Moved second reading of Bill S-257, An Act to amend the Investment Canada Act (mandatory national security review of investments by foreign state-owned enterprises).

He said: Honourable senators, it is my great honour to speak to my Senate public bill entitled An Act to amend the Investment Canada Act (mandatory national security review of investments by foreign state-owned enterprises).

I introduced Bill S-257 inspired by the rising global investments presented by foreign state-owned enterprises in Canada and troubled by the real threat they present to our key resource sectors, our critical infrastructure, sensitive technologies and ultimately our national security. This increase of extensive foreign interests in our companies and their assets, and their evolving security implications, begs us to consider whether full-scale security reviews of proposed investments in Canada by foreign state-owned enterprises should be mandatory rather than discretionary, and whether foreign countries should have a tremendous stake in our economic growth.

Two thirds of investment in Canada’s key economic sectors, such as energy, emerging technology, sensitive data, metals and minerals, entertainment, real estate, and consumer products and services, have been presented by state-owned enterprises, leaving the government dangerously open to a panoply of security risks as it fails to consistently perform its due diligence.

Why the government assesses investment through a net-benefit test and from a basic security perspective pursuant to the Investment Canada Act, the highest level of security screening, known as the national security review, exclusively remains subject to cabinet discretion and is sparingly applied with state-owned enterprises.

When a foreign state-owned enterprise presents an investment under the set of rules set by the act, Canadians must wait for the Minister of Innovation, Science and Economic Development to consult with the Minister of Public Safety and Emergency Preparedness to decide if the potentially injurious foreign investment should be referred to the Governor-in-Council before a proposition may be ordered to be reviewed under a national security standpoint.

Following the review, which I will explain soon, the Minister of Innovation, Science and Economic Development would again consult the Minister of Public Safety and Emergency Preparedness to either refer the investment to the Governor-in-Council along with a report on the review and recommendation, or, if satisfied that the investment would not be injurious to national security, notify the foreign investor that no further action would be taken.

Based on the recommendations and findings of the high-level review, the Governor-in-Council has the authority to decide to authorize investment with or without conditions, disallow the investment, or require the investor to divest control of the Canadian business or its investment in an entity.

Honourable senators, Bill S-257 proposes a technical change to the Investment Canada Act that would ensure that the Governor-in-Council would no longer have the discretion but, rather, the duty to scrutinize all foreign state-sponsored enterprise investments from a national security standpoint before reaching a decision.

Under the act, these reviews would include, but are not be limited to, the national security factors outlined through the national security guidelines, such as the potential effects of the investments in Canada defence capabilities and interests; potential effects of the investments on the transfer of sensitive technologies or the know-how outside of Canada; involvement in the research, manufacture or sale of goods and technology identified in section 35 of the Defence Production Act; potential impacts of the investments on the security of Canada’s critical infrastructure; the potential impact of the investment on the supply of critical goods and services to Canadians or the supply of goods and services to the people of Canada; the potential of the investment to enable foreign surveillance or espionage; the potential of the investment to hinder current or future intelligence or law enforcement operations; and the potential impact of the investment of Canada’s international interests, including foreign relationships and the potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

At this time, the risk factors identified in the national security guidelines are not exhaustive. Some of these risk factors are capable of being interpreted very broadly, particularly the concept of critical infrastructure, which is defined to include sectors ranging from the obvious ones of transportation, utilities and safety to broad sectors such as finance, manufacturing, food and information and communications technology.

These thriving sectors are increasingly considered to be a matter of national security. We can and really should also debate what constitutes sensitive technology. However, I will limit my remarks at second reading to the principle of the bill, which recommends a realistic change to strengthen our investment review process against threats caused by state-owned enterprises without removing the final decision-making power of the Governor-in-Council.

This bill proposes assessing every new proposed investment by a state-owned enterprise under the national security provision of the act to ensure that the nature of the assets or business activities and the parties, including the potential for a third-party influence, involved in the transaction automatically receive the due consideration required to ensure that foreign governments are not exploiting an investment deal through the guise of their state-owned enterprise to the detriment of our security.

This provision would ensure that only common state-owned enterprises would be compulsorily vetted by our national security review process, supported by Public Safety Canada, the Canada Security and Intelligence Service and other investigative bodies prescribed in the regulations before the Governor-in-Council makes an informed decision.

This bill would, therefore, impose necessary checks and balances on a mandatory basis to guard our economic growth against potentially threatening investments.

Honourable senators, I think this bill will be an important tool for the government, since it will help identify potential issues in advance and address them proactively, when necessary. The bill will help solve problems and avoid delays, especially with respect to investments made by state-owned enterprises. These investments can involve the transfer of dual-purpose technologies, sensitive data or know-how; can have a negative impact on the provision of essential services to Canadians or the government; or can allow a foreign country to conduct surveillance or espionage.

The Investment Canada Act already clearly defines a state-owned enterprise as:

(a) the government of a foreign state, whether federal, state or local, or an agency of such a government;

(b) an entity that is controlled or influenced, directly or indirectly, by a government or agency referred to in paragraph (a); or

(c) an individual who is acting under the direction of a government or agency referred to in paragraph (a) or who is acting under the influence, directly or indirectly, of such a government or agency.

Honourable senators, unfortunately, the existing wording of the act, which I just read, requires several successive administrative steps for matters of national security before cabinet can determine whether or not a proposed investment by a state-owned enterprise in a key sector of our economy must be subject to a thorough security check.

It is high time that Canada’s foreign investment policy reflect strict national security principles. Bill S-257 proposes a specific and effective screening measure that would ensure that direct investment by foreign state-owned enterprises will continue to be a part of our national wealth.

I’d like to repeat the following statement for clarity: Direct foreign investment, including by foreign state-owned enterprises, plays an important role in national research in Canada and economic prosperity. However, we must remember that our economic prosperity and our national security are intertwined. For that reason, this bill seeks to provide future governments with useful tools to guarantee the security of our investment climate. Consequently, the bill would implement a mandatory, non-discriminatory and predictable security review of investments by foreign state-owned enterprises in Canada.

Foreign governments are developing and deploying a growing range of capabilities to leverage, manipulate and advance their own facilities to their own national security interests through the guise of their state-owned enterprises. For instance, some countries use their state-owned enterprises to exert their country’s ideology and political interests through their techniques and are stealing intellectual property, influencing other nations’ domestic politics, conducting cyber espionage and even developing cyber weapons. These legal commercial entities in Canada can provide foreign governments with a strategic advance to inflict damage on our infrastructure, steal our sensitive data and even influence our democratic process if they are not properly vetted.

As I mentioned, the current government’s effort and risk-averse approach to encourage foreign investment represents a notable shift from previous governments.

Several lessons drawn from experience with Chinese state-owned enterprises clearly indicate that our investment policy needs to be updated and optimized for the world of today and tomorrow.

Hytera’s takeover of Norsat was a high-profile example of Canada’s approach to investment from China. Norsat, based in Vancouver, produces satellite equipment and transceivers, including those for military applications. This private firm proposed a friendly takeover, and despite considerable criticism from security experts, including the United States, the transaction was approved by the Canadian government. The approval was granted without a full national security review.

The lack of a full national security review, particularly in light of the government’s past hesitation in allowing Chinese investors to acquire access to sensitive industries, was a surprise development and the subject of considerable criticism from the media in Canada and even in the United States.

While the government’s approach to investment from China continues to evolve and there continues to be certain types of investments that would be expected to attract a high level of scrutiny, the government’s response to the Norsat acquisition suggested the kick-off of an extremely risky level of comfort with investment from China in a sensitive economic sector of importance to our security and our allies.

Several other high-profile transactions from Chinese investors were reviewed and approved by the government in 2017.

One of these was Anbang Insurance’s takeover of Retirement Concepts, which operates retirement homes in British Columbia, Calgary and Montreal. Anbang, which was privately owned and one of China’s largest insurers, has faced questions in the United States relating to its ownership structure and obvious ties to the Government of China. The Canadian government approved the transaction as being of a net benefit to the Canadian economy, without any question.

In another notable development relating to the review of investment from China in sensitive Canadian industries on national security grounds, the government revisited an approved Hong Kong-based O-Net Communications’ takeover of Montreal-based ITF Technologies, despite the previous Conservative government’s rejection of the same transaction in 2015. This approval was still granted despite O-Net being 25 per cent owned by China Electronics Corporation, a well-known Chinese state-owned enterprise.

Thankfully, Aecon’s acquisition by Chinese state-owned enterprise China Communications Construction Company was blocked in May of last year after an extensive national security review.

However, Huawei’s ongoing bid to build the next generation of our Internet is still going through a very necessary process. As we are still considering Huawei’s bid under our national security review threshold, Australia, the U.S., Japan, Germany, France, Poland and the Czech Republic have all concluded that Huawei’s expansion would put the next-generation communications infrastructure at risk.

Honourable senators, this government — and any future government, for that matter — should be running full-fledged national security reviews when foreign governments are investing in key sectors of our economy, especially when these are from countries that have high rates of corruption, poor transparency standards, and keep threatening the international rules-based order.

This bill would ensure that Canada does not simply carry out routine national security analysis when foreign state-owned enterprises from China, Iran, Russia and other countries with questionable backgrounds, dire human rights records, zero accountability, cultures of impunity, and remarkable rates of corruption seek to purchase our companies. This is all too important in an era of advanced technology and artificial intelligence, where emerging state-owned multinationals continue to occupy an important place in regional and global markets that can harm our economy and security.

Honourable senators, this issue of investment screening is relevant not only to our economy and national security but also to our fundamental foreign relations. This bill does not make reference to China, Russia or any country of special concern, as I mentioned in my examples. It is clear this provision is coherent if we turn our attention to the countries that represent a risk to our national security.

Many other countries understand that such safeguards are entirely justifiable, considering the increased threats posed by state-owned enterprises, which prey on all manner of technology and data, some with overlapping military and civilian uses, making our security and surveillance concerns global about such investments.

Germany’s government indicated that it would increase its power to block foreign direct investment.

China itself says it is tightening up on foreign investors.

Great Britain is doing likewise, and the European Union is developing an overarching screening framework for its members.

Australia and Japan both expanded their scrutiny last year.

The United States adopted a bill last year to expand the scope of the Committee on Foreign Investment in the United States, an inter-agency body able to block deals that may threaten national security and ultimately protect itself from any further bank fraud, technology theft, obstruction of justice and money laundering.

According to FBI directors, and our own former and current CSIS directors, Canada is not, nor will be, exempt from these types of threats. It is time for Canada to take a stronger approach to protect our national security — to respond to situations that are becoming increasingly challenging for our real estate, banking, critical infrastructure, universities and especially emerging technologies and sensitive data.

This bill therefore proposes a more thorough investment screening process to deal with the backdrop of potential threats to national security posed by new and emerging technologies, a rising suspicion of the motivations behind foreign investment by strategic competitors, and a global economic environment characterized by increased tensions and tit-for-tat retaliation.

We need to appreciate what is at stake in this bill, which remains committed to vigorous free trade and foreign direct investment, including from state-owned enterprises, for our economic growth. A government’s commitment to drive economic growth and attract foreign investment must be achieved while remaining vigilant and active to strengthen our national security from risky state-owned enterprise investments.

According to Statistics Canada, foreign direct investment in Canada in 2017 increased 1.9 per cent to $824 billion from the previous year.

According to the Investment Monitor 2017 report, state-owned investments in Canada equalled 24 per cent of the number of deals from 2003 to 2016, and constituted 72 per cent of the total value of foreign investment. This is due to the fact that the bulk of state-owned enterprise investment in Canada is concentrated in a few large deals pertaining to the resource sector and critical infrastructure. However, the report also notes that investments from state-owned enterprises consistently elicit concerns over ownership and appropriation of national resources.

The definition of “state-owned” in the act I highlighted earlier was changed to include individuals acting under the direction of a foreign government or enterprises either directly or indirectly influenced by a foreign enterprise.

In addition, whereas previous investment from state-owned enterprise above $330 million triggered a review — but not at the national security review scale.

According to data compiled by the China Institute of the University of Alberta, the top sectors for Chinese direct investment in Canada are energy, metals and minerals, entertainment, real estate and consumer products and services that are related to our critical infrastructure. Moreover, approximately two thirds of such investments are from state‑owned enterprises located mainly in British Columbia, followed by Ontario and Alberta.

Honourable senators, something that seems innocuous today, like such types of significant unreviewed investments, can readily turn into a vulnerability for our security of tomorrow. Take a look at the Chinese ban on canola, for instance.

A conference report published by the Canadian Security Intelligence Service in May 2018 called Rethinking Security: China and the Age of Strategic Rivalry, warned it is irrelevant whether a Chinese company doing business with a Canadian partner is a state-owned enterprise or not.

According to the report, all Chinese companies “have close and increasingly explicit ties to the [Chinese Communist Party].” The report further states that:

Unless trade agreements [and investments] are carefully vetted for national security implications, [the Chinese Communist Party] will use its commercial position to gain access to businesses, technologies and infrastructure that can be exploited for intelligence objectives, or to potentially compromise a partner’s security.

I think this resonates all too well with the consequences of ongoing diplomatic rifts with China, especially at a time when our direct foreign investment from China into Canada increased by 190 per cent between 2008 and 2017. It has almost tripled, according to Statistics Canada. This should not come as a surprise. The Chinese economy is centrally planned and led by a balance of 150,000 state-owned enterprises owned by both the central and local governments, controlled by the CPP, which preys on all manner of technology and data — and some overlapping military and civilian uses, making our security and civilian concerns of such investments grow.

Albeit continuous research, I remain unable to obtain information about the total level and value of investments made in Canada by foreign non-Chinese state enterprises.

However, I am able to provide the following key example. In 2007, statewide ASA from Norway took over the North American Oil Sands Corporation. In 2008, Abu Dhabi National Energy Corporation, also known as TAQA, took over PrimeWest Energy Trust. In 2009, Korean National Oil Corp took over Harvest Energy Trust. In 2011, PTT Exploration and Production PLC initiated a 40 per cent purchase of Canadian-based Statoil. In 2012, Petronas, a company from Malaysia, took over Progress Energy Resource Corporation. In 2015 was the acquisition of 50.1 per cent of the Canadian Wheat Board by Global Grain Group, a joint venture between U.S. food company Bunge Ltd. and a unit of the Saudi Agriculture and Livestock Investment Corporation. It is now with the public investment fund, a wealth fund owned by Saudi Arabia, that controls 75 per cent of this joint venture.

In the Asia Pacific Foundation 2016 national opinion poll, the survey results showed that Canadians are more likely to favour private investments than state-sponsored investments from the Asia-Pacific economy. Canadians are correct to be generally wary of investments from state-owned enterprises. This should be an important signal for us, since Canada opened us to high‑profile foreign investments between 2016 and 2017, which notably included significant investment from China, which outpaced investment from the U.S. in valued assets, according to the investment review division statistic for the 2017 fiscal year.

Honourable senators, China’s national growth and its international expansion now depend on the advancement of what is referred to as the new silk road or the “One Belt, One Road” initiative. This major development strategy is growing at an unprecedented rate. Huge investments have been made in strategic industries in over 152 countries, including infrastructure, construction, mining, artificial intelligence, agriculture, sensitive technologies, telecommunications, health care, culture, banking and energy.

It is therefore not surprising that parallels are being drawn between these investments and previous proposals from state‑owned enterprises that were approved in recent years without undergoing a thorough examination and security review. Although Canada conducts a careful security review of all proposed investments, including those that do not result in a change in ownership, review power related to national security is still rarely used, as demonstrated by the 2017 statistics on the national security review process.

Honourable senators, let me be very clear. Bill S-257 was drafted in a spirit of caution, not protectionism. This bill would help to dispel growing national security concerns when it comes to foreign state-sponsored enterprise investments.

Honourable senators, some of you might recall March 2017, when the Chinese ambassador to Canada, Lu Shaye, laid out tough conditions for a bilateral free-trade agreement. During an exclusive interview with The Globe and Mail, he said:

Beijing will seek unfettered access for Chinese state-owned firms to all key sectors of the Canadian economy during free trade talks, including an end to restrictions barring those enterprises from investing in the oil sands.

Canada needs to be able to function in an open investment climate but not to the detriment of our national security. We are clearly in the area where state-enterprise investments are receiving special attention in the context of the application of national benefit and national security tests under our national investment law. This is why this bill would prevent any risk-tolerant policy shifts from putting the safety of Canadians in harm’s way. Given the potential challenges posed to national security as a result of such investment, it is incumbent on Canada to have a legal framework that addresses such proposed investments in a realistic manner.

Honourable senators, any investment restrictions should be done for our security. We need to be careful not to circumscribe too much and to make sure that we do not overreach. But I also believe that foreign transactions involving Canadian companies should only be approved if the transaction is in the best interests of Canadians and our national security. This is why Bill S-257 proposes realistic checks and balances that would scrutinize harmful investments and threats that emerge from state‑sponsored enterprises.

Many in the private sector might not appreciate what is at stake in this bill. All stakeholders who care about trade and the necessary checks and balances should remain engaged.

Honourable colleagues, as I say, Bill S-257 is about prudence, not protectionism. This bill is deserving of your support and attention. It will provide Canadians, and all potential foreign investors, for that matter, with timely and predictable reassurance the Canadian government will review all investments proposed by state-owned enterprises from a national security standpoint in a manner that does not discourage investment, economic growth or employment opportunities in Canada.

I end my remarks with President Reagan’s famous quote, “Trust but verify.” That is all too accurate in this area, where the free flow across borders strengthens innovation and economic growth but should also strengthen our national security. Thank you.

Would the honourable senator take a question?

I’ll try my best.

It seems only fair; you ask me.

Senator, I know the prominent role you play in your caucus and on these issues. I’d like to know whether this bill has the support of your leader.

This bill is a private member’s bill. I presented it to the Conservative caucus. As I say, we are all independent in this era. They all decide to support or not support, but when I present, I present with the caucus, and we have the support of the caucus as well.

As a supplementary question, does this include the support of Mr. Scheer?

The question I would like to answer is — if you think this bill is targeting China; it is not.

Answer the question.

I’m trying to answer your question. The quick answer is, no, it does not directly target China but it targets all state-owned enterprise. You have Norway, Thailand, Malaysia, Korea and so on. The question here is every state-owned enterprise must be carefully vetted for our national security.

If I could ask one final time: Can I expect this will be part of the platform of the Conservative Party?

Well, I speak for myself. This is my view. This is my bill. It has the support of Conservatives in the Senate. So this is the view of all of us.

As I say, this bill is not targeting China. This bill is about prudence and not protectionism. This bill is to identify potential issues in advance where it is appropriate for government to look at it on the basis of national security.

As I say, oil is our natural resource, and it is very important for us. Some of the state-owned enterprises may use that leverage and push forward. I can use the example of many companies.

For example, if we can just focus on only one country to do trade, we might be bullied by that country because if you don’t listen to us, we will stop buying from you.

If all our infrastructure is owned by the state-owned enterprise, that government will have the leverage toward the Canadian government.

I don’t think it’s what you say, the state-owned enterprise buying the oil company from Canada and sabotaging its own company, I don’t think that’s the right one.

Well, as I say, oil is one of our natural resources. If a state-owned enterprise, SOE, owned all of our oil, they own exactly our natural resource, our exports, and they can use that as leverage, as I say, toward Canadian foreign policy.

Will the honourable senator take another question?

Sure.

Thank you very much. I appreciated the thoughtfulness of your presentation and how you have delved into the issues.

The area I want to question is the specifics of how you feel government approach to foreign state-owned enterprises currently fails to take into consideration national security. We’re certainly well aware of issues around Huawei and a number of others, and the investment in the oil patch.

It seems to me there is a complete review that is done that includes national security, but perhaps I’m wrong. Could you expand on that and explain what is lacking? I will take the time to thoroughly read your bill, but what is lacking in the current process, in your opinion?

Thank you for your question. As I say, with the present act, the Canadian government doesn’t have to go through every acquisition from foreign SOEs, for example, to a national security review. They don’t have to.

With this bill, we say the government has to review all SOEs. There is no discretion whatsoever. Every SOE that acquires a company in Canada, an investment in Canada, they have to go through the national security review.

The act we have now, the government doesn’t have to do it. I don’t know what criteria they have decided, but the government can say, “Well, it’s okay; we don’t have to review. Okay, this one is fine, but this company is not.” It’s up to them.

With this bill, the government will have to review every acquisition and then decide. It will no longer be at the discretion of the government. That’s what this bill is about.

I have a supplementary question. Thank you for that answer. Could you give us a real example of a situation of a state-owned enterprise investing or purchasing assets in Canada where the Canadian government in the past, of any political stripe, has failed to consider national security? Some people say if you see an obvious problem and a situation of failure, then a legislative response is fine.

If there isn’t a problem — as in the colloquialism, “If it isn’t broke” — what are we trying to fix? I appreciate how you have described that, but could you give me the example of where Canadian governments in the past have failed to consider national security interests?

Thank you for your question. The problem is I’m not in the government; so I don’t know what criteria they verify or if they review a particular company in order to say that they are adequate or there is no security breach whatsoever.

For acquisitions, we can take the example of AECON. With that project, the SOEs would like to buy the project, but because there are so many voices raised in concern, even the opinion of the former CSIS director and so on, this is basically the reason why the government has to go and review it again instead of at their own discretion, instead of having to go back to a national security review, and they decided not to allow the SOE to acquire the AECON company.

Senator Ngo, your time is about to expire but I saw two other senators rising. Are you asking for five more minutes to answer questions?

Yes.

Is leave granted, honourable senators?

Thank you, Senator Ngo, for introducing this important and interesting topic. Have you studied what the Australians are doing? They have recently become concerned about state-owned enterprises. I appreciate that your bill is not all about China, but most of the Australian concern is about China and one of things the federal government in Australia recently rejected was Chinese companies trying to buy the New South Wales electricity distribution network on the grounds of national security. That purchase was rejected. Have you done any study on what Australia and New Zealand are doing in this area?

No, I don’t have any studies on that one, but I looked at SOEs from other countries such as Norway, Kuwait and Korea. They have acquired, and the government is accepting their acquisitions.

Again, at that time, it is at the government’s discretion. I don’t know whether or not they go through the national security review, but they were accepted and the government gave the green light, so they were acquired. It was the same thing with Norsat.

What my bill is trying to do is to say instead of at the discretion of the government or the Governor-in-Council, every acquisition of an SOE has to go through a national security review, and then they decide. That basically gives them another tool to look at it and then to have a proper decision for the security of Canada.