Risks for Investors of Labour’s Proposed Nationalisation Programme for the UK Utilities Sector

Ahead of local elections on 03 May 2018, investors and funders should be aware - nationalisation of the UK Utilities sector is back on the political agenda. What is planned, how does this affect you and what should you do?

Ahead of local elections on 03 May 2018, investors and funders should be aware - nationalisation of the UK Utilities Sector is back on the political agenda. What is planned, how does this affect you and what should you do?

The Labour Party’s 2017 General Election manifesto pledged that, if elected to form the next Government, a wide-ranging nationalisation programme would form a key pillar of its economic agenda. Labour pledged to “bring key utilities back into public ownership”, promising to nationalise energy transmission and distribution networks, the entire English water system, private rail companies, as well as reversing the privatisation of Royal Mail and targeting PFI contracts. Whilst Labour has provided scarce details on its implementation proposals and costings, it is clear that the sums involved could be quite staggering. Think Tanks have estimated costs around £176bn - equivalent to 10% of UK National Debt - and on top of this will be the responsibility on a future Labour Government to fund future investment of these infrastructure critical utility systems. The water industry investment plans to 2040 propose £100bn more spending. Will a Labour Government fund these plans or will it prefer to divert scarce resources to other sectors which it deems to be of higher priority?

The markets have responded by taking Labour’s pledge, and the prospect of a Labour Government, seriously. In the ten months following the May 2017 General Election, the UK Utilities Price Index fell by nearly 25% (compared to just a 3% drop in the FTSE All Share Index). The results of the local elections next week could trigger a further downward trend in the Utilities share price if Labour makes gains in key Conservative strongholds. This event will be closely watched by Utility investors.

Nationalisation of profitable companies (as opposed to struggling or insolvent companies, as in the aftermath of the 2007/8 financial crisis) is not without precedent - the 1970s saw the nationalisation of successful aerospace and shipbuilding industries. However, our legal frameworks are now different from the 1970s and a nationalisation programme will give rise to far-reaching implications and complex legal models and frameworks. There will be many technical issues to understand once Labour’s implementation proposals are shared as well as many political obstacles to be managed - what will be in or out of scope, timing for implementation, what governance would be created for the new nationalised companies, parity of treatment for different investor classes, how to deal with the many complex finance questions and treatment of bonds, loans, leases and hedging arrangements.

Whilst the future structure of the UK Utilities sector remains unsettled, we can be more confident in predicting (from current Labour messaging) that whatever form a nationalisation programme takes - vesting equity and debt securities in publicly owned companies, revoking operating licences, passing Acts of Parliament, acquiring shares in private companies, other expropriation mechanisms - there is a real risk for current investors that they will not be offered full commercial value in compensation when their investments are taken back into public ownership.

Therefore, current investors should now review their legal and ownership structures and consider the implications of sub-optimal compensation terms. Whilst there may be scope for future legal claims through protections offered by the European Convention on Human Rights, these can’t be relied on with certainty and potential claims could be challenging. Instead, investors should now review whether they would benefit from protections against expropriation enshrined in international bilateral or multi-lateral investment treaties and trade agreements. These benefits would broadly require a Labour Government, amongst other things, to pay compensation that amounts to the genuine value of the investment and to do so promptly. If none apply, then consider if it is possible to restructure the investment, prior to a Labour Government, so as legitimately to fall within them which then significantly de-risks the nationalisation scenario.

The results of local elections on 03 May 2018 will present a key line in the sand against which the likelihood of a Labour Government emerging (and with it, a programme of nationalisation) can be assessed. A Labour victory at the next General Election will have a significant impact on current investments in the UK Utilities sector, as well as on future investment strategies. Taking steps now to understand, and prepare for, the implications of nationalisation is business critical. We will continue to monitor the environment and we encourage investors, funders and corporates to start thinking and planning around the prospect of nationalisation.

Our leading UK Government and energy and infrastructure legal experts, complemented by specialist international disputes and investment treaty experts and market-leading financial services lawyers, can provide guidance on the implications of, and likely challenges to, nationalisation for investors, funders and corporates based in the UK or internationally. Please contact Juliet Reingold to discuss how we can help you.

By Juliet Reingold, Partner, and Michael Deane, Trainee, Energy, Natural Resources and Infrastructure Projects, Simmons & Simmons LLP, London

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.