The railways. Water. Gas. And now broadband. Labour’s plans for nationalising key parts of the British economy take pride of place in the party’s manifesto, and have naturally attracted intense scrutiny. But most responses have focused on headline costs of nationalisation, rather than the effects nationalisation would have on productivity, service quality, and public finances in the long-run.

The Conservatives have claimed that Labour’s spending programme (of which nationalisation would be a major part) would cost £1.2 trillion, piecing together various estimates made by think tanks and industry groups. Unsurprisingly, this calculation has come under attack from Labour, and the argument over these figures will likely continue up to Election Day. And going further, Labour has rejected the premise of costing nationalisation in this way: “taking companies into public ownership is fiscally neutral by international accounting standards when bonds are exchanged for shares”.

Either way, these arguments have distracted attention from the other problems that have to be taken into account when weighing up the costs and benefits of nationalisation. These include knowing:

The scale of the investment that the newly-nationalised industries will need; How far efficiency will be devalued as a management objective in these industries; How disruptive nationalisation will be for staff and labour productivity; How nationalisation might damage the broader trade and investment climate at home and abroad.

1. The scale of investment needed

For each sector facing nationalisation, there is an investment pipeline needed to maintain or improve its assets. Many of the headline figures cited in the debate around the cost of nationalisation have only taken into account the immediate cost of compensating shareholders and what various different compensation formulae might call for.

Labour has committed to a £250 billion Green Transformation Fund over the next decade to tackle the climate emergency and support investment in physical infrastructure. But it is unclear how this maps onto to the investment needs of each newly-nationalised industry — and whether it captures their needs in their entirety. When the costs of maintenance or improvement have been considered at a more granular, industry-specific level, basic errors have been made. In the case of Openreach, the figures had to be corrected before the manifesto costings were published.

Nor is it clear where the funding for this investment will come from. If the industries are run well, with efficiency and productivity prioritised, and without the need to provide dividends or immediate returns to shareholders, then the industries may be able to fund part or even all of their own investment needs going forwards. Going by the track record of previous nationalisations, this is a brave assumption. The need to find new, non-taxpayer-funded sources for such investments was one of the main reasons why these industries were privatised in the first place.

2. Efficiency as a management objective

Why might it be difficult for the newly-nationalised industries to fund their own investment needs? In part this is because of the multiple, sometimes contradictory objectives that the Labour movement and its allies have in advocating nationalisation, many of which will be pursued at the expense of efficiency.

In water, for instance, the Labour Party has committed itself in the manifesto and elsewhere to ending outsourcing, increasing staffing levels, improving pensions, investing in infrastructure (including that needed to mitigate climate change and flooding), and reducing bills.

It is unclear how all this can be achieved without heroic assumptions around the impact of removing shareholder dividends, reducing senior leadership remuneration, and achieving operational efficiencies. Or without an implicit assumption around an increase in central government subsidy to the newly-nationalised sector.

Not every priority is of course achieved in contemporary examples of public ownership. Consider the Parisian water system. Following municipalisation an initial cut in water bills and spike in hiring was also accompanied by an anaemic rate of investment (something like 20 euros per inhabitant per year — a third of the French average).

Adjudicating between these different concerns (and the added matter of profitability and shareholder returns) currently occurs in the context of a structured dialogue between regulators and utilities. This has not always yielded the right balance. But there is, at least, a politically-independent, clearly-defined process for making such decisions and trade-offs — and one that ensures that maintenance and new investment do not fall too far down the priority list (storing up much greater costs for later).

It remains to be seen how these kinds of difficult trade-offs can be resolved and investment safeguarded under Labour’s nebulous “democratic public ownership” model. This model of ownership and management somehow is supposed to empower numerous stakeholders and special interests as decision-makers while ensuring that they cooperate rather than compete. And, at the same time, to make Whitehall step back from direct oversight and management, whilst also ensuring national targets and industrial strategy are followed.

3. Disruptions to people and productivity

Nationalisation would be disruptive for staff in the newly-nationalised industries. Moving into public ownership likely means that the performance management and incentive regimes for all staff would be upended.

For some staff, the experience of becoming state employees — with potential improvements in base rates of pay and pension offering — may be quite attractive. For others, any move to diminish performance as a component of salary and career progression might prove disheartening. As might the underlying loss of clarity over objectives and incentives, alongside the need to spend years adjusting to the change in systems, rather than simply getting on with the management of the organisation.

The nationalised industries thus will run the risk of losing some of their most dynamic and innovative staff to firms and sectors remaining in private hands (compare, for instance, the inability to retain managerial staff after the municipalisation of the Parisian water system). Attracting new talent may be just as difficult. Taken together, the newly-nationalised industries may face a serious decline in labour productivity as a consequence.

The impact on staff in the newly-nationalised sectors should not be the only consideration here. Designing the policies and processes required to move these sectors under state control, withstand any challenges, and put in place effective governance and controls on an ongoing basis will exert more pressure on an already-overburdened civil service. And all this at a time when government departments will also be expected to handle new negotiations with the EU27 on Brexit.

4. A cooler investment climate at home and abroad

A more complete cost-benefit analysis would also need to consider the broader impact to the investment climate within the UK, and the impact to the UK’s trade and foreign relations.

This would likely be limited in a scenario where the government used a relatively uncontroversial compensation formula — or simply took ownership through a gradual process of letting franchises lapse or buying shares on public markets.

However, the use of an ungenerous or contentious compensation formula could measurably decrease domestic and foreign investment in the UK, disrupting the ability of investors to realise or even calculate the value of any putative investments.

And then there is the nexus with Brexit. There is significant investment from companies within the EU27 in UK sectors that may be subject to nationalisation. Indeed, some of this comes from entities which are partially or predominantly owned by the governments of the member states themselves (e.g. Trenitalia).

These governments — on whom Labour is relying to negotiate a transition and future relationship more to its liking — will carefully consider how to protect their interests here. They may insist on including greater forward-looking protections for investors. Particularly troubling for those on the Labour left, the EU governments may not be content relying on investor protections in the ECHR, but may require inclusion of a robust Investor State Dispute Settlement or Investment Court System mechanism. Core parts of Labour’s interventionist economic programme would come under scrutiny from arbitrators (some of whom will be appointed by the EU) with the possibility of steep compensation or even reversal, and limited recourse. Coming to an agreement over this may prove a major roadblock in negotiations.

A fuller picture

A wide-ranging nationalisation programme would constitute a radical reshaping of the British economy. Much of the immediate attention around Labour’s manifesto has naturally focused on the breadth of its nationalisation proposals and continued disputes over the upfront costs of the programme. But there are other thorny issues to consider: before embarking on such an ambitious agenda, any government-in-waiting should consider the full costs and benefits of its proposals, and on whom these will fall.