The UK's privatized water companies, particularly Thames Water, have largely escaped effective oversight from regulators, an inquiry found. This lack of scrutiny allowed private equity models to leverage companies with significant debt, extract substantial profits, and underinvest in critical infrastructure, leading to environmental issues like extensive raw sewage discharges.
Thames Water, which serves a quarter of the UK, has accumulated approximately $14 billion in debt. A substantial portion of this debt, over $10 billion, was added during its ownership by Macquarie, an Australian bank and infrastructure asset manager. For instance, Macquarie and its investors reportedly saw annual returns between 15.5% and 19% from 2007 to 2017. During this period, $2 billion of the original acquisition debt was repaid to Macquarie via a Cayman Islands subsidiary, financed by new borrowings from Thames Water itself, despite regulator Ofwat's earlier intention to ring-fence such acquisition debt from the regulated entity.
Critics argue that the regulatory framework, particularly how the cost of capital is calculated, has been outmaneuvered by private equity, enabling excessive leverage and reduced investment. This focus on maintaining low water charges, rather than system quality, has incentivized firms to invest less and extract cash faster. For example, Thames Water was fined $20 million in March for dumping 4.2 billion liters of undiluted sewage between 2012 and 2014 and an additional $3.3 million recently for another incident, yet these fines are considered insignificant compared to dividend payments made.
While Macquarie claims Thames Water delivered $12 billion in capital investment during their ownership, analysts like Martin Blaiklock contend that the company was left with an additional $2 billion debt burden for the benefit of Macquarie and its investors. The financing costs for Thames Water are now immense, and this high leverage, coupled with the use of swaps, exposes companies and investors to market risks. Concerns about private equity involvement in the water industry were reportedly raised to ministers as early as 2002 but were kept secret for two decades.
The current ownership structure of Thames Water, involving various investment committees from global entities like Omers and Universities Superannuation Scheme (USS), further complicates effective governance and investment decisions. The ongoing struggle to secure promised capital injections highlights the difficulties of this fragmented ownership model, which critics argue is failing the water companies and their customers.
