Infrastructure
| Sector | Infrastructure |
| Sub-sector | Water |
| Location | United Kingdom |
Macquarie’s ownership of Thames Water has been the subject of widespread media coverage, some of which contains errors and mischaracterisations.
This case study provides an overview of our period of ownership, for further information you can also access the Macquarie and Thames Water factsheet which directly addresses key points and provides a data table drawing on publicly sourced information alongside a letter to stakeholders on the subject.
Rapid industrialisation and population growth during the early 1800s put pressure on the River Thames, with sewage from approximately two million Londoners emptying into the city’s main water source. Following the ‘Great Stink’ of 1858, Londoners invested in the city’s first modern sewerage system and expanded the clean water supply system – installing an extensive network of cast iron mains to connect homes across the city to clean drinking water and sewerage services.
Thames Water was privatised in 1990 after more than a century under public ownership. By this point, the Victorian installations continued to form a core part of London’s water and wastewater network and Thames Water was struggling to keep pace with required investment levels.
In 2006, Macquarie Asset Management led a consortium of long-term infrastructure investors and pension funds to acquire Thames Water from RWE, with Macquarie-managed funds acquiring approximately a 48 per cent ownership interest.
On taking control of the business, it was clear that a material step-up in investment was required. Thames Water’s network of aging pipes was leaking 862 megalitres of water each day, the company scored 22 out of 100 in Ofwat’s (the sector regulator) security of supply index, and more than 1,300 properties were affected by low pressure.1 Thames Water also faced issues with pollution, with its sewage treatment works 95 per cent compliant with regulatory standards.1
To prepare Thames Water for the next chapter in its history, Macquarie and its co-shareholders set in motion a programme to significantly increase investment in the network.
This strategy saw an average of more than £1 billion invested each year between 2006 and 2017 to maintain, upgrade and expand the network. With investment levels almost two-and-a-half times higher than when Thames Water was under public ownership and one-and-a-half times what was achieved following privatisation through the 1990s and early 2000s, the business was able to begin critical upgrades to improve operational performance.2
At the time of Macquarie’s initial investment, Thames Water had also expanded into business lines outside its core focus, including transport maintenance services, real estate and international markets. Macquarie partnered with the company to divest non-core areas of the business – helping management focus on the provision of water and wastewater services to the people of London and the Thames Valley.
During the period that Macquarie-managed funds owned a stake in Thames Water, the company undertook a record level of investment, despite the returns allowed by the sector’s economic regulator Ofwat being reduced.
As a result of this record investment in the network, which was financed with both debt and equity, Thames Water’s regulated asset base more than doubled from approximately £6 billion in 2006 to approximately £13 billion in 2017.2
To fund this investment programme, Thames Water’s debt grew from approximately £6 billion in 2006 to approximately £11 billion in 2017.5 The growth of Thames Water’s debt was proportionate to the growth of the regulated asset base and the regulated company maintained an investment-grade credit rating in excess of the minimum threshold set by Ofwat. Following the Global Financial Crisis, Macquarie supported Thames Water as it reduced the ratio of its debt to the value of its assets.
Outcome
The Victorian mains replacement programme saw some of the network’s oldest and leakiest cast iron mains replaced. At the time of Macquarie’s divestment in 2017, leakage was reduced to 675 megalitres per day. This 22 per cent reduction in leakage was the second-best improvement in the sector over the period.3
This initiative, combined with the construction of the UK’s first desalination plant, resulted in a significant increase in security of supply for Thames Water customers4. Thames Water achieved a rating of 100 (out of 100) in Ofwat’s security of supply index in the year Macquarie divested its final stake.
The compliance of Thames Water’s sewage treatment works increased to 99 per cent and pollution incidents were reduced by approximately 75 per cent over the course of Macquarie’s investment period.1 This improvement saw Thames Water achieve a 3-star (out of 4) environmental performance rating from the UK’s Environment Agency in the year of Macquarie’s divestment.
These improvements were achieved following investment in Thames Water’s sewage treatment capacity, including the expansion of facilities at Beckton to create one of Europe’s largest sewage treatment works5. The delivery of the Lee Tunnel in 2016, the largest capital project in the UK’s privatised water industry, also improved the health of London’s river systems – avoiding more than 16 million tonnes of sewage flowing into the River Thames each year.
With an eye to the future needs of the capital, Macquarie helped set in motion a generational construction programme to build a 25km super sewer. When completed in 2025, the Thames Tideway Tunnel is expected capture up to 39 million tons of untreated sewage that currently flows into the river each year from London’s legacy combined sewer system.6
When pollution events occurred, Macquarie worked with the company to learn from them and implement remedial actions. Following serious pollution incidents in 2013, Macquarie supported Thames Water to reduce pollutions incidents, leading to top quartile performance within two years.1
Despite investment levels per customer being among the highest in the industry, the bills received by Thames Water customers were the third-lowest in England and Wales.7
Drinking water quality was also consistently maintained amongst the best in the industry8 and the number of properties affected by low pressure was reduced to zero.5
As an asset manager, Macquarie invested in Thames Water on behalf of pension funds, insurance companies, and other savers who depend on the income generated from investments and require a return for the risk they took.
Whether looking at the regulated company or the broader group, the dividend yield achieved during Macquarie’s involvement with Thames Water was lower than the listed UK water companies and in line with regulator’s assumptions, with equity investors receiving £1.1 billion from the company in dividends over 11 years. Dividends were reduced as a result of the investment programme undertaken and represented approximately less than 10 per cent of the company’s cashflows.
Macquarie-managed funds achieved a total return of 12-13 per cent per annum, with this rate of return marginally above the regulator’s assumption of 10 per cent and reflecting the outperformance on operational metrics achieved.
Macquarie-managed funds gradually reduced their stake in Thames Water from 2011, with their remaining 26.3 per cent interest divested in 2017 as the funds reached maturity.
Although the investment delivered during Macquarie’s period of involvement with the business was significant and resulted in outperformance on key operational metrics, it was clear sustained investment was needed to maintain the company’s momentum and address the challenges posed by aging infrastructure, a growing population, climate change to water and wastewater network operators across the UK.
average annual investment over 12 years
in leakage rates
customer bills in England and Wales
consistently ranked amongst the industry best
All information current as at 31 March 2019, unless otherwise stated.
Note: The above financial figures relating to Macquarie Asset Management’s investment in Thames Water have been drawn from the Thames Water Utilities Limited, Kemble Water Holdings, and Kemble Water Finance annual reports freely available on Companies House. Kemble Water Holdings is the ultimate holding company for investors in Thames Water and Kemble Water Finance is the financing company for the Kemble Water group of companies.
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