Aecon deal threatened Canadian sovereignty, Trudeau says

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Prime Minister Justin Trudeau says his cabinet vetoed a Chinese state-owned conglomerate’s takeover of one of Canada’s largest construction companies because of concerns it could control critical infrastructure projects and threaten Canadian sovereignty.

Mr. Trudeau declined to outline the details of the national-security threats that led Ottawa to block the proposed $1.5-billion acquisition of Aecon Group Ltd. by China Communications Construction Co (CCCC), but cited Australia’s fear of losing sovereignty over its electrical grid as one factor.

“One can easily look at the example from similar investments in Australia where the Australians suddenly realized they had a significant portion of their energy grid … owned and controlled by a government that is not their own,” he told reporters on Thursday in La Malbaie, Que.

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“There are always going to be concerns about the ability of a country to continue to protect and deliver essential services to its citizens in a way that enhances and maintains their own sovereignty.”

In the end, Australia blocked a Chinese state-owned enterprise and a Hong Kong-listed firm from buying majority control of the country’s largest electricity distributor.

Mr. Trudeau indicated that Canadian security agencies had similar serious concerns about allowing CCCC − which is 63-per-cent owned by Beijing and answers to the ruling Communist Party − to be involved in critical infrastructure in Canada.

“We take seriously the work that our intelligence and security agencies do … and they made a very clear recommendation that proceeding with this transaction was not in the national-security interests of Canada,” Mr. Trudeau said.

Aecon is a partner in the the $2.7-billion refurbishment of Ontario’s Darlington Nuclear Generating Station, is building the massive Site C hydroelectric dam in B.C., and until recently was bidding with a team to construct and operate the $4.8-billion Gordie Howe International Bridge connecting Windsor and Detroit. The Trudeau government said it could not allow Aecon to bid on that project because of U.S. objections over the proposed Chinese takeover.

In the wake of the Aecon decision, the Chinese government has warned Canada to abandon “prejudice” against Chinese companies.

“We are opposed to political interference under the pretext of national security,” said Lu Kang, a spokesman for the Chinese foreign ministry. “We hope that Canada would cast aside its prejudice and ensure a fair and sound environment for Chinese enterprises.”

Mr. Lu also delivered a veiled threat that China could consider reprisals, saying “if things come to a stage where our interests are hurt, we will definitely take necessary measures to safeguard our lawful interests.”

The Aecon deal is only the fifth foreign takeover or investment blocked by a Canadian government on security grounds in the past 10 years: Others include the U.S. acquisition of MacDonald Dettwiler and Associates’ satellite division in 2008; an Egyptian billionaire’s bid to buy a division of Manitoba Telecom Services Inc. in 2013; a 2014 effort by a Chinese firm to build a factory too close to the Canadian Space Agency’s headquarters; and a 2015 purchase by a Chinese company of a Montreal fibre-laser company, ITF Technologies. In this last case, the Harper government blocked the deal but the Trudeau government later reversed the decision and allowed it.

Mr. Trudeau said Canada is nevertheless keen to broaden economic ties with China and said any free-trade deal needs to include rules that involve state-owned activities in sensitive areas of the economy.

“This is perhaps an example of something we would want to address within a trade deal,” he said. “We would certainly want to address security concerns and protect Canadian national-security interests as we move forward.

The decision to block the Aecon sale amounts to a significant change in the Liberal government’s approach to China. The Trudeau government came into office with a strategy of embracing China and pursing free trade with the world’s second-largest economy.

Wenran Jiang, a senior fellow at the University of British Columbia’s Institute of Asian Research, pointed out that the Trudeau government had previously allowed two companies with sensitive technology – ITF Technologies and a Vancouver satellite-technology maker – to be purchased by Chinese companies. In the second case, the purchase of Norsat, the Liberals did not even conduct a formal national-security review.

“I would say this is a change of the overall attitude and concern within the Liberal government,” he said. “It was [previously] definitely a much more open … Trudeau government, more optimistic about relations with China.”

Cabinet’s decision to block the deal came as a surprise to Aecon chief executive John Beck, who declined interviews on Thursday after issuing a statement late Wednesday night expressing disappointment over the rejection. Aecon and CCCC were willing to spin off divisions involved in the nuclear industry and to avoid bidding on Canadian military contracts or other sensitive infrastructure, but Ottawa made no attempt to negotiate with Mr. Beck, sources say.

Earlier this year, senior officials indicated that Ottawa was leaning toward approving the acquisition. Officials told The Globe and Mail that Aecon was a construction company that simply poured concrete and that there was no need for a full-scale national-security review.

Amid fears that CCCC was beholden to Beijing, public pressure built against the deal when Richard Fadden and Ward Elcock, two former directors of the Canadian Security Intelligence Service, and Canada’s former ambassador to Beijing, David Mulroney, called for an in-depth security review because Aecon was involved in critical sectors of the economy.

University of Alberta China Institute director Gordon Houlden said the concerns raised by Mr. Elcock and Mr. Fadden were an early indication to him that the deal might be quashed.

“I was not surprised, given the comments by former CSIS directors. With those indications, one can be reasonably confident that the security agencies would take a negative view of the interpretation, although under the Canada Investment Act, there are many official agencies that take part in the deliberations.”

Behind the scenes, U.S. officials were also voicing concerns about the Chinese takeover and warned that the company would not be allowed to bid on the Gordie Howe bridge or other bilateral infrastructure. U.S. authorities had already raised concerns when Ottawa approved the sale of Vancouver-based Norsat, which makes satellites for the U.S. Defence Department, to a Chinese firm.

Michael Wessel, a member of the congressional U.S.-China Economic and Security Review Commission, also publicly warned that the United States would not allow a China-owned Aecon to bid on infrastructure projects in the U.S.

“Right decision. Aecon is engaged in critical infrastructure and no way U.S. could allow Chinese SOE [state-owned enterprises] to bid on U.S. projects,” Mr. Wessel said via Twitter on Thursday.

The Aecon deal represented by far the biggest attempt by a state-owned Chinese company to invest in Canada outside of the Canadian oil patch.

Mr. Jiang, who has advised Western governments on China, predicted this rejection by Ottawa will have lingering effects.

“They will remember this,” he said of Beijing. “It will definitely make potential free-trade-agreement negotiations with China more difficult.”

With reports from Andrew Willis in Toronto and Nathan VanderKlippe in Beijing.