"The Prime Minister stated bluntly that the decision on CNOOC was 'the end of a trend and not the beginning of a trend.'"
Harper’s measured takeover verdict
After months of unusually public prognostication, the government gave its verdict on CNOOC Ltd.’s takeover of Nexen Inc. The decision struck a fine balance between Canada’s chronic need for foreign investment to develop its resource base and grow the economy and the concern of many Canadians about foreign control of the country’s resources through state-owned enterprises, particularly in the oil sands.
That the announcement was made and explained by Prime Minister Stephen Harper at a news conference late Friday underscores the sensitivity and complexity of the issue. There was significant opposition to CNOOC’s acquisition among members of the Conservative caucus, mirroring public opinion polls. (More than two-thirds of Canadians were found to be opposed.) The Prime Minister acknowledged Friday that the decision would have “broad” (i.e. not unanimous) support from his caucus.
The review process carried a lot of unwieldy baggage, including security concerns about the activities of Chinese telecom giant Huawei Technologies, problems with Chinese migrants working at a B.C. mine, concerns about human rights generally and, more fundamentally, rank sinophobia. Equally, the issue was an acid test of sorts on whether the government really intended to diversify and concentrate strategically on emerging markets that are growing rather than being exclusively dependent on traditional markets that are stagnating or sinking.
The government approved the CNOOC proposal without divulging the extensive undertakings offered by the company to meet the “net benefit” and SOE criteria of the existing Investment Canada requirements. Pointedly and correctly, it adjudicated the transaction under the terms of existing Investment Canada legislation. The onus is now on CNOOC to meet or exceed commitments on capital to be invested, employment, transparency, governance and so on, and on the government to ensure that it does.
Most importantly, the Prime Minister set very tight guidelines that restrict future SOE attempts to gain control of oil-sands companies. Although the bar for reviews of acquisitions by private-sector acquisitions will be raised to $1-billion, it remains at $330-million for SOEs. The Prime Minister stated bluntly that the decision on CNOOC was “the end of a trend and not the beginning of a trend.” He stressed repeatedly his concern about the degree to which the global oil market is already dominated by SOEs and where government policy, not market principles, reign supreme. Further control ownership of oil-sands companies in Canada by foreign SOEs could jeopardize the extent to which market forces would determine outcomes. It was obviously no accident that a confidential report to the Prime Minister underscoring this basic point about the impact of SOEs on the global market was released expeditiously under an Access to Information request just before the CNOOC decision.
The expressed preference for free-enterprise principles is what one would expect from a Prime Minister trained in economics. The manner in which he straddled both economic and political imperatives is certainly preferable to the “follow the will of the people” nostrum suggested a few weeks ago by former Reform Party leader Preston Manning. The essence of leadership, after all, is not to follow popular whim, but to lead and shape it.
To bolster public support and understanding of the decisions announced Friday, the government must spend more time articulating to Canadians precisely how dependent we are on foreign investment for the development of our resource base – and not just the oil sands. We will need an estimated $650-billion in capital, mostly foreign, by the end of this decade. Canadians also need to understand better the degree to which our prosperity also relies on the investments Canadian companies make abroad. This two-way street is critical to our prosperity and growth.
Significantly, the Prime Minister also signalled that Canada will seek comparable, reciprocal access for our own investors and exporters from countries seeking to invest in our resources, especially from China, where the economic relationship is currently sharply imbalanced. The relative openness of our market, our reputation as a secure source of supply and our strict adherence to the rule of law constitute real comparative advantages for us and should be deployed accordingly in any broad trade and investment negotiation.
We need to move forward now with a trade diversification strategy that allows for energy export diversification. Relying on the U.S. market for our oil and gas exports carries not only risks in terms of vulnerability, but also discounts daily the value of our resources. The sooner we find additional outlets, the better for our national interest. Decisions on critical infrastructure are vital to that objective.
The “only in exceptional circumstances” caveat to the blocking guideline on future SOE control stakes in the oil sands leaves an element of constructive ambiguity available to the government on investment decisions. It recognizes that not all SOEs are necessarily cut from the same government cloth. More fundamentally, it allows Ottawa to retain the whip hand on foreign investment decisions, as it should. Canada is certainly not alone in establishing limits and a degree of ambiguity in this regard. But perhaps it is time for us to work with like-minded countries such as Australia and the United States to establish a more common, as opposed to a competitive, approach to SOE behaviour.
Neither economic purists nor economic nationalists will be satisfied by the government’s decisions. Nonetheless, they constitute a measured verdict that serves the national interest, a fine balance between what is economically essential and politically prudent.
Derek H. Burney is senior strategic adviser for Norton Rose Canada LLP and a former Canadian ambassador to the United States. Fen Osler Hampson is distinguished fellow and director of global security at the Centre for International Governance Innovation and chancellor’s professor at Carleton University.
The opinions expressed in this article/comments are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors and/or International Board of Governors.