14 October 2019

Exposed again – the true price of Labour’s nationalisation plans

By

The Confederation of British Industry has produced a really important piece of research today on the extra borrowing involved in Labour’s renationalisation plans.

Strikingly, it completely vindicates the similar exercise we did at the Centre for Policy Studies – although their baseline figure for upfront cost of £196bn is even higher than ours.* (Their figures included rail rolling stock but not PFI, ours the reverse.)

In fact, it’s really important to dig into this – even on a day when so much else is happening.

Back in 2017, when I took over as director of the Centre for Policy Studies, we got endlessly frustrated by Labour’s refusal to provide any estimate of the cost of its promises on renationalisation. So we decided to have a stab ourselves. You can find the results here.

Knowing we’d get accused of being biased, we made sure that every single figure in our report was independent and authoritative. The only judgment calls we made were on which estimates to use – and we made sure to be as generous to Labour as we realistically could be.

For example, Corbyn had said he wanted to nationalise the Big Six energy firms, but Labour was only actually committed to nationalising transmission and distribution. Likewise, we accepted that rail could be nationalised without upfront cost by waiting for franchises to expire.

Even given that, our minimum price estimate was £176 billion. Strikingly, James Kirkup and his colleagues at the Social Market Foundation came up with their own estimates for the water industry a few weeks later which pretty much matched ours.

And now the CBI has run the numbers a third time. In short, we can be pretty confident that this represents a good ballpark for the fair market value of those assets.

In the ensuing 18 months, Labour still haven’t come up with their own figures – something we urged them to do in our report. And they still haven’t disputed a single one of our individual estimates.

Instead, they’ve deployed four separate rebuttal lines/strategies, which have become fairly familiar.

First, to play the man not the ball. John McDonnell, for example, described these as “fantasy figures plucked from the air by politically motivated think tanks”. He also claimed our work had been funded by the firms involved – in fact, the SMF’s was, ours wasn’t. But again: Labour refused to provide any figures of its own. And now the CBI has backed us up. So that’s not really convincing anyone any more.

Next, Labour has argued that the actual upfront cost will be far lower than the market value. Pushed by Andrew Marr, McDonnell insisted that “Parliament will set the price”.

We actually accounted for this possibility in our report – but warned against it. Because when the state can grab things it likes at less than their actual value, investors’ trust in an economy tends to evaporate fairly quickly.  Labour have now said that the prices they pay will be influenced by things like levels of investment and past “asset-stripping” by the companies involved.

Let’s leave aside the fact that this isn’t how markets actually work. Or that investment since privatisation in most of these sectors has actually been far higher.  (One reason for privatisation in the first place was that utilities had been starved of investment because schools ’n’ hospitals always won the competition for capital. Water bills have risen for example because new owners had to make good decades of under-investment.)

What this proposed valuation system essentially boils down to is John McDonnell playing Santa Claus – writing ‘naughty’ and ‘nice’ lists, and rewarding firms accordingly. Which, again, is a really bad way to run an economy. It also punishes millions of ordinary savers whose pension pots have been pushed into theoretically safe assets like infrastructure and utilities.

The third rebuttal – and the most intellectually respectable – is that we shouldn’t be focusing on the upfront cost, since the state will be gaining an asset: the cost of the borrowing will be covered by the revenues produced. To use McDonnell’s analogy, when you take out a mortgage, you’ve got an asset – the house – to borrow against. This is why he can claim that renationalisation won’t cost people anything.

To which there are a few responses. First, when you take out a mortgage, you generally actually find out how much the house is worth.

Second, that kind of calculation presupposes both that Labour’s massive programme of spending and borrowing will not affect the interest rates government has to pay, and that these firms will be recognisably the same entities.

But why commit such vast sums to nationalising these companies if you’re just going to run them in the same way?

Labour has promised to use the profits from these firms to pay back the borrowing involved in acquiring them. But it has also promised to ramp up investment; reward the unions; slash bills for consumers; and transform ownership structures to focus less on profit. It’s the economics of the loaves and fishes. And they still won’t explain how they’ll make the numbers stack up.
The final rebuttal line from Labour is the one it’s used today against the CBI – that this is just pretty normal and nothing to worry about. Everyone else has nationalised industries – why should the UK be different?

At a special Labour mini-conference on public ownership last year, Jeremy Corbyn grandly proclaimed: “From India to Canada, countries across the world are waking up to the fact that privatisation has failed and are taking back control of their public services…Research by the Transnational Institute identifies 835 international examples of privatisation being reversed. It really is happening: from water under citizen ownership and control in Grenoble, France, to mail under national ownership and control in Argentina.”

I appear to have been the only person to actually check his sources. And what I found was that the 835 renationalisations he described were, in fact, remunicipalisations: cities, towns, and in many cases villages taking back control of individual services.

So the 835 included:

– 8 swimming pools
– 7 Norwegian care homes
– 2 cinemas in Vienna
– Fountain maintenance in Rivas Vaciamadrid in Spain (population 460)
– A kindergarten in Bromskirchen in Germany (population 1,830)
– Groundskeeping for Rotherham Council

The Transnational Institute does give 49 examples of actual nationalisations. But most are from troubled countries like Bolivia, Ecuador, Argentina, and Venezuela – or Viktor Orban’s Hungary.

Otherwise, when a significant service was taken back into public ownership, it was generally a case of a particular contract expiring and local or national politicians deciding that they could do a better job.

There are no convincing examples of an advanced economy like ours deciding to devote tens, perhaps hundreds, or billions of capital to a sweeping renationalisation programme like this.

Perhaps because they all realise what Labour should too – that if you actually examine the problems with the privatised industries, it’s very hard to see how renationalisation is a panacea.

Instead, it remains what it has always been – an ideological solution in search of a problem.

*The CBI has since said that it should not have included the rail rolling stock in its estimate, since Labour has not actually pledged to nationalise the train fleet. However it added that this was ‘a fraction’ of the £196 billion total, and that even if Labour did not buy the trains outright it would still have to pay leasing costs (which as the CPS study said amounted to £1.4 billion in 2015/16).

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Robert Colvile is Director of the Centre for Policy Studies and Editor-in-Chief of CapX.