Well managed or not, state-owned enterprises are probably good for Canada

Stephen Gordon responds to Jack Mintz

Jack Mintz provides the best-reasoned defense I’ve seen for the Conservative government’s new rules about how takeover bids by foreign state-owned enterprises (SOEs) should be an “exception,” but I’m still not convinced.

Here is the key paragraph:

The economic role of takeover markets is to enable those with better management skills, technologies or other economic strengths to buy up companies operated less efficiently. In a world absent of taxes and government interventions, the best managers will be able to wrestle control of a firm by outbidding others with a higher premium on share offerings. This is what makes a business sector truly dynamic. For this reason, Canadians should not want to block foreign direct investment that will lead companies to be better managed. But SOEs come to the table with government support, either tax-exempt status or explicit or implicit financial subsidies. They might bring new capital, but they may not provide superior management. One no longer gets the best management operating companies through the takeover process, since SOEs are in position to outbid private competitors who pay taxes (now or in the future) and receive no public support. With the SOE takeover, inferior performance means a loss in profits and potentially job layoffs.

The problem I have with this argument is that even if SOE-managed firms did bring in high-quality management and better business practices, we’d still  see similar effects: the new entrants would also be in a position to outbid existing competitors, driving up the costs of labour and other inputs, and making life more difficult for existing firms.

It is almost certainly true that foreign publicly-owned firms have cheaper access to capital than most domestically-owned resource companies. But then again, so do foreign privately-owned multinationals. (Capital markets are highly integrated, but not perfectly so: multinationals can usually draw from a broader and deeper pool of savings.) In the latter case, this access to cheaper capital is usually presented as an argument in favour of foreign investment; it’s not yet clear to me why access to even cheaper capital makes SOEs less attractive.

Everything else being equal, Canadians should prefer that firms be well-managed: we want companies to produce the most value with their capital. But to the extent that the ability  to conjure new capital out of thin air (or from foreign taxpayers) produces benefits equivalent to good management, we needn’t be too fussy about how that value is created.




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Well managed or not, state-owned enterprises are probably good for Canada

  1. I agree completely with Jack Mintz’s take on this issue, not just in the highlighted paragraph.

    If China, through companies like CNOOC are concerned with private sector goals of getting a return on their investment, they can accomplish much the same by combining the two through joint ventures with a minority interest up to 49.9% – cheap capital and top management at experienced operating companies. Just double up the number of projects.

    Btw, just a few days after the CNOOC approval, EnCana announced such a deal with another Chinese SOE, PetroChina for $2.2 Billion.
    http://www.huffingtonpost.ca/2012/12/13/encana-petrochina-natural-gas-partnership-alberta_n_2294120.html

    Or bid on new leases and develop new investment plays internally – you don’t need to takeover an existing company to spend all of your cheap capital. If you run the new Nexen CNOOC like a Politburo influenced satellite, however, the top management will jump ship. Or you won’t be able to attract same.

    Don’t be fooled by overly optimistic production forecasts with inflated capital requirements (ie $650 billion) that are being used as scare tactics. A closer look at those numbers and the assumptions underlying them should put the extreme sense of urgency to rest.

    As I have mentioned before, there is no current shortage of investment capital in the oilpatch.

  2. Mintz is arguing that Fed government – the owner of GM and which also distributes billions of $$$ annually in business subsidies – should deny Asian orgs from paying a premium for two mid sized energy companies in order to preserve our blessed free market from any untoward foreigners with $$$.

    It is irrelevant who buys Canadian companies as long as they follow our domestic laws. More fool them if foreigners want to set up inefficient SOEs in order to purchase companies owned by Canadian teachers and retirees. Criticism of the two deals is being written by people with lurid imaginations trying to justify xenophobic twaddle.

    • No, your comment reflects an ignorance and lack of experience of all things oilpatch related.

      This seems to be a constant of the Justin Trudeau/Andrew Coyne/et al “unfettered by nuttin’ ” approach -including how taxes and royalties are paid, and what an oil and gas lease involves – the defacto ownership and control of the hydrocarbons contained therein (hint – it’s not like leasing an apt in Windsor).

      Stick to your “comparative advantage” – the cut and paste of others’ opinions.

  3. Just seams odd that in a nation that has systematically removed itself from state owned enterprises on partial reasoning of competition; that we would green light others state owned enterprises the advantage that we denied our own.

    We’ll subsidize and tax break recklessly but deem state controls to be counterproductive to free enterprise.
    As a worker, a consumer, and as a taxpayer I’m feeling a little underwhelmed at the potential long-term benefits for Canada.

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