Why was Thames Water allowed into clutches of Australian predator?

During our burning June, the British moved to the coast in record numbers. But how shocking to discover that from Sheerness to Bognor Regis, warning signs to steer clear had appeared on more than a dozen beaches due to sewage spills.

When ownership of the troubled Southern Water, which collects and treats wastewater, was transferred for £1bn to Australian investment bank Macquarie two years ago, the new owner pledged ‘a zero-tolerance mentality for environmental pollution’ and to deliver results for a of the ‘worst performers’ in the water sector.

Admittedly, turning around problematic utilities could take some time, but one could have hoped that by this summer the beaches in the holiday resorts on the southeastern edge of the country would be suitable for bathers.

The mystery is why underwhelming water regulator Ofwat once imagined that the bank and infrastructure company nicknamed the ‘Vampire Kangaroo’ would one day be allowed to take control of a privatized British water company. Macquarie’s history as a custodian of British water resources has been a fiasco.

Macquarie’s management of South East Water, which supplies water to much of the same area, was short-lived but profitable for investors. However, it showed a predilection for complex financial structures. This should have been a huge red flag.

Between 2003 and 2006 it turned its £386m purchase into a £665m sale value, raised £60m in dividends and loaded the balance sheet with £458m in debt. Despite this, Macquarie was allowed to get his hands on the 15 million customers of Thames Water and more recently Southern Water. The Macquarie blueprint of financial engineering at South East Water turned out to be the rehearsal for the looting of Thames Water, which now has a mountain of £14 billion in debt that threatens its independent, free-market future.

One of Macquarie’s great paradoxes is that in a world dominated by American financial giants, it is a great non-American survivor with roots stretching back to investment banking in the City of London.

It began as the Aussie offshoot of the city’s stalwart Hill Samuel, founded in 1832, which crashed in the 1970s after over-expanding its commercial property investments, including the Brighton Marina.

The name Macquarie is derived from the British army officer who was responsible for turning the penal colony of New South Wales into a settlement. The Australian kid has since grown to become the world’s largest infrastructure investor with nearly half a trillion pounds of assets to his name.

Under the leadership of British-born chief executive Shemara Wikramanayake, the company has taken on a green hue. His 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 for Macquarie to become a global investor in wind farms and solar energy. As Macquarie has spread its wings and become a major player in volatile commodities markets, annual income rose to £3.1bn and executives filled their boots. Resources boss Nick O’Kane collected a salary of £30.4 million – better than Wikramanayake, who had to make do with £17.2 million.

But no amount of greenwashing will ever make up for Macquarie’s vandalism at Thames Water. Private equity has wreaked havoc on Britain, from the defenestration of the historic department store chain Debenhams to Blackstone’s exploitation of care home residents in Southern Cross. But no deal has done more harm than Macquarie’s £5.1 billion purchase of Thames Water 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 his grasping stewardship of South East Water made it an unsuitable owner.

This earned me an invitation to meet one of the company’s brash, young Aussie executives at offices in the City, where he then slammed me for not recognizing the company’s genius.

Macquarie’s property set the stage for the destruction of Thames Water’s reputation. It was under his ownership that the streets of London became impassable when Victorian-era pipes leaked. Most worryingly, discharges into the Thames meant that Cambridge and Oxford crews preparing for the Boat Race had to navigate pools of raw sewage.

The worst damage was financial. The introduction of an extreme debt model, organized around the Cayman Island tax haven, was the start of the build-up to the £14bn mountain of debt.

Macquarie spent £11bn, scooped up customer bills, and set out to modernize Victorian pipes. But under his ownership, £2.7bn in dividends were removed and a further £2bn in loans. The pension fund’s deficit soared and the mountain of debt rose from £3.4bn at the time of the takeover to £10.8bn when it sold its last stake a decade later.

Successive Tory governments, pre- and post-Brexit, have adopted the position that the UK should always be open to inward investment, wherever it comes from. Macquarie has ruthlessly exploited this bias and has become the last resort for assets such as Thames Water, the Green Investment Bank and Southern Water.

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