Time's running out!
Like a lot of Canadians, I’ve been closely following the coverage of SNC-Lavalin stories coming out of Ottawa over the past week. There’s a debate playing out in op-ed pages across the country on whether or not SNC-Lavalin should be prosecuted for alleged fraud and corruption charges, or whether it would be preferable to reach a deferred prosecution agreement, whereby SNC-Lavalin commits to a number of reforms and pays a financial penalty instead of going to court.
I won’t get into the merits of either option — I’m certainly no expert on criminal law and corporate cases — but there’s one aspect that keeps getting talked about that intrigues me. It’s the possibility that if the federal government took SNC-Lavalin to court and won, SNC could be given a 10-year ban on bidding on federal contracts.
What kind of impact would that have on the company?
I developed an interest in infrastructure projects (sexy, I know) during my time working at Vancouver city hall, particularly from the work we did around securing the policy and financial support from different levels of government for the Broadway Subway. In fact just last week, the RFP went out for bids to design, build and finance the construction of it — the single biggest infrastructure project in Vancouver’s history.
The Broadway Subway is a $2.8 billion infrastructure project, with federal funding comprising roughly a third of the budget. Presumably, if SNC-Lavalin was banned from bidding on federal contracts, it would include public sector projects that have partial federal funding as well. I haven’t found any information online about the proposed ban that suggests otherwise, meaning it would cover pretty much every rapid transit project in the country.
A ban on bidding for contracts procured by the federal government would be substantial in and of itself. A search of SNC-Lavalin in the Public Works contract database, which covers all contracts awarded by the federal government since January 2009, yields more than 900 listings.
What about projects where the procurement is led by other agencies, but are federally funded? What would a 10-year ban on being able to bid on federally funded projects actually mean for SNC-Lavalin?
I went through SNC-Lavalin’s 2017 annual report, which is posted online (they haven’t reported 2018 yet). It contains some interesting figures that, when you piece them together, show that a ban on federal contracts would have a big impact on their business plan.
The annual report shows that in 2017, SNC-Lavalin had revenues of $9.3 billion. Of that, its infrastructure division was the second biggest source of revenue, at $2.2 billion. On a geographic basis, 52 per cent of SNC Lavalin’s revenue comes from North America, with Canada — at 31 per cent — being the biggest source, although it has dropped considerably in recent years, having comprised 60 per cent of revenue in 2014. But Canadian infrastructure is still a sizable chunk of their revenue stream.
Their financial statements show that $10.4 billion is booked for “revenue backlog” — a forward-looking indicator of anticipated revenues from existing contracts to be paid out over time. The biggest chunk of this — $4.6 billion — comes from projects in Canada. The statements also show that $4 billion of the total is coming from infrastructure projects.
You start to get a sense of how important Canadian infrastructure projects are to SNC-Lavalin.
There’s no specific forecast I could find related to how much future Canadian infrastructure projects SNC-Lavalin expects to win bids on — in essence, what future revenues and revenue backlog could be, specifically attributed to infrastructure. But there were some interesting comments that outline its importance to their growth prospects.
There were two statements that caught my eye. One was in president and CEO Neil Bruce’s message in the 2017 report, which says “We’re also well‐positioned to support the Government of Canada’s expected $180‐billion investment in infrastructure over the next decade.”
The other was in a section related to “Delivering on our Growth Strategy — Scorecard.” In “What We Are Working On,” SNC lists generating “organic growth as shown by being shortlisted on several major projects and by winning major contracts across all sectors in Canada.” For outlining its strategy to hit a target of $5 earnings per share by 2020, it says “Driving organic growth by... capitalizing on infrastructure investments in Canada.”
It’s pretty clear from reading the annual report that SNC-Lavalin’s longer-term strategy is focused on getting a share of the federal infrastructure contracts that are rolling out, as part of growing revenues for one of its most significant divisions: infrastructure.
One other key point. In 2017, SNC undertook the largest and most expensive acquisition in its history, spending $3.5 billion to purchase WS Atkins, a UK-based infrastructure company with 18,000 employees around the world. To do this, SNC-Lavalin took on a substantial amount of debt (including a $1.5 billion loan from the Caisse de dépôt et placement du Québec) to finance the deal.
I’m not an expert on Atkins or its potential synergies with SNC-Lavalin, but given where things stand now, I would propose you could view it one of two ways. SNC made a big investment to secure infrastructure market access outside of Canada to diversify its revenue streams, so a ban on Canadian contracts is less damaging than it would have been a few years ago. Or it piled on a ton of debt right at a time when it could be shut out of federal contracts, cutting revenue and raising concerns about its ability to pay down the debt. This is not insignificant given the recent news about a credit downgrade from Standard & Poors.
To put a ban on federally-funded contracts in perspective, we just have to look at Metro Vancouver. There are currently three major infrastructure projects at various stages: the $1.3 billion Pattullo Bridge replacement, which has bid proponents (including SNC-Lavalin) already shortlisted; the $2.8 billion Broadway Subway, which just went out for RFP; and the formerly-LRT-now-skytrain extension in Surrey, which preliminary estimates peg at $3 billion.
All three of these are once-in-a-generation projects. In the case of the Broadway Subway and Surrey skytrain, the federal government is committing roughly one-third of funding for the project costs.
The business case for the Broadway Subway was released publicly by the B.C. Ministry of Transportation and Infrastructure in September 2018, and estimates the design, build and finance component of the project to come in at $2.7 billion, $450 million of which is financing to be provided up front and to be paid back to the proponent upon completion of the project. The construction timeline is five years.
For simplicity’s sake, let’s say the contract is paid out evenly over the five years, including the financing. That’s $540 million a year in revenue. On a project this size, SNC-Lavalin will have partners that they bid with (as they did on the Pattullo bridge replacement), so not all of the revenue will flow to them. But even if you cut the revenue figure that goes to them in half, that’s $270 million a year from a single transit project.
$270 million on $2.2 billion equals a 12 per cent boost to SNC-Lavalin’s annual infrastructure revenue.
That’s just one transit project that is being funded as part of a $25 billion investment over a decade by the federal government. If we use $1 billion as the average contribution from the feds for a rapid transit project, that’s a potential 25 major transit projects for SNC-Lavalin to bid on over the next decade.
That’s only in public transit. Over the next decade, there is $21.9 billion in federal funding for green infrastructure, $21.9 billion for social infrastructure, $10 billion for trade and transportation, and $2 billion for rural and northern infrastructure projects. At this point, you’re likely into the hundreds of federally funded infrastructure projects.
One other point: those figures are only the dollars the feds will spend. Many of these funds, like transit, require matching investments from the provinces or cities, so the actual value of the projects — and the contracts to deliver them — will be even higher. In the case of transit, the feds will fund up to 50 per cent of project costs, meaning there is a minimum $50 billion worth of public transit projects being funded across Canada over the next decade.
Winning just a fraction of the bids on those projects could rapidly multiply SNC-Lavalin’s annual revenue in its infrastructure division — but all of it would be out of reach for SNC-Lavalin if they received a ten-year ban on bidding on projects that include federal funding. They would effectively miss out on a historic period of infrastructure investment in Canada.
I’m not a legal expert, so I won’t speculate on what the right approach is that the government should take; nor do I know enough about the different divisions within SNC-Lavalin to speculate on how they could potentially offset the loss of a revenue stream from Canadian government projects. Are there foreign markets doing comparable public sector investments in infrastructure over the same timeframe that SNC could bid on and have as good a shot at winning as they would in Canada? Would the federal government seriously consider limiting the bid ban to federally procured contracts, and leaving projects that have federal funding (the $180 billion in infrastructure over ten years) but delivered by other agencies eligible for SNC to bid on?
The conclusions I’ve drawn are taken from the most recent, publicly available annual report (now a year out of date) issued by SNC-Lavalin and the Infrastructure Canada website — and I would welcome opinions from people more well-versed in infrastructure procurement, corporate law and financial reporting than I am.
But given the amount of infrastructure dollars on the table, with even a basic level of financial literacy it becomes pretty clear why a 10-year ban on bidding on federally funded contracts would be a significant penalty for SNC-Lavalin.
SNC Lavalin is set to release its Q4 2018 earnings results and provide an update on its 2018 report on Feb 22, 2019.
Kevin Quinlan was a chief of staff to former Vancouver mayor Gregor Robertson. This article is a modified version of one posted on his LinkedIn page.