Quebec, Caisse have high hopes for new infrastructure deal

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Quebec's transformative new deal giving pension fund Caisse de dépôt control and responsibility over its future infrastructure projects was hatched during a fleeting conversation last summer.

Premier Philippe Couillard and Caisse chief executive Michael Sabia were seated together at the head table at an event in downtown Montreal. Mr. Couillard, newly elected and saddled with Canada's second-largest public debt and a sputtering economy, faced a rash of pressing infrastructure needs and limited ways to pay for them. Mr. Sabia, architect of the pension fund giant's turnaround after a stunning $40-billion loss in 2008, was making money for depositors and looking for attractive opportunities to make more.

"He said to me, 'Do you have any interest in doing stuff, you know, infrastructure, in Quebec?'" Mr. Sabia recalled in an interview Tuesday. "I looked at him and I said, 'Well as it happens …'"

As it happens, the Caisse had been increasing its infrastructure investments around the world, and now held stakes worth a combined $10-billion in projects as diverse as Vancouver's Canada Line rapid rail service and Belgian natural gas pipeline company Fluxys. Anyone who had listened to Mr. Sabia speak publicly since 2012 had heard him repeatedly express a desire to invest in more infrastructure in Quebec as well.

Negotiations between the Caisse and the government ensued and the result was made public Tuesday: a deal by which Quebec will give the Caisse new powers to control and develop major infrastructure in the province, a role traditionally occupied by government. The government will identify potential projects, and the Caisse will look at the profit possibilities and accept or reject them. It insists it will not undertake a project if it does not see solid commercial returns.

The Caisse will create a new infrastructure subsidiary to oversee its new investments. And Quebec will need to amend existing laws governing the Caisse to allow it to retain controlling interest in infrastructure assets. Currently, the pension fund is limited to owning 30 per cent of a project's outstanding equity. The Liberals have a majority, meaning they will be able to push through the changes.

Two public-transit projects have been identified for immediate priority consideration. A light-rail corridor on Montreal's new Champlain Bridge and a public-transit system linking downtown Montreal to the city's Trudeau International Airport and West Island. Their projected combined cost is $5-billion.

But the future impact of the agreement stretches far beyond Quebec's borders, according to the Caisse. Quebec isn't the only place facing pressing infrastructure needs and tight public finances. The pension fund said it will prove the model can work in Quebec and then export it elsewhere.

"I don't believe at the end of the day that this is, or is only, a Quebec story," Mr. Sabia said. "There will be and is a substantial market for the capabilities that this subsidiary will have – working for a long-term public investor, not a short-term flipper of assets, a team that has the ability to manage a project from planning to execution to operation."

Still, the logic of the model isn't quite as sound elsewhere as it is in Quebec. Here, when the Caisse makes money on infrastructure, so do millions of Quebec retirees. It might be a more difficult sell in the United States, Europe or Asia.

The model also has some inherent potential conflicts.

The Caisse is a major shareholder in several companies with interest in obtaining their share of infrastructure contracts, such as SNC-Lavalin Group Inc. and WSP Global Inc. If the Caisse runs tender processes, as it has committed to doing with the utmost transparency while encouraging "vigorous competition," it will also be influencing outcomes related to its separate investments.

More broadly, there's the question of the Caisse's autonomy. Although it currently operates at arm's-length from the government, the Caisse has a legislated dual role to maximize returns and help stoke economic growth. The government appoints its CEO and board of directors.

"How do you guarantee that independence when the government will constantly be demanding new infrastructure?" Parti Québécois opposition critic Nicolas Marceau said. In shifting investment risk for such big projects from taxpayers to retirees, the government is putting that independence in peril, he said.

Mr. Sabia insisted the Caisse is currently independent from the government and will continue to be so. He said the traditional belief in Quebec that government should control such infrastructure is changing.

"People in Quebec are realizing that there are limits to what governments are going to be able to afford," Mr. Sabia said. "These are projects that I suppose might not get done if it weren't for something like this."