[OPE] Ontario Teacher's Pension Plan

glevy@pratt.edu

----- Original Message ----- 
From: Jurriaan Bendien 
To:
ope-l@lists.csuchico.edu 
Sent: Sunday, August 10, 2008 4:51 AM 
Subject: Ontario Teacher's Pension Plan 

In the
deregulation days, much government infrastructure was privatised but new
infrastructural investments stagnated or even reduced, in many countries,
both the physical and the social infrastructure, in favour of quick
financial profit. Now however the realisation is dawning that
infrastructural investments are really essential, and could therefore
provide a profitable investment... particularly if state funds could
guarantee them. Arguably, the state is one of the few businesses in town
which has a more or less guaranteed income and capital base longterm,
"death and taxes" and all that. The state might have to invest,
since e.g. if there are too many potholes in the road, it becomes
dangerous to drive your car over it. And, if you have to use
infrastructure, you cannot easily get away from paying for it, somebody
has to pay anyway. In South Africa, for example, Mbeki cannot keep the
lights on because of continual power shortages
http://www.worldproutassembly.org/archives/2008/02/rand_sinks_as_s.html
This causes mass protests
http://www.thebusinessedition.com/millions-protest-in-south-africa-over-rising-electricity-food-prices-1222/

"The Banker" magazine comments: 

Governments around the world are facing up to an unpalatable truth: that
infrastructure is absolutely critical but extremely expensive.
Organisation for Economic Co-operation and Development (OECD) countries
are saddled with ageing and out-of-date infrastructure at the very time
that public finances are becoming increasingly tight; and developing
nations are discovering that infrastructure bottlenecks are the single
biggest constraint on economic growth. The amount of investment needed is
mind boggling.
http://www.thebanker.com/news/fullstory.php/aid/5847/Infrastructure_assets_show_recession_resistance.html

Similarly, Goldman Sachs sees new profit opportunities in
"building the world":
http://www2.goldmansachs.com/ideas/global-growth/building-the-world-pdf.pdf

That sounds great and progressive, and vastly preferable to
financial speculation which merely shifts capital from A to B without
improving the conditions of life for ordinary people, or even making them
worse. However, what do they mean by "infrastructure"? It's not
really about potholes so much. What they appear to mean mainly is:
telephone mainlines, mobile phone networks, electric power generation (and
more generally, developing energy resources), and roads. Also, they don't
necessarily mean building new infrastructure, but buying up existing
facilities (since the state may not be able to afford any new plant
anyway), and possibly restructuring them. A lot of infrastructure is
already privatised, but there's still opportunities there. 

For
example of this, cast the mind to that civilized and wealthy country
Canada, where private retirement savings amount to about $1.3 trillion,
representing nearly a third of all capital assets owned by Canadian
households
http://dsp-psd.tpsgc.gc.ca/Collection-R/Statcan/74-507-XIE/0010074-507-XIE.pdf

Established in 1917, the famous Ontario Teachers' Pension Plan
invested almost exclusively in bonds until 1990, when Robert Bertram was
appointed "executive vice-president, investment", with a mandate
to shake up its stodgy strategy. Under Mr. Bertram's leadership, Teachers
has spread its investment tentacles around the globe, making it a feared
competitor in some quarters and a highly respected ally in others. The
fund was the first Canadian pension plan to test the waters of the
derivative market.
http://www.otppb.com/web/website.nsf/web/canwest_teachersearningcurve The
Fund had various spin-offs, such as: 

The Teachers' Merchant
Bank, created in 1991 to handle private equity deals... It participated in
the largest leveraged buyout in Canadian history in 2002, teaming with
Kohlberg Kravis Roberts & Co., New York, for BCE Inc.'s telephone
directory business. As of mid-year 2003, the merchant bank had invested in
more than 100 companies and 25 private equity funds. The rate of return
exceeded 25 percent per annum.
http://www.fundinguniverse.com/company-histories/Ontario-Teachers-Pension-Plan-Company-History.html

The Ontario Teachers nowadays have very substantial foreign
equity investments (CA$36.3 billion in foreign equities as against CA$13.7
billion in Canadian equities). The fund totalled CA$108.5 billion at the
end of 2007. It now invests and manages the fund for 278,000 active and
retired teachers http://www.otpp.com/web/website.nsf/web/fastfacts (for
the major investments, see
http://www.otpp.com/web/website.nsf/web/majorinvestments). 

In
2006, the Ontario Teachers' Pension Plan nevertheless calculated it had a
shortfall of $31.9 billion, despite recording a 17.1% return in 2005.
http://www.nupge.ca/issues/pen-n26-apr-13-06.htm Despite good investment
gains, a preliminary valuation of the $108.5-billion fund as of Jan. 1,
2008 still showed a shortfall of $12.7 billion, plan officials said.
"This highlights the continuing challenge of managing a mature
plan," Teachers' CEO Jim Leech said in a statement, citing examples:
The ratio of working members to pensioners has shrunk to 1.6 to one, and
the plan now pays out $4 billion a year in benefits, almost twice the $2.1
billion it receives in contributions.
http://www.cbc.ca/canada/story/2008/04/01/teachers-plan.html?ref=rss 

At a guess, the average pension payout per retired Canadian
teacher per year must now be about CA$37,000 or so. The OTPP owns title to
about CA$390,288 of capital per member teacher, and if the reported
long-term average return on this capital is 11.4% per year, there's a
longterm average gross income of CA$44,493 per member teacher per year. Of
course, the return in 2007 was much lower, only 4.5%. But point is for
every dollar you pay out, you have to have 9 dollars invested. 

Anyway, the additional money to cover the stated shortfall has to come
from somewhere, so what do they do? Just recently, for example, 

The Ontario Teachers' Pension Plan (Teachers') and Morgan Stanley
Infrastructure (MSI) have completed the transaction to jointly acquire
SAESA Group (SAESA), a Chilean electricity distribution, transmission and
generation company from Public Service Enterprise Group (PSEG) for a
purchase price of US$887 million. (...) The enterprise value of the
company is US$1.3 billion. "As an international infrastructure
investor, we are very pleased to be a new, long-term shareholder of
SAESA's diversified electricity assets," said Stephen Dowd, Teachers'
Senior Vice-President, Infrastructure. "We invest in companies with
stable cash flows linked to inflation to help pay inflation-indexed
pensions."
http://www.morganstanley.com/infrastructure/pdf/SAESA_closing.pdf 

So you buy an asset in Chile for $887 million, which is worth $1.3
billion if it operates well (meaning among other things you recover
outstanding debts), so that you gain an asset value of $400 billion, 30%
more than you paid for it. Not bad going. They bought it off the American
PSEG Global which had to settle some debts of its own and wanted to
refocus its core business. http://tdworld.com/business/pseg-to-sell-saesa/
The sale generated an after-tax gain for PSEG of approximately $180
million during 2008.
http://www.tradingmarkets.com/.site/news/Stock%20News/1782316/ (The Left
ranks PSEG among the top corporate air polluters in the US
http://www.peri.umass.edu/Toxic-100-Table.265.0.html ). 

Late
last year, Teachers' also bought about 70 per cent of Chilean water
services operator Esval S.A. for $570 million. In 2007, it also bought
nearly half of the airport in Birmingham, England, with an Australian
partner for $875 million Cdn, the New York Container Terminal on Staten
Island, N.Y., for $2.4 billion US and other terminals in Bayonne, N.J.,
and in Vancouver and Delta, B.C.
http://www.cbc.ca/money/story/2008/06/17/teachers-chilean.html 

The investment by Ontario Teachers' in Chile, the fastest growing Latin
American economy, exporting its copper, salmon and woodpulp, looks like a
real winner: 

According to a Fitch special report, titled
'Chilean Energy Crisis: Electricity Shortages Loom in 2008,' Fitch expects
high diesel prices, combined with droughts, natural gas restrictions,
rising energy demand, and the initial delay in the development of new
projects to increase the likelihood of energy shortages and keep
electricity prices in Chile on an upward trend for the next couple of
years. 'Chile's current water deficit, combined with further disruptions
in the supply of Argentine natural gas, has raised concerns about possible
power shortages beginning as soon as March, the month when demand
historically increases,' according to Giovanny Grosso, Director in Fitch's
Latin America Corporates Group.
http://www.reuters.com/article/pressRelease/idUS211253+14-Mar-2008+BW20080314
http://en.wikipedia.org/wiki/Electricity_sector_in_Chile 

It is
extrapolated that if electricity demand continues to grow in Chile at the
current trend, per capita consumption would be equal to California's in
about a decade. For now, "much will depend on how the volatile peso
fares in coming months, as the government fixes its [electricity] prices
in dollars... In April the government decided it would cut wholesale
electricity prices by 5.2 percent in the country's heavily populated south
and center, citing a strong appreciation of the peso against the
dollar." http://in.reuters.com/article/oilRpt/idINN1731861720080717
However, electricity price hikes at the residential level are in the
pipeline in Chile.
http://www.morganstanley.com/views/gef/archive/2008/20080220-Wed.html 

In August 2007, Santiago de Chile was filled by protesters
demanding higher pensions, better public transport, subsidised housing and
a halt to rising food and electricity prices.
http://www.guardian.co.uk/world/2007/aug/30/chile.international It might
happen again - Chile's annual CPI is in fact now said to be running at
9.5% (core inflation - excluding food and energy - is at 8.7%
http://www.economist.com/agenda/displaystory.cfm?story_id=11731241).
"There's a nasty little inflation spike developing in Chile",
said Geoffrey Dennis, global markets strategist at Citigroup a year ago,
which, he said, did not augur well for equities
http://www.bloomberg.com/apps/news?pid=20601086&sid=aNSEyaWs4KhM&refer=news During the Lagos regime 2000-2005, average real wages in Chile rose by
1.6%.
http://www.ilo.org/wcmsp5/groups/public/---dgreports/---integration/documents/publication/wcms_085042.pdf

But everybody needs electricity, right? And teleconnections...
in June this year, 

The Supreme Court of Canada... ruled that
the $52 billion purchase of Bell Canada is valid, allowing the Canadian
telecommunications firm to be owned by the Ontario Teachers' Pension Plan.
CBC reports that BCE stock jumped almost 10-percent as a result, rising
$3.35 to close at $37.45 in New York.
http://www.electronista.com/articles/08/06/20/otpp.cleared.to.buy.bell/
Bell Canada lost 125,000 residential phone accounts in the quarter and
7,000 business accounts, which translated into further erosion of Bell's
long distance revenue, down almost 3 per cent to $298-million. Those
losses are part of a technological shift that has allowed cable companies
to begin selling phone services. (...) BCE is relying on growth in
wireless, Internet and television services to offset the losses.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080807.wrbce07/BNStory/Business/

The moral of this story? You can figure it out... a hundred
years ago, most global private investors lacked the amount of
capital,organisational ability or legal mandate to finance large
infrastructural projects, necessitating state initiative. But nowadays the
available private capital resources often dwarf state expenditures, and of
course once the infrastructure is put in place, with or without state
funding, you can buy the profitable or potentially profitable parts up, at
relatively low risk, and resell them. This happens across the world. And
in a turbulent world economy, low risk is where the big money goes... How
can the proletariat revolt against electricity bills, for example? A
popular pasttime across the world has been to rewire the supply or tamper
with the meters (cf. e.g. South Africa and Bangladesh), giving rise to
sophisticated software to track fraud. There are electricity protests
nowadays around the globe, from Texas and New Jersey to Nigeria and Kenya,
Yemen, China and New Zealand, England and Japan. But if the light goes
out, how to get it back on? 

Jurriaan 

Teach your
children well, 
Their father's hell did slowly go by, 
And feed
them on your dreams 
The one they picked, the one you'll know by. 
Don't you ever ask them why, if they told you, you would cry. 

- Crosby Stills Nash Young, "Teach Your Children" 

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