Exporting The CDPQ Infra Model?

Maxime Bergeron of La Presse had a good interview with the Caisse's President and CEO, Michael Sabia and Macky Tall, President and CEO of CDPQ Infra. The interview is in French and is available here but I tried to translate it below using Google so bear with me as I did my best to tidy it up (and it's far from perfect):
The news went under the radar last May. Just a few weeks after the groundbreaking of the Réseau express metropolitain (REM), held in the shadow of the skyscrapers of downtown Montreal, the Caisse de depot et placement du Quebec has quietly embarked on the first stages of a similar light rail system project in Auckland, New Zealand.

This multi-billion dollar project, if it comes to life, could mark the first milestone in a brand new export model of the institution's know-how in complex infrastructure projects. In an interview with La Presse, Michael Sabia, the Caisse's boss, and Macky Tall, president and CEO of the subsidiary CDPQ Infra, confirm that their phone has been ringing a lot since the beginnings of REM in 2015. The calls come from United States, Europe, English Canada and Oceania.

"The world is looking for new ideas, new ways to finance and structure infrastructure projects," explains Michael Sabia. In the world, there is a deficit of at least $ 1,000 billion a year in infrastructure. All experts in this field understand that it is impossible for governments to have all the financial resources to invest. "


The Caisse has obviously made an impression with its recent - and pronounced - turn towards infrastructure. Following an agreement with the Quebec government in 2015, the pension fund manager created CDPQ Infra to study two public transit projects that had been making strides for decades: a rail link to Montréal airport -Trudeau and another to the South Shore.

After eight months of accelerated analysis: the surprise. Rather than two separate sections, CDPQ Infra suggested building a single automated network of 26 stations spread over 67 km, which would connect several sectors of the metropolitan area. A project of 6.3 billion with a commissioning scheduled for 2021.

The Caisse proposed to act as majority investor, prime contractor and long-term operator of the network, which it will also own.

This unprecedented business model has earned many critics in Quebec, but so far, it works pretty much according to plans.

The REM is under construction, two years and dust after its initial announcement.

The pressure for the Caisse is enormous today.

"I think we have now demonstrated our ability to develop the idea, to plan the project, to work with governments and to choose world-class suppliers, but now, we have to demonstrate that we are able to monitor the implementation. the construction of a project of this magnitude, "admits Michael Sabia.

"If I can give you a sentence, it's proof of concept," he continues. In the CDPQ Infra model, REM is this proof of concept. That's why we have to deliver the goods. Show that it's not just an idea, not just a plan, but you have to make it real, realize that idea."


If the Caisse proposed the REM's bold project, it is convinced that it can derive stable and predictable profits for the benefit of Quebec savers. It believes it can generate a minimum return of 8% on its investment, threshold at which the two minority shareholders - Quebec and Ottawa - can expect to receive royalties.

If the plan works as planned, both levels of government should ultimately recover their capital investment ($ 1.3 billion each), as well as the financing costs incurred. Montréal, for its part, will inherit a state-of-the-art transportation system that could attract 160,000 users a day - and relieve some of its oversaturated roads and subways.

If construction costs explode along the way, or passengers shun the REM, the Caisse will look bad. Michael Sabia, however, indicates that his confidence level is "very high" and that he is "very comfortable" with the level of risk of the project.

"There is no guaranteed return, and that's why we've done detailed studies to make sure our financial projections are realistic and reasonable," said Macky Tall. And we are confident of achieving this return."

Mr Tall recalls that all the Caisse's investments in transport infrastructure are generating profits at the moment. The institution's portfolio of infrastructure assets has returned 10.3% over the last five years, resulting in a gain of $ 5.4 billion for Quebec savers.

The Caisse is a shareholder in the Eurostar and the Heathrow Express in Europe, as well as in the Canada Line in Vancouver. Jean-Marc Arbaud, who successfully piloted the Vancouver light rail project in the 2000s, was recruited as project leader for the REM.


The difference between the previous investments of the Caisse in infrastructure and the REM project is that it is part of a blank sheet - or almost - in this file. The CDPQ Infra team has developed the technical and financial aspects of the project from A to Z, and the Caisse's subsidiary will oversee its construction and operation. A "greenfield" investment, very different from an equity investment in an existing project or a traditional public-private partnership.

Without wanting to replicate the REM to infinity in all the major cities of the planet, the Caisse's executives hope to be able to export the "one-stop-shop" model developed in the Montréal light rail project.

"You bring all the elements: make the financial package, manage the construction, do the long-term operation and, yes, invest too, says Macky Tall. There are benefits to this model, because since most capital costs are financed, it gives the option that the project is off the government's balance sheet, which is not the case for the very, very large majority transport projects. "


While the Caisse has received dozens of expressions of interest in the REM model, it has only been in recent months that it has dispatched teams abroad to concretely study a handful of potential investments.

"We now have the ability to ask our planning people to look at other opportunities," says Michael Sabia. We are open, but since very, very recently. Since the beginning of the construction process [of REM]. "

NZ Super Fund, the New Zealand equivalent of the Caisse de dépôt, has identified CDPQ Infra as a potential partner to develop a light rail system of about 60 kilometers in the city of Auckland, valued at around 5.3 billion. In the spring, the group submitted an unsolicited offer to the government of that country to study the financial viability of a commercial investment in the transportation system, which was struggling to be achieved through traditional channels.

"This is a project that is at a preliminary stage, comparable to where REM was two or three years ago," said Macky Tall. The partnership was the subject of a press release and several articles in New Zealand, but the Caisse ignored it in Quebec.

For now, CDPQ Infra is studying "four or five" infrastructure projects outside Quebec in a slightly more serious way. They are mostly in the United States and "directly or indirectly" related to transportation, confirms Michael Sabia. The leader was invited to present the Board's business model to the White House in 2015 under the administration of Barack Obama before several governors.


The Caisse has not had any new discussions with the White House since the election of Donald Trump in 2016, confirms Michael Sabia. But he does not believe that the protectionist aims and the policy of "America First" advocated by the president will hinder the participation of the Quebec group in a possible project on US soil. Especially since decision-making is more at the level of cities and states in the infrastructure sector.

"In the few states we are working with now, some governors are Republicans, others are Democrats, not an overly partisan issue," says Macky Tall. It refuses to name the states concerned since the discussions are still preliminary.

The Caisse's strategy will be based from now on a gradual "intensification" of the export efforts of the CDPQ Infra model, says Michael Sabia.

"For now, the focus and priority are here, because I repeat, you have to deliver the goods. We will intensify our work outside of Montreal, but for at least a year, the priority remains the REM because we have to deliver this 67 km project. It's not simple."

The Caisse's main investments abroad in transport infrastructure

The Caisse de dépôt et placement has been involved in several projects or transport companies in recent years outside Quebec.

Canada Line

The Caisse has been one of the main investors in the construction and operation of this 20 km light rail link in Vancouver, which connects the airport to downtown. The line carries 120,000 passengers a day, beyond the initial forecast of 100,000.

Heathrow Express

The Québec institution is a shareholder of this rail link that connects Paddington Station in central London with Heathrow Airport (of which the Caisse is also one of the minority shareholders). The steep train line attracts 5.8 million passengers a year.


The Caisse is one of the two shareholders of Keolis, a public transport operator operating in 16 countries, which each year welcome more than 3 billion passengers, including by train, coach and tram. The Quebec group owns 30% of this business, which posted a turnover of 5.4 billion euros (8.2 billion CAN) last year.


Since 2015, the Caisse holds a 30% stake in Eurostar, which operates high-speed trains in Europe, including the only rail link between London and Paris. Eurostar carries about 10 million passengers a year.

Michael Sabia responds to critics

"It's not impossible"

Michael Sabia is agitated when he is reminded of the skepticism expressed by many when the Caisse announced its REM project in 2016. The leader, known for his sometimes boiling character, was visibly fed up with the "bullshit" that often surrounds the speeches about major structuring projects in the province. "At the beginning of this project, frankly, many, many people told us: it's impossible. Impossible. But we got here today, where people are building the project. Many people have told us that it is impossible in the next two or three years, to plan the project, to launch the tendering process, to look for all the approvals, impossible because it requires six, seven, eight years, usually. But it's done. So, frankly, when I hear, "oh, but in the other example, it does not work," or "oh, there's a problem here," my answer, frankly, is: bullshit. "

"We are capable"

Michael Sabia, who has spent most of the last 20 years in Montreal, first at the head of Bell Canada and the Caisse de dépôt, hopes that the REM project will act as a catalyst to restore Quebecers' confidence. "At one point, here in Quebec, we must be able to say that we are capable. We are not prisoners of history, we are not prisoners to deliver an infrastructure project that requires 10 years of planning and another 10 years of construction. We are capable and frankly, for me, another element of REM is to demonstrate here that we are capable of delivering world-class things, and within a reasonable time. "

"Inevitable" disadvantages

Critics of citizens affected by the $ 6.3 billion mega deal have begun to make their voices heard in recent weeks. Passengers on the Deux-Montagnes suburban train line, which will be replaced by an REM antenna, are already feeling the effects of the start of work. The digging of a huge hole on McGill College Avenue in downtown Montreal, to connect the REM to the subway, should also cause a lot of inconveniences. Michael Sabia says he approaches criticism with "a lot of collaboration and openness". Several modifications were made to the REM during the development of the project, such as the addition of connections to the Montréal metro. "That being said, you can not make an omelette without breaking eggs. This is not our goal, we will do everything to minimize these issues, but in the end, it is unfortunately inevitable that there are some issues. A forum will be held in the fall to explain in detail the different impacts, adds Macky Tall.

A "priority" performance threshold

The agreement between the Caisse and the Québec government provides for a "priority" performance threshold of 8% for CDPQ Infra, the project's prime contractor. This threshold must be met "to trigger the production of return for minority shareholders", namely Quebec and Ottawa, specifies a financial information note prepared by CDPQ Infra. Beyond this level, the dividends generated by the REM - if the project generates more profits - will be paid mainly to Quebec City and Ottawa, until the minimum level of return stipulated in the agreement for these projects is reached for these two minority shareholders (3.7%). This equates to the average cost of Quebec borrowing on all of its debt. "The REM project is the first public transit project for which the government will have a repayment of its capital investment and the average cost of borrowing," says one. Any excess dividends would then be shared among the three shareholders (CDPQ, Quebec and Ottawa).

The REM in numbers
  • 67 km automated network
  • 26 stations
  • Will connect downtown Montreal, the South Shore, the North Crown, the West Island and the airport.
  • In service 20 hours a day
  • Budget: 6.3 billion
  • Planned commissioning: 2021
  • CDPQ Infra: 2.95 billion
  • Government of Quebec: 1.3 billion
  • Government of Canada: $ 1.3 billion
  • Regional metropolitan transport authority: 512 million
  • Hydro-Québec: $ 295 million

Source: CDPQ Infra
Alright, so it's not a perfect translation but it captures the main points of the article.

I've already discussed the Caisse's greenfield revolution as well as the supposed $300 million REM cost overrun.

I have never seen so many "fake news" articles on a single project so I was pleasantly surprised when I read Maxime Bergeron's article.

Sabia is right, there's a lot of "bullshit" surrounding this REM project and there are many hidden agendas from unions and other special interest groups tryng to torpedo the project every chance they get by feeding garbage to sloppy reporters who don't bother to fact check what they print.

Even some astute blog readers of mine have questioned this project, the return assumptions and the governance surrounding it but I rebuff them and just tell them straight out: "You obviously have no idea of what you're talking about, stop reading garbage in Quebec newspapers and start researching and really understanding this project and its governance.'

If I were to venture a guess, and it's still early, the REM project will be a huge success which will transform Montreal's economy in a profound way.

Rest assured, however, there will be problems along the way, every major infrastructure project around the world runs into some problems, but as it stands, the team at CDPQ Infra is more than capable of handling these problems.

The wild card of course is Quebec politics. If a new provincial governent comes into power and replaces Michael Sabia and puts an end to this project or significantly curtails it, then it will have an impact.

But I wouldn't place too much weight on this as any governent with half a brain will see the long-term benefits of this project and that the model is in the best interest of all stakeholders.

In other words, nobody will dare play politics with the REM project because it's well underway and all hell is going to break loose if they do scrap it for shady political reasons.

Now, as far as exporting this model elsewhere, there are certain logistics which make it more diffcult, like different laws, different vendors and subcontractors, etc.

Don't get me wrong, the financing part is definitely exportable, but the actual construction and operation will undoubtedly differ depending on the country and unique circumstances.

Still, the Caisse is right to explore infrastructure opportunities in a crowded market:
Cyril Cabanes, Head of Infrastructure investments, Asia-Pacific, CDPQ, shares his views on the Australian and Indian markets, his take on disruption and the Canadian pension fund manager’s new in-house expertise in infrastructure development and operation.

With all the debate surrounding driverless cars and the future of transportation, you could almost forget driverless trains have been a reality for some time now.

The first, fully automated line that operated without a driver present in the cabin was the Port Island Line, which opened in 1981 in Kobe, Japan.

Since then the list of fully automated train lines has been growing and Canada is set to add another track in the form of a light rail network, the Réseau électrique métropolitain (REM), a rapid transit system for the Greater Montreal area in Quebec.

It will be the fourth largest automated transportation system in the world and it is being developed by one of Canada’s largest pension funds, Caisse de dépôt et placement du Québec (CDPQ), while the Quebec and federal governments are both minority shareholders of the project.

From an institutional investor perspective, what makes the venture unusual is that as far as infrastructure projects go, this one is as green as greenfield projects come.

Historically, pension funds have shown a preference for more mature infrastructure projects, or brownfield projects, where the risks are better known and the objective is to capture an income stream rather than capital appreciation.

But CDPQ has chosen to build in-house expertise in infrastructure development and operation through a newly established subsidiary, CDPQ Infra.

“CDPQ Infra’s first focus is the REM, a C$6 billion project. But as the REM evolves, we will be looking at other projects. CDPQ Infra is not just set up for one project, it’s a solid team that is able to manage a project from start to finish,” says Cyril Cabanes, Head of Infrastructure investments, Asia-Pacific, at CDPQ.

As the infrastructure sector becomes more and more crowded for investors, the establishment of a dedicated infrastructure development arm will help increase CDPQ’s added value in its dealings with partners and should give it a competitive edge over its fellow institutional investors, Cabanes says.

“This is a pretty unique capability; we are going to be able to use those skills to develop projects and become a more efficient investor in greenfield projects.

“We are not trying to put out a message that we are going to control everything we do going forward; we are still about strategic partnerships. But we will be a more sophisticated partner.”


Since joining CDPQ in 2016, Cabanes has looked after infrastructure transactions in the Asia-Pacific region and is based in Singapore. But as he worked for several years in Sydney, he is very familiar with the opportunities in Australia. Today, he oversees CDPQ’s infrastructure activities in this market, including stakes in the Port of Brisbane, in Plenary, the largest specialist public-private partnership business in the region, and in Transgrid, the owner and operator of the electricity transmission network in New South Wales.

Often Australian pension funds lament what they see as the lack of a clear pipeline of infrastructure projects they can invest in. But Cabanes says this perception has probably more to do with the abundance of privatisations in the past, than with the current pipeline of projects.

“Historically, in Australia, people have been reactive, largely because the market has been throwing quite a lot of opportunities at people. So when investors say the pipeline looks thin, then what they are basically saying is that the privatisation pump is being turned off,” he says.

“Now that doesn’t mean nothing else gets done.

“The good thing about Australia is that it has always provided a fairly regular, reliable flow of transactions.

“It has always punched above its weight in terms of infrastructure relative to its GDP (gross domestic product) and population. That has been the case since at least the mid-‘90s, when the privatisation trend started.

“I guess it is expected that in the next few months or years there will be a slowdown, but we’ve seen this before, where we’ve had two years without privatisations and then the pump started again.

“We are still pretty excited about the pipeline in Australia. We’ve built a large portfolio and strong partnerships, which now give us more opportunities.”


CDPQ has also been very active in India, following the reforms introduced by Prime Minister Narendra Modi, and recently announced a number of deals in private equity and infrastructure in the logistics, specialised corporate finance and energy sectors.

“Infrastructure in India has a patchy history, but we are lucky that we are coming in as the second wave of investors in India,” Cabanes says.

“It is particularly attractive because of the reforms that the country has been introducing in recent years and we are starting to see the effects of that quite tangibly.

“For example, India has a very high rate of non-performing assets sitting on the banks’ balance sheets.

“It has been a long-held hope in terms of providing a source of deals, but it was only recently that reforms were introduced to facilitate the restructuring of those loans and the sale of those assets. We are starting to see those assets coming to market now.

“Now, this is literally a several-weeks-old phenomenon, but it is going to have a huge impact on that potential.”

Last year, CDPQ acquired a 20 per cent stake in the largest solar energy developer, Azure Power.

Investments in companies such as Azure are perfectly aligned with the pension funds manager’s recently announced climate change investment strategy, which includes a 50 per cent increase in its low-carbon investments by 2020, Cabanes adds.

Technological Advancements

Driverless technology and solar energy generation are areas that have benefited from the increasing pace of technological advancements. But Cabanes is not concerned this rate of advancement reduces the time horizon for infrastructure investments.

“When we invest, we invest for the long haul, so of course we look very closely at technology and increasingly so in the last few years, even for assets that are so-called boring and that you would think are not especially sensible to technology and disruption,” he says.

Energy transmission has come under scrutiny from some analysts, who argue solar and battery technology will lead to a disaggregation of energy transmission. But Cabanes says these new technologies form more of an opportunity than a threat to the incumbents.

“Take Transgrid, for example, it is the largest energy transmission grid in Australia and we’ve been invested in Transgrid for a couple of years now,” he says.

“A lot of people would think that technology has nothing to do with Trangrid. It is regulated and will go on for many generations. Don’t worry about it.

“But people who are more technology savvy would tell you that we are crazy; microgrids could destroy the value of these assets.

“But we need to look at this from a new angle.

“We spend a huge amount of time on assessing technology risk and rather than looking at technology as a threat, you also have to ask yourself: ‘Could it be an opportunity?’

“In the case of Transgrid, it clearly is.

“The company benefits from renewables, because when you build a wind turbine or a solar plant, you need to connect it to the grid, because often these plants are far from deload centres. This is additional revenue and value for us.

“These are not threats; they are opportunities. Disruption is always as much an opportunity as a threat and it all depends on how you respond to it.”
Good article and while it doesn't specifically focus on exporting the REM project to Australia or India, clearly the Caisse has a foothold in these countries and can approach the right partners to discuss a huge megaproject if there is an interest down the road.

But first, the Caisse needs to focus on its own backyard, the Montreal REM project which is proceeding nicely. Greenfield infrastructure projects of this scale take years to deliver and there are always problems along the way.

Still, the Caisse has the right people to deliver on this REM project and focus on other similar projects around the world.

Below, an older (December, 2016) interview where Michael Sabia spoke with Mutsumi Takahashi of CTV News Montreal on the REM project. I think this was one of his best interviews on this project.