The increased investment levels during Macquarie’s ownership allowed Thames Water to complete vital capital works needed to improve operational performance.
Securing London’s water supply
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
Ensuring value for money
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
Delivering a fair return for investors
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.
Preparing for the future
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.