Construction group warns of price-cutting if Aecon sold to China

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The association representing 20,000 Canadian construction companies warns the proposed $1.5-billion sale of infrastructure builder Aecon Group to a Chinese-government owned enterprise could undercut competition and weaken the domestic industry.

The Canadian Construction Association is urging the Trudeau government to block China Communications Construction Co.'s (CCCC) takeover of Toronto-based Aecon and to take additional time to hear "more fulsome input" on the matter from an industry that employees 1.4 million workers.

The Liberal government is currently conducting a review of the deal to determine whether it is of "net benefit" to Canada. It has refused to say whether it is also conducting a formal national security review of the transaction.

CCA chairman Chris McNally said the Chinese construction giant, which is 63-per-cent owned by Beijing, would easily be able to underprice domestic rivals on infrastructure projects in Canada. That's because state-owned firms have easy access to Chinese government money and do not have to pay market rates for loans they get at discount, he said.

"This is not about competition from foreign construction companies – this is about foreign governments being in the construction business in Canada," Mr. McNally said in an interview. "They have more access to capital than the rest of them have and maybe cheaper capital and therefore they can underprice us and maybe significantly underprice us."

Aecon – a 140-year-old Canadian firm – is heavily involved in critical infrastructure across Canada, including nuclear-energy installations, pipelines, transit and hydroelectric projects such as the massive Site C project in British Columbia.

Mr. McNally echoed the concerns of other critics of the Aecon deal, who worry that China's one-party state might be able to influence corporate decisions in Canada. Beijing has ordered Communist Party cells be placed in all state-owned enterprises.

China Communications Construction Corp. obeyed the ruling and recently set up a "Communist Party of China Committee" within its corporate hierarchy. The firm has also helped China assert sovereignty over the disputed South China Sea by building artificial islands.

"It is a concern because, once again, a state-owned enterprise might have a motive other than a straightforward competition motive," Mr. McNally said.

A spokesman for Aecon, the target of this deal, released a corporate statement playing down Mr. McNally's comments as criticism from rivals.

"Aecon has received support from many of its unions, clients and business partners, all of whom recognize the deal will make it a stronger company," Aecon said. "We understand some of our competitors may not support that."

Jack Mintz, an economist and founding director at the University of Calgary's School of Public Policy, also opposes the Aecon deal. Canadians would oppose a Canadian-state-owned construction company from buying up private firms in this country, he said. So why should Ottawa allow another country's government-controlled companies to operate here instead, he asks.

"We need to be very careful to what extent we allow state-owned enterprises to take over industries in Canada," Prof. Mintz told The Globe.

He said Chinese-state-owned enterprises tend to be inefficient, noting that since 2010 they have earned annual average rates of return on capital of about four per cent – well below the return rate of China's private companies at 13 per cent.

The subsidies that state-owned companies, such as CCCC, receive from Beijing make it easier for them to underbid private companies for contracts.

If state-owned firms had to pay market rates for the lands and loans they received at discount – and forgo the direct subsidies given – they would be even less profitable, Prof. Mintz said.

The Canadian Construction Association is also raising concerns about corruption. The World Bank banned China Communications Construction Co. from bidding for World Bank construction projects for eight years – ending in 2017 – after one of its two founding companies were found to have engaged in bid-rigging and collusion.

"The playing field gets off level if one of the actors on it is not following the rules, some of which are laws," Mr. McNally said.

Mr. McNally would not say whether he had national-security concerns about allowing a Chinese state-owned firm to have a major role in vital Canadian infrastructure, saying that is a decision for Canadian security agencies to make.

Canada's largest construction companies have already lobbied Ottawa against this deal, outlining their concerns that CCCC has a poor track record when it comes to safety and corruption, and that a state-owned Chinese entity is not suited to work on projects with security concerns, such as the refurbishment of Ontario nuclear power stations and building military facilities. A senior federal official recently told The Globe that the Canadian construction industry is overreacting and that CCCC has a good track record, pointing to its takeover of John Holland in Australia.

Deepening trade relations with China, including the pursuit of a free-trade deal, is a key foreign-policy objective for Prime Minister Justin Trudeau, and has led the Liberals to loosen restrictions on outside investment from China.

Last week, the Chinese Communist Party's top diplomat, Song Tao, met with Trade Minister François-Philippe Champagne, the Prime Minister's national security adviser Daniel Jean and Elder Marques, who handles foreign investment in the PMO. It is not known if the Aecon deal was discussed.