Select Committee on Treasury Written Evidence

Memorandum from T Martin Blaiklock, Consultant, Infrastructure & Energy Project Finance


  The Treasury Committee has requested further comment with respect to the Inquiry into Private Equity. I am pleased to provide such comment herewith, particularly with respect to: (a) transparency"; and (b) "market abuse and conflicts of interest in private equity transactions".

  In the first Part of this Inquiry, I provided written evidence focussing on the impact of Private Equity on public services: PFI/PPP and the like. I have noted, however, that to date your Committee has seemingly not examined this area of Private Equity activity. My comments herewith, therefore, complement those made in the context of the Inquiry Part 1.

  Over the last 12 months I have be keeping a particularly close watch on the activities of Thames Water, not least because I am a Thames Water customer, but also because it is one example,—and a good example,—of Private Equity involvement with public services. The case of Thames is significant as it is the UK's largest privatised water utility, serving the Capital and 13 million customers, and also a monopoly service provider!

  Given that most, if not all, your Committee Members use Thames' services at one time or another at Westminster, they may also be interested in this example of Private Equity activity!


  In December 2006, Thames Water, a direct subsidiary of RWE, a quoted European utility, was sold to a consortium controlled by, what can be generically termed, "Private Equity". Just under 50% of the ownership of Thames now comes from Private Equity funds (controlled by Macquarie Bank), the balance from pension funds and the like. Overall, however, Private Equity, in this case, controls the strategic development and management of Thames (ref. Appendix, EV165, this Inquiry Part 1).

  In the structure shown overleaf [source: OFWAT Feb 2003 Consultation Doc], Thames Water Utilities Limited (at the bottom) is the utility licenced by OFWAT. However, Thames Water Utilities Limited is 5 or 6 times removed from the controlling investor group (at the top), of whom a number are based offshore in Luxemburg.

  Is this the "transparent" corporate structure expected of a UK monopoly public service provider??

["MEIF", etc are Macquarie Bank Infrastructure Funds; "Non-Macquarie Investors" represents offshore pension funds, etc].


    —  In June 2007, Thames Water reported (to OFWAT) that in the financial year to 31st March 2007 they recorded a profit after tax of £190.5 million. This was slightly less than the previous year, but not far out of line for the industry.

    —  In June 2007, Thames distributed dividends of £535.3 million to its shareholders for the financial year 2006-07.

    —  The only source of funds to pay such dividends, apart from after tax profits, is the Balance Sheet Capital of Thames Water.

    —  As a result, the recorded reduction in the Capital of Thames, as per the published Accounts, for this period was £310 million (£1,628.5 million minus £1,318.6 million). This represents a reduction in the Capital of Thames of around 20%.

    —  This reduction in Capital has increased the leverage, or indebtedness, of Thames Water from 57% to 72%.

    —  Nevertheless, Thames Water maintains its "investment grade" rating—and, therefore, creditworthiness,—albeit that its rating, along with those of other privatised UK water utilities, has steadily fallen since the early 1990's, reflecting perceived increased financial risks in the sector.

    —  According to recent comment I received from OFWAT on this issue, the exceptional Thames dividend of £535 million represented "a return of equity to shareholders rather than a dividend"!!! Is not a "dividend" a return of shareholders' capital, one might ask?? Such is the world of the Regulators!!!

    —  The above events have arisen just at the time when Thames needs to demonstrate its financial strength, as it is negotiating the financing of the capital expenditure relating to the Thames Tideway Tunnel Project (est value = £2 billion).

  Finally, I should add that I have good reason to believe that the same kind of financial operations can be observed in some, but not necessarily all, of the other UK private water utilities, which have succumbed to ownership by Private Equity in recent times.


  There is no doubt that the introduction of Private Equity-type investment into to privatised UK public services has sharpened up the financial management of such enterprises. However, such Private Equity investment has also:

    (a)  introduced a lack of transparency in the control, governance and, therefore, the accounts of such utilities. Some utilities, such as Thames Water, are effectively owned and controlled offshore, possibly by companies with limited liability and domiciled in tax-havens. Corporate information is, not surprisingly, hard to come by for such Private Equity investments!

    Hence, in the event of operational failure by such utilities, (eg the Seafield spill, Edinburgh, April 2007: Seafield was owned by Thames) it is quite possible that the controlling company and its directors cannot be called to account, notwithstanding OFWAT's Conditions P and F licencing requirements (which in themselves are not watertight: pardon, the pun!);

    (b)  increased the leverage and, thereby, decreased the financial strength of such utilities, at the expense of customers and the security of service; and

    (c)  introduced corporate uncertainty. The investment horizon for Private Equity is traditionally three to five years, which is short for public service utilities, which require long-term capital and financial stability. The only balancing feature has been the increased intervention, as direct investors, by pension funds and life insurance companies,—as principals, not clients,— albeit some are offshore owned and controlled. Such investors have longer time horizons and are ideal investors for such public service utilities.

  Overall, the impact of Private Equity has arguably not been very beneficial to the (private) public service sector, and such investor-types have picked off easy targets against a background of an unsuspecting public. Furthermore, the Regulatory regime may not, on occasion, be robust enough to cope with such developments. It remains to be seen what the long-term impact will be on quality of service, but some other examples, eg BAA, are not encouraging.

December 2007

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