Bombardier asks Export Development Canada to select investigator to review overseas practices

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Bombardier Inc. is hiring an independent organization to review its procedures for doing business in foreign markets in the wake of allegations that company officials used corruption and collusion to win a rail contract in Azerbaijan.

The Canadian airplane and train maker said in its second-quarter financial statements that it will work with a third-party group chosen by Export Development Canada “to evaluate our existing due diligence processes.” EDC helps Canadian exporters through insurance and financing and has been involved in billions of dollars of Bombardier contracts in overseas markets.

A World Bank audit in November, which was revealed by The Globe and Mail in May, alleged Bombardier colluded with senior officials at Azerbaijan Railways to win a 2013 contract worth US$339-million to install rail-signalling equipment in the country. The deal was 85 per cent financed by the World Bank.

The audit could lead to the Montreal-based company being blacklisted from projects funded by the international financial institution.

The World Bank alleged that Bombardier colluded with Azerbaijan Railways senior officials as far back as 2010 – three years before the contract was awarded – to secure the deal. A local company called Trans-Signal-Rabita was set up and it “did not have an office, employees, or accounting records” until it was awarded the contract in 2013, according to the audit, which is still continuing.

Investigators also said that Bombardier engaged in other conflicts of interest. The audit said that Bombardier was made aware in advance of the project’s budget and priced its bid to fit that number exactly; it paid bills for two Azerbaijan Railways officials to stay near the headquarters of its rail division, Bombardier Transportation, in Berlin; and it transferred money to two shell companies controlled by prominent figures in Russia’s rail industry, who in turn used their influence to ensure Bombardier won the contract in Azerbaijan.

Bombardier said that its own continuing internal investigation found “no evidence of any illegal or criminal conduct involving Bombardier related to the Azerbaijan project” and that “no evidence has been uncovered of any corrupt payments made or offered by the Corporation to any public official.” The issue with the Azerbaijan project was the result of a “failure of local management,” according to its quarterly report. It added that, to address the problem, the employees involved in the project have left the company, changes were made to the management team in its Swedish transportation division and it restructured its business activities in Russia.

“Since Bombardier’s first ventures in international business, the highest standards of ethical conduct have defined our Corporation," Bombardier said in its quarterly report. “And, we are confident that an independent review will confirm that same standard applies today as our employees deliver world-class products and services in every corner of the world the right way − responsibly and ethically.”

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The EDC said in a statement on Thursday that it was not involved in the Azerbaijan project, but that it is “nonetheless concerned about the allegations released via media reports."

“This review will help inform EDC’s future engagement with the company, including what additional measures may be required to ensure our due diligence meets best practices and all business we support is conducted responsibly,” the Crown agency said in the statement.

The announcement came as Bombardier reported second-quarter results in which earnings fell below analyst expectations. The company also adjusted its full-year guidance downward to account for the consolidation of its aerospace units and delivery delays in its transportation division. The stock closed down almost 16 per cent Thursday on the Toronto Stock Exchange.

In a bid to address backlogged delivery schedules in its rail division, the company also announced an injection of US$250-million to US$300-million into Bombardier Transportation. The additional investment is dedicated to completing five rail projects in New York, Britain, Switzerland and Germany. None of the funding is earmarked for its Canadian rail operations, including its Thunder Bay plant that is set to lose half of its work force beginning in November.

Bombardier posted a net loss of US$36-million, or 4 cents a share, in the second quarter ended June 30, falling from a profit of US$70-million, or 2 cents a share, one year ago. It also reduced its 2019 earnings forecast to a range of US$1.2-billion to US$1.3-billion adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Its previous forecast was US$1.5-billion to US$1.65-billion. The company reduced its 2019 revenue and profit guidance in April, citing late deliveries and other rail-division issues.

“The train [division] has been a little bit of a setback and it took us a bit of time to fully understand what needed to be done on these big projects,” chief executive Alain Bellemare said in a conference call Thursday. “We get it. We have good action plans in place.”

Executives were positive on the rail unit even after it posted a drop in revenue at US$2.2-billion, a 3-per-cent decline from the same time last year. With a backlog of US$33.6-billion in its rail unit, Bombardier anticipates that the impending wave of late deliveries will boost its cash balance next year.

“It’s important to remember that we’re expecting deliveries on multiple projects this year,” Bellemare said. “We are getting close to − with the best of our knowledge − unleashing the inventory we have built over the past two years.”

In the fourth year of its five-year plan to revive its rail division, the company aims to distance itself from a history of contract delays.

National Bank analyst Cameron Doerksen had lowered expectations for the rail division for 2020, but said that the unit could see long-term improvements.

“We completed a detailed assessment of [Bombardier Transportation’s] contract wins over the past three years and our view is that the risk profile of these contracts is meaningfully lower than the higher risk programs currently being delivered,” he said in a note.

The production issues have also affected Bombardier’s Canadian site in Thunder Bay as its contracts with the Toronto Transit Commission and Metrolinx have been plagued with missed deadlines, delayed deliveries and defective products. In early July, it announced that it would lay off 550 employees at its manufacturing plant as the contracts wind down at the end of the year.

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