Now that the Nexen and Progress Energy files are off the Industry Minister’s desk, it’s time to provide some clarity to the “Investment Canada Act”

My constituency office has received over one hundred e-mails and calls in the last few months regarding the now approved sale of Nexen to the Chinese State Oil Company.  All but one of my constituents were opposed to, or at least concerned about this transaction. Although I do not believe that such foreign investment impedes Canada’s ability to control its natural resources, it became clear to me that the system for approving foreign takeovers, although not opaque, was not as well understood as it could be.

The “Investment Canada Act” empowers the Minister of Industry to block foreign investments of “significant” size if they do not present a “net benefit to Canada”.  Although “significant” is defined by regulation, “net benefit” is quite nebulous.  The current threshold of significance is $330M for WTO Members.

Although “net benefit” is undefined, the Act does list six factors to be taken into account, where relevant.  They are economic activity (employment, resource processing); participation by Canadians; productivity, efficiency, innovation and technological development; effect on competition; compatibility with industrial, economic and cultural policies; and effect on Canada’s ability to compete in world markets.

The Act is silent as to if the six factors are to be ranked or if they are all equal; the statute seems to suggest that it is mandatory that the various factors be considered where relevant. However, the Act makes mention of neither “strategic resources” nor State Owned Enterprises.

For the record, I am in favour of both CNOOC’s takeover of Nexen ($15.1B) and PETRONAS’s takeover of Progress Energy ($6B).  The reality is: that of the three factors of production in resource based Alberta (Land, Labour and Capital), we have an abundance of the former, but we increasingly find ourselves needing foreign capital and temporary foreign workers. Sadly, there are just not that many Alberta Venture Capitalists with $21B in their jeans!

The further reality is that it is not entirely clear to me that governments and not shareholders are in the best position to make these decisions.  Certainly, if you own a small business, you would be able to sell that enterprise to whomever you chose to.  Why should stock certificates in a larger enterprise notionally be any different??    Absent some extraordinary security rationale, shareholders should be able to sell their personal property (shares) to whomever they choose.  Why, in a free market, should they be forced to sell their stock at a discount in a smaller pool of government approved purchasers??

It is for this very reason that, in my view, the net benefit test has an inappropriate reverse onus.  Absent an investment injurious to national security, deference should be given to markets and to the owners of property.  If there is not “Net Harm” to national security, the transaction should be allowed to proceed.

The issue of state ownership poses further issues, although more perceived than real.  It is acknowledged that states will occasionally pursue political rather than economic objectives.  That is why I am generally suspicious of Crown Corporations.  But in the case at hand, the costs of bad decisions are bourne by the citizens of China and Malaysia, while the benefit accrues to Canada.  The precious resource, while in the ground, does not belong to the extractor—it belongs to, and is regulated by, the provincial government. I see no net harm by allowing Asian State Owned Enterprises to pay royalties to the Province of Alberta and taxes to the Government of Canada.

The current Act and its vague mandate allows diplomats, bureaucrats and politicians to informally dissuade investors by creating uncertainty and risk for foreign investment analysts.  It is noteworthy that Canada’s share of direct world investment has fallen sharply in the years following the “Investment Canada Act”. Canada is now a net investor in the world.  This is so, notwithstanding that the Act is rarely invoked to block a foreign investment.

Certainly, unpredictability will suppress the value of Canadian shares if potential investors are deterred from considering Canada as a destination market.  Potential investors want certainty of rules and as a country that requires foreign investment, we ought to provide it.

Brent

1 comment for “Now that the Nexen and Progress Energy files are off the Industry Minister’s desk, it’s time to provide some clarity to the “Investment Canada Act”

  1. Peter Redmond
    December 12, 2012 at 11:20 am

    I agree with your comment on there not being an Alberta Venture Capitalist with $21 Billion in his pocket. At the end of the day, we need investors if we are ever going to develop the region to its fullest potential and in addition open up those new markets we seek. The production, the resources and the jobs that go with this investment will still be here in Alberta. I find it difficult to understand people’s arguments that the jobs and the profits go elsewhere???? The royalties and corporate taxes stay in Alberta and Canada.