Macquarie’s grip on global infrastructure

This is an audio transcript of the Behind the Money podcast episode: ‘Macquarie’s grip on global infrastructure’

Topher Forhecz
So probably the hardest-hitting question of the episode, but which water utility do you get your water from? 

Gill Plimmer
I’m with Thames Water, which is the largest privatised water utility in the UK. It services London and the surrounding region and it’s got about 15mn customers. 

Topher Forhecz
This is Gill Plimmer. 

Gill Plimmer
I’m the infrastructure correspondent at the Financial Times. 

Topher Forhecz
Right now Gill has been really busy reporting on the water utilities in the UK. Things aren’t going well.

How has service been for you? Have you noticed anything within your day-to-day when it comes to water? 

Gill Plimmer
I mean, my drinking water supply is OK, but there are definitely a lot of leaks. There’s a lot of burst pipes even up my road. People get their homes flooded with sewage every so often. And then there’s a surge, sort of flooding into the rivers, even on dry days. 

Topher Forhecz
OK. So we can just send this audio to customer service then at Thames, and that’ll take care of it. 

Gill Plimmer
Yeah, exactly. They might cut me off. (Chuckle)

Topher Forhecz
Gill is probably the least of Thames’s problems right now. As you heard, it feels like Thames and really most of the UK water utilities are falling into this unprecedented level of disrepair. In the last few weeks there have been nonstop headlines around these utilities. Things really kicked off in late June when the Thames’s chief executive abruptly left the company. 

Gill Plimmer
Then it emerged essentially that they had asked investors to pump in some money last year, and that’s for 1.5bn. And yet by March this year, they’d only received 500mn. So there’s a lot of concern over the financial stability. And Sky News broke a story that the government was on standby in case it needed to be renationalised. And really, that’s where we still are now. 

Topher Forhecz
Gill says the origins of this crisis date all the way back to the late 1980s. That’s when the UK government decided to privatise its water utilities. 

Gill Plimmer
It’s the only country in the world to fully privatise this water service, that went just sort of wholesale, sold all the water assets to private companies and then taken a fairly hands-off approach to how they’re actually managed. So it’s unusual in that sense, and water is just, like, crucial. 

Topher Forhecz
And once these private companies moved in, the utilities racked up billions in debt. 

Gill Plimmer
And they were privatised with pretty much no debt and given a couple billion pounds to make improvements. And now with the sewage flooding out and the water leakage, it’s just not really clear that all that debt has been used to pay for improvements. 

Topher Forhecz
Instead, it’s shareholders who are seeing big returns. And this model of buying infrastructure, saddling it with debt and paying out returns to shareholders is actually the brainchild of one company — Macquarie. 

Gill Plimmer
Macquarie is a massive Australian bank asset manager, commodities trader, and it's the asset management business that runs the water operations here. And it started off with South East Water and then it moved on to Thames and now owns Southern Water. In a way it represents a model of infrastructure investment that’s become incredibly popular worldwide and it uses private finance to invest in infrastructure and essentially borrows against these stable cash flows that they get from customers. So the beauty of water is they know that everyone has to pay for their water. 

Topher Forhecz
Macquarie is now the largest infrastructure asset manager in the world and its strategy is so popular it’s actually known as the Macquarie model. Gill says investors just love infrastructure. But . . . 

Gill Plimmer
The word investment isn’t quite the word. I mean you put your money in and get returns, but it’s not quite so clear that consumers (chuckle) get the returns that they want. And ultimately it’s backed by government. If Thames Water fails, the water will keep coming out of our taps, the government will move in and all those investors that have made off with a lot of money will be absolutely fine. That’s the thing. It’ll be taxpayers that are on the hook for the bill. 

[MUSIC PLAYING]

Topher Forhecz
I’m Topher Forhecz from the Financial Times, in for Michela Tindera. Today on Behind the Money, it’s been more than 30 years since Macquarie figured out how to turn utilities into lucrative assets. Now, with Thames and other utilities struggling, we explore what happens when private investment collides with a public service.

[MUSIC PLAYING]

Gill, thank you so much for being on the show. 

Gill Plimmer
Thank you. 

Topher Forhecz
So you have these companies that are seemingly not making improvements, taking on a lot of debt, are privatised. And when you pull back and look at who either owns them or has owned them previously, there’s one company that stands out that you’ve written about — Macquarie. What is Macquarie and what is their relationship to these water utilities? 

Gill Plimmer
So Macquarie is the biggest infrastructure investor in the world and they played a big part in UK water because particularly at Thames, you know, when they bought it, it had £3.4bn of debt and by the time it left it had £10.8bn of debt. And that’s part of the reason that Thames Water is in so much trouble today.

They sort of pioneered this whole model called the Macquarie model of borrowing against an existing infrastructure, and they really made the most out of privatisation. They bought, you know, a toll road in the US and then toll roads in Britain and from there they’ve just sort of expanded. So now they own an incredible amount of stuff really. They own gas pipes and broadband and nursing homes and they seem to be expanding into hospitals a little bit here and there. And they’re big on wind farms, all kinds of things. 

Topher Forhecz
Wow. And $590bn of assets under management. 

Gill Plimmer
Yeah, that’s a lot. 

Topher Forhecz
That is a lot. 

Gill Plimmer
It’s hard to get your head round. 

Topher Forhecz
So you wrote that Macquarie has been nicknamed at times the “Vampire Kangaroo”. Why is that? 

Gill Plimmer
So, Macquarie, when it comes to sort of big public sector infrastructure, it uses a standard private equity model where it creates infrastructure funds by raising cash from big investors like pension investment groups, and they provide the equity portion of the funding which is used to buy a particular asset like a water company or power company or telecoms network. And then they borrow the balance from big global banks or private debt funds. And Macquarie gets its income as the sort of manager of all these funds that are invested in the different assets and they get management and performance fees that are tied to the fund’s returns.

Essentially, they can borrow against the stable cash flows that are generated by having crucial, essential public sector infrastructure. It provides the security. So it’s a bit like having a house. 

Topher Forhecz
And where could that model run into trouble? 

Gill Plimmer
Well, it runs into troubles when interest rates start rising and when their company just becomes too indebted and more and more of the customer bill in this case is going towards paying off the debt. And there just isn’t enough to pay for the infrastructure and the maintenance of the infrastructure. 

Topher Forhecz
So, Gill, a lot of this privatisation started in the 1980s and 1990s. Can you talk me through what was happening on the government side that would want to make them privatise these public utilities? 

Gill Plimmer
Sure. Well, essentially, you know, the government under Margaret Thatcher, a conservative in the UK, was keen to privatise assets because they wanted to keep big projects off government balance sheet. And they also believed that privatisation would deliver greater efficiency. Local authorities had been running water assets up ‘til then and they genuinely believed that if they sold these companies to private investors, they would, you know, bring discipline to these companies and raise money from markets, and customers would pay it back at a slower rate through their bills. And it was a sort of user-pays principle which they applied, really, across the board. So transport, which also had been in public hands, was also handed to private companies. And the idea was that you transfer the cost to bill payers rather than taxpayers. 

Topher Forhecz
And so this privatisation that happened in the UK using the Macquarie model, did Macquarie apply that model elsewhere? Where did it go after it started acquiring utilities in the UK? 

Gill Plimmer
It did. I mean it also invested or bought a lot of toll roads, particularly in the US and Canada. But the UK has always been sort of at the forefront of privatisation and it’s probably the most privatised country in the world. And certainly more assets are privatised here than the US, for example. And of course they have set up regulators. There are three in water in the UK, but they really took quite a hands-off approach. 

Topher Forhecz
And do you have a sense of how many other asset managers have really adopted this model since? 

Gill Plimmer
Yeah, I mean, I think it’s caught on massively. And if you look at the figures, I mean, the number of global infrastructure assets under private management is now huge. It’s topped the sort of 1tn mark. And lots of the big, sort of, private equity firms like BlackRock have moved into this market. 

Topher Forhecz
So the Macquarie model, who’s criticising it and what’s their argument for why it’s a problem? 

Gill Plimmer
The number of critics is growing, of course, particularly in Britain, where there are these massive failures over sewage pollution. And essentially, you know, the argument is that the investors are quite distant. They’re funds whose first responsibility is to their shareholders, it’s not to providing water and sewerage services. You know, Macquarie has got into quite a lot of trouble for paying out nearly £3bn in dividends during its ownership of Thames Water and racking up the debt from 3bn to 10bn. 

Topher Forhecz
Also, there’s the argument that basically they’re just letting the system age and not actually investing in it and keeping it, you know, going. 

Gill Plimmer
Yeah. I mean, they would argue, of course. Water UK, which is the industry lobby group, will say we have invested £190bn into water infrastructure since privatisation. But the crucial point there is that all the investment actually comes from customer bills, so it’s not really them putting their hands in their own pockets. And in fact in Macquarie’s case, in the case of Thames Water, it seems not only to have taken out dividends and racked up the debt, but it also seems to have recovered the cost of its initial purchase fairly quickly. 

Topher Forhecz
Has anyone tried to say Macquarie and Thames are just the bad apples in this? 

Gill Plimmer
That was certainly the case. I mean, Thames Water received the biggest fine ever in 2017, it received a £20mn fine for tipping swimming-pool loads of sewage into the Thames River and tributaries. And at the time everyone said, “Oh, it’s such an outlier, you know, Macquarie is the bad one. The rest of us aren’t like that.” And since then it’s really emerged that it’s all the same. And then Southern Water in 2021 received a £90mn fine for tipping sewage into coastal waters and rivers. And again, that was described as borderline deliberate. You know, if you read the court documents, you just find that none of the sewage treatment plants have been maintained. I mean, in some cases, the companies’ workers had literally carted sewage away in trucks from the sewage treatment plant to avoid environmental inspectors. I mean, the scale of the misdoing was incredible, and that’s two companies and then there’s many smaller incidents across the board. 

Topher Forhecz
How do customers feel the effects of an ageing infrastructure system and utilities that are laden with this debt? How do they feel that in their bills? 

Gill Plimmer
Bills rose sort of sharply, I think, in the first couple of decades of the privatisation, and then that’s sort of risen at a rate below the rate of inflation in the past decade or so, very roughly speaking. But now, water companies are asking for bills to be raised quite a lot higher to pay for a whole raft of infrastructure investment that needs to be done. And that’s difficult because people are mad that the investment wasn’t done before.

They’ve been paying for the service for the past, you know, 30 odd years. And they simply haven’t got, received the improvements that they were hoping for. You know, at least one company has asked to raise bills by 40 per cent by the end of the decade. And that’s a huge increase to ask of people when they’re all so mad that, (chuckle) you know, they were angry that so much has been extracted in dividends and CEO pay and fees and so forth, and they just haven’t had the services they wanted. 

Topher Forhecz
So, Gill, really most utilities in the UK are privatised. Do you see any sort of comparable problems in the other services in the UK? Or is the water problem really a standout? 

Gill Plimmer
Well, the water problem is, a) water is just so crucial and it’s very visible. If your beach is closed and you’re on a summer holiday and you can’t swim in it because of sewage, it’s kind of obvious. I mean, there have been troubles with the power networks. I think there was some outages last year or the year before, and there was a regulatory report that sort of found that, you know, lots of the telegraph poles were still wooden, 1950s poles, and there hadn’t been adequate investment in infrastructure. And one of the big companies, which is also in the US, National Grid, is behind on providing connections for solar plants. So, you know, companies often have a 10-year wait to get connection to the grid for this solar power plant. So there are problems in other sectors, too. Yes. 

Topher Forhecz
So what do you think is going to happen? These companies are trying to secure funding. They still have a lot of debt. Interest rates are still high. What do you think is going to happen next? 

Gill Plimmer
It’s really hard to know. I mean, at the moment, the shareholders in Thames have made a commitment to put some money in. And it should be noted that, you know, when they received 500mn in March, this was the first time since privatisation 34 years ago that investors have had to put equity into the business. And they’ve pledged to put more in, but that’s conditional. So we have to see if those stump up and, if they’ve already taken losses, it’s a bit hard to see. I mean that’s a difficult choice for them, isn’t it? It’s like any investor, you know, are they just throwing good money after bad or do they try and keep it going in the hope that ultimately it will come right and they will get back to those stable revenues and dividends and (inaudible)? 

Topher Forhecz
Is there any possibility that the government will seize the utilities? 

Gill Plimmer
I mean, that’s certainly not the way the government is minded. It’s very keen on private sector investment and infrastructure. And in a way, having privatised infrastructure means you’ve got a flatcatcher. They don’t have to take the blame for the failings or the failure to invest in infrastructure. So they’re pretty keen on the current system and there’s no indication that they want to change it. 

Topher Forhecz
Yeah. From the sound of it, it’s like what kind of options do you have, right? Because not to be pessimistic about it, but the nature of private equity is to make things lean and efficient. And it sounds like there’s nothing really outside of this public uproar that would motivate them to go against the philosophy of private equity has always kind of leaned on. 

Gill Plimmer
Yeah, I mean, you know, some people are making the argument that these companies should be listed, which forces greater transparency and shareholders could put their hands in their pockets and may stump up a lot of money and the companies really cut back on things like chief executive pay and invest in water company infrastructure. That is one option, and the other is probably, you know, that they’ll topple over, over the size of their debts and they will end up back in national hands. But it’s very hard to know which way it’ll go. 

Topher Forhecz
So pulling back on to Macquarie, has Macquarie continued to invest in more UK infrastructure? 

Gill Plimmer
It has. Yeah. No, it’s a big buyer of UK infrastructure and has been for the past couple of decades. I think it’s possibly its biggest market outside Australia and that partly reflects the UK’s appetite for private sector investment in infrastructure. 

Topher Forhecz
And what other opportunities are they looking into? 

Gill Plimmer
So Macquarie has really moved into the renewable space and I think that’s where it sees its future. I think it’s one of the largest or the largest wind farm investors in the world and it’s exploring hydrogen technologies and all sorts of other things in that market. 

Topher Forhecz
And what do you think needs to happen so that these new opportunities don’t end up like Thames Water? 

Gill Plimmer
I think there’s a great need for more public transparency, if nothing else. There’s some complicated financial models out there. There’s, you know, all kinds of different ways that essentially are used to provide companies and investors with security, but that costs taxpayers’ money. And you can make arguments for them or against them. But I think what we really do need is more transparency over exactly how these models work and who pays for them. 

[MUSIC PLAYING]

Topher Forhecz
Gill Plimmer, thank you so much for being on the show. 

Gill Plimmer
Thank you. It was interesting to talk to you. 

[MUSIC PLAYING]

Topher Forhecz
Thanks for listening. If you want to learn more about this story, the articles linked in our show notes are all free to read right now. Today’s episode was hosted by me, Topher Forhecz. Michela Tindera will be back next week. Saffeya Ahmed is our producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio.