Thames Water and the Vampire Kangaroo

[Trinnydad]

Interesting article in the financial press this week which illustrates the myth of inward investment. Summary of it as follows:-

These details apply to Thames Water which is entirely owned by off-shore companies

Quote...............

?1.16bn Dividends paid to shareholders from 2006 to 2015

0 Corporation tax paid by Thames Water from 2011 to 2015

?10.2bn Borrowings by March 2016.

?260m pensions deficit by March 2016 (Shades of BHS ??)

Since December 2006 Thames Water has been owned by a consortium of institutional investors, including funds from China and Abu Dhabi. It was managed by Macquarie Capital Funds (MCF), dubbed by Australian newspapers the ?vampire kangaroo? for its ruthless focus on profits and tax minimisation. MCF did a classic job of sucking it dry and asset -stripping it.

Thames Water paid ?1.16bn in dividends between 2006 and 2015 - a return that equates to about half of the ?2.3bn of equity paid to buy Thames Water by the Australian Macquarie Capital Funds in 2006-07. It paid NO TAX during the last 6 years.

Unquote

This surely is a scandal of major proportions.

Furthermore, MCF will undoubtedly do the same with The Green Investment Bank which it has just bought from the government for ?2.3Bn. It was set up in November 2012, with ?3.8bn of government money. MCF have already started the asset stripping process by lining up "periferal" assets for sale to 3rd parties. The cash they get from these disposals will, to a large part, meet their initial outlay.

The govt just never learns.

[Loz]

Interesting that you should pick up on 'foreign' investment. Because home grown investment companies would have done it differently?

All sounds a bit UKIPish to me.

[Trinnydad]

Loz Wrote:

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> Interesting that you should pick up on 'foreign'

> investment. Because home grown investment

> companies would have done it differently?

>

> All sounds a bit UKIPish to me.

Heaven forbid! It's just that at a time when we need more central government funding for the NHS and education, it seems that the loss to the Treasury of corporation tax in this case is most regrettable.

[Loz]

So why did you use the phrase 'foreign investment'? Those pesky foreigners and all that?

[Trinnydad]

Loz Wrote:

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> So why did you use the phrase 'foreign

> investment'? Those pesky foreigners and all that?

"Those pesky foreigners and all that" is entirly your choice of words, not mine. I am no xenophobe and no 'Kipper. In deference to your comments I have amended my text to "Inward Investment". Is that OK?

To explain further, if we are going to protect the NHS and education, The Treasury needs to pull in extra tax from somewhere. If businesses don't pay tax then that is not healthy in terms of govt funding for infrastructure. The example I gave with TW shows how a burden of debt is used to eliminate profitability, so that zero tax gets paid.

Philip Green did the same with BHS.

The other common factor between BHS and TW is the pension deficit.

[Loz]

Trinnydad Wrote:

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> I am no xenophobe.

... and yet you seem to have it in for certain investors on the basis that they are not from this country.

> In deference to your comments I have amended my text to "Inward Investment". Is that OK?

Not really. That's just a synonym. It would be a bit like UKIP changing all their literature from 'immigrants' to 'people who travel from other places to live here'. It's kind of missing the point.

I'm still at a loss as to why you seemed determined to pin all the blame on foreigners... sorry, 'inward investors'.

[Dogkennelhillbilly]

"if we are going to protect the NHS and education, The Treasury needs to pull in extra tax from somewhere."

Privatisation also meant that the Treasury got a one-off wodge of money that it used to pay for healthcare, education and benefits (and everything else the government does), and avoided investing billions in the failing water infrastructure in London. That ?10 billion of borrowing would have had to come from the government if it didn't come from the private sector.

[Chick]

Well, that's privatisation for you. The company I work for was a state asset and is now owned by Macquarie who are about to sell us but first they will introduce more shite T's & C's. Having first ended final salary pensions we are awaiting with bated breath the next cuts in conditions. Billions lost to the treasury from privatisation.

[Trinnydad]

Loz Wrote:

-------------------------------------------------------

> Trinnydad Wrote:

> --------------------------------------------------

> -----

>

> > I am no xenophobe.

>

> ... and yet you seem to have it in for certain

> investors on the basis that they are not from this

> country.

>

> > In deference to your comments I have amended my

> text to "Inward Investment". Is that OK?

>

> Not really. That's just a synonym. It would be a

> bit like UKIP changing all their literature from

> 'immigrants' to 'people who travel from other

> places to live here'. It's kind of missing the

> point.

>

> I'm still at a loss as to why you seemed

> determined to pin all the blame on foreigners...

> sorry, 'inward investors'.

I'm at a loss to understand why you keep jumping down my throat. It's not something I expected or deserve.

Take over the thread and do with it what you want as I'm outa here.

[Alan Medic]

Trinnydad Wrote:

-------------------------------------------------------

> Interesting article in the financial press this

> week which illustrates the myth of inward

> investment. Summary of it as follows:-

>

> These details apply to Thames Water which is

> entirely owned by off-shore companies

>

> Quote...............

>

> ?1.16bn Dividends paid to shareholders from 2006

> to 2015

> 0 Corporation tax paid by Thames Water from 2011

> to 2015

> ?10.2bn Borrowings by March 2016.

> ?260m pensions deficit by March 2016 (Shades of

> BHS ??)

>

>

> Since December 2006 Thames Water has been owned by

> a consortium of institutional investors, including

> funds from China and Abu Dhabi. It was managed by

> Macquarie Capital Funds (MCF), dubbed by

> Australian newspapers the ?vampire kangaroo? for

> its ruthless focus on profits and tax

> minimisation. MCF sold its final stake in March

> 2017 to Kuwaiti and Canadian investors.

>

> Thames Water paid ?1.16bn in dividends between

> 2006 and 2015 - a return that equates to about

> half of the ?2.3bn of equity paid to buy Thames

> Water by the Australian Macquarie Capital Funds in

> 2006-07. It paid NO TAX during the last 6 years.

> Unquote

>

> This surely is a scandal of major proportions.

If no tax was paid in the last 6 years then no dividends were either. Those can be paid when a company is making a profit. What is the myth of inward investment? Why would the figures be any different if the company was UK owned?

[Villager]

Trinnydad Wrote:

-------------------------------------------------------

> Loz Wrote:

> --------------------------------------------------

> -----

> > Trinnydad Wrote:

> >

> --------------------------------------------------

>

> I'm at a loss to understand why you keep jumping

> down my throat. It's not something I expected or

> deserve.

>

> Take over the thread and do with it what you want

> as I'm outa here.

Dont be put off by Loz. . He is from Australia and for all we know, he might even work for Macquarrie. L-Oz, get it?

He probably just bailled up at the fact that he disliked you dishing the dirt on an Aussie business.

[One Who Does]

Alan Medic Wrote:

>

> If no tax was paid in the last 6 years then no

> dividends were either. Those can be paid when a

> company is making a profit.

That is a common misconception.

A company can be loss making but still pay out a dividend - provided the shareholders vote for it. This can done, say, under the following two circumstances:-

1. If the company has spare cash on the balance sheet.

2. If the company borrows cash from elsewhere.

In both these cases the company could well be loss making.

[Burbage]

Loz Wrote:

-------------------------------------------------------

> Interesting that you should pick up on 'foreign'

> investment. Because home grown investment

> companies would have done it differently?

It's a point echoed in a recent article in The Economist, which is hardly a bastion of insularity, and there seems to be something in it.

The theory of inward investment is that a overseas company, say Tata, buys up a failing UK-owned business and, through the force of offshore money, local talent and eye-watering bribes from the Treasury, transforms it into a failing overseas-owned business that, in passing, rewards the offshore investors handsomely and keeps a few thousand off the claimant count for a while. The nation's bashful history in railways, car-making, steelworking and nuclear engineering is ample evidence of that, with 'green technology' limbering up as I write.

As the Economist hasn't been the first to point out, the noble acquirers of redoubtable UK firms do tend to strip the assets and spit out the husks, along with all the workers, of everything they buy, without noticeably investing in anything except, on occasion, the fancy financial vehicles they need to work their magic.

That's not always so, but only because foreign investment isn't always aimed at businesses. The Heygate is a lively example of another sort of 'inward investment' that, no doubt, will bring cheer to many wallets, if none that spend much time onshore. This isn't new, of course, and older readers may remember the good old days of PFI, when contracts to manage hospitals were sold almost as soon as they were signed, at twice the price or more, to middle-eastern wealth funds with no obvious experience or interest in healthcare. Though, to be fair, the loss to the NHS we're seeing now was amply made up for by the votes gained by Labour at the time so, up to a point, it's swings and roundabouts.

It might be a stretch to pin the blame entirely on foreign owners of capital, and there are some home-grown opportunists about. However, as court reports and inquiries alike suggest, capital can cheerfully be both onshore and offshore at one and the same time, depending on exactly who's asking. Which means, if anything, the distinction is probably meaningless and that "home-grown investment" is at best a euphemistic synonym for the other sort.

[Dogkennelhillbilly]

"the noble acquirers of redoubtable UK firms do tend to strip the assets "

Thames Water was not a redoubtable company: it was losing 1/3 of all water through leaks. The assets were so borked that ?10 billion of investment was required.

[JohnL]

Dogkennelhillbilly Wrote:

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> "the noble acquirers of redoubtable UK firms do

> tend to strip the assets "

>

> Thames Water was not a redoubtable company: it was

> losing 1/3 of all water through leaks. The assets

> were so borked that ?10 billion of investment was

> required.

But I suppose the question is what are the terms of the

loans and how does that compare to public debt when you

also take into account that these debts also mean the company

doesn't pay tax.

[JohnL]

and the below is what worries me most as it seems similar to problems at some football clubs in the past.

"The reasons given by the companies for the dividends was the need to move funds on to pay down amassed debts sometimes taken on by holding companies through the purchase of the water companies themselves. "

https://www.theguardian.com/business/2012/nov/10/utilities-water-bills

[Trinnydad]

Alan Medic Wrote:

-------------------------------------------------------

>

> If no tax was paid in the last 6 years then no

> dividends were either. Those can be paid when a

> company is making a profit. What is the myth of

> inward investment? Why would the figures be any

> different if the company was UK owned?

It really all comes down to debt loading and tax havens plus the fact that debt interest is an operating expense and so can be offset against tax in the UK. Enough debt and you can wipe out any tax liability.

Macquarie group control 49 entities registered in the Cayman Islands, 18 in Bermuda, nine in Mauritius, six in the Isle of Jersey and four in the British Virgin Islands. The significant link is that all these locations are tax havens.

The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does not have a corporate tax, making it an ideal place for multinational corporations to base subsidiary entities to shield some or all of their incomes from taxation.

Let?s say there?s a company called Macquarie Utilities Cayman (MUC) and it is registered in the Caymans, as is a separate company called Macquarie Utilities Finance (MUF). They are separate but have the same shareholders.

MUC looks at a company called say English Water Distribution (EWD) which is profitable and is owned by several thousand UK shareholders. It is a good solid utility company with guaranteed cash flows. For years EWD has been paying corporation tax to HMRC as do the shareholders on their annual dividends. HMRC is happy and as it collecting a nice wedge of cash on a regular basis. Let?s say EDW?s stock market valuation is ?2Bn of which ?500,000 is spare cash on the balance sheet. It has no debt.

MUC makes a takeover bid of ?2.5Bn via the stock market. The bid goes through, so MUC now owns EWD. We need now to look at how MUC will pay for it.

MUC starts out with only ?0.5Bn in cash but it arranges to borrow ?2Bn from MUF and so MUC pays out the ?2.5Bn to the shareholders. MUC then borrows another ?1.5Bn from MUF and passes this debt on to EWD. MUF takes a dividend out of EWD to the tune of ?1.5Bn. So MUC now has a dividend of ?1.5Bn (transferred to Cayman) to show for an initial capital investment of ?0.5Bn. That?s a 300% return on investment.

Meanwhile, EWD which originally had ?0.5Bn free cash is now laded with debt which it must service by paying interest regularly to MUF via MUC at a rate set by MUF. Because this debt is huge, the interest charges eradicate the operating profits and so EWD pays no tax to HMRC and neither do the shareholders as they are in the Cayman tax haven. It is a simple matter thereafter for MUC and MUF to sort out their inter-company finances in the tax haven so no tax is paid.

On an on-going basis, EWD will balance the operating profits ( i.e. gross profit before finance costs) each year by taking on more debt as appropriate so that net UK profit is zero. It can also do this by adjusting the rate of interest at which the debt is serviced. It doesn?t have to be just debt as money can be extracted by royalties or management fees.

Macquarie is one of the most aggressive operators of this type tax avoidance and has been dubbed the ?vampire kangaroo? for its ruthless focus on profits and tax minimisation. It specialises in infrastructure, utilities, airports, toll roads, car parks, ferries, etc ? in fact anything that is low risk, low tech and guaranteed cash flow.

Further reading?

Read more: Why is the Cayman Islands considered a tax haven? | Investopedia http://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp#ixzz4gPlJ6cEq

http://utilitytalk.co.uk/thames-water-loses-250mil-pensions-pot-owners-squirrel-away-2bn-overseas/

http://www.right2water.eu/sites/water/files/Leaking%20away%20-%20the%20financial%20costs%20of%20water%20privatisation.pdf

http://www.thisismoney.co.uk/money/comment/article-4103092/ALEX-BRUMMER-Don-t-let-Aussie-vampire-kangaroo-suck-2-7bn-Green-Investment-Bank.html

http://www.afr.com/street-talk/why-the-british-are-calling-macquarie-the-vampire-kangaroo-20160913-grfobp?&utm_source=social&utm_medium=twitter&utm_campaign=nc&eid=socialn:twi-14omn0055-optim-nnn:nonpaid-27/06/2014-social_traffic-all-organicpost-nnn-afr-o&campaign_code=nocode&promote_channel=social_twitter

http://resource.co/article/government-sells-gib-vampire-kangaroo-macquarie-11802

[Borky]

Oh noes. Oh noes. The much lauded discipline of the marketplace has failed.

no one expected that.

Still, at least grandad made a couple of hundred quid from his utilities fire sale carpetbagging activities.

lolz.

[Trinnydad]

Borky Wrote:

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> Oh noes. Oh noes. The much lauded discipline of

> the marketplace has failed.

>

Market oversight in the form of "National Interest" legislation, as practiced by virtually all other countries, is the way it should be handled. France is one of the most active in this area.

It's also not too late as action could be taken along the following lines of a tax on revenue (rather than profit) for companies that are not incorporated in the UK.

Where the business sector is regulated then the regulator could be given additional powers to control pricing. I was thinking of such sectors as Water, Electricity, Gas, Rail and Bus fares.

[Dogkennelhillbilly]

You've described exactly what OFWAT does - control the prices charged by Thames Water and other companies. There wouldn't be any debt if water was two quid a litre...

http://www.ofwat.gov.uk/regulated-companies/price-review/2019-price-review/

[JohnL]

So what is May announcing now.

[TheCat]

As someone who worked for Macquarie for 7 years both in Sydney and London. As well as being married to Mrs Cat, who continues to work at Macq-Daddies, I feel I can say with some authority, that their reputation for ruthlessness is well earned

That being said, they exist to make a profit for their shareholders, so if they are operating within the law then the blame is not with them, whether they are 'foreign' or otherwise....

[Trinnydad]

Yes, they are very much the apex predator that rips the life blood out of infrastructure entities and siphons it off to a tax haven. Correct, you cannot blame MacQ as they exist only because the system in the UK allows them to do it. They are not alone but they are the ones who do it with such clinical aggression that their reputation resides in the halls of infamy. And yes there are several UK private equity oerations that do exactly the same.

The environment in the UK has allowed them to thrive because sucessive UK governments have allowed it to happen. They have failed to create a "national interest" restriction. Most other countries have done this and have prevented their prized businesses and infrastructure entities being asset stripped and hollowed out.

Coincidentally I met today a non-exec from MacQ today at the AGM of a large UK company and when I teased this person about MacQ's past reputation, the response was "Oh, don't worry, MacQ won't be doing any more take-overs here now - there's no decent infrastructure businesses left".

Just to repeat I dont bemoan the fact that they are foreign. I do regret the fact that we have had a series spineless/ignorant business ministers in recent decades. No doubt there was a degree of sef-interest involved also.

[Dogkennelhillbilly]

"They have failed to create a "national interest" restriction."

How do you figure this is successful in France? Water utilities are widely (if not universally) privatised there (Suez etc).

[Trinnydad]

DKH,

The National Interest restriction is designed to limit foreign take-overs. Which, if anyy, of the french utilities are foreign owned?

Here's an interesting study..

https://www.ft.com/content/ff76b7de-8e22-11e6-8df8-d3778b55a923