Labour’s plans to renationalise National Grid, revealed last week, show to what lengths Jeremy Corbyn and John McDonnell will go to seize privatised companies at below-market prices. But don’t think it is going to end with electricity. A leaked Labour briefing paper proposes re-nationalising the water industry for a cost of about £20 billion. McDonnell subsequently told Andrew Marr that he thought an even lower figure — £14 billion — might be adequate compensation to the owners. Given that the industry regulator, Ofwat, the Centre for Policy Studies (CPS) and the Social Market Foundation (SMF) each estimated the market value of these companies (excluding debt) to be in the region of £35 billion, this appears to be quite a discount.
How did Labour arrive at its figure? A clue is to be found in this gem from Labour’s proposal: ‘There is no reason for either of the following to be starting points for compensation: market value [or] regulated asset value.’ Continuing in this vein, the paper describes market value as unfair because it ‘incorporates expected future profits’, and states that Ofwat’s asset value measure of the sector was ‘purely notional’. But of course! Why would a Marxist believe that something is worth its market value?
While it’s easy to cheer the notion of fat-cat foreign bankers being forced to hand over their ill-gotten gains, the reality is more prosaic. Who actually owns the water companies? Much of it belongs ultimately to individuals through their pension funds, i.e., us. The Global Infrastructure Investor Association has identified 67 UK pension schemes with investment in the water industry, with around 5.8 million members between them. This includes the pensions of many public sector workers, especially those with local authority pensions.
Most of this money is invested in the three publicly listed water companies: Pennon Group, United Utilities Group and Severn Trent. All have yields between 4 and 5 per cent, making them steady performers with the predictable business model beloved of pension funds. With respect to Labour’s plans, Pennon Group has a book value per share of £3.81 vs a share price of around £7.12. United Utilities has a similar ratio, while Severn Trent’s ratio is nearer 4.2. Therefore, under Labour’s plans, shareholders would lose between 45 per cent and 80 per cent of the value of their investments.
Some of the privately held water companies use complex corporate structures to obscure their financial activities while paying little or no corporation tax. But this doesn’t make acquiring them simple. Anglian is partly owned by the Canada Pension Plan Investment Board (CPPIB) while South East Water is owned by two Australian investment trusts. Confiscating assets of companies belonging to two close international friends might cause a diplomatic incident. Similarly, Wessex Water is owned by the YTL Corporation of Malaysia, Sutton and East Surrey Water by the Sumitomo Corporation of Japan, and Northumbrian Water by Hong Kong-based Cheung Kong Infrastructure Holdings (CK).
Even assuming the companies > could be acquired for £14 billion, a Labour government would have to stump up a further £45 billion to settle its debts. What would be the point of borrowing nearly £60 billion to nationalise an industry which is working well? Labour has failed to make a case for what is wrong with the water industry as it is. McDonnell’s claim that nationalisation would save customers £220 a year in bills is pie in the sky. The average customer still pays less than a penny per litre of water delivered, and wastewater taken away, treated and returned to the environment. Water bills have risen in real terms by around 40 per cent since privatisation, but this ignores the investment in infrastructure since then.
According to Ofwat, customers are five times less likely to suffer from supply interruptions, 100 times less likely to have low pressure and eight times less likely to suffer from sewer flooding. Since privatisation, the industry has invested £140 billion in infrastructure — one reason why last year’s drought did not result in standpipes in the streets, unlike in 1976 when a nationalised water industry failed to cope with adverse weather.
McDonnell likes to say nationalisation doesn’t cost taxpayers anything because the state gains assets while shareholders would simply find their holdings converted to government bonds. But can we be certain that the ongoing revenues would cover the cost of servicing the existing debt as well as future investment?
Further, water companies would find themselves competing for funds against health, education and welfare. The current water infrastructure spending plan for England is costed at £100 billion over the next 25 years: who could expect that figure to be honoured by a chancellor looking to bail out the NHS? It’s also unlikely any great productivity improvement will be unlocked through government ownership. Productivity in the privatised water sector is up 64 per cent since privatisation vs pretty much zero in the wider public sector.
Customers won’t benefit from water nationalisation. But even worse would be the damage done to Britain’s reputation as a stable investment destination by a Corbyn-McDonnell grab on water shares at below value. That would damage our pensions and, by cutting Britain off from foreign investment, destroy wealth far in excess of the modest — and almost certainly illusory — savings which Labour is promising on our water bills.