Companies that supply public sector feel heat of latest wave of cuts

Insolvencies among businesses reliant on the public sector have shot up by 47 per cent this year despite a fall in corporate bankruptcies over the same period.

Some 168 companies in the health and social services, education and defence sectors collapsed in the first half of 2010, compared with 114 last year, according to research published today by the accountants Wilkins Kennedy, as overall business failure has dropped by 5 per cent in the same period.

Although the Government's full cost-cutting plans will not be detailed until October, suppliers are already suffering from delayed contracts. Health and social work have been the worst hit, with failures up 49 per cent on last year, compared with rises of 28 per cent and 42 per cent, respectively, in education and defence.

"Those companies that have become too dependent on the public sector are beginning to feel the pain," said Anthony Cork, a director at Wilkins Kennedy. "It is not just the actual cost cuts that are causing problems but the delay by public-sector bodies making spending decisions."

Insolvencies have also hit care home operators in the second quarter, with Orchard Care Homes, Angea Care and Cliftonville Nursing Homes all affected.

Larger companies are also suffering. Connaught, the social housing group, issued a profits warning forecasting annual losses and is in talks with banks over plans for a debt-for-equity swap. Mouchels, the consulting group, is also predicting losses in the run-up to the October spending review. And RM Group, which provides IT for schools, put out a profits warning when the Building Schools for the Future scheme was scrapped.

"A lot of suppliers to the public sector are now waiting for the other shoe to drop," Mr Cork added.

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