Labour to nationalise the water industry – does it add up?

Labour’s manifesto, to be released later today, will pledge to nationalise the multi-billion pound water industry. On the face of it, it sounds like it might make sense. Dig a little deeper, and it becomes clear that the policy is fraught with difficulties.

Before we start to look at the proposals, it is worth noting that the plans hinge on Brexit. Labour is committed to leaving the EEA as well as the EU, so we’ll assume that EU rules on things like state aid will not apply.

Labour’s plan would create a series of nine new public bodies to own and administer the water and sewerage systems. The party says that this will reduce bills by £100 a year per household, through scrapping the dividends currently paid to shareholders.

Unlike rail, mail and energy, there’s a pretty simple argument for nationalisation. Not only is the water industry a series of natural monopolies, it actually acts like it. With rail, mail and energy, you can choose which train operator you use – for example between Virgin and London Midland trains to Crewe, or between Eon and British Gas, or between FedEx or Addison Lee and Royal Mail – but you can’t choose who to buy your water from.

Prices have gone up since privatisation, and they have to pay shareholders a dividend. Simple as that, right? Good idea.

No, not quite as simple as that. There are three major issues with privatising the water industry.

Firstly, the cost. Nationalising a multi-billion pound industry will cost billions of pounds. Creating the structures to run them as ‘accountable public bodies’ will likely cost billions more.

There are 10 major water and sewage companies in England and Wales. Thames Water alone has a market value of £12bn.

There is no magic money tree. That money either comes from taxes or government debt, and raising taxes to pay for a multi-billion pound scheme that seems a little like an afterthought is going to hit the economy.

Debt hits the economy in a more direct way. There is only a finite amount of debt in the markets. The government is considered the safest investment of all, as governments in the west simply don’t default on their debt. As the government borrows more money, the rate of interest the government pays increases. As that rate increases, the amount of money left in the market decreases and the cost of taking out that debt increases. And private sector investment relies on corporate debt.

Secondly, efficiency. There are a lot of people working in the water industry, and Labour has pledged to retain all of the current staff in their current roles. There’s also a lot of money that goes around, and a lot of investment that goes into it. The profit incentive is god in business in ensuring efficiency.

This is why I’d be sceptical when Labour claims that cancelling dividends will reduce water bills by £100 a household. Without the profit incentive, and reliant on political will, there is little incentive to cut staff when necessary, or put forward changes to working conditions. Over another decade, inefficiency is king to a degree greater than the profit margin of the companies.

Thirdly, public risk. What happens when a nationalised company gets into financial trouble? The responsibility for paying goes to the state, and scrapping it and re-franchising is virtually impossible.

Historically, when a nationalised company fails, it can’t be scrapped. Instead, the government is left paying the multi-million pound deficit with taxpayer’s money or government debt for decades.