Labour’s water renationalisation plans just won’t wash
Renationalise the water industry? If the Labour party’s ambition was to make a few quid for the exchequer and do nothing else, the idea is not as wild as it may sound, despite shadow chancellor John McDonnell’s gloriously loose description of his financing proposals.
The government can currently borrow on the public markets at less than 1.5% for 10 years. It might cost £69bn to buy the entire water industry – that’s the value of the regulated assets – but the companies would arrive with income streams in the form of dividends. At Severn Trent, for example, the dividend yield is 3.4% at the current share price. Borrowing at 1.5% to buy an asset yielding 3.4% is not the worst trade in the world. And the state, if it wanted to act like a supercharged private equity house, would be able to juice up returns by refinancing the companies’ debt at a lower rate.
The problem, of course, is Labour’s idea is not to buy the companies in order to play games of financial arbitrage. One assumes the aim is to charge customers less since the manifesto complaint is that “water bills have increased 40% since privatisation”. At that point, the back-of-the-envelope arithmetic starts to fall apart. The bills represent the companies’ revenues. If you cut the revenues, you undermine the ability to pay dividends, and thus eat away at the worth of the asset. Nationalisation could quickly become very expensive.
But, it might argued, the exercise would be worthwhile anyway if the water industry is “dysfunctional” – Labour’s description. Is that really true, however? Water was privatised in the first place because politicians could see the mighty expense of replacing the Victorian-era infrastructure and thought a regulated private sector could do the job more efficiently. Ofwat claims success. It says £108m of investment had been made since privatisation in 1989 and bills are £120, or 30%, lower than they would otherwise have been. Labour may disagree – but it ought to show its workings.
A related argument says rewards for shareholders have been too fat. Thames Water – contained within a labyrinth of offshore holdings in the Caymans and elsewhere that make scrutiny next to impossible for outsiders – is a case in point. Shareholders such as Macquarie have done splendidly but Thames pleaded poverty when it came to funding the new “super sewer” under London.
But a simple answer to Thames-style problems is tougher regulation. The government could insist that Ofwat sets stiffer targets to benefit customers at the expensive of shareholders. There is no need to own the assets to ensure that outcome.
All industries are different, and there is a fair argument that the state could improve the railways in a way the private sector can’t. But water? Why bother? There is no need to nationalise.
EasyJet ready for takeoff in second half
Over the past 21 years, easyJet has recorded losses in 19 winter periods. That’s the way life runs in the tourism-driven budget airline business.
A record half-year loss before tax of £212m nevetheless looks alarming since it’s about £130m more than the average of recent years. But there are explanations – the fall in sterling and a late Easter. The critical question for investors is whether profits will return with the usual roar in the second half.
In theory, they should. Fears of overcapacity are finally fading as limping rivals such as Alitalia and Air Berlin suffer. EasyJet itself is expanding capacity at about 8% this year and, a 12 months ago, the competitors on its routes were keeping up. Now easyJet reckons the competition will be at half the pace by the end of the year.
If that’s correct, they are fewer reasons to worry that easyJet has stepped up expansion at the wrong moment. It won’t be a vintage year, but the City’s guess of full-year profits of £365m-ish feels more solid than it did six months ago. Clouds are clearing.
Straightforward withdrawal from Lloyds
Almost nine years after part-nationalisation, the last shares in Lloyds Banking Group have been sold. The government can also claim a profit of a sort – maybe about £500m –– even though that’s an odd way to look at things since there would have been many better ways to invest £20bn.
But at least the exit has been achieved without George Osborne’s silly idea of offering shares to the public at a discount. Philip Hammond, his successor as chancellor, was right to kill that proposal. The government’s obligation was to get the best price, as opposed to entertaining airy notions about building a “shareholding democracy”. That meant selling in the market. At least that job was done efficiently.