I had long reckoned that companies providing services to the Government were onto a sure-fire winner and have often cursed myself for not stuffing my portfolio with them.
Government departments have proved pretty inept at getting a good bargain and so many companies making money out of governments back the political parties with cash or free ‘advice’, which is why no-one in power wants to rock the boat.
Long term contracts, furthermore, provide good visibility of guaranteed lucrative earnings.
What I had not allowed for was the likelihood, or should I say inevitability, that greed would get the better of the companies receiving the golden eggs. One of the lessons in life is that greed feeds on greed, and the more you have the more you want.
So it has proved with support services. You might think that companies making money from government, usually providing a lesser service at a higher cost despite repeated claims that outsourcing does the opposite, would take jolly good care not to push their luck.
And when they get caught out, as Serco (SRP) did when it found it could not fulfil its obligations at the Olympic Games and the Army demonstrated it could do the job better and cheaper, you might think they would take care to see that no other scandals emerged until a decent period of time had elapsed.
Instead, Serco has moved on from accusations of incompetence to suspicions of fraud, with the Serious Fraud Office launching an inquiry into the scandal over tagging criminals. There have also been claims, denied by Serco, that it fiddled figures relating to out-of-hours GP services in Cornwall and the probation service in London.
Nor is Serco alone. Rival G4S (GFS) is also embroiled in the controversy over alleged charging for the tagging of criminals who had died or been put back in prison. Both have seen chief executives bite the bullet, Richard Morris at G4S and Chris Hyman at Serco. This week Serco’s UK head Jeremy Stafford has followed.
Stafford famously told MPs on the public accounts committee in April that the picture emerging of Serco was ‘not the company I know’. One can only hope that whoever replaces him will rapidly build up a better understanding of what is going on.
No doubt this will all get forgotten in due course. Now that even the Labour Party is funded mainly by big business we do not have an alternative government that will stop the private sector from profiting at the expense of taxpayers. But for now Serco and G4S face an uphill battle to win any more central government contracts and that is a nasty financial blow. I shall stay well clear.
Utilities Stock with Powerful Profits
First half figures for 
National Grid (NG.) were disappointing, with pre-tax profits down 7% to £979 million thanks to a weaker performance in the US. In the UK, however, the main worry is whether there will be sufficient power to transmit after successive governments have scrambled to appease the green lobby and failed to plan for the replacement of aging power stations.
UK operating profits were actually up by 7.7% in the first half and the company is avoiding the worst of the outrage for rising prices that has fallen on the generators and household suppliers.
The good news is that UK industry regulator Ofgem has set the pricing framework for National Grid for the next eight years, which gives a visibility of earnings that few companies can match, while in the US agreements have been reached for the gas and power generation businesses in and around New York.
Chief executive Steve Holliday says National Grid now has ‘the long term framework and clarity to continue to invest for the future’, which is obviously important for a company that needs to make heavy long term capital spending.
That does, however, touch on another cause for concern: debt levels. National Grid has borrowed £26.5 billion and has net debt of £21.4 billion. Although borrowing costs in the real world are patently divorced from central bank rates in the UK and the US, and National Grid is already paying about 5%, this debt could become a burden when interest rates start to edge up in a couple of years’ time.
I bought National Grid shares at 658p, including dealing costs, and they are now worth about 770p. I have not felt tempted to top up my holding at that level despite an attractive yield of about 5.5%. The good prospects are reflected in the share price.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
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