business rates than rent on too many high streets.

Investors were giving the shake-up a thumbs-up. They shouldn’t be too quick to cheer. Low-cost airlines are finding life tougher now they’re mature businesses. Shareholders are enduring the same sort of roller-coaster rides they get with more traditional carriers. The stock goes down, then up, then down. If they’re really lucky, they’ll be able to get off at more or less the same point as they got in with nothing worse than a shaky stomach.

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