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No to BHP, yes to CNOOC: Investment clarity a foreign concept

BHP Billiton boss Marius Kloppers must be fuming.

Two years ago, the Harper government killed his $39-billion (U.S.) takeover attempt of Potash Corp. of Saskatchewan. The deal offered no "net benefit" to Canada, the government said, and BHP, the world's biggest mining company, retreated to Australia.

Earlier this year, when China's CNOOC launched a bid for oil sands-to-North Sea oil player Nexen, Mr. Kloppers probably thought: Good luck, chumps.

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Indeed. CNOOC is China's state oil giant, ultimately controlled by the faceless technocrats of the Communist Party. China has a dubious human rights record; its companies are not models of transparency (though a minority of CNOOC's shares now trade publicly), meaning their motives and decision-making can work in mysterious ways.

By comparison, you know what you get in BHP. It is a red-blooded capitalist company whose every move is scrutinized by armies of investors, regulators and government mining and environment ministers. In Potash Corp.'s case, it promised all sorts of benefits, including turning Saskatchewan into its global fertilizer-agriculture centre.

As a bonus, BHP had more or less committed itself to building the $14-billion (U.S.) Jansen potash mine in Saskatchewan, the biggest of its kind on the planet (some $2-billion has been spent so far).

What was not to like? A lot, according to Saskatchewan Premier Brad Wall. He argued BHP ownership would provide no net benefit to Saskatchewan – forget Canada – and unleashed a tirade against Stephen Harper. With an eye on the early 2011 election, the Prime Minister buckled like a wheat stalk in a prairie storm. There is no denying that sending BHP packing was one of the government's most cynical industrial decisions.

So should we condemn Mr. Harper for epic inconsistency? A non-state-owned company is prevented from buying Postash Corp. but state-owned CNOOC is allowed to buy Nexen? And only CNOOC. From now on, no other state-owned company need apply for majority oil sands' investments.

Mr. Harper's CNOOC decision was equally political, of course. Allowing other state-owned companies to buy what's left of a resource apparently considered "strategic" – the oil sands – would be a vote loser everywhere in Canada, even in Calgary; note how few oil executives raged against the decision. At the same time, blocking CNOOC's bid for Nexen could have jeopardized Canadian trade with, and investment in, China. Consider the Nexen approval a bid to convince China to bless Canada with "most-favoured nation" status.

But, in this case, political did not mean impractical or illogical. "Yes" to CNOOC and "No" to all state companies who follow was a sensible decision for the current economic and political mood in Canada.

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Ditto the decision not to spell out what other industries are off-limits to state companies or perhaps even commercial foreign investors like BHP.

Few Western countries list companies or industries that are shielded from foreign investors. Governments want to preserve their flexibility to deal with particular situations at particular times. A shielded business today may be one that should welcome foreign investors tomorrow.

Providing precise guidelines for future foreign investments would have created all sorts of investment and legal problems. Suppose Canada's top gold companies, such as Barrick, the world's biggest gold producer, were shunted into the off-limits category. The valuations of those companies would plummet immediately as potential investors are ruled out of contention, raising the companies' cost of capital. And lawyers love the challenge of getting around rules and guidelines.

All of which does not mean that Harper & Co. have found a genuine solution to foreign investments. The problem is enforcement of net benefit promises and punishment for broken promises.

The "net benefit" test is being left vague on purpose because, again, each foreign investment is different (among other things, CNOOC has vowed to make Calgary its North American headquarters and maintain current staffing levels for five years). How can the government ensure those promises will be honoured? In the recent past, all sorts of net benefit commitments have gone out the window. Look what has happened to Stelco and Inco, where promises were not kept.

Enforcement would be hard, perhaps impossible. If the foreign parent lets its Canadian subsidiary languish, to the point it's a hollowed-out piece of junk, what is Ottawa to do? Seize a business that no one wants?

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To improve the odds that foreign investors will keep their commitments, the government could, for instance, insist on public scrutiny of the net-benefit undertakings. Maybe the investor should be forced to post some sort of performance bond that would be triggered, for example, if the Canadian business is shut before the net-benefit compliance period ends. The bond could be used to pay benefits to workers who lose their jobs, or for environmental clean-up.

But in the end, foreign investors will always have the upper hand because they will negotiate escape clauses based on market conditions: Sorry, Mr. Harper, but the steel or nickel or oil market has collapsed and we have to cut our losses.

To be sure, Canada will have fewer foreign owners in strategic industries (definition of strategic to come) down the road. What it will not have, ever, is a level playing field, a consistent policy, the ability to guarantee that net benefit commitments will be honoured or any sense that any foreign investment decision will be anything but political.

BHP's Mr. Kloppers learned this the hard way a long time before CNOOC barged into Canada.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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