Public Ownership isn’t a Takeover

As John McDonnell keeps pointing out, when it comes to water, energy and the Royal Mail, we’d be acquiring profitable assets which would return billions to the public purse every year:

“It would be cost free. You borrow to buy an asset and when that asset is producing profits like the water industry does, that will cover your borrowing cost.”

Once we’ve taken assets into public hands, we’ll be able to stop wasting money and reinvest our savings in lower bills and fares and more investment. But what about the upfront cost of buying back the companies involved?

Well, it’s not up to the CBI. Parliament will decide on compensation levels for buying back our services, based on the public interest.

UK and European courts have repeatedly said 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.”

So the CBI is wrong – investors cannot assume they’ll get full market value. There are various factors that parliament will take into account when deciding on the upfront cost of taking back our public services.

The CBI claim that renationalisation of water, energy, rail and Royal Mail would cost £196 billion. There are two problems with the way they calculated this figure.

Firstly, they used the Regulatory Asset Base (RAB)/Regulatory Capital Value (RCV) of the companies involved. But this isn’t the real market value, it’s just a notional figure used by the regulators.

Secondly, the 30% markup is based on traditional takeover practice. But bringing assets into public ownership isn’t a takeover.

It’s hard to imagine that parliament would justify giving shareholders 30% extra on top of RAB/RCV. Why would this huge handout to investors be in the public interest?

According to David Hall and Vera Weghmann from the University of Greenwich Public Services International Research Unit, estimating compensation in cases of nationalisation works quite differently:

“The estimates of ‘market value’ which have been published by stockbrokers and commercial lawyers and others should thus be seen as an opening negotiating position by investors in a dynamic political process, rather than a serious attempt to forecast the final result of a legal challenge in the UK.”

Value for the Public

As Jonathan Ford of the Financial Times points out, “the whole aim of the exercise would presumably be to stop private companies from making excessive returns from the public. Why then would the government start by paying a market premium based on those same excessive returns?”

If the CBI figure was too high, then how about just returning the market value of shares to the shareholders?

The problem with this is that actual, existing market value is not a fair price for buying back our assets. Why? Because we, the public, are the captive market, and shareholders have been receiving their billions based on continuously ripping us off.

We don’t have any choice about using these public services – water, energy networks, the Royal Mail, the railway – and that’s why they are so profitable. That’s why market value is so ridiculously high.

Arguably, it would be much fairer to pay shareholders no more than the actual money they invested in the service – the book value. If we just pay shareholders exactly what they’ve put in, public ownership is a great deal for the public purse.

Buying back the water companies in England would pay for itself in 8 years. It would cost £15 billion (the actual book value of shareholders’ investments) and we’d save £2.3 billion a year.

Buying back our energy networks would pay for itself in 7 years.  It would cost £22 billion (the actual book value of shareholders’ investments) to buy back the National Grid and the regional distribution companies and we’d save £3.2 billion a year.

Buying back our Royal Mail would pay for itself in 7 years. It would be even simpler – the private owners have managed it so badly that the market value today is only £2.2 billion, less than half of even the book value of the company – and we would save over £300 million a year.

When it comes to rail, we can take franchises in house one at a time as they come up for renewal without paying a penny in compensation. We already own the infrastructure through Network Rail. When new trains are needed, we can buy them directly on behalf of the public, and save ourselves the £200 million a year currently going to rolling stock shareholders.

We would then collectively own, control and benefit from all the assets of our public water, energy, post and rail systems.

Privatisation has Failed

The savings above assume that we pay shareholders back the money they put in. However, parliament can take into account the track record of these shareholders in taking care – or not – of our public services, and the mess we now have to clear up.

That includes the failures of privatisation and the way we’ve all been consistently ripped off for 30 to 40 years.

For example, in the case of water, our bills have gone up by 40%, leakage levels are 20-25%, dividends have been extracted of £1.8 billion every year and our rivers and seas polluted with raw sewage. The private sector has also built up a debt mountain, from zero debt in 1989 to £51 billion now. This debt would be honoured by our new publicly owned water companies and so in effect, privatisation has left us with a huge burden.

Parliament could take all of this into account in deciding on appropriate compensation levels. That means public ownership could pay for itself even more quickly than suggested above.

In every sector that Labour wants to bring into public hands – water, energy, rail and Royal Mail – there have been huge injustices which could impact the final figure for shareholders.

Bringing these assets into public ownership would not only pay for itself, it would have huge benefits for the environment, society and economy. Benefits like transparency, democratic accountability, lower bills and fares, more investment, more care and better services.

Instead of insisting private companies have to do everything, we can embrace a mixed economy and 21st century public ownership. Public services should work for all of us, not just for shareholders. The sooner we make it happen, the better.