UK water nationalisation bill could hit £90bn

The exercise undertaken by any UK government would be ‘no free lunch’, according to think tank the Social Market Foundation.

The cost of nationalising UK water companies has been estimated at up to £90 billion ($126.8 billion; €101.8 billion), following a report by think tank Social Market Foundation.

The ballpark figure of between £87 billion and £90 billion was calculated using an assessment of company accounts and following valuation methods used by investment banks and fund managers, the SMF said.

These valuations are approximately 1.3 times higher than the water companies’ regulated capital value attributed by regulator Ofwat, with the SMF stating this as an “imperfect measure” and using the “rule of thumb” of “RCV times 1.3” to reflect a more appropriate market value.

While the SMF conceded that a government could force through a sale below market prices, it said this would cost the UK economy in the long-term through desertion and future demands of risk premiums.

The report comes amid the threat of nationalisation from the UK’s opposition Labour Party, although Environment Secretary Michael Gove also wrote to Ofwat last week stating his concern about “opaque financial structures” used by those in the industry, as well as the belief that “some water companies have for many years been making excessive profits”.

The SMF said its report – which excluded privately-owned Welsh water firms – was produced independently but was commissioned by Severn Trent, South West Water, United Utilities and the recently-acquired Anglian Water. It also stressed that it was merely providing data on the policy and not passing judgement on the policy. Its figures are similar to estimations by think tank Centre for Policy Studies last month, which looked at the wider policy of nationalisation and placed the water figure at £86.25 billion.

“There is no free lunch on offer here. However it was done, nationalising the water industry would impose significant costs on the state and thus taxpayers,” said Scott Corfe, the SMF’s chief economist. “Those costs could be paid up-front as the government paid £90 billion to buy companies at their commercial values. Or they could be felt in the wider economy as the government forced through a sale at below market prices, which would put off other investors.”

The UK water industry is currently in the consultation stage following Ofwat’s publication of its 2019 pricing review policies late last year. The companies were told to lower their cost of capital to 2.4 percent RPI and Ofwat said “they will need to be more efficient and innovative than ever before”.