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John McDonnell is right: Britain can easily nationalise water

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John McDonnell is right: Britain can easily nationalise water

UK infrastructure

John McDonnell is right: Britain can easily nationalise water

Real question is whether ownership changes would improve the utilities

© PA

As the political debate about the future of Britain’s privatised utilities heats up, battle lines have been drawn over what it might cost to nationalise the water industry.

On the one hand, the Labour party’s soi-disant Marxist shadow chancellor John McDonnell maintains it would be “cost-free” to revive the old regional water authorities. On the other, some think-tanks say that this would crowd out other spending and even dynamite the public finances.

So which of them, if either, is right? Hard as it may be to credit, the politician is closer to the mark than his antagonists.

True, a Labour government would have to issue lots of debt to buy back the water companies. The think-tanks in question — the Social Market Foundation and Centre for Policy Studies — estimate the enterprise value of the sector to be about £80bn-£90bn.

In return, the state would get assets with an income that exceeded the financing cost. The English water companies had combined operating profits of about £3.5bn in 2016. At current 10-year gilt rates of 1.65 per cent, the interest cost on £90bn would be about £1.5bn annually. Even doubled, that would only rise to £3bn.

That, of course, assumes the state would really have to cough up the whole £90bn, which is itself a little questionable.

As the economist Dieter Helm points out in a new paper, comparing the present with the pre-IT world of the 1970s and 1980s is meaningless

The whole aim of the exercise would presumably be to stop private companies from making excessive returns from the public. Why then would the government start by paying a market premium based on those same excessive returns?

As for the claim that nationalisation would be the straw that broke Britain’s fiscal back, that too looks suspect. The national debt stands at about 85 per cent of gross domestic product and nationalisation would add about 5 percentage points. It is hard to believe that would break the bank. When Clement Attlee’s government undertook the great postwar nationalisations, the national debt stood at 245 per cent of GDP.

The real issue is not whether Das Kapital could supplant private capital, but rather whether it would make sense. It is about what might work better for the public as both consumer and taxpayer.

Could a state-owned industry deliver a product of comparable quality as efficiently as the private sector, thus avoiding the need for elevated private sector returns?

The private companies claim it could not, citing investment numbers and productivity gains since privatisation as if those clinched the argument.

They do not, of course. As the economist Dieter Helm points out in a new paper, comparing the present with the pre-IT world of the 1970s and 1980s is meaningless.

“It is the old counterfactual problem — comparing what is with what would have happened,” he writes.

What we do know is that much post-privatisation investment was mandated by EU standards and would have happened anyway. State-owned entities put in those investments on the continent, just as private corporations did in the UK.

Meaningful comparisons of efficiency are harder to come by. The water companies point to the fact that English consumers pay less than some Europeans, citing for instance that water costs twice as much in municipally-run Berlin as it does in Birmingham. However, that could reflect different policy costs or less abundant catchment systems.

Meanwhile, water costs are similar in France, which has mixed provision, while state-owned Scottish Water’s prices are 10 per cent below what the average English customer pays.

State ownership is hardly a panacea. As Mr Helm points out, its backers base their faith on the easy-to-question idea that the governance issues posed by private capital dissolve if you replace self-interested financiers with public spirited bureaucrats. This ignores old problems such as union capture and the politicisation of pricing.

Nor is the cost of capital in state-owned groups as low as is sometimes contended. Capital expenditure still involves equity risk that needs to be funded, either by state-owned companies forking out for private-sector contractors, or doing it themselves.

Yet for all these difficulties, private companies cannot simply dismiss nationalisation as impracticable. Nor is it enough to argue that ownership changes solve nothing.

They must look again at their own overcomplicated regulatory model and make it function more tolerably. Duck that, and they could lose the argument by default.

jonathan.ford@ft.com

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