(Bloomberg) -- Britain's Capita Plc—a little-known provider of services such as administering London's traffic congestion-charge scheme and collecting the licence fee for state-broadcaster BBC—has had its worst day on the stock market in a quarter century.
The company's woes point to even greater trouble for Prime Minister Theresa May's shaky conservative government.
Capita joins a growing list of companies such as Carillion, Mitie and Interserve that have encountered financial difficulties in recent months, sparking a debate over outsourcing of public services in the U.K. Over the past three decades, such companies have been paid tens of billions of pounds to do everything from maintaining nuclear weapons to cooking school lunches, and the recent run of bad news has many in the country questioning whether they can fulfill those contracts.
Capita's share plunge was tied to drastic measures aimed at spurring a financial turnaround by its new Chief Executive Officer, Jonathan Lewis, including a halt to dividend payments and plans to sell shares and assets. While Lewis was quick to distance Capita from the now-defunct Carillion and other struggling outsourcers, the company's troubles leave May's government politically exposed.
As May negotiates Britain's future relationship with the European Union, she's facing increased calls for her resignation, and Labour leader Jeremy Corbyn has cited the companies' lousy results as evidence of bad policy decisions by the Tories.
Capita was the biggest recipient of government contracts last year, according to researcher Tussell Ltd. Last summer, a consortium that included Carillion won contracts worth 1.4 billion pounds ($2 billion) to build sections of a new cross-country railway just days after the construction services company issued a profit warning. And Interserve Plc, which runs schools, roads, military bases and more, fell as much as 15 percent this month when the Financial Times reported that its balance sheet is under government scrutiny.
Why this is good news for Labour
The apparent failures of outsourcing have become a rallying cry for Corbyn, shown by polls to be neck-and-neck with May if elections were held now. The market is concerned that if he makes it to Downing Street, he would rein in outsourcers. Corbyn called the collapse of Carillion a “watershed moment,” and in a video that went viral on social media this month blamed it and its peers for “fleecing the public of billions of pounds.”
Read more on Gadfly: Corbyn's Corporate Enemies Are Making His Life Too Easy
“The Tories' privatization dogma risks lurching our public services from crisis to crisis, threatening jobs, taxpayers' money and leaving people without the services they need,” Labour lawmaker Jon Trickett said in a statement Wednesday. “The government must end its ideological attachment to private profit in public services and instead start putting the public interest first.”
Max Blain, a spokesman for May, downplayed today's news about Capita, saying the company isn't on the verge of failure. “We do not believe that any of our strategic suppliers, including Capita, are in a comparable position to Carillion,” Blain told reporters in London.
How did we get here?
When May took over the Conservative Party in 2016, she was hailed as the heir to Margaret Thatcher, who kicked off a wave of privatizations in the 1980s. Thatcher's local government minister, Nicholas Ridley, said the ideal council would meet once a year simply to draw up and sign all its private contracts.
Both major parties have embraced the practice. In his 1997-2007 Labour government, Tony Blair championed public-private partnerships for projects like construction of hospitals, arguing they delivered services faster and more efficiently.
But some contracts have come under fire for onerous repayment terms, souring the current Labour leadership on the idea. In a 2013 report on contractors focused on Atos, Capita, G4S and Serco, the U.K.'s National Audit Office questioned whether there's sufficient competition in procurement and whether contracts deliver value for money. G4S, whose largest customer is the U.K. government, was at the center of public furor when it failed to deliver adequate security staff for the 2012 London Olympics.
Why is this happening now?
The struggles faced by the outsourcers stem from various causes, according to Michael Donnelly, an analyst at Panmure Gordon & Co Plc. Building companies like Carillion have been hammered by years of razor-thin margins, facilities managers like Serco have struggled to get into higher-profit services like software, and technology-focused Capita has failed to cope with years of acquisitions.
“When you look at these companies, what's striking about them is that there are more differences between them than similarities,” Donnelly said.
What will Brexit mean for the industry?
Several outsourcers have blamed recent problems on the U.K.'s vote to leave the European Union. Interserve said the EU referendum and 2016's general election caused a hiatus in procurement, Mitie blamed Brexit for uncertainty in a dour trading update three months after the referendum, and in its most recent annual report Capita said it has suffered as the decision and the uncertainty that followed have taken their toll on the government's ability to sign new deals.
Capita, “like many firms, could not have predicted the result or the ensuing political turmoil,” the company wrote in the report. Since the vote, there has been a “lack of major central government outsourcing contracts coming to market.”
--With assistance from Alex Morales and Rebecca Penty
To contact the editor responsible for this story: David Rocks at drocks1@bloomberg.net.
©2018 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
