Industry Committee on June 15th, 2020

[The Chair, Liberal, Sherry Romanado]

Good morning, everyone. I now call this meeting to order.

Welcome to meeting number 24 of the House of Commons Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, June 1, 2020, the committee is meeting to study the Investment Canada Act. Today's meeting is taking place by video conference, and the proceedings will be made available via the House of Commons website.

I'd like to remind the members and the witnesses, before speaking, to please wait until I recognize you by name. When you are ready to speak, please unmute your microphone and then return it to mute when you have finished speaking. When speaking, please speak slowly and clearly so the interpreters can do their work. As is my normal practice, I will hold up a yellow card when you have 30 seconds left in your intervention, and a red card for when your time for questions has expired. Please respect the time limits as we want to make sure everyone has a chance to ask their questions.

I would now like to welcome our witnesses.

From the Council of Canadian Innovators, we have Mr. Jim Balsillie, chair. From Blake, Cassels and Graydon, we have Mr. Brian Facey, chair, competition, antitrust and foreign investment group; and Mr. Joshua Krane, partner, competition, antitrust and foreign investment group. As individuals, we have Mr. Christopher Balding, associate professor, Fulbright University Vietnam, from Vietnam; and Mr. Omar Wakil, partner, Torys LLP. Each witness will present for seven minutes followed by rounds of questions.

With that, we will start with Mr. Balsillie for seven minutes.

[Jim Balsillie, Chair, Council of Canadian Innovators]

Madam Chair and honourable members, thank you for the opportunity to present today. I am Jim Balsillie, chair of the Council of Canadian Innovators.

I welcome the committee’s study on the Investment Canada Act, because it’s a critical regulatory tool for ensuring Canada’s prosperity and security. In the modern knowledge-based and data-driven economy, the sources of prosperity and the vectors of risk have changed. The act must therefore change as well to ensure it remains fit for purpose.

Specifically, first, the understanding of foreign direct investment that informs the construction of the act is based on investment in tangible production. It does not reflect the contemporary economy where the most valuable national economic and security assets are intellectual property and data.

Second, the act is based on the premise that, with FDI, the direction of the flow of knowledge and technology is into Canada. This used to be the case with FDI into industrial production. It is not the case with FDI into the innovation economy where FDI is extractive.

Third, the concept of net benefit or risk could be reasonably applied in the industrial economy based on the size of the acquired business assets. In the knowledge-based and data-driven economy, prosperity and risk do not scale with size but with spillovers.

Canadian policy remains firmly grounded in industrial-era concepts, failing to develop national strategies for IP or for data. Companies and countries now compete by owning and controlling intangible assets. The EU is building its own cloud not because Europeans lack faith in the multilateral trading system, but because EU policy-makers understand that whoever owns the IP and whoever controls the data, controls who and what interacts with it, and this has major implications for their prosperity, security and democracy.

Canada is on the sidelines in the global competition for IP and data, contributing to their creation but not contesting their ownership and ensuing benefits. Consequently, we see the exfiltration of knowledge assets out of Canada on a regular basis, across borders with the stroke of a pen, currently without any national security or economic review. For example, foundational IP for AI that Canadian taxpayers have funded for two decades is transferred from the University of Toronto to Google. Also, Huawei creates 17 research partnerships with Canadian universities for equally valuable telecom infrastructure. There are many other examples.

Meanwhile, smart countries such as Germany with its 72 Fraunhofer institutes has one central exploitation department that administers and manages IP applications, exploitations and contracts on an expert basis. Germany, the U.K., the U.S., France and even the EU created updated FDI strategies while Canada has not. Germany went as far as blocking the hiring of one of its computer engineers, a recognition by policy-makers that the negative spillovers for Germany outweigh the private returns of the computer engineer.

IP and data have strong public good characteristics, so private decisions do not price the associated externalities or spillovers into their contractual agreements.

Three aspects of the current ICA study are particularly noteworthy as inappropriate for today’s economy: one, the valuation thresholds; two, a moratorium narrowly focused on acquisitions from state-owned enterprises of authoritarian countries; and three, a principal economic focus on jobs. Very few strategic transactions would require review based on these criteria and they don’t guide the attention of policy-makers administering the act to the issues relevant in the contemporary economy.

The focus on acquisitions from SOEs of authoritarian countries is insufficient, because if the assets are critical to Canada’s prosperity, security and sovereignty, then we need to ensure they remain in our control regardless of the foreign counterparty.

Finally, there are many other economic consequences beyond jobs that must be considered, especially since the key skills for the IP and data-driven economy are in short supply. Instead, we need to ask the following questions: Where does the value proposition in our economy lie; how is the value we generate connected to our prosperity and security; and is the act structured to guide an informed assessment of a given investment into the innovation, knowledge-based and data-driven economy?

Our current approach to dealing with Canada's most valuable economic and national security assets is akin to putting an additional bolt lock on the front door, while advertising that our screen door on the side is open.

In my attached appendix, I proposed an updated analytical framework for the ICA.

I thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Our next witness is Mr. Wakil.

You have the floor for seven minutes.

[Omar Wakil, Partner, Torys LLP, As an Individual]

Thank you very much.

Good morning, everyone. Thank you for asking me to appear before the committee. I am delighted to be here.

Let me begin my remarks by saying that I think the present foreign investment review regime works well in connection with its review of acquisitions of Canadian businesses. I do not think it's necessary to lower Investment Canada Act review thresholds. I do not think it's necessary or desirable to place a temporary moratorium on acquisitions by state-owned enterprises.

In my view, the act and the government's current enforcement practices already provide sufficient means to address foreign investment concerns, even during the COVID-19 crisis. There are a number of reasons for this.

First, in terms of process, the government already has broad powers to review virtually any acquisition of any Canadian business. In particular, all foreign investors are subject to potential national security reviews, regardless of the value of the Canadian business, so that's regardless of whether the business has been devalued as a result of the COVID-19 crisis.

Moreover, investors that are SOEs are also subject to net benefit reviews based on thresholds that are much lower than the thresholds for private sector investors. Importantly, the special low threshold for state-owned enterprise investors is based on the book value of the assets of the Canadian business. In many cases, temporary devaluations as a result of the COVID-19 crisis should not affect whether a review is required.

Second, in terms of substance, the government already has broad enforcement powers to protect Canadian interests and to do so on a case-by-case basis. In the case of national security reviews, the government can take, and I quote from the legislation, “any measures” considered “advisable to protect national security”. That includes blocking a deal, requiring a divestiture or imposing any conditions whatsoever on the investment.

In the case of SOE investments, there are also special requirements that SOE investors must meet in order to secure a net benefit approval. SOE investors must agree to adhere to Canadian standards of corporate governance and they must operate the Canadian business on a commercial basis. These commitments are perpetual. They apply for the lifetime of the investment and they are actively monitored by the government. In other words, there is a special rigour and scrutiny applied to state-owned enterprise investments to ensure that they operate in the same way as private actors.

In my view, it's highly preferable to continue to review investments in a nuanced and fact-specific way rather than having some type of blanket ban. With a case-by-case approach, investments that are problematic can be blocked or restructured. Investments that are not problematic can be approved to proceed.

There would also be at least three substantial practical risks and hurdles to lowering review thresholds or imposing a moratorium on certain investments.

First, as a general matter, lower thresholds or a moratorium may deter the injections of capital that foreign investment can bring. That could impede our economic reopening and harm Canadians. For example, the alternative for some distressed businesses may not be the status quo or it may not be acquisitions by Canadian buyers; it may be insolvency.

Second, an across-the-board moratorium may be controversial to implement. Labelling certain countries as “authoritarian” could exacerbate existing diplomatic tensions or create new ones.

Finally, and perhaps most significantly, there may be complex legal impediments to changing the Investment Canada Act's net benefit thresholds. That's because certain free trade agreements, such as the Canada-U.S.-Mexico Agreement, have carve-outs for the current thresholds that were negotiated terms of those agreements. In other words, I believe at least some of our trade agreements may have the effect of requiring the government to maintain the current net benefit thresholds, so a potential amendment to the Investment Canada Act in this regard may have unintended knock-on effects that would have to be carefully considered.

In sum, I believe the current regime is well calibrated to capture and deal with potentially problematic acquisitions of Canadian businesses. That's not to say there's no room for improvement. Incremental changes to the Investment Canada Act regime and its administration could be desirable. However, I see these steps as ones that are desirable in the long term and not urgently needed to address the COVID-19 crisis.

To name a few, the government should ensure that the investment review division and its sister agencies receive adequate funding to ensure net benefit and national security reviews are conducted with speed and efficiency. Second, there may be merit in providing additional case-specific guidance on national security reviews. Third, there may be merit in requiring or permitting investors to file notification forms where there are acquisitions of material minority interests, not where there are acquisitions of control, or as Mr. Balsillie has said, to give the government broader jurisdiction over transactions that do not involve acquisitions of control or acquisitions of ownership interests in Canadian companies.

With that, I conclude my remarks. I'm pleased to answer any questions that you might have.

Thank you very much.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Our next witness is Blake, Cassels and Graydon. You have the floor for seven minutes.

[Joshua Krane, Partner, Competition, Antitrust and Foreign Investment Group, Blake, Cassels and Graydon LLP]

Thank you very much, Madam Chair and honourable members. I'm grateful to be here to present evidence this morning. I am appearing on behalf of myself and my partner, Brian Facey, who's the chair of the competition, antitrust and foreign investment group at Blakes, but who is unable to be with us this morning.

We regularly provide advice to both foreign investors and Canadian businesses regarding all aspects of the Investment Canada Act. We are also the co-authors of Investment Canada Act: Commentary and Annotation, 2020 Edition, which is published annually by legal publisher LexisNexis. That book is in its eighth year of publication and is widely used by lawyers, Canadian businesses and foreign investors considering the applications of the ICA to investments in Canada.

I am presenting in my personal capacity and the views do not represent those of Blakes or its clients.

I will begin by providing an overview of the issues raised by the committee, followed by three recommendations for your consideration based on our experience. In short, we believe the Investment Canada Act and the review mechanisms do not require amendment, and no blanket policies or amendments should be adopted at this time. The ICA works as framework legislation that provides broad discretion to the minister to approve, reject or amend foreign investments on a case-by-case basis. We do believe that it is a priority area and that it is critical at this time and, in particular, that the investment review branch should be sufficiently staffed and funded to be able to carry out its important mandate.

The challenges arising from the COVID-19 crisis and faced by businesses and government are, indeed, unprecedented, and while we acknowledge the potential risks associated with foreign takeovers of Canadian businesses critical to national security, the ICA already gives extensive powers to the government to conduct in-depth reviews of foreign investments and to block or remedy any investment that raises a national security concern.

Reviews can and frequently do take upwards of 200 days to complete, but based on our experience and observations over the last several months, a blanket prohibition on investments by certain categories of investor or regarding certain industries is not warranted, and a case-by-case approach is appropriate. Imposing additional obligations on investors, especially without conferring additional resources on the IRB and its partner agencies and providing for additional transparency measures, could signal to the investment community that investors are likely to face additional red tape when trying to invest in Canada. Canada needs foreign direct investment to support a strong economic recovery.

It’s also important to keep in mind that Parliament made significant changes in 2009 to implement measures to protect national security, but at the same time it also took steps in 2015 to increase the monetary thresholds and reduce the number of economic or net benefit reviews. These changes achieved an appropriate balance between encouraging investment from our trading partners and making sure that Canadian intellectual property and manufacturing capacity did not fall into the hands of investors whose intentions may not be in the best interests of Canadians. Lowering the review thresholds would be moving backwards in terms of opening Canada up to much-needed foreign direct investment.

I'll now turn quickly to the recommendations that we propose.

Currently, the ICA does not require that investors give notice to the government before closing, unless the investment involves the direct takeover of a Canadian business whose value exceeds the applicable financial threshold. However, it is common practice for investors to notify the government before closing when an investment has potential national security implications.

In our view, this practice works well, but if changes are to be considered, they should be only in connection with investments in industries critical to Canadian national security, and trade agreement investors should also be exempted from a mandatory notification requirement before closing. The list of critical industries should be precise so that investors and Canadian businesses can easily ascertain whether or not a filing is required. Moreover, the government should not add to the already lengthy 200-day timeline for national security reviews. The investment review branch needs to have the resources and directives to triage cases quickly. Let me now turn to that.

We've also observed that when investments are under review, particularly on national security matters, the timelines can be quite long, and this is especially problematic where investors plan to establish new businesses in Canada that create jobs, conduct new research and develop products and services for the benefit of the Canadian economy. A permanent director of investments should be appointed soon, and the government should add more technical staff to the review teams that have the expertise to more quickly assess when investments raise or don't raise national security concerns.

Finally, we also encourage this committee to take steps to improve transparency during the review process. In our experience, investors are often left wondering why their investments get caught up in a national security review, and during that process, investors are told very little about the concerns and the steps that might be needed to address them. A robust national security review framework is in the interest of all Canadians, but that framework must be applied in a principled and transparent way. Investors should have the ability to meaningfully respond to concerns that have been raised, and that process should be built into the law and the regulations.

We thank you for the opportunity to address this committee on this very important topic related to Canada's economic future, and I would be pleased to address any questions that you might have.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We'll now move to Professor Balding. You have the floor for seven minutes.

Thank you.

[Christopher Balding, Associate Professor, Fulbright University Vietnam, As an Individual]

Thank you very much.

I will say at the outset that while I am not an expert on Canadian investment law, I believe I have the necessary expertise to speak on the threat of state-owned investment.

Ladies and gentlemen of the committee, thank you for giving me this opportunity to talk with you today on a topic that I believe is of great importance in the world today. I say this as an economist and as a citizen of a democratic country concerned about the influence of authoritarian states across a variety of sectors.

By intellectual belief, barriers to trade, investment and the free flow of labour are an anathema to me. I have spent most of my career working in Asia and teaching at universities promoting these ideals and values. I believe open liberal democracies benefit from their openness.

However, after working for nine years at Peking University HSBC Business School in China as a public employee, I was mugged by the reality of modern China and strong-armed authoritarianism. Modern China under Chairman Xi stands in stark opposition to the values that Canada, as an open liberal democracy, holds dear.

How do we balance the demands of open markets with the very real threat of predatory subsidized state-owned enterprises? To answer this question, we must first answer the question about the threat posed by expansionary authoritarian-controlled, state-owned enterprises. These are companies that are using public funds to target strategic enterprises and control key resources, assets or technology.

In China, we see many examples of state-owned or -linked companies receiving enormous state largesse to help them expand abroad. Whether that is providing vendor financing that would not be allowed under OECD rules, state-backed finance to make acquisitions or industries targeted by political leaders, state-owned and -linked enterprises from authoritarian states receive significant benefits that private enterprises in the rest of the world do not receive. They also target assets, whether in natural resources or technology, that are prioritized by political leaders rather than market forces. We have seen examples where China buys foreign technology companies and attempts to move the entire operation back to China. This is not market-force behaviour or even the behaviour of a trustworthy counterparty.

Arguably more worrying, we have seen examples where China tries different methods to avoid scrutiny of its investment activity and uses a variety of measures to disguise its activity, whether it is third party investment via various funds or whether it is failure to submit foreign investments for regulatory scrutiny, which later require forced divestment. In other examples, they have offered enticements to strike deals, offering opening the Chinese market if technology is transferred to them.

We have evidence that China keeps detailed records about intellectual property held by firms, with a range of related information that value the asset. It is clear that China has a targeted list with a hierarchy of technologies and intellectual property assets. All these behaviours raise valid concerns about the authoritarian Chinese state as a trustworthy counterparty in international investment.

Given the clear risks we see associated with investment from China, I believe it is in the best interest of Canada to seriously think about the risks associated with a country that has demonstrated a clear pattern of threatening and predatory investment behaviour.

I will be willing to take questions from the committee.

Thank you very much.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Now we will move to our rounds of questions. For our six-minute round, our first round of questions will come from MP Gray.

You have the floor for six minutes.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Thank you, Madam Chair.

Thank you to everyone for being here today.

My questions will be for Professor Balding, to start.

Some foreign policy experts have written about concerns regarding the Chinese state strategy to dominate through the acquisition of large companies in other countries. I want to know if you agree with this assessment, Professor Balding.

[Christopher Balding]

I would take a slightly more nuanced view but agree in, let's say, general terms. The general priorities that are set by China are laid down relatively regularly, annually, by top leadership, and they have very clear industrial targets. With the foreign exchange rationing that is effectively going on in China, when firms are going out abroad, either they are raising that capital outside of the Chinese markets so that it's in hard currency or they are being allocated that currency by SAFE, the FX regulator in China, which controls U.S. dollars. They basically have a list of industrial targets, sectoral targets, around the world so that the key state-owned enterprises or major state-linked companies in China have their shopping list, for lack of a better term.

I think it's a little more nuanced than that, but they definitely have a clear list of targets around the world that they are essentially looking for, whether that is in technology or natural resources.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

That actually leads into my next question. Some experts have also said that the goal of these takeovers is not about profit but about expanding their international influence.

Professor Balding, do you agree with this, and if so, what detriment could this have on the Canadian economy if these foreign takeovers aren't considering economic well-being?

[Christopher Balding]

I think it's very fair to say that a lot of these investments are made much more for influential purposes or for Chinese state strategic purposes. For instance, there is a U.K. semiconductor company that was sold to a Chinese conglomerate, and part of the agreement was that it would remain in Britain. There's currently a national security fight. Basically the Chinese are seeking to move the entire company out of Britain and, effectively, leave little or no staff in Britain.

It's not just influence, but there's clearly influence targeting. There is also very strategic.... Does this meet China's strategic goal, in this specific case, China 2020 to 2025, and its desire to upgrade semiconductor manufacturing output?

It's also very important to note that for what you referred to as “influence”, there are many examples in the investment world like that as well. Basically they seem to be less about economic and financial returns and much more about state policies.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

If a review right now is triggered through the current Investment Canada Act, there needs to be a proven net benefit to Canada.

Professor Balding, do you feel that the parameters that are currently laid out, listed, are sufficient to show net benefit?

[Christopher Balding]

With the caveat that I am not an expert on Canadian investment law or on exactly how “net benefit” has been defined over time in Canada, I think it would be well worth looking at that closer and at exactly the requirements that are placed on foreign acquirers.

There are many examples where Chinese companies have behaved in a manner that they.... Clearly, not only would they not necessarily follow an agreement after an acquisition was approved, but also they would move companies in different ways and reassign assets that would not be in the best interests of Canada.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

We've seen some examples of a Chinese state-owned enterprise, China Communications Construction Company, building globally, such as the Malta dry dock, the China-Pakistan economic corridor infrastructures and the Sri Lankan port city. Many academics call this the “debt trap diplomacy”.

How do you see this playing out, and is this something we should be concerned with here Canada?

[Christopher Balding]

Those are two specific issues that you raised. I think it's likely less of an issue for Canada because Chinese lenders are not necessarily lending significantly, that I am aware of, in any appreciable amount to either Chinese local governments or major Canadian industrial [Technical difficulty—Editor].

The other thing that I think is noticeable about China is that there was probably less thinking about this. I doubt that there was a debt-trap plan concocted in Beijing, and it was simply more that they were under orders to go out and lend to companies abroad in targeted countries along the Belt and Road .

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Thank you.

I think our time is up, Madam Chair.

[The Chair, Liberal, Sherry Romanado]

Unfortunately, yes.

Our next round of questions goes to MP Erskine-Smith.

You have the floor for six minutes.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Thanks very much, Madam Chair.

Before I get to the witnesses, the clerk did circulate a notice of motion. I just want to make sure it is a matter of public record today. I'll move it on Thursday, but just so everyone is on the same page, the motion is:

That, pursuant to Standing Order 108(2), the Standing Committee on Innovation, Science and Technology invite senior representatives from Loblaw Companies Ltd., Metro Inc. and Empire Company Ltd. [which owns Sobey's] to explain their decisions to cancel, on the same day, the modest increase in wages for front-line grocery store workers during the pandemic, including how those decisions are consistent with competition laws.

I know a number of us were quite frustrated to see that decision taking place, and I think it's important on behalf of Canadians that we have these companies in to explain themselves. Hopefully, they don't talk to one another first.

My question on the Investment Canada Act is the same for all the witnesses. We heard previous testimony to the effect that the policy guidance in mid-April that was issued by the minister's office effectively says there's going to be greater scrutiny on state-owned companies or companies that are associated with authoritarian regimes. There is currently additional scrutiny should those acquisitions be proposed. We heard some witness testimony, though, that rather than that policy direction there ought to be firmer guidance with greater specificity. Out of all of the witness testimony, that seems to be a recommendation that is reasonable.

I wonder, starting with Mr. Wakil, if that's something that you think we ought to support.

[Omar Wakil]

It is something that I think we should support. I should say by way of additional background that I think the government has, over the years, done a good job in trying to increase the transparency around national security reviews under the Investment Canada Act. The annual report that the investment review division issues is a valuable source of information to members of the bar and to foreign investors and Canadian businesses seeking foreign investment with respect to statistical information about the types of national securities that have been undertaken, the outcomes of the reviews, remedies and the timelines. There are also guidelines on national security reviews that are also helpful.

However, as I said in my opening remarks, I think additional guidance would be necessary. Investors in Canadian businesses don't mind having rules, but they like to have as much certainty about the rules as possible.

Additional guidance that may be helpful is case-specific guidance to the extent that's possible. Sometimes these national security reviews, by their very nature, inhibit the disclosure of information that may be valuable. I think there is additional guidance that the government could give as it obtains additional experience with national security reviews in case-specific situations, more information about the industry that was of interest to the government or information about the outcomes of the review.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Mr. Krane.

[Joshua Krane]

Thank you very much.

I agree with Mr. Wakil that the government has done a good job increasing transparency, particularly through the annual report. In my experience, however, investors are told very little about what specific national security concern their investments raise. They're not actually told anything until the 90th day of a review, and even then, they're just given a summary statement of a couple of sentences at a pretty generic level and then asked to make representations to respond. There's no formal process by which investors are given a thorough explanation of the national security concern, nor are they given specific guidance necessarily about the types of measures they could take to address those concerns.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Knowing that businesses, as Mr. Wakil says, depend upon certainty for investment, then ensuring that the policy direction that was issued in mid-April—which I think is the right policy direction as far as it goes—is translated into more fulsome guidelines with greater specificity is something that you would support.

[Joshua Krane]

Absolutely. Even during the case-specific process, additional transparency measures would help so that the investors know whether the outcome is looking promising or the outcome is just not going to work in their favour. To drag investors through a 200-day process only to tell them, “I'm sorry. We can't work things out,” doesn't necessarily send the best message to the investment community.