Vampire Beaver or Cuddly Canadian? The ‘Maple Revolutionaries’ Face an Identity Crisis

Canadians collectively hold some USD $2.4 trillion in assets in funded and private pension arrangements, representing 160% of GDP. Over USD $420 billion of these assets are held abroad, and many of Canada’s largest pension funds invest a significant portion of this capital in illiquid, long-term assets, such as transportation and municipal infrastructure. Investors favour these assets, since they tend to generate solid, stable returns over long periods of time.

Infrastructure assets pose political risks, however. As large pools of capital compete for profitable investment outlets in a world of easy credit and low interest rates, valuation multiples for privatized infrastructure assets are climbing in prized markets like Australia. Inflated asset prices may reward governments with windfall revenues, but also generate pressure for higher user fees and charges, in turn raising political risk — especially if high-priced assets must be ‘sweated’ in order to produce sufficient returns to justify the acquisition price.

Elevated political risk arising from ‘asset sweating’ seems to have befallen Thames Water, Britain’s largest water and sewage company. Servicing 22 million households in England and Wales, Thames Water has become emblematic of the water privatization increasingly criticized in the business press as “little more than an organized rip-off.”

The British government privatized the water industry in England and Wales in 1989. Today, 19 large regional private companies provide water services that are almost entirely funded by their customers, and financed through private investment.

In 2007, Australian infrastructure bank Macquarie and a group of investors acquired Thames for £5.1bn. Macquarie transferred control when it sold its remaining stake in March 2017 to a consortium of 11 pension and sovereign wealth funds, including Ontario Municipal Employees Retirement System (OMERS), British Columbia Investment Management Corporation (bcIMC), Alberta Investment Management Corporation (AIMCo), and the Ontario Public Service Employees Union Pension Trust (OPTrust). OMERS, the largest investor in the consortium, will see its ownership stake in Thames Water rise to 27.4% in early 2018.

During the 11 years it controlled Thames Water, Macquarie received estimated annual equity returns of between 15.5 per cent and 19 per cent. Separately, the Financial Times concluded that between 2006 and 2016, Macquarie paid itself and other investors £1.6bn in dividends, even as Thames Water was saddled with £10.6bn of debt and a £260m pension deficit. Over the same period, the firm paid no UK corporate tax, earning Macquarie the epithet “vampire kangaroo.”

Facilitating this process was the firm’s “mind-bending maze of intercompany structures,” many of which were located in tax havens and offshore jurisdictions. Thames Water’s complex and opaque corporate structure involves nine main group companies, two of which are registered in the Cayman Islands, and other subsidiaries, including one in Guernsey.

Meanwhile, between 1989 and 2015, water bills rose 40 per cent in real terms, according to a 2015 National Audit Office report. The company was also fined a record £20.3m in March 2017 for dumping 4.2bn litres of raw sewage into the Thames and its tributary over three years between 2012 and 2014. This penalty was followed several months later with an £8.55m fine for allowing the equivalent of 180 litres of leaks from each property each day, or 40 per cent of the average daily water consumption of a four-person household.

Millions of complaints to water companies in England and Wales and criticism of dividend payouts and bonuses to executives have fueled demands that Thames Water’s current owners deliver “rapid and radical reform,” or lose their license.

Facing Labour Party calls for re-nationalization of the water industry, Canadian pension funds have tried to distance themselves from Macquarie and distinguish themselves as responsible, long-term investors. Under new ownership, Thames Water has suspended dividends and moved to compensate households for poor service, while promising to close the company’s Cayman Islands subsidiaries. In collective bargaining with its employees, Thames Water had been pressing to close its 2,500-member defined-benefit pension plan. Recently, management agreed to a delay closure of the pension plan and conduct a study of fees and charges that unions argue are undermining the sustainability of the plan.

In response to Labour Party vows to renationalize the UK’s “dysfunctional water system,” at least one Australian investor has issued a pointed warning against rolling back private involvement. Thus far, Canadian pension fund managers have not followed suit. Fund managers instead insist that they welcome strengthened regulatory scrutiny, arguing that lax regulation only heightens the risk of political backlash. But Canadian pension funds are keen students of political risk, and adept at intervening in the regulatory process of host countries to defend their interests. Thus far, the jury is out whether heightened political risks will eventually compel the ‘Maple Revolutionaries’ to bare their teeth.


  1. I manage the Vancouver Island Community Investment Cooperative to provide vehicles for residents and institutions to invest locally in community impact projects such as affordable rental housing, renewable energy, locally owned living wage enterprises. $4.7 billion RRSP contributions annually by BC Residents flow into mutual funds that don’t contribute one cent, one cent, to the local economy. Redirect your money to your communities and ask your MLA to make this easier just as Nova Scotia has done with their Community Investment Funds .


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