By NICK STEWART
The issue of foreign state ownership in the Sudbury mining camp, an historic Canadian mining asset, should raise more than a few red flags, according to a director of a B.C.-based, pro-business, pro-free trade think tank.
The Brazilian government has a majority stake (53 per cent) in international mining giant Vale, one of the major players in the Sudbury camp that is currently in talks to take over Xstrata Plc, its chief rival in the region.
This kind of state ownership can make a company much less accountable to the checks and balances of the market, says Jason Clemens, the Fraser Institute's director of research quality and resident scholar of fiscal studies.
The company then becomes beholden not to the market and shareholders, but rather to the foreign government, which in turn is accountable only to its taxpayers.
He provides a hypothetical example where a state-controlled firm may require particular outputs, such as nickel, for its own domestic development initiatives. That firm may then opt to accelerate production at its Canadian operations, making large capital investments in order to bring all the nickel out of the ground in a span of 50 years rather than 100. Such a move would not be possible for a market-based firm, as share values would drop due to the reduction of its long-term prospects.
While the community may benefit from increased construction and job creation, it would also suffer by bearing the long-term costs involved with a shorter mine life.
“You want firms that make bad decisions to be punished, and you want their shareholders to pay the price, so there’s a response mechanism,” Clemens says.
“The problem is that when that mechanism is muted, which is what happens when the government owns or even partially owns (it), firms now can make bad decisions and not pay the price.”
Despite these attitudes towards firms in which state governments have a strong equity stake, Clemens is no protectionist towards foreign ownership. Rather, he believes Canada needs more foreign investment, not less, due to “typical under-investment” by most Canadian firms and banks.
Instead, his concern lies with state-involved firms making big moves in Canadian resource economies, not unlike China’s fully state-owned firms looking to muscle into the oil fields of Alberta.
He points to another hypothetical example where a firm with a 53-per-cent involvement from the Brazilian government must close a mine either in Brazil or in Sudbury due to declining commodity prices. While an ordinary, market-run firm would close the one with the highest cost, the state-involved firm would likely opt to preserve the local mine in order to maintain the happiness of its tax-paying, voting public. In other words, political considerations would outweigh business ideals, and Sudburians would have no real political recourse.
“The market knows better than we do, the market knows better than the regulators, and the market knows better than the politicians,” he says. “That to me would be where I would be expressing concerns about what are the implications across a whole number of issues for what is now at least a quasi-government agency owning those assets, particularly as it’s a non-Canadian organization.”
Walid Hejazi, a professor of international business at the University of Toronto’s Rotman School of Management, acknowledges that these fears have some validity, as a state-involved firm may choose to close down a Canadian operation over matters such as international trade disputes.
“A corporation is driven by profit and they’re only going to do something based on how it impacts the bottom line,” Hejazi says. “Governments have latitude to do things based on other criteria.”
However, he repeatedly stresses that the proposed move by Vale is of far less concern than some might think.
In particular, he emphasizes the primary objective of the local operations is to maximize profits within the Canadian mining industry, and this is unlikely to change as a result of a new ownership structure.
Even with some foreign state ownership, a firm engaging in a merger might even be motivated to implement synergies and make other investments enhancing the prosperity of Canadian operations. In fact, he points out that this lessened responsibility to the market may in some cases be a good thing.
As an example, he says a standard market firm faced with a problematic operation may be forced by shareholders to shut it down or reduce its capacity.
A firm with government involvement may instead believe that the material being produced is of interest regardless of commodity prices or operational costs. In that case, it has the ability to make any necessary investments in the operation, thereby preserving Canadian jobs.
Hejazi points out that many concerns arising over foreign firms with state involvement typically centre on countries with prominent human rights issues, such as China or the Middle East. Canadians don’t want to see their resources being used to fund governments with those types of records, he says. While democratic places like Brazil pose little concern in that regard, he takes issue with countries being categorized in this way as “good” or “bad.”
Others, such as economist Mel Watkins, argue that regardless of one’s stance on the issue, it’s a tale of too little, too late.
“You can approve one takeover, and you can find that the acquiring firm is taking over something else, or that the firm itself is being taken over,” he says. “The notion that we can sit here and imagine that there’s just automatic benefits from these things is just unwise.”
Watkins is the author of the 1968 “Watkins Report” on foreign ownership which is often credited with leading to the creation of the national Foreign Investment Review Agency (now Investment Canada).
He says too little time has passed since the 2006 takeovers of Inco and Falconbridge by Vale and Xstrata. As a result, the potential impact any further mergers may have is as yet unknown. This only serves as further indication that Canadian citizens need to be able to slow these kinds of foreign takeovers before they occur in order to understand their true meaning before they occur, rather than after.
“I think that the pace of change is too rapid,” Watkins says. “I’ve often thought that there’s some merit in throwing sand into some of this machinery and slowing it down a bit, even if [the transaction] is for the good, and I’m not always convinced it is.”