Why the National Wealth Fund Should Nationalise Thames Water

The National Wealth Fund (NWF) is the UK’s new public development bank, tasked with investing in UK infrastructure and supporting its new industrial policy. Public development banks like NWF are key to driving investment in the UK’s crumbling infrastructure. Unfortunately, its current mandate will not allow it to realise its transformative potential to rebuild the UK. Instead of focusing on ‘crowding-in’ private investors, the National Wealth Fund needs to prioritise public investment that immediately improves the economy and people’s lives, such as financing the nationalisation of Thames Water.

There needs to be new ways of thinking at the National Wealth Fund. In the four years of its existence, NWF’s predecessor, the UK Infrastructure Investment Bank, committed only £4.7bn of the £22bn it was allocated. Something clearly was not working in their investment strategy if they could not find more than £4.7bn worth of infrastructure investment in a country where infrastructure is largely falling apart due to severe underinvestment in recent decades. The UK cannot afford to have more of the same with the new National Wealth . Unfortunately, like the UK Infrastructure Bank before it, the NWF’s private sector investment focus and emphasis on ‘crowding-in’ private investors will prevent it from realising its full potential.

The Problem with ‘Crowding-In’

Parliament has mandated that most investments made by the National Wealth Fund have to ‘crowd-in’ private investors. The idea of using public money to ‘crowd-in’ private investment is that certain investments are too new or risky for private capital to invest. Public money invests first to demonstrate the feasibility of the project or uses a guarantee scheme to lower the risk profile sufficiently for private capital to be enticed into investing, also known as ‘de-risking’.

As private capital continues to expect higher and higher returns, de-risking often becomes a race to the bottom, with public money subsidising the increasing gap between a public project’s likely return and the return needed to entice private capital to invest, with deals often structured for the private capital to capture the lion's share of the upside while the public capital covers the risk. This dynamic is particularly apparent in the UK’s Private Finance Initiative (PFI), where in one case Scottish taxpayers 'will have paid [private companies and bankers] more than £14.8 billion in exchange for assets [schools] worth slightly more than £3 billion.' De-risking often ends up using a significant amount of public money to guarantee a certain rate of return on capital, rather than focusing on delivering the actual project, such as building new schools.

Another issue in its current mandate is that the National Wealth Fund is largely focused on investing in the private sector, with £23.8bn earmarked for investing in the private sector, versus just £4bn for financing government projects. At a time when public capital is decreasing, and private capital is increasing in the UK, this imbalance only accelerates the accumulation of private wealth of the very few, instead of investing in publicly-owned infrastructure that makes everyone’s life better. If the NWF wants to avoid the irrelevance of its predecessor, it should act quickly in the first two years of its existence to demonstrably improve the UK economy in a way that directly impacts ordinary people. It should rebuild the largest water system in the country.

The nationalisation of Thames Water

Thames Water, the largest water company in the UK, is on the brink of entering receivership due to its unsustainable debt load, poor service history, and decaying infrastructure. With coordination, the National Wealth Fund could be there to scoop up the company for a small fraction of its current value once it enters receivership, and lead the process of converting it into a non-profit or nationalised public corporation, as recommended by the recent Parliamentary report on the UK’s water companies. The political benefits would be immediate. Thames Water would go on an NWF-financed building spree, given all the deferred maintenance that has not happened under private ownership. As a result, both the NWF and the Labour Party could take credit for all the jobs created in the process, all while people’s water bills stop rising and service improves.

The public water system in the UK is an enduring reminder of the dangers of putting investor interests ahead of ensuring that a system is functioning properly. As noted in a recent piece on the state of the UK’s privatised water system, 'the grim trilogy of pollution, crumbling infrastructure and ever-higher bills afflict every water company in England and Wales', with the government report on water companies in the UK listing profit extraction from the water system as a main issue driving water companies’ poor performance. As noted in the report, '[UK water companies] need patient, long-term investors who can count on a predictable and stable environment.' That sure sounds like a job for the national infrastructure bank to me.

The UK cannot afford a National Wealth Fund whose hands are tied by arbitrary rules forcing it to work through the private sector to rebuild its infrastructure. Parliament should give the National Wealth Fund the flexibility to invest in opportunities that provide maximum value for the UK economy and people wherever those opportunities are found. By financing the nationalisation of Thames Water, the National Wealth Fund will have an immediate, public impact on people’s lives that will earn it the political capital to take necessary risks in building infrastructure to grow the economy in a way that benefits everyone in the UK.

The views expressed in this post are those of the author and do not necessarily reflect the position of the Atlantic Fellows for Social and Economic Equity programme, the International Inequalities Institute, or the London School of Economics and Political Science.