Was Corruption Also Rampant at CDPQ's Maple Highways?
Three former CDPQ executives recently accused of corruption also played key roles in a subsidiary which paid 1 billion for a toll highway in India, almost twice as much as what its rivals offered, La Presse has learned.
This acquisition of the Eastern Peripheral Expressway (EPE), announced in the fall of 2022, went unnoticed in Montreal. However, the Caisse de dépôt et placement du Québec spoke of it as “the largest road transaction” of the year as part of the government asset privatization program in India.
Acquisition price: 1.03 billion Canadian dollars. The second bidder, Cube Highways, offered only 575 million, according to two sources familiar with the situation, but who are not authorized to release this confidential information. CDPQ therefore offered 78% more, also reported the daily The Economic Times, in August 2022.
The Quebec pension plan manager has started investing in the highways of the most populous country in the world through the Indian Highway Concessions Trust. This trust is 75% controlled by a subsidiary of CDPQ, Maple Highways. It is this entity which controls the EPE since its acquisition in 2022.
At the heart of this structure are Cyril Cabanes, Saurabh Agarwal and Deepak Malhotra. These three former Caisse executives were accused of corruption in New York on October 24. They would have participated in a bribery system in order to obtain contracts for Azure Power Global, an Indian solar park firm in which Quebecers' nest egg swallowed up 600 million.
The highest ranking of the three, Cyril Cabanes held the position of vice-president, infrastructure, of the Caisse for Asia-Pacific until October 2023. He was also a director of Maple Highways.
The two other former Caisse employees accused in New York, Agarwal and Malhotra, also held administrative positions in the organization chart of the highway company in India.
In the wake of the corruption scandal at Azure, La Presse wanted to know if the Caisse detected irregularities in their work on Indian highways. The institution was stingy with details.
“Although we do not comment on the internal investigations we carry out, we can assure you that we are carrying out the necessary checks,” indicated its communications director, Jean-Benoît Houde.
This response is considered timid by Michel Séguin, specialist in corporate ethics management at the University of Quebec in Montreal.
“What they tell you is to believe them in good faith,” he said. We say “Trust us, we have the best measures”. But it’s up to them to be convincing. They have the burden of proof in that."
Gussets wide open
Inaugurated in 2018, the EPE, which extends over 135 kilometers and six lanes wide, allows trucks to bypass the capital New Delhi.
In total, six bidders responded to the call for tenders to buy the infrastructure in 2022. The lowest bid was 232 million, almost five times less than what the Caisse paid to get its hands on it, according to our sources.
How did the institutional investor come to pay such a price?
He adds that the Authority had set a “reserve price” at 54 billion rupees, or less than $900 million. This was the government's minimum target, communicated only once the call for tenders was completed.
“Maple Highways offered 16% above, while the average difference was 33% for previous auctions,” underlines Jean-Benoît Houde.
Despite reminders from La Presse, the Caisse did not explain why its subsidiary was the only one to bid more than this “reserve price”, all its competitors having offered much less.
Unanswered questions
Former anti-corruption investigator with the Royal Canadian Mounted Police (RCMP), Patrice Poitevin believes that the very high price that the Caisse subsidiary paid for the highway “raises questions”.
“What was the investment strategy? How did India assess the reserve price?", he asks.
But above all, he believes that CDPQ is accountable for the way it mitigates risks, in a country like India, where corruption is “systemic”.
For him, the involvement of the three former executives accused of corruption in Maple Highways should raise “red flags”.
This is also the opinion of Jennifer Quaid, expert in corporate criminal law at the University of Ottawa.
“I don’t know what happened on the ground, but there are certainly certain elements which suggest that there is grounds for further investigation,” she said.
The professor believes that the time has perhaps come for the Fund to “review its procedures” for investing in India. “I don’t think they can go unanswered after what just happened. But hey, that’s if you want to properly manage your reputation internationally and with the public…”
New niche
The Caisse’s foray into the highways sector in India is recent.
In January 2021, its subsidiary Maple Highways took part in a 360 million transaction to acquire a stake in a 67-kilometer stretch in the eastern state of Odisha. And everything indicates that the Caisse's offensive on the country's roads is not over.
With its partners, the Quebec institution is finalizing negotiations to acquire five other road projects from Ashoka Concessions, one of the main promoters of the sector, according to the Indian daily newspapers The Economic Times and Mint.
This would be a transaction worth at least 750 million, according to information circulating in these two daily newspapers.
Alright this article came out on Monday and I will go over the main points but first make sure you read my last two comments on CDPQ's India woes:
- CDPQ Rocked by Major Indian Bribery Scheme
- CDPQ's Trusted Man at the Heart of India Corruption Scandal
I also suggest you reread the expanded updates at the end of the second comment because there are a lot of unanswered questions here and to be very frank, I am wondering if a lot of this can be traced back to Michael Sabia and Anita George.
I'll get back to that below.
First, the article above.
"Not much there," said a friend of mine in France.
Well, not exactly, because I didn't know that Cyril Cabanes and his co-conspirators also had key roles at Maple Highways, a subsidiary in India which CDPQ owns that invests in toll roads there.
Given the accusations the Department of Justice, FBI and SEC in particular have laid on Cyril Cabanes, Saurabh Agarwal and Deepak Malhotra, it's not a stretch of the imagination to conclude they were doing shady things at Maple Highways too.
One of the easiest scams you can do is inflate the price of a project you are bidding on because financial details are kept secret so nobody knows what was paid and what the other bids are.
In this case, the C$1.03 billion price tag to acquire the Eastern Peripheral Expressway (EPE) certainly raises eyebrows.
And the former RCMP anti-corruption investigator, Patrice Poitevin, is right, CDPQ is accountable for the way it mitigates risks in a country like India, where corruption is “systemic”.
That also goes for CPP Investments, OMERS, OTPP, PSP and other Canadian pension funds doing business in India.
Each organization is responsible for how they mitigate risks -- all risks -- including operational risks which encompass fraud/ corruption risks.
To be frank, this story irritates me.
Why? Because I know for a fact Cyril Cabanes and his co-conspirators but especially Cabanes were paid big bucks to oversee operations in India, and they still went ahead with the bribery scheme.
What does this have to do with Michael Sabia and Anita George?
Well, Sabia got CDPQ into India, probably following his peers and he placed Anita George as head of operations in that country.
Soon after Charles Emond became CEO, Anita George departed the organization and we do not know exactly why.
Then this bribery scandal blows up and it involves these three former execs and Alan Rosling, the former chairman of Azure's board of directors, lies at the heart of it too.
All this to say there are many unanswered questions and unless an independent probe is conducted, we will never get proper answers and full accountability.
I'm also not politically naive.
The CAQ desperately wants this scandal to go away because they don't want to anger Quebecers before elections.
It's also true that Michael Sabia is now the head of Hydro-Quebec, so nobody wants to bring him in to Quebec City to get grilled on things that might have happened under his watch at CDPQ.
But without a proper independent probe, we will never know who is ultimately responsible for this mess.
And that might be just fine with the political class in Quebec City, not so much with Quebecers reading these articles wondering what the hell is going on at their provincial pension plan.
I'll be honest, a few of my sources told me Charles Emond inherited this mess from Sabia who placed Anita George in charge of India, but others are claiming she was running a tight ship so I have no idea who to believe.
Lastly and importantly, this bribing scandal happened with former CDPQ employees but it could have easily happened at other large Canadian pension funds.
It underscores the need to have an independent audit of your operational risk procedures but one area where I can tell you all boards of directors need to improve on is their whistleblowing policies.
If your employees are brave enough to blow the whistle on a major fraud case, they shouldn't be penalized, their allegations should be independently and thoroughly investigated.
To my amazement, at almost all of Canada's large pension funds including CDPQ, whistleblowing allegations are handled internally at the legal department and guess what happens when someone blows the whistle? (they're gone soon after)
It is the stupidest thing I ever heard of in my life so it's incumbent upon the board of directors to make sure all operational risks are independently assessed and that all whistleblower allegations are independently investigated by an outside team of investigators.
If all the allegations are handled internally, of course they will be buried and employees dismissed.
Alright, enough on this topic, it makes me sick to my stomach thinking Cabanes and others probably got away with a huge severance package in return for signing a non-disclosure agreement.
[Note: One journalist told me on Friday that CDPQ confirmed to him that Cabanes did not receive a severance package.]
I doubt there will be an independent probe, they're going to sweep this under the rug and politicians in Quebec City will stay mum unless more allegations come out of the SEC's investigation (doubt it under Trump).
Below, Adani Group Chairman Gautam Adani responded to the legal matter involving the US Department of Justice as a challenge which the Group has faced "not for the first time".
"As most of you would have read, less than two weeks back, we faced a set of allegations from the US about compliance practices at Adani Green Energy. This is not the first time we have faced such challenges. What I can tell you is that every attack makes us stronger and every obstacle becomes a stepping stone for a more resilient Adani Group," Mr Adani said at the 51st Gem and Jewellery Awards in Rajasthan's Jaipur.
The Economic Times also reports on Mr. Adani's response to the allegations.
Update: After reading this comment, Adrian Jones, an experienced infrastructure financier and private market investor, posted this on LinkedIn:
Overbidding of itself isn’t automatically evidence of corruption, it is often just either youthful exuberance and/or old men in a hurry.
There are loads of historic examples of winning bidders for infra (especially toll roads) paying double the price of the second placed bidders. It was exactly this scenario for which ingenious investment bankers developed “accreting super-senior swaps” : to allow equity to get the “overbid” amount out while allowing the “senior” lenders to think they have an amortising loan with decent cover ratios ... 🤣
Many infra funds I know (professionally not socially) would rather have defaulted assets still generating fees on par invested (or “mark-to-Moody’s” based NAV numbers - “80% recovery always, honest mate”) than dry powder. The odd default just means they are just a bit careless or unlucky (can happen to anyone) whereas too much dry powder makes them look lazy and/or friendless or even worse “difficult”/“stubborn”.
“Difficult” PMs really annoy the Distribution/sales team at Xmas time if management pay them on sales giving rise to AUM deployed not just vaguely mentioned over a coffee (or while snorkelling in the Caymans or Bermuda).
Excellent comment and I agree, loads of examples of overbidding (especially on toll roads) and that doesn’t
in and of itself prove corruption but in this case, these three former
executives accused of taking part in a brazen bribery scheme, well it
just doesn’t look good to overbid by such a wide margin on an Indian
toll road.
One infrastructure expert shared this with me:
Crazy to think that they bid nearly twice as much as the under bidder for Maple Highways. It would be good to know if there’s something more here. At a minimum it was very bad deal making.
I thank him for sharing his insights.
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