Spreading political fertilizer

In opposing the Potash Corp. takeover, is the province protecting Canada’s interests, or its own bottom line?

Spreading political fertilizer

The deal will cost Brad Wall's government $200 million a year | Darryl Dyck/CP

Saskatchewan, says its premier, Brad Wall, is in the world spotlight. “If you were watching the Google trends back in August,” he said at an Oct. 21 speech in Regina, “when the BHP Billiton hostile takeover story broke, you would have seen a real spike in terms of the number of stories with the word Saskatchewan. In fact, we broke our own record in terms of the number of media stories around the world involving the word Saskatchewan.”

The previous record, he added sheepishly, was set after the province’s beloved Roughriders lost the 2009 Grey Cup by having 13 players on the field for a key play. “So there have been some unintended benefits to all of this.”

Not everyone is so sure that attention is a good thing right now, as Wall strives to block the hostile takeover of Potash Corp. of Saskatchewan (PCS) by the Anglo-Australian mining giant. BHP Billiton would derive a bonus from the deal, since it is already building the world’s largest potash mine near the village of Jansen, 150 km east of Saskatoon. The first ore from the site is not expected until 2015 at the earliest, but with BHP and PCS merged, the new company could immediately subtract the capital costs of Jansen from royalty payments that PCS mines are currently contributing. Moving forward, that writeoff is expected to save BHP and cost the Saskatchewan treasury about $200 million a year over the next decade.

Coach Wall’s 13th man is federal Industry Minister Tony Clement, who could use the Investment Canada Act to block the takeover—although that power has been exercised only once in the act’s quarter-century history. Clement’s decision is due Nov. 3. In his Oct. 21 speech, Premier Wall, signalling frantically to Ottawa, glossed over the royalty impacts of the takeover and focused on other issues—the (negative but much smaller) corporate tax revenue effects of the deal, the strategic nature of potash as a “food security” resource, and the effects on the company’s Canadian competitors in the potash market, Mosaic and Agrium. The royalty problem had suddenly dwindled to a footnote.

That’s probably no coincidence. The Investment Act permits the federal government to review takeovers for “net benefit” to Canada. But “net benefit” has a specific itemized definition under the act, a definition consisting of industrial-planning and national-competitiveness criteria. A takeover could be blocked if it hurt Canadian labour productivity or consumer choice, but it’s not clear that anything in the act allows Clement to use it to protect Saskatchewan’s budget balance.

Potash Corp. was privatized by the Saskatchewan Conservatives in 1989. That exposed it, practically by definition, to the possibility of takeover. The royalty regime that is providing incentives for BHP Billiton to swallow PCS was introduced by the New Democratic government that followed, and tweaked further by Wall’s administration. BHP’s investment in Jensen will go ahead with or without a takeover deal, but most economists would say the royalty structure is doing exactly what it was intended to—rewarding investment in Saskatchewan.

Just ask the economist who researched the deal on Saskatchewan’s behalf for the Conference Board of Canada. “I don’t understand why Saskatchewan is doing this,” admits Michael Grant, lead author of the Conference Board’s report on the takeover’s effects. “Its leadership realized, even under the NDP, that they’re competing against Alberta and that they needed a more competitive resource-royalty regime. Lo and behold, it worked. Now they’re waxing indignant about an artifact of their own system.”

The board’s report is emphatic: “Formal provincial opposition to the acquisition of PCS by a private resource company would be seen as undermining the rights of shareholders to sell their PCS shares to the highest bidder.” So why is Wall fighting the takeover? At the very least, shouldn’t it have been a foreseeable consequence of PCS privatization and Saskatchewan royalty rules?

The premier says no. “I don’t know if you can structure your tax regime based on the off-chance that the world’s largest fertilizer company, a company apparently without natural predators, would find one in the form of the world’s largest mining company,” he says. “This would be the largest corporate takeover in Canadian history. We’re content, and I think the facts show, that our royalty incentive plan has been a success in Saskatchewan. We’re glad BHP Billiton sees Saskatchewan as a good place to do business. But we’re required to look at the net benefit of any deal.”

Clement, however, has other industries and other provinces to consider. Ottawa’s reluctance to use the Investment Act to jostle foreign investors has made Canada a net capital exporter, and more than half of the world’s mining companies are registered on either the Toronto Stock Exchange or the TSX Venture Exchange. The industry minister is likely to hesitate over the “benefits” of adding an implied provincial veto, and a heavy helping of politics, to the country’s foreign investment review apparatus.

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