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Thursday, January 31, 2008 BIP, BAM, Thank You Ma'am
...or how Vancouver Island's forests are drifting out to sea: Today, January 31st 2008, if all goes according to plan, a new listing will begin trading on the floor of the New York Stock Exchange: Brookfield Infrastructure Partners. For the first time, “BIP” will flicker across the electronic boards. A blip of a BIP. The parent company of BIP is the somewhat more hefty sounding Brookfield Asset Management, or “BAM” as it’s known in the financial pages. BAM controls approximately $90 billion in global assets comprised of property, power, and other “infrastructure assets” as they describe. That is to say, BAM managed these infrastructure assets until now. This corporate “spin off” has placed their timber and power holdings into the new entity, BIP. Sounds innocuous enough. Indeed, the workings of these corporate takeovers, mergers, and spin offs are usually as remote and shadowy to us as the machinations of the Wizard of Oz behind his curtain. We may get an occasional foul whiff from these corporate maneuverings and sometimes outright malfeasance is revealed—an Enron or a Hollinger will implode—but even then the repercussions seem remote from our daily lives. A kind of globalized theatre of the absurd is at work with over seven billion dollars lost in the latest fraud at Société Générale in France. Financial markets have, for the most part, become unmoored from real transactions involving real commodities. In the rarefied cyberspace of “the markets,” corporate persons are involved in the games of leverage, acquisition, and speculation. Meanwhile, in actual places, in our neighbourhoods and valleys, residents have real businesses involving tangible goods, services, and human interactions. Flipping through the financial pages of the Post, it's easy to believe these two realities—of the corporate and the community—exist in parallel, but separate worlds. If only it were thus. I find corporate gamesmanship becomes disconcertingly relevant when their assets encompass our lands and the ecosystems on which we depend. I start to feel nervous when absentee and largely unaccountable powers own the very hills, trees, and waters of home. And when our forests and streams morph into their “infrastructure assets” it's worth pulling aside the corporate veil. … Vancouver Island has a legacy of privately held lands carried over from the E&N Railway grants in the late 19th Century. Vast areas of the southeastern Island, along with all the incumbent rights, were traded for a railway line. After a dizzying lineage of deals and transactions, a few corporate owners have ended up with great stretches of private lands now valued in the hundreds of millions of dollars. The communities around here? Well, we got a walking trail along the defunct rail bed. This section of the Trans Canada Trail through the Cowichan Valley provides a pleasant way to view the logging, underway twenty-four hours a day and seven days a week on several sites. It's a sunnier walk now too, with the hills logged to the edge of the trail and the clearcuts stretching off into the distance. I'm sure it will be a tremendous boon to tourism operators. Getting back to BIP... One of BAMs earlier corporate birthings was of Island Timberlands, now one of the major private forest landholders in the province, with over 250,000 ha and almost all of it on Vancouver Island. As of today, by way of an obsure securities conjuring, BIP now holds a 37.5% interest in Island Timberlands and has, as they describe, the intention of “actively managing underlying assets to improve performance.” In other words, BIP intends take charge and squeeze the island of its forest wealth. Now BAM, the proud parent, is a global asset manager that grew out of Brascan a few years ago and is headquartered and registered in Canada at least. Toronto is a long way from the Island here, but it is vaguely within our sight. BIP, on the other hand, is of a more truly global generation—born, bred, and registered in Bermuda. Why stay in Canada with such cold and blustery winters? Even beyond the weather, there are some nifty benefits to carrying papers from Bermuda—the ability to avoid Canadian and US securities regulations, taxes, and court proceedings. Oh those sunny islands. Bermuda is an exclusive club and BIP puts it best in their Prospectus for the new entity, filed with what used to be their Ontario securities regulator on December 21st of last year: “It is the advice of our Bermuda counsel that an action brought pursuant to a public or penal law, the purpose of which is the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity, is unlikely to be entertained by Bermuda.” In securities legalese, this is the equivalent of flipping us, the people who live here and might care about what happens, the bird. Our sovereign capacity, as of today, has lost out to corporate rapacity. This development is especially troubling given recent changes in Provincial laws governing private managed forest lands in B.C. Under current legislation, local government—and by extension, local people—are expressly prohibited from any say in regional land management: “A local government must not adopt a bylaw ... that would have the effect of restricting, directly or indirectly, a forest management activity” (Private Managed Forest Land Act, s. 21). The offshoring of of the Island's forests through the creation of BIP does away with any final semblance of local control or oversight over the land base. And what they have in mind for their infrastructure assets is clear enough: the maximum return to shareholders, with some hefty corporate bonuses and salaries thrown in for good measure. Here is how BAM sums up its corporate mission: “Our goal is to achieve superior, risk adjusted returns for our clients and partners by identifying investment opportunities across select asset classes on a value basis supported by sound fundamentals.” I recommend downloading the Prospectus for Brookfield Infrastructure Partners—it’s available if you search the database SEDAR, under public companies, but please don’t print. At 361 pages, it’s a lot of verbiage and numerage. However, there are sections that provide a glimpse into the corporate persons mind, and into the direction our environment and our communities…I mean our infrastructure…is headed. Of particular interest are the twenty pages of “risk factors” contained in the Prospectus. The Directors of BIP are obliged to inform potential investors of these uncertainties and eventualities. While many of BIP’s risk factors relate to broader economic conditions, as with the rise and fall of currencies or interest rates, there are other troubling items flagged. They are worried about unruly unions; about any pesky interference by governments in the way of regulations or laws; about unsettled land claims and Aboriginal rights; about the possibility that they will have to leave some logs in Canada rather than ship them raw to their US and oversees customers where they can maximize their profit; and about the unpredictable forces of nature. While they don’t mention climate change directly, they do allude to the possibility of man-made disasters and other uninsurable losses. If I were considering an investment in BIP, here's the proviso I would be especially concerned about: “There can be no assurance that our timber operations will achieve harvest levels in the future necessary to maintain or increase revenues, earnings and cash flows. There can be no assurance that the forest management planning by our timber operations, including silviculture [sic], will have the intended result of ensuring that their asset base appreciates over time.” I live adjacent to areas that are being intensively cut by Island Timberlands now, and I can say with confidence that the asset base will depreciate over time. From what I’ve seen, the depreciation is already well underway. I saw the land base washing out to Cowichan Bay from flooding earlier this winter. My advice to any investors who remain untroubled by regard to social or environmental damages, is to buy in for two or three years while the final old growth and high value timber is harvested and during which time all possible lands are flipped into real estate and sold with a blustery windfall profit. But be ready to shift your assets quickly. From all appearances, Island Timberlands and their corporate masters have a similar approach to land management. BIP BAM BOOM. Be wary too. Another risk factor conspicuously absent from the BIP Prospectus, a risk which merits consideration by potential investors, is that the people who live among their infrastructure assets might toss them all the way back to Bermuda. Perhaps their investment team needs a historian. I say I wouldn’t invest in BIP as a costly matter of principle. Admittedly, they promise a healthy return on investment, but then I look at the very real damages and costs to the region where I live. These damages are adding up: increased flooding and erosion, loss of wildlife habitat, loss of local milling jobs and value-added opportunities, destruction of fisheries, loss of viewscapes and recreation opportunities, loss of tourism potential, loss of First Nations sacred sites. For the communities around here, it is a very costly return on investment. As a final irony, it turns out that I do invest in BIP, by way of the Canada Pension Plan Investment Board. These are the “arms-length” folks who manage our retirement investments (to the tune now of $120 billion). The CPP IB is a large investor in BAM and in Island Timberlands and has entered into several other consortium agreements with Brookfield. By virtue of this new corporate spin-off we are all investors in Brookfield Infrastructure Partners as they drain away our real wealth. The citizens of B.C. have a couple of choices. We can sit back and we can wait for our pension cheques as we watch any possibility of a sustainable local economy cut from underneath our feet and washed away with the hillsides, or we can muster whatever sovereign and civic powers we have left and wrestle our lands back from BIP and their Bermuda haven. The tax system may be our most effective tool in the short term. As it stands in B.C., the Private Managed Forest Land Act cuts the corporations a deal, bypassing local government and taxing “managed” private forest lands at much lower rates than you or I. Local residents are, in effect, subsidizing unsustainable land management. If we were to start taxing these corporations at a rate commensurate with the full costs to local ecosystems and local communities, I believe investors would quickly look elsewhere for their infrastructure assets and we could get on with building sustainable local economies, grounded in place, by people who care. BIP does in fact anticipate the troubling visage of tax policy changes in their Prospectus: “Any change in tax legislation (including in relation to taxation rates) and practice in these jurisdictions could adversely affect such company or entity, as well as the net amount of distributions payable to our unitholders.” Life is full of adversity. Welcome to the world, Brookfield Infrastructure Partners. Congratulations unitholders. Bust out the ticker tape. (I just found the following complements of nyse.com. Apparently there is a web cast of the opening bell today if you want to see the real crowning of the baby.)
Now can we get our forests back?
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