Thoughts and Opinions On Today's Important Issues

Wednesday, April 22, 2009

What Is DRTP Really Worth

No, I am not being nosey. I believe that DRTP's Howard Ave office closing and CP Rail's sale of a significant chunk of its interest are very telling. One wonders if the doublestack rail Tunnel concept makes any sense now. DRTP's valuation and how it is arrived at would tell us whether Michael Nobrega’s new plan for OMERS should concern us or not.

The ideas that people can put forward in times of crisis to get what they want. Take a look at what Michael Nobrega of OMERS said in a speech the other day to prove my point:

  • "We are all going through the most difficult markets in our careers. No one knows when credit will flow freely again …when economic recovery will take a firm hold … when equity markets will recoup last year’s huge losses … when pension funding deficiencies will disappear. In the meantime, employers and workers fear major increases in contribution rates as actuarial valuations are filed.

    This is the right time to bring about major change in the pension system so that we have the capital size… the shared professional expertise, the governance rigor and risk management disciplines to better handle future crises."

It troubled me when I saw this from OMERS in October, 2008:

  • "I read this comment on Marketwatch about the investments made by Borealis in infrastructure assets:

     “Borealis Infrastructure, a 10-year-old pioneer that has developed with other investors a portfolio of infrastructure assets with an enterprise value of over $25 billion, including a nuclear power plant, marine ports, a satellite company, oil and gas pipelines and health-care diagnostic services.”

    Yes, yes, yes I noticed the omission of DRTP too.”

To be fair, Nobrega discussed the DRTP investment in his speech that I will be commenting on. I will be dealing with it in another BLOG.

Remember when OMERS lost $600M in write-downs a few years ago, including assets in areas for which Nobrega had responsibility, and how it impacted negatively almost every municipality and taxpayer across the Province for several years since we had to make up the deficiency though our taxes. What will happen now that it lost $8 BILLION last year? How much will our municipal taxes increase to cover that gigantic loss? What municipal services will be cut-back?

But that is not what concerns me frankly in this BLOG. Here is what I have Blogged before from a Nobrega speech delivered in 2007:

  • “But our story is about much more than acquiring equity ownership of infrastructure assets. Creating Borealis Infrastructure as a separate investment entity of OMERS protects the plan from material risks. It also does something else that is vitally important. It enables us to create a corporate culture where we can attract investment specialists motivated by pay-for-performance incentives comparable to many private sector merchant banks...

    Few pension funds or merchant banks in the world match the depth and breadth of expertise that we have assembled at Borealis Infrastructure. In the next stage of Borealis Infrastructure’s evolution, we will partner with other like-minded pension funds in the pursuit and acquisition of trophy infrastructure assets around the world.

    The nature of this partnership could take several forms:

    • Creation of a North American infrastructure fund, managed by Borealis Infrastructure, in which OMERS would be the lead and largest investor; this fund structure is particularly attractive to smaller pension funds without the resources to pursue and manage an in-house infrastructure program.

    • Borealis Infrastructure and OMERS would also consider expanding their reach of co-investment partners to include other major capital pools around the world."

He is being absolutely consistent and moving forward on his ideas. As an example dealing with the latter point, he set up an office in London, England to go after Sovereign funds:

  • “OMERS, one of Canada's largest pension funds with a track record of exceptional performance, is weathering the current credit crisis and is taking its secret of success global. OMERS now has a presence in London UK.

    To accelerate its expansion into private market investments and to take the next step in establishing a global footprint, a new London office has been established under the OMERS Worldwide brand.”

    OMERS Worldwide will leverage the depth and breadth of OMERS active asset management expertise. "Pension funds and sovereign wealth funds that share our prudent and responsible investment philosophy want access to our management teams and assets," he continued. "We want access to large-scale opportunities and co-investment capital around the world.”

It is the first point--- Creation of a North American infrastructure fund, managed by Borealis Infrastructure---that makes me shiver.

I truly have to wonder if Nobrega is now trying to become the Canadian equivalent of Macquarie Bank with all of its infrastructure investing. Given the problems that are impacting the Australians, one has to ask if OMERS should be following a model that no longer seems to be working!

Here is what has said been said only a few weeks ago in relation to OMERS:

  • "In the near future, pension payments will exceed contributions and we will rely increasingly on investment income to pay benefits. In readiness for this change in a more difficult investment world, we have developed, in collaboration with the AC Board, a bold strategy to drive OMERS investment returns and create surplus wealth for our members.

    In order to generate long-term, stable investment returns, one priority of the strategy is to increase “direct drive” active management of investments from less than 70 per cent today to 90 per cent. This strategy has already resulted in the introduction of the OMERS Worldwide brand and the opening of our first regional office in London, UK in order to actively manage OMERS investments in Western Europe.

    A second priority is to form international alliances with like-minded investors to acquire large-scale infrastructure and real estate assets. These are asset classes where we have consistently achieved above-average investment returns as a result of our significant expertise.

    A third priority is to be prepared for pension reform and consolidation opportunities. Our pension administration expertise, coupled with our investment expertise, makes OMERS an attractive choice for Canadian pension plans seeking to strengthen their collective investment returns by being part of a multi-employer pension organization.

    Our strategy gives us the tools to find long-term opportunities in the midst of the current global financial crisis. By being alert and innovative, we will continue to secure the pension promise and build surplus wealth for our plan members.”

Wow, who comes up with these slogans---“direct drive” active management. Now that is action oriented.

Here is what OMERS wants to invest in:

  • “We would like to get a little bit more involved in the transportation sector,” Nobrega said in an interview in Toronto after the pension fund’s annual meeting. “Rail would be a big one, and airports would be another one…”

    Omers will consider rail assets in North America, with a focus on Canada, and airports in North America or Europe, Nobrega said. The fund manager is also interested in water assets outside Canada…

    “In order for the pension funds to get stable long-term returns, they have to invest in the big assets, whether they’re global real estate assets, global infrastructure,” Nobrega said. “They have to have a critical mass to get premium returns.”

I wonder if toll roads, truck highways and bridges fall under the generalized head of “Transportation” since they were not mentioned specifically. You know, multi-billion dollar projects like the DRIC Bridge and road as a far-fetched possibility! It would be a "trophy" infrastructure asset.

Oh my....I may not be far off my suggestion of billions of dollars to be made by a P3 investor in fees and excess profits---if the rate of return was 20% per year--at taxpayer expense over the life of a DRIC project P3 deal. That sounds like a very big "premium" to me compared with the Government financing it alone as with the Port Mann Bridge.

I will let you check out Macquarie Infrastructure Funds with your stock broker to see how poorly they have done and now it seems that OMERS wants to get into those areas. Here is just one example:

  • Macquarie puts Bristol International airport up for sale

    MACQUARIE has put Bristol International airport up for sale as the embattled Australian infrastructure giant scrambles to raise cash.

    The group is understood to have sounded out potential buyers for the airport, which carried more than 6m passengers in 2008…

    The airport was valued at around €320m (£283m) in 2006, but interested bidders are likely to offer much less now.

    During the boom, Macquarie paid huge prices for infrastructure assets, often with big debt packages, that have since values plummet. Many of its funds are now dumping assets at depressed prices to meet refinancing payments and return money to investors.”

The Port Mann bridge financing fiasco is another example.

Who knows, perhaps the OMERS strategy is to pick up infrastructure assets at bargain-basement pricing in the hopes that the assets will increase in value as time goes on.

Great strategy if it works. But what if it does not. What if infrastructure investing is a complete disaster. Remember funds have to be locked into an asset for a long term. The assets are generally illiquid and they would have a limited market of potential buyers if one wanted to dispose of an asset---unlike a stock postion that can be sold easily. In such a case, it won’t just be OMERS pensioners who will be hurt if Nobrega gets his way. As he said in his speech:

  • "Our pension funds need much larger capital bases. Only two… the CPP Investment Board and Ontario Teachers … rank among the top 20 in the world.

    OMERS … while a large pension fund at 44 billion way back in 46th place on the global list.

    OMERS cannot compete against the global giants as a small player. Nor can other plans. The Ontario industry is highly fragmented with many thousands of small plans…

    We need some form of consolidation in both the public and private sectors because our pension funds are simply too small

    Many people are surprised that our big banks and insurance companies, for example, typically have their own pension funds with assets of only $3 billion to $6 billion. Universities are even smaller at $1 billion or less. Thousands of pension funds have assets less than $100 million … that’s millions not billions … and as small as two or three million dollars…

    The next step is for Ontario to mandate through legislation the consolidation of private and public sector pension funds into super-funds comparable in size to Teachers.

    "OMERS must be one of the super-funds. OMERS has to date done the heavy lifting among pension plans in the area of infrastructure investing in the Province of Ontario...

    We are currently invested at the Windsor / Detroit border crossing where one of the largest infrastructure programs must take place in order to protect hundreds of thousands of jobs.

    OMERS has paid its dues and will continue to invest in the Province of Ontario and the rest of Canada."

Now I can feel more confident in my speculation about DRTP. It now seems that DRTP's truck expressway may not have been a serious investment, just dues paying to allow OMERS to be a “super-fund.” A DRTP-type concept had been dismissed years before by MDOT.

One wonders how well OMERS’s efforts at raising Sovereign Funds money were in this time of economic chaos. Was consolidating all of these acorn pension plans into a giant OMERS Oak fund Noberga’s real intention or his fall-back position?

In fact, it is more than that. Nobrega wants:

  • “Ontario to introduce legislation to advance pension coverage for the 65 per cent of Ontario workers without such coverage.

    We believe that joining a provincial plan should be mandatory for all employers and workers not currently covered.”

My goodness gracious, how much money would that bring in every year! How many people would be impacted whether they wanted it or not! It is a breath-taking concept worth billions of dollars each and every year to invest. Just like with Macquarie in Australia!

What is very troubling is this view that OMERS is so smart that other plans have to be legislated into becoming part of it whether they want to or not and that he should be allowed to play entrepreneur with pensioners money. Why that should sound familiar to Windsorites.

For myself, I am not sure that I would want OMERS to be my only choice as manager of my money. But then again Mr. Nobrega disagrees with me. He wants to be my manager whether I want him or not.

It is this arrogance that concerns me, this entitlement mentality:

  • “Why am I calling on the Ontario government to mandate consolidation?…None of us is going to consolidate willingly with anyone else … no matter how compelling the arguments.”

Nobrega can claim:

  • "Our credit team struggled to understand what OMERS was being asked to buy. They tried to assess how these CDOs would hold up if markets changed. They were concerned about the lack of transparency offered by people promoting these products.

    They examined forms of credit enhancement … quality of reporting … and liquidity lines. Our credit team looked at the yields being offered for the risk involved…

    There was nothing brilliant in this analysis. Our people were simply doing their day-to-day jobs … driven by the covenant we have with plan members to invest prudently.

    That meant investing in what we understand and can explain…

    By being skeptical, doing our homework and saying no, we avoided losses.”

Then how does he explain the OMERS loss of $8B last year in areas that they should know so well or the big losses of the past.

Mr. Nobrega’s goal is:

  • “to actively manage pension assets. The days of passive investing … of leaving investment decisions to fee-motivated outsiders … must come to an end.”

Is that what a pension plan fiducuary should be doing, being an active investment manager? Is there an unacceptable risk that is being taken on that should cause concern? These are serious questions that need answering since people's financial well-being after retirement is at stake.

Why is Mr. Nobrega advocating for this so strongly? In my opinion, he can see the handwriting on the wall. With the failures in the pension system about to hit if major companies go broke, funds for plans may dry up. Employers may also be looking for alternatives where they will not be on the hook for pension shortfalls like group RRSPs instead. Employees may demand them so they can control their own financial future and not leave it to the "experts."

He knows he better get the money while he can.

Just like the Governments spending our money by creating deficits to get re-elected, sometimes a crisis can be a beautiful thing!