OTPP Feels Heat Over Chile Water Deal

Submitted by Leo Kolivakis, publisher of Pension Pulse.

James Daw of the Toronto Star reports that Teachers' pension plan feels heat over Chile water deal:

A
leading champion for Canada's water supplies is chiding the investment
managers and Ontario teachers for investing $1.1 billion in Chile's
water systems.

The chair of the
Council of Canadians, a 70,000-member public advocacy group, says it's
fundamentally wrong for our public educators to profit from owning

essential public services.

The campaign led by Maude Barlow
strikes at the heart of investment strategies at the Ontario Teachers'
Pension Plan Board, which is the lead investor in companies controlling
37 per cent of Chile's water and sewage services.

Working on
behalf of labour, human rights and environmental movements in Chile,
Barlow met last Thursday with the Ontario Teachers' Federation.

"I'm
steamed," the energetic volunteer declared afterward. Her colleague
Meera Karunananthan was no happier after meeting later the same day
with Jim Leech, president of the OTPP.

Both the umbrella group
for teachers' unions and Leech argued it's the role of the pension
managers, indeed their legal obligation, to pursue the best financial
interests of pension plan members.

But
Barlow predicts profit-driven ownership of water supplies, dams, roads,
ports, airports, hospitals and schools will put the living standards of
the poor and middle class in other countries at risk.

"In Chile
and other places it's a matter of justice as water becomes privatized
and the rates are set by the market. Those who cannot afford to pay
those rates go without," she said in an interview.

Universal
access to water, sanitation, health care and education is certainly
vital, and some countries have messed up when turning public assets
over to the highest bidder.

Meanwhile, pension plans put their
members' savings at risk if they fail to factor in the risk of public
backlash, or natural disasters like the severe earthquake that struck
Saturday near Chile's coast.

Deborah Allan, a spokeswoman for
Teachers', said Monday that no Chilean employees died in the
earthquake, but the water system was damaged.

Recovery efforts
are being hindered by the lack of electricity and the potential cost of
repairs is not known. Teachers' Plan employees met to discuss what help
they might provide as individuals.

Beyond
the earthquake, there is always the risk a change in government could
lead to nationalization of private assets. Look no farther than the
former Brazilian Traction, Light and Power, once the largest Canadian
investment overseas.

It used to supply 60 per cent of Brazil's
total power and 75 per cent of its telephones, while carrying 1.1
billion passengers a year on its electric trams and buses.

But
the government insisted on buying the telephone business in 1969 and
power operations in 1979. It's hard to get full value when there's only
one buyer.

That said, countries around the world are recognizing
there can be advantages to private ownership. This presents an
opportunity to both major public pension plans, and the countries
seeking alternative sources of capital.

What's critical is to
have both the local government and the foreign investor act in the
public interest. Failure to do so can lead to public unrest.

Leech says public utilities can provide pension plans low-risk returns over a long period.

He pointed out in an earlier letter to Barlow that Chile's government holds a part interest in private water service companies.

Those
companies raised access to sewage treatment from 30 per cent to 90 per
cent in the decade ended 2008, and this resulted in a dramatic
reduction in cases of hepatitis and typhoid fever, he wrote.

Chile
sets water and sewage rates, and provides subsidies to 21 per cent of
customers served by the companies Teachers' controls, Leech added. So
the government ultimately controls the water resources, environmental
standards and profit margins.

It's not necessarily a panacea to
have water, road and electrical systems provided by government. Direct
or indirect tax subsidies can lead to waste and long-term consequences
for the environment.

For Barlow to succeed in her campaign,
Ontario's government would have to pass legislation to block
investments in regulated industries.

That would not be in our public interest, and it may not be in Chile's.

As I stated yesterday in my comment on OMERS' 2009 results, infrastructure investments are being privatized, allowing
private equity funds and pension fund managers to profit from these
deals as they purchase assets on the cheap from cash-strapped
governments.

I will admit that infrastructure is an excellent
long-term investment, providing stable cash flows, but it carries its
own set of risks. A couple of them were discussed in this article:
natural disaster and nationalization. And then there are reputation and
legal risks - something which Teachers is dealing with now following
the earthquake in Chile.

While private-public partnerships
are the likely future of infrastructure, privatizing public assets
isn't always for the common good. Inevitably, privatization will lead
to rationing of public goods as fees rise to allow investors to reap
the profits on their investments.

When it comes to
infrastructure, why allow public pensions to take equity stakes?
Governments should create infrastructure bonds and allow public pension
funds to invest in them as part of their fixed income allocations. Keep
it simple and clean.

Finally, I want to thank the committee
at the Concordia School of Public Affairs for organizing tonight's
panel discussion on pension reform. I enjoyed the discussion, met
interesting people, and even got to see Michel Nadeau again, the former
president of CDP Capital. And surprisingly, I agreed with many (but not
all) of his comments. Will come back with my thoughts on the panel
discussion later this week.

Comments

[Anonymous]

Hi Leo;

Another very good post!

Your quote : "As I stated yesterday in my comment on OMERS' 2009 results, infrastructure investments are being privatized, allowing private equity funds and pension fund managers to profit from these deals as they purchase assets on the cheap from cash-strapped governments."

And how is a 'cash-strapped government' created? I'll bet Greenspan himself is just now realising what it was all about. I wonder if Summers and Geithner have let Bernanke in on their "thinking" (whatever that may be). Personally : I doubt it.

Exhibit A: from Mish's Global Economic Trend Analysis blog : Article Title : Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

As you put it so nicely :

"As I stated yesterday in my comment on OMERS' 2009 results, infrastructure investments are being privatized, allowing private equity funds and pension fund managers to profit from these deals as they purchase assets on the cheap from cash-strapped governments."

all the best from

Namke von Federlein

[Anonymous]

as someone who lives in ontario, and has family in chile.. i find this article a bit lacking in.. well.. tact perhaps? anyway.. may God (or whatever 'higher power' you choose) be with them there in this terrible time. investments and pension plans aside.

[Anonymous]

Local public utilities should be owned by the local public. If anyone wants to invest in those utilities, it should be via buy bonds. But who the hell cares about right and wrong? After, we are humans. On this planet, we are at the top of the theft-and-lying-and-only-pretending-to-give-a-damn-about-anybody-but-ourselves "chain".