Infrastructure

Macquarie is investing in more resilient water and wastewater infrastructure at Southern Water

At Southern Water, Macquarie Asset Management (Macquarie) is providing investment and operational expertise to accelerate the company’s operational transformation and support the delivery of more resilient water and wastewater infrastructure across the south of England.

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Sector	Infrastructure
Sub-sector	Water
Location	United Kingdom

Opportunity

Southern Water supplies millions of customers across Kent, Sussex, Hampshire and the Isle of Wight with clean drinking water and wastewater collection and treatment services.

Like many other regulated water and wastewater network operators across the UK, Southern Water has faced a complex series of challenges while seeking to upgrade its ageing infrastructure and address the growing impacts of climate change and population growth.

Following years of operational challenges and repeated regulatory interventions, Southern Water received a £90 million fine from the Environment Agency in July 2021.¹ This record fine underlined the need for investment from new shareholders and additional focus to ensure the company could transform its performance and financial resilience to meet customer expectations.

Following its earlier investments in South East Water and Thames Water, Macquarie believed it was well positioned to apply its operational expertise to drive investment and operational improvements at Southern Water for the benefit of the communities it serves.

Approach

In September 2021, funds managed by Macquarie invested £1.1 billion in equity into the Southern Water group, recapitalising the business and reducing its leverage.

Macquarie’s initial investment was accompanied by a series of commitments agreed in consultation with Ofwat, the regulator for the water and wastewater industry in England and Wales.² These commitments became the focus of Southern Water’s Turnaround Plan, aiming to:

deliver a reliable and high-quality supply of water for customers;
protect and improve the health of rivers and seas;
deliver trusted and easy customer service;
empower its workforce by creating a safe, collaborative and inclusive workplace.

To achieve these aims, Southern Water confirmed £2 billion would be invested in the 2020-25 regulatory period to fix its underperforming pipes, pumping stations, and sewer network. When the impact of inflation and higher interest rates on Southern Water’s operating, maintenance and funding costs became clear, funds managed by Macquarie agreed to invest a further £550 million into the group in August 2023. This additional equity funding enabled the company to increase planned capital investment in its network by 50 per cent to £3 billion.³

This major investment programme – the largest in Southern Water’s history – is equivalent to investing £1,500 per household in the company’s catchment area and is approximately £1 billion more than the funding it received via the regulatory framework for the 2020-25 period.² Critically, the programme is designed to support Southern Water as it seeks to improve its performance on key operational metrics and reduce its impact on the environment. This includes meeting a commitment to reduce pollution incidents by 50 per cent by 2025.⁴

While supporting initiatives to help Southern Water improve its operational performance, Macquarie recognised the company could play a leadership role in promoting a redesign of the UK’s Victorian-era water and wastewater systems. Approximately 98 per cent of pollution incidents in Southern Water’s catchment area are outside of the direct control of the company and caused by rain-water run-off from highways and urban areas entering the sewer network.⁵ With greater pressure being placed on the sewer network as more intense rainfall due to climate change and a reduction in permeable ground area from urbanisation combine, Macquarie believed Southern Water could help identify and implement solutions that address the root causes of pollution in rivers and seas.

Outcome

Although Southern Water’s transformation will take time, the appointment of a new management team and investment by Macquarie has enabled the company to make initial progress against its commitments.

Following Macquarie’s first year of ownership, Southern Water was awarded a two-star Environmental Performance Assessment Rating by the Environment Agency (compared to a one-star rating achieved in previous years).⁶ Southern Water is targeting a three-star rating by 2025.⁶ This achievement, amongst other early improvements to Southern Water’s operational performance, followed significant investment in equipment such as pumping stations and a new control room.

A range of improvements to operational processes have also been made, including enhanced real-time monitoring of Southern Water’s sewer network enabled by the roll-out of ~24,000 sensors alongside the installation of Event Duration Monitors (EDMs) on all its storm overflows.⁷ These sensors are helping Southern Water to better detect and fix issues across its sewer network as they occur, with new EDMs increasing the accuracy and transparency of its reporting.

A new Clean Rivers and Seas Task Force comprised of environmental scientists, engineers, and industry experts was also established to oversee a series of projects demonstrating more efficient, cost-effective and environmentally beneficial ways to minimise the use of storm overflows.⁸ Following the formation of the Task Force, Southern Water outlined a long-term strategy to tackle the root cause of storm overflows across its region. The plan was underpinned with an initial commitment to invest £1.5 billion between 2025-35 to slow the flow of rainwater into the combined sewer system while increasing capacity across the network.⁹

On the Isle of Wight, the approach has seen Southern Water:

offer free, slow-drain water butts to households;
install raingardens at businesses, schools and community sites;
identify misconnections to the sewer system;
and enhance the capacity of its local treatment centres and pumping stations.

Southern Water’s collaboration with the community to implement these ‘no regret’ interventions alongside new approaches to surface-water management have cut spills by 70 per cent at a local storm overflow.⁵ Similar initiatives are being rolled out across the network, aiming to deliver a step-change in environmental performance and compliance.

With the backing of its new shareholders, Macquarie believes Southern Water can transform its operations and meet its regulatory obligations. However, Macquarie wants Southern Water to go further and faster and to share learnings with its peers to ensure successes can be replicated nationwide.

As Southern Water trials new solutions to key sectoral challenges and applies its engineering expertise in areas beyond its current mandate, Macquarie is supporting the company’s continued engagement with regulators, government, industry and stakeholders. These efforts aim to support the continued evolution of the regulatory framework so water companies can better meet customer needs and address pollution, leakage, security of supply and water quality.