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Canada’s hazy takeover rules hurt everyone

There's a long tradition in Canada of governments turning to experts to solve major policy challenges, and then ignoring their advice.

Take the country's foreign investment regime, which is now in the eye of a storm after Ottawa blocked one oil patch deal – Progress Energy Resources Corp. – and frets nervously about another – Nexen Inc.

The prevailing takeover rules are so unclear that the government might as well swap its "Open for Business" sign for a dry-erase board.

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Ottawa had a credible blueprint for overhauling Canada's outdated and murky foreign investment rules. They just chose to ignore it.

Following an upsurge of national angst triggered by the buyouts of Canadian resource giants Inco, Falconbridge Ltd. and Rio Tinto Alcan in 2006, Ottawa ordered up the exhaustive "Compete to Win" report. The result was the 2008 federal Competition Policy Review Panel headed by former BCE Inc. chairman Lynton (Red) Wilson, which urged the government to turn the investment review process on its head.

The Wilson panel anticipated the growing clout of state-owned investors as well as the commodities super cycle.

Mr. Wilson's prescription was to scrap the "net benefit to Canada" test and replace it with a "national interest" benchmark used by countries such as Australia. He urged Ottawa to reverse the burden of proof on takeovers, making it the responsibility of the government to demonstrate why a deal is bad for the country, not the other way around. And the panel said the government should publicly explain the rationale for blocking or approving transactions, scrapping a regime that "does not meet contemporary standards for transparency."

Ottawa implemented a few key recommendations and then inexplicably let the rest languish. Four years later the report still sits on the shelf.

Now it's dealing with the predictable fallout. Canadian investment policy is more muddled and politicized than ever.

The nebulous "net benefit" test remains a fixture of foreign investment reviews. It's become a moving target that no one truly understands – not foreign investors, not Canadians, and apparently, not even the government.

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The Conservative government is now belatedly promising changes it should have made years ago. Last week, Prime Minister Stephen Harper vowed a "clear and new policy framework" is coming. Ottawa promised much the same after the controversial 2010 decision to reject Australian mining giant BHP Billiton Ltd.'s takeover of Potash Corp. of Saskatchewan Inc., but nothing happened.

There are legitimate policy reasons for rejecting transactions. State-owned Petronas of Malaysia, which sought to buy Progress Energy, can shop in Canada, but it's protected from a takeover at home. The same applies to China's CNOOC Ltd., the state-controlled oil company that's trying to purchase Nexen for $15.1-billion. Ottawa is slated to rule on that deal next month.

The absence of investment reciprocity or evidence that state-owned actors won't behave like other companies both would qualify as possible reasons for saying no.

But how is anyone to know when the Investment Canada process is so shrouded in fog?

Ottawa still hasn't explained why it blocked the Potash Corp. deal. In the absence of an official reason, the prevailing assumption is that it was a political decision by a government desperate to lock down a majority in the then-looming federal election.

As a report this month from the Canadian International Council put it: "Few developed countries shroud their decisions in as much secrecy as Canada."

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There's a case to be made that vagueness gives the government greater flexibility, allowing it to adapt to changing economic circumstances, or simply to sniff the political winds.

But there's a cost to such murkiness. Investors don't know the ground rules at a time when Canada badly needs billions of dollars to build the vast infrastructure needed to get resources to hungry global markets.

And there's no plan to deal with the next wave of takeovers that come along – deals that could eclipse Nexen in size, significance and controversy.

Widely held Suncor Energy Inc. – Canada's reigning national oil champion – is shielded from a takeover by the Petro-Canada Public Participation Act of 1991, which limits any investor from owning more than a 20 per cent stake.

That still leaves the likes of Canadian Natural Resources Ltd., Talisman Energy Inc., Encana Corp., Cenovus Energy Inc. and TransCanada PipeLines Ltd. as potential prey.

Hardly the time for government dithering.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More


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