As the Guardian reports this morning:
Labour's plans for a sweeping renationalisation of utilities would cost Britain almost £200bn, the Confederation of British Industry has said.
Branding the plans as “eye-watering”, the nation's foremost business lobby group, which represents some companies that would be put into state ownership under a Labour government, said the project would add to the UK's debt levels and could come with costs to pensioners and savers.
It is very hard not to despair at the crass stupidity of commentary like this. The CBI really should be ashamed of itself.
First, they have assumed that Labour will pay a 30% premium over the market value of these companies at present. That is because they say this is 'normal' in a takeover. But this is not a takeover. It's a nationalisation. And the market has already determined the price of the asset each shareholder owns. Good luck with trying to claim more than that in the courts, I suggest. In other words, the CBI's valuation is wildly overstated.
But, second, it gets worse. This payment is apparently a 'cost' to government. It's as if the CBI thinks that in every takeover in British history value was destroyed and the acquiring company wrote off the asset bought through the profit and loss account as an expense straight after the purchase. That, of course, is not what happens. And there is good reason for that: valuable property have been acquired, as would also be the case here. In other words, this is not a cost. It is an investment. And the investment goes on the country's balance sheet in that case. Which means it is not a cost.
Third, the CBI then claim that the interest cost of the acquisition, which would be just £2bn a year, is a burden to be suffered. But that, of course, ignores the fact that these assets acquired have earned a return to date, which is precisely why they attribute such high value to them. In that case they are more than capable of covering a £2bn cost of interest. But the CBI forgets this.
So is any part of the CBI claim as to value, asset accounting or income cost true? No: not a single part is. The CBI apparently does not know how to value assets and account for takeovers, and nor does it realise that costs might have income compared to them.
To describe their claims as a shoddy piece of work worthy of a fail in sixth form business studies is to be too kind to them. It's just incompetent.
If the CBI does not like nationalisation it will have to do a lot better than that. And understand some basic, but essential accounting as well.
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Poor old CBI – pushed about by the ERG infiltrated Tory party but still caught up in its Neo-liberal bullshit.
It has ceased to be confederation for business – it is confederation of personal enrichment now – that’s all it is.
Perhaps it’s telling that they don’t lead with the argument “these businesses are more efficient in the private sector”.
I guess they think decades of seeing the “efficiency” of the private sector in rail, utilities etc in action will have made that argument a hard sell to the public these days.
Labour aren’t planning to nationalise and keep the companies as profit-making – they want to stop all dividends and restructure the companies to work for the benefit of local communities. Whether this is a good or bad thing is a political question, but there won’t be any dividends going forward, and so the value of what’s acquired won’t be equal to the price paid.
That claim makes no sense
Of the course the value can be the same
It may simply be dispersed in a different way
Which is the whole point, I think you’ll find
@Harpreet Singh,
Your comment reflects aspects of Labour’s dangerously fuzzy thinking about renationalisation. In a general election this will be ripped to shreds. Labour should pay attention to sympathetic, but constructive, critics. For example, Nils Pratley in the today’s Guardian:
https://www.theguardian.com/business/nils-pratley-on-finance/2019/oct/14/cbi-wrong-see-cost-big-issue-in-labour-nationalisation-plans
The best way to benefit local communities is via the GND household and small business energy efficiency and emission reduction proposals advanced by Richard and many, many others. They can also benefit from local authorities getting involved in energy supply, such as Robin Hood Energy, and in ensuring windfarms and large-scale solar installations benefit local communities directly.
My earlier comment:
https://www.taxresearch.org.uk/Blog/2019/10/14/the-cbi-really-needs-to-learn-double-entry-accounting-and-something-about-business-valuation/#comment-835690
focuses on the network valuation issue.
Have we had another ‘brain drain’ when I wasn’t looking some time? This makes me so discouraged.
Surely any cost to ‘pensioners and savers’ occurred when these utilities were privatised and sold off at a discount and then ended up in foreign ownership, usually partly owned by a government and thus making a mockery of being free from ‘the dead hand of the state’.
These utilities are natural monopolies, where competition does not work in the interest of the consumer. Northern Ireland has a publicly owned water supply and enjoys lower bills than those of us on the mainland. 12 electricity suppliers have gone bust this year with horrifying stories of their customers being chased for thousands of pounds in amounts outstanding with no recourse to OFGEN.
I could never understand as to why having a number of suppliers enhanced competition when all it has done is duplicate back office functions, reduce the capacity to benefit from the economies of scale which would occur should there be only one purchaser of the energy and lead to a plethora of tariffs that confuse the consumer and have inflated, unjustifiably, the price.
The CBI has scant regard for ‘pensioners and savers’.
You’re right Paul
A public owned clearing Bank for all public sector organisations ( ie Some of RBS … NatWest ) which we already own 66% .
Councils, schools and Hospitals pay a fortune in inflated Bank charges and fees . High interest rates!!!
Nationalised industries need their own bank .
Hear, hear!
I thought exactly the same when I heard this rubbish on the radio repeated as though it were gospel truth –
rather than being extremely economical with it.
Buried in the BBC website page is “the study’s focus was on costs rather than estimates of potential benefits.”
So the BBC are rebroadcasting (as tho’ it were correct) pure lobbying puff – again.
What the CBI do not like is that assets or wealth are being transferred to the whole population at large from a tiny minority who have far too much wealth and power anyway and are pursuing a path of increasing inequality. The CBI is desperate to prevent this happening and outright lies do not deter them.
In a fiat currency where government is the only party that has the authority to create or invest on behalf of the generations currently alive and generations to come I can see no reason why such a move should not be welcomed and NOT added to our current taxes. There is nothing to stop this generation of politicians to delete from the public ledger outdated tax liability going back two or three generations. Every ancient empire practised public debt control strategy – where the government holds the prerogative to pay off such debt as is or write down without payment accordingly.
Answer me this – do you think future generations will welcome the forethought to build new energy producing power solutions or not? How much do you enjoy being able to pay for keeping yourself and your family warm at nights, but you would deny this to future generations by saying ” we cannot afford it” but then …. the public taxpayer is not the government and does not have the right to create their own currency via the kitchen table but the government collectively does have that power as the ultra successful Chinese have proved. Be more like China. ;o)
I fully agree with your take on this. This scaremongering by the CBI is just an extension of the totally erroneous and self-serving “conventional wisdom” on monetary and fiscal policy advanced by those exercising political and economic power and promulgated by their media lackeys and tame academics. The drivel written by Andrew Rawnsley in yesterday’s Observer (to which you linked) is a perfect example.
Since the rail networks are effectively in public ownership, the focus initially will be on the water and waste water companies and the electricity and gas transmission and distribution networks. Over time, the train operating franchises should fall into public ownership. But there is no reason why the government should get involved in the electricity and gas supply businesses. (Labour’s vague noises about “democratising” local energy supply worry me.) It would be far better if government were to build on the work being done by Ofgem on collective switching.
For the water, electricity and gas networks the key issues are the asset valuation and the regulated return on assets. There is no reason why government should pay a premium on the regulated equity value of these businesses (once it takes over the contracted debt), but some premium may be required. (Shades of Nye Bevan stuffing the hospital consultants’ mouths with gold in 1948). Once the regulated rate of return is equal to the cost of debt (which will always be at a premium to the government cost of debt) any facile argument about increasing taxation to cover the cost of servicing increased government debt will become entirely spurious and irrelevant.
The outcome will be similar to the current public ownership and regulation of the electricity and gas networks in Ireland, but one would hope that the costly stupidities of that system might be avoided. In Ireland the utility regulator sets a cost of equity that treats the government as the equity holder exactly the same as it would a private sector equity holder. As a result the weighted cost of capital (WACC) is far too high. (The WACC has been too high in Britain for slightly different reasons. One is that the regulator here sets a notional debt/equity ratio which allows the networks to play financial engineering games.)
In addition, in Ireland, successive governments have adamantly refused to part-finance the huge demand for network investment and the regulator there has been required to over-value the networks and boost the WACC to generate additional cash flow up-front from final consumers to part-finance the investment governments have refused to part-finance. As a result, network costs are among the highest in Europe.
If these costly stupidities are avoided there is no reason why water and energy network re-nationalisation will not be successful and beneficial.
Interestingly, I shared this on the Graun’s comment section and it now seems to not be there!
Wot??!! No mention of socialised capital?
The shareholders should be compensated for the market&determined value of their shareholdings at the time of nationalisation, but they do not actually own the assets – buildings, land, machinery, cash holdings etc-of the companies. They all belong to the company itself, and so it would be ridiculous to take over a company and then compensate the company for taking control of its own assets.
This was, I believe, established in the High court in about 1947.
It is typical that this sort of knowledge is deliberately underplayed by that part of the Establishment that profits from economic ignorance.
And yet the incompetent CBI seems to be felt reliable on Brexit.