Industry Committee on June 18th, 2020

[The Chair, Liberal, Sherry Romanado]

As our next witness, I'm inviting Mr. Kingston from the Business Council of Canada.

You have the floor for five minutes.

[Brian Kingston, Vice-President, Policy, International and Fiscal, Business Council of Canada]

Thank you, Madam Chair and committee members. I very much appreciate your invitation to take part in these consultations on the Investment Canada Act, ICA.

The Business Council of Canada represents CEOs of 160 leading Canadian companies, and we're represented across the country in every sector and region. Our members employ around 1.7 million Canadians and account for about half the value of the TSX.

I would like to begin by underlining the critical importance of foreign investment to the Canadian economy. Prior to COVID-19 and the associated economic downturn, advanced countries around the world were already experiencing slower growth prospects, largely driven by demographic forces and weak productivity growth. In addition to those challenges, though, Canada faced heightened trade uncertainty, ongoing tensions with China, crippling rail blockades and a deteriorating investment climate due to regulatory uncertainty.

The already weak outlook for the economy pre-pandemic has now reached previously unthinkable lows. According to the PBO's analysis released just today, the economy is expected to shrink by 6.8% this year, and that is the weakest on record since the series began in 1961.

As we start to think about economic recovery, trade and investment absolutely have to play a central role. We are a trading nation. We depend on open access to the world. Foreign investment not only produces jobs, it enables technology adoption, promotes new management techniques and creates market access opportunities. We have a clear interest in creating stability, transparency, predictability, non-discrimination and protection for Canadian companies that invest abroad, but also for foreign investors wishing to invest in Canada. We need to ensure that any changes to the rules governing investment in Canada are as consistent and stable as possible. We absolutely cannot afford, as a country, to be perceived as a difficult place to invest.

Unfortunately, I believe that Canada could do better when it comes to attracting investment. Global FDI stocks have increased dramatically over the past 25 years, but Canada's share of global investment has been on the decline. Looking at the 2018 data, our share of total world inward investment stocks fell to 2.8%, which is the lowest level in about 20 years. Meanwhile, countries with more competitive business environments have witnessed an increasing share of global inward investment stocks. We must do better.

Turning to the ICA specifically, we support the government's recent policy statement of April 18 enhancing scrutiny under the ICA, given the extraordinary circumstances we find ourselves in. The pandemic and the associated economic fallout could create opportunities for acquisitions by companies that are motivated by non-commercial factors. That could put Canadian interests at risk. However, because we depend on trade and investment, we believe that the government should be very careful not to discourage commercially motivated foreign investment activity, and given that markets have rebounded somewhat since the depths of the crisis, the opportunity for predatory acquisitions by SOEs, for example, is diminishing. We think that these measures should be temporary in nature.

Finally, on the question of strategic industries and the ICA, the legislation clearly provides provisions to protect Canadian national security and absolutely must continue to do so, but I do think what requires a bit more thinking is identifying exactly what industries should be considered strategic and make sure that we have the economic framework in place to support those sectors.

For example, I think what we've witnessed throughout this pandemic is the importance of a strong—

[The Chair, Liberal, Sherry Romanado]

My apologies, Mr. Kingston, but is it possible for you to move your mike a little bit away from your mouth? It's a little too close.

[Brian Kingston]

Is that better?

[The Chair, Liberal, Sherry Romanado]

That's perfect, thank you.

[Brian Kingston]

One of the things that we've witnessed through the pandemic is the importance of a strong manufacturing base. Companies like CAE, General Motors and Linamar pivoted very quickly to produce critical equipment used in the fight against COVID-19. As businesses re-examine their supply chains with an emphasis on resiliency and insulating themselves from future disruptions, I think we really have an opportunity to make sure that Canada puts in place the framework to help these companies grow here to attract new investment into Canada in those critical sectors. That could be done through improving the regulatory environment and addressing the tax system. Those measures would help make Canada more attractive and ensure that we have that strong base to protect us in the future.

I'm happy to expand on that, and I'll leave it there.

Thank you very much.

[The Chair, Liberal, Sherry Romanado]

That was good timing, thank you so much.

I will now introduce the Canadian Bar Association. With us today we have Debbie Salzberger, Michael Kilby and Marc-André O'Rourke.

You have the floor for five minutes.

[Marc-André O'Rourke, Lawyer, Advocacy, Canadian Bar Association]

Thank you. I'll just set the stage here.

Good afternoon, Madam Chair and members of the committee.

I am a staff lawyer with the Canadian Bar Association, and we're very pleased to be part of your study.

The Canadian Bar Association, or CBA, is a national association of more than 36,000 lawyers across the country.

The CBA's primary objective is the improvement of the law and the administration of justice. It is with this goal in mind that we are here today on behalf of the Competition Law Section of the CBA.

Our written brief was prepared by the competition law section of the CBA, namely, experts from the foreign investment review committee. With me today are Debbie Salzberger and Michael Kilby, chair and vice-chair of that committee.

I now turn it over to Michael and Debbie to address the main points of our submission.

Thank you.

[Debbie Salzberger, Chair, Foreign Investment Review Committee, Competition Law Section, Canadian Bar Association; and Partner, McCarthy Tetrault LLP]

Thank you, Marc-André.

Thank you to the committee and to the chair.

On behalf of the Canadian Bar Association's foreign investment review committee, we offer two primary conclusions in respect of the reform proposals put forward in the context of the current pandemic.

I will speak to the first conclusion relating to national security reviews, and my colleague Michael Kilby will speak to the second conclusion, which relates to national benefit reviews.

Our first conclusion is that the government has no practical need to adjust the ICA's national security review regime in response to the COVID-19 crisis, given the tremendous powers already available to the government under that regime and the April 18, 2020 policy statement articulating its intention to utilize its existing powers to more closely scrutinize certain investments under the ICA.

The ICA authorizes the government to review any foreign investment by a non-Canadian involving a Canadian business on national security grounds where the government believes that an investment may be injurious to national security.

The national security provisions of the ICA do not specify threshold requirements based on the size of the target, the transaction nor the extent of the interest being acquired by the foreign investor, nor is the scope of activities that may implicate national security defined. This means that the ICA's national security provisions apply to an extremely broad array of investments, including minority investments across a wide variety of industries at the government's discretion.

The April 18 policy statement amplifies the existing discretion and the latitude available to the government to assess transactions that may be injurious to Canada's national security and explicitly includes opportunistic investments such as investments in public health-related businesses, investments in businesses that supply critical goods or services, none of which is defined, and investments by state-owned enterprises or private investors influenced by state-owned enterprises.

Under the current legislation, the government can issue a notice initiating a national security review process at any time from when it becomes aware of an investment until 45 days after receipt of the investor's filing under the Investment Canada Act, or 45 days after it learns of the investment if no filing is required under the legislation. In sum, the current legislation provides the government and its intelligence partners a significant amount of time to determine whether the investment raises potential concerns, and in such cases, has broad discretion to extend its review and ultimately mitigate any identified risk or block the investment altogether.

The April 18 policy statement articulates the government's intention to utilize these tools fully in the COVID-19 environment.

For these reasons, there is no practical need for any immediate adjustment to the ICA in response to the potential threats arising out of the current environment.

I will now turn it over to Mike to talk about our conclusion with respect to net benefit reviews.

[Michael Kilby, Vice-Chair, Foreign Investment Review Committee, Competition Law Section, Canadian Bar Association; and Partner, Stikeman Elliott LLP]

Thanks, Debbie.

I'll be very brief.

Our second conclusion is that the government's ability to adjust the ICA net benefit thresholds in response to the crisis may be significantly limited by Canada's international trade obligations and, in any event, any such adjustment may result in an unintended chilling of desirable foreign investment in Canada.

I see I just have a minute, so I'll be very quick.

The net benefit thresholds are set out in our submission. You're probably also aware of them from other testimony provided. They have been increased substantially since 2015. This has been a policy choice of successive governments. The very high nature of the thresholds means that very few transactions are subject to that benefit review. Approximately nine were subject to review last year.

I see I have a red card, so I will stop there. I want to respect the time.

[The Chair, Liberal, Sherry Romanado]

Thank you.

I now invite the representative of Équiterre to take the floor.

Mr. Viau, you have five minutes.

[Marc-André Viau, Director, Government Relations, Équiterre]

Thank you, Madam Chair.

Distinguished members of the Standing Committee on Industry, Science and Technology, thank you for having us here today. My name is Marc-André Viau, and I am the director of government relations at Équiterre. I will be sharing my time with Ms. Tzeporah Berman, from Stand.earth.

We are here today as part of this committee's study on foreign investment, following the adoption of the motion. Our contribution to the work of this committee is to present to you the results of a study that my colleague conducted, and with which Équiterre has partnered, on foreign ownership of the oil sands.

This is a report that shows that 70% of the oil sands are foreign-owned. So we're wondering if it's really still a Canadian resource.

[The Chair, Liberal, Sherry Romanado]

Mr. Viau, forgive me for interrupting, but I'm told the interpreters are unable to do their work because you are speaking too quickly.

Can you slow down, please?

[Marc-André Viau]

I'll try, Madam Chair.

If profits are increasingly going into the pockets of foreign investors, then the question arises as to who benefits from this operation. Is it Canadians, who have to foot the cleanup bill? My colleague will talk more about this in a few minutes.

Now, with respect to the motion passed and the specifics of the study, our report provides some answers as to the extent to which firms in strategic Canadian industries have depreciated as a result of the COVID-19 crisis.

As you will see, the loss in the value of oil sands companies predates the pandemic, and we invite the committee members to consider the reasons for this devaluation.

In addition, if the phenomenon predates the pandemic, committee members are invited to consider a second element of the motion, namely whether Canada should impose a temporary moratorium on acquisitions by the state-owned enterprises of totalitarian countries, in connection with the COVID-19 pandemic.

We also invite committee members to comment on why such a moratorium is more relevant now than it was in 2012 when the government approved CNOOC's purchase of Nexen. This raises the question of whether the nature of the political regime from which the investment is made is significant and whether this could be correlated with the devaluation.

Finally, the assessment thresholds in the Investment Canada Act are appropriate for a net benefit review. We support a review of the net benefit criteria as defined in section 20.

We invite elected officials to review paragraph 20(e), which deals with the compatibility of investments with national industrial, economic and cultural policies.

Considering that industrial, economic and cultural policies are increasingly linked to environmental policies, and considering Canada's progressive trade agenda, I think it would be good to include the concept of environmental compatibility in section 20 so that we can really talk about net benefits to Canada.

I now give the floor to my colleague Tzeporah Berman.

[Tzeporah Berman, Director, International Program, Stand.earth]

Madam Chair, thank you very much for having me here today.

I've been asked to speak briefly on the results of our investigative study of ownership and financial benefits from the oil sands.

I will say a quick word on methodology. This report is based on data from Statistics Canada, the oil companies' annual and quarterly reports, and data obtained from the Bloomberg terminal.

The global COVID-19 pandemic has devastated the global economy and plunged the price of oil to record lows.

I will provide a bit of context as to why we did this particular research. Even before the world was turned upside down by the first global pandemic in a century, as my colleague noted, the oil and gas industry in Canada, despite rising production levels, was cutting jobs, paying less in royalties, while demanding higher and higher subsidies. To be specific, despite increasing oil sands production, the number of jobs created by the oil and gas sector has continued to decline.

Since 2014, the industry has shed 53,000 jobs. In addition, reclamation of the oil sands, conventional oil and gas wells and pipelines in Alberta is now estimated to cost at least $260 billion in liabilities. There is increasing concern that taxpayers, not polluters, will be left holding the bill for the cleanup of this massive toxic liability.

Finally, in addition, using WTO definitions, ISED studies are showing us that the federal government is subsidizing the industry with billions of dollars to producers, not consumers, providing disproportionate advantage to fossil fuel producers over renewable energy.

For many years, industry lobbyists and spokespeople have argued that increased support and greater subsidies were fair because we all benefit from the oil and gas industry. While Canada has enjoyed many benefits of the oil and gas industry, this investigation reveals that the majority of profits from the industry are leaving the country.

We now know that most oil sands production is not owned by Canadians. Ten of the 14 publicly traded companies invested in the oil sands are headquartered in Canada, but only two of those are majority owned by Canadians.

[The Chair, Liberal, Sherry Romanado]

Unfortunately, Madam Berman, that is the five minutes. I believe you were sharing with Monsieur Viau.

[Tzeporah Berman]

Yes. Do I have 30 seconds just to summarize the findings?

[The Chair, Liberal, Sherry Romanado]

Absolutely.

[Tzeporah Berman]

I'll go right to the summary, then.

We found that 70% of oil sands production is owned by foreign companies. Foreign-controlled operational profit in the oil and gas sector doubled between 2012 and 2016. That's 3.5 times the economy-wide average. Even for the big five oil sands companies, through the first three quarters of 2019, their profit rate was 14.2%, almost double the Canadian industry average. They're doing well. They're making record profits. The majority of these profits are leaving the country.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

We will now turn to Osler, Hoskin and Harcourt.

Mr. Glossop, you have the floor for five minutes.

[Peter Glossop, Partner, Competition, Osler, Hoskin and Harcourt LLP]

Thank you, Madam Chair and honourable members of the committee, for inviting me to speak today. My comments are personal and do not necessarily reflect the views of my firm or clients.

I've been advising clients on the Investment Canada Act for over 30 years. During that time, I've seen the structure of the act evolve. In my early years of practice, the review thresholds were extremely low. Too many foreign investments were reviewed. The act didn't address state-owned investors or national security concerns. In contrast, today the act permits review only of significant investments and of all investments that could injure national security.

Because of COVID-19, administration of the act needs some temporary fine-tuning, but no significant changes.

I support careful scrutiny of state-owned investment and the application of national security considerations to all investments, as set out in the ministerial policy statement of April 18. I do not support lower review thresholds or a moratorium on state-owned investments from authoritarian countries, along the lines of the June 1 motion.

Lowering the thresholds runs counter to the trend in Canada's trade agreements for the last 30 years. If we adopt this change, Canada will send a strong signal that it is not open to foreign investment. It would reduce the options for Canadian business owners at a time of great financial distress, and it would call into question Canada's adherence to its international obligations.

Equally concerning is the proposed moratorium on acquisitions by state-owned enterprises, or SOEs, from authoritarian countries. How would “authoritarian” be defined? Not all SOEs are just government proxies. Some SOEs are legitimate investors, with corporate governance and a commercial orientation. Some SOEs are listed on a stock exchange and are accountable to their public shareholders.

The act already contains tools to carefully assess SOE investments on a case-by-case basis. All SOE investments are subject to review at a much lower threshold, based on book value. More of them tend to be captured relative to private sector investments. The definition of SOE captures a wide range of state-owned and state-influenced investors. The minister has the power to determine who is an SOE and whether an acquisition of control by an SOE has occurred. In a reviewable investment, an SOE must satisfy the normal net benefit to Canada criteria. The SOE investor also must satisfy additional criteria concerning good corporate governance and adherence to free market principles.

Problematic SOE investment from authoritarian countries can also be reviewed for national security reasons. Investments of any size can be reviewed on these grounds. The timelines in the act allow for a lengthy, careful review for national security. If enacted, Bill C-17 would enable the minister to extend these timelines further. Security review applies even when the investor does not acquire a complete Canadian business, and there are guidelines that list a full range of factors to be considered in the assessment. Using these powers, the government can block an investment, order a divestiture or allow it to proceed conditionally.

In conclusion, the review thresholds for private sector and SOE investments are set at appropriate levels. The existing review process for SOE investments is sufficiently thorough, and there is a robust national security review process.

Thank you for your time. I would be pleased to answer your questions.

[The Chair, Liberal, Sherry Romanado]

Thank you very much, Mr. Glossop.

I now turn to Michelle Travis from Unite Here Canada.

You have the floor for five minutes.

[Michelle Travis, Research Director, UNITE HERE Canada]

Thank you.

My name is Michelle Travis, and I am the research director of Unite Here Local 40, which represents hospitality workers across B.C. and is affiliated with our national union, which represents workers across Canada and the U.S.

Thank you for giving me the opportunity to speak to you today about the ICA.

In the context of COVID, the committee is studying the adequacy of the current ICA evaluation thresholds and whether to place a temporary moratorium on certain state-owned enterprises. In April, the minister announced that certain foreign direct investments in Canadian businesses will receive enhanced scrutiny. These measures will be in place until the economy recovers from the pandemic. We think enhanced scrutiny is needed; however, the real concern to us is the broader ICA review process.

There should be greater scrutiny of all deals reviewed by Ottawa, and that should not stop once we are on the other side of the pandemic. The valuation threshold for non-state-owned enterprises jumped significantly to $1 billion in 2017 and is now adjusted annually. That was a huge increase, and the higher threshold suggests that fewer transactions involving foreign direct investment will be reviewed for their impact on Canadians.

While a temporary moratorium may be worth consideration for state-owned enterprises of authoritarian countries, we also ask if this will apply to companies that are not officially state owned, but may have deep ties with authoritarian governments. We urge the committee to focus more broadly on the rigour of the ICA review process itself.

We ask the committee to consider these questions: How rigorously does the government assess the net economic benefit of certain transactions, and how can the review be made more transparent? What due diligence review is conducted on the ultimate beneficial owners seeking to invest in Canadian businesses? What heightened privacy protocols are foreign buyers expected to adopt when undergoing ICA review? What would trigger a new security review for transactions already approved under the ICA? What recourse is there to publicly review the undertakings and commitments made by foreign investors?

The average Canadian hotel worker may appear to be far removed from these issues, yet some of them work for companies acquired by opaque corporate entities in transactions approved under the ICA. In 2016, B.C.'s public pension fund, BCI, sold its hotel management company, SilverBirch, and a portfolio of 26 hotels to Leadon Investment for over a billion dollars.

The ultimate ownership of Leadon remains opaque. The Vancouver Sun tried to learn more about Leadon at the time and found only a downtown Vancouver-based law firm's mailing address and one director who listed his address in suburban New York. The Hong Kong connection was not obvious.

That same year, in 2016, Beijing-based Anbang initiated negotiations to acquire InnVest Real Estate Investment Trust, one of Canada's largest hotel owners, but backed out suddenly. The Financial Post reported that Anbang did not want to be named as the buyer and when that was met with objections, their representative, Lydia Chen, said she was representing a new pool of capital based in Hong Kong called Bluesky, which acquired InnVest for over $2 billion approved under the ICA review process.

Anbang was reportedly also under examination by China's insurance regulator at the time. They have denied any connection to Bluesky, but Anbang's former representative, Ms. Chen, is now the CEO of Bluesky and InnVest. Their ultimate beneficial ownership is unclear. Records from Hong Kong's corporate registry trace Bluesky to a shell company in the British Virgin Islands.

Questions about Bluesky's ownership bring us to Anbang, which underwent ICA review when it acquired Retirement Concepts for approximately $1 billion in 2017. Retirement Concepts is British Columbia's largest private senior care chain with 21 facilities and others in Alberta and Quebec. The facilities continue to be operated by an affiliate of Retirement Concepts. We don't represent workers at these facilities, but do represent workers in U.S. hotels owned by Anbang, as well as those who work in a hotel owned by an affiliate of Retirement Concepts.

Critics of the takeover raised concerns about Anbang's murky ownership and its CEO's ties to the Chinese state. Others questioned whether Anbang would adequately maintain staffing levels and quality of care. One year after Anbang received approval under the ICA, it was seized by Chinese authorities; its CEO was sentenced to 18 years in prison for fraud and embezzlement, and the Chinese government took a 98% stake in Anbang. Notably, the B.C. government has since taken temporary control of four of its seniors homes that were reportedly failing to provide proper care to residents.

Despite murky ownership and other concerns, the Leadon, Bluesky and Anbang transactions appear to have moved relatively quickly through the ICA review process. We wonder what criteria was used to determine the net benefit of these transactions.

Then there's the larger political context to consider, at least in the case of Anbang. Prior to our heightened tensions with China, there were already concerns about China's efforts to obtain sensitive information through economic espionage and direct investments. This has not been limited to so-called strategic sectors.

In 2018, the Marriott hotel chain revealed that it was the target of a massive cyber-attack that compromised the personal information of over 300 million Starwood guests over a four-year period. The attack was reportedly traced to hackers working for China's Ministry of State Security.

In conclusion, if the point of the ICA review process is to ensure that foreign investments benefit all Canadians, we think that a more rigorous and transparent net benefit analysis and security review should demand more of foreign investors, regardless of their countries of origin.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much, Ms. Travis.

We'll now go to our round of questions.

Our first round of questions goes to MP Genuis.

You have six minutes.

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

Thank you, Madam Chair.

I'll start with Professor Houlden.

You came to speak to the Sherwood Park Rotary Club, which I was a part of eight or nine years ago. You probably don't remember, but I want to thank you for being engaged with our community back in my constituency.

I want to probe a little bit some of the distinctions you made. I found it quite interesting that right now the Investment Canada Act looks at dollar value and generally at state-owned enterprises. However, you made the point, I think quite well, that we might distinguish between state-owned enterprises that are of a certain scale and that we also might want to be particularly cautious about private but state-affiliated companies.

Could you talk about those private state-affiliated companies in the Chinese context? We know that virtually all private companies of a certain scale are expected to have party committees that are central to the decision-making of those companies, and that those companies are expected to be gathering IP that is useful to the military and partnering with the military on an ongoing basis. There really isn't the state-owned enterprise and the private sector distinction that we would see in other economies; there's a centralization of power and control. Maybe we should make other kinds of distinctions around whether IP is involved or not.

Could you speak about possible changes that we could make to the act that would bring in this concept of private state-affiliated companies?