The UK’s Thames Water – infamous for pumping raw sewage into waterways – parent company has now defaulted on its debt.
Why should the failure of a UK water company be of interest to Australia and Australians? First, because it illustrates the failure of many privatisations to improve service and performance. Second, because it is symptomatic of problems throughout the UK not only in the water industry but also other services – from railways to NHS supplies.
…and finally, because at the heart of the problems was the Australian Macquarie Group – dubbed the vampire kangaroo in a nod to Goldman Sachs’s great vampire squid taunt.
The various financial complications in the history of Thames Water need deep forensic accounting knowledge to properly explain. But the problems started when Margaret Thatcher wrote off five billion pounds of debt when she privatised the industry in 1989.
Macquarie bought Thames Water in 2016 and successively sold off slices of the company finally quitting in 2017 with the sale of its final stake for an estimated 1.35 billion pounds.
The original price was 2.8 billion pounds with 2 billion repaid – not by Macquarie and investors – but by new borrowings raised by Thames Water through a Caymans island subsidiary.
During its ownership it withdrew around 1.2 billion pounds in dividends and other shareholders got another 1.5 billion pounds while increasing Thames Water’s debt from 1.6 billion pounds to 10.8 billion pounds.
In 2017 This is Money newsletter reported that Macquarie “piled on debt, sucked out profits and paid virtually no tax” during its ownership.
By the time of the 2017 sale Thames had paid just 100,000 pounds in corporation tax while the pension deficit (pensions for staff vaguely like Australia’s super system) increased to 260 million pounds.
At the time Martin Blaiklock, former utilities director of the European Bank for Reconstruction and Development said “I think customers have been stuffed. They’ve ripped off customers and they’ve got away with it. It’s a shocker.”
Then Labour MP and Work and Pensions Select Committee Chair, Frank Field, urged the Prime Minister “to teach these rip off companies that they are not running one-armed bandits where they always win. They have huge responsibilities to their pension funds, their employees and their shareholders.”
Now, after all this, Thames Water’s current parent company, Kemble, which has nearly 15 billion pounds in debt, has defaulted.
A Macquarie spokesperson, commenting on the developments, told The Guardian (4/24) “We manage debt investments on behalf of long-term institutional investors in a range of infrastructure companies, providing long-term financing for essential infrastructure. Macquarie has not had any control or influence over Thames Water’s operating company since 2017.”
Macquarie also said it had invested more than 11 billion pounds in Thames Water during its ownership.
Yet days after the 2017 sale was announced Thames Water was fined 20.3 million pounds for huge sewage leaks. The Guardian reported the judge as describing the environmental breaches as ‘wicked’ while noting a ‘continual failure to report incidents’ and ‘history of non-compliance.
Great timing is, after all, the key to successful investing.
All in all, according to The Guardian (7/23), Thames Water is now the UK’s most indebted water company rated by Standard & Poors with leverage exceeding 80% – most of it accrued under Macquarie ownership.
Mathew Lawrence, Common Wealth Director and co-author of the book, Owning the Future, said the story of Thames Water was emblematic of wider failures of privatisations and that water companies which were sold off without debt had borrowed a total of 53 billion pounds.
“In real terms bills have increased by around 40% since privatisation, yet investment by the companies by only 15%. The consequences are glaringly evident….. every day raw sewage is discharged into our rivers and seas more than 1000 times on average….In real terms bills have increased by around 40% since privatisation in England and Wales.”
He contrasted this with Scotland which resisted privatisation and has lower prices, greater investment and better water quality.
“What lessons can we draw from this story. That water privatisation has been an unvarnished success in only one way: the enrichment of shareholders and executives,” he said.
And as for the sewage problem The Financial Times has reported that Thames Water and the Government have set up a new and separate company which will construct, own, manage and finance a tunnel to prevent raw sewage from overflowing into the Thames.
Who’ll help pay for the tunnel? Customers with their water bills.
Meanwhile, according to Financial Times research, water companies in England and Wales have paid 2.5 billion pounds in dividends and added 8.2 billion pounds to their net debt since 2021.
Australia has had mixed results with privatisations although nothing on this scale – except perhaps for the ruination of that once great airline – Qantas.