The Global and Mail
OTTAWA -- Despite its professed open-door policy, the federal government is in danger of erecting major barriers to foreign investment as it establishes new rules for proposed takeovers by state-owned enterprises or those involving national security, lawyers and business people said yesterday.
Industry Minister Jim Prentice said this week that Ottawa will soon be establishing new screens for foreign investment under the Investment Canada Act.
But while the minister insisted that few proposed takeovers would be subjected to an additional review, many experts suggested yesterday the government could end up with a blunt instrument that would discourage foreign investors from considering Canada.
Debbie Salzberger, a mergers-and-acquisitions lawyer with Stikeman Elliott LLP, said the government will have to be extremely careful in crafting the new rules.
"Potential legislation may have some commendable goals, but if we don't have clear implementation, it becomes an opportunity for protectionist or politically motivated action," Ms. Salzberger said yesterday. "That's always a concern."
She had complained about a bill introduced by the previous Liberal government that added a "national security test" to the Investment Canada Act. Critics said the test was too vague and could be used to justify the government blocking a broad range of foreign takeovers.
Since taking office, the Conservative government has raised concerns about state-owned companies that are eager to invest in Canada, but may be operating as geopolitical tools of their home government rather than free-market participants.
In his speech, Mr. Prentice said Ottawa will not target state-owned companies simply based on their nationality but rather will attempt to gauge whether those companies operate according to market principles.
But that may be easier said than done.
Most Western experts agree that Norway's StatoilHydro ASA is a model corporate citizen, even though it is owned by the Norwegian government and has a mandate to help develop the Norwegian economy.
But what about OAO Gazprom, the Russian gas giant that is often criticized as a tool of the Kremlin but is listed on the London Stock Exchange and claims to be a market-oriented company Or China National Offshore Oil Corp., one of three major Chinese state-owned oil companies that has shares listed on the Hong Kong Exchange and in New York.
Wenran Jiang, who runs the China Institute at the University of Alberta, said Chinese state-owned companies perceive the government's proposed investment screens as a thinly veiled warning that they are not welcome to make acquisitions here.
He worried Canadian firms could face retaliation in China, which is increasingly opening its doors to foreign investment.
But it is not only state-owned companies that Ottawa will be forced to deal with. Increasingly, state-run investment pools from countries like China and oil-rich Middle Eastern nations are scouring the globe for acquisitions.
Economist Bill Robson said the government will be treading on dangerous territory as it attempts to ward off unwelcome suitors while maintaining - or even increasing - Canada's share of job-creating foreign investment.
"It's very difficult to craft rules of this kind without unintended consequences," said Mr. Robson, who is chief executive officer of the C.D. Howe Institute, a leading business think tank.
He noted many state-run pension funds, such as the California Public Employees Retirement System, are susceptible to political interference. Would such funds from the U.S. or other developed countries be more welcome than the Abu Dhabi state investment pool, which controls an estimated $600-billion (U.S.)
And if the federal government throws up new hurdles for state-owned investment pools, it might find pension funds like the Canada Pension Plan Investment Board or the Ontario Teachers Pension Plan facing similar restrictions overseas, Mr. Robson warned.
Peter Franklyn, a lawyer with Osler Hoskin & Harcourt LLP, said the Organization for Economic Co-operation and Development has developed some guidelines for assessing corporate governance of state-owned companies, including the number of outside directors, the timely and transparent reporting of financial results, and fair treatment of all shareholders.
Those guidelines will be critical factors when Ottawa looks at proposed takeovers from government-owned companies, he said. But, he added, those factors are difficult to codify into a transparent investment policy.