Opinion

We’ve crunched the numbers – nationalisation would be a bargain

Ignore claims about crippling levels of compensation: public ownership would pay for itself within seven years• David Hall is a visiting professor and former director of the Public Services International Research Unit at the University of Greenwich

The Labour party’s proposals to bring water, energy, post and broadband into public ownership have been received with some public enthusiasm – privatisation of these sectors has never been popular. But they have also been subjected to various criticisms, mainly focusing on the potential cost of compensating shareholders, including the possibilities for legal action by investors, and the supposed impact on UK pension funds. Most of these critics have remained silent about the benefits of public ownership.

Our research at the University of Greenwich, however, shows first that these benefits are large and provide excellent returns for any plausible estimates of compensation. Second, it shows that many claims about the level of compensation and its impact are based on errors about the law and about the identity of shareholders.

To start with the benefits: the most easily quantifiable benefits come from not having to pay out dividends to private shareholders or high interest rates on private debt. These savings would amount to about £8bn per year across all sectors: £2.5bn from public ownership of the water companies, £3.7bn from the electricity and gas transmission and distribution companies, about £1bn from public ownership of BT’s broadband and services divisions, £170m from Royal Mail, and up to £1.4bn from taking remaining private-finance initiative (PFI) projects into public hands.

These are net savings, calculated from companies’ own accounts by comparing the dividends paid to shareholders and interest currently paid out by the private companies with the future cost of low-interest government bonds to replace the shareholders’ equity and the private debt.

Regional and local economies and households would get a substantial boost from this. Whether the savings are used to reduce prices or to increase public investment, the money would remain in the local economy rather than being sucked out by international finance, and would be spread fairly equally around the country because we all use these utilities. The savings are equivalent to more than £300 per household per year, or about £6 per week. That’s about £750m per year per region, with regions such as the north and north-west of England benefitting at least as much as the more prosperous south. And for the average parliamentary constituency it’s about £12m per year.

There would be other benefits. Efficiency gains would be made from eliminating the bureaucratic transaction costs of contracting between different companies, especially in sectors that have been “unbundled” such as rail or energy. So, for example, universal provision of broadband could be done considerably more efficiently and cheaply through a public sector monopoly – £20bn as compared with £32bn if we relied on “incentivising” private investors. We would also gain proper public control and accountability, and be much better able to rapidly implement renewable energy policies to deal with the climate crisis, and develop the green economy with long-term planning for jobs and training.

Some of the claims made about compensation have been wildly implausible – the Institute for Fiscal Studies, for example, has shown that the CBI estimates were more than 2.5 times higher than the actual market value of listed companies.

UK law on compensation is simple: parliament must decide compensation in each case, and is not constrained by corporate claims for “market value”. This is under the very clear principle stated by both the appeal court and the European court of human rights that “legitimate objectives of public interest, such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value”. A sound economic approach would be to return to shareholders the money they had actually invested in the companies – the “book value” of their equity, a total of £56bn – without providing any public money to preserve any of the current excessive returns. In view of the annual savings of £8bn per year, that means nationalisation would pay for itself in seven years. The companies would show up on the government balance sheets as assets of equivalent value, and the compensation would increase government debt by only 3%.

We should ignore the crocodile tears over the impact on pension funds and employees. UK pension funds own only 5% of the water and energy companies, so 95% of the value of higher compensation would go to largely foreign investors. Employee shareholdings are even smaller, except in the case of the Royal Mail, but employee shareholdings in any case have to be treated differently, as an employment benefit, and so could not suffer any loss. The potential for investors to claim higher compensation by using bilateral investment treaties (BITs) is real, but BIT processes are costly, take years, are uncertain in outcome, and are currently facing strong political opposition across the world, including in Germany.

So even after taking account of the cost of compensation, public ownership of these sectors is a bargain. It makes much better economic sense to bring these sectors into public ownership than leave them in the hands of private investors.

• David Hall is a visiting professor and former director of the Public Services International Research Unit at the University of Greenwich