Election 2010: Which sectors will prosper in the aftermath?

The Co-operative AM's Paul McGinnis finds out which sectors will benefit in the post-election period.

The key debating issue for politicians in the run up to the general election was the parties' plans for deficit reduction and the effect their decisions will have on the economic recovery.

Although all three main parties agree public sector spending must be cut, each has their own approach. And with a probable period of austerity ahead, it is understandable investors could be concerned.

However, regardless of how the new government goes about tackling the deficit, there a number of important public policy issues that require urgent government attention and that should create opportunities for investors in the post-election period.

Outsourcing

Cutting spending in the public sector is vital, with predictions it will account for 50% of GDP by 2011 if left unchecked, compared to a long-term average of 38% of GDP.

However, any perceived deterioration of ‘front-line' public services will not be tolerated by voters and the new government is faced with the task of figuring out how to give the public its cake and eat it too.

Efficiency was the word on every candidate's lips - doing the same or more for less money by increasing productivity. But the public sector is notorious for its inefficiency. Although Labour pumped money into the public sector in the decade from 1997, productivity actually dropped by 3.4%, according to the Office of National Statistics.

In comparison, private sector productivity grew by 20% during that period. Therefore, part of the new efficiency drive is likely to see increased use of the private sector to outsource government services.

The government already outsources a range of public services. Capita handles the IT and human resources for many city councils, Compass works with the armed forces and police, and Connaught is a leader in social housing, to name a few.

Outsourcers promise to maintain, and even improve, services while delivering cost savings of up to 30%. The Julius Report, commissioned in 2008 by then business secretary John Hutton to chart the public service supply industry, said the typical savings from outsourcing could be 20%-30%.

Outsourcers with strong relationships with government, and the ability to scale up operations or diversify business models, stand to benefit most. Serco regularly wins large contracts and the scope of its work in the UK is increasing. But it is also diversifying so it is not solely reliant on the public sector or the UK - in the first half of 2009 it won a record number of new contracts in locations from Australia to Dubai.

Mitie, which currently provides cleaning staff and recycling services to the government, has created a specialist arm to help companies meet carbon reduction targets set by UK and EU law. Government departments are subject to these regulations just like businesses, so this is an area where specialist knowledge, as well as cost savings, is an incentive to outsource.

Renewable energy

With the UK committed to cutting greenhouse gas emissions by 18% by 2020, compared to 2008 levels, there is likely to be post-election support for renewable energy that will benefit some energy suppliers.

For the country to achieve this target, a substantial increase in the amount of energy from renewable sources will be needed - from the current 6% to around 30%. At the same time, the UK faces a potential ‘power crunch' in this decade, as old coal and nuclear power plants close.

New sources of energy - and preferably renewable ones - must be found. Nuclear may be clean but it is politically divisive and plants face years of planning approval. And many energy companies have held back on investing heavily in other renewables without incentivisation from the government. The recession has also lowered demand for energy, leading some companies to put plans on hold. But other companies, such as Scottish & Southern Energy, have already moved forward. Renewables now account for 20% of its overall capacity and it is ideally placed to increase this.

More specialist firms, such as engineering and infrastructure planning consultancy RPS, also stand to benefit from the need to change the UK's energy landscape. Its expertise in feasibility studies and environmental impact assessments, as well as technical skills required for the construction of renewables projects, make it another potential beneficiary.

Healthcare

The NHS is one public service each party says it is determined to protect. However, as the baby boom generation ages and therefore requires more and more from the NHS, it will be difficult to maintain current service levels without either further investment or cost savings.

A recent report by The King's Fund and the Institute of Fiscal Studies estimated demographic pressures alone are likely to cost the NHS an additional £1.1bn-£1.4bn a year at 2010/11 prices, requiring average funding increases in real terms of around 1.1% a year.

When Labour came to power in 1997, investing in the NHS was a key pledge. By 2009, it had increased spending by almost three times compared to 1997. But with the current fiscal restraints, even maintaining spending in real terms will be difficult.

Therefore healthcare could be another area which benefits from government outsourcing. There are already areas which are outsourced, the most obvious of which is the construction and maintenance of hospitals through private finance initiatives (PFI). IT and cleaning have also been outsourced. The outsourcing of medical treatment itself is more controversial, but seen as a way of reducing waiting times.

So far, there has not been a massive appetite amongst the public for private medical insurance, but the government might consider tax incentives to promote take up if it thought that might help relieve the burden on the NHS. Any tax relief would have to clearly be offset by a reduced NHS burden to make it viable.

However, the clear winners in this sector, whatever political decisions are made, will be pharmaceutical and medical device companies. Firms such as GlaxoSmithKline and Smith & Nephew will benefit from the baby boomers' need for medication and medical devices to help them maintain active lifestyles into old age.

After the result

As the new government takes power and begins to prioritise the tough decisions, it will become clearer which sectors and companies stand to benefit the most. Of the sectors outlined above, the main threat to outsourcers is public sector spending cuts are so deep some services are not outsourced but cut all together. And energy companies may find carbon reduction takes a back seat to deficit reduction. However there is no turning back the clock for baby boomers.

Paul McGinnis is head of research at The Co-operative Asset Management