Driving institutional investor participation through innovative project management model

Réseau Express Métropolitain (REM)

Context

• To ease traffic congestion and reduce travel time between downtown Montréal, its suburbs and airport, CDPQ Infra sought to develop a 67km light rail transit (LRT) project, spanning 26-stations
• The LRT's proposed route goes through areas of high economic development potential, such as: the airport, Technoparc St-Laurent, the Université de Montréal, the Peel Basin and the Wellington-Bridge area

Problem

• Québec faced growing urban congestion problem but the proposed project to solve that problem was estimated to cost USD 4.53B2 and was of considerable scale
• Québec faced difficulty in developing and funding the project rapidly enough to maintain the project's feasibility and attractiveness for investors, pushing them to develop • an innovative partnership model

Innovation

• CDPQ Infra and the government of Québec took on c. 70% and c. 30% equity stakes, respectively, providing c. USD 2.2B and USD 960M in investment, respectively, to the REM project
• CDPQ Infra's (an institutional investor) business model provided a process innovation as it had both the financial capacity and technical expertise to both invest in, and manage, the execution of an infrastructure project, reducing risk exposure to project cost overruns or delays due to inefficiency
• The Canadian Infrastructure Bank provided USD 960M of debt finance as a 15 year senior secured loan at an initial rate of 1%, growing to 3%

Stakeholders Involved

• Caisse de dépôt et placement du Québec (CDPQ) – Canadian pension fund company and institutional investor the led the design, planning and financing of the REM project
• Canada Infrastructure Bank – provided USD 960M2 of debt finance into the REM project
• NouvLR Group – consortium4 awarded the engineering, procurement and construction tender for the REM project

Results/Impact

• Once completed, the REM automated light rail system is expected to reduce travel time from the airport to downtown Montreal to 20 mins, alleviating congestion on nearby roads – a saving valued at USD 1.05B annually
• The light rail network is expected to meet the USD 0.52 per passenger per kilometer cost target, which the ARTM1 will use to set rates on the REM rail network
• The project's expected cost was kept within the announced financial estimates, with construction costs of USD 4.72B, a less than 5% variation from the preliminary estimates

Key lessons learnt

• The direct participation of an institutional investors with relevant expertise in project management facilitated a downward pressure on costs and reduce the risk of project incompletion by aligning the interests of management with that of a long-term investor
• The taking of equity stakes in the project by government and institutional investors increased the attractiveness of investment in the project for debt providers by reducing the risk associated with the project
• While the participation of institutional investors in project management has the potential to improve project execution, that participation's effectiveness relies on the institutional investor having relevant expertise, limiting the viability of such a model in other contexts