Nationalisation and public control: costs, opportunities and trade-offs

Earlier this month, the new Prime Minister Andy Burnham established a public control taskforce to examine how public control across essential services such as housing, water, energy and transport ‘can be utilised to return them to public service, and bring down costs for families’. Before this, in July, the government nationalised British Steel. And in a recent poll, YouGov found that a majority of people in Britain are in favour of public ownership of service providers in many of these sectors, including water, rail, energy and buses.

In this explainer, we set out what greater public control or ownership could look like across these sectors. While the merits and risks of increased public control will vary case by case, we outline some of the key economic considerations that should inform the government’s decisions in this area. We summarise what different versions of public control could mean for the public finances, including how it could affect measures targeted by the fiscal rules.

Types of public control

‘Public control’ can mean a range of things, from regulation of how services are delivered and priced by private companies, through issuing franchises for private companies to operate particular services, through government ownership of a partial stake, to full public ownership (nationalisation). Whereas ownership implies control, control need not imply ownership.

The government already regulates water, energy, transport and housing; the nature of this regulatory intervention varies across industries. Some regulations intervene directly on prices. Ofwat, the water regulator, sets maximum prices that providers can charge customers based on assessed and agreed business plans with water companies. Ofgem, the energy markets regulator, sets the energy price cap, which limits the unit rates and standing charges that energy providers can charge households on standard variable tariffs, based on the costs faced by providers plus an allowance for a small profit margin. Similarly, the government caps the amount by which social rents can increase. Regulation intervenes not only on prices but also on the quality and extent of provision. For example, the Office of Rail and Road can review the closure of railway stations or lines, in some cases requiring rail providers to continue running certain routes, even where they might not generate a profit.

More stringent regulation was already on the previous Labour government’s agenda: a Clean Water Bill was included in the May 2026 King’s Speech, with the aim of ‘cleaning up’ the water industry by overhauling regulation and establishing a new water ombudsman to strengthen consumer protections.1

Another form of public control (building on rather than replacing regulation) is a franchise model in which private companies bid for the right to operate a service, the features of which are specified by the government. This is most common in public transport, where a set of bus or rail routes are bundled together and franchised out. These contracts generally involve the company paying an up-front fee in exchange for collecting a share of revenues and, if applicable, a relevant subsidy for operating, as well as meeting standards of service quality. Bus services in London have been run on a franchise model since 1995, and this model is increasingly being used across Great Britain: Greater Manchester, while Andy Burnham was mayor, launched a franchise system in 2023, and Liverpool City Region, the West Midlands and Wales have announced plans to use similar systems going forward.

A further step in public control is for the public sector to provide services itself. In some cases, such as water in Scotland and Northern Ireland, as well as rail and bus services in Northern Ireland, all provision is by the public sector – i.e. there is full nationalisation. In other sectors, providers with different levels of public control coexist, including in healthcare and education. Within housing, 17% of households in England and Wales rent from a local council or a housing association, with the latter, as we discuss below, on the edge of the public and private sectors.

Rail has seen major changes in the extent of government control over time. In the mid 1990s, British railway passenger services were privatised and a franchise model established. Franchising was the most common method of operating rail services in Great Britain from 1997 until the early 2020s. During the COVID-19 pandemic, more tightly controlled contracts were imposed, and subsequently governments have been progressively returning passenger rail services to publicly owned operators as the previous operators’ franchises expire: the Welsh and Scottish Governments took control of franchises in 2021 and 2022, respectively, and the UK government has been doing the same for the remaining franchises since 2025.2 The Railways Bill currently going through parliament will consolidate the UK government-operated franchises into a single, publicly owned company, Great British Railways. In this case, the overriding aim of greater public control is to produce more integrated and efficient – and therefore cheaper – rail services.

Finally, governments can also take ownership – in part or in full – of companies themselves. Nationalisation has often been a last-resort measure in the last 50 years, but the government has used it a number of times. This happened most recently when the government fully nationalised British Steel in July of this year, and during the 2007–08 financial crisis, when the government took ownership stakes in a number of banks.

Companies in regulated sectors such as water and energy that are in financial distress can be taken into a Special Administration Regime (SAR), a process sometimes described as temporary nationalisation. Under this scheme, the government appoints a professional insolvency practitioner to run a company in the public interest until it can be sold to a new, private owner. Thames Water, a private operator supplying water to around a quarter of England’s population, has been in financial difficulty for some time and could soon be taken into an SAR.

Why increase public control?

There are a number of reasons why the government might want to exert more public control over private companies or even nationalise the provision of a service.

Many industries that the government already tightly regulates and might consider bringing further into public control – including rail, water and energy – rely on networks that require large investments to establish and maintain. These networks cannot realistically be provided by many small providers competing to offer the best product at the lowest price. Economists call this a natural monopoly. This provides an argument for networks such as the rail network or the electricity grid to be under public control (or put another way, it means that the usual benefits of competition do not apply). This natural monopoly argument does not apply to all sectors where public ownership is a feature: the provision of housing has limited network effects and housing is traded or rented between many participants on an open market, so the natural monopoly argument does not apply in the same way there.

When it comes to providing a service using an already-established network, scope for competition may still be limited. This can leave one or a few firms with a dominant market share, pushing up prices for consumers and reducing how much those services are used. This creates a case for government intervention, although there can be disagreement over its form and scope. The government could use regulation, such as by capping prices in an industry to avoid artificially high prices, or could instead use fuller public ownership.

A natural monopoly is one case where public control could promote the efficient provision of services and may lead to lower prices for consumers or higher wages for (more productive) workers.

But the government might also use public control to achieve policy goals other than economic efficiency, and be willing to pay a cost to do so. To secure supply chains, it might want to ensure that domestic production continues even if this would not be profitable. This was the case with British Steel, as its Scunthorpe plant was the only remaining site producing virgin steel in the UK, which the government deemed to be strategically important. The government might also want to increase access to products or services – for example. in remote areas where their provision is loss-making. It might want to control prices as a way of lowering costs for consumers. Or it might want to support the workforce in particular industries, raising pay or employment beyond levels the market would provide.

Public control can also be used as a temporary measure at times of economic disruption. This was the case during the 2007–08 financial crisis when the government took ownership stakes in a number of banks to prevent their collapse and the negative consequences of bank runs.

These various goals might be achieved using different forms of public control, including regulation and full public provision. But they can also often conflict with one another. This is exemplified by a recent finding that privatising Swedish state-owned enterprises led to productivity gains for the firms, but persistent income losses and a higher risk of unemployment for incumbent workers. Where the government has social goals, it is important to note that public control of production or provision is not the only way to achieve them – the government has a range of other tools it could use, including subsidies, taxes and benefits.

What would greater public control mean for the public finances?

The government has not yet announced how or to what extent it would like to exert greater public control over water, energy, transport and housing. Details will be crucial for determining the impact on the public finances.

Here, we discuss the factors that will determine the fiscal impact of increased public control. There can be both an initial cost and a cost (and revenue) from running a service thereafter.

One important issue is that the impact of changes to public control depends on what is defined as ‘public’ and is therefore included within headline measures of the public finances. Answering the technical question of when an organisation starts to count as part of the public sector is less straightforward than it might sound. The Office for National Statistics (ONS) judges whether an entity is under the public sector’s control using indicators such as who has the right to appoint people to the board or other important roles,3 and whether the public sector provides essential financing that comes with restrictive controls. Classification decisions can hinge entirely on the stringency of government regulation, as they did in the decision to classify housing associations as part of the public sector in 2015 and the reversal of this decision in 2017.4

Importantly, this means that when it comes to the fiscal consequences of increased public control, there is no clear dividing line between policies through which government takes a formal ownership stake in a company and more ‘light-touch’ policy options such as stronger regulation or government-backed loans with conditions attached. Options short of full nationalisation, including those where there is no government ownership stake at all, may still act to bring an organisation onto the public sector balance sheet and therefore affect measured fiscal indicators, including performance against the fiscal rules.

Given how consequential this classification can be, the government may be tempted to carefully design measures to increase public control that do not cause the ONS to reclassify what is in the public sector. However, targeting the point of reclassification exactly is risky, as elements of the classification rely on judgement and, more importantly, the classification decision is not the only thing that matters. Statistical classification is necessarily binary: an organisation is either in the public sector or it is not. But fiscal risks are more nuanced. The government’s responsibility for and exposure to risks related to an organisation are not simply switched on or off at the boundary. For example, the government may still consider it necessary to step in to support an organisation that is not classed as being in the public sector if it runs into difficulties, bringing with it real fiscal costs regardless of the original formal classification.

Whatever the classification of an organisation, some interventions to increase public control have up-front costs. These costs can vary widely from case to case – this is true for recent interventions, and for a range of potential interventions that are currently being publicly debated.

For example, when the public rail operator takes control of an expiring rail franchise, the previous private sector operator is not owed compensation. No company changes hands; the previous private sector franchisee is simply no longer contracted to provide the service. The situation is similar when a contract is terminated by the government due to poor performance, or when an operator hands back a franchise before it expires. In all these cases, there is no up-front cost of acquisition or compensation. Notably, the government is only taking the operation of railway services into public hands.5 Trains themselves continue to be leased from (private) rolling-stock companies, which own the trains and are distinct from train operators. This is an example of the fiscal and political importance of up-front costs: Labour explicitly argued in its 2024 pre-election railway plan that it would be fiscally irresponsible to nationalise rolling-stock companies given the high value of assets they own (which implies the required compensation would be high).

When a distressed company is taken into public ownership through insolvency proceedings, which would be the likely route to increased public control for Thames Water, investors are owed ‘appropriate value’ compensation. A company’s financial and regulatory failings, its debt and its assets affect this value. In the case of a Special Administration Regime for Thames Water, some of the close to £20 billion it carries in debt may be written off (we return to the question of how different types of assets and liabilities score on different measures of debt below).

Whilst ‘appropriate value’ compensation for Thames Water may be modest, the up-front cost of compensation could be more significant in other cases. In 2025, the Department for Environment, Food and Rural Affairs estimated that nationalising the whole water sector in England and Wales would require around £100 billion in compensation to existing owners. Others have disputed this figure, however – Ewan McGaughey, a professor of law at King’s College London, argued in a report for the think tank Common Wealth that the compensation due would instead be ‘close to zero’; other estimates fall somewhere in the middle. A key underlying disagreement centres on how to appropriately value the assets owned by the companies, which is fundamentally a legal question. In the case of British Steel, the government judged that it had no remaining commercial value, and hence no compensation is due to the company’s former owner for its nationalisation. But this has yet to be fully determined – the government has said it will appoint an independent third-party valuer, and previous owner Jingye has already threatened to pursue international arbitration over the matter.

But fair compensation is not just a legal question and does not just affect the individual owners. Strong property rights – individuals and firms having the confidence that their property will not be taken away arbitrarily or without fair compensation – are an important foundation of economic activity. If compensation is too low, other investors may fear the risk of nationalisation below fair value in future, and hence be discouraged from investing or owning property in the UK. If, on the other hand, compensation is too high, it wastes government resources. In some cases where public control is a response to a crisis, the expectation of very high compensation from the government if taken over may even weaken incentives for other companies to comply with regulation or manage company finances prudently.

As well as initial costs, there are typically ongoing costs for the public finances associated with greater public provision of services such as water. This includes the cost of maintaining, and perhaps upgrading, water infrastructure. It also includes day-to-day running costs, including staff costs. For example, Thames Water would reportedly need £2.4 billion to keep running until the end of 2027. Similar costs relate to energy or rail networks, or building more social housing. A broad view of public control may consider these running costs – net of income from consumer charges that funds them – part of the fiscal impact of public control.

Where there is a net cost to the public finances, this can be funded like any other fiscal cost: through borrowing, through taxation or through cutting other spending. It is worth noting that costs are not immutable, and proponents of either public or private control often argue that their preferred model will be more successful at cost control. There is no simple and unequivocal answer to whether this is likely to be the case, with different factors pushing in different directions. For example, under private control, the profit motive can provide an incentive to reduce costs, and individual workers and managers may be rewarded more directly through promotions or bonuses within more flexible pay and career structures. Strong regulation or other forms of public control may dampen these forces. On the other hand, a public monopolist may be able to reduce some wasteful spending (e.g. on brand differentiation or bidding for a franchise or government contract), and the public sector is usually able to borrow more cheaply than a private sector firm would.

Public control could also be followed by changes to who pays for services and for the infrastructure underpinning them. Very broadly, the government can choose between whether customers or taxpayers should be facing the costs, and whether this should be based on usage, income or a combination of both. Notably, the government already exercises substantial control over prices using regulation and subsidies in several sectors where private firms provide essential services, so public ownership is not a prerequisite for the government to intervene on pricing. In the case of the energy network, Jarvis, Levell and Upton, in this year’s IFS Green Budget, offer a detailed discussion of the economic merits and drawbacks of funding network costs in the energy system through general public spending or through flat or varying charges to households.

Will the fiscal rules constrain the government’s choices on public control?

With fiscal room for manoeuvre in short supply, it is natural to ask how different forms of increased public control of a service could affect performance against the fiscal rules. Of course, as ever, the fiscal rules can only provide a partial view of the full fiscal impact of interventions to increase public control. As discussed above, some interventions come with up-front fiscal costs, whether these are the cost of taking ownership or because of new regulation leading to an organisation being reclassified as part of the public sector. There can also be ongoing costs – for example, if the government decides to subsidise a loss-making company as part of the public sector. In this section, we examine whether and how the fiscal rules might place a constraint on the public sector taking control of an organisation. Of course, where the costs are low or the government chooses to counterbalance them with cuts to other spending or tax rises, the impacts of increased public control on the fiscal rules may be minimal.

The government currently has two fiscal rules. Both of them target future years in the Office for Budget Responsibility (OBR)’s medium-term forecast, rather than the current year. They require:

• debt to be falling as a share of national income by the third forecast year, currently 2029–30 (the debt rule);
• the current budget to be in balance or surplus from the third forecast year (the borrowing rule).

If an increase in public control entailed a one-off cost in the present (or the very near future), this would not have a large impact on performance against the fiscal rules. Debt would be pushed up, but would not necessarily be falling by less in the year targeted by the debt rule, and borrowing in the target year would only be slightly elevated due to higher debt interest costs. The nature of the debt rule also means that the impact of taking a highly indebted company such as Thames Water into the public sector is not determined by the debt currently on its balance sheet, but by how this debt will evolve in future or, more precisely, how the OBR forecasts it will evolve. A one-off ‘ratcheting up’ of debt would, of course, still affect the public finances – as with any government policy – and the two fiscal rules cannot comprehensively capture the full fiscal impact of increased public control.

The debt rule targets public sector net financial liabilities (PSNFL), a measure that nets off a wide range of financial assets, including assets owned by publicly owned corporations. When the public sector buys a financial asset, the outlay increases PSNFL, but the asset reduces it by an offsetting amount. If a company is brought onto the public sector’s balance sheet, its liabilities push up PSNFL, whereas assets, such as equity in subsidiaries or loans made by the company, reduce PSNFL.

The Labour government has chosen to target PSNFL, rather than the measure of public sector net debt (PSND) targeted by the previous Conservative government. PSND is essentially a cash measure, meaning that it nets off only liquid (cash-like) assets. For either of the measures, it is the type of asset or liability that matters for inclusion, not whether it is held by central government or by a corporation within the public sector.

A debt rule targeting PSNFL does not necessarily constrain the government’s choices on public control any less than a debt rule targeting PSND, for two main reasons. First, and most importantly, PSNFL only nets off financial assets, not physical ones. Second, PSNFL broadens the scope not only of assets, but of liabilities too – for example, deficits of funded company pension schemes are included in PSNFL as a liability.

As an illustration of these issues, consider the water industry. On the assets side, the OBR estimates that close to 90% of the water industry’s assets are physical, including the water mains network, treatment works, reservoirs and other physical water infrastructure.6 On liabilities, the water industry holds significant debt, including some types of liabilities that score on PSNFL but not PSND (such as Thames Water’s pension scheme, which was in deficit when last valued). The OBR estimated that moving the whole water industry into the public sector in 2023–24 might have added £91 billion in liabilities to PSNFL and subtracted only £12 billion in financial assets.

Whichever measure of debt is targeted by the debt rule, both fiscal rules are forward-looking and are little impacted by one-off borrowing, as discussed above. However, for any nationalisation or other increase in public control that led to a reclassification of an organisation into the public sector, the government would also inherit any profit or loss that organisation was making on an ongoing basis, and this would affect its performance against the fiscal rules.

If the newly publicly owned or controlled organisation’s revenues were higher than its costs, this would feed through to lower public sector borrowing. Debt, in turn, would fall by slightly more in each year, making the debt rule easier to meet too. On the other hand, if the organisation was expected to make a loss going forward, the government would be expected to borrow more, and debt would be expected to fall by slightly less (or rise by slightly more). The implications for the current budget balance, and therefore the government’s performance against its borrowing rule, are more nuanced. In many sectors – particularly those in which delivering the service requires infrastructure that is costly to maintain – we might expect many of the ongoing costs to be investment rather than day-to-day running costs. In this case, greater public control could improve the current budget balance even if the overall borrowing picture is worsened, because revenues exceed day-to-day running costs but not total costs. This would improve the government’s performance against its borrowing rule. However, this would not make the overall costs to the public finances of greater public control any less real.

Overall, the effect of greater public control on the fiscal rules depends on the specific case. There are, however, some general points to note: if the change does not cause a reclassification into the public sector, then effects on performance against the fiscal rules are likely to be limited, and would most likely come from decisions that might accompany the change, such as additional subsidies or spending on more regulation. If it does cause a reclassification – for example, if an organisation is taken into full public ownership – then the up-front costs, however large, will usually have a very limited impact on the government’s performance against the fiscal rules, because they are forward-looking. The fiscal rules do recognise ongoing profits and losses. If much of the costs of the organisation taken into the public sector are investment costs, the effects on the borrowing rule, which targets the current budget, will be smaller than if the costs are mainly day-to-day costs, though the effects on the debt rule will be the same.

Summary

Public control raises important economic questions. Which model will provide the strongest incentives to achieve policymakers’ objectives on access, quality, costs and prices? How does the government wish to trade off objectives such as the efficiency of production, employees’ interests and its strategic priorities? How uncertain fiscal costs should be funded is relevant too. But it is important that decisions are not made solely on the basis of the fiscal rules. If the details of statistical classification and the measures used for the fiscal rules become the guide for government decisions on public control, economic outcomes will be poorer for it and the credibility of the fiscal rules will be diminished.

The 2026 edition of the IFS Green Budget is funded by the Nuffield Foundation, Barclays and the Economic and Social Research Council (ESRC) through the Centre for Microeconomic Analysis of Public Policy (CPP). IFS is an independent Research Institute. As with all pieces of work, IFS has full editorial control over its analysis and conclusions.  In addition to providing funding, Barclays authors will write chapters for the 2026 Green Budget, covering topics (the macroeconomic outlook and bond market) where their expertise complements that of IFS.