A new report from the Social Market Foundation thinktank assessing the likely costs associated with nationalising the water and sewerage industry in England has concluded that the best estimate gives a ‘takeover value’ of £90 billion.

The report was commissioned by Anglian Water, Severn Trent, South West Water and United Utilities, and was produced independently by the Foundation using publicly available data from Ofwat, the London Stock Exchange and the annual accounts of the water companies.

Image: Social Market Foundation report

The report seeks to provide an overview of the likely implications of nationalisation on public sector debt levels, and the ongoing impacts of nationalisation for public sector net borrowing.

The key findings of the research are:

• The best estimate of the costs of obtaining control of the regulated businesses gives a ‘takeover value’ of £90 billion.
• If the government were to purchase the water industry’s assets at a takeover value of £90 billion, it would entail a 5% increase in government debt levels.
• The government would also need to meet the long-term investment requirements in the water sector, estimated to stand at over £100 billion over the next 25 years, in 2016/17 prices.
• The research assesses how public sector capital expenditure would have been divided in the 2016/17 fiscal year, if water investment in that year was undertaken by the government. It reveals that water investment would be the third biggest category of capital expenditure, accounting for 13% of all public capital expenditure.
• If the government were to acquire the water industry’s assets for less than the market price, it would have financial implications for UK households, including the workers in the water companies.

There are major UK ownership interests in the listed companies with more than six in ten of shareholders across all three listed regional water and sewerage companies being UK-based. The figures are similar across the three listed firms, ranging from 60% in Severn Trent to 70% in Pennon (owner of South West Water and Bournemouth Water). Many workers own shares in the listed water companies. A third of employees in United Utilities participate in their employee share scheme, as do two thirds of South West Water employees and 70% of Severn Trent’s UK employees.

If it were to purchase the water companies in England, the government would acquire an asset which at present makes a profit. A wide range of factors would determine the profitability and self-sufficiency of a state-owned water industry. Factors that could affect profitability include:

• A potential increase in public sector borrowing costs in the event of a government rolling out a programme of nationalisations and higher levels of spending.
• Water pricing becoming increasingly politicised, leading to a detachment between prices and costs in the industry.
• Transition costs associated with nationalisation, including the need to establish a new regulatory regime and management incentives.
• Whether the public sector would match the productivity growth of the private sector, which has seen productivity in the water and sewerage industry increase by 64% since 1994.

Drawing on data from the London Stock Exchange and company annual accounts, the SMF estimated the current enterprise value of the regulated parts of England’s water companies. Enterprise value measures the market capitalisation of the water companies, plus their net debt levels, and is a widely-used gauge of company value. Across all the water companies in England, the report estimates an enterprise value of £80 billion for the regulated parts of the businesses.

The SMP has emphasised that the report is not a full assessment of the merits and drawbacks of a nationalised versus a privatised water industry. Its primary focus is to consider the costs that the government could initially face if it wanted to purchase the companies from their current owners.

Water UK "nationalising the water sector....risks adding significantly to the national debt"

Commenting on the report, 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 £90 billion spent on nationalisation would be the same as what is spent on education or the salaries of every doctor, nurse and other NHS employee twice-over. Taxpayers would also bear the brunt of paying another £100 billion for infrastructure investment.

“Water companies have a strong track record delivering real results over the past three decades. They’ve invested £150 billion, reduced leakage, improved drinking water quality, and helped improve our environment. We have a service to be proud of – let’s not risk undoing what’s been achieved.”

Click here to download The cost of nationalising the water industry in England