The National Post is Canada’s second largest national paper.
Jack M. Mintz is the Palmer Chair, School of Public Policy, University of Calgary.
State entities have advantages over other bidders
The world is watching Canada as we twist ourselves into a pretzel trying to decide whether CNOOC, China’s large multinational oil company, should be permitted to purchase Canadian energy producer Nexen. The decision is difficult. Capital is needed for our ever-expanding economy. Yet, this is not a typical takeover since it involves a state-owned company acquiring a sizeable Canadian company.
Some issues are red herrings. Canada is being hollowed out. We are losing another national champion. Foreign owners contribute little to the country. Head-office operations disappear. Resources are a “strategic” asset, whatever that means.
Yet, the evidence does not back up this hysteria. Canada is in the middle among 100 countries in terms of inbound foreign direct investment (FDI) as a share of GDP. Many studies, especially Statistics Canada’s, show that FDI involving private-company acquisitions of Canadian-controlled assets confer a net benefit to Canada, including better productivity, higher wages to workers, technology transfer and new management. These make Canadian businesses more competitive and make for wealthier Canadian and foreign investors, who get a premium on their shares.
Besides, Canada is hollowing out other countries, with our outbound FDI exceeding inbound FDI in the past two decades. If anything, we should encourage others to remove barriers to FDI, not increase them ourselves. Besides, we are not so innocent: We impose ownership limitations in several industries, including finance, transportation and communications.
The $15-billion CNOOC-Nexen transaction raises an entirely different issue — to what extent do we wish to see the Canadian business sector operated by state-owned enterprises and sovereign wealth funds? In today’s world, sovereign-indebted industrialized countries with aging populations do not have a large surplus of savings available for private-sector investments. Instead, a significant share of new capital comes from emerging and resource-rich economies, with state-controlled entities doing the investments.
So far, most of the state-controlled investment has involved partnerships with Canadian companies or the acquisition of relatively small companies (usually less than $5-billion in asset size). The CNOOC-Nexen transaction raises the bar substantially.
The Investment Canada Act imposes some special conditions on state-owned enterprise takeovers of Canadian companies to satisfy the “net benefit” test. These tests require that the company operates commercially and satisfies the normal corporate governance and behaviour standards.
While this approach makes some sense for the odd state-controlled takeover, it misses a larger point. Even commercial-oriented state-owned entities are less efficient than private companies. A large number of studies have shown that state-owned companies underperform private companies and that privatizations lead to far better economic performance. Canada has had its own experience with successful privatizations, among them Potash Corp., Cameco, CN and Petro-Canada.
For the rest of this column, please go to the National Post website: http://opinion.financialpost.com/2012/09/10/jack-mintz-time-to-put-%c2%adlimits-on-larger-state-takeovers/