Quebec has bet $615 million of public money on a cement plant

Located in the remote Gaspesie peninsula, McInnis Cement’s new factory owes its successful opening earlier this summer largely to the provincial government. The factory’s price tag is a staggering $1.5 billion. Roughly 40 percent of that comes from the government’s economic development agency, Investissement Québec, and pension fund, the Caisse de dépôt et de placement du Québec.

So with the first tonnes of cement being shipped out this summer, Quebecers can’t really afford to lose.

The Port-Daniel plant is the largest of its kind in Canada and will produce up to 2.5 million tonnes of cement annually. In a region struggling with high unemployment and a weak economy, both McInnis and the government have claimed it’s a smart investment for economic development.

The idea for a cement factory in the region can be traced back decades, and the initial project was first conceived in the mid-1990s under the name Cimbec Canada. Despite millions in investment from the Caisse, the first iteration of the cement factory failed since the promoters weren’t able to raise enough funding. The Caisse later sued them to get their money back.

Fast forward a couple of decades, and the market seems ripe for expansion. In a world of increasing urbanization, demand for cement here and abroad is growing, especially in Trump’s America. “If Trump’s infrastructure plans go ahead as planned, there will be a massive need for cement in the North American market,” says current CEO Herve Mallet.

A few years ago the cement project piqued the interest of Quebec’s Beaudier Group. They may not have seen Trump coming, but they did anticipate growth in the U.S. market. Beaudier is the investment arm of the Beaudoin and Bombardier families – who’ve been historically tight with government and have received billions in governmental financial assistance over the past fifty years.

Beaudier bought 67 percent of the project from Cimbec and acquired majority control in 2011, planning to sell cement to American markets. By now, the planned production output had doubled in size – and so had the cost.

But in spite of presumably high demand and supposedly strong market conditions, the project remained without significant private investment.

Instead, Beaudier turned yet again to the Quebec government. The project was pitched as an economic development opportunity, creating much-needed jobs and fitting perfectly into the Parti Québecois’s economic strategy for Gaspesie.

In 2014, then-premier Pauline Marois announced $100 million in equity and $250 million in commercial loans from Investissement Quebec, with another $100M equity coming in from the Caisse. Beaudier took out another $350 million in loans from a National Bank syndicate.

“If Beaudoin-Bombardier-Beaudier weren’t who they were, this project might never have gone ahead,” says Yves-Francois Blanchet, who was Minister of the Environment at the time. The project remained without other major private money until summer 2016, when other investors were recruited, including the Bank of China and BlackRock Investors (who seem to be everywhere these days).

But before construction was even finished, Investissement Quebec had taken $116 million of provisions for losses on the loan it provided to McInnis, as revealed by the Globe & Mail last June. Although these provisions don’t necessarily mean Investissement Quebec won’t make the money back in the future, in short, it’s already preparing for the worst.

It shows that the project is a lot more high risk than the government would have us believe. Moves like these don’t happen unless investors assume they’re not going to make that money back.

Under normal financing arrangements, the first parties to get paid back are those that have provided commercial loans. In this case, that’s the National Bank and Investissement Quebec, who both chipped in loans with high interest rates. The next to get reimbursed are debenture investors like BlackRock (a debenture is unsecured debt that’s higher risk than a loan). The last to get paid back, if at all, are equity investors. Equity investors usually hold shares in the company, and their investments are much higher risk. For the McInnis project, this includes money from the Caisse and Investissement Quebec.

So if Investissement Quebec has already taken provisions for losses on their loan, it doesn’t bode well for the $365 million of public money that’s acting as equity in the project.

The provincial government’s line has always been that the investment will benefit Quebec in the long run. “Investissement Quebec provided a loan whose interest will generate supplementary revenue,” says Blanchet. “All that money, it doesn’t come immediately from Quebecers’ taxes.”

Although managed independently, Investissement Quebec is a public fund. The government created it the 1970s to stimulate local economic development, and its operations are subject to certain provisions under Quebec law. Likewise, the Caisse de Depot is a public investment institution that manages Quebecers’ pension funds.

But Investissement Quebec has come under fire recently. Last year’s auditor-general report blasts the organization for its lack of transparency, inability to cover its financing costs, and increasing tendency to take direction from government.

Unsurprisingly, Quebec’s other cement plants weren’t pleased with the amount of public funds going to their competitor. Rival company Lafarge partnered with environmental groups to launch a lawsuit against the project in 2014 for not undergoing Quebec’s standard public environmental review.

Since 1996, certain major industrial projects are required to pass through Quebec’s Bureau d’audiences publiques sur l’environnement, which includes public hearings with independent experts. Even though the McInnis project has grown to twice the size of the original proposal from 1995, the company argued they didn’t need a review since the initial project was submitted before current environmental law passed.

McInnis responded to the lawsuit by citing the delays a public review would cause, and threatened that their investors could pull out if the review went ahead.

The Liberal government needed the lawsuit gone and their investments secure.

An inter-ministerial committee was formed to strategize and respond to the lawsuit. Then in 2015, the Liberals passed a bill exempting the project from public consultations, effectively protecting their investment.

Successive governments have continued to justify the project economically by the jobs it would bring to Port-Daniel’s chronically under-employed rural population. In 2014, Marois’s government touted the creation of a minimum of 400 long-term jobs – pretty significant in a town of 2500 people.

Political opponents were quick to criticize these numbers. François Legault, leader of the Coalition Avenir Québec, blasted Marois for throwing “$450 million in public money for maybe 400 direct and indirect jobs. That’s over $1 million per job.”

Three years later, the costs per job have risen dramatically as the project budget has gone up. Alarm bells started ringing when cost overruns in excess of $440 million were announced last year, bringing the total budget to over $1.5 billion.

In response, the Caisse invested another $125 million in equity, convinced the project was still profitable. They took over majority ownership, with a 55% stake in the project. They also demanded that management be reviewed (the CEO stepped down in August). Other investors were recruited, including the Bank of China and BlackRock Investors (who seem to be everywhere these days).

But let’s face it: Quebec was already in too deep. After over twenty years of government support, millions of dollars, and an unprecedented law, was taking over the project to try and ensure its success the only option?

With more and more public and private money going to the project, who really stands to benefit? And when? According to McInnis’ own estimates, the economic benefits during the first 20 years of operation are $135 million in Québec and $158 million in Canada.

Whether Quebec sees a return on its investment is a bit of a double-edged sword. If the project succeeds, Beaudoin and the government might make some cash, while the planet continues to warm and Quebec likely makes concessions on its climate change targets. Not really a win-win scenario.

But if we’re serious about meeting our climate change goals and we phase out polluting products, investments like this one may end up being total flops. A recent report by the Carbon Tracker think tank says that globally, trillions of planned fossil fuel investment over the next eight years could be redundant or wasted, considering government climate change targets.

So is investing in products like cement the right way forward for a sustainable and economically-sound future?