29 November 2019
By Professor David Hall:
Public Services International Research Unit, University of Greenwich
The benefits and the costs
The private shareholders and the CBI only talk about the costs of compensation for nationalising the water and energy grid companies (and Royal Mail, PFI, and parts of BT). But we should start with the benefits:
- the total annual savings to households would amount to £6.2 billion, every year:
- £2.5 billion from public ownership of the water companies
- £3.7 billion from public ownership of the electricity and gas transmission and distribution companies
- Further similar savings would arise from nationalisation of Royal Mail, parts of BT, and from taking the existing PFI projects into public hands
- these are net savings, after taking full account of the costs of public sector borrowing to compensate existing private shareholders
- the average household would be better off by £142 per year as a result of nationalising the energy grids, and £113 per year as a result of public ownership of the English water companies. A combined effect of £5 per week
- local economies would get a continuing boost from keeping this money locally rather than letting it go into the accounts of international finance. On average, every parliamentary constituency in the UK would benefit by about £10million per year
These are just the easily quantifiable benefits. We would also gain proper public control and accountability, and be much better able to implement policies, especially to deal with climate change and environmental damage.
How much compensation?
Some wild claims have been made about the amount of compensation. The CBI has recently claimed that the shareholders of both water and energy companies would be entitled to over £90 billion each, for a grand total of nearly £200 billion. They are wrong, for multiple reasons.
- Firstly, their figures include all the debt of the companies, which is just wrong. The debtholders would not be affected, only the shareholders would lose their stake and be due compensation.
- Secondly, the CBI add on 30% to the estimated value of shares, which they call a ‘takeover premium’: but nationalisations are not subject to stock exchange rules on takeovers.
When these mistakes are deducted, a reasonable estimate of the market value of the water and energy companies in mid-2019 would be £79.5 billion
But UK law does not say that shareholders should be compensated by being given the ‘market value’ of their shares. It says that parliament can and must decide in each case, and include the compensation in the relevant act. And the courts will not override this, because parliament is a better judge of the public interest than the courts, and the most recent judgments against shareholders claims stated that, in the public interest, parliament could decide that rectifying social or economic injustice requires compensation of much less than market value.
The Public Services International Research Unit (PSIRU) paper thus estimates the cost of compensation, based on returning to shareholders the money they have actually invested in the companies, rather than paying ‘market values’ which perpetuate the current excessive returns to shareholders at public expense. It calculates that:
- The total cost of compensation by returning shareholders’ actual investment would be £49.7 billion.
- the annual savings of £7.8 billion identified above mean a return of over 15%, so the nationalisation would pay for itself in less than 7 years
The myth about UK pension funds
The privatised companies and the CBI also claim that UK pension funds, and pensioners themselves, will suffer badly if compensation is based on the actual book value of shareholders’ stakes in the companies.
They claim that private shareholders in general should be given an extra £45 billion on top of what they have invested in the companies, then they just make a sweeping assumption that ‘20% of the shares are held by UK investors’, and then claim that £9 billion could be lost to ‘UK savers and pensioners’. And so they conclude that we should all support paying higher compensation.
- This is a very strange suggestion: even on their own figures, foreign investors will get four times as much benefit than the UK investors, £36 billion compared with £9 billion, so higher compensation is a very bad way of trying to help UK investors; especially as all the extra £45 billion compensation they seek would be paid by UK citizens, who will thus in net terms lose £36 billion while the overseas investors would gain the same amount.
But they are simply wrong about the effects on UK pension funds, because they don’t have any evidence of how much of the privatised companies are actually owned by UK pension funds, or how big a proportion of pension funds is invested in these companies. By contrast, PSIRU has made a precise assessment of exactly how much of the water and energy companies are owned by UK pension funds, and how significant for the funds and pensioners would be a variation in compensation. The results show that:
- UK pension funds own only 8.5% of the water sector, and 2% of the energy grid companies: about 5% overall. So 95% of the benefit of higher compensation would go to other investors, which is a very inefficient way of helping UK pensioners.
- these shares in the water and energy companies represent only 0.17% of the £2,200 billion assets of UK pension funds, which are spread across many sectors, countries, shares and bonds.
- The difference between compensation for the UK water and energy shares based on book value compared with market value thus represents less than 0.1% of the value of UK pension fund investments. This is less than the daily fluctuation in share prices on the London stock exchange.
- This variation would thus be invisible for funds which are managed on the principle of risk-spreading, and also too small to have any impact on actual pensions paid.
The myth about employee shares
The CBI also claim to be concerned about the impact on employee shareholders – again without any evidence of the actual level of these shareholdings.
- PSIRU research shows, however, that only 0.1% of the shares in the water and energy companies are held by employees. That would still be significant for those employees themselves, but, under rulings from HMRC, their shareholdings have to be treated as an employment benefit. So they can and must, by law, be treated differently from other shareholders.
What about investment treaties?
PSIRU has also examined the potential risk of legal action under bilateral international investment treaties (BITSs) and the Energy Charter Treaty (ECT) over compensation for the nationalisation of water and energy companies. Based on detailed analysis of actual ownership of the companies, the paper shows that the potential for using BITs or the ECT is, in practice, limited to investors who hold about 20% of the companies. Moreover, BITs (or ECT) processes are costly, take years, are uncertain in outcome, and are currently facing strong political opposition across the world, including in Germany.
Image credit: taxrebate.co.uk - Creative Commons