Firms told not to rely on public sector contracts

MIDLANDS companies reliant on public sector contracts for their work could face problems if services are cut following the General Election, PricewaterhouseCoopers has warned.

Firms in such a position should take action now to minimise any risk to their operations, the business advisor said.

In addition to staying conscious of risk, they could also position themselves to take advantage of public sector investment opportunities and think about where and how they can help the public sector address its challenges, added PwC.

It said all political parties agreed that cuts would be necessary to address record national debt, partly arising from steps taken by the Government to shore up the economy.

While uncertainty remained about the timing of the election, areas expected to be targeted for cuts include:

•    The welfare budget, which could mean cuts in universal benefits, such as child benefit for the better off
•    A slowdown in capital spending whoever wins the election, which could mean fewer new hospitals and schools
•    Public sector pay and pensions
•    Potentially more privatisations and ‘outsourcing’
•    Savings in the £44bn defence budget
•    Savings in ‘more discretionary’ services such as some of those provided by local government

For SMEs supplying local authorities or other public sector contracts, these cuts could pose a significant threat to their financial stability and undermine the region’s economic recovery, said the advisor.

Andy Parker, entrepreneurial business expert at PricewaterhouseCoopers in the Midlands, said:
“As the economy begins to show signs of recovery and businesses begin to focus more on growth, SMEs are particularly vulnerable and it is important for them to stay risk-aware.

“Some businesses have more public sector customers than others and are therefore more vulnerable, but all should be reviewing each piece of business in order to assess its sustainability and taking this into account in their business planning.”

While risk awareness is vital, the impending public sector cuts could also present opportunities for some businesses, he added.

“For example, some local authorities may be planning to outsource services in a bid to reduce operational overheads or public sector interests in leisure or infrastructure may be sold. These could present investment opportunities for agile companies,” said Mr Parker.

Such investment opportunities came with inherent risks and required careful consideration, he warned.

One example concerned the risks associated with taking on public sector pay and pension arrangements.

PwC said companies with existing public sector contracts should aim to stay as close as possible to their customers in order to spot areas where spending cuts were more likely and where potential investment opportunities could arise.

They should also seek expert advice about which types of services are most vulnerable to spending cuts in the short to medium term.

Michael Kitts, public sector leader at PricewaterhouseCoopers in the Midlands, said: “The Government’s Operational Efficiency Programme has flagged types of services where cuts may be made and the initial focus is likely to be on back office services – the types of services that could be delivered by the private sector through outsourcing arrangements or shared services.

“While other discretionary services may also be at risk, essential services in areas like health and education are likely to remain spending priorities and are less likely to face significant cuts.”

“However, the upward pressure on costs is expected to continue for some essential services, particularly in areas like social care and this could cause cuts to encroach into non-discretionary areas in the future,” he added.

Simply shaving off 5% of admin costs would not be enough and any new government would need to look at where and how the public sector spends tax payers’ money, said Mr Kitts.

This would present threats to some private sector suppliers while providing opportunities to those who are able to rise to the challenge, he added.