Last Friday, the federal government announced an updated policy and revised guidelines regarding acquisitions by foreign state-owned enterprises in Canada. This accompanied the approvals of two multibillion-dollar SOE acquisitions: Nexen Inc. by China's CNOOC Ltd. and of Progress Energy Resources Corp. by Malaysia's Petronas. These approvals were based on the policy in force at the time the state-owned enterprises filed for them, which is appropriate. But many Canadians felt that prospects for further large investments by SOEs aiming to gain majority control of Canadian businesses required policy rethinking.
Indeed, the revised guidelines for evaluating whether such acquisitions pass the "net benefit" test – which all foreign investments above a certain value threshold are required to pass under the Investment Canada Act – imprint a new strategic bent on the regime surrounding foreign SOE acquisitions in Canada. In the process, they provide a number of valuable clarifications for investors, but may also have broader, perhaps unintended, consequences on Canadian trade and economic policy.
The revised guidelines require, rather than simply suggest as in the past, an evaluation of the commercial orientation, corporate governance and transparency of the SOE's proposed Canadian acquisition. As part of the review process, the government will inquire more explicitly into the control that the foreign SOE would exercise over its proposed Canadian acquisition and the industry in which it will operate. Thresholds for reviews of foreign private acquisitions (which will become less restrictive) and foreign SOE acquisitions (remaining where they are) will now diverge, underscoring the additional scrutiny warranted by the state-owned status of the foreign investor.
The revised guidelines also introduce novel requirements to consider both adherence to free enterprise principles and industrial efficiency when reviewing proposed acquisitions of Canadian businesses by foreign SOEs. These express a clear public policy preference for private enterprise operating in a pro-competitive environment, which is generally to be welcome.
Given the expansive definition of SOEs – potentially including private firms that are indirectly influenced by governments – the scope of these requirements could be fairly sweeping. It remains to be seen how the Canadian government will interpret them so as not to cast the net too wide in rejecting such investments that might otherwise benefit the Canadian economy.
Furthermore, the decision to focus on free enterprise principles and efficiency in state-owned foreign investors raises a new set of questions regarding the application of the net benefit test, which will continue to be the basic test used to screen large acquisitions by both foreign private and public investors. The way the net benefit test is currently applied is not always aligned with the principles of free enterprise or economic efficiency.
Indeed, in a number of sectors, regulation of the Canadian economy is not based on free enterprise and efficiency principles, a fact Canada's trade and investment partners will now feel more welcome to underline in their trade and investment negotiations with Canada. In short, there may be calls, as a result of the revised policy, for greater congruity between the standard that will be applied to foreign state-owned enterprises and that which will apply to other foreign investors or even to domestic industry. This could be a perhaps unintended, though not unwelcome, consequence of the revised guidelines.
Majority state-owned ownership in the oil sands will now only receive the go-ahead on an "exceptional basis," which is a de facto declaration of a national strategic interest in the oil sands. This opens the door to state-to-state negotiations whereby Canada could leverage access to state-owned investors in exchange, for example, for broad market access concessions for Canadian firms. Allowing for exceptions also suggests that if the government finds that it has overplayed its hand and the new policy has a negative impact on investment plans, there is room for players to request that talks with a state-owned investor be allowed to come to fruition on an exceptional basis.
Overall, the new guidelines clarify Canada's policy regarding large foreign state-owned investments. They will no doubt result in some reassessment of investment and financing plans by some who may have counted on a more open-door policy toward state-owned enterprises, but the door remains largely open, including for potential minority stakes in oil-sands ventures. The de facto declaration of the oil sands as a strategic asset and the new emphasis on free-enterprise principles may well have trade and economic policy consequences beyond SOE investments in Canada.
Daniel Schwanen is associate vice-president of trade and international policy at the C.D. Howe Institute.