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Former CSIS director Ward Elcock says Aecon sale to China is not in Canada’s strategic interest

Former CSIS director Ward Elcock says the takeover of Canadian infrastructure giant Aecon Group Inc. by a Chinese state-owned firm is not in the country’s strategic interests even if a national security review approves or places conditions on the $1.5-billion transaction.

A decision on whether to approve the acquisition by Beijing-owned China Communications Construction Co. (CCCC) is expected by Friday, although the review could be extended for another 45 days.

Cabinet ordered a full national-security review of the takeover bid last month under section 23.5 of the Investment Canada Act, a measure invoked when the federal government believes an investment could be “injurious to national security.”

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Ward Elcock.

Fred Chartrand/The Canadian Press

Mr. Elcock, who was director of the Canadian Security Intelligence Service and a former deputy minister of National Defence, told The Globe and Mail that the transaction is not in the country’s best interest.

“Allowing a Chinese state-owned company which is controlled by the state of China, and does what the state of China tells it, is not something we necessarily want to encourage,” Mr. Elcock said in an recent interview. “They represent the Chinese government on everything they do.”

Read more: Chinese takeover would bar Aecon from bidding on Canada-U.S. bridge

Related: Aecon takeover by Chinese firm could fail over security concerns, analyst says

Even if the takeover is approved, Mr. Elcock said he cannot imagine that Ottawa would allow Aecon to work on critical infrastructure in sensitive sectors of the economy that require security clearances.

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.

Aecon, for example, has partnered with SNC-Lavalin Nuclear Inc. on a $2.75-billion contract to refurnish Darlington Nuclear Generating Station.

“From a security point of view, I doubt they would ever get a job that would require a security clearance,” Mr. Elcock said. “If there are security clearances around it, my guess is that they would then have to build – if they want to keep the contract – they would have to build some sort of Chinese wall around the Darlington contract that would exclude a lot of people from the information or knowledge that was classified.”

It is possible that the national-security review could recommend that Aecon must “sell certain business … but you would still have a Chinese government-owned construction company working in the Canadian industry and do you want that?” Mr. Elcock added.

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Richard Fadden, another former CSIS director and national security adviser to Stephen Harper and Justin Trudeau, raised similar concerns about the Aecon acquisition.

“There is a significant question about whether we should tolerate Chinese state-owned companies which are essentially under the thumb of the Chinese government, that we should tolerate Chinese companies buying into the Canadian market,” Mr. Fadden told The Globe. “That gives me pause for concern.”

An Aecon spokesperson said in statement on Friday that China Communications Construction Co. is a publicly traded company that operates “in other major western countries, including Australia where a similar acquisition of a construction company in 2015 was approved by the Australian government following an extensive government review that included national security considerations.”

Investor concern about the Aecon deal mounted last month before Ottawa announced its national-security review and shares have traded below China Communications Construction Co.’s offer price of $20.37.

Chris Murray, an analyst at AltaCorp Capital Inc., said last week the national-security review announced by Ottawa in February has created additional uncertainty about whether the acquisition can be completed under existing terms.

Mr. Murray said he believes Aecon’s telecom business is the primary reason for the lengthened review of the Chinese takeover as “the federal government is highly sensitive to potential Chinese access to core national infrastructure” in Canada.

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Mr. Murray speculated that Ottawa could order the divestiture of Aecon’s telecom business which generates annualized revenue of $150-million.

“We believe there is a very low probability of the transaction being approved as is, given security concerns expressed by the federal government and other allies around telecom infrastructure, particularly as Canada embarks on a once-in-a-generation process of replacing its fiber and wireless networks,” Mr. Murray wrote in a note published on March 20.

Several of Aecon’s largest competitors have asked Ottawa to block the takeover on the grounds that CCCC – which is one of the world’s largest infrastructure companies – has a poor track record when it comes to safety and corruption, and that a state-controlled Chinese entity is not suited to work on projects with security concerns.

The deal is also opposed by the Canadian Construction Association, which counts 20,000 member firms and has concerns that Aecon could undercut rivals by having access to Chinese government subsidies. The Conservative Party has raised worries about CCCC’s close ties to the Communist Party and allegations of corruption and bribery on infrastructure in the developing world.

Aecon, led by chief executive officer John Beck, has played down concerns that have been raised about its involvement in critical infrastructure projects, such as nuclear facilities – contracts that would pass on to CCCC if the transaction is approved by Ottawa.

“Aecon does not own any intellectual property related to nuclear energy; nor does it possess any other sensitive proprietary technology,” the company said in a statement last month. “Aecon offers construction and refurbishment support to clients in the nuclear industry.”

The construction firm has also pushed back at the notion that an Aecon owned by China would receive subsidies from Beijing in the same way that China Communications Construction Co. does. Any subsidies CCCC receives “are related to specific research and development projects in China that are available to any company involved in those projects.” The subsidiary of CCCC that would own Aecon, the company said, “does not receive government subsidies for its international activities.”

All foreign investments are subject to some degree of national-security screening, but the federal cabinet only infrequently issues an order of the kind it has made on Aecon.

In the 2016-17 year, for example, Ottawa conducted five national-security reviews under Section 25 (3) of the Investment Canada Act.

Data from the past five years show transactions subject to a national-security review under Section 25 (3) of the Investment Canada Act have only been approved afterward when Ottawa imposed conditions on the deals.

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