Justice, jobs and SNC-Lavalin: How much does the engineering giant matter to the economy?

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When Canada went to war in Afghanistan in 2001, the federal government turned to SNC-Lavalin Group Inc. to set up a base for its troops.

The Montreal-based engineering and construction firm provided logistics support and built the Camp Julien military base on a rubble-strewn stretch of land on the western edge of Kabul. Working under the constant threat of attack near homes shattered by previous conflict, they set up everything the Canadian army would need: Sewage system, power supply, dining and washing facilities, a helicopter pad and a makeshift hockey rink.

SNC-Lavalin had responsibility for much of the infrastructure and services that people relied on. The company used its expertise operating in some of the world’s most remote environments and even hit on a side business, selling the crystal-clear water tapped from deep underground wells on site to buyers such as the French military. SNC-Lavalin’s work was pivotal to the Afghan mission, said David Perry of the Canadian Global Affairs Institute, who has studied private contractors’ role in military operations. “Working out all of that kind of back end support is critical to operational success.”

Today, SNC-Lavalin is at the centre of a raging legal and political fight. The company faces the prospect of a multiyear trial on corruption and fraud charges that could undermine its ability to win new contracts. A conviction could tear the company apart. It wants to negotiate an out-of-court settlement (called a deferred prosecution agreement, or DPA) that would avoid a criminal trial and spare what it calls its “innocent” stakeholders. But its attempts to do so have created a heap of trouble in Ottawa.

Prime Minister Justin Trudeau and his staff repeatedly pressed then-attorney-general Jody Wilson-Raybould to intervene in SNC-Lavalin’s case and negotiate a settlement, according to Ms. Wilson-Raybould’s testimony before a House of Commons committee this week. For four months, she said: “I experienced a consistent and sustained effort by many people within the government to seek to politically interfere in the exercise of prosecutorial discretion in my role as the Attorney General of Canada in an inappropriate effort to secure a deferred prosecution agreement with SNC-Lavalin.”

Her account of the Prime Minister and his staff trying to influence the handling of a criminal case on behalf of a large corporation based in his home city has landed the government in its biggest controversy since it took office in 2015. Mr. Trudeau’s motivations, it seems, were both political and economic.

Wilson-Raybould on SNC-Lavalin and Trudeau: What you missed from her bombshell testimony, and what it means

SNC-Lavalin has symbolic importance in Quebec, as one of the largest truly global companies to have its headquarters in the province. And there are thousands of jobs involved. In a Sept. 17 meeting between Mr. Trudeau and Ms. Wilson-Raybould, she said he raised both issues. “The Prime Minister asks me to help out – to find a solution here for SNC – citing that if there was no DPA there would be many jobs lost and that SNC will move from Montreal,” she testified.

But how real is that threat?

After the RCMP charged SNC-Lavalin with corruption and fraud in 2015, the company raised the possibility, both internally and to federal officials, that it might sell itself or move its headquarters to Britain if forced to endure a potentially damaging trial ending in a conviction. That would not be easy, however. A $1.5-billion loan agreement with the Caisse stipulates that SNC-Lavalin has to keep its base in Montreal until at least 2024 (though such agreements can be renegotiated).

SNC-Lavalin is undeniably an important company in Canada. But its importance has been shrinking, at least in terms of employment. Since February, 2012, when SNC-Lavalin first disclosed it had discovered financial irregularities it couldn’t explain, namely undocumented payments later discovered to be bribes, the company’s payroll in Canada has declined by more than half, to roughly 8,500 people from 20,000. It currently employs about 2,500 people in Quebec, including 700 at its Montreal head office. Five times as many SNC-Lavalin employees work outside the country as in it.

Despite that employment decline, political leaders in both Ottawa and Quebec City appear determined to protect SNC-Lavalin. Even amid accusations of improper interference in the justice system, the Trudeau government said this month that it could still order the director of public prosecutions to settle the case against SNC-Lavalin without a trial. It’s also looking at changing federal procurement rules to give the government more leeway in deciding bans on suppliers convicted in court.

In the provincial capital, the new Legault government, which has pressed Ottawa to give SNC-Lavalin a negotiated settlement, calls the builder one of roughly 10 companies “strategic” to the Quebec economy. With the company’s stock price at low levels not seen in a decade, it has vowed to shield SNC-Lavalin from any unwanted takeover attempts. Quebec pension fund Caisse de dépôt et placement du Québec, SNC-Lavalin’s biggest shareholder with a stake of nearly 20 per cent, said it will be “a rock” for the company and that it has “a lot of potential in the long run.”

Beyond political calculations and history, the key to understanding why these governments and institutions would go to such lengths to protect SNC-Lavalin lies in the numbers and in the kind of work it does. For all of its stumbles, SNC-Lavalin was vital in the build out of modern-day Canada. Without it, the country’s engineering and construction landscape could become a messier and more expensive place to do large-scale projects – even if the talent that makes the company what it is, the people, would carry on with other companies.

“SNC-Lavalin contributes every day to every facet of Canadian life,” Neil Bruce, the company’s chief executive officer, said in an internal video published last October. He suggested that the company’s future growth might not pass through Canada if it is banned from federal government contracts. SNC-Lavalin declined to make Mr. Bruce available for an interview for this story.

Its head office includes the type of workers Premier François Legault covets as he tries to produce more jobs paying $50,000 a year or more for Quebec’s economy and close the average wage gap with Ontario. As Quebec Economy Minister Pierre Fitzgibbon put it in an interview with The Globe and Mail in January: “This is his obsession.”

Moving its headquarters would complete a shift of operations away from Canada that’s been happening through natural growth, as well as through mergers and acquisitions. Following SNC-Lavalin’s purchase of U.K-based engineering firms Kentz Corp. in 2014 and WS Atkins in 2017, SNC-Lavalin now employs about 10,000 people in the United Kingdom, more than in Canada. It just opened a new office in London.

“We’ve expanded as a company but we’ve expanded internationally with international clients” in recent years, Mr. Bruce said. On the company’s fourth quarter conference call Feb. 22, he said although the company would welcome an out-of-court deal, it is now mainly focusing on the coming trial. A special committee of directors is also readying backup plans to protect shareholder value.

Mr. Bruce, a Scotsman hired by SNC-Lavalin in 2013 from Britain’s AMEC Plc, apologized for the company’s darker past in an open letter to Canadians published last fall. “The truth is, the events prior to 2012 that led to the federal charges should never have taken place,” he said.

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Former SNC-Lavalin executives went to great lengths to curry favour with Libya’s former dictator, Moammar Gadhafi, and his playboy son Saadi. But the SNC-Lavalin bosses also tried to pass off the pandering as a legitimate business expense. Court testimony from one of those executives reported in Montreal’s La Presse sheds new light on the effort the company made to keep Saadi happy when he came to Canada for a visit in 2008, including paying for his prostitutes and pocket money.

Mr. Bruce insists SNC-Lavalin has undergone a profound shift in its corporate culture, governance and internal controls over the past five years, with a new board and new senior management. The company is now subject to external monitoring as part of an administrative agreement with the federal government that allows it bid on federal work while the court case continues.

SNC-Lavalin has not shied away from playing the economic nationalism card as public scrutiny of its business intensifies. Among the company’s major Canadian contributions it has highlighted in recent weeks is the massive Manic-5 hydroelectric dam in Quebec, Ontario’s Darlington nuclear generating station, the Husky Lloydminster Refinery in Alberta and Vancouver’s SkyTrain transit system.

The company is working on seven of the 10 biggest construction projects underway in Canada, according to data from infrastructure trade publication ReNew Canada. Total value of the projects: $66.8-billion.

“It think it speaks to their expertise and I think it speaks to the type of work they’re doing” in this country, said Andrew Macklin, ReNew’s managing editor. Most of those top 10 projects are big energy and transit projects, he said. Project owners involved value SNC-Lavalin’s skill set and what they bring to the table, he said.

SNC-Lavalin is one of only a dozen large-scale infrastructure companies worldwide and the only one in Canada capable of taking a project from start to finish, according to analysts. And while that doesn’t mean the company’s continued presence in the country is necessary to keep building new power plants and subway systems, its absence would surely be felt, especially on major projects where it partners with others.

“It’s healthier moving forward with large scale infrastructure projects when there’s competition in the bid,” Mr. Macklin said. “You don’t want to be in a position ever where you’re doing a multi-billion project and you only have one consortium that comes forward that’s qualified to do so. I think that’s where the real potential risk here is.”

That sentiment is echoed by Benoit Poirier, an analyst at Desjardins Capital Markets. He said sponsors of major recent projects in Canada such as Montreal’s Réseau Express Métropolitain (REM) transit project and Toronto’s Eglinton LRT received bids from only two groups in the tendering process, reflecting a preference by engineering and construction companies to work in partnership on major contracts. Take SNC-Lavalin out of the mix and you could ultimately reduce the competitiveness of bids, he said.

The company was chosen as part of winning consortiums for both the REM and Eglinton LRT. Still, Canadian contracts have shrunk in importance in tandem with its workforce. Canada made up 31 per cent of SNC-Lavalin’s $9.3-billion in revenue in 2017, down from 66 per cent in 2013, according to Desjardins. Mr. Poirier estimates federal work represents no more than half of the Canadian total. The company doesn’t disclose the value of its work with the Canadian government.

Among the biggest pieces of federal work is SNC-Lavalin’s role in building Montreal’s new Champlain Bridge. Federal procurement records show the company is also executing dozens of other contracts, many of them tiny, three or four-figure deals such as washing windows in federal buildings and inspecting fire systems.

For investors, the Canadian work is peanuts. Most of the company’s market value is tied to SNC-Lavalin’s 16.76 per cent stake in Ontario’s Highway 407 toll road, which stretches from Burlington to Pickering and gives paying motorists a way to bypass the area’s more congested arteries. It is a money machine for its owners, including Spain’s Ferrovial SA and Canada Pension Plan Investment Board. Analysts estimate SNC-Lavalin’s stake is worth about $5-billion or $28.50 per share (the company’s stock closed the week at $36.57). The highway generated a profit margin of 41 per cent on revenue of $382.7-million in the third quarter ended Sept. 30.

Desjardin’s Poirier said he believes SNC-Lavalin could handle any potential ban from federal contracts if it were found guilty on the criminal charges. He said SNC-Lavalin management indicated to him in a meeting that it would be able to diversify the balance of its exposure away from Canada to other regions over a three-year period.

There’s also a possible backdoor to Canada. If no out-of-court settlement is struck and SNC-Lavalin is found guilty after a trial, a federal ban would apply to the legal entities charged. In this case that is SNC-Lavalin Group Inc., division SNC-Lavalin Construction and subsidiary SNC-Lavalin International. Analysts such as Derek Spronck at RBC Dominion Securities say they believe its British business would be excluded from a ban.

“With the EU trade agreement with Canada that was recently enacted, the Comprehensive Economic and Trade Agreement allows for European companies to bid on Canadian government contracts,” Mr. Spronck said in a research note. “We see the potential ... for SNC to still bid for Canadian federal contracts through its other legal entities, which now includes WS Atkins.”

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But there’s another problem. If SNC-Lavalin ran away from the fire here, it would still face the prospect of being blacklisted by international clients, who might have policies preventing them from doing business with convicted suppliers. Criminal charges alone have cost the company an estimated $5-billion in lost business as rivals seize on SNC-Lavalin’s legal uncertainty, Mr. Bruce has said. An actual conviction would be worse.

“We believe SNC-Lavalin will struggle to win projects and attract new fundamental investors for as long as its legal troubles persist,” Raymond James analyst Frederic Bastien said in research published this month, adding that politicization of the company’s situation dims the chances for a settlement. “The scandal lends itself well to campaign-time propaganda.”

Mr. Bruce isn’t as pessimistic. SNC-Lavalin’s backlog of work won worldwide but not yet completed stood at $14.9-billion at the end of December. And he says the company continues to win its share of contracts. “We’re very, very confident around a number of prospects both inside Canada and internationally,” he told analysts Feb. 22.

That’s not the case in Saudi Arabia, however. There is real concern about SNC-Lavalin’s ability to secure new work there because of a diplomatic fallout between Canada and the Middle East kingdom. The company has roughly the same number of employees in Saudi Arabia as it does in Canada, and a deterioration in its prospects there led to a recent $1.24-billion writedown in its oil and gas division.

Despite the fact governments in power stand to be embarrassed if SNC-Lavalin picked up and left Canada, the country could probably handle such an exit from an employment perspective. The evidence suggests the company’s Canadian staff would find new jobs.

Engineers Canada, the national organization of engineering regulators, projects in its latest labour market study that job openings for the profession’s 14 specialties, including civil, mechanical, electrical and chemical engineering, will top 9,000 a year until 2020 before tapering off. That means if SNC-Lavalin’s engineering staff in Canada were to be laid off tomorrow, demand for their expertise is high enough that all of them could potentially find jobs quickly.

Prime Minister Justin Trudeau’s argument that he sought a settlement of SNC-Lavalin’s criminal charges to preserve head office jobs at the company was dismissed by former SNC-Lavalin insiders.

“The jobs issues is simply a deflection, a red herring,” said Ted Gamble, who worked as an engineer for SNC-Lavalin until 2012, then moved to a rival company’s project in New Brunswick.

Mr. Gamble said SNC-Lavalin has been moving decision-making executives from Canada to England as part of a global growth strategy since buying Atkins for $3.6-billion. “SNC is clearly going to maintain a [regional] Montreal office, and to the extent skilled employees lose their jobs, they’re going to find work at Hatch or WSP.”

Reaction to SNC-Lavalin’s legal woes from current and potential customers and investors has been mixed.

Vancouver-area mayors last month urged the Lower Mainland’s transit agency to make sure it isn’t forced to use SNC-Lavalin for a $4-billion transit Skytrain extension project. “There is yet another federal scandal involving this company and it does not instill confidence out in the public,” said Port Moody Mayor Rob Vagramov.

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Meanwhile, equity investors continue to have questions about the company’s plans and opportunities. At a private meeting between SNC executives and investors organized by National Bank of Canada earlier this week, David Taylor of Taylor Asset Management said Mr. Bruce and his team appeared dead on their feet and focused on what’s going wrong instead of on what’s going right.

“Neil is, and rightfully so, he’s beaten up and he’s bruised and he’s battered,” Mr. Taylor said. “If it got heated it’s because I think they could have probably done a better job of talking about all the positives and all the opportunities. ... I think they’re in a bind here. They’re in a tough position. But they’ve got some great assets. And they spent all their time talking about what’s gone wrong.”

Others are voicing their support for SNC-Lavalin. Their general thinking: The company’s ability to deliver big ticket projects matters more than what happened in Libya under departed management.

Right now, the largest infrastructure project in Canada is the $12.8-billion refurbishment of the Darlington nuclear power plant in the Toronto suburbs and SNC-Lavalin is involved. The facility produces approximately 20 per cent of Ontario’s electricity. Ontario Power Generation, a government-owned utility better known as OPG, runs the power station.

“OPG’s project partners are crucial to the success of the refurbishment,” spokesman Neal Kelly said in an e-mail. “SNC Lavalin Nuclear is part of the CanAtom Power Partnership Group, which is the key partner on this project. We have completed more than 70 per cent of the work and the refurbishment project is tracking on time and budget.”

Ontario’s other major nuclear operator is Bruce Power LP, which handed responsibility for a $475-million renovation of its reactors to a consortium led by SNC-Lavalin this past June, more than three years after prosecutors filed criminal charges against the company. SNC-Lavalin and its partners have shown “the experience, commitment and dedication to safety, quality, productivity and innovation” allowing the project to be on time and on budget, Bruce Power spokesman John Peevers said Friday.

Caisse de dépôt, SNC-Lavalin’s biggest shareholder, is counting on the company to help deliver its $6.3-billion REM, a 67-km light rail project in Montreal. Construction has begun with a view to carrying the first paying passengers in 2021.

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Bay Street analysts, who work closely with the companies they cover, expect the Liberal government will find a solution to SNC-Lavalin’s legal woes that wouldn’t be as damaging as a maximum 10-year ban on bidding for federal contracts.

In a report, CIBC World Markets Inc. analyst Jacob Bout said Public Services and Procurement Canada are finalizing a new regime for sending corporations into the penalty box. “The proposed changes would give the government greater discretion to decide on whether a ban makes sense, and if so, an appropriate length of time.”

The Liberals have promised to spend $180-billion on infrastructure over the next decade. Analysts expect SNC-Lavalin will win its share of these Canadian government mandates, along with projects outside Canada. New infrastructure assignments are expected to offset a potential decline in SNC-Lavalin’s sales to mining and oil and gas companies, which are dealing with low prices for commodities.

CIBC’s Mr. Bout forecasts SNC-Lavalin’s revenues from infrastructure projects will increase by 13 per cent to $2.5-billion in 2020. He also predicts SNC-Lavalin will boost revenues from nuclear projects by 27 per cent to $1.2-billion next year.

The company became the dominant domestic player in the sector in 2011 when it bought Atomic Energy of Canada Ltd. from the federal government. Annual sales from SNC-Lavalin’s clean energy group are seen by analysts as doubling, to $888-million.

Overall, CIBC expects SNC-Lavalin’s revenues will rise by 3 per cent next year, to $10.4-billion, reflecting weakness in commodity-linked sectors. Up and down Bay Street, most analysts assume SNC-Lavalin can continue to sell its services to government-controlled entities and the world’s largest utilities.

Finally, there is the issue of competition.

There is a view among political leaders in both Quebec City and Ottawa that Canada needs to level the playing field for home-grown companies competing against rivals in countries that already make use of out-of-court settlements for corporate offenders, or so-called deferred prosecution agreements. That includes the U.K., the United States and France.

Former federal attorney-general Jody Wilson-Raybould faced pressure to make use of DPAs as corporate get-out-of-jail cards long before Mr. Trudeau began banging the drum for SNC-Lavalin. In a 2017 letter to Ms. Wilson-Raybould, former CEO of the Business Council of Canada John Manley said: “The fact that DPAs already are in use in several OECD countries puts our firms at a competitive disadvantage.”

"It’s been no secret that the Trudeau government wants to make sure that there is some mechanism available for SNC to deal with this issue,” said one lawyer specializing in white collar defence, who was granted anonymity because he was not authorized to discuss the matter publicly. “There is generally a recognition [in other countries] that this is the way to deal with these issues when you’re dealing with companies.”

So why did federal prosecutors decide not to give SNC-Lavalin a deal? The company maintains it does not know. But by law, prosecutors are not allowed to consider national economic interests when deciding whether to settle with a company. The lawyer said that one factor against SNC is that the company remains in the headlines and is still being investigated by police for past practices. Under these conditions, a settlement would not be understood by the general public.

“I think in the mind of the prosecutor here, they want a criminal conviction on the record,” the lawyer said. “There’s still a high-profile element to it. And it may have been the prosecutor’s thinking that we want to make an example out of this."