Foreign investment firms, private equity, pension funds and businesses lodged in tax havens own more than 70% of the water industry in England, according to research by the Guardian.
The complex web of ownership is revealed as the public and some politicians increasingly call for the industry to be held to account for sewage dumping, leaks and water shortages. Six water companies are under investigation for potentially illegal activities as pressure grows on the industry to put more money into replacing and restoring crumbling infrastructure to protect both the environment and public health.
More than three decades after the sector was sold off with a promise to the public they would become individual small shareholders or “H2Owners”, control of the water industry has become dominated by overseas investment vehicles, the super-rich, companies in tax havens and pension fund investors. The ownership structure is such that transparency and accountability are limited, according to Dr Kate Bayliss, a research associate with the department of economics at Soas University of London.
International investment funds with large stakes include several household names as well as sovereign wealth funds. For example the Qatar Investment Authority is the third largest shareholder in Severn Trent, with a 4.6% holding, while almost 10% is held by the US investment company BlackRock and its subsidiaries, according to analysis of shareholdings as of October this year.
A subsidiary of the Abu Dhabi Investment Authority has a 9.9% stake in Thames Water, while 8.7% is owned by China, the analysis shows.
The Guardian has tracked more than 100 shareholders of the nine main water and sewerage companies and six smaller firms that serve customers in England. The research reveals at least 72% of the industry is controlled by firms in 17 countries, while UK firms own 10%. Ownership of 82% of the water industry was traced overall.
Most water firms in England are now privately owned. Only three; Severn Trent; Pennon Group, the parent company of South West Water, and United Utilities, are listed on the stock exchange. But their shares are largely owned by the same type of infrastructure funds and private equity firms that own water companies in private hands.
Bayliss has carried out academic research of the industry ownership structures and said: “This is a quite different model to how one might expect a private company to operate. It’s not simply a case of the owner aiming to raise revenue and lower costs and keep the profits. Private equity earnings are more likely to be achieved by restructuring company finances, or financial engineering than productivity improvements…”
“There is a much stronger focus on extracting revenue, rather than the long-term health of a company … It creates risky financial structures. We’ve seen some retail companies collapse with this private equity structure,” she added.
The ownership structure of some water companies was so complex and opaque that it was impossible to know exactly who owned them, said Bayliss. “Is it possible to work out what funds are flowing where? Some fund managers I’ve spoken have told me: ‘You’ll never get it. Unless you are an insider, you just can’t work it out.’”
By country the US has the strongest foothold in English water companies, with investment firms owning nearly 17% overall. Canadian and Australian companies are the second and third biggest overall investors in English water.
BlackRock has stakes in Pennon, Severn Trent, United Utilities and Bristol Water. Other US private equity firms also have footholds in the English water industry. Lazard Asset Management and the Vanguard Group both hold shares in Pennon, Severn Trent and United Utilities.
Two Canadian pension funds, Ontario Municipal Employees Retirement System and Canada Pension Plan, own a third of Thames and Anglian Water respectively.
Macquarie, an Australian investment firm, moved in to shore up Southern Water last year with a £1bn injection after the company was fined £90m for dumping billions of litres of raw sewage into coastal waters off Kent and Hampshire. The fine came after what the judge said was a history of criminality for previous and persistent pollution of the environment.
Macquarie, which reported half-yearly profits of more than £1.3bn in November, owns 62% of Southern. Another 15% of the water company is controlled by the US investment firm JP Morgan Asset Management.
Another Australian investment firm, IFM Global Infrastructure Fund, has a 20% stake in Anglian Water, whose parent company, Anglian Water Group, is registered in the tax haven of Jersey.
Overall Australian investment companies control 11% of English water.
At least a fifth of the industry is owned by corporations based in Asia. Northumbrian Water, which supplies 2.7 million people in north-east England, is ultimately owned by the Cayman Islands-registered CK Hutchison Holdings Limited, the business empire of Li Ka-shing, Hong Kong’s richest individual.
This summer the CK Group sold a 25% stake in Northumbrian to the New York-listed private equity firm KKR for £867m.
In Yorkshire the water provided to homes and businesses, and the wastewater treatment, is owned by a consortium of private investment groups based in Singapore, the US and Germany as well as an Australian pension fund. They own Yorkshire Water’s parent company, Kelda Group, which is based in Jersey. The company is registered in the UK for tax purposes.
Ash Smith, a co-founder of the campaign group Windrush Against Sewage Pollution who has investigated water companies for several years, said: “The smell of privatisation and weak regulation reached far across the globe and attracted the most powerful and clever shareholders’ funds.
“The deal was unbelievable – buy a refundable stake in a water monopoly and feast on the guaranteed annual bills from captive customers in exchange for nothing.”
The ownership of the water industry is being exposed as the government orders firms to spend £56bn over 25 years to reduce the scale of raw sewage discharges into waterways from storm overflows.
The government has said the cash injection amounts to the “largest infrastructure project to restore the environment in water company history”.
But it is not the web of international investment firms and private equity that is being asked to pay for the capital investment. Instead, ordinary customers are to foot the bill, according to the storm overflow plan released by the government.
The public will pay on average £42 a year to foot the bill for reducing sewage discharges. But some customers will pay much more; particularly those living in areas served by Wessex Water, Yorkshire Water and United Utilities who could be asked to pay more than three times that figure because their companies have the biggest investment programmes to tackle storm overflows, according to the government.
Wessex Water, which supplies more than 1 million customers in Bristol Somerset, Wiltshire and Dorset is fully owned by YTL Corporation Berhad, a Malaysian infrastructure conglomerate helmed by Francis Yeoh.
Water companies said the industry was investing record amounts of private money into the sector. Yorkshire, Southern and Thames said they had not paid dividends for seven, five and five years respectively. Yorkshire said it was not expecting to pay dividends during its five-year business plan period to 2025.
Martin Bradley, the head of Macquarie Asset Management’s real assets team for Europe, the Middle East and Africa, said Southern Water was showing early signs of operational improvements after the investment made by Macquarie. “We are focused on accelerating this momentum, supporting Southern Water as it delivers on our commitments and invests the equivalent of £1,000 per household in its region this regulatory period to upgrade its infrastructure,” he said.
A spokesperson for BlackRock said that as a minority investor on behalf of its clients, the firm engaged with publicly listed UK water companies on governance and material sustainability risks. “It is not, however, the role of minority investors to direct these companies – this role is the responsibility of their management teams with appropriate board oversight, and as determined by their regulator,” they said.
Severn Trent said it had invested £25bn in infrastructure, including £100m each year improving the rivers in its region. The company said it believed paying dividends was important, and a large proportion of its shareholders were retail investors, including more than 70% of its employees, and pension funds that depended on dividends every year.
United Utilities said it had a strong track-record of responsibly raising debt at low rates to fund long-term investment in water and wastewater systems, and to deliver a better service for customers, to protect the environment and ensure affordable bills.
South West Water said it had invested £9bn into the region’s water and wastewater infrastructure, delivering improved performance for customers and the environment. Anglian Water said it had invested about £20bn since privatisation to reduce leakage and to improve drinking water quality and the environment; all of which was made possible almost entirely through private financing. The company said net dividends it had paid by Anglian Water since 2010 were well below the level expected by the regulator. Wessex Water said dividends paid reflected the allowed regulated return, plus any outperformance rewards.
The company said YTL had been a stable owner for more than 20 years and was committed to long-term stewardship of an important public service asset. Northumbrian Water did not want to comment.