Election 2017 fever is in full swing. Over the past week, all the major parties have released their manifestos. The manifesto which has caught the eye of most people is that of Labours with its radical plan of borrowing heavily to spend on welfare and pre-existing infrastructure. They key word here being pre-existing as Labour want to nationalise the National Grid along with the energy, rail, mail and water industries. Now I wouldn’t mind a government borrowing to invest in new insfustructure but in this case Labour wants to borrow to buy out infrastructure that already exists. But I digress and that is a topic for another day. In this article, I will attempt to explain how Labour would nationalise the aforementioned industries and who the biggest beneficiaries of the nationalisation who’d be (surprise: its not the taxpayer)?
How Labour Would Nationalise The National Grid?
For those who don’t know what National Grid does, the company owns energy transmission lines. The company plays the crucial role of transporting energy from hubs and stations to households.
National Grid being a publicly listed company, its market value (how much it is worth) can be seen in real time. As of today, National Grid is worth just under £40 billion. But as well having a UK presence, National Grid also operates in the US with the split of revenue between the two almost being 50:50. For this argument, we can assume that Labour only wants to buy the part of National Grid that operates in the UK.
From this we can deduce that nationalising National Grid would cost £20 billion. But it’s not as easy as that. This is because if Labour comes to power, investors and traders will front-run on National Grid stock by pushing the price up as they know that the government will buy it. Furthermore, investors will want a take-over premium for selling their shares. For a company with stable increasing cash-flows, I assume the takeover premium would be 30%.
The way I look at it from the above, the only way a company like National Grid can be Nationalised is by the government vastly overpaying for it. I expect the government would have to pay between £25 – £30 billion for just the UK part of the business. Not a great deal for the taxpayer unless the government has some plans to somehow ring out efficiencies. The real winners of any nationalisation will be the existing shareholders in National Grid. They would be the ones laughing all the way to the bank. The tax payer would get a raw deal as they would be paying for assets at the peak of their cycle (infrastructure asset prices are at all time highs and overvalued due to low interest rates).
Just another thing to consider for those that are pro-nationalisation. The government already owns 20% of the National Grid. Heck they own 20% of all businesses that operate in the UK. This is because companies like National Grid pay Corporation Tax to the UK government and the rate was 20% last year. So even without having to spend a penny on nationalising National Grid, the UK government and taxpayer still get 20% of all profits made by the company.
Nationalising the water companies will be similar to nationalising the National Grid as the government will have to buy out the companies which control all the water assets outright. This again will prove to be highly expensive as investors will want a decent premium. Not all water companies in the UK are publicly listed as some of them are private companies and this makes it hard to judge what the cost to government would be. But Ofwat put the capital value of the 32 water companies in England and Wales at £69 billion.
For Royal Mail, Labour says it would acquire enough shares to restore majority public control. Buying 50.1% of it would mean an investment of just under £2.15bn at current share price.
Nationalising the rail industry is perhaps the easiest from all the different sectors. This is because the government already owns National Rail – the company that owns the rail network (the actual infrastructure). This leaves the train franchises which are currently in private hands i.e. east Midlands, south west, virgin etc. Rail industry nationalisation is the least costly of all the options as the government could take over the franchises when the current contracts end.
Will The Taxpayer Benefit From Nationalisation?
In investing the number one rule is never to overpay for an asset. From the above, we can see that in order for government to nationalise various industries they will have to over pay and this will defiantly hurt the taxpayer.
Apart from paying over the adds for the assets, another important determinant of the taxpayer getting value is the time-frame these assets are held for. If somehow a national decree is taken out to protect the companies from privatisation then the extremely long holding period of ‘forever’ would mean that nationalisation will actually work in favour of the tax payer. But if say these companies were nationalised and down the line another party comes into power and wants to privatise these industries again, then in this instance the taxpayer would lose.
So whilst the price and time period will determine whether the taxpayer will benefit or not, the capitalists who own the companies will be the real winners. They will get paid a decent amount for parting with the assets. If nationalisation were to happen, I would bet the share prices of National Grid and Royal Mail would jump.
The other thing to note is whilst a nationalised industry should bring down bills on utilities and train fares, the industry is normally subsidised by the government as opposed to making efficiency gains that lowers the cost. In short this means that whilst your water bills and rail ticket prices go down, your taxes will go up!