The Social Market Foundation (SMF) released a report yesterday arguing that nationalising the water industry could cost £90bn and lead to a decrease in investment.

The report is in line with others that make similarly dire warnings. The Centre for Policy Studies recently put a figure of £86.5bn. These might seem like huge amounts, but the cost of keeping it private could be much higher.

SMF admit that their figure is only one of a range. Different methodologies will calculate different figures, based on how we value the industry and what costs we think the government would be liable for. The claim that the government would have to pay market rate for the service, for instance, is disputable.

For a hypothetical, let’s allow that the figure is accurate. I want to ask whether this £90bn valuation will end up as a cost to the tax payer, and if so whether it might not still be cheaper than the eventual cost of carrying on as we are. You probably won’t be surprised to learn I think the answer to the first question is “probably not” and the answer to the second is “probably yes”.

Advocates of nationalisation (including myself) say that the cost to the tax payer would be minimal, because interest rates are so low. Initially the government will need to issue debt to transfer ownership. This does not add to the stock of debt in the economy, but moves it from the private sector to government sector. As such it is unlikely even at face value to increase interest rates, so the cost of servicing the debt is unlikely to increase. And at the same time the government gets a big, new asset on its books. That means the government could borrow the money to purchase the services, and then the value derived from the services supplied and assets gained would likely cover the cost.

SMF warn that should the government buy out the 9 companies that currently provide water and sewage treatment in England (Wales, Scotland and Northern Ireland have their own systems) then the current rate of interest at which government can borrow would increase, as the market would be spooked by the spectre of a nationalising government.

The assumption here is that issuing debt to take a service back into public ownership will appear to the markets as fundamentally different from the massive debt that governments have taken on over the past decade, during which rates have remained low. I think this argument is fundamentally unsound. If we consider interest rates over the past ten years, during which time the government engaged in a period of massive spending to bail out banks (effectively partial nationalisation), then drastically cut back government spending, before opening the proverbial taps again, with the programme of quantitative easing, during which the yield on government debt has stubbornly refused to rocket. Despite the fluctuations in government spending, the market remained confident that government debt is a safer bet than the alternatives.

20 yield on government debt