At its party conference this week, Labour outlined plans to bring PFI contracts back within control of the government, and reiterated plans for renationalisation of rail, water, energy and Royal Mail. Many people will be shareholders in these companies, either directly or via their pension fund. How will it affect them?
There are two main types of investment that are affected by the plans. The first are infrastructure investment trusts. These are trusts such as 3i Infrastructure, John Laing Infrastructure and HICL Infrastructure. All are multi-billion pound trusts that investors have turned to because they pay a good income and offer reasonable stable capital growth.
These trusts hold PFI assets and would be vulnerable to those assets being taken back under government control. Equally, these infrastructure funds are used widely by pension funds. Labour has said it will swap them for government bonds, but 10-year government bonds currently have an income of 1.4%, compared to 4-6% for these trusts.
Should investors sell out?
The level of compensation is usually written into PFI contracts, so – in spite of their claims to the contrary – any Labour government might not have a choice about how much they pay to take them back.
Analysts Canaccord issued a note saying: “PFI contracts typically document a right for project companies to receive compensation if they are voluntarily terminated by the public sector, and generally this compensation is based on market value.” Investment trust analysts estimate that the compensation could exceed £100bn. Either way, shareholders should be protected. The share prices of these trusts haven’t moved significantly since the announcement.
The utilities sector is the other vulnerable area. Over 690,000 people applied for Royal Mail shares when it floated in 2013 and far more will have exposure to utilities companies, such as Centrica, National Grid or Severn Trent through their pension funds.
Here compensation arrangements are more difficult. Although the Labour Party has said shareholders would be compensated, it has said they won’t necessarily receive the full amount if the company in question has been a ‘poor corporate citizen’. Again, the details are scant, but it means investors may not receive the full current share price on renationalisation.
However, share prices have barely moved with investors believing that, when push comes to shove, the bill will simply be too big for a Labour government with plenty of other spending commitments.