Nationalisation as a Response to Failing Public Service Providers: Challenges and Alternatives

There have been multiple examples in recent years of nationalisation being used as a strategy for protecting the functions of failing public service providers. In the UK, at present, there is a demand for the nationalisation of Thames Water, which supplies water to 16 million users but is struggling financially and operationally. Proponents of nationalisation often overlook the complexity of the process, which involves the expropriation of shares and can be an expensive option. The expense arises in part due to the globalised investment context, where bilateral investment treaties (BITs) between various countries require compensation from foreign investors who suffer expropriation. There is wide foreign ownership of Thames Water, as well as many other UK public service suppliers. The practical and legal obstacles to nationalisation may mean that compensation must be paid at full market value, or not far short of it, even where the nationalised company is insolvent or failing. This paper examines the compensation frameworks applicable to the nationalisation of distressed public service providers with foreign ownership, analysing both bilateral investment treaties and the European Convention on Human Rights. Using Thames Water as a detailed case study, we demonstrate that current international investment law standards, which were developed for the expropriation of profitable enterprises, prove ill-suited when applied to the nationalisation of insolvent companies. Requiring “prompt, adequate and effective” compensation at fair market value for failing public service providers, such as utilities, creates perverse outcomes, as the taxpayers are asked to fund both the rescue of failed private ownership and the infrastructure investments that private owners neglected, while the shareholders who presided over the decline receive windfalls from state intervention. We propose an alternative framework based on four graduated responses: (1) enhanced regulatory intervention before failure occurs; (2) the use of upstream insolvency procedures, including restructuring plans; (3) the use of ordinary insolvency procedures of liquidation and administration; and (4) nationalisation as a last resort when market-based solutions are exhausted. Crucially, in this last case, we advocate for compensation to be calculated on a basis that reflects the insolvency of the nationalised entity. This entails valuing expropriated interests at what shareholders and creditors would have received through the insolvency proceedings that nationalisation displaces, which will typically be well below market value, even zero.