Government to address state-owned enterprises and national security considerations

On October 9, 2007, Canada’s Minister of Industry, Jim Prentice, announced that, this fall, the Canadian government “will examine the need for guidelines on takeovers by state-owned enterprises” and will “carefully consider the creation of an explicit national security test” in the context of foreign investment review under the Investment Canada Act.1

Speaking before the Vancouver Board of Trade in a widely-anticipated address, Minister Prentice emphasized that “Canada is open for business”, but said that safeguards must be put in place to protect Canadian interests. With respect to investments by entities owned or controlled by foreign governments, Minister Prentice explained that the “government’s concern is not with the ownership of the foreign capital being invested”, but rather with “ensuring that state-owned enterprises in Canada are operating under the same standards as any other commercial enterprise operating in Canada, including those related to transparency, good governance practices and whether they operate according to free market principles.” With respect to national security considerations, Minister Prentice noted that several countries have the means to review and block foreign investment on national security grounds, and commented that the lack of a national security test in Canada for foreign investment is “an oversight that should be addressed.”

Calls to allow for “national security” reviews of foreign investment in Canada, and to scrutinize foreign state-owned investments in particular, are not new. Indeed, the Minister’s announcement is consistent with the formation in July of this year of the Competition Policy Review Panel, with a mandate to examine, among other things, those very issues.2 In fact, in June of 2005, Canada’s former Liberal government introduced draft legislation to amend the Investment Canada Act to empower the Governor-in-Council (effectively, the federal cabinet) to review and disallow foreign investments in Canadian businesses on “national security” grounds.3 Similar legislation was again introduced in November, 2006 to prohibit foreign investments thought to be contrary to the “national interest”.4 Both bills ultimately died on the order paper before they could be enacted.

The introduction of a “national security” test for foreign investment potentially raises serious issues with respect to the transparency, predictability and political neutrality of foreign investment review in Canada. Indeed, a principal criticism of the proposed 2005 and 2006 legislation was its failure to define “national security” and to list specific factors to be considered in evaluating concerns, and it remains to be seen whether a “national security” review would include objective criteria for its application. That said, Minister Prentice did state that “[t]he The Investment Canada Act should not – and will not – become a shield to protect Canadian industry from the full rigours of global competition.”

Given the recognized importance of trade and foreign investment to Canadian prosperity, it is crucial that Canada continue to be perceived, in Minster Prentice’s words, as “open for business”. The takeovers of several Canadian icons in the past year or so, however, appear to have ignited an outpouring of concern, which the Minister’s announcement appears designed to address. Many in the business community, however, are also worried that the introduction of any explicit new tests in the Investment Canada Act will have a chilling effect on foreign investment in Canada.