Industry Committee on May 21st, 2013

[The Chair, Conservative, David Sweet]

Ladies and gentlemen, welcome to the 70th meeting of the Standing Committee on Industry, Science and Technology. We have two witnesses before us who I will introduce in just one moment. I just wanted to get a motion on our current budget for this study. Our clerk always makes sure we have enough in our budget. It's $5,100 for this study. Could I get a motion for that budget amount for the study?

[Dan Harris, NDP, Scarborough Southwest, ON]

Is this the study on Investment Canada?

[The Chair, Conservative, David Sweet]

Yes, presently.

Thank you, Mr. Carmichael. All in favour?

[Some hon. members]

Agreed.

[The Chair, Conservative, David Sweet]

(Motion agreed to)

That's carried. Thank you very much.

Yes, Madam LeBlanc.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I would like to move the motion that was presented on May 7. I have a copy of the motion in French and in English.

The motion is basically requesting that Bill C-60 be divided into six pieces of legislation, which could then be properly referred to the appropriate committees. I am more interested in the part stating that “Clauses 136 to 154, related to the Investment Canada Act; be allowed to be renamed as Bill C-62”.

You have the whole motion, for which I have already given notice. We strongly feel it is very important that in order for us to properly study the Investment Canada Act it shouldn't be hidden in an omnibus bill such as Bill C-60, but should be divided so that we can properly study it in committee and in depth, and so that as a committee we would be able to make recommendations and report back to the House.

This is the motion I would like to move at this point.

[The Chair, Conservative, David Sweet]

Madam LeBlanc, I need to rule against the admissibility of the motion. I can outline the reasons for that. It goes outside of the mandate of the committee and there are two specific reasons why it does.

First, Bill C-60 was not referred to this committee and certain issues raised in the motion fall outside the committee's mandate as provided by Standing Order 108(2).

As well, the motion suggests the committee call on the House to delegate a power to the Standing Committee on Finance. Committees are creatures of the House and may not go beyond the powers given to them by the House. Only the House has the ability to delegate certain powers to the committees, and refer to them in any other issue for review. That's according to O'Brien and Bosc, pages 962 and 973. Therefore, it's not admissible for a committee to make recommendations regarding the powers of another committee.

Second, it's also suggested the committee recommend to the House that the finance committee be given the power to divide Bill C-60 into several bills. It also recommends that these various bills be referred to various committees. Once again, such recommendation goes well beyond the mandate of this committee. It is up to the House to decide which committee a bill will be referred to.

The House already decided to refer Bill C-60 to the finance committee. Even if the House agreed to give the finance committee the authority to divide the bill, and the committee exercised the authority, the resulting bills would remain before the finance committee. Therefore, this is clearly not an issue that our committee is able to decide on.

For all these reasons, I have to rule against the admissibility of the motion.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

If I may make a comment, I find it very unfortunate that this committee will not have the opportunity as duly elected representatives of Canadians to study in depth the portion of Bill C-60 that relates to the Investment Canada Act. We strongly feel it is something that should be done. We are being deprived of the opportunity to do so.

[The Chair, Conservative, David Sweet]

With that set aside, we'll go back to our regular agenda and introduce the two witnesses who are before the committee. First is Mr. Paul Halucha, director general, marketplace framework policy branch, strategic policy sector, Department of Industry. With him is Matthew Dooley, who's a senior policy analyst, marketplace framework policy branch, strategic policy sector.

It's my understanding, Mr. Halucha, you'll be doing the opening remarks, so please proceed.

[Paul Halucha, Director General, Marketplace Framework Policy Branch, Strategic Policy Sector, Department of Industry]

Thank you, Mr. Chair, and members of the committee.

My name is Paul Halucha, and I'm the director general of the marketplace framework policy branch at Industry Canada. I'm here with Matthew Dooley, who is the acting director of the investment, insolvency, competition and corporate policy directorate at Industry Canada.

We are here to speak to Division 6 of Bill C-60, Economic Action Plan 2013 Act, No. 1, which would amend the Investment Canada Act, or ICA, for two reasons. The first is to clarify how proposed investments in Canada by foreign state-owned enterprises, or SOEs, and World Trade Organization, or WTO, investors will be assessed. The second is to allow for the extension, when necessary, of timelines associated with national security reviews.

The proposed amendments to the ICA are being advanced within the broader context of Canada's commitment to an open foreign investment and trade environment. Canada welcomes foreign investment and is an important contributor to economic growth that brings new ideas, capital, and jobs, as well as access to new markets and global supply chains. At the same time, Canada is committed to maintaining marketplace framework laws that are up to date and effective.

Since 2006, in response to the changing economic and global circumstances, the government has advanced several changes to Canada's foreign investment review framework. In 2007 the government introduced guidelines to clarify the application of the net benefit factors in the review of proposed SOE, state-owned enterprise, investments.

In 2009, the government introduced amendments to the ICA. They included a commitment to incrementally increase the net benefit review threshold to $1 billion in enterprise value for WTO investors, transparency provisions and a national security review process.

In 2012 the government introduced additional transparency amendments to the ICA. The government also introduced new enforcement provisions to promote investor compliance with undertakings. Finally, the government published information on the administration of the Investment Canada Act.

These recent changes to the ICA framework have updated Canada's foreign investment review process, the purpose of which is to review significant investments in Canada by non-Canadians to determine whether they are likely to be of net benefit to Canada, and to provide for the review of investments that could be injurious to national security.

Each investment is examined on a case-by-case basis. An investment is either notifiable or reviewable, depending on what size it is, whether it involves a WTO investor, whether it is direct or indirect and whether it could pose a national security threat.

Where an investment is subject to a net benefit review, the Minister of Industry considers the plans, undertakings, and other information submitted by the investor in light of the six net benefit factors listed in section 20 of the Investment Canada Act.

On December 7, 2012, following the approval of two significant foreign investment transactions—CNOOC's acquisition of Nexen and Petronas’ acquisition of Progress Energy—the government provided clarification. The Prime Minister and the Minister of Industry issued statements clarifying the foreign investment review process, with a particular focus on SOEs and potential concerns about their non-commercial objectives.

Statements stress that while foreign investment is crucial to Canada's economic growth and prosperity, the government clarified that going forward, investments by foreign state-owned enterprises resulting in the acquisition of a Canadian oil sands business would be found to be of net benefit only on an exceptional basis, and that SOE transactions will be carefully monitored throughout the Canadian economy.

The government also updated the SOE guidelines to emphasize the importance of good corporate governance, free enterprise principles and industrial efficiency. Another reason for that update was to address concerns surrounding the potential influence of foreign states on commercial activities in Canada.

In addition, the government announced plans to retain the current net benefit review threshold for WTO SOE investors. Meanwhile, the government continued with its plans to progressively increase the net benefit review threshold for private sector WTO investors to $1 billion in enterprise value.

Lastly, the government announced its intention to allow for the extension of the timelines associated with the national security review process. These extensions will provide the government with additional time, if needed, to thoroughly review transactions that are potentially injurious to the security of Canadians.

Division 6 of Bill C-60 includes amendments to the Investment Canada Act needed to implement key components of the government's December 7 announcement. The amendments can be grouped into three principal areas.

First, section 137 establishes distinct net benefit review thresholds for WTO private sector and SOE investors, apart from those in the cultural sector.

With direct reference to the amendments passed by Parliament in 2009, the thresholds for WTO private sector investors will incrementally increase to $1 billion in enterprise value over four years. Related regulatory amendments that define the methodology for enterprise value will be required to bring these changes into force.

The current asset value threshold of $344 million will be maintained for WTO SOE investors. As is currently the case, the threshold will be annually indexed to account for inflation, i.e., changes in nominal GDP.

Second, provisions in clauses 138 to 142 concern timelines associated with national security reviews. Clauses 138 and 139 increase the amount of time the minister has to deliver a final net benefit decision once a national security review process has been concluded from five days to 30 days. Clauses 140 to 142 support the extension of related timelines under the national security review process. The government intends to prescribe the length of some of the related timelines through subsequent amendments to the national security review of investments regulations. The Minister of Industry intends to use these extensions when addressing complex national security issues, which can involve multiple jurisdictions.

Third, provisions in clauses 143 to 145 permit the Minister of Industry to determine or declare that an entity is controlled in fact by a state-owned enterprise. These provisions support the government's commitment to carefully scrutinize SOE activity across the Canadian economy. The control in fact provisions mirror those powers already contained in the cultural and national security sections of the Investment Canada Act. Following parliamentary approval, the government intends to publish the necessary related regulatory amendments required to bring certain changes into force.

We are happy to answer any questions you may have on the proposed amendments.

[The Chair, Conservative, David Sweet]

Thank you very much for your remarks, Mr. Halucha.

We'll move now to our first round of questioning, a seven-minute round.

Mr. McColeman, for seven minutes.

[Phil McColeman, Conservative, Brant, ON]

Thank you, Chair, and thank you, witnesses, for being here.

I'm going to start off with questions that were raised in a letter presented to Chair Sweet. It's addressed to the Honourable Joseph A. Day, senator and chair. It is from the Canadian Bar Association.

They have three questions relating to the changes that you've talked about. I'll read them one at a time. I'm not sure that time is going to permit, but I'd like to ask for your response to their questions. If we have time to get through all three, all the better, but if not, perhaps one of my colleagues can follow up in subsequent questioning.

The first question is:

The definition of state-owned enterprise (SOE) is unclear and, in conjunction with new powers that allow the Minister to deem an entity an SOE, make it difficult to ascertain whether an entity will be treated as an SOE under the ICA. As drafted, even Canadian companies could be subject to the SOE review provisions. The broad reach of the SOE definition engenders uncertainty for all investors.

Could you respond to that question?

[Paul Halucha]

For sure.

I would argue that the definition is actually not unclear. The government announced and published, as part of the state-owned enterprise guidelines in the fall, an updated definition of what a state-owned enterprise is. It's contained in the bill and is spelled out very clearly. It reads:

“state-owned enterprise” means (a) the government of a foreign state, whether federal, state or local, or an agency of such a government; (b) an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or (c) an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency;

I would conjecture, and this is consistent with some of the other arguments brought forward by the legal community, their concern is that the concept of influence is not as precise as the concept of direct or indirect control. We can talk a bit about influence in the discussion today.

I would argue, first, it's clear that influence is not as certain as direct control or indirect control. There's a level of ministerial discretion.

I would also note that the act provides principally for ministerial discretion in making evaluations. You could argue that the net benefit factors similarly provide the minister with discretion. They're not as clear as many in the investment community would like.

I would argue as well that at the time when a new public policy is put in place, when powers have not been tried, have not been used, this is the time when you have maximum uncertainty. As cases are reviewed, as the minister makes determinations, there will be a body of evidence that will build up. This is the same practice, the same body of evidence that has built up around other unclear concepts that lawyers have identified in the past.

For example, in 2007, when the SOE guidelines came in, they indicated they were unclear, that there would be a lack of clarity. With time it became evident how the government was implementing them and uncertainty declined. The legal community doesn't have concerns about SOE guidelines anymore.

In 2009, when the national security provisions were brought into force, it was the same thing. There were concerns that with this increased uncertainty, we wouldn't know how the minister would apply the power. Now, after a number of years, the uncertainty is down quite a bit. In fact, you'll notice that in none of the legal briefs that have been written since the budget implementation bill was tabled do they raise any concern around national security provisions, even though there are changes in the budget implementation bill related to those.

With time, I think the clarity will be there.

Finally, I would note that we have an investment review group within Industry Canada. The investment review division engages often with lawyers, engages often with foreign investors. To the extent that they can help to provide certainty, that group can be called upon to consult with foreign investors.

[Phil McColeman, Conservative, Brant, ON]

I'm only going to pick out one sentence. Maybe you hit on it with your influence factor, but I want to make sure that their concern is considered. They say, “As drafted, even Canadian companies could be subject to the SOE review provisions”. Is there that ambiguity, in your mind, in terms of these changes?

[Paul Halucha]

No, there's not. I would indicate that if, through a de facto review, it were determined that a Canadian company was in fact owned, controlled, or influenced by a foreign state, then it's not a Canadian business.

[Phil McColeman, Conservative, Brant, ON]

I'll move to question number two that they posed:

The Minister will have broad powers to deem an “acquisition of control” of a Canadian business by an SOE even if it is only a minority investment or joint venture. This will make it difficult to know whether an investment is subject to “net benefit” review. In addition, the Minister could potentially exercise this deeming discretion long after a transaction has closed.

What's your reaction to that concern they've articulated?

[Paul Halucha]

SOE investors could fall below the review threshold in the asset value of a private sector trust.

Effectively the de facto power provides the minister with the authority when he has evidence, or reason to believe, that a transaction that has, in appearances, been effectively billed as a minority stake in fact provides control to a foreign entity, a foreign state-owned enterprise. It only applies in the case of state-owned enterprises so there is no authority with this power to look at regular private commercial transactions. It's only for state-owned enterprises.

That, by definition, significantly limits the types of transactions that we're talking about. I would note as well that there are instances where transactions are structured precisely to get around the review process in the act. The act has an anti-avoidance provision in it, but it's quite a blunt measure. It doesn't provide an exploratory power. The de facto power provides the minister with an exploratory power. If he has concerns, if he has reason to believe that a transaction is in fact giving control to a state-owned enterprise, he can undertake a de facto control test with the purposes of giving himself clarity. That's what the power does. Then there's ultimately a review on the other side of that.

If he determines that a company, a state-owned enterprise, in fact has acquired control, not legal control but de facto control, of a Canadian business, then he has the authority to order a review under the act.

It's not as though he says no at that point. It's not as though the determination that it's a state-owned enterprise ends the process. There's still the full review process to go through.

In terms of the question they raised at the end about the lack of limitation around the power, the challenge would be that if you were to delimit the power and, say, arbitrarily pick a period of 180 days, effectively you would be telling foreign state-owned enterprises they had 180 days to structure a deal in a way that the government doesn't notice and so the minister wouldn't do a de facto control test. After that the minister has absolutely no ability to look back. It would be like working around the avoidance provision. The anti-avoidance provision is similarly an arbitrary power within the act, and it similarly is not time delimited. If you avoided the act five years ago and the minister finds out about it today, he's permitted to act.

I'd make another point around the de facto control power in that under the Investment Canada Act, it already applies in the realm of culture and in national security, and it is broadly used in many other acts and legislation. It's not a power that's been developed from the ground up. It does have a precedent and it exists.

Thank you.

[The Chair, Conservative, David Sweet]

I just want to advise members, if they don't mind my exercising my discretion, that because of the nature and the complexity of the questions and answers, I'll try to be fair to all parties across the board. I just want to make sure that when a question is asked there's a fulsome answer, because I think the nature of the subject requires that.

Madam LeBlanc.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I would like to thank the witnesses very much for coming to speak to us about a topic, which as the chair pointed out, is quite complex. And for that very reason, we have to study this part of the bill, indeed the entire Investment Canada Act, thoroughly.

I would like to focus on the increasing threshold that will be put in place over the next five years. The increase will actually lead to fewer and fewer transactions being subject to the Investment Canada Act. They will just be approved without a real review. A company like Future Shop could just end up in the hands of foreign investors, and we would lose one or more Canadian companies.

As far as the higher threshold goes, I'd like to know whether you've done an assessment of how many acquisitions would no longer be subject to the application of the Investment Canada Act.

[Paul Halucha]

Thank you very much for the question.

Before we turn to the enterprise value, I want to be clear that for national security there is no threshold, so at no point does anything change around the requirement that all transactions be considered from a national security perspective. The liberalization is only in the context of the net benefit review.

As I indicated, it's a regulatory proposal that's been published two times. It was published two years ago and then last spring, and we are right now finishing analysis of the comments we've received from stakeholders. The proposal will only come into effect, obviously, once the changes in the budget implementation bill are approved by Parliament, and then also once the regulatory approvals are approved. So the five-year clock has not started yet.

In terms of analysis, forecasting is very difficult to do because you cannot be sure what types of investment and what sectors are going to be impacted. You can't look forward with a crystal ball and make any kind of prediction, even if we look—

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

If I may, I want to know whether you can do any forecasting by analyzing the data from the past five years, when the current threshold was being applied.

[Paul Halucha]

Yes, that's exactly what we did.

We did an analysis based on past reviews. The threshold increase to $600 million in enterprise value would reduce the number of reviews, by our estimate. This is looking back. We looked back over about four years of reviews. We manually, ourselves, went to look at what their trading value was. For some things like liability, for some parts of the formula, there is often proprietary information behind it so we couldn't perfectly replicate it. But based on assumption, once we go to about $600 million liberalization, then the number of transactions reviewed decreases by 30%. At $1 billion, the enterprise value reduction is about 50%.

Another factor was that at the time we did this analysis the government hadn't yet made the determination to maintain the threshold where it was for state-owned enterprises, so to the extent that in that four years of data we have state-owned enterprises that made acquisitions in Canada, they would not be counted. So it could be slightly different from that, but I think that's a fair assumption.

I think that's about it. That was the analysis we undertook.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I want to pick up on something you said in your opening statement.

I would like to know whether natural resource companies with oil sands operations are going to benefit from the exceptional circumstances under Bill C-60. Would you kindly elaborate on that?

[Paul Halucha]

If I understand you correctly, you're asking in the case of the oil sands about the nature of the exceptional circumstances the Prime Minister elaborated on.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Yes.