We published this short YouTube video last night.
The media says nationalising the UK water industry would cost £90 billion, and that taxpayers would foot the bill, but that's absurd. In this video, I break down the flawed assumptions behind that number and explain why the actual cost could be near zero, and why nationalisation might not cost the public a penny.
There is no the audio version of this video.
This is the transcript:
How much would it cost to nationalise the UK's water industry?
The number that is bandied around by politicians is £90 billion. And you'll also hear them saying that it's going to be paid for by taxpayers' money.
There are two issues with their claims.
One is that £90 billion was an estimate prepared some time ago by a very right wing think tank who basically thought that if you were going to nationalise water you would have to repay all the debts owed by the water companies to the loan financiers who have kept them in business and profited heavily by doing so.
That's total nonsense. If a company is bust, you don't pay off the loan financiers to it. You pay a fair value for the business, and that is it.
What's the fair value of the water companies right now, given that they are both actually financially insolvent in some cases, like Thames Water, or environmentally insolvent in the sense that they can't actually deliver us clean water without it being full of, let's be blunt, shit, in most cases.
Well, their value is nothing, in my opinion. Literally, precisely pounds zero, or maybe one pound each.
That's the price we should pay for the water companies.
And would we have to pay taxpayers' money to bail these companies out? Let's not talk nonsense here. We have nationalised companies in the past, and what do we use to nationalise companies? We issue new debt to nationalise companies.
Not a single penny of money raised from taxpayers is involved in any way at all, because firstly, there will be almost nothing to pay. And secondly, bonds will pay for it. And if the bonds are issued at the right price, and there may only be a few of them, then you should be able to raise enough money by running these companies profitably in the future, in the way that we would desire, without ever imposing a burden on the state.
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It is ironic that the largest suppliers of a solvent in this country are insolvent.
The water industry was privatised not to provide a better, cheaper water supply but to supply the City of London and the financial sector with a large number of assets to be stripped and money scalped from captive customers. Much of the assets have gone, but the water companies continue to supply huge fees and charges as well as interest to city institutions. As they get nearer to insolvency, the fees and charges as well as interest rates go up.
What the city wants now is a bail out followed by back to private sector scalping. Blue Labour will oblige. But never mind the scapegoats such a the disabled and migrants will continue to be pilloried.
There is a case for nationalising the whole water industry but this will be controversial. Far less controversial would be nationalising Thames Water…. indeed, it is anything other than nationalisation that would be controversial/unpopular. All the current “rescue” plans for TW involve paying very high interest rates in order to “kick the can down the road” – more money paid to financiers…. until eventual nationalisation.
Shareholders of TW are already wiped out and they know it. What about debt? Total debt is about £17bn and there will be differing levels of seniority among lenders in the event of bankruptcy but the assumption that this all has to be paid back is nonsense. Lenders must take a loss.
Now, you and I might differ about the level of loss that lenders should take but I have previously suggested paying 75% of face value by exchanging existing debt for 40 year debt with a coupon of 3.5%. You might be harsher. But, whatever, the interest burden on TW is drastically reduced for the next 40 years which would make it far easier to make the investments needed and no money is needed “up front”. Of course, even if no “upfront” cost it would still cost in “Present Value” terms about £13bn (or less if you have your way) but this is not huge and does not have to be found today.
What about the other water companies? Well, hold their feet to the fire on environmental (and other) issues until they either perform or “hand over the keys” to the state.
In any case, it can be done with no upfront cost…. and it will certainly not be £90bn.
I think you’re being FAR too generous, Clive. Investors do due diligence before handing over their money. They knew exactly what was going on from day one. And they also have significant ability to pressure the board running the company. Instead of using that pressure to make Thames Water do a proper job, they used it to demand impossible rates of return. Well, the gravy train is grinding to a halt. There is no reason to compensate anyone.
Maybe lessons will be learned by investors, but I doubt it. On the contrary, greed will push them to apply even greater pressure on their other investments in order to make up the losses. Late-stage capitalism is on life-support, and there is no justification for government oxygen.
“Shareholders of TW are already wiped out and they know it”
I am delighted to hear it, but remain sceptical.
The idea that TW shareholders might get bailed out by the taxpayer is disgusting. Imagine placing a bet – which is what shareholders did – and then getting a government handout to cover your gambling debts when it doesn’t come in. Utterly disgusting, but I wouldn’t bet against it happening.
I can’t help but feel there is a lot of false information and manipulation going on here.
Politics is nothing more than a means of legalised theft – a strange world where badly behaved capital gets away with outrageous behaviour and ordinary folk get locked up over TV licence. I’m not expecting are form natural justice in the outcome of this at all. Even the later Alan Budd had his suspicions about privatisation which he seemed to accept had been confirmed in the long run.
Best of luck England. In Scotland we are somewhat different, although not without our problems, as Richard recently pointed out. With our publicly owned Scottish Water, recently adjudged to have the second cleanest drinking water in the World, and having put in place a twenty five year plan to maintain, or perhaps improve that standard, I believe we are in a much more fortunate position than you South of the border. With the Scottish Industry Investment Group, (SGIG), the Water Industry Commission for Scotland, (WICS), and the Independent Customer Group, (ICG), all looking after our, the public, interest, I’m hopeful we will never have to face the problems that customers in England are facing.
https://weownit.org.uk/news/steve-reed-thames-crisis/
As Steve Reed had been given tickets to football matches by Thames Water weownit tried the same. This is what happened.
https://weownit.org.uk/news/where-was-steve/
Are you sure you have the right spelling for the MPs name – I believe that a G is missing in his surname.
I say chaps – where’s the money trough kindly provided by the water companies eh what!
https://anotherangryvoice.substack.com/p/the-new-job
Without having any access to relevant data at the mo, I would say the answer is it will cost a lot less than what’s been doled out in dividends and fines.
Thanks JenW.
AAV is again, right on point
Another excellent one from them.
Thanks for the post Richard.
I agree that Thames water, being bust, is worth, at most, £1.
Sadly there is precedent for bailing out failed businesses. The government bailed out failed banks. I can’t understand why it paid more than £1. Even after being bailed out shareholders, who should have been wiped out, had the cheek and the temerity to complain they were not adequately compensated!
My assumption is that the banks bamboozled the then PM and the Chancellor by saying that the UK economy would collapse if they were not bailed out. Utter tosh – but it shows the power of lobbying. Of course that lobbying was only effective because of the economic illiteracy of PM and Chancellor (sorry Alistair 🙁 ).
I hope this precedent won’t be repeated although, worryingly, we still have massive economic illiteracy amongst politicians.
As for cost to the government money – utter, utter tosh. The water companies were sold on the basis that they could operate so much more efficiently than the public sector that they could not only improve the service (they have clearly failed), but could also make a good profit for their shareholders. There’s some truth, for some shareholders, in the latter. But only by taking an organisation without debt, loading it with debt, paying the loans to shareholders (and senior employees), and then bailing out of the empty shell by offloading on other naive “investors” (more fool them). In short the process has just been one of asset stripping – no bailout needed or desirable.
The public sector could hardly fail to be better. If the original rationale for privatisation I still valid (it never was, but proponents haven’t changed their “assessment”), then the public sector should make a tidy profit through nationalisation.
So the idea here is to seize the water companies without compensation. Or maybe to appoint a commissar to value them at £1 a throw and then ban anybody except government from buying at that price.
And you seriously claim that you’re not a communist.
I was a chartered accountant for 42 years, frequently valuing companies as a result.
I advised on buying quite a lot of them along the way. I bought and sold a fair few as a director.
I know how to value companies. The water companies are bust, in my opinion. This has nothing to do with communism – not that I suspect you know what you are talking about when you use the term. It has everything to do with sound financial judgement.