Industry Committee on March 3rd, 2011

[Bruce Campbell, Executive Director, Canadian Centre for Policy Alternatives]

Thank you, Mr. Chairman.

I'm going to start by making a number of observations. First, all of the major recipient countries of foreign direct investment limit it in key or strategic sectors, and all have review or screening mechanisms. These do not appear to significantly affect overall FDI flows.

Brazil, for example, has foreign investment limits on mine assets. In certain areas, only majority-owned Brazilian companies can operate. It's interesting that the takeover of Inco by the Brazilian company Vale, had it been the other way around, would have almost certainly been rejected. The government holds golden shares that protect Vale from unwanted foreign takeover.

In the case of Australia, which has rules similar to our own, the regulator has indicated a clear preference for foreign investments in its large companies to be kept below 15%. The takeover of Alcan by Rio Tinto, an Australian company, would likely have been rejected had it been the other way around.

The U.S. screens foreign direct investment. The main tool is the national security clause, which is notoriously undefined. You know that it has been used. It was used in the United Arab Emirates company Dubai Ports World in its purchase of the U.S. company that ran the U.S. ports system. It forced it to sell off its U.S. operations. It was also invoked in 2005. The Chinese state-owned oil company was forced to drop its bid for the U.S. oil company, Unocal.

My second observation is the obvious: that Canada is open to FDI and can't be accused of not being so. You know the figures on the approvals of takeovers by Investment Canada, and it only reviews 10% of takeovers. Foreign-controlled corporations held 56.4% of manufacturing assets in 2008--those numbers just came out today. And foreign-controlled companies held 45% of operating revenues in the oil and gas sector. In 2006, foreign control over Canada's mining sector assets rose, in the wake of takeovers, to 47.4%, and in the case of operating revenues, to 66%. So Canada is definitely open.

We know there are problems. We've heard about some of them today. I listened to part of the last panel and the issues of transparency. The minister himself has indicated that his government wants to compel foreign investors to make their undertakings public on jobs, local processing, technology transfers, etc.

I'm sure you're also aware of some of the high-profile examples where the process broke down. In the case of Vale Inco, amongst its undertakings were no layoffs for three years and employment not to fall below 85%. It cut 463 jobs in 2009, and in the face of really stringent concessions, it forced a long and bitter strike in Sudbury and elsewhere. It finally announced last fall that it was closing its operations in Thompson, throwing 500 people out of work--and that's 40% of the city's workforce.

With the Australian company, Rio Tinto, and Alcan, commitments were made and they weren't lived up to.

The final example is the steel industry, which in the space of a few years was pretty much sold off.

I would say that in revisiting the foreign investment review policy, it should be part of a broader industrial policy. This would include a plan for protecting, nurturing, and developing strategic natural resources, strategic technologies, and strategic sectors.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Campbell. I'm sorry, we're well over the time.

[Bruce Campbell]

I was going to indicate a couple of suggestions for changing the act. I'll do it in the questions.

[The Chair, Conservative, David Sweet]

That would be great. You'll have a chance. We have enough time for questions.

Mr. Hart, for five minutes, please.

[Professor Michael Hart, Simon Reisman Chair in Trade Policy, Norman Paterson School of International Affairs, Carleton University, As an Individual]

Thank you, Mr. Chairman.

I'm here as a private individual, a former official, and currently as a professor of public policy, so I can stand back and take a broad look at this.

When you put this into the context of broader Canadian interests, over the last 60 or 70 years, Canada has participated actively in efforts to reduce impediments to international exchange, whether that be of goods or services or capital.

In the earlier panel one of the members asked where Canada stood compared to others. My view would be, unlike Mr. Campbell, that Canada is an outlier. Among OECD countries, Canada is an outlier along with Australia.

I take the view that we have come a long way since the foreign investment review act. When it was passed in 1984, the Investment Canada Act, served a very useful purpose as a transition instrument. But I think in the world we live in today, decisions about what to buy, whom to buy it from, and where to invest should largely be left up to private sector interests, whether they be consumers or investors.

From that perspective, I thought the report that Red Wilson did for the government a little over two years ago on competition policy in Canada, and which also looked at investment issues, was spot on. I was one of the witnesses for that committee. Let me quote his advice:

...that any restrictions on foreign investment should be rare, narrowly conceived, limited to very large takeovers, and grounded in concerns about national security.

If I were sitting in your chairs, I would be looking seriously at scrapping the Investment Canada Act and replacing it with a narrowly conceived national security act. Foreign investment restrictions are a very poor instrument for dealing with the issues that people try to use it for.

If your objective is to deal with corporate behaviour, for instance, then you should do that through the Competition Act or the corporations act. If you're trying to deal with fiduciary issues, deal with them through the Financial Administration Act and similar kinds of acts.

Using foreign ownership restrictions almost always has perverse effects. It devalues the assets held by Canadians, reduces the opportunity for Canadians to benefit from foreign capital and expertise, and it reduces entrepreneurship in this country.

I cannot think of any public policy purpose that would be served by foreign ownership restrictions, except in those rare circumstances when the foreign investor is masquerading as a private investor but it is really a government that is investing. When governments invest, whichever vehicles they may use, they have other objectives than private investors. Other than that, I think the decision as to where to invest and how to invest should be made by the private investor.

There is a mistaken idea in Canada that when we have a foreign takeover of an existing Canadian corporation, that is a net loss to Canadians. I think that's a very big mistake to make. In effect, all that means is that a group of investors outside of Canada have a view that a particular asset can be used more effectively than the current investors are using it. They're willing to take that chance. In return, they provide capital to the former investors who can then invest it in whatever venture they think would be more profitable. The result of that is a better functioning Canadian economy.

From that perspective, I'm going to take a much more root-and-branch view than I think some of your other witnesses have. Rather than tinkering with the act, I suggest you rethink the act.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Hart.

We have a bit more time because we didn't deal with business and we got going quite quickly after the change. So we'll start with seven-minute rounds.

Mr. Rota, for seven minutes.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you very much, Mr. Chair.

And thank you all for being here.

It was interesting. In listening to the presentations, it seems that Canada would be more similar to Australia or New Zealand, or some other countries that have a large number of natural resources. When I look at foreign investment, I look at what it will bring to the country as far as jobs, technology, and innovation. That applies to the natural resource sector as well.

But when I'm looking at foreign investment, it's money coming in and actually growing something, as opposed to a natural resource, where it's coming in, taking a raw material out of the country, and maybe creating a few jobs.

Could I get some comments on that? Could you differentiate, if you can, between a foreign investment and an acquisition of a natural resource?

Mr. Campbell, would you like to start off?

[Bruce Campbell]

I think you could perhaps look at the specific case. Look at the case of potash. I think the government was wise to decide to disallow that. I think that was a wise decision because I think that is a strategic resource. I think as Dick Haskayne, a former chair of a number of resource companies and a strong opponent of the proposal to take it over, indicated, what happens when one of our national champions--and he considered it a national champion, and there are others--is taken over and the decisions are made outside the country is that those effective decisions, even if there is a branch plant or head office, are made outside the country. In the case of the marketing structure...particularly if Potash had decided--and it indicated that it had decided--it was going to pull out.

I just think that's an example of a strategic company, and when you're talking about removing the main decision-making from the board of directors and the CEO outside of the country, then it is not in the public interest. That's an example of the divergence between the public interest and the private corporate interest.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Mr. Bloom, I'd like your thoughts on that as well.

Mr. Hart, I'll have another question for you on the next one, if you don't mind. It's just that I have very limited time.

[Dr. Michael Bloom]

I'll take the example of the potash deal, which I've spent some time thinking about. It was an opportunity to bring capital into the country. It may turn out, as it does in so many deals, that the capital comes anyway, because BHP is still considering the Jansen Lake mine and the $12 billion investment.

I think it's very important to note that if you looked at the analysis up to 2030 of that potential takeover, you would find that there would have been more than 1,000 jobs created in the Jansen Lake mine for the building of it and in connection with all the ancillary infrastructure required for a big mine. Then there would have been a large number of jobs in the mine and then direct and indirect and induced effects on the economy.

So you can actually get, in the case of a resource, depending on what the resource is and how it's used, very substantial investment in jobs and communities out of it with foreign capital coming in--depending on the resources.

In the case of potash, it can't be stored out of the ground for long periods of time, and the market for it is international.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

It really comes down to the negotiations that take place with the government at the time when they're coming in to buy a natural resource.

[Dr. Michael Bloom]

It does indeed. It was pretty clear, for example, in Saskatchewan, that the government there clearly had authority through the royalty regime and its taxation structure to ask for and get a structure that would satisfy it in many ways.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

I'll just cut in there, because we are limited in time.

I'll go to Mr. Hart. I don't want him to feel left out on this one.

There is a term that's come up quite often, and I've heard it again today, and I'm hearing it more and more from constituents, and that is reciprocity. Why are we allowing countries to come and invest in Canada if they will not allow us to invest in their country? I'm not saying that's the way to go, but it is becoming a stronger and stronger voice. I'm not sure if it's protectionism as much as it is a question of saying if it's going to be free trade, then let's make it free trade. Let's not let others come in and buy us out if we cannot then go into their countries.

What effect would reciprocity have on the Canadian economy? I'd like to hear from Mr. Hart and then Mr. Campbell, if they don't mind.

[Prof. Michael Hart]

I think it would have a very negative effect. The use of the concept of reciprocity in trade negotiations was an effective technique in order to get barriers to come down. To use that same technique to get at investment barriers, I think, would be a very effective way to shoot yourself in the foot, because the issue is not the nationality of capital but the acquisition of capital.

In almost all instances, capital does not have a nationality. So if we're interested in developing this country--and I don't care whether it's a natural resource or a manufacturing or service part of the economy--then we will need capital. If that capital is not readily available for a particular venture in this country, then we should welcome it from any other investors who are prepared to risk that capital.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

It doesn't matter where that money comes from, then, whether it comes from China, a state-owned company, or whether—

[Prof. Michael Hart]

No, I said there was one area where I thought it did matter, where the investor is not a private investor but a government-controlled investor. In that case, I would want to look behind it to see whether there are national security implications.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Mr. Campbell.

[Bruce Campbell]

If we're going to talk about strategic sectors as part of the net benefit calculation, then we have to have a strategy. I think this review should also be considered part of a bigger review of what the strategy is. I'm not so much concerned about the reciprocity, although in my opening presentation I mentioned a couple of examples where there wasn't reciprocity.

The important thing is to have a policy and then identify, within that policy, the key strategic sectors.

The major recipients of the foreign directive—Brazil, Russia, India, and China—all have industrial policies. They all have strategies. Within that, they review foreign investments or disallow—

[The Chair, Conservative, David Sweet]

That's it. I'm sorry. I was giving your witness a little more time.

Monsieur Bouchard from the Bloc for seven minutes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair.

I want to thank our witnesses for being with us this afternoon. My first question is for Mr. Campbell.

You talked about Rio Tinto's takeover of Alcan. Did I understand correctly that the Minister should have nixed that transaction?

[Bruce Campbell]

I'm not privy to all the proceedings of that relationship and review. But I do know that in the case of Rio Tinto certain undertakings were made, certain commitments, and those commitments were not fulfilled, it would seem.

They made commitments to capital spending, which they did not uphold. On the major upgrades in their plants in Saguenay and in Kitimat in B.C., those capital investments weren't made. They closed the plant in Beauharnois. They reduced production in Vaudreuil. They cut head office jobs by almost 20%. I think it was 1,100 jobs in all. That's the estimate of the jobs loss.

It seems to me that under the act, if you're going to have criteria for measuring net benefit, you have to be able to monitor and you have to be able to enforce. That enforcement should include sanctions up to and including revoking the transaction, the takeover.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

So, conditions were not met from the outset. You think that there were major issues in terms of failure to comply with the conditions that had been set.

[Bruce Campbell]

Exactly. Let's face it, I think Alcan can be considered along with PotashCorp. That was about equivalent in size to the Potash proposed takeover, about $40 billion. It is one of our national champions. It is open to scrutiny whether that was a wise decision to make. If it was, then the conditions that were applied were not properly met.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

I have another question for you, Mr. Campbell.

We know that the applicable threshold for determining the “net benefit to Canada” is set at $312 million currently, so anything below that amount is not subject to review. We also know that, in Canada and in Quebec, there are many small- and medium-sized companies. How will Canada and Quebec be affected by foreign investors taking over small- and medium-sized companies? Will the impact on them be significant? Will changes occur?

[Bruce Campbell]

What I would definitely say is that I would be very skeptical of raising those thresholds from the current levels. I know there have been recommendations that they be raised to a billion, in some cases, and to weaken the net benefit tests.

I think before making a judgment as to whether...they should be reviewed beforehand. Under the national security clause they can be reviewed, even if they're smaller, and in sectors like culture, of course.

But for others we have a track record. We have a history of Investment Canada reviewing or at least giving notification, so we have the record of those transactions. There are something like 13,000 of them. It would be really interesting to do a report or a study of those, or a sample of those, underneath the threshold and what has happened, in fact. Before considering whether to raise or lower the threshold, I think it would be important to actually review just what the history has been with respect to those takeovers. Have the companies thrived or not thrived in the wake of those takeovers?