15 November 2019

The City ignores Labour’s nationalisation plans at its peril

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Earlier this week the Shadow Cabinet briefed members of the utility industry on Labour’s nationalisation plans. The fact that this received no press commentary and that National Grid’s interim results did not mention nationalisation at all speaks volumes for how the City is bizarrely uninterested in this general election.

The risk is one of complacency. If Labour somehow wangled its way into office, perhaps via a coalition with the Scottish National Party, and went ahead with its nationalisation plans, there would be a complex legal assault on the UK’s reputation for orderly markets, potentially leading to an investor strike and negative nominal interest rates.

Tuesday’s event was co-hosted by Shadow Business Secretary Rebecca Long Bailey and the amiable Barry Gardiner, the party’s International Trade spokesman, and a former headboy of Haileybury College (where I also went to school). He apparently returned to address the Political Society a few years ago, but these details are omitted from his personal CV.

Labour’s nationalisation plan, as previously disclosed, is to pass two Acts of Parliament. The first would commence the process of nationalisation, and the second would then set the level of compensation. So, if anybody asks how much it would cost, they cunningly reply that it is a matter for Parliament to decide. According to a party document called ‘Bringing Energy Home’ compensation could be below market or book value.

The Centre for Policy Studies, CapX’s parent organisation, puts the total extra borrowing required for nationalisation of utilities at £176 billion, though it recognises there is considerable uncertainty over elements of Labour’s plan.

Meanwhile the Conservatives appear unable to say anything much, except to admit privately that renationalisation is “popular in the polls”. A Sky News poll, for instance, shows that 56% support renationalising the railways.

Well, it depends what you ask. If people understood the implication of nationalisation for pensions, especially public sector pensions, which would have a hole blown in them, they might think differently.

Regulation is tougher than it was, and the energy companies and the water companies are investing huge sums to deliver a zero-carbon economy and water capacity, which would be put at risk if successive governments subjected them to the stop-start Treasury-style management typical of other public sector organisations, such as the NHS.

However, I am sure I am not alone in thinking the railway system does need reform, including a more powerful independent regulator.

Labour claims its plans are legally watertight. But political legal advice is notoriously incompetent, as we saw with Boris Johnson’s attempt to prorogue Parliament. There would be grounds for legal action from investors under the European Convention on Human Rights, which guarantees property rights, plus the 60 Bilateral Investment Treaties to which Britain is a signatory.

This, and the subsequent reorganisation of the businesses under regional and community boards, all accountable to a Sustainable Investment Board chaired by John McDonnell, would be hugely disruptive and chaotic.

The compensation to investors would be paid via the issue of new gilts, which, theoretically would cause gilt yields and interest rates to spike. However, even this is not as it appears. Labour clearly has radical plans for the Bank of England and it is obvious that much of its spending would be financed by resuming money-printing and expanding the Bank’s balance sheet.

The likely investor response, counter-intuitively, would in the first instance be to pile into gilts, driving interest rates into negative territory, further increasing pension deficits and turning the financial system, especially the banks, on its head. When it came to investing in other UK assets, especially risk capital, they would probably go on strike.

As it stands, the BBC’s poll of polls puts Labour on 28%, making all this thankfully unlikely. It could only form a Government if it does considerably better than that and, even then probably only with the help of either or both of the SNP and the Liberal Democrats. And bear in mind that Lib Dem leader Jo Swinson this week appeared on the front page of the Financial Times wearing boxing gloves, promising to put neither Jeremy Corbyn nor Boris Johnson in power if there is a hung Parliament.

One of the uncommented upon features of the election campaign so far has been the erosion of the Liberal Democrat poll rating from 21% to 16%. For me this sits oddly with anecdotal evidence that lots of liberally-minded people who voted for David Cameron and the Conservatives now say they are going to vote Lib Dem as a protest against Brexit.

The post-war peak for Liberals came in 2005, when Charles Kennedy won 62 seats on 22% share of the vote.

However, the logic of the situation is that to have a chance of revoking Article 50, Ms Swinson would indeed have to prop up a Labour Government. It is possible that many liberal voters instinctively realise this and are indicating to pollsters that the only thing they hate more than Brexit is Corbynomics, the ultimate illiberal agenda.

Nigel Farage’s decision not to stand Brexit Party candidates in any Tory-held seats is certainly useful for Boris Johnson, if not a complete game-changer. The betting markets are now indicating a Conservative majority in Parliament of 41-44 seats. Until the election results show how the vote breaks down regionally at a constituency level and the impact of the smaller parties, we just don’t know what is going to happen.

Investors are either bored or relaxed about the risks, just as they were with the Brexit referendum itself in 2016 and the last election in 2017. Yet, if anyone needs reminding, neither of those quite worked out as planned.

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George Trefgarne is founder and CEO of Boscobel & Partners consultancy