A report in the Financial Times has suggested that the potential renalisation of water companies in England and Wales could cost as little as £14.5 billion – far less than the alternative figure of up to £90 billion suggested by think tank Social Market Foundation in February 2018.

The article is based on research by ratings agency Moody’s on behalf of the leading financial newspaper.

The research carried out by the SMF, commissioned by Anglian Water, Severn Trent, South West Water and United Utilities, had concluded that the best estimate of the costs of obtaining control of the regulated businesses gave a ‘takeover value’ of £90 billion.

The £14.5 billion figure calculated by Moody’s is the book value of the 15 English water companies’ shareholder equity – the basis on which the Labour party, which is proposing to renationalise the privatised utilities, favours compensating to shareholders.

The FT draws attention to the fact that the English water companies’ equity is worth £18.3 billion when calculated as regulated capital value minus the book value of the debt, according to Moody’s.

The newspaper article also highlights the fact that the SMF research had put forward a figure of £44 billion based on market value which would increase to £90 billion if the companies’ debt was included.

The SMF findings were based on enterprise value, which measures the market capitalisation of the water companies, plus their net debt levels, and is a widely-used gauge of company value.

WaterUK - nationalising the water sector “risks adding significantly to the national debt”

Commenting on the SMF report at the time of publication, Michael Roberts, Water UK Chief Executive, said:

“This independent report should give real pause for thought to those who favour nationalising the water sector. It risks adding significantly to the national debt, with serious harm to the wider economy and future investment.”

The FT article has also drawn attention to comments by leading economist Professor Dieter Helm, current Chair of the Natural Capital Committee, who has advised government on the regulated utilities, as saying that the SMF report had “virtually no intellectual substance and the [£90bn] figure was wrong”.

Ofwat made "serious, fundamental and long lasting mistakes in 1994, which have bedevilled the industry ever since"

Professor Helm’s comments come in Water Boarding, an interesting paper which looks at the pros and cons of private ownership versus public ownership and is also highly critical of the role water sector regulator Ofwat has played since privatisation:

“The regulator made serious, fundamental and long lasting mistakes in 1994, which have bedevilled the industry ever since, and they are the basis of the attacks on the subsequent conduct and performance of the industry ever since.”

“It took time for the companies to realise just what an open financial goal the first regulator had allowed to open up, and in some cases it would take takeovers to fully realise these gains which had not been anticipated at privatisation.”

“In companies like Anglian Water, the full extent of the opportunities would be grasped, in this case led by the current chairman of OFWAT in his former role as Anglia’s chief executive.”

“Almost none of this was inevitable. It happened largely because regulators let it happen.”

Professor Helm continues:

“ If more and more detail, and more and more pages, produced better answers, there might be some excuse for this growth of regulation and the bureaucracy that goes with it. But there is in fact no evidence that regulators are getting better at their jobs.”

According to the economist. regulating just one utility now takes up in staff on both sides nearly as many people as it took to run the Indian part of the British Empire in the early nineteenth century, and significantly more than the entire Foreign Office in this period. Describing this as “out of all proportion to the task” Professor Helm said:

“As the regulatory state has grown, there is little evidence that performance has improved. Instead regulation has become an industry in its own right, with not just the regulatory bodies’ employees, but civil servants, company regulatory departments, and a new industry of consultants and advisers, with financial institutions in on the game too.”

“The reason for felling so many trees each periodic review is that the regulators have gradually lost the plot. They have encroached further and further into management decisions, about which they have no comparative advantage….Regulation is not neutral, and detailed regulation is open to capture by vested interests.”

Click here to listen to Professor Helm comment on private versus public sector ownership of the water companies.