Monday 18 November 2019 11:12 amIG Talk

Labour’s nationalisation plans: The threat and opportunity

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Joshua Warner joined IG in 2017 after several years as a journalist. He started his career reporting for a local newspaper prior to studying at university, after which he joined a leading London-based financial newswire. He focused on the natural resources sector as a commodities reporter, before moving into a senior reporter role and then becoming newsroom editor.

The Labour Party is expected to release its manifesto this week, with leader Jeremy Corbyn promising to publish “the most transformative, radical and exciting programme ever put before the British electorate”.
The party is set to recommit to some of its major pledges made in 2017, including plans to bring energy, water, rail and mail delivery companies into public ownership. It confirmed last week that it would nationalise BT Group’s Openreach network so it can roll-out ultrafast broadband across the country for free.

There have been some wild claims about Labour’s nationalisation plans, all of which should be taken lightly. For example, one highly cited figure from the Confederation of British Industry claims it would cost £196 billion. But that was based on old data, didn’t weigh-up any potential economic benefits and assumed Labour would pay market value.

Labour’s shadow chancellor John McDonnell has said it would be “cost neutral” because it intends to compensate shareholders by issuing bonds, meaning it is trading a liability for a profitable asset. Labour has said its manifesto will be fully-costed when it is released.

But make no mistake, for those that have invested in companies like National Grid, Centrica, United Utilities, Severn Trent, Royal Mail and the number of rail operators, a Labour government could pose a huge threat. Shareholders have usually lost-out when firms have been nationalised in the past and they have rarely been happy with the compensation they have (or haven’t) received.

Labour looks highly unlikely to pay a fair price to investors. For example, it has said it needs to take “pension fund deficits; asset stripping since privatisation; stranded assets; the state of repair of assets; and state subsidies given to the energy companies since privatisation” into account when judging the worth of National Grid and others that manage the countries energy network. It said it would pay BT an undisclosed fee for Openreach.

If Labour intends to pay below market value, it will face problems. Nationalisation has mostly been used to cure companies that are in financial distress, and there are concerns this is what Labour is basing its model on. Labour has said, in its 2018 proposals for nationalising the water industry, that it was looking to use the same legislative tools that were used to nationalise failed bank Northern Rock, which, in the end, saw its shareholders completely wiped out.

The problem is, the companies that Labour is targeting don’t fit that bill – they are healthy, profitable businesses that have raised investment in infrastructure while delivering returns for investors. Labour’s discontent comes from a belief that no-one should be profiting from the provision of crucial public services and that more money could be freed up to reinvest by redirecting the sums currently dished out in dividends each year. It also thinks services should be of a higher standard considering the amount consumers are being charged for their energy and travel, and that the energy firms are unable to truly tackle climate change because they put profits first.

The threat is more immediate for some. The party said “energy distribution and transmission will be brought into public ownership immediately” after it is elected, and water companies are a high priority too. Royal Mail could also be an early target as Labour hopes to use it to launch a new nationalised bank, and investors in the Royal Bank of Scotland should also be alert as Labour has previously said it wants to keep the bank in public ownership. Private companies operating rail services will probably be ousted when existing contracts expire.

Ultimately, we won’t know how far Labour will take its nationalisation pledges until the manifesto is released. However, it would be unsurprising if Labour decided to water-down or soften its approach somewhat. It is ambitious to nationalise one industry, let alone four at the same time. The state of the economy and the public purse also remain uncertain whilst Brexit is up in the air, so Labour may want to avoid over-stretching its spending plans. Either way, don’t expect it to be a quick process as a Labour government would undoubtedly face legal challenges regardless what approach is taken.

The latest polls suggest the chances of the UK having a Labour government on December 13th is highly unlikely. But it is early days in this election and the political picture is more volatile and uncertain than ever. If Labour gains in the polls then investors will feel an urge to flee the usual safety that energy, water, rail and mail stocks usually offer. However, for those that doubt that Labour can win the election or push through such radical plans, any undue selling pressure could present a cheap entry point for investors seeking a bargain or regular dividends – assuming they remain private, that is.