Earlier today my colleague Goldy Hyder published a column in the Ottawa Citizen extolling the benefits of foreign investment and calling upon the Federal Government to adopt three of the main recommendations of the ‘Red Wilson’s “Compete to Win”’ report. These recommendations included raising the threshold for reviewable transactions to a billion in enterprise value, replacing the net benefit test with a reverse onus requiring the minister to demonstrate why a transaction would be contrary to Canada’s interest, and improving the transparency and timeliness of the review process.
As a supporter of free enterprise I strongly endorse Goldy and Mr. Wilson’s recommendations, but as a realist I don’t have too much hope that the government will move on the reverse onus issue. All indications are that there will be regulatory changes to the Investment Canada Act guidelines this fall focusing on two of the areas where the Act’s implementation is most criticised. Expect a requirement for greater transparency of investors’ undertakings and stricter enforcement of the term of the undertakings. We can be hopeful that threshold level will be increased.
Debate over the net benefit test has been around since the legislation was passed by the Mulroney government. Witnesses were pretty clear that when the industry committee reviewed it last spring there was little appetite to change the definition. Moving to a reverse onus test would reduce the flexibility the politicians have to assess the political fallout of a major transaction. As we saw in the Potash scenario, governments often require legal and economic cover when deciding to make difficult political decisions. The net benefit test is sufficiently vague and broad to allow governments this flexibility without forcing them to resort to a political explanation.
While moving to a reverse onus test would be a powerful signal that Canada is wide open to foreign investment, it would be a change to the legislation that is out of sync with the politics of our time. Since the financial meltdown governments around the world have been demonstrating increasing protectionist reflexes as they attempt to mitigate citizens’ fears of global economic instability. While the benefit package that BHP offered on the Potash transaction was unprecedented, it still was not enough to mitigate fear. The same can be said for Australia’s recent decision not to allow the merger of its stock exchange with Singapore’s. Congress’s insistence on attaching “buy American” conditions to the USA’s recent economic stimulus is another manifestation of protectionism. Now we are hearing that the Canada EU trade talks have stalled around the issue of opening up public contracts and services in each other’s markets. Everyone wants to be known as free trader but governments still want to give the edge to their home grown businesses!
Until we move out of this period of economic instability – which may be with us for another couple of years – expect all governments around the world to react cautiously when foreign investment poses perceived risk to local enterprises.