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Friday, February 28, 2014

Terence Corcoran: Fascism by another name

Terence Corcoran: Fascism by another name

| | Last Updated: Oct 26 

Should the CNOOC-Nexen deal be approved? Or the Petronas takeover of Progress?
Reuters Should the CNOOC-Nexen deal be approved? Or the Petronas takeover of Progress?

CNOOC-Nexen: Here's the real reason Canada should reject the deal

State ownership makes mockery of markets

Recent media reports portray Ottawa as ready to horse-trade its way out of a looming foreign investment crisis over takeovers of Canadian companies by state-owned enterprises. In Bloomberg’s version, “Canada plans to ask China to allow several transactions in exchange for approval of state-owned CNOOC Ltd.’s $15.1-billion bid for Nexen Inc., said a person with knowledge of the matter.”
Finance Minister Jim Flaherty quickly announced that he personally had no knowledge of the matter. But speculation persists, particularly over attempts by the Bank of Nova Scotia and Manulife Financial to secure greater access to Chinese financial sectors. The Canadian mining industry is also keen on massaging its way into the Chinese market, and if that means using CNOOC’s $15-billion Nexen takeover as a reciprocity play, so much the better. Or so it is said.
As the Harper government wades deeper into the challenge posed by state-owned enterprises investing in Canada, whether from China or Malaysia or even the United States, some overarching issues need to be recognized. Foremost is this: The global rise of state-owned enterprises (SOEs) poses a threat to the market principles that have governed international and national investment for decades, and that dominate Canadian law and policy today. Investor-driven corporations, aiming to maximize profits in an open competitive market, are at the heart of market capitalism. Some find it politically advantageous to talk of state-owned enterprises as part of the rise of some benign “state capitalism” around the world. These two words are a mischievous ideological sabotage of Western values. A half century ago, state capitalism was called fascism, and it should continue to be today.
The very idea of reciprocity between Canada’s rule-of-law system based on economic and individual freedom and China’s totalitarian regime boggles the imagination.
If banks, resource companies and computer manufacturers want to do business in a country that cannot or will not open its markets and protect corporate rights, that’s a business problem. Canada as a country has nothing to trade on this front, unless it intends to undermine its own core economic and political values at home.
Canada should therefore follow the highest principles in dealing with SOEs from Malaysia, China or anywhere. Easy to say, but what might that mean in practice? Should Canada accept foreign direct investment from state-owned enterprises? If yes, under what conditions? Should the CNOOC-Nexen deal be approved? Or the Petronas takeover of Progress?
The point has often been made, including in this newspaper, that as a free-market, open-investment country, Canada could just let CNOOC pay its 60% premium to Nexen investors, who can take the money and run, leaving the Chinese to sort out the overpriced asset schmozzle they purchased.
But buying a corporation is not like overpaying for passive investments such as bonds. Randall Morck, distinguished professor of finance at the University of Alberta and an expert in international corporate governance, sees a corporate takeover as a much more fundamental transfer. “With equity control comes control of the company, the ability to hire and fire people, the ability to made decisions about what to invest in,” said Mr. Morck in an interview. Canada got out of Air Canada because it was badly run as a state-owned enterprise, he adds, with managers often forced to answer to political rather than economic demands.
If Canadians have sound economic and political reasons for rejecting Canadian SOEs, how can we embrace foreign SOEs? The answer is that we can’t, as Mr. Morck and Vikas Mehrotra, also a professor at the University of Alberta, argue in a commentary in Friday’s Financial Post. SOEs through history are notorious value-destroyers, and Canada would be wise to adopt foreign-investment rules that recognize the inherent flaws in the SOE model.
The Morck/Mehrotra foreign investment review process calls for a two-track approach. Track one carries an always-on green-light signal to private market-based foreign investment, and a yellow-to-red signal on SOE investments, regardless of national origin.
Private firms make mistakes, but the overall outcome in a competitive market is greater economic efficiency. “Profit-maximizing firms keep the economy from wasting resources,” they write. The great historical model of SOE failure is the Soviet Union, where “central planning, by disconnecting enterprise management from profit-maximization, ultimately allowed so vast a waste of resouces that the Soviet economy simply collapsed.”
The scale of wealth destruction in China, India and elsewhere is not comparable to the Soviet experience, but foreign state-controlled firms still pose a value-destruction risk. “All this suggests,” say Mr. Morck and Mr. Mehotra, “that state-controlled foreign firms’ takeover bids be discouraged as a matter of general policy.”
The Investment Canada Act already makes this distinction. SOE and state-controlled enterprise bidders must meet Canadian corporate governance standards and demonstrate a commercial orientation. “Many state-controlled enterprises in many countries, not just China, likely fail both tests. Their governance is often overtly politicized and their objectives obviously discordant from economic efficiency,” say Mr. Morck and Mr. Mehotra.
Since most of Nexen’s assets are outside Canada, the risk to the Canadian economy of a CNOOC takeover are likely small. In that case, approval might be justified.
The principle, however, remains that SOEs are to be met with skepticism and discouraged, regardless of the country of origin, including this hypothetical: As the new president of the United States, Mitt Romney sets up a national U.S. oil company to foster his goal of North American energy independence. USOil then decides to buy Sun Oil. The Canadian answer should be no, on the principle that Canada is a free-market nation governed by private investment principles rather than state objectives.

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