Why was Thames Water allowed into clutches of Australian predator?

During our blazing June, Britons headed to the coast in record numbers. But how shattering to find that from Sheerness to Bognor Regis warning signs to steer clear had gone up on more than a dozen beaches because of sewage discharges.

When ownership of troubled Southern Water, which collects and treats waste water, was transferred for £1 billion to Australian investment bank Macquarie two years ago its new owner pledged ‘a zero-tolerance mindset to environmental pollution’ and to improve outcomes for one of the ‘worst performers’ in the water sector.

Admittedly, turning around problem utility firms can take time, but one might have hoped that by this summer it would have rendered the beaches in the resorts on the nation’s south-eastern rim fit for bathers.

The mystery is why underwhelming water regulator Ofwat ever imagined the bank and infrastructure firm, which has earned the nickname of the ‘Vampire Kangaroo’, should ever have been allowed to take control of a privatised UK water company again. The history of Macquarie as a custodian of UK water assets has been a fiasco.

Stewardship by Macquarie of South East Water, which supplies water in much of the same area, was short-lived but profitable for investors. However, it demonstrated a liking for complex financial structures. This ought to have been a huge red flag.

Twisted: The history of Macquarie as a custodian of UK water assets has been a fiasco

Between 2003 and 2006 it turned its £386 million purchase into a £665 million sale value, extracting £60 million in dividends and loading the balance sheet with £458 million of debt. In spite of this, Macquarie was allowed to get its hands on the 15 million customers of Thames Water and more recently Southern Water. The Macquarie blueprint of financial engineering at South East Water proved to be its rehearsal for the plundering of Thames Water, which now has a £14 billion debt pile threatening its independent, free market future.

One of the great paradoxes about Macquarie is that in a world dominated by US financial behemoths it is a great non-American survivor with roots dating back to merchant banking in the City of London.

It started as the Aussie offshoot of City stalwart Hill Samuel, founded in 1832, which crashed in the 1970s after over-extending its commercial property investment including the Brighton Marina.

The name Macquarie derives from the British army officer responsible for turning the penal colony of New South Wales into a settlement. The Australian infant has since grown into the world’s biggest infrastructure investor with almost half a trillion pounds of assets under its belt.

Under the stewardship of its British-born chief executive Shemara Wikramanayake the enterprise has taken on a green tint. Its rebirth as a climate change warrior was sparked in 2017 when the Tories decided to dismantle the Green Investment Bank, a LibDem coalition project. It was sold to Macquarie for £2.3 billion after a bitterly contested takeover battle. 

The deal was a prelude to Macquarie becoming a global investor in wind farms and solar energy. As Macquarie has spread its wings becoming a major player in volatile commodity markets annual income soared to £3.1 billion and executives filled their boots. Commodities boss Nick O’Kane collected a pay cheque of £30.4 million – outpacing Wikramanayake, who had to make do with £17.2 million.

But no amount of greenwashing is ever going to make up for the vandalism of Macquarie at Thames Water. Private equity has done enormous amounts of harm to Britain from the defenestration of the historic department store chain Debenhams to the exploitation of care home residents by Blackstone at Southern Cross. But no deal has done more harm than Macquarie’s purchase of Thames Water for £5.1 billion from German utility owner RWE in 2006.

At the time of the deal, as City Editor of the Daily Mail, I warned that Macquarie’s reputation for financial engineering and its grasping stewardship of South East Water made it an unsuitable owner.

British-born: Macquarie chief executive Shemara Wikramanayake

This earned me an invitation to meet one of the firm’s brash, young Aussie executives at offices in the City, where he proceeded to dress me down for not recognising the genius of the enterprise.

The Macquarie ownership set the scene for the destruction of Thames Water’s reputation. It was under its ownership that London’s streets became impassable as Victorian-era pipes sprung leaks. Most alarmingly, discharges on the Thames meant Cambridge and Oxford crews preparing for the Boat Race found themselves navigating around pools of raw sewage.

The worst of the damage was financial. The adoption of an extreme debt model, organised around the Cayman Island tax haven, saw the start of the build-up to the £14 billion debt mountain.

Macquarie did spend £11 billion, ladled on to customer bills, starting to modernise Victorian pipes. But under its ownership £2.7 billion was removed in dividends and a further £2 billion in loans. The pension fund deficit soared and the debt pile swelled from £3.4 billion on acquisition to £10.8 billion when it sold its final stake a decade later.

Successive Tory governments, pre- and post-Brexit, have bought into the thesis that the UK must always be open to inward investment from wherever it comes. Macquarie has exploited this prejudice ruthlessly and become the buyer of last resort for assets such as Thames Water, the Green Investment Bank and Southern Water.

Britain is now paying a heavy price for the failings in Whitehall, Westminster and among regulators to properly understand the risks.

This post first appeared on Dailymail.co.uk