Canada: FIPPA’s Net Benefit

Last Updated: November 26 2012
Article by Milos Barutciski and Matthew S. Kronby

Canada a winner in Chinese deal, despite misguided criticism

The conclusion of the Canada-China Foreign Investment Protection and Promotion Agreement (FIPPA) is an important step in Canada's relationship with China. The FIPPA negotiations were initiated 18 years ago by the Chrétien government and brought to a close by the Harper government. It is something of a coincidence that the agreement was signed at around the same time that the government of Canada is reviewing the proposed acquisition of Nexen by CNOOC, a Chinese state-owned-enterprise (SOE).

Yet these events, while unrelated, raise two important questions for Canada's foreign-investment policy. First, what is the right approach to reviewing SOE acquisitions, regardless of their nationality? Second, what is Canada's interest in relation to growing foreign investment by Chinese SOEs and private companies alike?

In a concurrent development, Industry Minister Paradis recently announced that Petronas (a Malaysian SOE) has not yet satisfied the government that its proposed acquisition of Progress Energy is of "net benefit to Canada." While not about China, this decision must nevertheless be viewed in the context of the CNOOC/Nexen transaction. It is quite possible that that the Petronas transaction will ultimately be approved. Either way, however, the government can be expected to make its decision on the Petronas transaction with an eye to its implications for the CNOOC/Nexen deal. That is entirely appropriate in our view.

The long-term consequences of these decisions are of immense importance to Canada and should not be rushed. As a country that believes in the rule of law — at home as well as abroad — it is important that we make decisions based on principle. We must not single out any one country for domestic political reasons. While not yet in force, the FIPPA includes a most-favoured-nation (MFN) commitment that prohibits discrimination against Chinese investors relative to other foreign investors. Nor would we want to discriminate, given China's importance as a source of foreign investment for the foreseeable future. It is therefore critical for Canada to maintain an even-handed approach to Chinese investment in relation to other sources of foreign direct investment.

Chinese SOEs have also been singled out for the possibility that their investments may be made on non-commercial grounds in pursuit of "political" ends. That possibility, real or imagined, also applies to other countries. Canada's response must therefore be to treat investments by SOEs of different nationalities — Chinese, Malaysian or any other country — in a consistent manner. Each SOE should be considered on its own merits, including its business orientation and the extent of political influence over its affairs. This will allow us to simultaneously live up to our MFN commitments in the FIPPA and approve SOE investments under the Investment Canada Act (ICA) only when they are truly of "net benefit" to Canada. What that means for any particular transaction will be up to the government of the day to assess on a case-by-case basis.

Apart from the MFN obligation, which applies to both prospective and existing investments, the FIPPA focuses on the treatment of investments that have already been made. It offers protections to investors against such risks as discrimination, expropriation without compensation, and arbitrary decisions by governments, once they are established in the other country. This distinction highlights an important point: that the FIPPA will not change the ability of either country to review or reject investments from the other when it determines that they are not in the national interest.

Prime Minister Stephen Harper has announced the government's intention to add further clarity to the "net benefit" test and the review of investments by SOEs. The FIPPA will not change anything in this regard, and Canada will retain the power to approve, impose conditions or block SOE or private investments when they are not of benefit to Canada. In the final analysis, that is the flexibility the government requires. All of Canada's investment agreements provide for it.

Some critics have nevertheless criticized the FIPPA because it is not "reciprocal."Others have asserted that its investor-state dispute procedure will open the door to Chinese investor claims that will overrule the decisions of democratically elected governments or expose Canadian governments to ruinous liability awards. Both of these claims are misguided.

Quite apart from the fact that the obligations in the FIPPA apply to both China and Canada, the reciprocity argument ignores two obvious realities. One is that the benefits of a predictable, rules-based environment for investment under the FIPPA are far more likely to accrue to Canadian investors in China than to Chinese investors operating in Canada, who already take a predictable, rules-based environment for granted. The other is that growing Chinese investment in Canada is virtually certain (and desirable) with or without the FIPPA. To the extent the FIPPA promotes further investment in Canada, it is very much in Canada's interest: Canada needs access to foreign capital to fuel its economic growth much more acutely than China does.

Nor can investors ask dispute tribunals to strike down government decisions. All they can ask for is monetary damages for breaches of the agreement. The contention that the scale of these damage awards will be large ignores 18 years of Canadian experience with investor-state dispute settlement under the NAFTA. The very few claims against Canada that have been decided in favour of the investors have resulted in awards totalling about $8-million. Canada has also chosen to settle two other cases for a total of about $150-million, most of that sum relating to the expropriation of AbitibiBowater's assets by Newfoundland. Investment rules exist precisely to provide redress in such cases.

Canada has the tools under the ICA to determine whether investments beyond the statutory financial threshold are in its economic interest. Canada also retains the ability to stop or undo investments that pose a threat to our national security, regardless of their size. To the extent that Canadians believe additional clarity and transparency in the investment review process is beneficial, the FIPPA does not preclude that. Moreover, the fact that China has chosen to protect its markets from foreign investment is not a cogent reason for denying Canadian businesses the protections that the FIPPA will provide for their investments in China. In our view, the FIPPA is clearly of benefit to Canada and Canadian investors in China.

Originally published in FP Comment, November 15, 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Milos Barutciski
Matthew S. Kronby
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