IN THE NEWS ~ Feds need to show their work' on net benefit test, say experts

Feds need to show their work' on net benefit test, say experts

Experts on foreign investment say a clearer foreign investment review framework needed, but negotiations must stay confidential.

Chris Plecash, The Hill Times

The federal government is expected to announce new standards for foreign investment by state-owned enterprises, but it's unlikely that the secrecy around foreign takeover reviews will be lifted, say sources familiar with trade and foreign
investment negotiations.

Glen Hodgson, the Conference Board of Canada's chief economist, said it's time for the federal government to clarify the standards for foreign takeovers of Canadian
companies by state-owned enterprises (SOEs) like Petronas and the Chinese
state-owned China National Offshore Oil Corporation (CNOOC).

"This cloak and dagger' behind-the-scenes decision of net benefit is not serving Canada's interests anymore. It may have been useful for a long period of time, but we need more capital to develop the oil sands and our economy, and you've got to make the rules clear," said Mr. Hodgson, a former director of government and international relations and former vice-president of policy for Export Development Canada. "It's like math class you have to show your work."

"It's perfectly fair to clarify the rules around state-owned enterprises, because
they're agents of foreign policy for foreign investments," Mr. Hodgson
said. "Transparency is in Canada's long term interests. We want this country to be seen as a welcoming environment for foreign investment."

Foreign takeover bids for Canadian companies by SOEs have emerged as the latest economic and foreign policy challenge for the Harper government.

The government has until Nov. 10 to determine whether a $15.1-billion takeover bid by CNOOC for Calgary-based energy firm Nexen is of net benefit' to the Canadian economy, after extending its initial 45-day review of the acquisition by an additional 30 days on Oct. 11.

Approving the deal could be politically costly for the Conservatives, who rely on Alberta as their political base. According to a recent survey by the University of Alberta's China Institute, 64 per cent of Albertans disagreed with the statement that "Chinese investment in Alberta in the form of full ownership is acceptable."

All foreign acquisitions exceeding $330-million are subject to the net benefit test
laid out in section 20 of the Investment Canada Act. Under the test, the Industry minister must weigh the effect that the investment will have on the Canadian economy, particularly employment, resources, and exports; the level of participation by Canadian business and industry; the impact of the
investment on productivity, efficiency, and innovation; the effect on
competition within Canadian industry; the investment's compatibility with "national industrial, economic and cultural policies," taking into account the "industrial, economic and cultural policy objectives" of involved governments; and the overall impact of the investment on Canada's global competitiveness.

Industry Minister Christian Paradis (Mégantic-L'Érable, Que.) already rejected one foreign takeover bid earlier this month announcing that Malaysian SOE Petronas Energy's $5.2-billion play for Calgary-based natural gas company Progress Energy Resources did not meet the net benefit test under the Investment Canada Act minutes before midnight on Friday, Oct. 19.

No explanation was given for the deal's rejection, but in an email Margaux
Stastny, Mr. Paradis' director of communications, stated that the criteria
detailed in the Investment Canada Act were clear.

"In making his determination, the minister carefully considers the investor's
plans, undertakings and other information submitted by the investor, as well as
information received from affected provinces, other federal government
departments consulted and submitted by Canadians," Ms. Stastny wrote.

Following the rejection of the Petornas deal, Prime Minister Stephen Harper (Calgary Southwest, Alta.) conceded that the government was considering how it will deal with future SOE investments as part of its deliberations over the CNOOC
deal.

"The government does, in the not-too-distant future, have an intention to put out a
clearer and new policy framework regarding these sorts of transactions," Mr. Harper told media following a meeting with Jamaican Prime Minister
Portia Simpson Miller on Oct. 22.

The opposition has pounced on the government's handling of foreign acquisitions.

"It is mystifying to me how any Conservatives can think that they have enhanced economic credibility when they make a decision behind closed doors at midnight on Friday night. Did the minister flip a coin what went into that decision," NDP natural resources critic Peter Julian (Burnaby-New Westminster, B.C.) said following Question Period on Oct. 22. "We have no idea of what actually went into
that decision. That is no way to run the Canadian economyone of the largest economies in the world."

While the opposition has rebuked the government for reviewing foreign acquisitions in secret and failing to clarify the net benefit test, Mr. Hodgson said that it was important for negotiations between the government and foreign investors to remain confidential.

"You can't negotiate everything in public because you don't build trust by doing
that, and then you've got critics who think they have the right to [intervene]
when they have no skin in the game at all," said Mr. Hodgson, who pointed
to current negotiations between the NHL Players' Association and team owners as
an example of how public talks can lead to posturing and stalemate.

The Conference Board of Canada has recommended that the federal government
introduce conditions that would require SOEs investing in Canada to follow "normal commercial principles," including reserving senior executive positions for
Canadian citizens, issuing shares locally, and additional measures that isolate corporate operations from state foreign policy.

John Capobianco, senior partner and vice-president with lobbying firm Fleishman
Hillard, agreed that it is important for the government's deliberations and
discussions with foreign investors to be conducted out of public view.

"These deals are complex, and I think that opposition politicians have every right to ask and probe, but getting into some public debate also prolongs the transaction," said Mr. Capobianco, who lobbied against the 2010 hostile takeover bid for Saskatchewan's Potash Corp. by Australian-based multinational BHP Billiton.

Mr. Capobianco acknowledged that the case could be made for the government to
disclose the basis of its net benefit decision after the fact, but such details
could also be politicized by the opposition or exploited by competing
investors.

"The minister makes the final decision based on the information at hand. Once you have the possibility of that being open to the public, I think it creates a
huge amount of risk, competitive advantages, and I think companies would be
much more guarded in what they offer if they know that it's going to be made
public in its entirety," he said.

Petronas announced last week that it would appeal Mr. Paradis' decision. The Malaysian SOE has until Nov. 18 to make additional submissions to the Industry minister. Meanwhile, the government continues to review the CNOOC/Nexen deal, and will require the consent of the Chinese SOE if it wishes to review the takeover bid beyond Nov. 10.

cplecash@hilltimes.com

Twitter:
@chrisplecash
The Hill Times

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