Think tank Common Wealth has published a report that shows how the UK government could nationalise failing utilities like Thames Water without any cost to the taxpayer.
Debate over renationalising water companies has sparked anew following the difficulties faced by Thames Water, with many MPs calling recently for the company to be ‘put out of its misery’ and taken into public ownership.
The government, however, has said it will not renationalise water companies due to the prohibitive cost this would incur, which it estimates at more than £100 billion that would have to be paid by taxpayers.
Common Wealth argues that this number is ‘nonsense’ and the product of water industry lobbyists, stating that the true and fair value in law of bringing water into public ownership is close to zero.
“Bills are soaring, sewage is everywhere, as shareholders and banks take billions,” Common Wealth said.
It noted that nearly every river in England is polluted, the country’s bathing water is the worst in Europe, and over £85.2 billion in real terms has been taken by shareholders since privatisation while water company bills are being hiked by 36% over the next five years.
“England’s privatised water system is extreme. No country in Europe has privatised its water as we have done; ninety per cent of cities worldwide have water in public hands. Cities like Berlin and Paris that did privatise their water have taken it back into public ownership (in 2013 and 2009 respectively).”
Cost of public ownership ‘deliberately false’
Addressing the government’s cited costs to nationalise water companies, Common Wealth said this figure stems from a report funded by Anglian Water, Severn Trent, South West Water, and United Utilities and is ‘deliberately false’.
It said this figure using the regulatory capital value of companies, which is calculated by Ofwat for enabling or restricting dividends and stems from the assumed market value of water companies at privatisation in 1990, plus Ofwat’s calculation of capital investments that have been made each year, multiplied by the Retail Price Index.
Notably, this figure does not include debt and has not been endorsed by Ofwat itself.
“It is not based in law. It bears no relationship to reality or the true and fair value of the companies,” Common Wealth said.
The think tank argues that when considering the cost of public ownership, the question is not of paying a ‘regularity capital value’ but a true and fair value in law.
This value can account for returns already paid to shareholders and bondholders, or the damage caused by pollution, and subtract this from market values. When the government takes a failed operator like Thames Water into special administration to manage its insolvency, it is only secured creditors, not shareholders that are due to be paid an ‘appropriate value’, Common Wealth said.
The think tank argues that in certain cases this ‘appropriate value’ should be zero, including in the case of nationalising Thames Water.
How to nationalise Thames Water for £0
When considering the case of taking Thames Water into public ownership, Common Wealth looks at the appropriate value that should be paid to secured creditors of the company if it is taken into special administration.
Firstly, it notes that Thames Water shareholders have taken over £10.36 billion in dividends, in real terms, since 1989 and should not be paid any more.
“When a company is insolvent, shareholders normally get nothing. This was the case when Railtrack plc collapsed due to the then-government refusing to bail it out and transferring its assets to the public body, Network Rail Ltd.”
Secondly, Common Wealth argues that Thames Water bondholders have taken around £13.68 billion in interest and returns in real terms since 1989, which it said is grossly excessive compensation for their loans and they, therefore, should also receive nothing.
Lastly, it argued that both shareholders and bondholders have left the need for £23 billion in repairs to infrastructure that has caused widespread pollution and damage, and therefore the ‘appropriate value’ for their claims is zero.
The think thank said it would actually make more sense for Thames Water shareholders and bondholders to pay the government the £23 billion for the damage they have left, although there is no legal mechanism to enforce this.
“Water company bondholders and shareholders would be likely to argue in court that a special administration plan — where they receive zero compensation — is unfair,” Common Wealth said.
“However, they would have to show that the Government is acting irrationally, which is a very difficult case to make when they have taken more in interest payments and dividends than they had originally paid for their rights, and when their profits have come from the pollution caused through their breaches of statutory duty.”
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