Harper is right on SOE takeovers – by Jack M. Mintz (National Post – December 14, 2012)

The National Post is Canada’s second largest national paper.

Jack M. Mintz is the Palmer Chair in Public Policy, University of Calgary.

Most criticisms of Ottawa’s SOE position are mystifying

This past week I attended the Globes business conference in Israel, only to miss the great brouhaha over the Harper government’s decision to approve the takeovers of Nexen by China’s CNOOC Ltd. and of Progress Energy by Malaysia’s Petronas. Prime Minister Stephen Harper also announced at the same time tougher guidelines for state-owned-enterprise (SOE) takeovers of Canadian companies on a going-forward basis.

Reading the National Post on my iPad, however, you would think that the Harper decision was a great travesty. The editorial page criticized the decision as undermining free markets, a rather surprising view since SOEs are far from being “free” of foreign-government intervention.

Another criticism was that the two takeover approvals were inconsistent with the new policy restrictions on state-owned enterprises. This is a fair point, but we have to remember that Canada is not a banana republic. When the rules of the game are changed, usually transactions that have been put in place, even if not yet consummated, are typically grandfathered. We do this all the time in tax policy, sometimes involving billions of dollars in transactions that get grandfathered or provided transitional relief. Although the “net benefit” test under the old regime is far from clear, the two takeovers would have likely passed anyway.

Others lamented that the exorbitant premiums offered for Canadian companies by foreign SOEs will no longer be possible, leading to a higher cost of capital for resource companies. SOEs come with cheap capital due to the financial support of their governments, so if they earn poor returns on their investments they pay the price, with the previous Canadian and foreign owners walking away with bags of money.

But there are consequences. A subsidized cost of capital enables inefficient companies to operate longer, thereby pushing up prices in the economy. The macroeconomic consequence is to squeeze out some profitable private companies operating in the same and other sectors.

Others felt that SOEs should have a free ticket so long as they obey Canadian rules. However, even if SOEs obey labour, environment and tax laws, it does not mean that they will operate efficiently, since they may have other legally acceptable objectives that they pursue, besides profits.

As I have argued on these pages in the past, Canada and the rest of the world have benefited substantially from the privatization of SOEs through better jobs, incomes and growth for their economies. This point has been repeatedly made in the international literature. This point was also made by the prime minister when he announced the new rules.

For the rest of this article, please go to the National Post website: http://opinion.financialpost.com/2012/12/13/jack-mintz-harper-is-right-on-soe-takeovers/