Economic lessons from the SNC-Lavalin fiasco

Hey there, time traveller!
This article was published 15/3/2019 (243 days ago), so information in it may no longer be current.

I will leave it to those more ethically evolved and politically astute than me to comment on the hapless performance of the prime minister in managing the SNC-Lavalin fiasco. I do feel certain that Trudeau the Elder may have simply arched an eyebrow and dismissed the entire affair with the greatest of ease. Trudeau the Lesser has demonstrated that while the apple may not fall far from the tree, sometimes it bounces downhill and away.

Most commentators have offered myriad of opinions on the political issues, the validity of deferred prosecutions, and the "rule of law" as a bedrock of our system. But for me, a lowly economist, the entire SNC-Lavalin affair offers important lessons.

SNC-Lavalin is at the pinnacle of engineering firms in Canada with 29,000 employees worldwide and some 9,000 domestically. Were criminal charges to proceed and SNC-Lavalin lose the right to bid on work in Canada for the next decade, the demise of its Canadian operations and the elimination of these jobs would be an important blow to a high technology firm that is at the core of many of Canada’s major infrastructure projects. Such a setback would likely create reputational losses, affecting worldwide contracts and risking the very viability of the firm.

The pressure for a deferred prosecution was ostensibly to avert this job loss, which on its face seems serious. SNC-Lavalin has its head office in Montreal, so from a political economic perspective the government wished to avoid any losses in Quebec, during an election year especially, since employment growth has been stagnant in that province.

However, this job loss is not that serious and the failure of politicians to grasp this salient point stems from three sources. First, they do not place the gain/loss in context. This was true in the case of New York’s tax benefits conferred on Amazon. The 25,000 jobs promised as part of the location of a second headquarters pales beside the fact that the economy of New York City employs 4.4 million workers and is adding half a million workers every five years.

During 2018, the Canadian economy added 163,000 jobs, most of which were fulltime. So, while any job loss is regrettable and the shareholders and employees would experience some discomfort, the economy could probably absorb the loss if SNC-Lavalin closed shop.

Also most of SNC-Lavalin’s Canadian employees work in three provinces — Quebec, Ontario, and British Columbia — with 3,400, 3,000 and 1,000 workers respectively. This mitigates the actual economic impact in Quebec, but the symbolism of 3,000 lost jobs in that province remains.

More important is the second source of economic befuddlement. Politicians do not understand the dynamics of capitalism. It may seem cavalier to state that shareholders and especially employees experience discomfort from bankruptcy and job loss. But consider what would happen were SNC-Lavalin to close operations in Canada.

While it is the largest civil engineering firm in Canada, it is not the only one. Based on an informal count at least 10 firms across the country — including companies such as Stantec, PCL, AECON, Ellis-Don, Genvar, and Dassau — have similar capabilities.

The laid-off employees possess technical skills that would allow them to find work quickly within the industry. As part of the bankruptcy reorganization, other firms would buy contracts to continue work in-progress. Shareholders might lose some asset value, but that is simply part of the risks one must assume to play in the capitalist sandbox.

The bottom line is simple. A bankruptcy by SNC-Lavalin would be an economic wound that would heal quickly. Its competitors are no doubt salivating at the prospect.

A third issue is rent seeking. Economic rent reflects the extra income from a resource or asset beyond the minimum needed to bring it in to production or use. The salary for Tom Brady, the star quarterback for the New England patriots, has two parts — the minimum needed to encourage any athletes to play pro football and the extra he enjoys by virtue of talent and a track record.

Economic rent also accrues when a group persuades government to adjust the rules in its favour. Rent seeking is the primarily reason to lobby government in an endeavour to adjust the rules of the game or present a case for differential treatment. Now there is nothing wrong with lobbying government. Non-profit organizations, private individuals and all businesses do it. Politicians encourage the process of "listening" to the people. The problem occurs when some seem to have preferential access to the political process.

The apparent ease of access that management of SNC-Lavalin had to the government, as evinced by Michael Wernick’s testimony before the Standing Committee on Justice and Human Rights, demonstrates a coziness that seems to transcend normal lobbying. No doubt such contact reinforced the dire consequences were criminal prosecution to proceed. The hazard of such intense lobbying is that no one in government comes up for air to complete basic fact checking.

This unfolding fiasco shows the difficulty any government has in providing stewardship to a diverse regional economy. During the last month of 2018, when much of the frenetic activity occurred to save 9,000 SNC-Lavalin jobs, the Alberta economy lost 17,000 jobs.

Gregory Mason is an associate professor of economics at the University of Manitoba.