20 November 2013

Today, representatives of four of the biggest public sector contractors – Serco, Capita, G4S and Atos – will face the Public Accounts Committee on ‘The delivery of public services by private contractors’.

According to one of two reports on public service contracting published by the National Audit Office last week, the ‘big four’ earned £6.6 billion (bn) between them from the UK government and public sector in 2012-13. They received this for running back office functions like IT and facilities but also for frontline services like prisons, benefit claims and defence.

Outsourcing government services might also outsource a great deal of the risk and responsibility to these companies. A series of controversies – from Olympic security to out-of-hours GP services to overcharging for tagging criminals – have led to the replacement of top executives at both Serco and G4S and commentators are now raising questions about whether big contractors will continue to bid for and provide services if their reputations continue to suffer.

As these companies face the public trial of a select committee hearing, it’s worth examining the impact on their bottom line by looking at the share prices of the big four on the London Stock Exchange (or rather the big three, as Atos is not listed in London).


Serco are the most reliant of the big four on UK government contracts – their total worldwide revenue in 2012 was £4.9bn, with UK public sector revenue of £1.8bn (2012) and UK central government revenue of £1.2bn (2012-13).

The company’s share price has fallen significantly this year as a result of performance failings and political scrutiny. Indeed, the company has lost over a fifth of its value in the past year – share prices fell from 550p on 16 November 2012 to 425p on 15 November 2013.

Serco shares reached a high of 684p on 8 July 2013 before tumbling to 620p by the 12 July after a Public Accounts Committee report on 11 July criticised Serco’s ‘substandard’ out-of-hours GP service in Cornwall. Share prices suffered another big drop at the end of August, falling more than 11%, from 603p on 28 August to 539p on the 29 August, just as the Justice Secretary called in the City of London police to investigate alleged fraud relating to the transport of prisoners.

The last week has seen another big drop of nearly 17% (from 504p on 13 November to 419p on 14 November) as the company issued a profit warning, based in part on its being prevented from bidding for new contracts with the Ministry of Justice as the department continues a review of its biggest contracts.

(See Google Finance and the London Stock Exchange for more details.)


G4S had worldwide revenue of £8bn in 2012, with revenue of £0.7bn from the UK public sector and £0.6bn from central government in 2012-13.

On the face of it, its relative lack of reliance on the UK public service market may have helped it weather various storms better than some of its competitors – from 16 November 2012 to 15 November 2013, it saw its share price rise from 244p to 255p. But its share prices in November 2012 had been hit by its loss of the contract to run Wolds prison and failure to win any new contracts, which saw 20p wiped off between 2 November and 16 November 2012.

G4S also experienced problems during the Olympic summer when it emerged that they did not have enough security staff for the Games, followed by a statement from the Home Secretary to the Commons, an appearance by chief executive Nick Buckles before the Home Affairs Select Committee and a critical report from the committee. The company’s share price buckled like a select committee witness, shares falling by 9% to 254p in one morning after the company admitted it faced losses of up to £50m on the contract late on 13 July. The select committee appearance seemed to push the price even lower, to 240p, although shares had recovered to around 268p by the time the report was published and did not fall below 263p the following week. (The episode doesn’t appear to have deterred G4S from considering providing stewarding and security at the 2014 Commonwealth Games, however.)

Looking at 2013, the company hit a high of 314p at the end of April before a warning that its margins could be lower than expected, with a resultant dramatic fall in share price at the beginning of May. But its lowest point (208p) came on 15 July, a few days after the Justice Secretary announced a review of the company and asked the Serious Fraud Office to consider an investigation into overcharging for electronic tags.

(See Google Finance and the London Stock Exchange for more details.)


According to the NAO, Capita earns around 96% of its £3.4bn revenue in the UK, with £1.1bn coming from the UK public sector and £0.5bn from UK central government in 2012-13.

Capita has seen its share price rise from 713p on 16 November 2012 to 983p on 15 November 2013, although there have been some bumps along the way. The company’s share price dropped by nearly 4% on 15 October as the Office of Fair Trading announced a market study into public sector ICT services. On 4 April there was a drop from 906p to 881p, on the same day that Capita announced it had missed its targets for running court interpretation services. Capita also saw a drop, from 1037p to 998p – on 25 July, the day it announced its half-year results.

Capita won the electronic tagging contract that got Serco and G4S into trouble and its generally buoyant share price suggests analysts feel the company will pick up further work if G4S and Serco’s fortunes continue to wane.

(See Google Finance and the London Stock Exchange for more details.)

What might this analysis tell us? First, it appears that companies delivering outsourced public services do suffer the consequences of failure – particularly when amplified by public scrutiny. Two kinds of information appear to affect share price most: winning contracts and negative stories – including high-profile select committee appearances and government reviews. Serco are more reliant on UK public service contracts for their revenue and, consequently, their share price appears to be particularly responsive to ‘bad news stories’ about their contracts with government. Often, it is difficult to spot comparable accountability for ministers and employees when they mismanage government contracts.

We also see rapid peaks and troughs as the market gets new information about companies. Winning government contracts naturally often boosts a company’s share price – as seen by Capita’s share price increases in the past year. But it is striking that incidences of failure (rather than outstanding performance on a particular contract) appear to have the greatest impact on share prices. This raises the interesting question of whether investors are judging the capability of these companies overall or simply reflecting the reality that the prospects of these companies often relate as much to specific incidents as overall performance.

Certainly, it is very hard to find out how well these companies are actually performing overall. The Institute has previously argued that government should publish not just about the amount of money going to contractors but an assessment of the quality of service they provide. Such information would allow the public – and investors – to see much more clearly whether G4S and Serco are just suffering problems in a few contracts but are generally performing well – and they might tell us too how attractive the prospect of using other providers actually is.

Such information would, we hope, shift the public debate as well as share prices – helping us to see the good as well as the bad in government contracting and forcing private providers and government to explain not just scandals but also cases where providers have been underperforming for some time without any consequences. This way we might start to see real accountability not just for publicly listed companies but for publicly accountable politicians and their officials.


Thanks for this Gavin. So much of previously public provision is now outsourced in the UK, and the issue has risen so far up the political agenda, that it would seem to be a no-brainer to put more information about performance into the public domain. We could then see where outsourcing is working, bringing efficiency & economy, and where it is failing, creating the opportunity to consider taking services back in-house.

I think the test is not just to look at the immediate shocks of bad publicity but to see how/why the share price recovers. My concern (I'd be interested to see some analysis) is that the price might well bounce back quite quickly - certainly before anything obviously positive has happened (taking steps to address concerns concerns raised, or new contracts awarded) - which suggests such problems only superficially damage these companies, and are soon forgotten about by the market.