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Canada's Taxpayers Are Giving Billions To A National Embarrassment

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Canada won a distinction last month that most of us would rather we had lost: We had the most companies on a list of firms banned from doing business with the World Bank over corruption.

In a sense, that was something of a statistical lie. All but a few of the Canadian companies banned from doing World Bank business were actually subsidiaries of one company: SNC-Lavalin, the engineering giant based out of Montreal that has now pretty much become a national (and international) embarrassment.

The allegations that have emerged against SNC-Lavalin over the past few years are almost too many to list in this article, and stray at times into the almost fantastical.

There is former CEO Pierre Duhaime's arrest by the RCMP last year over allegations of misspent funds that may have ended up as bribe money for projects in Montreal and Africa, and his re-arrest earlier this year on corruption charges linked to allegations of bribery involving the McGill University Health Centre in Montreal.

There are the allegations of a ridiculously cozy relationship with the late Libyan dictator Moammar Gaddafi, right down to offers of cushy executive board positions to the dictator's relatives, and allegations that the company tried to smuggle one of Gaddafi's sons into Mexico during the recent upheaval that left the dictator dead.

The allegations of bribery against the company stretch from Bangladesh to Algeria to Montreal. At Quebec's inquiry into corruption in the construction industry, the company admitted to illegally raising funds for politicians in the province.

So you would think a company that has brought so much bad publicity to Canada's name around the world, whose alleged corruption comes within a whisker of touching Canadian politicians, would be a toxic hot potato no government in Canada would want to touch.

Well, you'd be wrong. In the couple years since the allegations against SNC-Lavalin started coming to light, the company has won billions of dollars in taxpayers' money from various levels of government around the country.

Late last year, the company the World Bank won't touch won the contract to build Ottawa's long-delayed light rail, a $2.1-billion project the engineering firm won as part of a consortium, and the single largest capital undertaking in the city's history.

Months earlier, the company won the contract to build greater Vancouver's Evergreen Line, the latest addition to the city's SkyTrain network, a contract worth $889 million.

The company has had plenty of luck with the federal government as well, winning a contract worth an estimated $400 million to provide support services to Canadian troops operating overseas.

A federal Crown corporation even campaigned to help SNC-Lavalin win a contract to build a hospital in Trinidad and Tobago. But the T&T government proved to be more interested in fighting corruption than any Canadian government apparently is. It rejected doing business with SNC, or any company that has "difficulty in passing the test of confidence." Canadian governments, apparently, feel no such compulsion.

So if even Trinidad can say no to SNC-Lavalin, why can't Canada? And why doesn't Canada want to? Despite the publicity surrounding SNC's problems, the news of its lucrative contracts for taxpayers' money barely registered in the news, with the odd story here and there, and not many follow-up questions from the media.

So I decided to ask. I contacted Ottawa City Hall, to find out if the questions surrounding SNC's legal problems played any role in the city's decision to hand the company the largest infrastructure project the city has ever undertaken. I am still waiting for a response.

I contacted British Columbia's Ministry of Transportation, to ask them the same thing with respect to the Evergreen SkyTrain line. I was told that "no one is available for an interview," but was reassured that SNC won because they met all the province's requirements at the lowest cost.

But according to government documents obtained by Business In Vancouver, SNC's scandals were enough of a concern to be discussed at a meeting the Evergreen Line's project board in the summer of 2012.

"The chair asked for an update on recent press reports on SNC and whether there would be an impact on the procurement process," the minutes of the meeting stated. "The project team confirmed that SNC is required to disclose any material changes to their financial situation under the terms of the RFP."

And that's it. Much of the rest of the documents were blacked out, BIV reported.

So let's see how this works. SNC-Lavalin is good enough to win some of the largest infrastructure projects being undertaken in Canada today, but is somehow at the same time too embarrassing to talk about publicly. If you can't see the sense in this approach, you're not alone.

SO WHY SHOULD WE CARE?

Granted, there are compelling reasons for SNC-Lavalin to win these contracts, particularly the Evergreen line. As B.C's Transport Ministry told me, the company has a long track record of big construction projects in B.C., including the Sea-To-Sky Highway and the William R. Bennett Bridge. The company built some of the existing SkyTrain infrastructure and holds the contract to operate it.

"SNC-Lavalin is operating 'business as usual' in B.C.," the transport ministry said. "We have done our due diligence on the procurement, and we are confident we have selected a primary contractor that can deliver the project on-time and on-budget."

"Business as usual" indeed. Not even the shattering of a company's reputation on the global stage can stop it from winning lucrative contracts in Canada.

Part of this is the subtle and sometimes not-so-subtle ways that Canada engages in economic protectionism.

Is it a coincidence that Montreal-based Bombardier, with its train factory in Thunder Bay, keeps winning contracts to build light rail in Canada, time and again beating its major global competitors, Alstom and Siemens? It got to the point where those two companies didn't even bother bidding for Toronto's new streetcar contract when it came up several years back, despite showing initial signs of interest.

Yes, Bombardier's jobs in Thunder Bay are important. Using taxpayers' money to support local workers is, arguably, a noble compromise of free market principles, and one that's often written into the contracts governments issue.

And SNC-Lavalin, with its 12,000 Canadian employees, also benefits from these types of policies. But there has to be a limit to this kind of "Canada-first" thinking. Why? Because of moral hazard.

Moral hazard -- you've probably come across that term if you've been reading U.S. business news in recent years. It's the idea, popular among some economists, that when a business does wrong, it has to suffer some sort of punishment or it will simply keep doing wrong.

Moral hazard has been mentioned repeatedly in the context of the U.S. bank bailout of 2008-2009. Bailing out the banks was a bad idea, critics said, because it essentially rewarded those banks for making the bad bets that tanked the global economy during the Great Recession. Bail the banks out, the moral hazard theory goes, and they'll just go and do it all over again. (Evidence is mounting that this prediction is coming true.)

But moral hazard can apply to an engineering giant like SNC-Lavalin as well. Ignore the scandals engulfing the company, keep giving the company billions in government contracts, and you eliminate the incentive for the company to clean up its act.

To its credit, SNC-Lavalin is, actually, trying to clean up its act -- though some of that is undoubtedly a public-image campaign. The company announced an amnesty for its own employees, to convince people to come forward and admit wrongdoing. Thirty-two people have come forward so far, though "no new information of a material nature was revealed."

New CEO Robert Card has been busy chatting to reporters, playing up his company's efforts at revitalizing its image. And underneath it all, a simple subtext: It's just these few employees who are allegedly corrupt, not the company as a whole.

Well, so far the markets aren't buying it, and it seems to be investors who are eliminating the company's moral hazard for it. SNC stock has fallen from a peak of around $60 per share three years ago, and is hovering near the $40 mark, as many investors shy away from the embattled company.

SNC-Lavalin seriously slashed its profit outlook this week, forecasting a net income of $10 million to $50 million this year, down from a forecast of $220 million to $355 million. But that has to do with a weakening mining sector, and not with contract-issuing governments waking up and doing the right thing.

Don't count on any government in Canada to hold SNC's feet to the fire. Blinders on and taxpayers' cash in hand, they're willing to reward allegations of corruption with big, fat contracts.

After all, as B.C.'s Transport Ministry said, this is just "business as usual."

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