The UK’s water industry has for years promised to clean up its reputation for pollution incidents, leaks and murky financial dealings. Yet once again, it is hoping for a clean start. In total, water companies spilled raw sewage into coastal bathing waters more than 5,500 times last year, prompting a another investigation by the Environment Agency and the industry regulator, Ofwat, in November. Weeks later, Ofwat raised a red flag over the financial health of three of Britain’s biggest water companies – Southern, Yorkshire and SES. The regulator expressed concern about “weak levels of financial resilience” and levels of customer service that lagged behind the rest of the industry. For Southern, the resilience report gave a snapshot of the company’s financial health before an equity injection from a familiar character in the water sector’s chequered history, the Australian investment bank Macquarie. Macquarie gained notoriety for its role as the owner of Thames Water between 2006 and 2016, when it attracted fierce political scrutiny for extracting billions in shareholder dividends while Thames’s debt soared. By 2018 the Labour party had called for the sector to be returned to public ownership. But five years after selling out of Thames, the Australian infrastructure investor was given the regulator’s blessing to return to run one of the most troubled water companies in the industry – a move that raised eyebrows in the industry. The £1bn in fresh equity for Southern over the summer followed Ofwat’s decision to enforce a record £90m fine against Southern for deliberately pouring sewage into the sea, and came with a promise to invest a further £2bn over the next four years. Macquarie has not stopped there. Within months of its return to the UK’s water sector, it agreed to invest £130m in green bonds issued by a subsidiary of Affinity Water, and £120m in Anglian Water’s debt. The passive investments are part of the bank’s sprawling set of investments in UK infrastructure. Macquarie owns the Green Investment Bank, which was set up with UK taxpayer funds and controversially privatised four years ago. Under its ownership, GIB’s profits more than quadrupled to £144m for the year ending March 2021, compared with the year before. It has paid a total of £174m in dividends to Macquarie, which also owns gas networks, airports and telecoms service companies across the UK. Aileen Armstrong, a senior director at Ofwat, said the regulator had “really welcomed the money coming into the regulated business” while being “clear about the expectations on what the company needed to do for customers. “We have wanted to see a turnaround, and a component of that is an equity injection into the company, which is what this transaction did. We have been very clear – and would be with any prospective new owner – about what we expected of the regulated company and the need for a turnaround in the operations there,” she said. One senior industry source said Ofwat’s decision to give Macquarie its blessing to return to the water industry showed “just how desperate they were” after Southern’s record pollution fine and its troubling financial position. “Southern was not an attractive prospect for investors, and the company’s management was, perhaps unsurprisingly, on its knees. Investors would not have been falling over themselves to take a share of Southern,” the source said. However, Martin Bradley, the head of Macquarie’s “real assets” team in Europe, the Middle East and Africa, said his bank was happy to return to the UK’s water industry despite “misunderstandings” over its ownership of Thames and the concerns over Southern’s financial health. “We didn’t pay a premium for Southern Water,” he said. “We invest in long-term infrastructure, and there’s nothing more long-term than the provision of utilities like water. This is what we do, and we think we’re quite good operators.” Macquarie’s spell at Thames was far from blemish-free. In 2017, the water company was fined £20m after admitting it dumped 1.4bn litres of raw sewage into the River Thames at six sites in Oxfordshire and Buckinghamshire between 2013 and 2014. The water company’s finances were also a cause for alarm, with Macquarie criticised for selling Thames with almost £11bn of debt after a decade in which the bank paid itself £1.6bn in dividends, ran up a £260m pension deficit and paid next to no UK corporation tax. A former senior Thames employee said of Macquarie: “Were they an effective, focused investor? Absolutely. But can you expect them to operate a utility in the public interest? Well, only if you are certain that the regulatory framework rewards the good behaviours and penalises the bad. Ofwat hasn’t always done that.” The characterisation of the Australian bank as a “vampire kangaroo”, or an aggressive asset stripper, has sometimes been unfair, he added. “They did extract more out of the company than would be ideal, but it was in full sight of the regulator. And where it made sense under the regulatory framework for Macquarie to invest in Thames, they were happy to invest too,” he said. Macquarie’s interests in the water sector are part of a more than £50bn of investment in UK infrastructure that it has either arranged or invested directly since 2005. These include Cadent, which is the UK’s largest gas distribution network operator, as well as the operator of Aberdeen, Glasgow, and Southampton airports and the broadcast service provider Arqiva. “We didn’t need to convince the regulator,” Bradley said of Macquarie’s return to the UK water industry. “Ofwat has said they’d be keeping a close eye on the situation at Southern Water. They expect us to deliver, and we expect to deliver.” The former Thames employee said that at the end of the day, Macquarie was driven entirely by the bottom line and the letter of Ofwat’s regulation. “They were always in it for the money, and they were able to use the regulatory regime to take an aggressive approach at times,” he said. However, there have been concerns for some time that there has been “underspending in areas that Ofwat didn’t measure” that has led to “an accumulation of problems over decades”. Armstrong said there had already been “quite a lot of change in the regulatory regime since Macquarie was last in the sector”. “Over the last few years we’ve been very clear about making sure there is financial resilience in the sector and that the companies are focused on delivering good operation performance,” she said. Hopefully this time, Ofwat has been clear enough. The regulator can wash its hands of the past only so many times.