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What a 10-year ban on federal contract bids would mean for SNC-Lavalin

The Canadian Press
What a 10-year ban on federal contract bids would mean for SNC-Lavalin

MONTREAL — As a scandal surrounding SNC-Lavalin Group Inc.’s lobbying efforts to avoid criminal charges continues to plague the federal government, it remains unclear exactly what a conviction would mean for the company.

The engineering and construction giant is facing criminal prosecution over alleged bribes to Libyan government officials while pursuing business in that country. Under the current rules, a conviction includes a 10-year ban on federal contracts.

CEO Neil Bruce, who assumed leadership in 2015, has repeatedly said the organization has turned over a new leaf, and that a prosecution at this date would only punish “innocent employees.”

Nearly one-third of SNC-Lavalin’s $9.3 billion in revenues in 2017 came from Canada, down from roughly 60 per cent of revenue in 2014. Analysts estimate that up to one-half of home-turf revenues stem from federal contracts.

Analyst Yuri Lynk of Canaccord Genuity said the reputational damage of a looming corruption case could hurt the company more than a decade-long ban on federal contract bidding.
“It hurts their reputation,” he said. “Their competitors would always be reminding clients that you’re dealing with someone with outstanding charges against it in its own country.”

On Oct. 10, shares plunged more than 13 per cent after news broke that federal prosecutors had declined to negotiate the charges, making prosecution appear imminent.

In the ensuing political scandal, various Liberal officials have made remarks about the spectre of large job losses and the risk that SNC-Lavalin would pull up stakes from Montreal to settle overseas in London.

The company currently employs about 10,000 people in the United Kingdom, more than the 8,500 or so stationed in Canada. However, the advantages of moving abroad are unclear.

“What’s moving to London really going to do?” Lynk asked, noting SNC-Lavalin would face the same bidding restrictions in Canada should a 10-year ban come down.

The U.K. serves as a major base for engineering companies in the European Union, but that bridge may crumble with the country’s impending departure from the EU.

“One of our major concerns around the U.K. is the impact of Brexit…so it’s not as simple as, ‘Hey, let’s go from Montreal to Manchester and call it a day,’ ” said analyst Chris Murray of Altacorp Capital.

Canada’s recent free trade deal with the EU allows European companies to bid on Canadian government contracts, potentially opening a door to SNC-Lavalin through subsidiaries, such as the London-based WS Atkins, that are not listed in the criminal case, analyst Derek Spronck of RBC Dominion Securities said in a research note.

Other experts say that even if the company shifts its focus further abroad, a criminal conviction in Canada could land it on blacklists in other countries.

In Canada, the restriction would apply to contracts that are “issued by a federal department or agency and contain the integrity provisions,” Public Services and Procurement Canada said in an email. It is not clear whether a ban would apply to major provincial or municipal contracts that happen to receive federal funding.

One possible workaround lies in the public services minister having the power to reduce or waive bidding bans under certain circumstances, said international trade lawyer Lawrence Herman.

“This is not a law but rather a policy under the government’s integrity regime,” he said in an email.

Moreover, the government is now considering changes to those ethical procurement rules, with Public Services holding a month-long public consultation last fall on a proposed “ineligibility and suspension policy” that would give officials more flexibility to set the ban period.

Analysts say a remediation agreement would likely lead to a major stock bump, sorely desired after shares have been hovering at seven-year lows of around $36.

It might also lessen the appeal for SNC to sell part of its 16.77 per cent stake in Ontario’s 407 ETR highway. The company has been mulling a partial sale for at least six months, which would hand it a slice of the $2.2 billion some analysts say the stake is worth.

SNC-Lavalin is working on the five biggest infrastructure projects in Canada, according to trade magazine ReNew Canada. Those contracts alone amount to $52.8 billion, and include projects for Bruce Power and the Darlington nuclear plant in Ontario as well as the Site C dam in B.C.

In 2013 SNC-Lavalin was barred from bidding on any construction project backed by the World Bank for up to 10 years. It also paid undisclosed restitution in 2017 to seven Quebec municipalities as part of the Quebec government’s program to recover money paid in connection with public contracts obtained as far back as 1996 as a result of fraud or fraudulent tactics.

Further clouding the legal woes are court documents that show Quebec prosecutors are working with the RCMP on the possibility of new criminal charges against SNC-Lavalin tied to a contract to refurbish Montreal’s Jacques Cartier Bridge.

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