Utility Week

10 | 17TH - 23RD MAY 2019 | UTILITY WEEK News Inside story T he UK's political system is in disarray – dominated by Brexit and the lack of any consensus to exit the EU as voted for in the 2016 referendum. While the outcome of the present Brexit impasse is difficult to predict, an early gen- eral election should not be discounted, even if any sane member of the Conservative party is unlikely to welcome it, given the Tories' desperately poor opinion poll ratings at present. Neither is the Labour party quite as con- fident as it once was a‡er its poor perfor- mance in the recent local elections. Nonetheless, any watchful investor must recognise that an early general election, for whatever reason, could take place – and it's far from clear what its outcome would be. Indeed, a Labour-led government, perhaps supported by the SNP, is a real possibility. For the UK utilities sector, such an out- come would have major ramifications, and that is something that fund managers are increasingly addressing. Undoubtedly, politi- cal risks are weighing more heavily on the utilities sector, for which the Labour party has some radical proposals. Of course, some other sectors will also be fearful of what an incoming Labour gov- ernment might do. RBS, for instance, as the recipient of an infamous £45.5 billion tax- payer bail out over a decade ago, is vulner- able, especially since the government's stake still exceeds 60 per cent. And the housebuilding sector, whose share prices have boomed partly due to the Help-to-Buy scheme, would be another Labour target, along with the few remaining UK-based railway franchise operators. Alternative destinations For overseas investors, there are many opportunities to avoid the complex political risks currently faced by UK utilities. Conse- quently, overseas fund managers, especially in the US, will look closely at energy and water businesses based elsewhere in Europe. Orsted and Vestas, two leading Danish renewable energy companies, are obvious examples, along with Spain's Iberdrola, A 'smash and grab' renationalisation Current political turmoil could result in a general election, and a Labour government bent on taking utilities back into public ownership. Nigel Hawkins says fund managers need to weigh the risks. Water sector rocked The renationalisation bogeyman is refusing to go away for utilities – and last weekend it got a whole lot worse for water companies, says Suzanne Heneghan. Industry has dubbed it a "smash and grab raid" that would "spell disaster" for customers and shareholders, yet a leaked blueprint for renationalisation could see a future Labour government bring the water sector back into public ownership for a knockdown price. According to the Sunday Times, the internal document reveals that Labour leader Jeremy Corbyn aims to pay up to £24 billion less than the market value of the companies, leading to calls that shareholders, pensioners, and employees could lose up to half the value of any holdings they have in the companies. The political waters had been choppy enough since shadow chancellor John McDonnell unveiled his renationalisa- tion vision at Labour's party conference last September, building on manifesto pledges to bring key utilities back into public ownership and declaring that the water sector would be the first to taste the "biggest extension of economic demo- cratic rights this country has ever seen". Yet despite the warning signs, the weekend news rocked the sector, revealing for the first time the scale of Corbyn's plan. It says Labour will pay compensation of less than £20 billion for water companies, which at conservative market estimates are worth £44 billion, and anywhere up to £90 billion if debt is included. Compensation would be a "political process of negotiation" with shareholders, who along with lenders could see government bonds handed out in return should Labour execute its plans. A party spokesperson said: "Labour will fix this broken system", adding that "bringing the water companies back into public ownership could save households £100 a year on their bills".

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