Details have been scant on how Labour's renationalisation plans would work in practice. Now, shadow chancellor John McDonnell has fleshed out the party's thinking. David Blackman looks at the arguments for and against the proposal.

In just over four years’ time – the next scheduled date for a general election – utilities could be facing imminent renationalisation.

The biggest concerns will be in water industry boardrooms, where wholesale public ownership is on the cards according to the 2017 Labour manifesto. It also promised to bring back the energy network into public ownership. However, beyond the headline slogans, details have been scant about Labour’s plans.

In a speech at a conference just over a fortnight ago, shadow chancellor John McDonnell waxed lyrical about not wanting to recreate the “top down bureaucratic” state-owned businesses created after the Second World War.

Labour’s emerging thinking is most fleshed out in a report on alternative models of ownership presented to McDonnell in the run up to the conference. This suggests a blend of national state, local and community ownership for the National Grid and other electricity and gas sector infrastructure. The boards running the companies would be split between state appointees, local and devolved administration government nominees, consumer, and employee representatives.

Spreading ownership

In his speech, seen by Utility Week, McDonnell argued for a more co-operative model of ownership on the grounds that “nobody knows better how to run services” than those who deliver them. Spreading the ownership in this way would also safeguard the industries against reprivatisation, he added.

McDonnell was less forthcoming in his speech about how Labour will pay for its public ownership plans. When pressed, he has said that Labour would swap shares in energy and water companies for government bonds.

With the government able to borrow at relatively low rates, McDonnell argued that the profits from utilities could service these debts while delivering lower bills for customers. By cutting out the dividend payments to shareholders, Labour could achieve both goals.

However, Scott Corfe, chief economist at the Social Market Foundation (SMF), says it is “pretty unclear” how the water companies’ current owners would be compensated.

The SMF published a report in early February seeking to quantify how much Labour’s water company plans would cost. This calculated that regaining control of the water utilities alone, based on standard takeover practice, would cost the government £90 billion. On top of that, the SMF estimates that the government would also have to pay out £100 billion in order to meet the industry’s investment needs over the next 25 years.

No obligation

McDonnell has rubbished the SMF’s estimate as a “fantasy figure”, adding that the research had been funded by “water companies whose shareholders are terrified of losing control of a money-making racket”. The SMF estimate factors in a 20-30 per cent acquisition premium which would typically be paid by new owners in takeover scenarios, although Labour has not said that it would pay any such additional sum.

Nothing in legislation spells out how much the owners of industries, which it is planning to takeover, should be paid, Corfe acknowledges: “There is no obligation to compensate shareholders if it doesn’t want to.”

Some of the utilities’ biggest shareholders are UK defined benefit pension schemes, which like the safe and steady returns offered by utilities.

Caroline Escott, investment policy lead at the Pensions and Lifetime Savings Association, agrees with Corfe that it is “hard to judge” the impact of Labour’s plans until further details are revealed. “Issues that will need to be considered – if nationalisation of utilities such as water companies were a possibility – are over what period the process would take place, what sort of compensation will be offered to investors and what precedent will this set.

“If – for example – investors were compensated at a fair market price it would help mitigate pension funds concerns; it is important to remember that pension funds invest on behalf of their members, so any deal will need to be fair or you could find that ordinary people are disadvantaged.”

Significant consideration

She adds that pension funds will be examining the period over which Labour planned to implement its plans, which would determine how much leeway investors have for adjusting their holdings.

Another “significant consideration”, she says, would be the impact of the renationalisation drive on the market overall and specifically on UK gilts. The SMF report calculates that its £90 billion estimated figure would push up total government borrowing by 5 per cent, with potential knock on consequences on financing costs.

And giving investors a poor deal could shake confidence in the UK, Corfe warns: “If you are a foreign investor wanting to invest in the UK and you see the government is purchasing assets below the market price you might be more hesitant about investing in the UK.”

He adds that Labour still has questions to answer over the government’s role post-nationalisation and the risk of more politicised decision making on water prices in the run up to elections. “One of the motivations for having a privatised water industry is because it depoliticises the price setting process.”

Potential costs

In addition, utilities would find themselves competing for investment with other immediately pressing public services, says a Water UK spokesman: “The potential costs are huge, pointing to a world where future water investment struggles to compete with health, housing or education for taxpayers’ money.

“If you look at our record, private companies have invested heavily to reduce leakage, improve drinking water quality, and protect the environment after years being starved of cash under public ownership. Properly-incentivised, customer-focused companies subject to effective regulation is the right way to meet future challenges, not going backwards with nationalisation.”

Corfe agrees: “It’s not clear what you would be achieve by nationalisation that you would not achieve by better regulation.”

But he adds that utilities and the government will have to make a more compelling case for private ownership if they want to ward off nationalisation. “Although in normal times industry is in favour of light touch regulation, this is an instance where industry could call for more regulation because the alternative to business as usual is this industry being nationalised.”

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