SNC-Lavalin Group Inc. is pulling out of bidding on several major Canadian infrastructure projects as the fallout from the company’s strategic shift begins to be felt throughout the country.
Montreal-based SNC will withdraw its candidacy on lump-sum turnkey projects across Canada for which it has been shortlisted, company spokesman Nicolas Ryan confirmed. He said SNC could re-enter the bidding as a subcontractor under other bidders or if the structure of the projects changes to offer a “better risk profile.”
SNC is bowing out of projects including Vancouver’s $2.8-billion SkyTrain Broadway extension, Vancouver’s $1.4-billion Pattullo Bridge replacement, Edmonton’s new Valley Line West light-rail line and Montreal’s Lafontaine tunnel modernization, Mr. Ryan said.
The development alters the competitive dynamic on billions of dollars worth of infrastructure contracts in Canada. It increases opportunities for other companies such as Toronto-based Aecon Group Inc. and Los Angeles-based Aecom, but leaves SNC’s current bidding partners and project sponsors scrambling to assess their alternatives.
On the Lafontaine project, a contract being spearheaded by Quebec’s transportation department, SNC and construction specialist EBC Inc. of Quebec City made up one of just two groups to qualify for the bidding. SNC’s declared intention to bow out of the project leaves EBC in the lurch and raises the possibility that the government could reopen the bidding process to make it more competitive.
“We’re analyzing the situation,” said EBC spokeswoman Johanne Laurin. She declined to comment further.
SNC’s move is part of a wider shift in corporate strategy announced by the firm last week. It plans to exit lump-sum turnkey contracting to focus on more fee-for-service consulting and nuclear work. Such lump-sum contracts, in which the builders bear responsibility for any cost overruns, have been “the root cause” of the company’s recent financial performance issues, SNC chief executive officer Ian Edwards has said.
Mr. Ryan declined to specify what percentage of SNC’s current revenue is made of lump-sum turnkey work or how many such projects the company is working on or bidding on in Canada. SNC said in an investor presentation in June that 25 per cent of its overall business consists of fixed-price engineering, procurement and construction contracts, which analysts say are the same as lump-sum turnkey contracts.
Cost overruns on these sort of contracts are not uncommon. Almost every company that does both engineering and construction and has such contracts in its backlog has encountered “major execution issues” over the past three years, according to Canaccord Genuity analyst Yuri Lynk.
“Time and time again we see engineering and construction companies accustomed to performing cost reimbursable work taking on lump-sum turnkey contracts with disastrous effects,” he said in a recent note. He said examples of companies that have moved away from that type of construction work to focus on consulting services include Bilfinger SE of Germany and Houston-based KBR Inc.
Some political leaders in places where SNC has bid on major infrastructure projects have expressed concern about the company’s involvement in local work because of its legal trouble. SNC faces charges of bribery and fraud related to its business dealings in Libya in the early 2000s.
Neil Bruce, SNC’s former CEO, told The Globe and Mail in March that some of the company’s commercial partners were also getting cold feet because of its legal situation. He said partners pulled out of bidding groups on two projects because of doubts about SNC’s future and worries that their chances of winning the bids “have come down because of the bad publicity” surrounding SNC.
But while some might applaud the company’s decision to retreat from fixed-price contracts – one city councillor in Edmonton last week called the development “a blessing in disguise” – experts warn it won’t be without consequence. That’s particularly true in the transit sector, where SNC has a strong reputation for its previous work, said Andrew Macklin, managing editor of infrastructure trade publication ReNew Canada.
Costs might increase for governments and other project sponsors on contracts if other companies don’t step up to fill the void, Mr. Macklin said. Certainly, there will be an impact on the quality of bidders, he said. “As SNC falls out of bidding on these megaprojects, it means there is one less strong option for project owners to consider.”
In general, there is enough expertise available from companies in the infrastructure space to ensure future projects will get done, Mr. Macklin said. He pointed to Ontario’s recent effort to open the door wider for European companies as a potential element in the future.
SNC is involved in eight of the 10 biggest construction projects under way in Canada in various capacities, according to the latest data on ReNew’s website. They include the $12.8-billion refurbishment of the Toronto-area Darlington nuclear power plant, which produces approximately 20 per cent of Ontario’s electricity.
The company estimates it will complete the remainder of its current lump-sum contracts, worth $3.2-billion, by the end of 2024. It has vowed to provide details of cost overruns on resource and infrastructure contracts on Thursday when it reports second-quarter results.