Government officials who tour Coppermills, a vast Thames Water treatment works in north-east London, are left under no illusions about the dire condition of Britain’s infrastructure.
“It’s in a shocking state,” said one official who has visited the 1960s site, which supplies approximately a third of the capital’s population with drinking water and sewage services. “It’s a slow-motion management disaster.”
Thames has publicly admitted that Coppermills is in such poor condition that it could be a “point of failure”, leading to prolonged water supply disruption for more than 500,000 people.
Coppermills is just one corner of a huge, decaying empire that serves 16 million customers across London and the Thames Valley.
Evidence of that decay has become all too frequent: from the rivers clouded with sewage when it rains, and the burst pipes and water mains, to the threatened water shortages when the sun shines. A slow-moving crisis that has engulfed Thames has left it teetering on the brink of a painful restructuring, or even a temporary renationalisation.
Thames has also become a powerful totem of mismanagement, corporate greed and lax regulatory oversight. And for a new Labour government coming to terms with its economic inheritance, Thames is a timebomb that is about to detonate.
New breed of investors
The roots of that decay can be traced back more than two decades. In the early 2000s, as the government prepared to shunt two renationalised companies, Railtrack and British Energy, back into private hands, the message to regulators was clear: play nice and do not put off foreign investors.
It was against this backdrop of light-touch regulation that Macquarie, which started out as a small Australian merchant bank in the 1960s, decided to buy Thames Water in 2006.
Britain’s privatisation wave, kicked off by Margaret Thatcher in the 1980s, was entering a new phase. The early owners were cashing in their lucrative investments, and a new breed of financially savvy investors was circling.
The Macquarie-led consortium outmuscled investment heavyweights – including the gas-rich state of Qatar and Guy Hands’s Terra Firma – to land the £8bn acquisition from German’s RWE.
Macquarie pruned costs ruthlessly. Thames Water lifer Cliff Roney, who had a four-decade career within the company before retiring in 2018, recalls a perceptible shift when it took over from RWE.
“When Macquarie arrived, they presented a glossy presentation to us, promising investment in assets and staff. Within months, it was clear we’d been sold a pup,” he says. “Some important sites needed in case of water shortages were sold off. They were so tight on spending, you could barely order a box of pens. All the skills were contracted out – we had electricians, blacksmiths, window fitters – they were all outsourced under Macquarie.”
Parsimony even extended to the boardroom – although not where pay was concerned. When Martin Baggs left his job running Thames Water in late 2016, he might have expected a lavish celebration, or at least a gold watch. Baggs had spent seven years as chief executive churning out profits and dividends for Macquarie. But in recognition of his service, Baggs and his top team were each presented with a tea towel.
“It had self-portraits drawn by the directors – they didn’t even pay for a designer to create them,” says a former Thames executive. “Macquarie ran a very tight ship: if money didn’t need to be spent, it wasn’t.”
They added: “I’m not saying they’re not the bad guys in this, but they were responsible in the core running of the company. If you needed to buy vital chemicals, you could buy them – you just couldn’t buy any more than was absolutely necessary. It was all very precise. They would not leave any dividends if that could be taken out.”
Hollowed out
But money was flowing, elsewhere. A £656m dividend was extracted in the first year of Macquarie’s stewardship, in 2007, dwarfing the company’s profits of £241m. Thames churned out dividends of more than £200m in each of the seven years which followed.
It carved Thames up into a complex corporate structure, layering debt across multiple tiers of companies. This so-called whole-business securitisation even involved setting up subsidiaries in the Cayman Islands.
The consortium would ultimately take out £2.8bn during Macquarie’s ownership, representing two-fifths of the total £7bn in dividends that Thames Water has paid between 1990 and 2022, according to Guardian analysis. Macquarie said £1.1bn was paid out to all shareholders, with its funds receiving £508m.
Its current owners – which include Canadian pension fund Omers, the UK universities pension fund and a subsidiary of the Abu Dhabi sovereign wealth fund – have not taken a dividend since 2017, although “internal” dividends have been paid to service debts higher up its complex corporate structure.
Thames Water, which was privatised with zero debt, saw its debts swell from £3.4bn in 2006 to £10.8bn in 2017, when Macquarie sold its final stake. The pension position went from a £26.1m surplus in 2008 to a £260m deficit in 2015. “They left Thames in a crumbling state,” says Roney.
From 2004 to 2019, there were “grotesque excesses” of debt amassed at water companies, including Thames, while dividends grew fatter, a senior water industry source said. “It was asset stripping, pure and simple.”
A Macquarie spokesperson said: “Debt increased in line with the company’s asset base, which doubled due to the record £11bn of investment delivered over the period.”
The highest profile Macquarie executive linked to Thames is Martin Stanley, its former head of asset management, whose division oversaw Thames Water transactions. He earned £10m in 2021, the year he stepped down from the role.
Irked by “misconceptions” about utility investors, another Macquarie executive, Martin Bradley, the head of asset management, who oversaw the Thames transactions, wrote to the Financial Times earlier this year arguing that the consortium had kept bills affordable and invested £11bn in network upgrades.
The company has even taken the unusual step of addressing media “mischaracterisations” online.
The Macquarie spokesperson said: “We have had no influence over the decisions taken at Thames Water in the seven years since our managed funds sold their final equity stake. During the 11 years in which our funds were shareholders in Thames Water, we oversaw the largest investment programme in the company’s history and the highest rate of investment per customer in the industry.”
Concerns about underinvestment in the water industry amid the broader challenges of the climate crisis and population growth led to a National Infrastructure Commission report in 2018 which underlined the need for greater drought resilience and leakage reduction. It is still issuing such warnings, saying in 2023 that “a lot more still needs to be done”.
In the aftermath of that report, long-mooted plans for reservoirs finally advanced, including a reservoir to the south-west of Abingdon in Oxfordshire – although it still remains the centre of an intense local tussle.
By the time Macquarie cashed in its stake, work had begun on the much-debated Thames supersewer, a separate project that sits outside Thames Water’s ownership but which will ultimately be paid for by Thames customers.
It was hard to find a corner of British infrastructure free from the bank’s reach. From airports such as Glasgow, Aberdeen and Southampton to the gas pipe network manager Cadent, Macquarie was now deeply embedded in the UK’s critical national infrastructure.
Its link to Cadent would prove handy – insiders say Sir Adrian Montague’s position as Cadent’s chair, and experience dealing with Macquarie, contributed to his appointment as chair of Thames in July last year, parachuted in to handle its turnaround.
But along with those assets, Macquarie has acquired a mixed reputation among financial services professionals. Three current lenders to Thames criticised its approach during its time as a major shareholder at the company, saying its behaviour had reflected poorly on the rest of the investment community.
Outrage grows
In March 2017, Britain’s biggest water company was hit with a huge fine – a precursor of what was to follow.
It was just eight days after Macquarie had sold its final stake in Thames to investment managers controlled by Omers and the Kuwait Investment Authority.
The Environment Agency’s prosecution led to a record £20.3m penalty, imposed after the emergence of huge leaks of untreated sewage into the Thames and its tributaries which had led to serious impacts on residents, farmers and wildlife, killing birds and fish. The incidents, in 2013 and 2014, took place at sewage treatment works at Aylesbury, Didcot, Henley and Little Marlow, and a large sewage pumping station at Littlemore.
“This is a shocking and disgraceful state of affairs,” said Judge Francis Sheridan, delivering the sentence at Aylesbury crown court. “One has to get the message across to the shareholders that the environment is to be treasured and protected, and not poisoned.”
In the four years after Macquarie’s exit, Thames was fined £32.4m for 11 water pollution cases, including £4m for discharging an estimated half a million litres of raw sewage into the Seacourt and Hinksey streams in Oxford.
In 2023, it was fined £3.3m and called “reckless” over a 2017 incident which saw millions of litres of raw sewage enter two rivers near Gatwick airport. That came on top of £12m of penalties for late or badly managed roadworks in London.
The fines were also racking up elsewhere: in 2021, Southern Water was fined a new record of £90m by the Environment Agency for deliberately dumping billions of litres of raw sewage into the seas off north Kent and Hampshire over several years.
Between 2015 and the summer of 2023, there were 59 prosecutions of water companies in England, with fines handed down by the courts of over £150m. As the fines mounted, so did the public outrage, led by a clutch of vociferous campaigners, notably the former lead singer of the Undertones, Feargal Sharkey.
Financial implosion
The political winds started to shift, with the then environment secretary, Michael Gove, saying in 2018 that water companies “have not been acting sufficiently in the public interest.” Some had been “playing the system for the benefit of wealthy managers and owners, at the expense of consumers and the environment”, hiding “behind complex financial structures” to avoid scrutiny, he said. Ultimately, it had allowed “failures to persist for far too long”.
But the wheels of regulation turn slowly. Ofwat’s concerns were building in 2018, 2019 and 2020, according to insiders who were working on issues such as dividends at the time. In 2017, the Cayman subsidiaries were ordered to be shut down.
“By the time Macquarie left, it was abundantly clear that it had ransacked Thames,” a former Ofwat board member told the Guardian. “It might have been after that particular horse had bolted, but Ofwat did take steps to try and stem the tide of dividends.”
But it was ultimately only last year that Ofwat gained new powers to stop the payment of dividends to shareholders if they threatened a water company’s financial resilience.
And despite the catastrophic financial position it left Thames Water in, Macquarie made a shock return to the English water industry in 2021, taking control of troubled Southern Water and injecting £1bn to save it from possible renationalisation. Its surprise comeback came with a warning from the then chair of Ofwat, Jonson Cox, who told Macquarie that “very profound changes” would be required at Southern.
Macquarie said that the regulator had welcomed its investment in struggling Southern Water.
Ofwat faced a worsening conundrum. The water monopolies were so heavily indebted that fines risked further undermining their financial resilience.
By 2021, mounting outrage over sewage discharges had reached a climax. In November of that year the Environment Agency and Ofwat announced separate, parallel investigations into “potential widespread non-compliance at wastewater treatment works”.
Meanwhile, financial problems at Thames were starting to mount. Sarah Bentley, the latest chief executive to promise to turn around the struggling utility, abruptly resigned in June 2023. Before the week was out, it emerged that the government had begun contingency planning for the collapse of Thames, and that Montague would become chair.
Accounts differ on the reasons for Bentley’s departure. Industry sources claim she was frustrated with a lack of available funds to turn around Thames more quickly. Montague told MPs she was “feeling the burdens of office were quite considerable”, before hastily apologising. “Sarah Bentley became known as the Scarlet Pimpernel: she was barely seen and only communicated with most staff through emails and bulletins,” recalls Roney.
Across English and Welsh water companies, fraught negotiations with Ofwat were under way over how much they could increase bills by for their next five-year spending cycle, due to run from 2025 to 2030.
But cash was running out. In July 2023, Thames said it had secured £750m of emergency funding from its shareholders to run to March 2025 and indicated that a further £2.5bn would be needed to cover the five years to 2030.
By December, Thames’s complex financial structure was the source of intense examination in Westminster, and had been described by one MP as an “absolute shambles”.
The arrival in January of Chris Weston, the former British Gas executive who was most recently boss of power generator Aggreko, was a last roll of the dice by its despairing shareholders. The £2.3m-a-year chief executive was “the bolshiest utilities executive they could find,” sources said.
But not everyone is convinced of this: another former colleague says Weston had a reputation for indecision at Centrica, notably when he was running its North American subsidiary Direct Energy. “The joke was Chris was much like the Canadian weather – if you didn’t like his decision, just hang around for half an hour and it will change,” a source recalled.
In March, shareholders dropped a bombshell: they pulled the plug on the first £500m tranche of the £750m committed the prior summer, deeming the company “uninvestable”. Ministers showed little sympathy – Gove called Thames “arrogant”. With no more shareholder cash forthcoming amid the standoff with Ofwat, Thames’s parent company, Kemble, told its creditors in April it would be unable to pay a £190m loan due at the end of that month.
Inside Whitehall, contingency planning for Thames’s failure gathered pace. A team set up inside government to study the Thames situation in 2023, codenamed Project Timber, drafted a blueprint for turning Thames into a publicly owned arm’s-length body. Lenders would be forced to take heavy losses – with the rest of its £15.6bn of debt added to the public purse. Its dire situation was described as a “critical risk” to the country in briefings to the prime minister, Keir Starmer, and chancellor, Rachel Reeves, within days of them taking office.
A Thames Water spokesperson said: “We have set out an ambitious business plan for the next five years, and with consistent leadership and priorities, time and resources, and the appropriate regulatory determination, we will turn around this business and make it perform for all our customers, the environment and our wider stakeholders.”
The special administration regime for water monopolies, hastily drawn up when the industry was privatised in 1989, was updated. The changes now allow companies to enter administration and ultimately be sold as a going concern after their debts are restructured, rather than liquidating the company.
Crucially, the rules have been rewritten to protect taxpayers, ensuring any state support issued would now need to be repaid, before even secured creditors.
The company’s fate now rests on how generous Ofwat is with its first ruling on its spending plans on Thursday. Thames has been lobbying desperately to allow it to pay dividends up to Kemble, increase bills by up to 59% and receive smaller fines, but it is unlikely to receive a warm reception.
A damaging restructuring for investors and lenders – or even temporary renationalisation – looks inevitable. Ofwat’s final view on bills increases will be released in December. Thames, its investors and – quietly – Macquarie will hope it is still in private hands by that point. The 35-year privatisation experiment looks set to culminate in a crisis that the new Labour government will have to clear up.
