Industry Committee on June 18th, 2020

[Prof. Gordon Houlden]

Thank you.

I'll speak to any community organization at any time—that's a policy—and I'm delighted to have that connection.

I think you're quite right. Not all SOEs are created equal. There are 300,000 of them; some pose a lower risk and some a higher risk. In general, an SOE with a more direct connection in sensitive sectors is more risky, but if you're, let's say, in China's Ministry of Science and Technology or China's Ministry of National Defense and you're interested in a potential dual-use technology, you may well want to approach that acquisition through a private company.

If you look at our dataset, we divide SOEs and private enterprises in the investment in Canada. One of my researchers just came last year and said, “Look, there's about 5% we can't even figure out because there are, it looks like, historical tendencies, some connections there.” I said, “Do we put it in one or the other, or divide it?” He said, “No, leave it as an unknown because it makes the point that you can't always even determine if it is an SOE or not.”

I would say this: Don't focus on the big, lumbering coal miner where we know where the product is going, which is probably to China—the firm may need a market; the province may need a market. Look at the high-tech—and we don't have enough of it—innovative companies. That's where I would focus maximum effort. Public safety and the intelligence capacity of this country are not unlimited. There's one company in Edmonton, for example, that produces pot stickers and ships them to Japan, the U.S. and Canada. That's not the focus. It is a state enterprise, but it's harmless, in my view. Go for where the risk is greatest, and that's innovation, IP threat. Focus on that to the degree necessary. That, to me, is even more important than the threshold issue: focusing on the best targets.

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

I'm going to try to get in a couple more questions for you quickly.

It's very interesting what you just said, that intelligence capacity is limited. This means that right now, with the present funding levels for our intelligence agencies, from your perspective, the government is forced to make choices about looking into this aspect and not as much into this other aspect, even if we can't necessarily know if there's some possible risk.

[Prof. Gordon Houlden]

Even within those agencies, from my experience in working with them when I was in government and even subsequently, there's not always enough capacity. You don't make China experts overnight. It requires language skills, cultural understanding, understanding China, long postings, building up the skill set, giving them promotional avenues. You don't move people around on a chessboard. We're never going to be equal to the U.S. I've met with the CFIUS group and lectured to them in the United States. They have much more capacity, and fortunately, we have access to that.

I'd say this: Identify risk and go for that rather than a shotgun approach. If and when China appears, it may be risky or it may not be risky, and that's a key determination to make.

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

It sounds like we need to have the capacity and the willingness to conduct these reviews.

I wonder what you think about how political factors could influence the government's willingness to conduct national security reviews in certain situations and about the risks around that. We've seen cases of Chinese state retaliation aimed at defending the particular interests of even not officially state-owned but state-affiliated companies that are sort of darlings of the regime.

Some of the witnesses are saying that the government has the power to do national security reviews already, so what's the problem. But if we're hearing that there's limited resource capacity and there are also political factors, might that pose some problems in terms of the government's will or ability to do these reviews when necessary?

[Prof. Gordon Houlden]

They shouldn't be. There shouldn't be those hesitations. They ought to just go to the heart of the matter, in my view, irrespective of who might be annoyed. However, if you're going to write into the ICA naming companies, put on your seat belt, because there'll be a strong reaction.

To me, using language such as “state-owned enterprise” or “authoritarian regime” is fine. China figures that out just like that. They know it's pertaining to them, because they're the only large authoritarian country that is putting a mountain of investment, a large amount of investment, into Canada. They'll figure that out, but if you name them and you make a lot of public statements, you're going to worsen it, not just for our two Michaels but for that broad political relationship that, like it or not, we do need to maintain.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We'll now move to MP Ehsassi. You have the floor for six minutes.

[Ali Ehsassi, Liberal, Willowdale, ON]

Thank you very much, Madam Chair, and thank you very much to all the witnesses who have kindly appeared before our committee today.

For the first question, I'd like to go to Ms. Salzberger.

Ms. Salzberger, I've had the opportunity to review the submission you've made. Thank you very much. It's very comprehensive and has answered some questions and concerns that I had.

You referred to the national security guidelines under the ICA, which were published in 2016. As you indicate in your submission, it is a very broad provision. There are no monetary thresholds, and it's quite obvious that the 2016 statement is concerned about the transfer of sensitive technology. It discusses critical infrastructure, critical goods and services. How significant is the 2016 notice that was provided by Industry Canada?

[Debbie Salzberger]

Do you mean the guidelines?

[Ali Ehsassi, Liberal, Willowdale, ON]

Yes. You've stated that this is very broad, that it encompasses and covers any type of transaction that would be of concern. Would you delve into this one more time just to unpack it for us and tell us how it would cover everything?

[Debbie Salzberger]

Sure. I guess there are two ways to answer that.

One way is the fact that it is undefined by definition, for non-definition means that there is very broad discretion within the act to cover evolving threats, current threats and so on, across a variety of industries, including technology, IP and so on. That's been a topic of discussion, I think, of this committee over the last few days.

The Investment Canada Act guidelines also make reference to public safety commentary on the types of issues that might be covered or concerns that might be covered under the national security provisions of the Investment Canada Act. For those who aren't as familiar with the guidelines, there's a laundry list of potential effects of the investment that are covered. They include not only defence-related capabilities, transfer of sensitive technologies and know-how, things that you might expect, but given the April 18, 2020, statement, we also understand, and it has been emphasized, that the guidance covers things like supply of critical goods and things that are covered under government contracts.

To sum up, I think it's quite broad. I don't know if that answers your specific question.

[Ali Ehsassi, Liberal, Willowdale, ON]

Absolutely.

On page 5 of your submission, you state that under the national security review provisions, these provisions “extend beyond acquisitions of control even to minority investments”. From a procedural standpoint, is there a de minimis threshold if someone wants to make a portfolio investment? How does that process work? How is it flagged for our various government agencies?

[Debbie Salzberger]

The Investment Canada process works in the context of an acquisition of control. An acquisition of control by any foreigner of a Canadian business requires the submission of a notification or an application for review to the investment review division.

The statement in respect of our submission speaks to the fact that the national security review provisions of the Investment Canada Act extend beyond notifiable investments, i.e., beyond acquisitions of control, and could include, within the jurisdiction of the government, to review investments that are minority investments which otherwise are not notifiable.

I think your question is on potentially how those investments would come to the attention of the government.

[Ali Ehsassi, Liberal, Willowdale, ON]

Yes, exactly.

[Debbie Salzberger]

There are various ways. It's possible that they may be through public disclosure. As well, as I think you heard earlier from our friends at CSIS and Public Safety, our understanding is that there are avenues through which there is monitoring. That is outside of the scope of the Investment Canada Act, in the sense of non-notifiability, but not out of the scope in the sense of jurisdiction.

[Ali Ehsassi, Liberal, Willowdale, ON]

Thank you.

Now, I will go to Mr. Glossop.

Mr. Glossop, you come at this with many decades of experience.

One of the concerns that's been raised today is on how ownership can be opaque if there are investments. How is beneficial ownership determined, and how robust is the system that we currently have in place?

[Peter Glossop]

Thank you for the question.

I think the system does permit the government to unpack ownership quite well. There are extensive provisions around determining ultimate control of the investor. When an investor is submitting a notification or an application for a review, that information must be submitted, including, for example, the directors of the investor, the highest-paid officers and the nature of any foreign state ownership in that investor.

[Ali Ehsassi, Liberal, Willowdale, ON]

Thank you.

That's my time.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We will begin the next round of questions.

Mr. Savard-Tremblay, you have the floor for six minutes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Good evening.

Thank you, Madam Chair.

Mr. Viau, thank you for your presentation on behalf of Équiterre.

You mentioned in your report that a major part of the oil sands industry was foreign-owned. I would be curious to have the figures as well as the trend because, in 2016, I read a text by Mr. Daniel Breton, Quebec Minister of Sustainable Development, Environment, Wildlife and Parks in 2012, in which he stated that fewer and fewer foreign companies were interested in the oil sector. I should point out that this was about the oil sector in general, not just the oil sands. That may be the difference; you may or may not confirm it, since you are the expert.

Mr. Breton indicated that, in the end, there were fewer and fewer royalties, and that the large and growing share was in fact pension funds. In other words, the pensions of Canadians and Quebeckers were at risk. In fact, the Caisse de dépôt et placement du Québec jumped into this for a while. We were putting pensions at risk for this sector which, in the end, was anything but interesting in the long term.

I'd like to get your comments on that.

[Marc-André Viau]

Thank you very much for the question, sir.

I will answer, and then I'll give the floor to my colleague so she can complete my reply.

Our study shows that 70% of production is controlled by foreign interests. In terms of growth, control of operating profits is said to have increased from 31.6% in 2012 to 58.4% in 2016. These are profits that go into the pockets of foreign interests. There is certainly an increase in this area. On the other hand, there is a decrease in jobs, 53,000 fewer jobs compared to the peak in 2014, and an increase in the cost of cleaning up orphaned wells. So there is a combination of factors.

Maybe you want to add a word on that?

[Tzeporah Berman]

You are right that there has been a major flight of IOCs from the oil sands. Over the last five years, we've seen about $30 billion to $50 billion from major international oil companies pulling out of the oil sands, companies like Statoil, Total, etc. We've also seen major investment houses and insurance houses make statements saying they will no longer insure oil sands or related activities, and they will no longer invest in oil sands or related activities, because of the high-carbon nature of our oil, some because of concerns relative to indigenous rights as well.

Despite foreign ownership pulling out of the oil sands directly, the ownership of the existing companies, the investors in the existing companies, still tops 70%. This is because of increased investment by Chinese national oil companies, which now control 5.2% of oil sands production, which is 3.5 times more than the majority of Canadian-owned companies. American interests now own more than 52% of oil sands production, more than twice the number of Canadian shareholders, and more than all other non-U.S. investors combined.

We looked at each company, and looked at their percentage that was Canadian-owned. If you look at the average Canadian ownership within the eight largest Canadian companies, it's only 18.8%.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

It's interesting that there's a small disengagement trend, but the majority are still there.

Mr. Viau, earlier you mentioned the possibility of controls in this sector and in many others depending on the country of origin, according to certain criteria which could be linked to the regime, for example.

Have you thought further about the criteria, and more importantly, about how to establish them in order that an evaluation be done before authorizing an investment?

[Marc-André Viau]

What I said earlier is that we should ask ourselves whether the political regime should be a determining criterion for takeovers or investments. In some sectors, several stakeholders have shown that this criterion might be relevant. I am thinking of the technology sector, for example.

For our part, we would like to see environmental factors taken into account in determining a net benefit to Canada. When there are environmental costs associated with investments, there cannot be a net benefit to Canada.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I see the red card coming up.

[Marc-André Viau]

I was able to finish my answer.