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ALEX BRUMMER: Shameful behaviour of the giant outsourcing companies makes Corbyn’s backward economics …

The post-Thatcher revolution for the British economy has largely been about removing the heavy hand of the state and unleashing private enterprise. It is on the back of this transformation that the UK has become a far more flexible economy and among the fastest growing in the Western world. Key beneficiaries of this change have been the outsourcing companies G4S, Mitie, Serco and Capita. They have taken the skills they learned in Britain and exported them to the rest of the world, becoming an important stream of overseas income.

Boost: Jeremy Corbyn sits on the floor of a Virgin Train critising overcrowding and citing a need for public ownership. It is a great pity then that the executives and boards in charge of these large enterprises, several of which catapulted into the FTSE 100 premier league of shares, have not shown themselves to be exemplars of Anglo-Saxon capitalism. Serco is under investigation by the Serious Fraud Office for alleged falsifying government contracts.

G4S was found to be overbilling on public sector work and Mitie shares plunged after it revealed income has been affected by budget cut. Latest to admit to failings is Capita where the shares plunged by 26.7 per cent after the company disclosed that it is incurring all kinds of penalties for delays in updating the IT systems for London’s congestion charge. When it was first installed it was regarded as a model for big cities everywhere. Just to add to Capita’s woes, it says that Brexit – that catch-all excuse – is responsible for a poorer outlook for both its recruitment activities and its work for the financial sector where it is one of the registrars used by many public companies.

The reality as far as the City is concerned is that while there may have appeared to be a summer pause, there has been no shortage of work ranging from the change of control of ARM, which fell into the hands of the Japanese group SoftBank to the merger of the London Stock Exchange and Deutsche Boerse and the bid for UK Mail by Deutsche Post.

Similarly, a series of initial public offerings give lie to the idea that finance is moribund post-Brexit. What really seems to have rattled investors in Capita is a combination of rising debt levels and falling profits. Companies doing long-term work for government and the private sector must by definition have strong balance sheets, which can withstand the ups and downs of the economic cycle.

The bruising of the outsourcing sector could not come at a more sensitive time. Theresa May has promised to clean up capitalism, but the governance of companies doing vital work for the public sector and local authorities has been found badly wanting. We may all regard the economic policies of the Corbyn claque, with the heavy reliance on the state to do everything, as stultifying and a step back into darkness. But unless the outsourcers can rebuild a reputation for efficiency, fairness and competence, the electorate might start to think that Labour has a point.

Fire sale

Even if Deutsche Bank succeeds in negotiating down the £11billion fine from the US Justice Department, which has sent its shares plunging and led to a European banking horror show, the bank’s problems will be far from over. It may just about avoid a rights issue and/or government recapitalisation, but its business model is broken. Unlike the UK banks with their enormous retail and small business franchises, the German money centre banks, Deutsche and Commerzbank, are minnows in their domestic market with a 10 per cent share of business between them.

Much of the lending and deposit taking is spread among some 2,000 smaller institutions, the Sparkassen and Co-operative banks, and the larger Landesbanken. The result is a highly competitive marketplace where it is hard to make profits and local and regional loyalties override all else.

That means that Deutsche chief executive John Cryan has few options but to sell assets to sustain his business. Abbey Life went earlier this week and its retail arm Postbank is thought to be next. Disputes with the American authorities over capital mean that the US investment banking operation may have to be jettisoned too.

The group’s asset management operations are sub-octane and unlike Credit Suisse it has little in the way of private banking to cushion the decline. The last best hope may be a merger. Efforts to forge an alliance with Commerzbank recently failed and there has been some suggestion that BNP Paribas might be interested. But the appalling track record of cross-border bank mergers – RBS and ABN-Amro and Franco-Belgium bank Dexia – come is wholly unattractive.

Sky fall

A tempting combination of a strong dollar and a falling share price at Sky cannot have escaped the notice of the Murdoch family. It has long been interested in acquiring the 60 per cent minority holding in the satellite broadcaster that is in outside hands. Last time out the clan was thwarted by the fallout from the News of the World scandal. But with Sky Deutschland and Sky Italia now fully under the umbrella of the London quoted company it may be time for 21st Century Fox, which is need of regular income streams, to strike. James Murdoch, who has been keeping the chairman’s seat at Sky warm, would have to step aside once again.










Article source: http://www.thisismoney.co.uk/money/markets/article-3814458/ALEX-BRUMMER-Shameful-behaviour-giant-outsourcing-companies-makes-Corbyn-s-backward-economics-credible.html

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