PART THREE: The Players
“Better to make good investments than just fast investments”, said CEO of the Canada Infrastructure Bank Pierre Lavallée.
The CIB has seen a record amount of employment turnover that is running rampant throughout its upper ranks. Pierre Lavallée’s abrupt departure as CEO of the Canadian Infrastructure Bank, a brief two years into his five-year term, left many questions. It’s really not that mystifying though when you look at what actually happened with the REM light rail system deal.
What was supposed to be set up to be a guaranteed moneymaker so far has fallen short. “Projects must meet the criteria of supporting the Canadian public good and they must have a revenue-generating component”, said Lavallée. But numerous officials involved in the REM project have stated that the project is a big financial risk. Questions have been posed concerning its profitability. Purchasing existing infrastructure means that there is already a record of an asset’s performance. Building new infrastructure networks from scratch differ in that proven profitable financial pathways have not been yet forged. Returns on the REM system will be based on revenue gained after its completion - on a 99-year fixed rate contract based on a mere $0.72 per kilometre per passenger charge. Quite a term to be locked into.
It didn’t help that the project was under-budgeted from the start. The $6.3 billion dollar price tag was stated to have come “within five percent of preliminary estimates." Five percent of that figure is $315 million - not exactly spare change. It was reported as a cost overrun, and the project meanwhile has been trimming stops to try to save money along the way.
Bombardier had wanted the contract originally, and there is little question that SNC-Lavalin likely received preferential treatment in being granted the contract considering who runs the bank, but it should be counting itself blessed after dodging a what may be quite a bullet. SNC-Lavalin posted dramatic negative cashflows totalling upwards of $367 million during 2019, which the company attributed to cost overruns and financial pitfalls associated with on public-private partnerships. The President of SNC-Lavalin, Ian Edwards, even said the company would be "halting all lump-sum turnkey contracting."
The Toronto Star reported that two architecture firms walked away from the REM, saying “it was so ugly and problematic," that they didn’t want to be associated with it any longer.
“There’s no proof that we actually need this train."
So it seemed it was prime time for someone to join Bill Morneau under the bus. Pierre Lavallée was finished, but not before collecting a healthy undisclosed bonus on top of his $600000 per year salary. Blacklock’s reported that records received pursuant to an inquiry showed the executive was eligible to receive up to $1.1 million in bonuses on top of his regular salary. Never has underperformance been better rewarded than with this government.
A statement released on his resignation read that he stepped down as part of a transition in a move to “support more revenue-generating infrastructure in the public interest.” Was that not what we were doing there in the first place? How to show your cards. Is the REM light rail system going to turn profits or not? Only time will tell how long it will take for the project to pay for itself, and if it turns out to be a gainless partnership it will take us 99 years to exit it.
The Canadian Press obtained a copy of a CIB briefing notice provided to the Finance Department in 2020. It stated the bank should clearly “demonstrate the public benefit” from projects to back up its investing methods, which is “clearly communicated to Canadians.”
The rest of the information had been blacked out.
It’s been a revolving door of executives ever since, and the only tragic part of this is that no one has gotten hit by that door yet on their way out. The CIB’s Board Chair and former CFO of the Royal Bank of Canada, Janice Fukakusa, left with with Pierre Lavallée. Ehren Cory, former partner at McKinsey & Co, stepped in as the bank’s new CEO, brought in to “get money out the door." Michael Sabia, former President and CEO of the CDPQ, took over the role of Board Chair. François Lecavalier, former Vice-President of SNC-Lavalin, and Nicholas Hann, formerly a director with HSBC, whom were heads of development strategy and investment strategy respectively, both left the CIB with less than a year invested in their employment.
To go through every appointment change would be exhausting to read and is unnecessary. The rate of turnover is simply that great, and obviously speaks to a deeper dysfunction within the institution. One gets the sense no one wants to be left holding the hot potato once the music stops.
Someone inevitably will be though. Every single member of Quebec’s public pension plan, the CDPQ. Upon entering the agreement with the CIB, the Caisse de dépôt et placement du Québec assumed all the project's risks. Any shortfalls, which in the case of REM now total over $300 million and counting, will be covered entirely by CDPQ. By pensioners. Macky Tall, CEO of the infrastructure arm of CDPQ, boasted that "If the project is successful, provinces share in the upside, but they're not exposed to the downside. CDPQ holds the risk."
This is not just a funding mechanism that aims to benefit private corporations – it is one where cost overruns can be absorbed by and hidden in plain sight within public pension plans.
To be continued…