A lesson in what not to do

In an issue with a strong impact investing focus (see p. 17), let's not mince words: Thames Water's recent record £20.3 million ($25.6 million; €23.5 million) fine for discharging 1.4 billion litres of untreated sewage into the river Thames in 2012-14 punishes the kind of appalling failure no self-respecting company should ever want to have on its CV.

Calling the scale of the pollution “unprecedented” and “a shocking and disgraceful state of affairs”, Judge Francis Sheridan said he had to “make the fine sufficiently large to [..] get the message across to the shareholders that the environment is to be treasured and protected, and not poisoned”.

Up until recently, Macquarie Infrastructure and Real Assets was Thames Waters' largest shareholder, before it divested its 26.3 percent stake to Borealis Infrastructure and Wren House Infrastructure Management. Other shareholders include BT Pension Scheme, ADIA, BcIMC, AMP Capital, QIC and Fiera Infrastructure. 

MIRA and the new shareholders declined to comment for this column. 

In a statement, Thames Water chief executive Steve Robertson said the company “had learned from these serious events” and made “a number of key changes”, including increasing staff in “key operational roles” and investing around £20 million a week “on continually improving our service to our customers and the environment”. He also expressed deep regret over the polluting incidents.

That's encouraging, but not yet enough to obscure Judge Sheridan's comments about Thames Water's “continual failure to report incidents” and “history of non-compliance”, or his damning conclusion that “it should not be cheaper to offend than to take appropriate precautions”. The water company had already been fined £1 million and £380,000 on two separate occasions in 2016 for similar problems that occurred in 2013.

In a world where infrastructure investors solemnly pledge allegiance to the ESG flag, it's extremely disappointing to see such a high-profile ESG disaster occur under their watch. Were it not for the all-consuming Brexit juggernaut, Thames Water's fine could've also ended up having much bigger consequences for the industry.

Here's how Thames Water's record of private ownership can look to an outsider: bought by a Macquarie-led consortium from German utility RWE in 2006, Thames Water has since returned over £1 billion in dividends, seeing its net debt balloon from more than £3 billion to £10 billion-plus. In 2015-16, it recorded a £742 million operating profit.

True, it's spent over £1 billion in annual capex improving its services over the last decade, but when it came time to build a £4.2 billion 'super sewer' under the Thames, it needed significant government help. We in the industry are used to viewing Thames Tideway Tunnel as a pathfinder project, testament to how government guarantees can crowd in institutional capital for greenfield projects. An outsider could easily read it as an example of a private company dumping risk on the taxpayer as it enriches its shareholders.

If Brexit was not stealing all the headlines and the UK Labour party was not imploding, Thames Water could be the perfect poster child for any political force wishing to turn back the clock on privatisation. 

We've said it before: the idea that private infrastructure ownership in developed markets is an irreversible trend is ripe for the same kind of rude awakening that Donald Trump's election brought to proponents of globalisation. Any investor complacency on this front would be a serious mistake.