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Chinese firm buying Aecon was subject to fraud ban by World Bank

Aecon road crews work on Highway 407, near Highway 427 in Toronto, in this file photo.

Kevin Van Paassen/The Globe and Mail

A Chinese state-owned firm that is buying Canada's largest publicly traded construction company helped Beijing assert sovereignty over the disputed South China Sea by building artificial islands there, and was barred until recently from bidding on World Bank projects because of an acquisition's "fraudulent practices."

China Communications Construction Co. Ltd., which on Tuesday announced a $1.45-billion deal to acquire Aecon Group Inc., the builder behind landmark Canadian infrastructure such as the CN Tower, is the latest example of China's deepening interest in the Canadian economy.

Aecon eyes growth with $1.45-billion sale to Chinese construction group

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The Beijing-based buyer is more than 63-per-cent owned by the Chinese government, a degree of ownership that stokes concern that such a deal could allow President Xi Jinping to advance his country's national interest in a critical area of the Canadian economy.

Aecon's corporate history includes work on Vancouver's SkyTrain and the Halifax Shipyard. It has recently been a partner in a $2.75-billion refurbishment of Ontario's Darlington nuclear facility, a $279-million contract on a Toronto subway system extension and has worked on projects for the Canadian military.

This transaction must still undergo at least one review by the Trudeau government. Karl Sasseville, press secretary to federal Innovation Minister Navdeep Bains, said the takeover will be scrutinized to determine if it is of "net benefit" to Canada.

He said it's yet to be determined whether the transaction will be subject to an official national-security review, a stringent process for assessing threats from a foreign takeover that China has publicly rejected as a protectionist manoeuvre.

The deal is certain to be controversial, particularly because of the company's past and also because a Beijing-owned Aecon holds the potential to face sanctions by the U.S. government – or blocked from bidding on contracts that relate to the United States.

The Trump administration is hawkish on trade with China, and Republican U.S. Senator Marco Rubio, for example, proposed the South China Sea and East China Sea Sanctions Act of 2017, which would penalize those involved in building the artificial South China Sea islands that Beijing is using to bolster its territorial claims in the region.

China Communications Construction Co. has been reluctant to discuss its involvement in China's construction of these islands, but a dredging vessel owned by CCCC Dredging – a subsidiary – has been captured in surveillance photography of the area. The parent firm also worked with Beijing to assert Chinese sovereignty over the area by partnering to offer cruise tours through the region. The Philippines, Malaysia, Vietnam, Taiwan and Cambodia all lay claim to part of the South China Sea.

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The World Bank banned China Communications Construction Co. and all subsidiaries from bidding for World Bank construction projects in 2009 after a company it acquired was found to have engaged in bid-rigging and collusion in the Philippines National Roads Improvement and Management Project. The World Bank slapped the ban on the company until January of 2017.

Deputy Conservative leader Lisa Raitt urged the Liberal government to subject the Aecon takeover to a full-scale national-security review.

All foreign takeovers of Canadian companies undergo a security screening analysis for their potential to harm national security, but a formal national-security review is far more extensive and requires a decision by the federal cabinet. It is undertaken when the government decides a deal could be injurious to national security. A far-reaching probe would analyze the potential impact on Canada's defence capabilities and economic interests and investigate the impact on the transfer of proprietary technology outside Canada.

"I certainly hope it is not a cursory review. I would certainly hope the cabinet would not waive the full-scale national-security review to ensure the safety and security of Canadians," Ms. Raitt told The Globe and Mail. "If this [had happened] in the Harper government it definitely would be a transaction that we would look at very carefully."

Ms. Raitt said she is concerned because China Communications Construction Co. is "clearly state-owned" and it could use the takeover to advance China's interests in key areas of the Canadian economy.

"This is a communications and construction company and everybody is aware that the future of the world is embedding communications within infrastructure that is public and we want to make sure everything is secure when it comes to security," Ms. Raitt said. "This is a big deal."

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Justin Trudeau's Liberal government has made closer ties with China, including a potential free-trade deal, a cornerstone of its foreign policy. Beijing has publicly deplored Canada's national-security reviews as protectionism and demanded they be part of the free-trade talks.

China's ambassador to Canada, Lu Shaye, predicted Thursday in a speech that Beijing and Ottawa will "launch formal negotiations in the near future."

Since the Liberals came to power, they have been much more open to investment from China in a number of key sectors of the economy.

NDP MP Nathan Cullen said Canadians should be alarmed if the takeover is approved by Ottawa because Aecon is involved in key sectors of the economy, especially when the construction giant is being sold to an undemocratic country such as China that has such large ambitions.

"When I talk to Chinese officials, they are consistently interested in toeholds. They want toeholds into telcos, they want it in military operations and companies that work near the military and transportation networks and the building of key infrastructure," Mr. Cullen said.

In June, Ottawa approved a takeover of a Canadian high-tech company by China's Hytera Communications, even though the U.S. Department of Defence is reviewing all its business dealings with Vancouver-based Norsat International.

Norsat's customers include the U.S. Department of Defence, the U.S. Marine Corps, the U.S. Army and the giant aircraft-manufacturer Boeing, in addition to NATO, the Irish Department of Defence, the Taiwanese army, and major media companies such as CBS News and Reuters. Norsat says its technology is also used by Nav Canada, operator of the country's civil air-navigation service.

Concerns were raised in Washington and in Parliament that Hytera's takeover of Norsat would help provide technology for the Chinese government. In March, Hytera was sued by Motorola Solutions over allegations that three engineers who left Motorola to work for Hytera stole patents and trade secrets.

Two former directors of the Canadian Security Intelligence Service – Richard Fadden and Ward Elcock – weighed in, saying the Norsat transaction should have been subjected to a full-scale security review.

In February, Ottawa approved the sale of one of British Columbia's biggest retirement-home chains to a Beijing-based insurance titan with a murky ownership structure in a deal that gave China a foothold in Canada's health-care sector.

In March, the government approved a Chinese takeover of a Montreal high-tech firm, ITF Technologies – a transaction that had previously been blocked by the former Conservative government after it became convinced the deal would undermine a technological edge Western militaries have over China.

Editor’s Note: An earlier version of this story said the value of the Aecon deal was $1.51-billion. It has since been changed to $1.45-billion, which is the equity value. The equity value plus debt would equal $1.51-billion.
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