UK's Stock Market and Investors Concern Over Labour’s Renationalisation Plan

  • May 31, 2019 BST
  • Team Kalkine
UK's Stock Market and Investors Concern Over Labour’s Renationalisation Plan

Overturning decades of pro-privatisation public policy, Britain’s opposition Labour Party, as part of a sweeping nationalisation policy, announced radical plans to bring several major British industries into public ownership. The party wants to nationalise some of the key utility companies, including energy and water infrastructure, as it argues the public has been ripped off and poorly served by private firms running vital services. The news sent the share price of utility firms tumbling and had investors fretting over the proposed plan. The proposal has come under heavy criticism from investors as they contend that it could impose unfair losses on shareholders. The party has said that rather than linking compensation with market prices, it would be linked to asset values.

Many of the targeted companies are owned by overseas investors, including sovereign wealth and private equity funds, and the opposition party is yet to disclose the mechanism it proposes to use to compensate the investors. However, in a paper by the opposition party regarding renationalising Britain’s energy network companies, the party said that compensation would be fixed by parliament. People close to the party said compensation could be linked to book value or regulated capital value, with either method leading to pay-out at well below current share prices. The party argues that deduction should consider pension fund deficits, state subsidies since the 1980s and asset stripping since privatisation.

The plan would add billions of debts to the state balance sheet as investor compensation would come from bonds issued by the Treasury, replacing shareholdings with government-backed bonds. If the party follows up on its plan, shareholders will become lenders to the electricity industry and receive annual coupon instead of dividends. Labour also says that the government will be able to cope with this additional liability on the Treasury’s balance sheet as it would buy profitable companies and the interest paid on these bonds would be lower than that paid by a private company owner.

Despite a national election not being due until 2022, the prospect of nationalisation is worrying investors and investors have reacted angrily to the possibility of losses, describing the plans as wrong and extremely unfair. Andrew Rose, chief executive of the Global Infrastructure Investor Association, said that investors must be paid a fair value that reflects market value as it is imperative for the reputation of the country. Moreover, adequate compensation is expected under international law, and some investors are protected by their countries’ treaties with Britain. Last year, some analysts have suggested utility companies to consider redomiciling or restructuring foreign ownership. In the event a Labour government tried to renationalise them, this would offer investors protection under international investment treaties.

Due to Brexit, which has split in the Conservative party and led to policymaking to paralyse, Tories’ ratings have declined, and this has reduced the likelihood of Conservative minority government lasting until 2022, increasing the risks of Labour government in the next elections. The party in its recent document cited the case of Northern Rock for which no payment was made during the financial crises. However, critics claim that when taken into public hands, the company was insolvent, but today’s utility companies are highly profitable. The proposal of renationalisation was made after the water and energy networks were widely criticised for neglecting customer service in favour of executive pay and dividends. However, experts assert that this can be solved by regulation rather than nationalisation. More than public acquisitions, quicker and more immediate remedies are available at a far lesser expense.

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