The Economic Playbook 2: Investment and Growth

Manor Farm Utilities had minor debts relating to infrastructure investments. But the lenders were secure in the knowledge that the debt could be repaid. The government had hoped that private ownership would bring the disciplines of commercial business to the old water authorities. But water was different from most businesses. The company remained a monopoly, only its ownership had changed. The change to commercial ownership of the old water authorities, had in fact led to the development of multiple water provider monopolies. Water, unlike energy and gas could not come from different providers, the customers could not move to another cheaper provider, they were stuck with Manor Farm Utilities. The regulator could control prices and standards of service, but its remit did not extend to every commercial decision Manor Farm Utilities might make.

The Nordstrϋm Group of Vestmark had slowly grown its share interest in Manor Farm Utilities, and now it proposed to shareholders and the board, a takeover, rating the share price 25% higher than it was currently quoted. Many players became involved in this takeover, and all guaranteed large fees for the work they undertook, enabling the takeover. Who would argue, as Nordstrϋm Group an engineering and infrastructure conglomerate that began with hydroelectric dams, expanded into municipal infrastructure, waste processing and desalination. They could clearly demonstrate expertise in water provision, and on the face of it, looked like a commercial good fit. They offered some options for the government to make the takeover palatable to the customers, by saying that Manor Farm Utilities would remain a local company, but now with the investment resources to improve water and waste services. Whilst the government could influence the company through regulation, the commercial decisions of Manor Farm Utilities now belonged principally to its board and shareholders. That had been part of the purpose of privatisation, to place the decisions of the water provider at arms length from the government.

Nordstrϋm group, seemed to be good for their word, developing plans for flood protection and improvements in waste management through a replacement programme of the old sewage systems. While government welcomed Nordström's commitments to investment in Astonia, the new owners were already considering a much larger opportunity. Nordström group was planning a buy out of a water company on the other side of the world. Although faced with differences in culture, language, geography, climate and an unpalatable government, the companys pressed on with the buyout. The board presented shareholders with the prospect of a multinational water business, five million additional customers and substantial opportunities for long-term growth in earnings and shareholder value. Despite the differences, there were many positives to this takeover, the country was rapidly urbanising, yet only 40% of its population had modern sewage treatment. Its government was opening its water sector to international investment. Manor Farm had expertise in exactly what it needed to support the infrastructure development needed to enable to country to become an international player, with a seat at many international groups.

Everyone was happy and so commercial takeovers played out a further two times. Manor Farm Utilities now took over water supply companies in different countries. The lenders supported the investment, as now with 30 million captive water supply customers, Manor Farm Utilities, now called MFU noted that in the current economic cycle, borrowing is cheaper than issuing new equity. Their revenues were also predictable, their customer base was stable and debt remained comfortably within investment-grade parameters.

Despite all the congratulations from investors and the happy shareholders and investment banks, a non-executive director, Shay Clancy, a friend of Edward Doyce, kept asking, how does international diversification uphold the standards of the old company and the hope of privatisation, that water and the environment would be better managed. But Shay was a lone voice, and although the minutes recorded his concerns, no one asked the questions, how these investments fulfilled the ambitions of Edward Doyce, that Manor Farm Utilities would become a company with a portfolio of engineering developments, that would lead the world, not an investment platform.

Shay Clancy continued to raise concerns about the diversification of MFU, until he retired at the end of his tenure, two years after buying the first international water company. The hope of the board that MFU would become a multinational company with diverse interests, amongst the largest utility companies in the world, was becoming true. The transformation attracted attention beyond the water industry. Nordstrum's chief executive appeared on the cover of Global Business, was interviewed by international broadcasters and received an annual bonus exceeding his basic salary. The financial press described MFU as an example of how an old regional utility could become a global infrastructure business.

At the same meeting at which they approve the latest £1.5 billion overseas acquisition, an Astonian engineering team requests £8 million to trial neighbourhood water-storage systems. roof and surface-water capture, neighbourhood storage, creating a non-potable water supply for toilets, gardens, public landscaping/industrial use. This would reduce demand for treated mains water and reduced storm-water load on sewers. Not only would this avoid the need for new reservoirs, but that were also always held back through local planning resistance. It would also limit local flooding, though holding back water runoff during heavy rainfall periods. The systems could be included in new developments, and retrofitting to existing housing stock was relatively cheap.

The engineering team were excited, and they were given initial funding of £500,000 to develop a small-scale model. The engineering team reported to several layers of middle management, that slowed development. A feasibility study was completed and a small trial approved, but the full neighbourhood project never made it into the capital programme. The engineers behind the project, frustrated by the delays moved to another company, and the project is mothballed. The acquisitions agreed by the board were successful, and MFU is now a major infrastructure company.