Is Covid-19 a catalyst for (re)nationalisation? 

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The Treasury’s purse strings seem to be non-existent as the government seeks to keep the country’s economy afloat whilst controlling the spread of the virus. Could this become a permanent feature for some industries – and what would it mean for their pension funds? 
 
As the pandemic has forced the country into lockdown, the government has taken effective control of some companies and could give loans to others which might never have the means to pay them back. At the same time, the public seems to have lost any aversion to state control it may have had. Could this be the beginning of the road to renationalisation for some sectors? 
 

Railways come into focus 

 
Transport plays a crucial role both in reducing the spread of the virus and keeping the economy going. It is therefore not surprising that the government has suspended its contracts with rail operators and is paying them a percentage so they continue to run some of their services despite very low passenger numbers. 
 
The arrangement is in place for six months, but few expect the world to ‘return to normal’ come September, so what does this mean for the future profitability of rail operators? 
 
Running a railway line profitably can be difficult at the best of times, as the associated leasing and network costs are high and margins small. But if public confidence does not return and passenger numbers remain low for some time – perhaps never returning to pre-pandemic levels – this could tip companies into the red permanently, and ultimately spell the end of private ownership. 
 
It is unlikely that the rail franchises that existed before Covid-19 will be sustainable when the emergency support measures come to an end, believes one person familiar with the situation. Some people will be afraid to travel, and others have found new ways of working, while social distancing measures might need to be observed, forcing trains to carry fewer passengers. 
 
The only ways forward from there could be nationalisation – which a Conservative government would likely seek to avoid – or a new shape operating model, where the revenue risk is taken by the government, which would be a continuation of the current position.  
 
So while the Treasury regards the Covid-19 emergency measures for railways as a short-term arrangement now, it might be forced to change its position if profitability dictates otherwise. The need to achieve net zero emissions by 2050 could provide a further push towards public ownership of the railways. 
 
Other sectors are facing similar but slightly different problems. Airlines have also said that social distancing would mean they have to either fly at a loss or ramp up ticket prices, an option that is not open to rail firms in the same way.
 
Bus operators might end up with more lines that are run as a community service rather than for profit, meaning they receive subsidies from local government; and Tata Steel, the operator of the Port Talbot steelworks, has been in the news as it seeks a solution for its Covid-related cash flow issues, including potentially a government loan. The Treasury is engaging with the steel and other sectors about their situations. 
 
What role do pension schemes play in nationalisation candidates?

For the defined benefit schemes of companies in the rail and other sectors, the discussions about nationalisation might not be viewed negatively, as government support would enhance the covenant.

But for the rail sector, the pension scheme itself could be part of the reason why operators are struggling – Stagecoach and Virgin Trains were disqualified from three franchise competitions last year for their unwillingness to underwrite a £6bn scheme deficit, and the latter left the market as a consequence. Some have pointed out that those competing for franchises nowadays are often the national operators of other states.

A review of rail franchising has been delayed because of the current crisis, but some believe it could suggest something like the management contracts currently in place. 

If it were to nationalise railways, the government could subsume the assets of the Railways Pension Scheme under its consolidated fund and show this as a nearly £27bn credit, whilst not having to disclose liabilities as a debt; this is a specialty of public sector accounting and has happened to other schemes. When the government took on the deficit and liabilities of the Royal Mail scheme in 2012 in preparation for the group’s privatisation, it took over the assets but did not have to show the liabilities in its accounts, which under IAS19 were at £44bn in March last year.

This year’s Budget revealed the government is also due to sell the assets of the Bradford & Bingley and Northern Rock AM schemes, as they equally become unfunded central government schemes with liabilities largely invisible to taxpayers. 
 

Is the public mood turning towards state control? 

 
Some believe renationalisation of the railways to be inevitable, particularly as Network Rail, responsible for maintaining tracks, bridges and tunnels, is already publicly owned.
 
“Some of the arguments against fragmentation which led to nationalisation in 1947 are equally valid today,” said Ian Neale, director at policy specialist Aries Insight.
 
He criticised the continued privatisation of public services, saying that “a fairly recent example was the unquestionably disastrous privatisation of the probation service” by former minister for transport Chris Grayling, where out of 10 firms in the sector, eight were rated inadequate in a subsequent review. Neale added that the creeping privatisation of parts of the NHS have also been exposed as problematic.
 
The pandemic, and the public’s support for the NHS, could be a catalyst for people demanding more state involvement, he thinks. “With the appreciation of keyworkers, people have discovered the extent to which we are actually interdependent, which increases the appeal of collective solutions under public control,” he argued, suggesting that even an increase in national insurance contributions would not be opposed given that some previous increases were passed without any issues. 
 
“In the light of current events I think the public is ready to increase funding for the NHS,” he said. However, for anything else, it will depend on what exactly is proposed and how it is presented. Generally, NICs increases tend to be more readily accepted than tax hikes, as “presentationally, ‘national’ and ‘insurance’ are much more comforting than ‘tax’”. 
 
Will we see the renationalisation of some companies in the aftermath of Covid-19? Share your views