Government contractors warn that austerity cuts threaten their future

The coalition's spending plans will further damage companies that supply local authorities
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The Independent Online

Public sector procurement chiefs will exploit weak, existing contracts with suppliers to help push through cuts, experts warn, making government contractors even more at risk during the current austerity drive.

The danger to firms, ranging from small teams of window cleaners right up to public companies, comes as many suppliers to the public sector are already feeling the pressure from a government determined to fulfil its promise to slash spending.

"Legal agreements between government and their service providers are very different from ones between two private companies," one public sector procurement expert said. "They give government massive flexibility – in some cases to renegotiate fees each quarter."

In recent weeks, a string of major companies that supply the public sector have been hit as efforts to cut public expenditure begin to gain pace.

The Government's plans have already resulted in Cable & Wireless Worldwide – which provides telecommunications to large corporations, as well as local authorities and government bodies – issuing a profit warning last month that caused its shares to slump by 17 per cent.

Meanwhile, Connaught – which last week admitted that it is about to breach its banking covenants because customers and suppliers are imposing stricter terms – said in June that local government had deferred some of its contracts to provide maintenance services for the social housing sector.

Elsewhere, investors have become jittery about outsourcing firms such as Capita, whose shares have slid almost 100p since the start of May to close on Friday at 726p, while telecommunications giant BT Group last week reiterated that it is in talks with the Government over spending cuts.

Alastair Rimmer, head of the business strategy unit at accountants PricewaterhouseCoopers, said: "UK companies need to stress-test their business models and revisit their business plans today rather than waiting for the detail of the comprehensive spending review in the autumn. The first step is awareness. Many companies don't know the extent to which their revenues depend on public money, and only a few have made plans to deal with the inevitable falls that the spending cuts will bring."

The spending review will be published on 20 October and will set out spending plans from 2011 to 2015.

The Treasury's website warns: "The Government has said that reducing the deficit is the most urgent issue facing Britain today. That is why it has committed to a significant acceleration in the reduction of the deficit over the course of this Parliament."

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