The Canadian government was right to block the sale of MacDonald Dettwiler's space division to Alliant Techsystems of Minnesota. But the way the deed was done has created the need for some additional, urgent work by federal Industry Minister Jim Prentice.
Instead of having Mr. Prentice use the Investment Canada Act, the blocking of the MDA sale should have been left to Foreign Affairs Minister Maxime Bernier.
Under the 2005 Remote Sensing Space Systems Act, a foreign affairs minister may deny any transfer of a satellite licence that imperils the "national security or defence of Canada" - as the sale of MDA's Radarsat-2 would have done. Since the remote-sensing legislation is very specific, using it to block the sale would have avoided any collateral consequences for other foreign investment.
The Investment Canada Act, in contrast, has very wide application. It sets out a "net benefit" test and directs the industry minister to consider a number of economic factors, but makes no mention of national security. As a result, Mr. Prentice had to read national security into the legislation as an implicit consideration.
This exercise of ministerial discretion has created uncertainty for foreign investors, and not just in the space industry. Which Canadian assets and companies are protected by the new, unwritten national security test? Are shipyards that build navy and coast guard vessels off limits? What about the companies that train pilots for the Canadian Forces? What about ports and railways, and the companies that operate them?
An implicit national security test creates unacceptable political risk for potential investors. But now that the test exists, Mr. Prentice would only sow more confusion if he reversed the MDA decision and handed the matter to Mr. Bernier.
The solution is to recognize that free trade and foreign investment are compatible with an explicit national security test. In our post-9/11 world, foreign investors are accustomed to the fact that security sometimes trumps trade. What they want - quite reasonably - is for governments to spell out the balance as clearly as possible.
Other countries do so already. The United States has an explicit national security test that includes the protection of critical infrastructure in the energy, communications and transportation domains. Britain, France, Germany and Japan all have explicit national security tests. So, too, does China - one of the largest recipients of foreign investment and a full-fledged member of the World Trade Organization.
Most trade agreements include explicit national security exceptions. Both the WTO and NAFTA allow a country to deny "access to any information the disclosure of which it determines to be contrary to its essential security interests" - a provision that covers at least some of the imagery produced by Radarsat-2 and perhaps even the technology behind it.
Mr. Prentice, who clearly understands his portfolio, has been preparing for an explicit national security test since becoming Industry Minister last summer. In December, he introduced guidelines on how the "net benefit" test would be applied to foreign state-owned enterprises such as national oil companies or sovereign wealth funds. This move was prompted by concerns that Chinese state- owned oil companies might buy into the Alberta tar sands.
The proposed sale of MDA was not covered by these guidelines, because Alliant is not a foreign state-owned enterprise. It is a foreign private enterprise that conducts most of its business with a foreign government. Among other things, the MDA saga shows that the difference between public and private is not always clear cut.
To his credit, Mr. Prentice was already moving on this front, too. In November, he said the cabinet would "be examining the necessity for an explicit national security test for foreign investment. In doing so, we will examine what other G8 countries have done."
But the examination was made contingent on the conclusions of the Competition Policy Review Panel, a group of industry insiders convened by the government last July and expected to issue recommendations this summer.
The uncertainty caused by the MDA precedent needs to be addressed sooner than that. Mr. Prentice should put amendments to the Investment Canada Act before Parliament this spring. The recommendations of the Competition Policy Board can be dealt with when the bill is in committee.
The amendments should include an explicit national security test, clear guidelines, and an independent body to review foreign takeovers expeditiously and provide reasoned recommendations. Such a review mechanism would reduce uncertainty and help guard against the politicization of rulings on proposed sales.
Big decisions often necessitate further decision-making. In Mr. Prentice's case, blocking the sale of MDA has created an urgent imperative. It's time to modernize the Investment Canada Act.
Michael Byers testified before three parliamentary committees on the proposed sale of MDA.