== Introduction

Before their election win on 4 July, the Labour Party leaked to the press a “shit list” drawn up by Sue Gray, the Chief of Staff of the Leader of the Opposition, of potential crises that could befall the new government in the near future if they were to be elected.(1) Top of the list, above such headaches as public sector pay negotiations and prison overcrowding, was the collapse of Thames Water, the private provider of drinking water and sewage services for roughly 15 million people in London and the south-east of England. The company, which was privatised along with the rest of the English and Welsh water industry in 1989, is currently owned by a consortium of pension funds, insurance companies, sovereign wealth funds and asset management companies. Over the 35 years since privatisation, Thames Water has passed through the hands of many different owners; perhaps the most important has been Macquarie, an Australian financial services group. Macquarie oversaw the company from 2006 to 2017, a period where debt grew from £4.4bn to £10.5bn, yet roughly £2.7bn in dividends were paid in total to investors.(2) Thames Water now has £18bn in debt which it is struggling to pay interest on and a rapidly deteriorating environmental record. In March it asked Ofwat, the state regulator of the privatised water utilities, to raise bills by 44%, and later by 59%, claiming this is what it would cost to bring its infrastructure up to the required environmental standards and meet its ballooning financing needs.(3) In June, Thames Water released a report warning of a “risk to public safety” from flooding and infection of drinking water if it is not provided with funding to perform infrastructure improvements.(4) In August the credit ratings agency Moody’s downgraded the credit worthiness of Thames Water’s debt, putting it in breach of its licence conditions and moving it closer to nationalisation.

Water nationalisation was included in the 2017 and 2019 Labour Party manifestos under the leadership of Jeremy Corbyn. While that incarnation of the Labour Party is now gone, and the recently announced Independent Water Commission chaired by the former deputy Bank of England governor Sir Jon Cunliffe has explicitly ruled out nationalisation as a general solution to the industry's problems, supporters of the Labour left may hope that one of their policy proposals will be carried out in this case by the hand of fate. It may be a bittersweet victory, as nationalisation (or “nationalisation-lite” if the company is placed into a Special Administration Regime) won’t be carried out in order to “give people a stake in our economy” or improve environmental conditions, but rather to underwrite the debt of a failing utility company to the benefit of global financial capitalists, which will have to be paid by British workers directly through higher bills or indirectly through taxes.

Macquarie, and companies like it, deserve their label of financial “vultures”. It is commonly argued that these firms belong to a particularly predatory or neo-liberal form of capitalism where investors buy out formerly nationalised assets and strip them for a profit, destroying them in the process and saddling the public with the debt.(5) These assets are generally essential pieces of infrastructure such as railways, power grids, or water treatment plants, which are part of “natural monopolies”, where due to the characteristics of the service it is not practicable to have multiple sellers on the market (e.g. it is not realistic to have multiple sets of power grids or water pipes connected to every house). This condition of monopoly then allows the asset owner to extract what is essentially a rent on a service which is resistant to competition and is relatively unaffected by business cycles and economic crisis (people do not massively increase the amount of water they use when things are good, and when things are bad utility bills are the last thing they will cut back on), which can be increased beyond the enterprise profit rate.

However, the Macquarie and Thames Water scandal is not an isolated episode. Their story is one that is intimately connected to the development of global capitalist society over the past 50 years. In fact, it is impossible to understand the history of the last half century without understanding the essential role that entities like Macquarie play in perpetuating capitalist society in conditions of stagnating and decreasing global rates of profit through the restructuring of essential assets like Thames Water. At the same time however, poor conditions in the water industry far predate the “financialisation” of water. Therefore, we review below the evolution of water supply in the UK and trace how it has gone from private ownership to public, and then to public with reorganisation on a wider scale, and then back to private ownership in 1989. All changes have been driven by the problems of profitability which affect the capitalist system as a whole. This tendential fall in profitability can only be reversed by a devaluation of constant capital and rationalising and restructuring industries. The last of which entails speed ups and reduction of the workforce. However, even after such measures profitability tends to fall once more. The privatisation of 1989 represented a massive devaluation of the capital of the water utilities for the capitalists who bought them, though not, of course, for global capitalism as a whole. At privatisation the debts of the water companies were taken over by the state and an injection of state funding was provided. We show how the finance capitalists who finally snapped up the water companies were able to turn them into vast Ponzi schemes with financial engineering in order to massively enrich the financial capitalists involved. All this also evaded the restrictions which Ofwat was supposed to enforce. This procedure, of course, has not been limited to utilities like Thames Water but has been implemented on a global scale enabling finance capitalists to suck up the surplus value produced by workers worldwide, and appropriating it for financial capital. The machinations of the banks and other finance capitalists have been underwritten by the state. The present problems have been precipitated by the rise in interest rates which have exposed fractures in the supposedly “brilliant financial engineering” by the likes of Thames Water’s owners. As such it is also worth putting into context how the world of “asset management” has both radically shaken things up, yet also allowed the centuries-long capitalist management of water resources within the Thames Valley to continue unabated.

== The Management of Water

In the early history of London water abstraction for cooking, cleaning, and washing happened mainly by drawing water from shallow wells located in public places and private residences or directly from the River Thames. Small conduits and wooden or lead pipes were also installed at public expense to bring fresh water to public cisterns in the centre of the city from the 13th century. Human waste, or “night soil” as it was euphemistically known, was collected by private contractors and sold for a profit to farmers in the surrounding countryside. Thus, there was no pressing need for a general sewer system for transporting all waste that connected to the river at a faraway location downstream of the city, what we would recognise as a “wastewater system”. The relatively low density of population meant that pollution was at a level which was not overtly offensive to city-dwellers (i.e. through smell, sight or taste; the responsibility of microorganisms for waterborne diseases was not widely accepted until the mid to late 19th century after Dr John Snow’s work during the 1854 cholera outbreak in London). Large-scale and privately organised supply of water began in the 16th and 17th century with the enterprise of the Dutch engineer Peter Morris, who constructed a pumping station powered by a water wheel in the northernmost arch of London Bridge to pump Thames water to various residences in the City of London, and Hugh Middleton, whose New River was an elaborate scheme constructed between 1609 to 1613 to bring clean water directly from the unpolluted springs of the River Lea in Hertfordshire via aqueducts to the City of London. The importance of this undertaking to the economic life of the city can be seen in that in 1695, the three largest companies in London were the East India Company, the Bank of England, and the New River Company.(6)

During the late 18th and early 19th century, the enclosures of the common lands and a pronounced fall in agricultural wages(7) led to a swelling of the capital’s population and an immense strain on its infrastructure. New energy sources and manufacturing processes increased the amount of waste produced and deposited in the Thames and its tributaries.

The growth in the demand for manure from agricultural regions also did not keep up with the growth of its supply within cities and so an increasing amount of human waste was deposited in midden pits (urban cesspools). These were simple underground structures which were little more than holes in the ground lined with thin layers of wood or bricks which were very infrequently cleaned out. As a result, the accumulated waste within these middens seeped into the surrounding groundwater, from which drinking water drawn by shallow wells became contaminated. The introduction of the water closet and proliferation of associated sewers meant that in the early 19th century there were roughly 140 outlets emptying untreated sewage directly into the Thames.(8)

By 1828, nine companies supplied roughly 80% of households with water, all of which apart from the New River Company drew their water from the Thames.(9) Before 1815 there had been some competition between these firms to supply water to customers and as such prices had been kept relatively low. By 1818 the companies north of the Thames agreed not to compete and demarcated for themselves exclusive areas of operation which allowed them to raise their prices to pre-competition levels.(10)

Water quality increasingly became a prominent question in local politics. In 1827 a pamphlet called “The Dolphin” was anonymously distributed to complain about the practices of the Grand Junction Water Company, which was drawing water from within a few yards of its sewage outfall in Westminster. The work was written by John Wright, a collaborator of Sir Francis Burdett, the leader of the Radical party in London politics of the period of the late 18th and early 19th century.

A royal commission of 1828 appointed P.M. Roget, a physician; William Brande, a chemist; and Thomas Telford, the famous civil engineer, to investigate the decline in water quality of the metropolis. The causes given for the deterioration since around 1816 are summarised as being “the increase in industrial effluent, notably from the gas industry, passing into the river; the steam boats, whose constant passage stirred up the river bed; and the greater flow of water through the sewers, which had led to unprecedented pollution of the river”.(11)

The importance of clean water for health was already recognised despite the lack of understanding of the precise mechanism by which diseases spread. Accordingly, calls for reform were widespread across the country. In 1844 Samuel Holme called for the municipalisation of Liverpool’s water supply in the following language: “water is as essential to the health and comfort of mankind as the air we breathe, and when mankind congregate in masses counted only by tens of thousands, it is essential to the public health that is should be most abundant, not doled out to yield 30 per cent interest, but supplied from the public rates and at net cost”.(12)

There was a resistance to reform from local governments in two regards, namely tradition and cost to ratepayers. Waste collection had traditionally been a profitable business carried out by private contractors using carts to physically remove waste then sold to farmers. The pail system, which allowed waste collection to be carried out more efficiently, was hoped to improve sanitation in provincial cities and towns without the need for large and costly sewage systems. Although there were brief episodes of public waste collection where this reduced costs, such as in Edinburgh, where municipalisation of waste collection services initially saved around £2,800 a year(13), more typical was the case of Bolton where the cost per house of public waste collection leaped from 3s 6d to 53s 6d after switching from the public middens to the pail system.(14) Such systems were never tried on a large scale in London where it was clear the size of the metropolis and quantity of waste necessitated larger engineering solutions.

Despite the commission of 1828, legislation to force the London companies to act wasn’t passed for another twenty years. Under the 1852 Act, all London water companies were required to move their water intakes to above Teddington Lock (the tidal limit of the Thames) and to use sand filtration(15) to treat all water being supplied to the public. These did nothing to reduce the raw sewage emptying into the river and did nothing for the large proportion of London’s poor who still collected their water from public pumps drawing from contaminated groundwater. It was estimated at the time that the poor quality of water was the cause of a third of all deaths.(16)

The ineffectiveness of the act and the injustice of the existent system towards the labouring poor of the city were shown two years later during the cholera outbreak of 1854, which claimed 616 lives of people living in the slum area of Soho near the pump at Broad Street(17) which had been built less than a metre away from an old leaking cesspit. The last cholera epidemic in England, which took place in 1866, was centred in the largely working-class East End of the city. The East London Waterworks Company was shown to be responsible for the outbreak through its negligence in its maintenance of a reservoir adjacent to the polluted River Lea.(18) Yet during the time of the cholera outbreak, the board of directors did not see fit during their meetings to even mention the major loss of working-class life.(19) Politicians had good reason to allow this situation to continue as “it was estimated that seventy Members of Parliament in 1851, and eighty-six in 1852, were financially concerned in water companies”.(20) (21)

As the population continued to grow throughout the 19th century and the understanding of public health improved, the demands being placed on the water companies increased. By the 1890s it was widely accepted that the companies were being overwhelmed in their ability to both meet the public health needs of the system for continuous supply of wholesome water and to make a profit at the same time.(22) The setting up of the London County Council (LCC) in 1889, which was the first somewhat representative political body to cover the entire metropolis, created an arena on which the fate of the water companies could be debated. The progressive faction on the LCC, made up of Liberals, Radicals, and Fabians, demanded the immediate municipalisation of the water supply. The Fabians were the most fervent supporters of what they at one point called “communism of water”(23) which they saw as one part of a much larger programme to reform the metropolis by using local government to provide services more cheaply and effectively than private enterprises.(24) The conservatives were naturally against anything that smelt of collectivism or potential increase of the local rates. However, even they could not deny the failures of the companies and the regulations put on them by local government, especially in the light of droughts during the 1890s which radicalised large parts of the London working class against the companies. Water shortages in September 1898 prompted a protest that filled Trafalgar Square with Londoners calling for the elimination of the water companies.(25) After an initial amalgamation in 1902 of the eight surviving private companies, in 1904 the functions of the water utilities were finally taken over by the Metropolitan Water Board (MWB), a public committee appointed by the London County Council, which went on to manage the water supply of London for the next 70 years. The MWB was an independent body made up of local MPs, councillors and former water company directors, who despite party political differences amongst themselves did not make major changes to the way the system was run compared to the privatised system. The Fabians described the act which created the MWB as “plutocratic”. This was because the act compensated the water companies for the loss of their assets with stock in the MWB that paid guaranteed dividends of 3%.(26)

The MWB understood that in order to meet its statutory aims (“to provide adequate water of good quality at an affordable price”), they needed to continually invest, and that this could be done by raising rates up to a certain value (not more than 8.5% of the total value of the premises supplied without ministerial consent) and taking loans from the central government, which were nearly always forthcoming.(27) The experience and memory of pollution and public health crises in the 19th century had taught the bureaucrats that ran the MWB that the provision of clean water was a “social good”, something that was necessary for the functioning of society, and that to a certain extent it cost whatever it cost. In 1920 a parliamentary Committee on the Metropolitan Water Act stated on the potential for cost savings from municipalisation: “Not only has there never been any savings in total cost, [but] the actual expenditures of the [new London-wide water] board have been in excess of the total of the eight undertakings whose properties were taken over. The cost of the water supplies … has risen”.(28) This was far from the promises of the Fabians that municipalisation would mean both an improvement of quality and a lowering of prices.

The designed unaccountability of the various water authorities across the country such as the MWB had unforeseen consequences. The rate of investment in infrastructure was based on simplistic predictions of linear population growth and rates of water usage drawn from previous experience.(29) As such they failed to meet exponentially increasing use of water during the postwar economic boom. As the water authorities were politically unable to increase water bills beyond inflation, it economised by reducing the service it provided. This meant a sharp reduction in water quality across the country during the 60s as large amounts of raw sewage was dumped into rivers, fields and the sea. Recognising the deteriorating environmental situation (their hand was also forced by accession to the European Communities in 1973 which had more stringent environmental regulations) and the public unwillingness to stomach increased water bills at a time of economic uncertainty during the early 1970s, the Heath government introduced the Water Act of 1973, which rationalised the hundreds of different water authorities across the country into a handful of Regional Water Authorities (RWAs) based on river catchments rather than local government areas. The Thames RWA thus became the successor to the MWB.

Beyond administrative efficiencies(30) the major benefit of the Water Authorities was expected to be changes to the sources of finance. Previously for local water authorities, budgets were not ringfenced and so sometimes money originally earmarked for water infrastructure investment was redirected to other ends. The 1973 act placed control of borrowing directly under the central government, which was expected to give the RWAs greater access to credit. The irony of the legislation was that it ended up having the exact opposite effect. Two years earlier Richard Nixon had ended gold convertibility for the US dollar, ending the Bretton Woods system of fixed currencies that had regulated the post-war world economy, during which time large-scale government borrowing was considered to be beneficial for the economy under the Keynesian economic consensus. The 1973 oil crisis (which began three months after the Water Act was given Royal assent) blew the lid off energy prices and sent inflation skyrocketing. As the US raised interest rates in response, borrowing suddenly became much more expensive. By 1976 a combination of balance-of-payment and public deficit crises meant that the UK government had to go to the International Monetary Fund (IMF) to request a $3.9 billion loan (1976 dollars), the largest loan in the IMF’s history at that point. When prime minister James Callaghan said to the Labour Party conference in September of that year that “We used to think that you could spend your way out of a recession (…). I tell you in all candour that that option no longer exists”, increased water infrastructure spending was undoubtedly part of that option that no longer existed.

In an attempt to increase the amount of funding available for the RWAs, the following Conservative government introduced a new act in 1983 which led to two important changes. The first was to allow the RWAs to borrow from private markets, which opened the door to later changes, but was not at the time taken up by many private lenders. The second was to introduce long-run marginal cost pricing for determination of water tariffs, which allowed prices to be slowly raised in anticipation of future investment. This led to a recovery of capital investment, which had plummeted during the mid-70s.

The level of investment was still not sufficient to remove the need for government funding and finally it was decided to fully privatise the industry, following the example of other public utilities such as British Telecom and British Gas. In order to make the industry attractive to private investors, the government wrote off the significant existing debt, made a one-off injection of public funds, and provided extremely agreeable capital tax allowances.(31) Perhaps most importantly, the new companies would have much more power to raise prices. Following privatisation this is exactly what they did. In the 15 years after privatisation, average tariffs rose 35%. However, this was also accompanied by large increases in investment, which finally began to improve the quality of English and Welsh rivers from the dire state they had reached during the 60s and 70s(32) (although this was somewhat helped by the deindustrialisation that occurred during the 1980s).

Despite the bill hikes, the companies were largely not performing financially. In 2001 Yorkshire Water tried to con its customers into supporting a pseudo-municipalisation that would get them off the hook for debts incurred since privatisation which were becoming unsustainable. The international water companies that owned the utilities began to exit the sector as the returns proved to not be as big as they had hoped. Relatively low, yet stable returns however were the exact sort of investments that institutional investors such as pension and investment funds happened to be looking for at the time. They began to purchase the companies on masse and the ghost of nationalisation which was briefly raised at the time was extinguished. From 2006 one of these investors was the massively successful Australian financial company Macquarie, which had a track record of investing in lucrative infrastructure projects and making millionaires of its partners. Underneath the surface however were some very shaky fundamentals. Paradoxically the financial crisis of 2007-08 uncovered the weaknesses which were endemic to the entire financial industry, yet also strengthened the power and influence of asset management companies like Macquarie that promise to provide safe and guaranteed returns to investors. And the techniques that Macquarie used to provide this “easy money” are undeniably behind the current parlous and decrepit state of our water utilities.

== The Management of Assets

Macquarie Bank, which organised the consortium that bought Thames Water in 2006 and remained a part owner and overall asset manager until 2017, is not just any old bank. For starters, it is a rather strange combination of roles. It is part asset manager, part private equity fund, part investment bank, and part hedge fund. Secondly, despite its relatively small size it is incredibly prodigious. Just in the UK it currently owns, or in part owns Southern Water; the M6 toll road; the Silvertown Tunnel, Southampton, Glasgow and Aberdeen Airports; a dozen offshore wind farms, and as of July 2024 the entire British Gas Network. What began in the late 60s as the Australian branch of a small British merchant bank, became the world's largest infrastructure asset manager and invented an entire industry of “infrastructure finance” that has been copied by many others.

Since acquiring a trading bank licence in 1985 and separating from its parent company, Macquarie has grown persistently thanks to its specific knowledge and excellent connections in a niche section of the finance world. Its way of doing finance has become known as the “Macquarie model”. There are three basic elements to this model: buying privatised utilities with monopoly pricing opportunities, borrowing greatly against the assets using a “whole business securitisation” strategy that operates through multiple layers of holding companies for tax avoidance purposes, and then providing enormous dividends to its investors using this debt. Through this model Macquarie turned what had been a boring part of the world of finance into a much more profitable but speculative one.

This was not the case before the post-war boom ended. During the 50s and 60s many American banks, for instance, operated on a 3-6-3 model, that is: borrow at 3%, lend at 6%, and be on the golf course by 3pm. Banks were limited in the amount they could borrow or lend, and in the rates of interest they could pay. Therefore, large mainstream banks were mainly limited to using savers’ deposits to offer simple products like business loans and mortgages. The end of the Bretton Woods sysyem, which was so damaging for the financing of the RWAs as seen above, was ultimately extremely beneficial for banks. The need to prevent inflation from eating away savers’ deposits meant that mainstream banks lobbied central governments hard to allow them to offer higher interest rates. In the ensuing de-regulation of the banking sector that followed in the late 70s and early 80s, banks found themselves with a lot more freedom in their ability to borrow, lend and create novel financial instruments and vehicles. The archetypal financial vehicle of this period was the private equity fund, which is a means by which investors could use large amounts of borrowed money to buy out a publicly listed company which was considered to be “undervalued” (i.e. paying too high wages or investing too much rather than handing out dividends), take it private, sell off loss making parts of the company, and then use profits from these sales to pay off the loans used to purchase the company and keep the remainder for themselves. Central governments tacitly supported the actions of these funds because they saw them as trimming the fat of the economy and making it more efficient. It did not matter that many of these companies were large employers. The lives of hundreds of thousands of people who were fired and made redundant during the 1980s were, as always under capitalism, calculated to be worth less than a rising stock market.

The post-hoc public rationalisation of this strategy by the British government (although it was a worldwide phenomenon) was that the economy would transition from the so-called “socialism” of the 60s and 70s to a “popular capitalism”. On one hand there must be no return to the “incomes policy” strategy begun by Wilson’s government in the mid-60s whereby industry and unions co-operated to keep pay demands and labour militancy controlled as even this low but assured wage growth would cause inflation. On the other hand, workers would now be able to own shares in public companies and take part in the cash free for all happening in the FTSE. That wages could cause inflation yet the dividends from “popular capitalism” could not, tells you something about how seriously the political class took the “democratic” element of their policies. Over the 80s unemployment increased massively and inequality skyrocketed as stock market wealth accrued to the already richest in society. There were some elements of “popular capitalism” that stuck, however. Most prominently of these were institutional investors which managed funds with large numbers of retail investors such as insurance and pension funds.

In the early 90s in Australia Macquarie stumbled on the formula of using elements of the private equity approach not with publicly traded companies, but with formerly nationalised infrastructure. In 1991 Macquarie advised Mission Energy, part of the Californian utility SCECorp, in its acquisition of the majority stake of a coal-fired power station in the Australian state of Victoria from the Labor-run government. The experience convinced Macquarie that there was serious money to be made from the privatisation of public-sector assets. A year later that same government introduced the “Superannuation Guarantee”. This was a reform to the pension system in Australia that made pension contributions mandatory for all employees and employers. From 1992 to 1996 superannuation assets increased from AU$148bn to AU$245.3bn.(33) These pension funds suddenly had massive amounts of funds and needed investment opportunities that matched their liabilities. Infrastructure was a perfect fit. The consistent and predictable cash flows over long periods of time from monopolised utilities could be relied on to pay out pensions in a way that cyclically sensitive assets such as bonds and publicly traded equities from more competitive industries couldn’t.

The long-term horizon meant that Macquarie ended up behaving in different ways than a usual private equity fund. Macquarie holds onto assets for longer than private equity firms do, in order to provide consistent payouts over the long term which it collects fees from, rather than making a quick profit from breaking up companies and selling the parts. These dividends are further increased by borrowing against the assets of the infrastructure.

Using debts to pay dividends may seem an extremely risky strategy, and rightly so. Many critics of Macquarie’s strategy were pointing out, even before the financial crash in 2008, that this resembled a highly speculative strategy which with higher interest rates could very easily morph into what Hyman Minsky called a “Ponzi finance scheme” where debt instead of being used to invest and raise income is being used to pay off interest creating a self-perpetuating doom loop that leads to bankruptcy(34) (while Minsky was describing something very real, that is the ceaseless quest for profit leading to riskier and riskier behaviour, this was not as he considered it, specific to “credit markets” but is rather the entire raison d’etre of capitalist society). These critics were ultimately right, although they wouldn’t be vindicated for almost another 15 years.

But to return to 2006. After the sale of Thames Water to the Macquarie led consortium, a Whole Business Securitisation model was set up in order to issue debt. This worked by setting up several financial vehicles which were separate from the water company and therefore not subject to as strict regulations in terms of levels of debt, etc. Both these companies were then organised under a holding company which was owned directly by Macquarie and the other investors. While Thames Water had agreed with Ofwat a specific amount of money it needed to borrow over a specific amount of time in order to meet infrastructure investment objectives such as reducing sewage overflows or leakages which was included in the calculation of allowable bill increases, the securitisation procedure created a wide range of different financial products with varying amounts and maturity profiles which were sold on the public bond market and which had a total value far larger than the amount assumed to be necessary by Ofwat. Ofwat was aware of this and accepted this excessive increase in debt as part of the price to be paid for accessing private sector money. Ofwat a