Private equity and the regulation of financialised infrastructure: the case of Macquarie in Britain's water and energy networks

ABSTRACT This paper explores the ways that private equity practices of financialised value extraction have migrated to the water sector in England. In line with the financialisation literature more broadly, we show how private equity investors have found innovative financial mechanisms for increasing investor returns that are unrelated to productive activity. The resulting financialised, highly-indebted corporate structures create costs and risks for utilities which raise concerns for social equity. The regulatory response to these financial innovations has been slow and had limited effect. The regulatory toolbox, governed by a narrative of competition, has consistently been biased towards investors and misses much of the scope of financialised corporate extraction. A review of the activities of a major private equity investor, Macquarie, active across numerous infrastructure sectors in the UK, illustrates the dynamic way in which infrastructure funds are moved across investments and sectors in ways that can escape regulatory processes and increase investor returns. The paper shows how the regulator is caught in an impossible bind in meeting the contradictory and contested interests of investors, end users and the state such that we question whether the socially equitable regulation of financialised infrastructure can ever be possible.


Introduction
Infrastructure is widely considered to have become 'financialised' as across the globe diverse physical structures have been transformed into financial assets (O'Brien and Pike 2017, O'Brien et al. 2019. This is a process driven both by fiscally constrained governments turning to the private sector for infrastructure investment, and growing interest from institutional and other private financial investors seeking new opportunities (Inderst 2010, Bayliss and Van Waeyenberge 2018. Britain has been at the forefront of the expansion of private finance in infrastructure since the sale of the country's core utilities in the 1980s and 90s and this looks set to continue according to the country's 2020 National Infrastructure Strategy (HM Treasury and accommodating' financialisation in infrastructure (O'Brien et al. 2019(O'Brien et al. , p. 1300. This paper aims to unpack the contradictions that this entails, exploring the complex interplay of shifting structures and agency relations in regulatory practices that characterise state-market interactions in late-stage capitalism. Our focus is the water sector in England with particular attention to the rise of private equity (PE) investors.
The nature of private investors in England's water utilities has changed substantially since the regional networks were privatised in 1989 by listing on the London Stock Exchange (LSE). Most water companies have since been delisted and the majority have been taken over by financial investors (see below). Meanwhile, the regulatory framework for these networks has been firmly oriented around narratives of competition and addressing market failure. This paper draws on evidence gathered through interviews with key stakeholders in the infrastructure finance sphere, 1 attendance at conferences, observations at industry events and extensive consultation of grey literature, including industry reports, company accounts, and policy documents. By focusing on infrastructure, the paper makes an important contribution to a rich political economy literature on the implications of PE ownership patterns (Morrell and Clark 2010, Appelbaum and Batt 2014, Froud and Williams 2007, Phalippou 2017, Morgan and Nasir 2021.
Section 2 provides a review of the literature on infrastructure financialisation and the ascendance of PE funds in general, and in England's water sector, in particular. Section 3 outlines the attempts by the state to address financialised practices in the water sector and shows that these have been slow and remain contested among state agencies and investors. Section 4 turns to a case study of a major PE infrastructure investor, Macquarie. Drawing on the company's selected operations, we show the dynamic ways in which PE infrastructure funds are moved across investments and sectors in ways that can escape regulatory processes. Ultimately, we conclude by questioning whether it is possible for the state to introduce adequate measures to create socially equitable outcomes for consumers in a regulatory system that is significantly under strain due to an increasing set of modifications, as it confronts sophisticated investors and well-seasoned practices of wealth extraction.

Financialisaton and private equity
Financialisation is often loosely defined and has acquired a wide range of meanings (Peck and Whiteside 2016, Aalbers 2019). Van der Zwan (2014) delineates three features of financialisation: a new regime of accumulation where profits accrue through financial channels rather than trade or commodity production; the ascendancy of corporate orientation in which shareholder value is the main guiding principle; and the financialisation of everyday life where low-income and middleclass households become incorporated in financial markets. The state plays an important role, reflecting not so much a retreat as the emergence of 'an altogether different type of state intervention' (Van der Zwan 2014, p. 117, and see also Karowski 2019). In the context of infrastructure, the state has been acknowledged as an architect and facilitator of financialisation (Ashton et al. 2012, O'Neill 2013, O'Brien et al. 2019. For Appelbaum and Batt (2014), instrumental in the transition from 'managerial' to 'financial capitalism' has been a shift in economic agents, exemplified by the increasing prominence of private equity (PE) finance, which has been growing at a rate of over ten per cent a year since 2004 (Batt and Morgan 2020). Indeed, the value of 'assets under management' 2 by private equity agents reached US$6.2tn in June 2021 up from US$578bn in December 2000 (Preqin 2021). Morgan and Nasir (2021) identify three main components of the PE investment model: 3 manage acquisitions. The GPs typically invest a small share of their own equity in the PE fund and receive fees based on fund performance (Appelbaum and Batt 2014). . Limited Partners (LPs) are the fund investors. Participation is usually restricted to high-net-worth individuals and institutional investors. Pension funds are the largest source of capital. Although LPs provide equity investment, they do not exert direct control over investments. . The PE fund makes acquisitions by buying companies, in a process managed by GPs using equity from LPs (and the small GP stake). These acquisition companies are then restructured, both operationally and financially to generate financial returns before the PE exits from the investment by selling the company (Appelbaum and Batt 2014).
There are several ways in which the operational structure of a company owned by a PE fund will differ from that of a corporation where shares are publicly traded. First, the ultimate goal of an acquisition is to generate a return for the PE fund. A PE acquisition is treated as a 'financial instrument in a portfolio for the purposes of the managers of the PE fund and the investors in the fund' (Morgan and Nasir 2021, p. 460). As a result, management of such an acquisition is focused on the interests of the GP and LP rather than those of other stakeholders in the acquired company (such as its employees, customers, suppliers, or the broader community within which it operates) (Appelbaum andBatt 2014, Morgan andNasir 2021).
Second, the finances of acquired companies are usually radically restructured with debt playing a prominent role in the acquisition process and subsequent financial engineering practices (Morgan and Nasir 2021). PE acquisitions are heavily leveraged, with around 70 per cent of the investment typically financed through debt in a leveraged buy-out (LBO) and the debt typically carried by the new corporate structure of the acquisition. PE-owned companies carry much higher debt loads than public companies (Appelbaum and Batt 2014). Investments offering stable cash flows and barriers to entry (such as infrastructure) allow acquired companies to bear particularly high debt levels (Froud and Williams 2007). Appelbaum and Batt (2014) liken a LBO to the purchase of a house with a mortgage, except that 'homeowners pay their mortgages whereas PE funds require the companies they buy to assume the debt and pay it off' (p. 47). The use of debt means that more assets can be acquired by the PE fund and, when finance is cheap, returns to the PE fund increase. With higher debt levels, more company revenue is directed towards debt servicing obligations and the company is more vulnerable to external shocks or an economic downturn, 4 although the fund and acquisition typically have limited liability and returns to PE funds are often frontloaded to limit the possibility of loss.
Third, there is considerably less scrutiny of GPs in their ownership of corporations. GPs are not subject to the potential shareholder pressure or public scrutiny of publicly listed companies. GPs play an active role in the acquired companies, selecting the Board of Directors. While the pre-existing management framework may be maintained, it will be structured to align the interests of the company managers with those of the PE fund, for example via financial incentives (Appelbaum and Batt 2014). Furthermore, despite owning many high street brands, PE funds are not well known to the public (Morgan and Nasir 2021, p. 459). They tend to remain under the radar, so that the reputational effect of potential failure sits with the acquired company (Batt and Morgan 2020).
Finally, PE funds are associated with an increased concentration of extreme wealth. PE funds tend to generate higher returns than the stock market (Bloomberg 2019) but investing in a PE fund remains the preserve of larger scale investors such as pension funds and the already wealthy.
Still, for Appelbaum and Batt (2014, p. 268), the PE model can play a positive role in the economy, pooling private capital for investment in companies that may not otherwise attract investment. The model can support small and medium sized companies in accessing finance for expansion, and nurture underperforming companies to generate good returns for investors that may include pension funds and public organisations. However, PE earnings are more likely to be achieved by financial means than productivity improvements. Furthermore, the strategies in the pursuit of high returns render PE-owned companies more prone to bankruptcy, with associated social costs Morgan 2020, Morgan andNasir 2021).

Financialisation and infrastructure
The private sector is involved in infrastructure in different ways, from financing and construction of specific projects (such as through the UK Government's now defunct Private Finance Initiative) through to owning core service providers (see Van Waeyenberge et al. 2021). Infrastructure has been increasingly attractive for PE funds. Preqin (2020) reported a record 707 active infrastructure fund managers in 2020, compared with just 109 infrastructure funds in 2010 (Inderst 2010). The sector is attractive because of high barriers to entry, economies of scale and inelastic demand leading to predictable cash flows (Ashton et al. 2012). Such predictability offers advantages for debt servicing allowing for returns to be generated via financial engineering rather than operational change. These cash flows can be repackaged so that diverse fixed physical investments are converted into tradeable and comparable financial products (Aalbers 2019, O'Brien et al. 2019. The result has been a shift in the fundamental meanings of infrastructure from a public good into a generic 'asset class' or 'universal thing' (Bear 2020, p. 46), understood in terms of an income stream, decoupled from the underlying specifics and materialities of provisioning (see O'Brien et al. 2019. A growing catalogue of studies reveals the diverse ways in which infrastructure financial flows have been manipulated to boost returns to shareholders. Examples include water in California (Pryke and Allen 2019), water in England and Wales Pryke 2013, Bayliss 2014), an airport in Brussels (Deruytter and Derudder 2019), railways in India (Bear 2020), roads in Australia (McManus and Haughton 2020), social care in Britain (Bayliss and Gideon 2020) and housing in different parts of the world (Aalbers 2016). PE funds have often played a role in these accounts.
PE performance is typically judged by financial metrics but Morrell and Clark (2010) draw attention to the importance of the often neglected wider social costs and benefits. Morgan and Nasir's (2021, p. 468) insistence that PE 'demands our attention' is all the more urgent in the context of infrastructure, where the ethical implications of private (rather than public) financing ring particularly loudly. The effects of standard PE practices, resulting in high debt levels, weakened company balance sheets, fragile financial structures, the diversion of revenues to debt servicing as well as wealth concentration, raise additional concerns for social equity when funded by taxpayers and consumers via their engagement with vital and monopolistic services. Furthermore, accountability and transparency are compromised by low disclosure, often exacerbated by complex corporate structures routed via tax havens (O'Brien et al. 2019, Pryke and Allen 2019. Regressive intergenerational transfers occur when revenue from future bill payers is brought forward to fund current shareholder distributions.

Financialisation and private equity in England's water system
England's regional water utilities were privatised in 1989 by listing on the LSE. This shifted public utilities (and their borrowings) off the government books and sought to improve efficiency through market incentives. To date, however, there is little evidence that such projected efficiencies were achieved, especially when compared with other European countries (Yearwood 2018) or publicly owned Scottish Water (Helm 2020). Investment in the sector between 1990 and 2014 amounts to £126bn and this has been primarily financed by debt (NAO 2015). Net debt of the water companies rose from zero in 1989 to £51bn in 2018 (Yearwood 2018). While these liabilities do not feature as government debt, they still need to be serviced and repaid by households and businesses via their consumption of essential and monopolistic services. Table 1 sets out the current owners of England's 15 water and sewerage and water-only companies. These are categorised by ownership type. Just three remain listed on the LSE in March 2021  Table 2 shows a breakdown of the household customer numbers for these companies in 2020. The majority of householdsaround 56 per centare provided with water via companies that are, or have been, owned, at least in part, by PE investors.
PE-owned water companies have been financially restructured in line with the PE 'tendency to exploit available credit' (Morgan and Nasir 2021, p. 462, original emphasis). A number of PEowned utilities including South East Water, Thames, Anglian, Yorkshire, Southern and most recently, Affinity Water, in 2013, have taken advantage of the secure revenue stream provided by water to increase gearing (the ratio of debt to equity and, as such, a standard measure of indebtedness), using a financial instrument known as 'whole business securitisation' (WBS). Future revenue streams from bill payments are used as security against which to borrow. This practice means that the balance sheet can bear a higher debt load while maintaining a credit rating within the bounds required by regulation. These companies have carried out WBS via Cayman Island-registered subsidiaries to get round obstacles in UK legislation in relation to LBOs. 5 This has allowed them to refinance so that at least part of the original cost of the acquisition comes to be located with the water utility (Bayliss 2014).
WBS results in a major hike in debts. For instance, Yorkshire Water saw company debt increase by 60 per cent from £1.5bn to £2.4bn in 2006 following WBS (Yorkshire Water 2007, p. 28). Anglian Water's net debt increased by 67 per cent resulting in a 60 per cent increase in gearing following WBS in 2002(Anglian Water 2003. And the company with the most recent WBS, Affinity Water, saw a 61 per cent increase in net debt (Affinity Water 2013) (see also Thames Water discussed below).
Thus, the entry of PE into the water sector in England has triggered typical PE behaviour with rising debt via financial engineering and opaque corporate structures. Under the ownership of PE funds, it is difficult to assess the full extent of returns to investors due to the diverse ways in which these are achieved. But in some cases, increased debt was linked directly to dividend payouts. Yorkshire Water for example, paid a special dividend to its owners of £717m alongside normal dividends of £109m in the same year of the WBS (Yorkshire Water Services Annual Report 2007, p. 28), and see Thames Water below. One assessment commissioned by the government's Department for Environment, Food and Rural Affairs (DEFRA) by Vivid Economics deems returns achieved by water utilities between 2010 and 2018 to be excessive (i.e. more than required to finance their functions). This has been achieved by increasing debt levels as well as lower than anticipated interest and tax costs (Vivid Economics 2018). Another indicator of returns is the premium paid by investors above the company asset value which indicates an expectation of returns from means unrelated to standard operations (Ashton et al. 2012), and transactions in the water sector reflect valuation premia significantly over and above company regulatory capital values (Vivid Economics 2018, Helm 2021).

Regulating financialised infrastructure
Private investment in infrastructure leads not to a retreat but a restructuring of the state engendering new forms of relations between state, capital and society (Bear and Mathur 2015). Regulatory processes and structures dictate the terms on which capital can engage and profit from infrastructure investments, enabling and constraining particular economic agents and interests (Levi-Faur 2009, p. 181, Cahill 2014. With England's water, the state faces the dual task of protecting end users while ensuring that firms are able to finance their operations. To effect the latter, the state has created a regulatory structure which ensures highly predictable cashflows from low-risk investments (Helm 2020, Moody's 2020. It is, however, the stability of this revenue flow that makes these investments particularly conducive to their financialisation. These competing pressures create a conundrum for regulating private infrastructure participation in the context of financialised capitalism. This section examines the way in which regulation has sought to address financialised practices in English water companies. It demonstrates that its response has been slow and remains contested among both state agencies and investors.

The regulatory framework for water: a brief introduction
The model for the regulation of water networks in England was established on privatisation in 1989. The regulatory framework is strongly grounded in a narrative of competition (Stern 2014, HM Treasury 2020. This is reflected in the mandate of the economic regulator Ofwat which is required to protect the interests of consumers by promoting effective competition (Ofwat n.d.).
The water utilities are governed by a system of price controls that was originally designed for privatised telecoms in the 1980s and set out in the 1983 Littlechild Report (Beesley and Littlechild 1989). Under this system, the regulator sets maximum tariffs for a fixed time period (usually five years), on the basis of the so-called 'RPI-X' formula, with the retail price index (RPI) measuring inflation, which is adjusted by a factor, X, derived from estimates of anticipated costs and performance against previous targets. The value of X, determined in negotiations between the private provider and the regulators, is heavily contested as small changes in the assumptions of the regulator, for example, regarding the cost of capital, can lead to significant changes in equity returns (see Wild 2018). The price control system is intended to mimic a market, with companies operating effectively as 'price takers' as they would under conditions of perfect competition. Within the parameters of the price controls, and the need to maintain an 'investment grade' credit rating, firms choose their own modus operandi, in a structure that was intended to promote innovation and encourage efficiency. However, outcomes from this regulatory framework are widely acknowledged to have been biased towards investors (HoC 2015, Ofwat 2017. The UK's National Infrastructure Commission also cites a systemic bias towards investors in the regulatory architecture, resulting from uncertainty as well as corporate lobbying (NIC 2019). 6 The conundrum of regulating financialised water provision Regulation has always been plagued by information asymmetries (Ashton et al. 2012, Stern 2014 and these are compounded by the contestations and corporate complexities of financialisation. For many years financial engineering by investors in the water sector was not directly addressed by regulation (Allen and Pryke 2013). With attention largely to prices, the regulatory narrative of promoting competition steers the regulator away from intervening in the corporate practices where shareholder returns are made, including corporate debt and dividend payments, as these are deemed to be 'market outcomes'. Indeed, the high levels of water company debt were at one point considered evidence of the strength of the 'stable and transparent regulatory framework' (Ofwat 2011, p. 37).
More recently, Ofwat has begun to introduce some measures to address the risks posed by the financialisation practices outlined above. Since 2015, companies have been required to report on specific financial metrics such as regulatory gearing, dividend yield, credit rating, post tax return on capital, interest cover ratio (Ofwat 2015). Firms are now required to demonstrate 'financial resilience' (Ofwat 2018(Ofwat , 2020a, while Ofwat (2020b, p. 91) highlights the risk of corporate failure as a potential threat from highly geared water companies. The most recent Price Review in the water sector (PR19) introduced the 'gearing outperformance sharing mechanism' (GOSM) which aims to ensure that firms share benefits from high gearing with customers (Ofwat 2020b p. 85). In a further attempt to rein in wealth extraction, the prices set by Ofwat in PR19 required companies to reduce water bills by an average of £50 per household (or 12 per cent) over the following five years.
While these measures constituted a major departure from previous price setting practice, their effectiveness in redressing the balance between end users and investors remains limited for several reasons.
First, Ofwat was slow to respond to financialisation. WBS has been going on since the early 2000s. The slow regulatory response means that, by the time firms try to lower gearing, the original agents who loaded the companies with debt have often moved on (see below for a detailed discussion in the context of Thames Water). Second, the regulatory measures resulted in a downgrading of the credit ratings of water companies on account of what Moody's considered 'political interference', given their interpretation as 'departures from long-standing regulatory practice' (Moody's 2018b). Ofwat's innovation had a direct effect on company performance against regulatory metrics (the requirement to retain an 'investment grade' credit rating), highlighting the complex interdependence between these agents. Third, some companies have responded to these measures by increasing equity finance, which is achieved by borrowing further up the corporate chain. But these additional debts at the holding company level are still sustained by the revenue of the operating company, thereby shifting, rather than addressing, the original vulnerabilities. Southern Water, for instance, has been struggling with high gearing. Around 33 per cent of its turnover in the past decade has been allocated to net finance costs (Southern Water Services Ltd Annual Reports, various years). Its parent company injected equity of £700m to reduce company gearing. But while this was lowered to 70 per cent for the operating utility, gearing rose to 94 per cent for the parent company which reported that the liquidity available to pay interest on debt for the holding companies would be exhausted by October 2021 without successful refinancing (Greensands 2021, p. 44).
Finally, these regulatory attempts at stricter controls led to an immediate backlash from investors. Following the PR19 price determinations, four companies appealed to the Competition and Markets Authority (CMA) on the grounds that the tighter rules would prevent them from carrying out adequate investment. The CMA subsequently upheld their appeal in its 1,239-page final report (CMA 2021). The CMA was concerned that the GOSM would 'represent a significant break from a wellestablished regulatory approach' (CMA 2021, p. 1050). But in a response to the CMA, Ofwat reiterates (2020c, p. 3): 'we can have no confidence that these higher returns will translate into investment services for the benefit of consumers and the environment'. Ofwat highlights that in the thirty years since privatisation, they have seen no evidence that allowing companies to charge higher prices directly increases investment, rather than simply boosting shareholder returns.
The disputes in the latest price review point to the multifaceted nature of the state which is not a monolithic entity, nor necessarily a set of aligned entities, but rather a complex, overlapping and sometimes contradictory set of institutions, practices, and concepts (Abrams 1988, Mitchell 1999. This is evident not just in the dispute between the CMA and Ofwat but also in the wider pressures to improve quality and mitigate the effects of climate change. While other regulatory agencies such as the Environment Agency, the Drinking Water Inspectorate and the National Infrastructure Commission call for greater investment in water, Ofwat has a responsibility to ensure that spending is in the best interests of consumers, who are the ultimate funders of water provision. The issues raised by Ofwat highlight features of financialised infrastructures more broadly. Companies insist that they need higher revenues to finance investment yet there are no guarantees that increased revenues will not simply drain away into interest payments, dividends and directors' pay. At the same time, the UK government's promise of long-term policy certainty (HM Treasury 2020, p. 68) effectively limits the scope for regulatory innovation to curb investor returns. The tension between Ofwat and the CMA goes to the heart of the contestation that surrounds regulation and which has become accentuated under increasingly financialised practices in the sector. Measures to tilt the balance in favour of consumers inevitably impinge on investors and this meets with resistance.

Financialisation and opportunities for PE infrastructure investors: a case study of Macquarie's investments in England's utilities
While regulation aims to be attentive to sector-specific features, infrastructure investors use the funds that they manage to buy and sell ownership stakes across a diverse portfolio. In this section we explore the opportunities that regulated infrastructure assets offer to PE investors through a closer look at the activities of a major fund manager in the UK, Macquarie, highlighting the links with PE investment more broadly, raised in Section 2.
The Macquarie is listed on the Australian Securities Exchange. It has a policy of 'adjacency' to manage risk through expansion across new sectors and new geographical domains (O'Neill 2009) and a history of buying infrastructure assets that are 'under-leveraged' (see Deruytter and Derudder 2019). The company is widely acknowledged as highly successful (O'Brien and Pike 2017, p. 27), described as the 'millionaire's factory' owing to its levels of executive pay and shareholder returns (Smyth and Shrikanth 2019). Its initial expansion into infrastructure investment in Australia in the 1990s, led to it being dubbed 'the bank that ate Sydney' in the Australian Press, on account of its extensive and diverse investment portfolio in the city (Jefferis and Stilwell 2006, p. 45). Macquarie has received high praise and won numerous investor awards (Melville 2020). As a result, the company's funds are highly attractive for investors (acting as Limited Partners, LPs, see Section 2). The Macquarie Super Core Infrastructure Fund (MSCIF), for example, launched in May 2017 with a target of raising €1.5bn, was substantially oversubscribed, closing in July 2018 with €2.5bn of investor commitments. LPs included public and private pension plans, insurance companies, corporates and sovereign wealth funds (Whiteaker 2018).
In the UK, Macquarie operates across a range of sectors including property, rail transport and renewable energy. One of Macquarie's early UK investments was in the M6 Toll Road in 2000. Complex intercompany refinancing in 2006 took the holding company's debts to over £1bn alongside a dividend payment of £393m 7 despite the concession company being consistently loss-making. Macquarie also provided shareholder loans to the operating company at up to 12 per cent interest (Midland Expressway Ltd Accounts various years). In 2013, debt restructuring saw Macquarie exit the investment, and ownership transferred to the company's creditors. The investment became loaded with so much debt that lenders eventually took a write-off of £1.3bn (Phalippou 2017, p. 112). These aspects of the financial arrangements highlight the way that infrastructure financing is manipulated in the interests of shareholders with returns resulting from financial manipulation rather than operational performance.
The rest of this section, first, carefully unpacks Macquarie's operations in the English water sector and, second, demonstrates how, despite its poor track record in the water sector, it seamlessly moved to assume a strategic stake in the UK's gas distribution network.

Macquarie and the English water sector
Macquarie's first move into Britain's water sector was through its Macquarie European Infrastructure Fund's (MEIF) acquisition of South East Water for £386m in 2003 from the French group Bouygues. Macquarie's stake was subsequently sold in 2006 to two infrastructure funds managed by Hastings Funds Management, a division of Australian banking group, Westpac, for £665.4m (Bream 2006). The utility's borrowing doubled under the control of Macquarie as debt finance was raised through a Cayman Islands subsidiary via a WBS, see above (South East Water Ltd 2005).
Following the sale of its stake in South East Water, in 2007, Macquarie-managed funds were part of a consortium, Kemble Water, that bought Thames Water, the largest water company in England. Floated on the LSE in 1989, Thames Water had been delisted in 2001 when it was acquired by the German utility RWE. The Kemble consortium comprised 14 investors, including Dutch, Australian and Canadian pension funds as well as other private equity investors (Ofwat 2007). The consortium paid £5.1bn for its acquisition of Thames Water (Robinson 2017). Macquarie had a 47.65 per cent stake held via six separate infrastructure funds registered in Guernsey, Bermuda and Australia (Ofwat 2007).
In a public consultation before the Kemble takeover of Thames Water, respondents including investors, consumer representatives and other stakeholders, raised concerns regarding the stewardship of Macquarie's earlier infrastructure investments in the UK, including in South East Water and the M6 Toll Road. The regulator took the view that capital structures and dividend payouts 'are essentially a matter for the companies and the markets' (Ofwat 2007, p. 13) and not a matter for regulatory concern. The offshore ownership structures and Macquarie's track record of significant financial engineering in UK infrastructure assets were considered to be outside the regulatory remit.
In the decade of Macquarie's ownership, from 2007 to 2017, the financing of Thames Water was revolutionised, in line with PE practices outlined in Section 2. Soon after takeover, Thames Water's gearing ratio increased from 52 per cent to 72 per cent in 2007, following a WBS via a Cayman Island subsidiary. Water bills were securitised with a bond profile stretching out to 2062 (Allen and Pryke 2013). Company refinancing meant that £2bn of the £2.8bn borrowed by investors to buy the investment (acquisition debt) was repaid to investors from new borrowings (Plimmer 2017, Robinson 2017. Following the 2007 refinancing, the company paid shareholders a 'special dividend' of £535m, despite profits that year being only £190m (Thames Water 2007, p. 52 and see Blaiklock 2008, Bayliss 2014. Over the decade, debts increased from about £3.2bn in 2007 to £10.7bn by March 2016 (Thames Water Utilities Ltd Annual Report, various years). Gearing reached over 80 per cent in 2017, well above sector average (Moody's 2018a). Meanwhile, Thames Water paid out dividends of more than £2.5bn between 2007 and 2017 (Bayliss and Hall 2017).
While under the control of Macquarie, Thames was responsible for numerous raw sewage leaks, leading the Environment Agency to impose a record fine on the company of £20.3m (Environment Agency 2017). Furthermore, paying shareholders dividends took priority over contributions to company pension funds (Blaiklock 2018). Pension liabilities swung from £26.1m surplus in 2008 to deficits of £65m in 2009 and £260m in 2016 (Plimmer and Espinoza 2017).
Thames Water's financial structure became increasingly precarious and in 2016, it was unable to bear the cost of a new sewer tunnel constructed under the River Thames, which had to be financed by a new independent company (and funded through a levy on customers' bills year before the sewer became operational). In part, this was due to the high debts and fragile financial structure of Thames Water (Loftus andMarch 2019, Bowles et al. 2021).
The Macquarie equity stake in Thames Water was sold off in segments, often for undisclosed sums and the full extent of the returns generated for Macquarie and its LPs has not been disclosed. According to the Financial Times, the returns on Macquarie's investment in Thames are estimated to be between 15.5 per cent and 19 per cent annuallyalthough Macquarie disputed these figures stating that the internal rate of return on its MEIF fund, including the Thames investment was 12.3 per cent (Plimmer 2017). In 2018, a presentation by an investment adviser to the South Carolina Retirement System Investment Commission recommended that the pension fund managers invest in the upcoming Macquarie MSCIF fund on the basis of the high returns generated by the earlier Macquarie fund MEIF. The latter was in part due to the returns made from their stake in Thames Water. The presentation showed 8 that the value of Macquarie's investment in Thames increased by a multiple of 2.7 of the initial equity over the ten-year investment period. This was due largely to growth of the asset base as well as 'outperformance' on cash flows and cost of debt, and gains on sales. Macquarie's investment in Thames was around £2.4bn (Macquarie's 47.65 per cent equity stake in the £5.1bn purchase pricesee above) so these figures suggest that total returns on Macquarie's investment came to around £6.5bn, creating a gain in value of over £4bn. These gains are described as being 'over the allowable regulatory return' (RSIC 2018). 9 These rough calculations demonstrate the potential scale of the benefits from financial engineering.
Macquarie's investments have generated extraordinarily high returns for investors, although the full extent is not publicly known. But the condition of the acquisition, Thames Water, was considerably depleted under Macquarie's control, becoming heavily indebted and with a poor environmental and social record. When Macquarie sold its final stake in the company in 2017, numerous media outlets published articles that were critical of the company's activities. This is Money reported the sale of Thames Water with the headline 'Vultures who left Thames Water with £10bn of debt: Controversial Aussie bank Macquarie sells stake in UK giant'. The Financial Times ran a lengthy article titled 'Thames Water: the murky structure of a utility company' and the BBC broadcast a radio programme titled 'Macquarie: The Tale of the River Bank' in September 2017. However, Macquarie had long departed the water sector by the arrival of the regulatory interventions which sought to curb the financialisation practices it had pioneered. It had exited from Thames Water before fines were issued for the pollution that had happened under its control. In line with PE's portfolio approach to acquisitions, other potentially lucrative opportunities presented themselves in Britain's gas distribution network.
Before we move on to discuss Macquarie's involvement in gas distribution in the UK, it should be noted that, in August 2021, it was announced that despite their track record, Macquarie would return to water with a £1bn rescue package for ailing Southern Water via the Macquarie Super Core Infrastructure Fund in what could be termed a 'secondary buyout'. The fund ('Series 1') is described as 'yield focused' (Macquarie 2018). The previous owners of Southern Water had, however, already hiked up debts and failed to invest in infrastructure leading to record pollution levels, raising the question as to how Macquarie will generate returns from this acquisition. Nevertheless, negotiations were conducted in secret and Ofwat has welcomed the deal.
From water to gas: plus ça change … In 2017, despite the widespread criticism of its role in Thames Water, Macquarie was part of a consortium that bought Britain's largest gas distribution network (GDN). Until June 2005, the country's eight GDNs were owned by National Grid Gas Plc, a subsidiary of National Grid Plc, a publicly listed company. Four of these were sold in 2005, and in 2017, the Macquarie Super Core Infrastructure Fund (MSCIF), took a stake in a consortium, Cadent Gas Ltd, that bought all four of National Grid Gas's remaining GDNs, providing gas to 11m customers. 10 This was one of the largest recent infrastructure deals in the UK and the sale attracted extensive investor interest, with the deal described in the business press as a 'rare opportunity' for the big asset managers and sovereign wealth funds to invest in infrastructure networks at this scale. Cadent Gas Ltd, the winning consortium, bid a 50 per cent premium to the regulated asset value (Dockreay 2017). The sale led to a payout to shareholders of National Grid of around £4bn (National Grid 2018, p. 101). The total funds raised for the purchase came to £5,902m. This included debt finance of £2,300m funded by borrowings from 13 banks that contributed £138.46m each. A further £502m was raised in debt via a Macquarie company, MIDIS. The seven equity stakeholders include other infrastructure funds and two sovereign wealth funds (SWFs) (from China and Qatar) (IJGlobal 2017).
Since the acquisition, the new owners have begun to shape Cadent Gas Ltd in a way that is amenable to financialised wealth extraction. Cadent is owned by a parent SPV, Quadgas Holdings TopCo Ltd, which is registered in the offshore jurisdiction of Jersey. A series of holding companies has been established between the consortium and the licensed utility, Cadent Gas Ltd (Cadent 2017). In the four years since the acquisition, shareholders have received dividends of over £1.2bn on their equity investment (Cadent Gas Limited Annual Report and Financial Statements, various years). Gearing is relatively low at 64 per cent, compared with the high gearing levels that were a feature of Macquarie's involvement in Thames Water. However, debt appears to be accruing higher up the corporate chain, and credit ratings agency, Moody's, has downgraded the licensed utility Cadent Gas Ltd (from A3 to Baa1) due to significant gearing at the holding company, Quadgas MidCo Ltd, which has a gearing ratio of around 86 per cent (Moody's 2020). As was the case in the water sector, PE ownership has led to restructuring to boost financial returns and to reduce scrutiny of a debt-laden,off-shore corporate structure.
This overview of some of the transactions of Macquarie funds in the UK shows how the fund managers have been adept at trading acquisitions to benefit GPs and LPs. But investments and shareholder returns are entirely funded by current or future bill payments of households and businesses as they meet their basic needs of water and energy (and in other infrastructures). Moreover, regulatory changes fail to discipline fast-moving extractive practices as these travel from one sector to another.

Conclusion
Infrastructure financialisation has led to new ways of extracting value from physical assets and underlying revenue streams. These are far removed from the more traditional methods of profit maximisation associated with privatisation (see Ashton et al. 2012, O'Brien et al. 2019, Pryke and Allen 2019. The expansion of PE investors in the global economy has raised concerns regarding the risky financial structures they generate as well as their adverse impacts on social equity (Appelbaum and Batt 2014). These concerns are magnified in the context of the provision of essential services.
While the activities of Macquarie are highly celebrated in financial circles, profits for PE funds are realised by saddling the utilities that provide essential services with high debt levels, 'leaving the customers with balance sheets which were exhausted' (Helm and Tindall 2009, p. 426). The utility is left in a fragile position particularly if new investment is needed (as was the case of Thames Tideway) or if regulation is tightened (as in the case of Southern Water). An estimated 20 per cent of the average water and sewerage household bill, of £400 in England and Wales, covers interest and dividend payments (CMA 2021, p. 46), while many households struggle to pay .
The state's response to financialised practices in infrastructure has been slow and muted. The water regulator was late to intervene. Tighter controls in PR19, including the GOSM, established in part to address the financing practices adopted when Macquarie funds were shareholders of Thames Water, only evolved after the company owners had changed. Considerably more could be done to increase pressure on investors to operate for the public good, such as enforcing higher disclosure on shareholder returns, requiring broader stakeholder representation on the Board of Directors, preventing ownerships in tax havens and banning certain investor types such as funds with a fixed duration. However, the state, tasked with mediating between the competing interests around infrastructure investments, has consistently favoured investors' interests (NIC 2019). In this concluding section we set out some pointers as to the underlying and more intractable drivers of financialisation. Such an understanding is essential if there is to be progress towards the definancialisation of public service provisioning across sectors (Karowski 2019).
First, as Froud and Williams suggest (2007, p. 12), a major legacy of the expansion of PE investment in the economy is the normalisation of 'the pursuit of value through financial re-engineering'. Financialisation is subtly promoted in the narratives that underpin the way that England's water system is conceptualised. Once seen as a public good, the depiction of the sector in terms of an imperfect market has meant that financial engineering techniques to boost shareholder returns have (until recently) been outside the purview of the regulator (Bayliss 2017). Moreover, the market framing is effective in obscuring the distributional outcomes from regulatory processes ). In addition, a 'revolving door' between the regulator, water utilities and consultants, who advise both of these parties, can be expected to perpetuate the financial focus of the water system. 11 Second, there are limits to how much regulation is possible. The regulatory model was intended to be 'light touch', but this goal has been eroded as regulatory practice has become increasingly dense. PR19 generated thousands of pages in company, regulator and consultancy reports and the process has successively become longer. For the first time, a price review overlapped with the subsequent round, as the 2024 Price Review process started before PR19 was completed. Past experience indicates that overly detailed regulation can be counterproductive and does not necessarily lead to effective scrutiny. It becomes difficult to 'see the wood from the trees' (Ofwat 2010cited in Bayliss 2014. There are also associated costs which are passed on to end users. Firms and the regulator draw heavily on legal and consultancy services to support their negotiations. Water companies say they spent three years and around £140m between them on PR19, adding at least £15 a year to customers' bill (Plimmer 2021). The appeal to the CMA by four of the largest water companies cost at least an additional £26m (CMA 2021(CMA , p. 1158. Even the architect of the original RPI-X structure denounced the increased time and resources devoted to PR19 (Littlechild 2020, p. 7). Lightness of touch and ambitions of transparency have long been lost in the density of regulatory practice.
Finally, regulation is not simply about setting and enforcing rules but about mediating across contested, complex and interrelated interests in the sector. The regulatory regime is tasked with promoting the needs of end users, investors and the state (itself a set of conflicting and contradictory agencies). But these interests are both contested and inextricably interlinked. Intervention in favour of end users can weaken the regulatory stability that is important to attract and retain private investment. But it is precisely this stability that has enabled companies to securitise future bill payments, to the benefit of investors (Helm 2021). Moreover, regulation is a political choice. Private, rather than public, financing of infrastructure remains politically attractive in Britain and elsewhere, in part because its liabilities do not feature on the government balance sheet. In its review of regulation, the National Infrastructure Commission was specifically advised not to include recommendations which 'have significant impact on the public balance sheet' (NIC 2019, p. 8). But while the government books may appear in a better light, the public are paying heavily for a debt-laden system of water financing, structured in the interests of PE investors.
Thus, regulation is not simply about policies and processes; it is a question of cultures and capabilities as well as politics. Furthermore, regulatory processes are caught in an impossible bind in meeting the diverse and contradictory interests of consumers, investors and the state. In line with the wider critique of PE (Morrell and Clark 2010, Appelbaum and Batt 2014, Morgan and Nasir 2021, this examination of the workings of the water system leads us to question the ethical justification for such a system of extraction from the provision of water. When agency relationships and power relations are unpacked, it is unsurprising that the needs of investors dominate, given the weight of expertise and financial resources as well as the government's expressed preference for attracting more private investment. Given these structural complexities, we question whether the socially equitable regulation of privately financed infrastructure can ever be possible.
Notes of infrastructure projects for resilience, infrastructure financing communities, policing during the Covid-19 pandemic, and police professionalisation.