Westminster's claims that nationalising England’s privatised water industry would cost £99 billion are "nonsense", according to new think-tank research, which argues that the cost to the British taxpayer would be almost zero.
Common Wealth, an economic think-tank, said the figure often cited by ministers is based on inflated and misleading calculations drawn from water companies and their backers in the private sector.
The real cost, under UK law, would reflect the fair value of the assets – not the so-called “regulatory capital value” (RCV) that the government has repeated. "The true and fair value to bring water into public ownership is close to zero," the report said.
"The £99 billion headline figure is an invention of corporate lobbyists."
Pennon Group PLC (LSE:PNN, OTC:PEGRY) and Severn Trent PLC (LSE:SVT) shares are down 0.9% this morning, with United Utilities Group PLC (LSE:UU.) are down 0.7%.
The report, written for the think-tank by Ewan McGaughey, professor of law at King’s College London, comes amid mounting public anger over soaring water bills, sewage discharges into rivers and seas, and the financial instability of companies such as Thames Water, which is burdened with £20 billion of debt.
According to Common Wealth, more than £85 billion has been paid out to shareholders since water was privatised in 1989, with bondholders receiving a similarly large sum. At the same time, infrastructure investment has stagnated, with no major reservoir built since privatisation and 35 sold off.
Water firms are now allowed to raise bills by 36% over the next five years under Ofwat’s latest settlement – a move campaigners say will force households to pay for decades of underinvestment and financial engineering by private owners.
The think-tank argues that bringing water companies back into public hands through existing legal mechanisms – such as licence revocation or special administration for insolvency – would not require the government to pay shareholders or most creditors the inflated values suggested by the industry.
Instead, the law requires only “appropriate value” to be paid to secured creditors. Shareholders, who are last in the rank in insolvency proceedings when it comes to being paid, would typically receive nothing – particularly given the scale of dividends and financial extraction already taken out of the system.
The example of Thames Water was given, where shareholders have extracted £10.36 billion since privatisation and bondholders received £13.68 billion, and at the same time, the company faces an estimated bill of the same combined amount of £23 billion for infrastructure repairs and clean-up.
“There is no legal obligation to pay shareholders anything,” Common Wealth stated. “Bondholders have already received excessive returns. The cost of public ownership is therefore limited to the administrative expense of appointing a special administrator.”
Undermining the case for public investment
The £99 billion figure originates from a 2018 report by the Social Market Foundation – a think tank that Common Wealth notes was funded by Anglian Water, Severn Trent, South West Water and United Utilities.
That report relied on the RCV figure, which is used by Ofwat to regulate dividends and price controls but has no legal status in compensation calculations.
Market values, the report notes, are in many cases far below RCV. United Utilities’ market capitalisation is currently £7.2 billion compared with a regulatory capital value of £13.8 billion.
A failed £4 billion bid for Thames Water earlier this year from private equity firm KKR contrasts with a regulatory value of £19.6 billion.
The wide gap between market and RCV, Common Wealth argues, shows that using the higher figure is “absurd” and reflects only an attempt to scare ministers away from serious engagement with public ownership.
Calls for the renationalisation of the water industry, which is a fully privatised sector only in England compared to around 90% of global urban water systems remaining publicly owned, have gained traction as environmental standards deteriorate and corporate financial mismanagement comes under greater scrutiny.
Other European cities, including Berlin and Paris, have reversed earlier moves to privatise water services, citing cost, performance and accountability concerns.
The report concludes that privatisation has resulted in a system that “funnels billions to shareholders and bondholders, starves infrastructure, and pollutes the environment”.
With public ownership now widely supported by voters, the report said the legal and financial barriers are lower than the government claims.
“Water is a natural monopoly and a basic human right,” said Common Wealth. “It should be run in the public interest – not as a financial asset for extractive investors.”