OTTAWA - Canada is missing out on billions of investments from cash-rich China because of Ottawa's confusing foreign takeover rules, says a report from the Conference Board.
The Ottawa-based think-tank makes clear it is a supporter of foreign investments — including from China — saying simply that economies that have access to global capital do better in terms of growth and job creation.
But although the federal government has declared Canada open for business and is aggressive on the free trade front, it has kept in place opaque rules that may be scaring away foreign investors, the report says.
It has chosen the example of China because the world's emerging economic super-power is also among the fastest growing sources of foreign capital, with the potential to become Canada's second largest investor base next to the U.S.
But Canada is not getting its share now — Australia attracts three times as much investment from China, the report says. And it blames the Investment Canada Act, with its obscure "net benefit" test, as potential hurdle that may explain part of the poor record.
"The evidence is that our global share of foreign investment has collapsed over the last 25 years," from 16 per cent in 1970 to three per cent in 2009, said Glen Hodgson, chief economist with the Conference Board.
The comparison looks better if investment is put in relation to the size of Canada's economy, but Hodgson said that's still not good enough.
"We have growth potential that many other economies don't have, not just the resource sector, but across our national economy. China is investing around the world right now and maybe we're satisfied with our level, but I don't think we should be."
China has about $14 billion in investments in Canada, half of which is in the resource sector. The report notes that in most cases, China maintains a minority share so as to avoid political problems.
The report agrees that Canada should scrutinize Chinese forays into Canada's resource sector. State-owned enterprises are sometimes servants not of the market but of the shareholder, which in China's case is a communist government.
But the Conference Board argues that once national security issues are resolved, China should be treated like any other foreign investor. As well, Canada should spell out its rules for investors so that they know the tests they need to pass.
That's not the perception today, the report says.
The Investment Act's "net benefit" rule — although seldom invoked to reject a takeover — is unclear and opaque and as a result, adds costs and political risk to what should be a clear-cut business decisions.
"We have no idea how many firms came, sniffed the market and simply didn't want to run the gauntlet," said Hodgson.
The Harper government has rejected two foreign takeovers in its six years in office, the most notable being the failed bid by Anglo-Australian mining firm BHP Billiton for Potash Corp. (TSX:POT) in 2010.
There has been speculation that government would again face a difficult decision should a foreign bid emerge for troubled Research in Motion — one of the country's most globally recognizable brands.
Reacting to the Potash controversy, the government said at the time it would clear up the rules regarding how the net benefit to Canada rule is being applied, but then changed its mind.
This spring, Industry Minister Christian Paradis announced only modest changes to the Act, including an amendment that would permit him to disclose he has sent a preliminary notice rejecting an investment and to explain his reasons.
In an email response to the report, Paradis said the government's "foreign investment review process is sound and encourages investment, economic growth and prosperity in Canada."
The Conference Board says the Act should be amended along the Australian model with clearly defined rules about ownership and governance. It also calls for a national interest test and a national security test.
A key change would be to reverse the onus from the foreign bidder to the government to show that an investment is not in Canada's interest. That was also recommended by the Red Wilson Report, which Ottawa commissioned four years ago.
Hodgson said that foreign investment should be seen as a good, unless the government can show that it is not.
A spokesman for Trade Minister Ed Fast noted that Canada had recently concluded negotiations for a Foreign Investment Promotion and Protection Agreement with China and expects investments to keep growing.
"We ... welcome partnerships between Chinese and Canadian companies that bring together capital and expertise with a view to shared pursuit of new markets and opportunities in Canada, China, and third markets," said Rudy Husny, in an email response.
10. Oil And Gas Accounts For 4.8 Per Cent Of GDP
The oil and gas industries accounted for around $65 billion of economic activity in Canada annually in recent years, or slightly less than 5 per cent of GDP. Source: <a href="http://www.ceri.ca/docs/2010-10-05CERIOilandGasReport.pdf" target="_hplink">Canada Energy Research Institute</a>
9. Oil Exports Have Grown Tenfold Since 1980
Canada exported some 12,000 cubic metres of oil per day in 1980. By 2010, that number had grown to 112,000 cubic metres daily. Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=9&SheetID=224" target="_hplink">Canadian Association of Petroleum Producers</a>
8. Refining Didn't Grow At All As Exports Boomed
Canada refined 300,000 cubic metres daily in 1980; in 2010, that number was slightly down, to 291,000, even though exports of oil had grown tenfold in that time. Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=7&SheetID=104" target="_hplink">Canadian Association of Petroleum Producers</a>
7. 97 Per Cent Of Oil Exports Go To The U.S.
Despite talk by the federal government that it wants to open Asian markets to Canadian oil, the vast majority of exports still go to the United States -- 97 per cent as of 2009. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
6. Canada Has World's 2nd-Largest Proven Oil Reserves
Canada's proven reserves of 175 billion barrels of oil -- the vast majority of it trapped in the oil sands -- is the second-largest oil stash in the world, after Saudi Arabia's 267 billion. Source: <a href="http://www.ogj.com/index.html" target="_hplink">Oil & Gas Journal</a>
5. Two-Thirds Of Oil Sands Bitumen Goes To U.S.
One-third of Canada's oil sands bitumen stays in the country, and is refined into gasoline, heating oil and diesel. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
4. Alberta Is Two-Thirds Of The Industry
Despite its reputation as the undisputed centre of Canada's oil industry, Alberta accounts for only two-thirds of energy production. British Columbia and Saskatchewan are the second and third-largest producers. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
3. Alberta Will Reap $1.2 Trillion From Oil Sands
Alberta' government <a href="http://www.huffingtonpost.ca/2012/03/27/alberta-oil-sands-royalties-ceri_n_1382640.html" target="_hplink">will reap $1.2 trillion in royalties from the oil sands over the next 35 years</a>, according to the Canadian Energy Research Institute.
2. Canadian Oil Consumption Has Stayed Flat
Thanks to improvements in energy efficiency, and a weakening of the country's manufacturing base, oil consumption in Canada has had virtually no net change in 30 years. Consumption went from 287,000 cubic metres daily in 1980 to 260,000 cubic metres daily in 2010. Source: Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=6&SheetID=99" target="_hplink">Canadian Association of Petroleum Producers</a>
1. 250,000 Jobs.. Plus Many More?
The National Energy Board says oil and gas employs 257,000 people in Canada, not including gas station employees. And the Canadian Association of Petroleum Producers says the oil sands alone <a href="http://www.capp.ca/aboutUs/mediaCentre/NewsReleases/Pages/OilsandsaCanadianjobcreator.aspx" target="_hplink">will grow from 75,000 jobs to 905,000 jobs by 2035</a> -- assuming, of course, the price of oil holds up.