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PHIL HARWOOD

If net benefit is mysterious, national security review is a black box Add to ...

Phil Harwood is a former adviser to former prime minister Stephen Harper on matters relating to the Investment Canada Act and foreign direct investment. He is principal at Harwood Strategic Consulting Inc.

The Liberal government recently released their 2016 fall economic statement, which included some anticipated new initiatives. One such measure is the new Invest in Canada Hub, a dedicated agency intended to proactively court foreign investment into Canada. As the government pursues its new foreign-investment agenda, it is only a matter of time before it faces its first real test of the Investment Canada Act, Canada’s foreign-investment review mechanism.

The previous government dealt with a number of high-profile, politically thorny transactions, involving companies in sectors ranging from aerospace to potash, oil and gas to telecommunications. Commentators have opined at length about how the act functions, but their focus has typically centred on one type of review, the long-standing net-benefit test.

However, in the Investment Canada Act, there is another type of review that is less understood: the national-security review.

Outside observers find the net-benefit test mysterious in how it operates.

But if the net-benefit test is mysterious, the national-security review has historically come across as an unknowable “black box.”

What is it and what does it cover?

Put simply, the national-security review could apply to any attempt by a non-Canadian company to buy a Canadian business in whole or in part, or to establish a business in Canada.

If the minister of innovation, science and economic development, after consulting with certain cabinet colleagues, considers that the non-Canadian company’s investment could be “injurious to national security,” the minister can trigger a review.

The broad parameters and powers under the act mean that virtually any foreign investment can be subject to a review. While some may call this overreach, the reality is that certain business actors are agents of foreign states, whether formally or informally. Canada enjoys relationships with many countries that are like-minded and trustworthy partners, but that is not true for all foreign states; just because someone arrives on our doorstep with a bag of money to invest doesn’t mean they are there with good intentions.

Certain business deals must be scrutinized in detail, then, to ensure long-term security is not traded for short-term economic activity. Only the government of Canada is positioned to carry out this mandate. No other entity or level of government has the tools or authority to conduct this vital, often delicate, task.

So what about calls to make the review process more transparent? When it comes to government activities, transparency is typically a good idea. However, in the case of a national-security review, the government simply cannot be fully transparent, nor should it attempt to be. When it comes to business deals with attendant security concerns, complete transparency invites evasion of the rules and exploitation of a process designed to protect Canada.

In their fall economic statement, the Liberals announced that they would soon publish guidelines under which investments are examined under the national-security review. Their stated goal is to increase transparency and help investors navigate the review process, while protecting national-security safeguards.

This will no doubt require careful balancing on the part of the government, and time will tell whether those calling for increased transparency will be satisfied when the guidelines are published.

That said, rather than judging it on process, the government should be judged on the outcome of its decisions. But a “no” is not the same as a “bad decision.”

Regardless of how detailed the future guidelines prove to be, what can businesses do to avoid falling afoul of the national-security review? What advice should they put into action?

It should go without saying that preparation matters. If a business deal involves a non-Canadian company, planning can never begin too soon. Smart planning begins with the right questions: Is your business in a sector that carries a particular security concern? Which international partners are “like-minded” and which are not? If a business deal raises security concerns, what can business leaders do to mitigate those concerns up front?

These may sound like obvious questions, but the reality is that many companies simply don’t consider them, or consider them when it is too late.

One good example involves the sale of Manitoba Telecom Systems’ Allstream division. The first attempt to sell Allstream in 2013 was blocked by the federal government on national-security grounds.

While this was costly and challenging to MTS, the company learned from the experience and started planning another attempt to sell Allstream, this time considering the Investment Canada Act from Day 1. Last December, the federal government approved Allstream’s sale to a Colorado-based telecommunications company.

National security should never be undermined in the name of short-term economic gain, but it doesn’t need to be.

As the Liberal government courts foreign investment, it must be careful and thorough in reviewing what comes, and businesses can and must plan ahead to avoid the costs and reputational damage that come along with a rejection by Ottawa.

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