The confusion and uncertainty generated ten days ago by the government’s unexpected ‘stroke of midnight’ rejection of Petronas’ bid for Progress sent more than a shiver through financial markets. A transaction that had received scant attention beforehand suddenly became front page news and re-ignited concern in many quarters over whether the government is open to foreign investment and, if so, on what terms.
In the wake of the immediate market disruption, the government seemed to signal indirectly that it was seeking to put in place specific guidelines for State-Owned Enterprises (SOE’s), such as Petronas (of Malaysia) and CNOOC, the Chinese SOE seeking to acquire Nexen.
It is understandable for the government to have some concerns about the manner in which SOE’s, or at least some SOE’s, conduct their affairs — particularly in terms of cost of capital, competitiveness, transfer pricing and taxation, and transparency considerations, all of which could be assessed under the opaque “net benefit” clause, as well as the SOE and national security provisions, of the existing legislation.
But not all SOE’s are the same. Several, including Petronas and CNOOC, are investing and operating already in Canada’s resource industry. Each of their current applications would provide tens of billions of dollars in project development with positive effects for the communities where they would operate, including aboriginal communities.
Both are friendly, not hostile, acquisitions and involve no critically important intellectual property. Most of Nexen’s assets are actually outside Canada — though there may be some concerns south of the border over the fact that it is a technology leader in deep-sea drilling.
It is important, too, to remind ourselves that foreign investors are obliged to adhere to Canadian laws and regulations. If those are deemed insufficient to preserve Canadian values, however defined, then we should change the rules.
Canada needs and ordinarily welcomes foreign investment to develop its oil and gas potential. Natural Resources Minister Joe Oliver has estimated that we will need $650B by the end of this decade, “much of it foreign.” Much of the available foreign capital lies in emerging market countries like China and Malaysia and much of that is state-controlled.
The oil industry on a global basis is hardly the hallmark of free enterprise for “open market” theoreticians. State-owned oil companies are the dominant players and the OPEC cartel sets world prices. Political considerations are a constant factor affecting oil markets.
The government also may be understandably concerned about “opening the floodgates” to the point where even “Canadian jewels” in the oilsands are taken over, leaving Canada with minimal involvement in, let alone control of, our natural resources. But neither Progress nor Nexen would qualify for such concern. And, given the vastness of the oilsands, it is difficult to see how any one firm could dominate production.
The economic rationale for foreign investment is indisputable. Canada’s growth depends on it. The challenges posed by SOE’s in particular and foreign acquisitions in general are inherently political. A “one-size fits all” guideline may not be the answer. In fact, tighter guidelines may not resolve what essentially is a political management challenge for the government.
The more government attempts to clarify or codify its approach to foreign investment, the more it will limit its capacity to exercise political judgments.
The government may prefer a strategic framework based on clearly stated principles (not a checklist) as the foundation for investment decisions. It might also consider a clearly defined national interest test that includes close examination of the market capitalization and transparency of foreign firms, a determination of the degree of access permitted by the investor’s country and an analysis of the effect of the acquisition on Canada’s global competitiveness.
And if it wishes to preclude outright takeover of “crown jewels”, it should establish equally clear hurdles to that effect. But new prescriptions should be proscriptive, not retroactive, or cobbled on the fly. The two pending applications should be adjudicated on their merits, free of any phobias.
Especially in the case of China, the government also should reach out politically and negotiate terms that will provide better access for Canadian firms and rectify the “imbalance” in the economic relationship cited publicly by the prime minister. It is a matter of leverage and enlightened self-interest.
When a government loses control of its own agenda, as appears to be the case, or changes the ground rules as investment applications are being considered, it creates damaging uncertainty and magnifies the challenge of finding a balanced solution, one that respects our economic needs but also provides a basis for sensible political management. Ultimately, the government has to reconcile our need for foreign capital with the political desire to be seen to be controlling our national destiny.
When it comes to foreign investment, this is no time to embrace an “igloo” mentality. Constructive rather than destructive ambiguity should be the goal and the sooner, the better. The government’s strong suit is its sensible stewardship of the economy. Uncertainty and confusion over foreign investment rules threaten to undermine that solid reputation.
Making choices in a turbulent, highly competitive global economy is not easy but blocking investments that respect existing Investment Canada criteria offers little economic or long-term political reward. Decisions on these applications will determine whether the government will ‘walk the talk’ on diversification and seriously intends to broaden economic ties beyond traditional but sagging markets like the U.S. and the EU.