Investors have slammed plans by Labour to renationalise some of Britain’s key utility companies, saying the proposals could impose unfair losses on shareholders were compensation linked to asset values rather than market prices.
The UK’s main opposition party has yet to spell out in detail the precise mechanism it would use to settle with investors in energy and water companies, many of which are owned by overseas investors including sovereign wealth and private equity funds.
But in a Labour document this month about renationalising Britain’s energy network companies, including National Grid, the party stressed compensation would be fixed by parliament rather than automatically linked to market prices.
People close to Labour said payouts to shareholders could be pegged to book value — defined as assets minus liabilities on a company balance sheet. Alternatively, Labour said compensation could be based on regulated capital value — a measure of a utility’s assets on which watchdogs permit it to earn a rate of return.
Linking payouts to either valuation measure could lead to compensation at well below current share prices.
For instance, the stock market listed Severn Trent currently has a market capitalisation of £4.6bn. Yet were the water company valued at net assets based on its 2018 balance sheet, that would drop to £994m — a discount of 78 per cent. If it were measured at regulated capital value, and net debt deducted, it would be worth £4bn — or 13 per cent below market price.
For United Utilities, valued at £5.3bn in the stock market, the position is similar. The discounts would be 45 per cent at net assets, and 21 per cent at regulated capital value.
Investors have reacted angrily to the possibility of losses. “Labour’s plans would be bad and extremely unfair,” said one investor in a water company. “Some comments suggest that prices might be below [regulated capital value] or book value, which would be outrageous.”
Andrew Rose, chief executive of the Global Infrastructure Investor Association, a trade body representing institutional investors, also expressed concern at Labour’s plans, saying: “It is incredibly important for the reputation of the UK that investors are compensated on a fair value that should approximate market value.”
Labour proposed renationalising the water and energy networks after they were widely criticised for prioritising dividends and executive pay over customer service. For instance, since being privatised free of debt in 1989, English water companies have run up borrowings of £51bn and paid out dividends of £56bn.
Labour’s plans would bring water and energy utilities back under state control by purchasing the equity and compensating shareholders with government bonds. The party argues that there is nothing to stop parliament setting the level of investor compensation.
Its recent document about energy renationalisation cites the case of Northern Rock, the bank brought under state control during the financial crisis for no payment.
But opponents of Labour’s plans claim this example is questionable because the company was insolvent when taken into public hands. The water and energy utilities, by contrast, are highly profitable.
Professor David Hall, an academic close to Labour, said that while investors had a right to expect compensation, the quantum should reflect the circumstances.
“A key reason to renationalise these companies is that we believe the returns they have been making are excessive,” he added. “It would be highly eccentric of the British taxpayer to base the termination payment to investors on maintaining these excessive returns.”
Basing compensation on net assets or regulated capital value would capture the equity built up in the companies by investors, Prof Hall suggested, and was therefore a reasonable yardstick.
If Labour chose to calculate compensation based on regulated capital value, some investors might receive no payouts because the companies’ liabilities exceed the value of their assets.
Yorkshire Water, for instance, has a regulated capital value of £6.4bn and net debt of £6.4bn, according to its 2018 accounts. If £1.8bn of derivative liabilities were also deducted, any compensation for the company’s investors — which include GIC, a Singaporean-based sovereign wealth fund and FTC, an Australian based pension fund — would be ruled out.
Opponents of Labour’s plans have questioned the party’s assumption that it would be free to compensate investors at sub-market prices.
Dan Neidle, a partner at the law firm Clifford Chance, argued this would go against the grain of custom and would flout Britain’s international legal obligations.
“International law requires fair market value compensation when a business is nationalised,” he said.
The prices paid to investors in past UK nationalisations — from the 1940s through to the 1970s — were all based on market value, although in some cases, such as the cottage hospitals wrapped into the National Health Service in 1948, there were no prior owners to compensate.
Past nationalisations have faced legal challenges. When the UK took the aircraft and shipbuilding industries into state ownership in 1977, investors unsuccessfully challenged the compensation formula even though it was pegged to market prices. They did so under the European Convention on Human Rights, which protects an individual’s right to property.
Lawyers admitted this right cannot be relied on absolutely, given that the convention gives ministers latitude to pursue the “public interest”. However an investor claim could have a stronger chance if the compensation proposals were seen to be arbitrary and to have uneven effects.
Some lawyers said investors can achieve superior protection through bilateral investment treaties negotiated by the EU, and the UK itself.
Many utility companies are owned by overseas investors who could have rights under an investment treaty. For instance, Wessex Water is owned by the Malaysian company, YTL, which benefits from the UK-Malaysia treaty.
But Totis Kotsonis, partner at law firm Eversheds Sutherland, said that although it was “correct in principle” that investors who can rely on bilateral investment treaties would ultimately be in a better position than those who cannot, “ultimately how effective this route would be in offering better protection would depend on the method used for calculating any compensation”.
“My understanding is that most [bilateral investment treaties] do not prescribe any particular method,” he added.
The trade body representing energy network companies said Labour’s plans, if implemented, would hurt pensioners whose retirement funds are invested in its member groups.
“These pension pots, which are sustaining the lives of millions of UK pensioners, are at risk with these proposals,” said David Smith, chief executive of the Energy Networks Association.
Michael Roberts, chief executive of Water UK, the sector’s trade body, also criticised Labour’s plans to renationalise utilities.
“Doing so at less than market value makes a bad idea even worse, by turning away the future wider investment in the UK on which ordinary people depend and at precisely the time when the prospects for our economy are so uncertain,” he said.
