An interesting assertion

The assault by shadow chancellor John McDonnell came as he pledged total, “permanent” and cost-free renationalisation of water, energy and rail if Labour won power at the next election.

The logic goes like this. Government can borrow more cheaply than the private sector (well, most often, not always).

Buy the companies with the cheap money, the dividend income more than covers the interest costs, free money!

Well, OK. But did it actually work out that way last time around? Actually, no, it didn’t. The nationalised industries were less efficient. Less profit that is, for any given level of charges and or quality of service. We can tell this because both profits and levels of service have risen since privatisation.

At which point the question becomes well, what’s the balance between that lesser efficiency and the cheapness of financing? Past experience of nationalised British companies doesn’t favour the financing side of that equation, does it?

58 thoughts on “An interesting assertion”

  1. The Unused Testicle

    Well, it will be a way of some of Mad Mac’s Mates becoming home grown oligarchs in the future.

    In the short term, they, along with Mac, will become merely stinking rich.

    Enriching the country, well, not so much.

  2. It’s even weirder than that. In another article in the Guardian, it says:

    “It would be cost-neutral because you would be bringing into public ownership an asset,” McDonnell told Sky News.

    “In addition to that, you would not just have an asset, that asset would give you income. Instead of that income going to shareholders, it would come to the taxpayer.”

    Asked whether public ownership would cost “absolutely nothing”, he replied: “Exactly that”.

    So it costs nothing because you swap cash for an asset that’s worth the same as the cash. QED. More: having taken the asset for no cost, you then get income from it. Magic!

  3. Nationalisation was done at low rates of interest last time too. Br Gas 3% Br Elec 3% etc. Of course they weren’t relatively low rates of interest when the bonds were issued. But by the late 60s the Treasury was having to pay much more for its borrowing. Treasury 7 1/2%. And then we got the 70s….

  4. They’ll issue government gilts to buy the shares from the current owners. The gilts will carry no interest and be non-transferable.

    Then, politicians with no industry experience will make decisions on how the businesses are run based on political ideology. They may appoint managers of a similar political persuasion to themselves to manage day to day activities.

    What could possibly go wrong?

  5. @napsjam
    So it costs nothing because you swap cash for an asset that’s worth the same as the cash

    You just know it won’t be cash. It’ll be long term bonds that are “worth” the £cash.

    And of course the company valuation will include future profit for the next 10 years?

    And naturally, the purchase from the existing private owners will be entirely voluntary?

  6. I’m terrified that a good proportion of the public and our representative think that this is a good idea, but I think the really chilling bit is the word “permanent”

    One parliament doesn’t have the power to stop a later one from reversing its decisions. Are we talking about some sort of “super-law” that can never be overturned? When everybody realises that the government can’t run a mail service we aren’t allowed to sell the wreckage?

  7. “So it costs nothing because you swap cash for an asset that’s worth the same as the cash”
    But what’s the value of the asset?
    An asset is worth what you can sell it for. We know what the assets were worth last time they were sold. Privatisation. But who’d fancy the chances of doing a second privatisation when the privatised assets of the first one have been forcibly confiscated by the government? Who’d trust government?

  8. I can sympathise with the water nationalisation – it’s both a natural monopoly and a necessity for life (you don’t need to wash every day, but it passes Adam Smith’s linen shirt test). It’s the easiest one to argue for, even if the case still stumbles on our host’s arguments.

    But the others – energy, rail – where’s the monopoly? For electricity you can cover your house with solar panels, heat with oil, install a CHP boiler, etc. For transport, a chap called Henry Ford has a curious invention which may yet gain traction.

  9. So Much For Subtlety

    What I don’t get is the historical illiteracy of both this politician and the people interviewing him. It is almost as if no one has ever thought of this, or tried it, before.

    Perhaps someone could ask him if nationalisation is so great why don’t we try it with agriculture? After all, it is not as if that has ever been tried before, right? What could go wrong?

  10. So Much For Subtlety

    Meanwhile, at a conference on alternative models of ownership in London, Corbyn backed the nationalisation of Britain’s energy system as a way to tackle climate change.

    Well I suppose that Pol Pot’s radical nationalisation programme did a great deal to reduce Cambodia’s carbon footprint.

    Who said that the French Kings forgot nothing and learned nothing?

  11. Anyone else see the secondary ( or is it primary?) purpose of nationalisation? The new nationalised industries are going to need to be able to negotiate with their workforces over pay etc… Cue the return of the big closed shop unions. These won’t be the “people’s” assets for very long. They’ll be in the hands of the union bosses.

  12. I remember reading at the time of water privatisation, that new EU regulations on water quality would be a massive cost, and it was intended to shift that cost to private investors. Not the only reason of course.

  13. The problem with arguments over renationalisation is its everything to with old politics going back 30 years.

    Before the tinternet.

    Old political grudges kept alive by old men means they just won’t see past Arthur Scargill etc.

  14. As I always say, nationalisation is not a form of ownership as properly meant. It is a dagger to the heart of the very concept of property ownership.

    Opponents of this folly could do worse than point this out. So for instance when some Corbynite chump says we’ll all own the railways, merely ask him how he’ll sell his share should he decide he wants to.

  15. To be fair the rationale here is not greatly different to what happens in the commercial works when one firm purchases another by issuing a pile of debt. But in that case, “firm X has a low cost of capital so can afford to issue debt to purchase firm Y, which has a high cost of capital, and thereby make a profit” would be a fallacious argument, because the relevant cost of capital for the expand-by-taking-over-Y project is the one for the firm being purchased, not the one doing the purchasing, and ultimately this ends up being incorporated into X’s cost of capital. In particular you can’t use X’s original, lower cost of capital to do the discounting on Y’s cash flows and say “positive NPV of purchasing this one”.

    So while I can see where the potentially misleading claim of “costless” comes from (in the sense that such a takeover will generally have an NPV around zero, because you do indeed have an asset and a debt, though there are still opportunity costs in terms of what could have been done instead) I’m not sure how “the state can borrow at lower rates” comes into it. Since the debt issued by the state is near-enough risk-free – particularly since the UK retains the ability to print its own currency – does this create an exception to the rule of using the target’s cost of capital during valuations? Or in reality is the effect still there, but the rise in government borrowing costs from taking over commercial operations is almost indiscernible because it is masked by all the other borrowing the state is doing?

  16. So Much For Subtlety

    bloke in spain – “Cue the return of the big closed shop unions. These won’t be the “people’s” assets for very long. They’ll be in the hands of the union bosses.”

    Not to mention all the Political Commissars that will take over the HR departments to ensure that every mains repairman is sufficiently racially diverse and sexually enlightened.

    It could be an endless source of employment for the utterly unemployable who make up the Labour Party’s key electoral demographic.

  17. That’s how I see it, SMfS. This time round, the parties sitting either side of the negotiating table would be essentially the same people with the same agenda. And that’s de-democratisation. Turning a country into one-party state.

  18. Mao is keeping very quiet about the huge investments in utilities by pension funds, which he us going to replace with compulsory bonds will low rates.

    Cost to pensions income?

  19. Um, what about the tax the State gets now from the profits? If all the profits are going to be taken up paying the bond holders their interest, won’t the State lose out? Plus there’s the cost of investment in the infrastructure – if all the profits are taken up paying for the debt used to buy the asset, then all investment will have to come from the owner, the State.

  20. I think that McDonnell’s line that nationalisation would be free is not going to help him. Most voters over 40 understand that when something sounds to good to be true it isn’t. Since Labour have the callow youth market down up to win they need oldies who won’t bite on this.

  21. The moment I turned away from Labour was when I went freelance and worked for a local authority and realised just how inefficient they were and a few percent profit wasn’t going to come close.

    We’re going to need a new party. The Tories have had 7 years to destroy Labour’s nests and done nothing, and in fact, boosted them. By “nests” I mean the bits of government stuffed full of Labour-voting and unionised employees who see voting Labour to defend their jobs as worthwhile. Drive them out of those jobs and into the private sector and they’re going to start thinking about voting against Labour, as now, they support their taxes being left alone.

  22. @mattwardman

    That’s a really salient point which I hadn’t thought of. What’s it called (generally), in relation to the original proposal? “second / third order consequence”? The “forgotten” man?

  23. Justin, AndrewC, I’m no expert, but i think international law requires that an expropriation or nationalisation has to be properly compensated. There’s American case law suggesting the compensation has to be in freely convertible cash – foreign exchange.

    So i don’t think “government gilts” carrying no interest and not being transferable is going to be a practical plan for a Labour government, but who knows, they might try. I’d expect them to be more likely to just print the money. Any which way, it’s a bonkers plan, but a Labour government would be bonkers in all sorts of ways.

  24. The inefficiency of nationalised industries was demonstrated (i) by the requirement for all of those privatised by the Thatcher and Major governments to reduce prices in real terms (in money terms raise them by RPI-X) [Water wasn’t owned by Central government – there was a mix of private and municipally-owned companies]; (ii) by the vastly improved customer service after privatisation; (iii) by the only steel company that wasn’t denationalised by the Churchil government (in Nye Bevan’s constituency) never making a profit while othersd did despite SCoW paying markedly higher wages; (iv) the exceptionally good growth in the Czech economy after Vaclav Klaus’ Kupon Privatisation which jusrt handed over ownership from the state to its citizens, (v) the famines created by collective farms in Russia, China, Ethiopia, Cambodia … – Russia is once again a wheat exporter having had to import millions of tons of wheat from Australia under Communism.

  25. Reviewing the viability or otherwise of whatever cockrot McNasty says is meaningless.

    He neither knows nor cares about any of it. It is just whatever load of sanctimonious bollocks he thinks will turn the mugs out on the day.

    What he wants Is POWER and if he and his gang get it all bets are off. This is the moment these cunts have waited 150 years for. And if they get in my “unthinkable” schemes for sacking the SCS etc will seem like small-fry stunts indeed.

  26. “The logic goes like this. Government can borrow more cheaply than the private sector (well, most often, not always).”

    That’s because the government takes on more of the risk. Loans to a small business run the risk of the business declaring themselves bankrupt and not having to pay the loan back. The interest rate is partially to pay for the cases where this happens.

    The government is judged less likely to declare itself bankrupt, so it therefore repays more of the debt on average.

    In other words, the price of debt to the government is exactly the same as to private industry. It’s just that it pays the money back directly as repayments, instead of indirectly as interest in lieu of bankruptcy risk.

    Or to put it another way, if the government borrows directly, it has to pay it all back. But if it borrows indirectly via a private contractor, it has some probability of paying it back plus interest, and some probability of not having to pay some of it back because the company went bankrupt, with the risk-weighted costs being equal. It benefits from bankruptcy protection in case it all goes wrong

    If this was not so, there would be arbitrage to be made from the difference.

  27. M B Ears: …debt issued by the state is near-enough risk-free

    I’m not sure that’s quite right. Firstly, states have been known to default on their debt (or go cap in hand to the IMF as the UK did).

    Then the “printing money” option you mention and the ensuing inflation will reduce the value of the debt and lastly the foreign exchange risk to foreign holders of the debt will increase as the UK economy falters while inflation rises and the value of sterling plummets.

    We’ve been here before…

  28. Andrew M “I can sympathise with the water nationalisation – it’s both a natural monopoly and a necessity for life”. You can, of course, catch all the rain that lands on your house and garden and use that for only the collection costs. It’s called a water butt and some plastic sheets. But you won’t have made it potable, and if you run out you are very stuffed. Plus, what are you going to do with your wastes? Septic tank and earth closet? So there are inescapable costs.

    The points is, do you want a completely state-run monopoly, or do you want a state-regulated monopoly? If there was competition, it would have to be along the lines of electricity or gas, not the phones, or we’d have enormous disruption with roads being dug up willy-nilly!

  29. Solid Steve 2: Squirrels of The Patriots

    Seems Ritchie has a rival in the Atlas Shrugged baddies cosplay competition:

    Prof David Hall, from Greenwich University, says the nationalisation of the failing bank Northern Rock – and a court case that followed – showed it was “perfectly reasonable” for the government to take ownership of a private company without fully compensating shareholders.

    In Northern Rock’s case, investors were paid nothing.

    Maybe we should nationalise Professor David Hall’s house and give him a couple of quid before he’s chucked out?

  30. So Much For Subtlety

    MyBurningEars – “Since the debt issued by the state is near-enough risk-free – particularly since the UK retains the ability to print its own currency”

    Ummm, the point about printing more money is that the debt is not paid back. Inflation is a way of stealing the lenders’ money and *not* paying them back. So the fact that the British government can turn on the fiat money tap *is* a risk. And one that lenders will presumably consider.

    It would be foolish to assume that any of the money that Trump is borrowing will ever be paid back. Trump himself does not have a good record and the US government is unlikely to be able to afford it over the medium term. So they will default either openly or through inflation. At the moment the East Asians are willing to lose money to keep their currencies down so it is not quite as stupid as it looks. But it is still stupid.

  31. Take an asset – such as a utility company. Currently its shareholders can expect a profit, government can expect tax and overall investment is expected to happen over time.
    Then have it nicked by government for say £10 billion.

    Pension funds develop a big hole if their payment isn’t big enough. Now this asset becomes a liability, government now controls wages, pensions, investment, profit, prices etc. To keep the public sweet they cut the price – but company wasn’t making much profit anyway (a few percent) so even at that level the price paid will take many years, even decades, to be covered. And in the meantime the government increases wages, doesn’t increase prices so much and people feel happy. Government has to deal with pension, investment etc and oh look another recession, another time of government ‘cutting’ spending.
    Have used nationalised services, have used privatised services – and far better service on the privatised services.

  32. MacDonnell’s view is as Mr Ecks tells us complete cockrot. Issuing £90 billion of gilts to the current shareholders and nabbing their shares has a cost (£90 billion), but no up front cash changes hands. In return the government gets assets (shares) that over time will produce a cash flow valued today at £90 billion.

    Meanwhile the £90 billion of extra gilts end up on the government’s balance sheet, as will all of the debt in the nationalised companies, thereby increasing the yield on all gilts and pushing up the coupon on newly issued gilts. The £90 billion asset will only produce that value cash flow if the new owners let the companies borrow more to fund ongoing investment, but if we learn anything from government ownership, it is that tgovernments scrimp and save on such investment, so the underlying infrastructure will become as delapidated as it was the last time it was owned by the government.

  33. As Anon mentions above, cocooned from reality by being in school/university/the entire public sector, it is possible to believe the utter crap churned out by socialists.

    The moment you realise the necessity of incentive and how socialism destroys this is the moment you realise that socialism can’t work and you know WHY socialism can’t work.

    You then add to that the corrosive effect of socialist political dogma on business, on society and on the human soul itself.

    Then, the endless examples of socialism failing all make sense. And you see how evil it is. At best promoted by naïve idealists, at worst by mendacious cunts.

  34. Alex

    “thereby increasing the yield on all gilts and pushing up the coupon on newly issued gilts”

    This seems to be (from my only semi-educated perspective) what the Modigliani-Miller propositions would predict, and how it would work in corporate finance if MegaCorpConglomerated bought the water companies with debt rather than the UK government. Are there any complications introduced by the fact that the state is not an economic actor on the same playing field as big corporates – for example its control over taxation and the currency?

  35. Anon:

    I have been arguing for years that entrenched civil service bureaucracies are the chief proponents of socialism.

    Likewise I have been arguing for term limits on civil service employment.

    10 (or 15 or 20 or whatever seems best) years total employment in all levels of government and you’re done, out, finished, retired, ineligible for further paid employment in any capacity, direct or indirect, consultant, independent, nothing.

    What about senior generals and admirals, deputy ministers and so on? They’re the worst – keep a close eye on them and fire them early.

    Oh, and no pensions at all for public “service”. Buy your own or starve.

  36. @Gamecock “Water supply is local. Nationalization gives control to people hundreds of miles away. Bad idea.”

    So does privatisation when the shares are bought by pension funds. More so when they are Australian investment funds or Canadian pension funds who are big buyers of UK infrastructure.

  37. @MBE: There isn’t a lot of difference. A big oil company like Shell has borrowed at rates comparable to gilts in the past, and has certainly borrowed at rates lower than several G20 governments.

    The idea that government can borrow more cheaply than privatised companies is also largely misleading. By nationalising a lot of industry and putting all their borrowings and the cost of their equity on the government’s balance sheet, the government increases the market yield requirement on all government borrowings.

    The difference in yield between 10 year AA and AAA Euro government bonds (an easy benchmark to make because there are plenty of examples) is about 0.5%. The fact that the water companies are borrowing at or about government bond rates rather than water company utility rates (might be rated A) is offset by the fact that the government rating will likely drop from AAA to AA or worse, and the costs will be about the same, just the incidence falls on tax payers rather than shareholders.

  38. The Unused Testicle

    The thing that illustrates that Labour have no fucking clue about anything is that they don’t know how to solve the riddle of blocking Brexit to shaft the “Tories” versus not being able to effect their nationalisations if we are a member of the EU.

  39. ‘Likewise I have been arguing for term limits on civil service employment.’

    I had never heard this idea before! Not sure it’s a good idea – you’d have to pay enormous wages to attract people. But it is INTRIGUING!

  40. @ Alex
    So when Mrs Thatcher privatised the Water companies, their customers were given priority* in the allocation of shares. Cambridge Water Company was already nominally a private company with shares that, until then, paid a fixed dividend and were owned by an assortment of funds seeking a reliable income [higher than gilts thanks to the illiquidity premium (by which I mean illiquidity of the shares, not the water)]. An American Hedge Fund took umbrage because its attempt to buy control failed when various colleges bought shares with the result that the Cambridge Water Company was controlled by its customers.
    * I was able to buy shares in my local water company, tried to buy shares in the one covering my childhood home and got scaled down to 100 shares.

  41. Solid Steve 2: Squirrels of The Patriots

    The moment you realise the necessity of incentive and how socialism destroys this is the moment you realise that socialism can’t work and you know WHY socialism can’t work.

    Very much this.

    And you can see the destructive effects of bad incentives in private sector organisations. Happens all the time when the accountants decide to screw over the sales people or the sales people get an incentive plan that’s decoupled from the business plan or the senior management decide to loot the company.

    But these missteps tend to be self-correcting. Carillion went bust, but we’re still paying South Yorkshire Police to turn a blind eye to Moon Cult rape. Woolworths went to the great pick n mix in the sky, but NHS pratfalls remain one of the leading causes of premature death in the UK.

    I can only imagine how shit a leccie company run by the likes of Diane Abbott and Tom Watson would be. But thanks to the awful, terrible, very bad, no good Conservatives we may very well find out in the not too distant.

  42. Fred Z,

    “I have been arguing for years that entrenched civil service bureaucracies are the chief proponents of socialism.”

    Of course. State employees generally want more money and power. And the further they are from having any real market value, the more socialist they are. Nurses tend not to be that socialist. Museum curators are.

  43. @Surreptitious Evil
    You obviously have NOT read the accountants’ report. I have.
    Northern Rock had more assets than debts. In order to allege that Darling’s condiscation of the shareholders’ property was justifiable, he had to pretend, among other things, that the Bank of England would default on its statutory duty to act as a lender of last resort so that Northern Rock would be forced into a “fire sale” of assets, that its mortgage book would be sold at a massive 20% discount to its written-down value, that there would be no tax reclaimable in respect of the losses incurred thereby, … (I’ve forgotten some of them) and that the fee paid by HMTreasury to Goldman Sachs to prepare a report on Northern Rock for HM Treasury was a liability of Northern Rock at the date of confiscation before it had been commissioned!
    You should not trust a Labour politician further than you can throw him.

  44. “But these missteps tend to be self-correcting. Carillion went bust, but we’re still paying South Yorkshire Police to turn a blind eye to Moon Cult rape. Woolworths went to the great pick n mix in the sky, but NHS pratfalls remain one of the leading causes of premature death in the UK.”

    And Woolworths wasn’t as badly managed as most of the public sector I’ve worked with. They only went out of business because Amazon, Tesco, Apple and a bunch of others were marginally better. Not VW vs Trabant better.

  45. @John77: true but the shares were largely underwritten and held by City banks. When water companies entered the FTSE 100, tracker funds and other general UK equity funds were obliged to hold some of the shares, which were not restricted to local shareholders.

  46. The best argument against nationalisation is that it’s been done before, not that long ago, and it didn’t work.

  47. Anyone who believes the public sector can outperofm the private sector in delivering goods or services cheaper, faster and/or of better quality has clearly never worked in both sectors.

    They also haven’t deeply considered the process that resulted in the smart phone or computer on which they are reading this comment.

  48. Bloke in Costa Rica

    Really all this points out is that we have never, despite the misery they cause, killed enough socialists. The next time round I vote we kill all of them.

  49. @ Alex
    Underwritten by City banks but not held by them (they didn’t have that much spare capital to invest in those days). Some shares were allocated to, and some were bought in the after-market from “stags” by, insurance companies and pension funds but most institutional investors were underweight because a majority of private investors bought shares in their local company and sat on them (until they were taken over in the case of Thames Water, Yorkshire, Northumbrian).
    You may have noticed – I have – that Thames Water’s behaviour deteriorated after it was bought by a German utility (MacQuarie hasn’t been quite as bad): prior to that the threat of complaining customers turning up at the AGM to castigate the directors had a benign influence.

  50. My impression from the short time that I can bear to suffer the MSM each day is that virtually none of the points above are being discussed on Sky, BBC etc. Can anyone here who can put themselves through the agony of watching/reading MSM give me comfort and tell that I am wrong?

  51. @ BlokeinBerkshire

    The MSM reflect the interests of the majority of their ‘customers’. Once they stop watching crap like Reality TV and take an interest in the world, then the MSM might actual report some real news.

    Same reason we have such awful politicians – not enough people care to improve the situation.

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