The spectre of nationalisation of the water and energy sectors under a Corbyn government has reared its head again. Labour recently firmed up their plans to nationalise the energy sector with the release of a document entitled “Bringing Energy Home”. Perhaps the resurgence of the debate has been precipitated by newspapers having more pages to fill, with a temporary hiatus of Brexit from the news agenda.
As ever, details on how this would be achieved are sketchy, but (in the case of water) would appear to involve shareholders being compensated at less than 50% of “market value”. The energy network plans are again suggestive of an attempt to compensate shareholders at below market value. This is in spite of the fact that many UK pension funds hold substantial stakes in these companies. It is difficult to imagine trustees welcoming the latest announcements.
Bondholders and shareholders would be compensated by receiving gilts, under the latest proposals. Among the many flaws in this approach are concerns around the theoretical value of UK government debt (typically, credit holders would be keen to receive gilts as proxies for their corporate holdings, but that may be challenged) under an administration that seeks to expropriate private assets.
The proposed methodology used to assess the compensation due to stakeholders (seemingly based on a calculation of how much stakeholders have historically spent investing in assets) would be an archaic method, and this would be unlikely to stand up to legal challenge (it is worth noting that under the previous wave of UK nationalisation, the legal view was that the Government should pay compensation based on the six month period prior to announcement of the nationalisation policy). As an indication of the legal difficulties in the proposed method, a partner at Clifford Chance, Dan Neidle stated that in every UK privatisation so far, the state paid market value, so it was not up to Labour to decide what was a fair price. He stated “That’s not what the UK precedent is and that’s not what international law says”.
The ongoing investment required to maintain the infrastructure of the energy networks and the UK water sector is huge: the last Ofwat regulatory review saw the 17 companies responsible for maintaining the UK’s water sector invest a total of £44 billion. Ofwat’s regulatory regime was described as stable and predictable by rating agency Moody’s (before nationalisation pressures started to bite). It is this stable, predictable and market-leading regulatory framework that allowed investment of this magnitude to take place.
Whilst we recognised and highlighted the benefits of expedited closure of the opaque Cayman entities (used by some water companies) in terms of restoring public trust and lobbied the sector to this effect bringing both sectors back into public hands would represent a retrograde step and one that could do untold damage to the UK’s reputation as a place to do business.