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Perspectives | Issue

Navigator’s folio of ideas, insights and new ways of thinking

Investment Politics

January 26, 2013
Jonathan Lowenstein
Jonathan Lowenstein | Principal, Executive Office Lead

The Hon. Jim Prentice is now a senior bank executive, following a distinguished career in public service. His leadership of various ministerial portfolios — including Industry, Environment, and Indian Affairs and Northern Development — led Prime Minister Stephen Harper to describe his role as ‘Chief Operating Officer of the Government of Canada,’ upon his departure from public life.
Navigator recently sat down with Jim Prentice to discuss politics, investment and pipelines.


NAVIGATOR: This issue is about the role of politics in shaping capital markets. Your professional experience, first as a cabinet minister and now as a bank executive, affords a unique perspective. How do you describe the interplay between the two spheres?
JIM PRENTICE: Well, I’ll answer that question as a banker rather than as a former politician. What I’ve learned since I joined is just how incredibly sensitive capital markets are to the public policy environment, generally. That’s certainly true of fiscal policy, it’s true of monetary policy, and it’s true as well of sectoral policies and policies affecting things like foreign direct investment. Capital markets are sensitive to all of those things.
There’s something else that I think that’s quite important: In the context of the global marketplace today, which is evermore interrelated all the time, markets are also sensitive to the differentials in terms of politics and public policy between countries.
Reflecting back on your time spent in Ottawa, to what extent was the potential impact on capital markets considered in day-to-day political calculations?
It was certainly considered and I think the strength of the Prime Minister and the Conservative government has been a sensitivity to how markets perceive public policy developments. I can tell you that whether you’re speaking of fiscal policies, energy policies, or environmental policies, there was certainly a close regard to the impact of those policy changes on the business community and on capital markets.
You’ve been quite vocal about Canada’s reliance on foreign investment. When speaking with global investors, how do you describe Canada as a place to invest?
Here’s the reality: We are a country that is small in population — barely half of one per cent of the world’s population — but we occupy a disproportionate share of the world’s landmass — something in the order of 15, 16 per cent of the world’s landmass. We own a disproportionate share of every single commodity that matters, and so capital markets are extremely important to us.
If you take the energy sector, just as an illustration of the point, the go-forward five-year average of what we would expect to invest in the energy sector in Canada is in the order of $50 billion per year; if you compare that to what we raise in domestic capital markets, it’s in the order of $15 billion per year. We have enormous capital requirements, almost double the capital that we have domestically that we require in the way of foreign investment.

It’s because we are a country that is small in population, but with enormous ambitions, that we have always needed other people’s capital to develop out Canada.

Much has been made of sovereign wealth fund and state-owned enterprise (SOE) investment. Can Canada afford to overlook certain classes of capital?
I think it’s important contextually to note that, particularly in Asian countries, there is a reliance on state-owned enterprises as a dominant form of assembling capital. These are economies that are more collectivist than ours. They are at different stages of development and so they have much larger aggregates of capital in the form of SOEs.
If you look at the world’s 25 largest energy companies you’ll find a disproportionate number of state-owned enterprises.

My position has been that they bring a unique perspective. I’m of the view that they should be welcomed in Canada. We need their capital. We need them to platform their international business in our country. Frankly, pragmatically, that’s because if they’re not platformed in Canada —in Calgary or Toronto or Vancouver —they’re going to be platformed in Houston or London or somewhere else.

It’s capital we need, it’s business we need, and we’re searching for those investment dollars. It’s not to say that we would accept those dollars under any terms and conditions. We need to be careful, and we have been.

We have enormous capital requirements, almost double the capital that we have domestically that we require in the way of foreign investment

Last year Canada experienced considerable contraction in terms of foreign investment. Many observers have attributed this to the Prime Minister’s policy announcement following the approval of the CNOOC and Petronas transactions that these decisions should not be viewed as the beginning of a trend but rather the end of a trend. How do you explain the drop-off?
Well, firstly, there has been a very clear drop-off. It’s demonstrable.
If you look at the inbound foreign investment in the energy space over the last five years, the numbers are massive (in the order of $70 billion invested in the Canadian energy space). If you look at what happened in the last year, there was a very significant drop-off in terms of inbound foreign direct investment, and Chinese state-owned investment essentially stopped.

My view is that there has been three causes. Certainly the fact that we have experienced difficulties in Canada in terms of developing infrastructure to export our energy off the continent has cast a bit of a pall over energy investments.

Secondly, the Canadian energy markets have been pretty active, pretty frothy if you will, and so there’s been a readjustment of prices in a downward sense. And until that happened, I think investment, generally, had begun to fall off.

But certainly a third reason has been the change in the foreign direct investment rules as they relate to state-owned enterprises.

I think it is the confluence of those three factors that has led to a very dramatic drop-off in mergers and acquisition activity, in inbound foreign direct investment, and consequentially a significant reduction in capital market activity, generally.

You’ve said in the past the policy has been mischaracterized or misunderstood in certain quarters. When asked by foreign investors, how do you interpret the Prime Minister’s remarks?
Well, the first point I would make is that Canada needs to continue to be open for business. We continue to have an imperative to get the message across that Canada is open for business.
Any changes to the foreign direct investment rules — specifically to the Investment Canada regime — are watched very carefully by international investors. We cannot reiterate too many times that we’re open for investment, that we want to see foreign investment, and that we’re an ambitious country that welcomes other people’s capital, including capital from state-owned enterprises.

My point has been that we need to continue to say that.

The changes that were made to the Investment Canada Act are very significant. They have had the essence of ring-fencing the oil sands, if you will, from majority ownership by state-owned enterprises.

That is a policy that I support, but we don’t want to see that misinterpreted as a policy that has walled Canada off from foreign investment in any way. And so we need to make sure people understand this.

These are also policies that are directed at state-owned enterprises generally, but not all state-owned enterprises are the same. So, Statoil is a different entity, being a state-owned enterprise from Norway, than, for example, Sinopec, being a Chinese state-owned enterprise. So we need to be careful and assiduous about making sure that people understand where we are coming from as a country and that we welcome capital.

To what extent should Canadians share Prime Minister Harper’s concerns around the re-nationalization of Canada’s economy through foreign SOE, and sovereign wealth fund investment?
If I understand your question, I think we all have a concern that state-owned enterprises are not the same necessarily as private-sector enterprises. They are different. We need to acknowledge that they are different.
They are very different forms of aggregation of capital. The important practical point is that they are a dominant form of capital in today’s global economy and we cannot exclude ourselves from that marketplace. But to be clear, state-owned enterprises represent an amalgam, if you will, of the power of the state and the power of combined capital, and so we need specific rules that deal with them.

As the Minister of Industry in a former life, I brought in Canada’s first set of specific policies that dealt with state-owned enterprises. I stand by that approach. But I think you have to go back to the fact that we are not concerned about the ethnicity of money that is coming to Canada. What we are concerned about is how that capital behaves once it’s in the Canadian marketplace, and ensuring that it behaves according to market principles. Ensuring that we have, for example, the standards of shareholder protection, minority rights protection, and transparency that we have in the marketplace in North America.

If the capital behaves according to our rules, we should welcome it on those terms.

In your judgment, what impact has the uncertainty surrounding the Northern Gateway, Keystone and other pipeline projects had on Canada’s attractiveness to foreign investors?
The difficulties that we have had in executing infrastructure to export our oil and natural gas, whether it’s to the United States or off the West Coast, have had a very significant effect on the Canadian energy space and, inferentially, on the Canadian economy.
We see that in a reduction in M&A activity. We see that in the inventory of properties that are for sale on the market today, where investors are actually exiting Canada and putting their properties up for sale. And we see it in the deferral of investment decisions for major capital projects.

The long and short of it is that if you look past 2020, Canada does not have the capacity to export incremental volumes of oil from the Canadian oil sands. We don’t have the transportation capacity to move the product to market. Investors are very cognizant of that. These are the most sophisticated companies in the world.

They are well aware, and they are being very careful in terms of their investment decision.

So this is having a profound effect on the energy space. We are seeing the consequences already; it’s not simply post 2020. We are seeing the market consequences today. You’ve noticed, for example, over the last couple of years there have been, at various points in time, enormous price differentials between the world oil price and the price we are recouping for Canadian oil. That reflects the fact that we’re unable to achieve world prices because we’re selling our oil as a world product, we’re selling it into a congested continental marketplace. And so the consequence for the private sector, and for governments, amounts to billions and billions and billions of dollars that we are losing as Canadians.

It is an extremely important issue, and I’ve gone so far as to say the most urgent economic priority that we face in the country is getting these pipelines and infrastructure built.

As Minister of Industry, you oversaw an amendment to the Investment Canada Act to reinforce the net benefits test, and developed the first set of guidelines that are applied to state-owned enterprises. How has the definition and application of net benefit changed over the past five years?
That’s an interesting question.
Firstly, I believe that the net benefit test is the appropriate test, and I stand by that test. The net benefit test is a good way to measure up the pros and cons of an individual investment choice: Is it to the benefit of Canada, or not?

I think we are still measuring the same microeconomic considerations — the ability to create jobs, the ability to secure technology, the ability to secure innovation, and the ability to make sure that we have a diversified economy and no concentration of ownership.

But to come to your question, I think some of those circumstances have changed; some considerations have changed.

We are probably more globally focused in terms of our ability to compete as a country, and in our ability and desire to recruit foreign capital into the Canadian market. I think, in a sense, the net benefit test has become a bit more worldly. We are in a competitive global marketplace where Canada, like other countries, competes for capital. We have a better sense of that today than we did 10 and 20 years ago, for sure.

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About the author:

Jonathan Lowenstein
Jonathan Lowenstein | Principal, Executive Office Lead

Jonathan Lowenstein is a Principal and Executive Office Lead in Toronto. He possesses a proven record of engaging and mobilizing interests through carefully tailored campaigns.

Prior to joining Navigator, more than a decade ago, Jonathan honed his sales and marketing skills in a variety of contexts. Most recently, he assisted a Toronto-based company expand nationally, developing strategies to penetrate the BC marketplace.

A graduate of Queen’s University, in Kingston, Ontario, Jonathan earned a Bachelor of Arts (Honours) degree while studying politics and business. Throughout his time at Queen’s, Jonathan was actively involved with the Alma Mater Society’s student clubs where he served in a number of roles including Treasurer and President.

Jonathan holds a CPIR designation in investor relations from CIRI-Rotman.

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