A month after the federal government approved the Nexen Inc. and Progress Energy Resources Corp. acquisitions, many are still scratching their heads over the government’s new guidelines for investment by state-owned enterprises in the oil sands. The approvals of the Nexen and Progress acquisitions were the right result, and the government did the right thing by not changing the rules mid-stream. To deny the deals would have cast a pall over many future foreign acquisitions.
However, the review process for foreign investment in Canada still remains very murky. The Conservatives have now set a higher bar (just how high is unclear) for state-owned enterprises – particularly for investment in the oil sands. But the Investment Canada Act’s nebulous “net benefit” test continues to create uncertainty for foreign investors.
The new policy for SOEs is concerning to the Alberta government, who fear a reduced pool of capital from which to finance development of the oil sands. Indeed, the Harper Conservatives’ sudden protectionism around the oil sands is perplexing. Production by a firm like Nexen or Progress does not impact the worldwide price of oil. Alberta can still collect the same royalties and demand the same environmental and safety standards of foreign-controlled operations as of any domestic producer.
Even if an SOE planned to preferentially ship oil to its home state, it would face the opportunity cost of doing so and we could still assess royalties at the market price. If there are concerns about an OPEC-style cartel gobbling up our oil sands, such acquisitions can be challenged under competition law.
But most importantly, the political flare-up around these recent transactions underscores the big problem with the current foreign investment review process: the “net benefit” standard itself. Rather than presume that foreign investment is generally good for Canada, the current test places the burden on the investor to “satisfy” the Minister of Industry that the transaction has merit. With wide criteria for assessing “net benefit,” the discretion lies entirely with the Minister to accept or deny a deal. Practically, the Minister’s “satisfaction” is not subject to judicial review.
Because of this approach, the OECD consistently ranks Canada as among the most highly restrictive to foreign direct investment within industrialized nations. Andrew Coyne compared foreign investment review to “a game of blind man’s bluff, only with both players wearing blindfolds.”
Similar to the C.D. Howe Institute’s proposal, Canada should replace the current “net benefit” test with a “net detriment” standard where the onus is on the Minister to show that a transaction poses unacceptable risks for Canada. “Red” Wilson’s 2008 Competition Policy Review Panel also recommended reversing the onus.
A workable model for reforming foreign investment review is found in the current framework for reviewing mergers in competition law. We don’t presume that every merger will create a monopoly, but mergers beyond certain thresholds are reviewed by the Competition Bureau. If the Bureau believes a given merger is anti-competitive and a solution cannot be negotiated, it is up to the Bureau to prove the merger will lessen competition at the Competition Tribunal (a specialized federal judicial body). With a reversed onus and clearer criteria, a similar tribunal process could apply to challenges to particular foreign investments.
Such a reform would place foreign investors on a more level playing field with domestic investors, broadening the pools of capital to which our companies have access. An active market for corporate control is crucial discipline for companies, and foreign investors can bring new ideas and better management to boost the productivity of stagnating firms.
That said, certain transactions may raise unacceptable risks. Back in 2008, the proposed acquisition of space company MacDonald Dettwiler and Associates Ltd. would have transferred control of a key radar imaging satellite to a U.S. acquirer. This raised national security flags that the Canadian government’s access to certain critical data might be blocked.
In the 2010 bid for Potash Corp. of Saskatchewan Inc., the Saskatchewan government believed that the foreign acquisition posed a substantial risk to provincial government revenues. As Janice MacKinnon described, the company was a “swing producer” of potash and its production influenced the worldwide price of the commodity. Saskatchewan worried that a foreign acquiror might extract potash at a pace that would threaten provincial royalties.
Yet, such specific concerns would have been caught by a “net detriment” test and their validity could have been evaluated by an impartial tribunal. Importantly, the decision would no longer be so unpredictable and subjective as under the “net benefit” standard. Since the onus would be on the Minister to show the transaction was not in the national interest, investors would have greater certainty as to whether a transaction would proceed. This would reduce the risk of an arbitrary or politically-motivated denial.
While there are specific and legitimate circumstances under which a federal government should block a transaction, our default should be openness to trade and investment. If a transaction is to be blocked, there should be specific evidence of a specific risk that can be tested by a reviewing court. Our economy must be governed by law and not by the vagaries of politics.
Grant Bishop is a law student at the University of Toronto and previously served as an economist at a major Canadian financial institution.