Labour claims taxpayers would face a massive bill for nationalising the water industry. But that's not true. If a fair price is paid for the businesses and their debts, nationalising should impose no cash cost on the Treasury at all.
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This is the transcript:
Nationalisation does not cost taxpayers money. Now, that isn't, of course, what Keir Starmer says. He would have you believe that nationalisation is a cost which is borne directly by every person in the UK. But when he says so, he's talking complete nonsense. And my evidence for saying so is very simple and very straightforward.
I only have to look at what happened when very large parts of the UK economy were nationalised after the Second World War to find out what really happened and what really happened then was that the railways, the steel industry, and a whole host of other activities from canals to bus companies to transport companies and the mines, were all paid for with bonds.
Now, a government bond is simply an IOU, a promise to pay. It's issued by the government via the Treasury and, in this case, was issued to the people who previously owned shares in the businesses that were nationalised. A commission was set up to work out what the fair value of the railways, the mines and so on were, and once that fair value had been determined - and it was a lengthy exercise because there were a lot of companies involved - the payment due was not settled in cash. Nothing, in fact, was paid in cash to those who had to give up their shares to the government because their businesses had been nationalised. They were all paid in bonds.
The normal interest rate paid on those bonds at the time was around 3%, and the bonds were issued for periods of at least 30 years or so, and many of them were subsequently extended in length.
My point is quite simple. No cash changed hands.
Therefore, when Keir Starmer says, and I have heard ministers claim it, that to nationalise the water industry might cost £80 to £90 billion, and taxpayers can't afford to settle that, and there are other priorities for spending, he is talking complete nonsense because the government would not as such spend anything to nationalise the water industry.
It's also nonsense to claim that they would pay £80 to £90 billion for the water industry because, quite simply, the water industry is not worth £80 to £90 billion.
Even if you take into consideration the fact that it has significant debts owing within the companies that would be acquired, they are not worth the face value at which they are recorded on their balance sheets because a fair value commission would make it clear that in practice the water industry is very largely bankrupt.
The amount that would be paid would be the fair value of the assets acquired for their current use. And we know, for example, that the water industry is clearly not performing as we require. It is pumping large quantities of effluent into our rivers and streams and onto our beaches in ways that are quite contrary to the law. And it is not guaranteeing that they will even supply us with clean drinking water. The consequence is that those assets that are owned by those companies at present are not performing, and therefore, as any corporate financier would know, they are going to be valued at significantly less than the figure that is on their accounts if they were acquired by a third party - in this case, the government.
And, therefore, the people who have lent money, knowing that there was always a risk implicit in that loan structure, will have to take what is called a haircut. In other words, they will be repaid less than they lent. So, there is, firstly, no chance that the water industry is worth what their accounts claim them to be valued at, and, secondly, even if they were, there would be no cash paid to the shareholders to acquire these companies.
That is, I stress, because bonds would be issued in place of the assets acquired. And that will, in fact, be true for not just the shares that will be acquired, but also for the debts within those companies that might be acquired. They, too, could be replaced by government bonds.
Now, people have a paranoia about the value of bonds in issue because we have all been told that this represents the national debt that is a burden on our grandchildren.
How is having clean water a burden on our grandchildren?
How would also having guaranteed safe electricity supplies into the future, and by safe I mean climate-sustainable electricity supplies into the future, be a threat to our grandchildren?
It isn't a threat to our grandchildren. It would be an asset for our grandchildren and the price would therefore be worth paying.
But let's also be clear, they won't be paying for this either. Why is that? That's because if we look at the history of the national debt ever since it was first created in the 1690s - in other words over 320 years ago - the national debt has always risen in value, and it always will for two good reasons.
First of all, all governments need to run deficits to provide the additional money that a growing economy requires, and we are a growing economy, and we will be a growing economy for some time to come, and they need to issue new debt, which is represented by new money in practice, to cover the costs of inflation, which requires that new money be in existence.
So, there is never going to be a need to repay this debt. All that happens when, after 30 or 40 years, the redemption date for the debt came up, it will simply be rolled over. In other words, the existing debt will be repaid but it will be repaid by the issue of a new debt, which will literally just change the interest rate owing on it.
So, the only cost of nationalizing water is the interest charge on the bond that is issued, and let's be clear that to date the water companies have been able to pay all the interest owing on the borrowings on their own balance sheets. They are not technically insolvent in that sense. In fact, they have always been able to settle their liabilities as they fell due. And therefore, replacing those debts that they now have with new bonds, which will be issued at a lower rate than the rate at which the water company's borrowed because the government is now guaranteeing that debt, therefore meaning that the interest charge will be lower, is something that the water industry can already afford to pay.
In other words, the nationalisation will pay for itself out of the water revenues that we all provide to the water industry already by paying our water bills as they fall due. There is therefore no net cost to nationalising water or to nationalising other industries which are already borrowing heavily and which are settling their bills as they fall due.
The claim that Keir Starmer has made that we cannot afford to take these industries back into public ownership is, therefore, completely and utterly wrong. Not only can we afford to take these industries back into public ownership, but we won't even necessarily suffer a cost from doing so because they are already covering the cost of the interest payments due on the borrowings that they have and the borrowings required to actually nationalise these companies could be less than the borrowings that are already in place in the companies in question.
Keir Starmer is making a false claim to support the idea private industry knows best. But it doesn't in this case because clean water is more valuable than anything else that we can just about require. We can't live without it.
To, therefore, suggest that we cannot afford to nationalise the water companies in England to guarantee that supply of clean water to the people of the country is straightforwardly wrong.
And the real question is, why does Keir Starmer keep telling us nonsense about this? Or does he simply not understand how finance really works?
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I think that Starmer and his allies and even his opposition are being warded by their various industry-backed minders from considering the kind of economic perspectives on this blog. It is indirectly ignored, derided, dismissed and in all sorts of little ways made to appear not worth the effort to consider. By contrast the commonsensical seeming approach of handbag economics seems, well, common sense -why would you mess with that?
We need sound-bitey earworms that burrow through that blithe insulation from reality. Something as ‘catchey’ as Thatcher’s handbag …
Looking at The Railways, the Government was constantly concerned that the LNER (Despite the Flying Scotsman, streamlined High Speed trains etc) was on the brink of bankruptcy prior to WW2, had they waited after the war when their value had been inflated by guaranteed income paid by The Government, the Atlee administration could have held on for a few years and picked up several of the ‘Big Four’ at bargain basement prices from The Liquidators.
In the same way all the current Government needs to do is hold the water companies to their legal duties and then put them in Special Administration like Railtrack and they will cost them peanuts.
Stymied (Starmer) is obviously one of those that since he gets free glasses and clothes (as well as goodness knows what else) affording his water bill is not a problem.
The real triumph of Neo-liberalism is the hyper-individualisation of people that creates disconnects like this.
Even our problems and our ability to cope with them or not have been de-socialised. We now all succeed or fail in total isolation from one another – you can have what you want or fail as much as you want and depending on your income the market will provide a definition for both.
Brave new world eh?
Agreed.
Strange then, if we can’t afford nationalisation, that other governments can not only nationalise their own utilities, but that those foreign utilities can buy our utilities.
What is supposed to be the advantage of private companies? One touted advantage was that they could borrow the money needed for investment. But, in reality, they go to the regulator and demand higher charges to pay for investment. To be clear, they are not acting as normal commercial companies. If, for example, a supermarket wanted to invest in a new shop, they wouldn’t put up their prices to pay for it. If they did that they would lose sales. Instead they would borrow the money. Then, once the shop was open, they would pay for the investment from the profits of the new shop. So, with the water industry, if they were truely a commercial company, they would borrow, invest, and then, only once the investment was completed, would they put up prices. That would be fair because then those enjoying the fruits of the investment would be paying for it. Instead, the nationalised utilities ask those who are not getting the service today to pay, in advance, for others to get that service. That’s not right. It’s not even capitalism. It’s extractive rentierism.
Well you could “appropriate” the assets and pay bond holders next to nothing and shareholders nothing. The difficulty there is what happens when the Government looKs for private capital to fund State projects in the future? Like we are at the moment. They will fear the same happening and will walk away. Also long dated Government bond yields are close to 5%. What they were after WW2 is of no relevance.
You miss so many points.
First, rates are falling – and will.
Second, the government can control that.
Third, the State never requires private funds – it makes all its own money, and the private sector’s too.
And appropriation is not the issue – fair value is. Do you know what that means?
“What happens when the gov’t looks for private capital to fund state projects in future?”
Just because Reeves keeps telling us that government can’t fund state projects without private capital, doesn’t make it true. She is lying when she says that, as Chancellors, Prime Ministers and Presidents have repeatedly lied about our fiat currency for decades.
Gov’t can fund state projects by central bank money creation, a fact of life since 1971, when we left the gold standard. We do it regularly, that’s how we bailed out the banks in 2008 and dealt with Covid. It doesn’t have to be paid for with austerity.
They can then regulate the money supply and control inflation by taxation.
Private capital has a role in a mixed economy, but NOT as a necessity for funding state projects.
This blog is a place where that monetarist lie from Reeves and her mentors, is debunked regularly.
Of course, private capital has an interest in maintaining the lie, and destabilising Chancellors who discredit it. But they are slowly losing the argument.
The claims made here presumably also apply to nationalising the major supermarket chains. There would not be a cost to taxpayers in doing that. Pay for it with bonds, the State owns the assets and can even invest to ensure that we get a clean food supply. I’m labelling UPF as ‘dirty’ in this context.
But it’s easy to imagine what might go wrong.
In pricniple, yes that is true. They could be made into co-ops, for example.
But the fair value would be very high and what would the gains be?
You are, I presume, completely and deliberately missing the point.
Starmer doesn’t get his clothes and spectacles paid for and his event tickets by not taking the side of rich business people and their anathema to state owned businesses which close off exploiting monopoly supply situations!
Beautifully crafted, why is no one taking notice of anything you say?
They are.
Why do you say otherwise?
You noticed, after all.
Perhaps Misha is asking why nobody with the reins of power is taking notice of this blog, which is a puzzle to many of us. After 15 years of Oxford’s disproven economic theories, isn’t it time to give someone else’s ideas a go?
As I understand the Thatcher consensus the narrative of taking former state owned industries in to the private sector was to provide competition which in turn would keep prices low , that at least was the basic debate that was sold to the public .
So where’s the competition with the Water industry ?
As a yorkshireman the only provider available to me is Yorkshire Water who have carte blanche to provide whatever service they wish and charge me accordingly .
The regulator seems to me to be nothing more than a made up title because if it were an authority then clearly the Water industry wouldn’t be in so much trouble .
The regulator only has one job and fails spectacularly to do it and clearly isn’t fit for purpose .
Any Labour government worthy of the name that inherits an industry in so much trouble , an industry that is so important in sustaining life it shouldn’t have to think twice about returning it to the public domain .
It would be nice to wake up one morning and actually believe we have a Labour government who share our considerable concerns and have the courage of conviction to act instead of their timid mindset that panders to the legacy of Thatchers 1% .
The water regulator is clearly all dried up and under the Tories was meant to be like this from the start. The “of’s” all appear to be like this as the “greedies” intended. The country needs to tell politicians loud and clear to stick their “of’s” where the sun doesn’t shine! Not going to happen though with such an ill-informed electorate who have little in the way of economic and monetary theory merely conjectures how matters in these areas work supplied mostly by right-wing media!
Starmer could be doing so much more to the benefit of us all. I hope those labour MPs who just sit quietly, saying little and doing even less, wake up quickly.
Those who voted Labour need them to become an effective counter-balance to Starmer’s false narrative. At the moment, I just see extremism benefiting from current policies, and that would be an even bigger disaster.
If the knowledge of the average Labour Party member is anything to go by, and I know quite a few, they have swallowed the Thatcherite lies. At a slightly higher level in the hierarchy, the Starmerite lies are reinforced. Those who know better, and speak out, are liable to be ignored or politically defenestrated.
The bright ones have already left or been chucked out.
As a party member, I have tried to offer thoughts in areas where I think I have something to offer. Fortunately, I have been ignored rather than (literally) defenestrated….. but it is a bit annoying.
The general case for Water nationalisation is a good one but the details of “compensation” to existing shareholders and lenders is complicated and would be argued/litigated forever. However, the more pressing concern is Thames Water and in many ways it is easier as the failure is more egregious – well, at least in financial terms. Let’s deal with that one… and maybe it becomes a model for others.
Current suggested private sector solutions all offer debt at high rates (a way to siphon out money), higher bills (to support interest payments) with no guarantees as to the effectiveness of the promised investment.
Nationalisation is the only sensible answer; shareholders get nothing (they aren’t expecting anything) and bond holders get a haircut… this could be done by exchanging TW debt for 3% 30 years gilts “face value” for “face value” (the “haircut” would be the fact that these new gilts would trade at about 70% of face value).
Of course, lots of haggling over the exact terms but given the parlour state of TW the current lenders can’t push too hard.
Why isn’t the government prepared to do this? I guess they are worried that they will then be held responsible for everything going forward – shit in the rivers, higher bills etc. ……. but “taking responsibility” is what government is for!
I suspect the litigation risk can be limited by litigation.
And I suspect 70% is generous, but the point is nationalisation is possible.
The question to ask here is: left as it is, where does TW go from here? Where is the required investment to come from? Who will invest, who will lend if it is just perpetuation of what exists? Without Survival, simply to satisfy bondholders seems to me unsustainable in the long term. What is any other way out; for the consumer, the Government, or indeed the bondholders?
As far as I can see, to put it in simple terms; the scale of any TW ‘haircut’ would determine the cost floor (but not ceiling) of nationalisation of the industry; and as it is presumably the worst case, everyone else would expect more. That makes it a great deal more expensive than the assets are worth (even if we could determine that flight of fancy). The suggested ‘haircut’ I am sure is very shrewdly judged by an experienced eye, to pass a test set by the investment industry: but that does not seem to me to set a good example, or value for money in a privatised sector that has effectively ruined the industry; to say nothing of the ruined environment and filthy rivers, or the old, out of date and decayed quality of the infrastructure. This is a failed industry that has let down the public very, very badly. It isn’t a haircut that is required, but a filleting. Not least as a necessarily stern example to the financial sector investment predators, always anxious to feed cheaply off a monopoly We really do have to stop making it too easy for chancers, in a way likely to sober the exaggerated expectations they have come to expect to be given exploitative opportunities to make ridiculous profits by the indulgence of successive British Governments; ance and for all.
Water privatisation has been a total disaster. It has provided a feeding frenzy for foreign asset strippers to pay themselves huge dividends and interest at the expense of investing in water pipes and resevoirs. Thames is one of the worst examples, but none of them have delivered anything close to acceptable performance in terms of reliable supply and proper sewage disposal. And they have lied and covered up the true extent of sewage discharges into rivers and seas. Offwat is badly led, badly underfunded and the worst example of a toothless regulator that you could think of.
I agree that Thames Water will be a possible template for how to deal with the other companies, but I have zero faith that Labour will grasp the nettle and nationalise it.
“…why does Keir Starmer keep telling us nonsense…..”
Either ignorance or he’s a liar.
Possibly a bit of both and tempered by vested interest. (?)
I don’t trust him. His eyes are too close together.
“ And the real question is, why does Keir Starmer keep telling us nonsense about this? Or does he simply not understand how finance really works?”
And the second real question is why the supposed journalists fail to challenge this nonsense, or are they as ignorant of how a fiat currency works as he would like us to believe?