SNC-Lavalin Aims Past Scandal to New Levels of Growth and Transparency
Pushing beyond a corruption crisis, Canadian design-builder expands globally in core sectors.
In 2011, SNC-Lavalin Group Inc. published a glossy, 250-page book to mark the centennial of the Montreal engineer-constructor, recounting its growth into a business and government contracting giant that built or has managed much of Canada’s infrastructure, and took its expertise global. The book, effused its publisher in an online promotion, is “a whirlwind tour of the people, projects and decision points that shaped SNC-Lavalin into what it has become.”
With an introduction by then-CEO Pierre Duhaime, the book is rarely touted at the now almost 40,000-person firm, as a corruption scandal that unfolded in 2012 under his watch has resonated throughout SNC-Lavalin’s 21-story corporate headquarters.
Duhaime, a four-decade company veteran, was forced to resign and now faces trial for fraud and bribery related to the award of a large Montreal hospital contract. He has pleaded not guilty in preliminary hearings. But corruption allegations expanded to other top managers and projects in India, Bangladesh, Algeria and Libya—with major bottom-line and reputation impacts the firm has worked to overcome.
The company enters its second century still dogged by legal, financial and perceptional fallout from what’s known and surmised about the corruption issues, but it is betting that its boosted ethics culture, improving bottom line, and new global needs will provide the edge to grow in size and geographic footprint in a challenging and competitive marketplace.
Led since last year by its second non-Canadian CEO, SNC-Lavalin has implemented a global employee ethics program and made deals at numerous government levels to resolve infractions, repay and recover fraudulently obtained proceeds, and continue its eligibility to bid government work.
Still, a trial on 2015 federal charges over alleged bribes and fraud linked to past work in Libya won’t start until 2018. A conviction could debar the firm for 10 years from its Canadian public-works contracts, which include leading the signature $3-billion replacement of Montreal’s Champlain Bridge in a public-private venture. Sources close to the case say that outcome is not likely.
President and CEO Neil Bruce, 56, a veteran Scottish-born oil-and-gas engineer brought in to improve project execution and accelerate growth, is impatient to push SNC-Lavalin past the scandal in his goal to double 2015’s $7.23-billion revenue total and profitability of the firm, traded on the Toronto stock exchange. “We want to get back to even keel and put that stuff behind us,” he says. “We want to build an open, transparent organization, where there’s no tactics or hiding behind things.”
A 15-year veteran of U.K.-based AMEC (now AMEC Foster Wheeler), he engineered SNC-Lavalin’s 2014 acquisition of Britain’s Kentz Corp, which greatly expanded the new parent’s oil-and-gas capability, particularly in the Middle East. The executive earned the prestigious Order of the British Empire in 2011 for his contributions to engineering, but associates say he is struggling to master Quebec’s dominant French language. An industry source says Bruce left AMEC in a management dispute over its growth strategy but has implemented some of that firm’s approaches at SNC-Lavalin.
The firm already has benefited from its key positions in surging North American infrastructure markets and links to new opportunities in improving power, oil and gas, and mining niches globally—what Bruce considers core markets. “Having a portfolio between these four sectors, between design and construction and between services and major projects, is the ideal place for us to be,” says Bruce. “We won’t chase after what’s the most attractive sector at any point in time.” The firm noted nearly $9 billion in backlog as of Sept. 30, $4 billion of which was in infrastructure work.
Even with the “commercial issues” SNC-Lavalin disclosed on Nov. 3 in its quarterly results related to an unnamed Middle East oil-and-gas contract that hurt earnings, analysts are bullish. Apart from that, “every division showed positive earnings [before interest and taxes] contribution in the E&C business,” says Maxim Sytchev, a managing director at National Bank of Canada, Toronto, who rated its shares as “outperform.” The company in November said it nearly has reached its C$100-million cost-reduction goal, an effort begun last year that includes selling its landmark Montreal office and adjacent land and leasing back space. It maintained for the year its earnings guidance of C$1.30 to C$1.60 per share.
“We never were and are now not of the view the company would have a materially more difficult time securing work because of the issues,” says Yuri Lynk, director of equity research at Canaccord Genuity Corp. “I have been covering the stock for a better part of 10 years, and I haven’t seen a funnel as big as this.”
SNC-Lavalin has been a Canadian icon since its origins as two separate engineering firms in 1911. The two merged 80 years later, some say in a move promoted by the government. It has had an ownership stake in valuable assets, some already sold, and others such as Canada’s only electronic tolled highway, in Ontario; and the country’s CANDU nuclear technology, bought in 2011, that today is being marketed globally in reactor construction through a subsidiary.
“We’ve got an incredibly good balance sheet, great assets and, currently, next to no debt—quite a different position than a lot of our competitors,” says Bruce. “We’re investing and have skin in the game.”
In the wake of its 2012 crisis, SNC-Lavalin wiped clean its former executive suite, recruiting American Robert Card, a former CH2M executive and U.S.
Energy Dept. official, to engineer a new “world class” approach to global ethics as a priority in a firm at which looser business development practices were long tolerated, some say encouraged, by past chiefs. He tapped Andreas Pohlmann, a German who advised bribe-scandal-scarred Siemens Corp., as SNC-Lavalin’s first chief compliance officer. Non-disclosure agreements prevent Card and other former SNC-Lavalin executives from speaking to ENR, they say, but in a 2013 Canadian media interview, Card said employees' careers “depend on absolute compliance” with the firm’s ethics mandates.
Pohlmann also declined to discuss SNC-Lavalin specifics, but ethics compliance is “the foundation for a sustainable business,” he told ENR. “New prospects want to see if they can be proud of this employer. It’s a prerequisite to recruit talent.”
The program included amnesty for employees to report potential wrongdoing and bonuses tied to ethics performance. Employees now have “a duty to report,” Pohlmann told The Wall Street Journal in 2014. “We now start all meetings of four or more discussing ethics as well as safety," says current compliance chief Hentie Dirker, who reports to the firm’s general counsel.
The firm also started in October a collaboration with global anti-bribery group TRACE International to launch an anti-bribe and ethics awareness-raising campaign in South Africa for small and medium-sized firms and multinationals in the region. Dirker says more than 50 companies now are involved.
Richard Leblanc, an ethics law professor at York University, Toronto, notes changes SNC-Lavalin made to its board, which failed to detect the past management failures. “They had people in over their heads … who really didn’t understand the construction industry,” he says, adding that directors of Canadian companies in risky areas, such as mining, oil and gas and construction, also are rethinking whether it is worth doing business in certain countries.
“I would think this was a wake-up call,” says analyst Lynk. “It brought to light a couple of issues with board oversight and governance.” While media reports and opinions have criticized the board for being “asleep at the switch,” Sytchev says “it acted to preserve the continuity of the company.”
A component of the company also remains, since 2013, debarred from World Bank work for eight to 10 years, stemming from a corruption scandal over the contract award for the Padma Bridge in Bangladesh. The bank dropped its funding for the estimated $3-billion project, which has been replaced by Chinese financiers, with China-based contractors set to complete work in 2018.
While a top bank official publicly acknowledged SNC-Lavalin’s ethics overhaul in a 2015 Montreal speech, a spokeswoman declines to say whether the effort will alter the penalty. The company says bank work made up a very small portion of its revenue.
As for the federal charges, levied in 2015 for alleged bribes of Libyan officials after a headline-grabbing raid of SNC-Lavalin’s premises, the firm has agreed to strict conditions and third-party oversight of its business practices.
Bruce says the firm can await its fate in court, not set to happen until 2020. Also in the mix is a deferred prosecution agreement (DPA)—a legal outcome not now available in Canada under which the firm would be accountable for past actions but not criminally convicted, which could impact its domestic contracting status and overseas prospects.
Former CEO Card was outspoken on the need for DPA legal authority in Canada, something that exists in the U.S. and U.K. Bruce is hopeful that, based on its toughened ethics stance, the firm can settle the charges without prosecution, even without a DPA in place. “We’re willing to do whatever it takes,” he says, adding that DPAs granted to foreign competitors may not have been as rigorous.
The Trudeau government has signaled it would be open-minded toward a DPA, although officials have been more focused since taking over last fall on rolling out a major infrastructure spending program. Toronto attorney Milos Barutciski, representing clients indirectly involved in the SNC-Lavalin litigation, says the firm “would be an obvious candidate as a sinner who has repented.”
But there are critics of the DPA approach. “SNC now is changing internal procedures that may or may not work,” says Patricia Adams, executive director of Probe International, a Toronto corporate watchdog group, who thinks such agreements diminish “employee self-enforcement.”
Leblanc notes one mining company CEO client who point-blank told employees, “If you ever give a nickel to anyone … I will fire you and ensure you are prosecuted to the fullest extent of the law.” Adams also is critical of a Canadian Supreme Court decision last May that allowed the World Bank immunity in providing details to prosecutors and defense attorneys in pending legal actions against former SNC-Lavalin executives, and by them against the firm.
In the meantime, Bruce is leveraging the company’s strengths. “We’ve got huge growth potential organically, specifically in infrastructure, and a fantastic balance sheet once we get the stability and people have the confidence in us delivering,” he says.
Even with the Trump administration’s talk of a $1-trillion infrastructure push in the U.S. and a core of U.S.-based employees, SNC-Lavalin believes Trudeau’s Canadian infrastructure plan will provide plenty of opportunity for the firm at home. SNC-Lavalin is short-listed on a $4.4-billion Montreal light-rail project, to be partially funded by one of Canada’s largest pension funds; the planned $3-billion Gordie Howe bridge, connecting Windsor, Ontario, with Detroit; and a $900-million Toronto light-rail project. “These are certainly big, chunky projects,” says analyst Lynk.
In an earnings call last month, Bruce said work on the Champlain Bridge “is going pretty well, slightly ahead of schedule. The project is in good health.” He also anticipates active project bidding next year. “If people are struggling for revenue, they will have to wait for 2018,” says Bruce. “But we’re not in that position.”
The CEO also foresees acquisition, to broaden the firm’s global reach into Europe and Asia, where it is weaker. In the U.K., “they’ve actually kicked off a whole infrastructure piece that North America still is talking about,” he says, pointing to announced airport and high-speed-rail upgrades, among other projects.
SNC-Lavalin also sees huge global potential in the nuclear sector. The firm in September signed a deal with China National Nuclear Corp. to build CANDU reactors in China and Argentina. In a video interview, Sandy Taylor, president of the company’s power unit and signatory of the deal with Chinese officials, called it a “game changer” for its ability to expand the technology’s more efficient uranium-fuel recycling. “If we look at the nuclear sector as a whole, it takes longer to get things started, but there’s a lot coming to fruition,” he said.
But Leblanc says the firm should tread carefully. “China is ranked as one of the more corrupt countries in the world, but it is enacting anti-bribery statutes,” he says. “It is not Libya, but it is not a Western country, either.” Taylor said its Chinese JV “will have all the same standards and expectations as the company.”
And despite the Middle East oil-and-gas execution issues that Bruce says will resolve with “lessons learned,” he is optimistic about the sector, particularly as crude oil rose above $55 a barrel to hit a 16-month high on Dec. 5, after OPEC moved to cut production. The firm last spring won an EPC contract of undisclosed value at Aramco’s Ras Tanura refinery in Saudi Arabia to expand asphalt production facilities, say online reports. Bruce and other execs also point to SNC-Lavalin’s niche in facility maintenance.
According to the CEO, company employees want to move on. “The more global, experienced people join us because they see what’s the ambition of the company,” he says, adding that its workforce is "really fed up with what some folks have done to the company and are desperate for success." Adds analyst Sytchev, “given all the compliance procedures implemented, this is a very different company.”
But not all are so magnanimous. “Some people are not going to forgive us,” says SNC-Lavalin spokesman Louis-Antoine Paquin. An industry management consultant cautions, “Just making assumptions that something in your culture goes away because you will it away is not founded.”
Industry peers are watching. “You do not change the culture overnight, but they are on the right path, as is the rest of the industry in Quebec,” says Robert Gomes, CEO of Alberta-based engineering firm Stantec, which in 2015 acquired the key assets of Montreal engineer Dessau after its CEO resigned over bribe allegations in Quebec. “It was not only our industry that had to change but the clients and government, as well … so time will tell.”
Bruce is resolute. “We’ve had issues in the company we wouldn’t wish on anyone,” he says. “But it’s been an opportunity to build … the systems and processes we want, with no surprises as our goal.”