I posted this thread on Twitter this morning. It covers water, nationalisation and dire accounting by the Office for National Statistics:
Discussions I have had over the last day or so suggest that there is massive political reticence to consider nationalising water because this might increase the UK's national debt and this, apparently, is a political taboo which prevents consideration of something so important.
The thread that follows is a bit geeky, nerdy or whatever else you might like to call me. But I've avoided technical complications and stuck to the core issues because they should matter to people who care about politics, water, and our survival. I hope you will read it.
There are three possible responses to this supposed debt problem. One is to consider whether nationalising water will increase the national debt. The second is to ask why we have such poor accounting for that debt. The third is to look at solutions that prevent this paranoia.
I have suggested that water nationalisation is essential. I can see no way that England's water companies can raise the £260bn required to deliver clean water, rivers and beaches to the people of this country. That's because they are environmentally insolvent.
Nationalisation will require that the shareholders and (maybe) the debt financiers of the water companies be compensated for their losses. My best estimate is that this might cost £45 to £50 billion. But this will not be paid in cash. It will be paid for with government bonds.
As most people know, issuing bonds creates a liability for the government. Assuming the bonds have a redemption or repayment date on them (and all UK government bonds do at present) they have to be repaid at some time.
Bonds used to pay for nationalised industries in the 1940s were repayable in 30 years. The fact that they were immediately replaced by new bonds, meaning no effective repayment took place, is ignored for accounting and by MPs who claim debt is a burden on their grandchildren.
Accounting, properly done would, however, recognise something that the debt fetishist MPs do not, which is that in this case the debt is used to buy an asset. That asset would be the water companies, whose fair values would have been determined to be £45bn to £50bn.
In other words, debt would have been issued, but only because an asset would have been bought. So, the actual net worth of the government would not have changed as a result of nationalisation. The debt repayable in a generation's time would be represented by something of value.
Claiming in that case that the national debt has gone up and so the government can do nothing about the water industry - which is fundamental to not just our well-being but to our survival - is absurd. That is putting accounting before need, and that should never happen.
It is, however, what the UK's Office for National Statistics, which is responsible for preparing the UK's national debt data, would probably do. I can say that because since 2013 they have included the borrowings of Railtrack in UK national debt, but ignored all its assets when doing so.
The result is that because Railtrack is nationalised and owns the rails on which all the UK's trains operate because that network is too important to be in private ownership UK national debt is claimed to have increased by £28bn at present but the track is treated as worthless.
That, of course, is not true. But that's how the ONS accounts for this.
And this is not the only such issue. Right now it claims that the Bank of England, which is owned by the government, contributes around £300bn to the national debt but you will find no such number in its accounts.
Instead, that figure is made up (I use the term wisely) by the Office for National Statistics because it will not recognise the value of some of the assets that the Bank of England owns that are related to the debt in question. That is deeply misleading accounting.
There are exceptions, though. For example, the nationalised banks (NatWest and Lloyds and others in the past) have massive liabilities on their balance sheets and are, or were, state-owned. But the ONS excludes those liabilities from the national debt.
The ONS does this because whilst these companies were or are state-owned and effectively state-guaranteed, they have supposedly independent boards of directors and so the ONS says they aren't state-controlled and so can be excluded from the national debt.
Again, this is complete nonsense. The reality is that the government could change the directors of these companies at any time to make sure that they do what the government wants. Of course they were or are state-controlled in that case.
As a result both their assets and their liabilities should be included in the estimation of the national debt - which will go down as a result.
The only reasonable conclusion to this discussion is that the ONS produce what I call CRAp accounts - they are completely rubbish approximations to the truth.
The ONS know I think this. We have discussed it. They began publishing how they calculate that bogus figure for debt created by the Bank of England as a result, as if that would keep me happy. It does not.
There is good reason for that unhappiness. If you want to know why Labour is taking about using social enterprise companies to control water is precisely and only to get around the dire accounting rules used by the ONS. And that's ridiculous when nationalisation is needed.
Accounting should never shape the way in which a transaction is done, most especially when as a result of dire accounting standards the wrong policy is pursued. But that is what looks likely when it comes to water.
Nationalisation of water should not increase the UK's national debt. If terrible accounting suggests it does then there is something wrong with the accounting, not the idea of nationalisation. So what can be done about this?
First, the ONS could be told to produce national accounts which properly reflect the assets owned by the UK government and the companies it controls. It has the power to do that.
The ONS will protest as a result saying that the resulting figure does not comply with international standards for national accounting, which were last revised just before the 2008 financial crash and, as a result, hopelessly fail to reflect current data needs.
That said, I accept the ONS's point. It is correct in the sense that the UK does have an obligation to produce the CRAp data required for international comparison purposes. But the ONS excuse is also nonsense.
The reality is that the ONS already produces a range of figures for UK national debt. None recognise the assets I want included, but that's not relevant. What the range shows is that the ONS can decide how to account when it wants. And it is choosing to produce misleading data.
It could now, if asked, in that case also produce figures that are not misleading by including asset information. They would not be internationally compliant, but so what? Call them management accounts if need be. I don't care. What I want is useful data.
Useful national accosting data is:
- True and fair, which at the very least means it is not misleading
- Helps good decision making
- Reflects economic reality.
Right now what the ONS do does not meet any of those criteria so we get poor decision-making as a result. The political fear that I have already mentioned of nationalisation is clear indication of that. And that has to stop.
I reiterate: poor accounting should never get in the way of good decision-making, but it is in the UK because the ONS is producing really poor and deeply misleading accounting data. It is time to tell the ONS to produce decision-useful data. Then we might get better political decision-making as well.
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Why nationalise to central government when they could be taken into ownership by councils or consortia of councils?
It seemed to work back in the 19th century.
Centralisation is not the answer – all those industries nationalised in the 1940s with the odd exception didn’t turn out well and the UK went from being Europe’s richest country to one in the middle of the non-communist rankings over the following 4 decades.
Because we need national water grids now
I suspect the concern in political circles is not so much over increasing the UK’s debt but rather revealing to the public how easily more money (or bonds) can be and routinely is (or are) created and revealing austerity for the scam it always has been. Aside from avoiding any genpop anger which might reasonably be expected, our politicians, I believe, labour still principally to create and reinforce an oligarchy in which they’re part of the winning team, able to look down on the rest of as lords to peasants. They don’t want the true nature of debt made plain then as they don’t want to give that aspiration up, preferring to see the majority of us suffer and die instead. Don’t forget too dire warnings to the effect that inclement weather on scales not seen in living memory may soon precipitate an unwelcoming environment in which there literally won’t be enough for all. Our political classes, better placed to shield themselves from any such effects than many, might well welcome a few billion untimely deaths as it means there’ll be more left for the survivors, ie, them. Their behaviour is entirely understandable then when regarded as utterly unprincipled self-interest.
I think you are moving over into the absurd here
Sorry – they may be incomptent but welcoming a few billion deaths is an absurd claim.
It was this obsession about debt that gave us PFI. Have we learned nothing?
What ignorant twerps the majority of MP’s are. Staring the buffoons right in the face is that Thames Water corruptly got into debt in order to increase shareholder dividends not do its duty and invest in the business. Ipso facto borrowing or money creation can be used for good and bad purposes.
Water authorities bills as you’ve rightly pointed out Richard are increasingly used to make the public subsidise the life style of shareholders. Why are MP’s comfortable with that especially Starmer’s Labour Party MP’s?
These MP’s are also ignoring the fact there will be a continuing income stream from a nationalised water and sewage industry plus the issue of treasury bonds to buy the industry is a version of paying on the “never-never” where time devalues the nationalisation cost.
Starmer in particular is unbelievable. It’s clear it’s OK for him that the private sector borrows money to invest in assets but contrary to the party’s fiscal discipline rules which state it’s OK for government to borrow for capital spending but not current it’s actually not possible to do so when you have a pressing need in front of you! Yet another Starmer u-turn. The man is a joke!
There are days when you learn something and a little light bulb flashes in the brain as deeper insights follow. Today was such a day. Thank you for giving me enlightenment AND ammunition for arguments.
If the ONS skews its accounting, then the board needs replacing with people who are competent. They may be good statisticians, but they need to understand political economics too. Here they are: https://www.ons.gov.uk/aboutus/transparencyandgovernance/leadershipteam
New blog here by weownit. Looks good. More people need to see it.
https://weownit.org.uk/blog/9-ways-privatised-water-fighting-its-life
Very good
@Jenw Thanks for posting the weblink. For me the most revealing sentence was this:-
“Unsurprisingly, Lord Michael Howard, who helped lead the original privatisation three decades ago, says there can be ‘no free lunch for nationalisation of water’ .”
Very clearly Howard is in denial that the public sector can make productivity gains just like the private sector and therefore “the free lunch” is exactly that without having to add the burden of dividend handouts to shareholders and especially exposing the industry to the corruption of “hollowing out” insolvency through excessive debt borrowing to maximise dividend payouts. For Howard to pretend it’s worth the risk of this corruption when the industry provides such vital services is just plain irresponsible!
Hi,
Enlightening as always, and not too technical at all. Thank you.
I wonder if the debt fetishists consider a mortgage an unsustainable debt for their grandchildren as they seem to do for water nationalisation.
There may be another option which is to follow the example of Welsh Water which I believe is a non-profit organisation.
Food for thought.
Could the reason for the reluctance of the main political parties to privatise be that they know water bills are going to have to go up substantially and they want the blame for this to fall on the privatised companies, not them? The regulator has interpreted its remit as being to keep water bills as low as possible, when in fact most people would have happily paid more for better services, and investment, because £30/40/50 pm whatever it is, is trivial to most people and for those for whom it is not, they should have had a subsidy. Nationalisation is the correct path, but as Lord Howard said, it is not a free lunch.
I think you are almost certainly right
I applied for a discount as suggested by the water company. If my water bill had been more than £495 a year I might have got one, as I was eligible under the total household income. As a single person on a water meter it’s less than that anyway.
A pensioner needs to be on pension credit to get it, and pay more than 3% of total income for their water. I always resent it when government ministers say that more pensioners could apply for pension credit. Pension credit tops up your income to £10454.60. Someone has decided that it’s possible for millions of pensioners to live on less than that.
An extra ten or twenty pounds a month to pay for water for all those families using foodbanks would really not be possible, either, and they would not all get discounts.
@ Chris Lamb I don’t believe Howard meant “free lunch” in the sense you portray it that is obviously a very trite thing for him to have said. Of course there has to be payment! I think he really meant you’ve got to pay the market for the services. Well the market has simply cheated Mr Howard on these two vital necessities water supply and sewage disposal! What have you got to say about that? You can turn round and say “better government” but it’s happened under your government’s watch. So instead of sound bites let’s hear from you how this is going to be prevented again using the market in control!
[…] The poor accounting of the ONS must not prevent the necessary nationalization of the water companies Financing the future […]
Why should lenders and shareholders be compensated? Why should they be protected from the consequences of bad decisions by the public purse? They have privatised the profits – let them also take the losses. I would suggest that the company should be allowed to fail and the government buy it out of administration. That might also concentrate minds elsewhere in the industry.
Law on this basically does not low that.
It may be bad law, but it exists.
What do you think of these proposals by Dieter Helm?
Nationalisation Not the answer.
Planning on Catchment Areas.
https://dieterhelm.co.uk/regulation-utilities-infrastructure/time-to-pull-the-plug-on-the-water-privatisation-model/
I am afraid I think it relies on a naive belief that a patchwork of contracts might deliver the benefits of nationalisation whilst leaving the risks outside the state sector – and I cannot agree.
The usual suspects can be relied upon to complain about government debt without ever acknowledging that a balance sheet has two sides by never mentioning the existence of assets. They are profoundly unserious.
Where water works and the like are concerned there is an entirely separate problem — no natural monopoly should ever be privatized, full stop.
I understand Thames Water has raised £750m from shareholders. It appears it requested £1Bn. This may be presented as ‘failure’, but I think it also suggests shareholders have some basic confidence in the industry business model.
The fact that Thames may generally be believed by critics to fail to deliver the level or quality of services that justify its monopoly status; even if the financial performance is sufficiently poor on some measures to require refinancing (but not poor for shareholders), nevertheless does not seem wholly to remove shareholder confidence. A monoploy service that does not require to provide the fully scheduled level of capital investment required, or necessarily provides a rigorously and stringently regulated, full water and sewage service to the public, perhaps possesses a unique measurable financial value in its own right.
Maybe the way to tackle this is not ‘geeky’ analysis; but to use the analysis to provide
something the public and even investors could use:
a ‘rip-off’ Index. Roughly, the smaller the per share equity investment, the smaller the per share investment in fixed assets, and the larger the dividend; the higher the index.
🙂
Political economy clearly matters more thyan finace here
The power to extract payment is seen to be king