PF Global have today published a new report, Public Control, Private Costs? The Trade-offs behind reform of England's water sector.
The report examines the costs and balance-sheet consequences of different models of public control, from full nationalisation to regional systems planning. It finds that changing ownership moves where risks and trade-offs are resolved, but it does not remove the fundamental constraints facing the sector.
Full nationalisation would cost around £105bn, the enterprise value of England's water companies. Lower estimates, ranging from under £15bn to zero, rely on compensating only book equity or bypassing creditor claims, and carry significant legal and economic risks. The report identifies several costs and risks that any reform must confront. These include:
- Transferred debt: Nationalisation would add at least £82bn to public sector net financial liabilities (PSNFL). Even if all industry debt were refinanced at gilt rates, debt interest costs could be as high as £5-6bn a year.
- Investment: The sector needs over £290bn of enhancement investment over the next 25 years, around £12bn a year or close to £500 per household. That is equivalent to 9.5% of education spending and close to a fifth of UK defence spending.
- Fiscal rules: £12bn a year is equivalent to 6% of annual public sector net borrowing, against fiscal headroom that may be as low as £10bn. Unlike a one-off reclassification, recurring borrowing can alter the path of PSNFL in the very year the fiscal rule is tested.
- Cost of capital: A one-notch deterioration in water sector credit quality could add £39.30 a year to household bills in the long run. With contagion to the energy sector, the total rises to £50.
Drawing on precedents including Network Rail's reclassification, Welsh Water's mutualisation and the Thames Water restructuring, the report tests the leading low-cost proposals and sets out how the Cunliffe Review's regional systems planning could increase public control without raising financing costs. The report argues that the status quo is not a credible counterfactual, but that trade-offs between investment, bills, borrowing and risk remain under every model. The task for government is to choose the model in which they are managed most effectively and transparently.
In a foreword to the report, Paul Johnson CBE, Senior Adviser at PF Global says: "The costs of a change of ownership would be substantial. There is little to suggest that the benefits would be great enough to justify those costs."
