The Royal Mail may join a long list of privatised utilities and infrastructure companies sold off to foreign investors. Almost all of the electricity and gas industries are in foreign hands, including nuclear. Look closely at the private equity and the share registers of the remaining listed companies across the utilities, and foreign investors overwhelmingly dominate. Thames Water does have the UK pension fund, USS, but the rest of its investors are mainly Canadians or from the Middle East.
When it comes to the nationalised utilities, like Network Rail, parts of the future nuclear industry and perhaps even some water companies in due course, the borrowing required in the public sector comes from foreigners too. They are the buyers of the government bonds, and these are the means for funding and financing the utilities’ investments.
In the UK this is probably inevitable, but not perhaps for the reasons most imagine. Two key features of the UK economy dictate the need to date to sell off the family silver to foreign buyers. The first is the persistent balance of payments current-account deficits, as imports exceed exports. Since the balance of payments has to balance, there has to be a capital inflow to the UK to effectively lend UK citizens the money to pay for living beyond their means. Importing more than is exported is not a free lunch. The crown jewels of the utilities are the easiest assets to back this deficit, though much of UK industry has had to be sold off to bridge this gap. With an element of government guarantees, in a world where interest rates have been incredibly low, utilities have played the role of higher-yielding quasi-government securities.
The second is just as insidious: the UK citizens not only want to live beyond their means with an excess of imports over exports, but they don’t like saving to provide the funds to finance investment. UK savings are negative net of capital depreciation. This is a truly remarkable and alarming state of affairs. Its consequence is obvious: the source of marginal finance has to be foreign not domestic. There is no net UK source of finance.
Savings are negative for the government, and industry largely operates in the world of dividends = profits, and hence does not reinvest retained earnings as equity. Households do not save enough for their pensions.
Think what this means for the ambitions for net zero and all the investment that both political parties want to see. No wonder Keir Starmer and Rachel Reeves went to Davos in early 2024 to appeal to foreign investors, and in November 2023 Rishi Sunak invited foreign investors to his Hampton Court event. They have no choice.
Does it matter that utilities and infrastructure are in foreign hands?
The reason why all this matters is that, as Reeves and Starmer and Sunak demonstrated, beggars cannot be choosers. They are takers not choosers, and the terms of engagement are one-sided. Foreign investors have the whole world to choose from. To win the competition to attract them to the UK, they have to be offered regulatory stability and a high enough cost of capital. It is no good pulling the plug on Thames Water and screwing down the cost of capital, and then expecting no consequences to follow.
This is why, for all the huff and puff from the regulators, when Thames Water’s investors say that the business is uninvestable, and when they demand caps on fines and a halt to dividend restrictions, Ofwat begins to buckle. Scared of bringing in a special administrator, all sorts of fixes are contemplated. Fear of a flight of foreign capital is sobering.
The position of future governments as “beggars” is considerably worsened by BREXIT. Foreign investors are no longer protected by the European Court of Justice and the European frameworks. The whole point of BREXIT was to gain freedom of manoeuvre to have the sovereignty to change the rules to suit the UK without having to conform to the standard-setting of Brussels. On the one hand, the exercise of that freedom creates opportunities to make the UK more favourable to foreign investors (to be a “Singapore-on-Thames”), but, on the other, also to chop and change the rules much faster and more easily.
BREXIT also exposes the value of the currency. The old days of an interest rate premium for holding UK assets have re-emerged. Real interest rates are higher and likely to stay higher to limit the drag of the process of 100 years of devaluations. Outside the euro, this was always a risk; outside the internal market, the risk is all the greater. Sterling only strengthens when investors bank on the UK paying an interest rate premium, as is happening now.
Where this leaves the UK utilities
The result of foreign ownership and reliance on foreign finance is that the UK finds itself in a remarkably exposed position. UK workers work for foreign-owned companies, and the dividends flow overseas. A Marxist might say that UK workers are becoming the proletariat for foreign capitalists. Those dividends are based on a cost of capital high enough to keep the foreign-owned companies interested, and that is reflected in the bills that UK citizens pay.
Take the net zero energy programme. Most of the companies doing this are foreign-owned. They rely on foreign capital for investment. Worse still, the supply chain of the materials for the wind and solar panels and batteries is mostly foreign too. Foreign-owned companies rely on foreign finance to buy foreign supply chain materials. Nationalisation would change very little of this, except to swap foreign purchase of government bonds (and the associated guarantees that taxpayers and consumers will underpin them) for dividends. The cost of capital, payable to foreign owners of equity or bonds, does not go away.
Should the government step in?
Most developed countries would not tolerate this ownership structure. They would see sovereignty and ownership of the core utilities as synonymous. At privatisation, the government sought golden shares to control takeovers. It is true that the EU acted against these, but there is a world of difference between EU member states’ investors owning utilities in other member states, and investment from outside. Now every other country is a foreigner.
Those golden shares are mostly gone. The assumption in the UK has been that it does not matter who owns UK core infrastructure and utilities, and it is this that let China into Hinkley and the nuclear programme and Huawei into telecoms (and Thames Water and much else too).
This approach is best described as ideological – a belief in the overarching virtue of global capital markets without limits. It can be seen most starkly in the nuclear case. Suppose that China is a potentially hostile state. Suppose it is threatening Taiwan. Suppose the UK’s closest ally is the US. Suppose the US responds strongly to a Taiwanese invasion or more likely a blockade (mimicking what is happening in the Red Sea with the Houthis). In those circumstances, would it really be sensible to have China inside the UK’s nuclear industry, or at the core of our cyber and broadband networks?
A serious ownership and control policy requires a serious policy to increase savings and a serious policy to address the excess of imports over exports. Neither party is remotely willing to address the necessary switch from consumption into savings, and then savings into investment. Neither has a clear trade policy, other than trying to cope with the consequences of the damage done to trade by BREXIT. The voters like living beyond their means. Foreign ownership of the utilities and infrastructure is the obvious consequence.
None of the above is inevitable. A better prospect is defined first by taking back control in the UK of the core infrastructure – most countries control their own core infrastructure. This means that the water, sewerage, transport, energy and fibre networks ought to be British-owned in the main, and under national not foreign control. There should be either explicit government shares or serious national security scrutiny. It means that a national policy of savings is required to deliver the core finance for the investment in these infrastructures and utilities. It means that the net zero transition needs a re-industrialisation of the core supply chains to the UK, again with the matching savings patterns. And it means that there should be a trade policy which provides for a gradual move towards a greater balance, with UK citizens living within their means.
To see how badly it can go wrong, take a look at the takeover proposition for the Royal Mail. Postal delivery to every household and business in the UK is a core service to its citizens and its businesses. It has cross-subsidy at its heart with the common postal charge. Attached to the Royal Mail is a parcels business. The latter is profitable, the former is not. All sorts of guarantees and undertakings can be written in for new foreign owners. But, as was discovered with the takeover of Cadbury’s, these are time-limited and may not be worth the paper they are written on. The point of the Royal Mail universal service obligation (USO) is that it is long term; guarantees and undertakings are short term. If the parcels business is to be sold, then the USO services should be separated out. Better to put them with the post offices (another loss-making social service) into a national framework, rather than try to make them profitable but cross-subsidise the losses.
