Saturday, November 26, 2005

State Capitalism By Any Other Name

In the mercantilist period of Canadian History the State was crucial to the expansion of British Colonial monopolies in Canada, like the Hudsons Bay Company. The State cleared the way for the Private Railway company the CPR to expand westerward, and in order to make sure the CPR did not have a sole monopoly of the rail lines paid for by Canadians, the State created its own railway, CN.

Today the largest institutional investors in Canada are public pensions plans. The three largest are the Ontario Teachers Pension Fund and the Ontario Municipal Employees Retirement Fund and finally our national Canadian Pension Plan, CPP. All three of late have been bemoaning the fact that they have had to invest overseas because the Canadian economy does not allow for Public Private Partnerships (P3's).

The irony in this is that the OTP and OMER are jointly funded by unions and the employers, in this case the State. And the CPP is funded directly by Canadian Taxpayers. Today CPP is one of the largest investors in commercial real estate in Canada.

CPP to pay $1B for malls
Quebec City, Sherbrooke: Pension giant's third billion-dollar deal this year

The CPP Board, which invests cash not needed for current pension-fund obligations, stunned the real-estate world this year with two major deals in a span of three weeks. The first deal was a 50% equity stake in the $2-billion takeover of O&Y Properties Inc. that was led by BPO Properties Ltd. Then it spent $1-billion to acquire a 50% interest in 11 properties owned by Oxford Properties Ltd., a subsidiary of the Ontario Municipal Employment Retirement System.
The pension fund's new dominance is symbolized by the fact it now owns half interests in two of the country's largest bank towers, the Royal Bank Plaza and First Canadian Place, both in the heart of Toronto's financial district. The expected price for the shopping-mall portfolio is reported to be in the $800-million-to-$1-billion range and based on a capitalization rate or rate of return of about 6.25%, will offer an extremely low rate of return, which is indicative of the strong demand for retail property. That demand has left pension funds increasingly as dominant players in the field because they can accept a lower rate of return than publicly traded entities.

The push for P3's by the government and the public pension funds are the modern form of State Capitalism in the age of neo-liberalism. Rather than having the State directly own enterprizes or businesses, as is the traditional definition of State Capitalism, the State is the investor in private enterprize. In this case the use of public pension funds is State Capitalism through the back door. Without this investment capitalism cannot function. So whats changed since the days of the CPR? Not much.

Pension fund capitalism

Peter Drucker, one of the foremost business theorists of the 20th century, who died earlier this month, understood all this. He predicted, 30 years ago, that western capitalism was moving towards what he called "pension fund socialism", a kind of economy owned by the workers through the pension funds being reinvested in the economy on their behalf. Back in the 1970s, Drucker thought the money pensions could raise for investment might reignite a golden age of economic growth. As America was ahead of the game in pushing its pensions on to the money markets, he argued, it could claim to be the first truly socialist country in the world.Since then, our economies have become much more reliant on pensions to keep them moving. But there is something strange about how institutional investors are investing those pensions on our behalf. In his book Pension Fund Capitalism, Professor Gordon Clark of Oxford found them guilty of loss aversion: being more worried about losing money than excited about making it.

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