Caterpillar and the Investment Canada Act

There’s been some good public debate about the need for changes to the Investment Canada process in light of Caterpillar’s incredible actions in London.  They showed up uninvited in 2010, took over a long-standing productive profitable plant, demanded money (from workers and government alike), then left — leaving behind a shuttered plant and a shattered community.

Clearly something needs to change in terms of how the federal government regulates this process: sorting out foreign investments that can add genuine value to our economy, from those which are beneficial to corporate interests and investors but ultimately undermine our capabilities to produce and innovate.

The claim that Ottawa is somehow “powerless” to do anything about Caterpillar’s aggressive actions (whether at the time of the 2010 takeover, or even now) is ludicrous.  A government that was interested in protecting its citizens clearly possesses the sovereign power to act.  When pushed politically (in the MDA and Potash cases), even the Harper government never let the fine print of the Investment Canada Act (ICA) stand in the way of forceful interventions.  I can’t imagine the government of Korea or Germany standing by as a foreign firm marched in, took over a strategic industrial asset, extorted the citizenry, and then walked back out the door they came in.  Danny Williams certainly didn’t, either.

The government, oddly, has presented two distinct rationales for why the original Caterpillar acquisition was not fully reviewed: that the purchase was too small (relative to the $299 million threshold for WTO investors that was in place in 2010), and/or that the purchase didn’t have to be reviewed at all because it consisted of an “indrect acquisition”  (whereby a foreign investor buys a firm that was already foreign-owned).  The specific wording of the ICA is clear as mud (to this non-lawyer, anyway) regarding which factors trigger a review, and the government’s inconsistent response has muddied the waters further.

As an interim measure, CAW President Ken Lewenza has asked the federal government to divulge the details of Caterpillar’s initial 2010 acquisition (contained in its notification under ICA rules), so that the government’s claim that the acquisition was too small to trigger a formal review can be independently assessed. 

http://www.caw.ca/en/10948.htm 

Caterpillar stated that its takeover of Electro-Motive represented $1.3 billion in assets, and Electro-Motive Canada represented the most stategic manufacturing asset in the whole firm, and almost half its total workforce.  It seems unlikely that a fair value determination would put the whole Electro-Motive Canada operation under the threshold.

The ICA gives the government plenty of scope to revisit the 2010 acquisition if it turns out Caterpillar’s initial claim was unbelieveable (and I am curious to know whether Ottawa performed ANY due diligence on that notification … or did they just accept Caterpillar’s word for it?).

In the longer run, of course, the whole Investment Canada framework needs to be overhauled.  In theory the government will soon initiate a major review of its foreign investment policy.  Lewenza’s submission to Industry Minister Paradis also highlighted the major areas that will need to be reformed as part of that review.  Here are the relevant points from his letter.  In coming months, progressives will need to flesh out our arguments on these and other aspects of foreign investment, to push back against the predictable straw-man responses that we are somehow trying to cut off Caanda from world capital:

Improved Transparency:  Right now the review process is entirely secretive, with Investment Canada refusing to even divulge whether an application has been received, let alone the terms and effects of that acquisition.  This leaves other stakeholders (including workers, communities, and lower levels of government) entirely in the dark regarding an acquisition and its significance.  Our union was in this position, for example, at the time of the initial Caterpillar acquisition of Electro-Motive.  By the time we learned of it, it was a fait accompli.  There must be a more reasonable balance struck between the needs for confidentiality of acquiring businesses, and the needs for all affected economic stakeholders to know what could happen to them.

Stakeholder Input:  In a related vein, other stakeholders must have a legislative ability to provide their input to the foreign investment review process, through public hearings or other consultative mechanisms.  This is a fundamental prerequisite for economic democracy.

Tighten up Loopholes:  The idea that a $330 million acquisition (the current threshold for WTO investors) is “too small” to matter, and therefore should not be reviewed, is not credible – especially given a complete lack of transparency or independent verification regarding how that value is measured.  Similarly, the exemption of “indirect acquisitions” is an especially dangerous loophole, one that proved disastrous in the Electro-Motive Canada case.  Current discussions regarding a potential business combination between Glencore and Xstrata provide another current example of the potential dangers of exempting indirect acquisitions.  Indirect acquisitions should be fully reviewable by the Investment Canada process if they meet the other criteria for review. 

Defining and Measuring Canadian Costs and Benefits:  The concept that a foreign investment must provide a “net benefit” to Canadians in order to be allowed to proceed, is in principle a valid one.  The problem with the current ICA is that it provides no detail, transparency, or verification regarding how the costs and benefits of incoming foreign investments are to be contemplated, measured, and compared.  In practice, this “net benefit” test has been mostly meaningless, except that it allowed the government (when pressed by political forces) to overrule exceptional acquisitions (namely, the MDA and Potash cases).  The new legislation should recognize the many dimensions of cost-benefit analysis affecting foreign investments.  It should downplay the one-time benefit received by Canadian financial investors as a result of a potential acquisition, and focus instead on the long-run net impact of the acquisition on Canadian production, employment, investment, and exports.  The fact that a foreign investor might be willing at a certain point in history to pay a premium price for the shares of a Canadian company (as occurred with several Canadian resource companies at the peak of the last resource cycle) should not lead government to approve acquisitions which subsequently cause long-run damage to Canadian facilities and production (as we have experienced painfully in the aftermath of the takeovers of Inco, Falconbridge, Alcan, and Stelco).

Imposing and Enforcing Commitments and Conditions:  In the course of reviewing and approving foreign investments, an appropriately pro-active government would have many opportunities to negotiate commitments from the incoming investor that would enhance the net benefits to Canada.  These could and should include commitments regarding its future Canadian production footprint, technology transfer, minimum employment and training commitments, and targets for investment and innovation activity.  These commitments, once attached to an approved acquisition, must be divulged and be subject to a more genuine enforcement process (including the imposition of financial penalties up to and including annulment of the acquisition) than has occurred to date.  The embarrassing experience of U.S. Steel, which thumbed its nose at its Investment Canada undertakings (and then bought itself out of those undertakings through an insulting, minimalist out-of-court settlement) demonstrates dramatically that government must be prepared to use meaningful powers of enforcement to ensure that the Investment Canada process is more than a token hoop for foreign investors to jump through.