G4S faces test as UK awards contracts

Government to announce prisons outsourcing agreements this week

© Bloomberg News

G4S will find out this week whether the Olympics security fiasco has hurt its ability to win new government outsourcing contracts when the biggest ever cluster of prison privatisations in the UK is announced.

The FTSE 100 security group shrugged off the £50m cost and massive reputational damage of the Games fiasco to report revenues up 6.3 per cent for the first nine months of the year, or 9.2 per cent including the Olympic contract.

The company said underlying revenue growth from emerging markets, which account for over a third of group profit, was 9 per cent over the nine months, helping to offset slower US government and European markets.

Nick Buckles, chief executive, said organic growth had been driven by strong contract wins in its UK business including two prisons and a £35m to £60m a year deal to provide facilities management for 340 courts and administrative buildings for the Ministry of Justice.

More recently it won a £13m contract to provide electronic tagging in Scotland for five years – the first large deal secured after its failure to supply the 10,400 security guards promised for the London Olympics forced the government to call in the army to make up the numbers. The company is still locked in negotiations with Olympic organisers over final payment on the contract and said it hoped to reach a resolution by the financial year-end.

Nevertheless, Mr Buckles admitted that the real test of the post-Olympics climate for the company will come this week when the UK government, which accounts for about 13 per cent of revenues, awards a further six out of nine prisons that have been put out to tender.

“We’ve been a pioneer in government outsourcing but we won’t know how it shapes up until the first set of [post-Olympics] contracts is awarded,” he said.

Investors had feared that the flow of deals would be stymied after MPs said the company should be barred from new government contracts.

The group is bidding to win six of the nine prisons up for tender against Serco, Sodexo and Mitie, a FTSE 250 company, which has entered the race in partnership with the Prison Service.

G4S has enmeshed itself with the UK government over the past 20 years, winning milestone outsourcing contracts. In 1992, the company opened the first prison to be run by the private sector, The Wolds, in East Yorkshire. Last year it took over the Victorian inner-city facility at Winson Green in Birmingham – the first prison to be transferred from the public sector to a private provider.

Amid reports that the army is getting ready to fill in if there are illegal prison strikes ahead of the next wave of privatisation, Mr Buckles said the transfers would require careful handling. “There was a fairly large risk in moving from the public to private in Birmingham but we sat down and talked with prison officers. You’ve just got to be very careful with how you treat people,” he said.

Transferring prisons from the public sector to private is considered inherently more challenging as they come with existing unionised workforces and older buildings, which are less conducive to modern management techniques.

With the government seeking to raise the number of prisons run by the private sector from 16 to 45 by 2016 as it seeks cost savings of 20 per cent, Mr Buckles said he expected further opportunities in the running of prison and probation services. “There’s going to be more opportunities in prison and probation contracts. We’re pretty confident as an industry that government outsourcing is set to continue.”

Robert Plant, analyst at JPMorgan, said: “A UK government contract win would be very positive, given expectations that G4S will be frozen out of the market, at least in the short term, due to their failure to fully deliver the London Olympics contract.”

Shares in G4S, which works in over 125 countries and runs operations from immigration and border control to cash transportation and guarding ships from pirates, were up 2 per cent at 266p in early morning trading.

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