Critics slam Defra’s use of RCV in water nationalisation costing

Defra has published details of how it arrived at the conclusion that nationalising the water industry would cost £100bn. This was in response to criticism that its number derived from a water industry funded 2018 report by the Social Market Foundation which put the cost of nationalisation at £90bn. It was also in reponse to alternative, much lower figures put forward by multiple other parties including the University of Greenwich and Professor Sir Dieter Helm.

Defra said its three central assumptions were: 

• The regulatory capital value (RCV) of the water sector is the closest proxy for the total value of the sector’s debt and equity (£99.3bn in 2024 and £106.7bn in 2025, according to Ofwat data).

• The total cost of nationalisation would reflect the cost of purchasing the equity in companies and the cost of assuming their existing debt liabilities – it rejected the suggestion that debt should not be compensated, "given that water sector creditors could demand compensation immediately, diverting critical funds from our essential public services”.

• It is not appropriate to apply a discount or a premium to RCV, given the significant uncertainties and possible variation between companies.

Critics have taken issue with the use of RCV as an artificial construct – which takes the value of the water industry at the time of privatisation in 1989, adds on the value of investment over 35 years, then adds on inflation – rather than a reflection of true market value.

Cat Hobbs, director of We Own It, said the calculation ignores the £22bn that would be paid out by 2030 in dividends and debt repayments, and “ignores the powers and levers held by government. Parliament can decide on appropriate compensation for nationalisation, weighing up public interest versus shareholder interest. And the government itself creates the regulatory framework for water which decides its market value. If it gets super tough on sewage and bills, the value of these water companies will plummet.”