What a glorious assumption!

There is, however, something that CPS ignore. The current owners of these assets will value them at the commercial cost of borrowing to buy them. It is a fact that the commercial cost of borrowing to buy an asset is higher than that which the government pays. The result is that the private sector will value these assets at a lower rate than the government, precisely because the government can borrow more cheaply than anyone in the private sector. So, when the government, after nationalisation, substitutes borrowing in these industries at the government’s rate of interest as opposed to current borrowing at commercial rates of interest the value of these assets will rise. At the same time interest costs within these these industries will fall, and the surplus that they will generate will be greater than that which the private sector could have made. The result is that in fact far from requiring that additional tax be paid these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector.

And how do we know that could happen? Because evidence supports the argument; that’s why.

If this assertion were true then the water companies would be worth less today than they were when privatised.

Are they?

30 comments on “What a glorious assumption!

  1. No!
    But that is not a sufficient answer to Murphy’s witterings since before privatisation, water boards were not run to make a profit and the small private water companies were only allowed to make enough profit to pay the fixed dividends on their shares (exceptionally, Water Companies had equity shares with fixed dividends – OK, they could *in theory* pay less but they could not pay more).
    The Thatcher government demanded, when privatising other utilities, that they cut prices in real terms every year but allowed privatised water companies to raise prices in order to catch up with the massive under-investment of the Water Boards while they were owned by various local governments or consortia of local governments. The principal benefit was not financial but the major improvement in the quality of water drunk by consumers. I have moaned before about Thames Water causing an outbreak of dysentry while I was taking ‘A’ levels …
    I might add that pre-Thatcher the private water companies charged lower rates than the municipally-owned water boards, despite paying dividends. Now *that* is evidence that Murphy is, as usual, wrong. Where he finds “evidence” to support his claims, I know not unless it is East Coast Main Line where the customer satisfaction ratio went from bottom, or maybe second-bottom, under temporary nationalisation to top under National Express to nearly bottom again under temporary nationalisation.

  2. I omitted to say that I can remember Shell being able to borrow cheaper than the UK government, and at one point it could borrow at less than the interest rate on bank deposits (long time ago, but that sort of thing is memorable).
    Murphy is wrong, as usual.

  3. Anything is only worth what a buyer will pay. Who can buy a.government owned utility? It must either be a private body in which case it is worth no more than it would be if it were already private. Or it could be a foreign government. Is the gentleman in favour of selling utilities to foreign governments.

  4. Testable claim: how’s that return to the Exchequer going for Scottish Water ( nationalised ), after capital expenditure.
    Actually it’s probably not too bad but only because of the frequent comparisons to the privatised water companies keeping them honest.

  5. If you read a political memoir from the 70s the recurring theme is employees of nationalised companies striking until the politicians blinked and handed over more money. Making certain decisions remote from politicians is one of the under-emphasised benefits of privatisation / outsourcing.

  6. isp – back when the world was young and summers were hot, binmen worked for the council. They had strikes, sometimes multiple strikes a year. Since our binmen worked for a private company we’ve not had one strike that I know of. The only bin strike I can remember in years was Birmingham – with its council binmen.

  7. @Martin

    The left well remembers the miners strike in the early 80s

    Many of today’s left weren’t even born then but they well remember how the entire nation, as one, stood up to back the miners in their strike against the evil Thatcher.

    When I tell them that I was around then and remember that not one single union from outside the mining industry went on strike for even a lunchtime to support the miners and in fact many miners didn’t go on strike to support the striking miners, the left tell me I must be wrong. Because they remember what they have been told by the older members of the left. And they were there.

  8. “…until the politicians blinked and handed over more money.”

    Which is why socialism doesn’t work. Won’t. Can’t. Ever.

  9. @john77, January 22, 2018 at 7:24 pm

    The Thatcher government demanded, when privatising other utilities, that they cut prices in real terms every year

    Yep, annual price changes of RPI-X% were great as forced companies to increase efficiency and productivity.

    Current (Blair/Brown) return on asset value makes them complacent with no incentive to be better.

    I’m surprised Mr Worstall hasn’t addressed this.

    Where he finds “evidence” to support his claims, I know not unless it is East Coast Main Line where the customer satisfaction ratio went from bottom, or maybe second-bottom, under temporary nationalisation to top under National Express to nearly bottom again under temporary nationalisation.

    GNER (Sea Containers) also vastly improved East Coast Main Line service. imho Richie’s “evidence” is what he heard some drunk bloke in pub saying, or what he dreamed last night.

  10. An asset or company is worth what someone else will pay for it.

    If its “worth” to government is a premium to its existing valuation based on a financing rate that is available only to the government, then it ain’t worth that premium.

    Murph is a moron.

  11. Robert Colvile, in today’s Times wrote:

    “Yes, water bills are up, but that’s because privatised firms are making up for decades of public underinvestment: now the backlog has been cleared, prices are set to fall. Meanwhile, those same firms are now 64 per cent more productive. ”

    I can just imagine that going into reverse, can’t you?

  12. “It is a fact that the commercial cost of borrowing to buy an asset is higher than that which the government pays.”

    Arrggh. Even Simon Wren-Lewis has managed to work this one out.

  13. John77; “I omitted to say that I can remember Shell being able to borrow cheaper than the UK government…”

    I’m young enough not to be able to remember that, but it used to be, at least 15 years ago, part of the City’s institutional memory, or for those who had been paying attention anyway.

    Then again, I once reported to someone with an Economics degree who had no idea that the 70s oil shock had ever happened, or that the UK had called the IMF in.

    That was an interesting 15 minutes.

  14. Martin; there was a strike by the binmen in Brighton, last year, I think. For all I know, it’s still bubbling away, under the surface.

    Brighton is run by the Greens.

    Still. At least there’s a 20mph speed limit in the town centre.

  15. @ Pcar
    Nationalisation of GNER increased profits by drastically cutting the service that was provided at the same price and by ignoring the interest cost of investment.

  16. “15 years ago” – surely you should be called “DucklingMcDuckface”
    An Economics degree from *where*? Mars?

  17. AndrewC;

    Channel 4 made a documentary about the strike around the 10 year anniversary; I remember watching it when first broadcast.

    The final scene was two (by then) ex-miners, talking in an empty social, working men’s club; one from each side of the strike’s divide. Although they disagreed on a lot, the final, poignant message, from both, was “at least our kids won’t be going down t’pit”.

    Strangely missing from subsequent broadcasts.

    The other classic is the coverage of the TUC conference as the strike winds down. The Nottinghamshire miners join the Congress, and the NUM representative announces that Scargill has been elected President FOR LIFE!

    Watch the faces of the board/Congress members behind him…

  18. John77,

    “Nationalisation of GNER increased profits by drastically cutting the service that was provided at the same price and by ignoring the interest cost of investment.”

    Do you you have a link that explains all that fin layman’s terms. GNER is always used as a justification for nationisation and it would be good to have a good counter argument.

  19. – “The result is that … these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector. ”

    That’s what Labour did in New Zealand: increase the returns demanded of the state-owned power generators as a stealth tax which hit the poorest hardest.

  20. What’s he on about? When a company buys and capitalises an asset, the value on the balance sheet is its price tag. The interest on any borrowing required to fund the purchase is written off to the P&L each year. Sure, you’ve got a loan liability to offset against your shiny new asset but that value will be the same no matter who’s borrowing it. The cost of servicing that debt is a revenue expense.

    So yes, borrow at a lower rate and you’ll make more profits, obviously. But your asset values are exactly the same either way.
    .

  21. Somewhere West, Bath or Bristol, I think.

    There has been / was a very long one in Birmingham.

    Anyway, from the quoted sermon:

    The result is that in fact far from requiring that additional tax be paid these industries should begin to make a return to the Exchequer greater than anything that they could generate as a profit in the private sector.

    We all remember the generous surpluses Britain’s nationalised industries returned to the Government pre-Thatchercaust. Thatcher only privatised them to spite the Government and give that money to her friends.

  22. It seems that somebody has told Snippa about the dividend valuation model. However he doesn’t understand what it means. An asset’s value derives from the cash it generates not on its acquisition cost

  23. @ BiND
    I can no longer find an easy link to customer satisfaction covering the two periods of nationalisation showing the marked improvement under National Express and the deterioration under “East Coast” as the transportfocus website only shows the last years but
    http://data.transportfocus.org.uk/train/complaints/tocs/
    shows the remarkably high number of complaints for a company with fewer passenger journeys than any other and less than 10% of South-West Trains and the rapid improvement since Virgin took over the franchise.
    The wiki page on “East Coast (train operating company)” says “Originally East Coast were to receive five Class 180 Adelante DMUs. Due to a reduction in the number of extra services, and with Directly Operated Railways stating its unhappiness with the Class 180 units,[16] they were sent to First Great Western for use on the Cotswold Line instead.”. East Coast cut the service and did it worse.
    The page also quotes the Guardian saying that East Coast paid HM Treasury “over £1bn” – rather less than the £1.4 billion that National Express had contracted to pay.

  24. @ BiND
    Missed out that “East Coast returned over £1bn to the Treasury” is weasel-speak for EBITDA>£1bn – it carefully excludes (hoping we’ll ignore) the amount of capital the Treasury put in and ignores the depreciation of fixed assets (except leased rolling stock where depreciation is included in the lease payment) and includes any interest chargeable on money invested by the Treasury. Since National Express invested £44m in the first few months of the franchise (the accounts for later years don’t split it out from other investments) investment and interest costs thereon must run into the hundreds of £m. It quite definitely but obscurely does *not* mean that East Coast made a profit of £1bn as the Grauniad would like you to believe.
    Aldo, of course, if National Express (or any other TOC) made a profit the Treasury would have pocketed 20% of that

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