The China National Offshore Oil Corporation (CNOOC) takeover of Nexen Inc. led to the emergence of the Harper Doctrine.

Opinion: Issue of state-owned enterprises erratic, unpredictable.

By Jack Austin, Vancouver Sun

At a recent symposium hosted at SFU’s Beedie School of Business and the Jack Austin Centre for Asia Pacific Business Studies, I invoked the baseball analogy of a “diving catch” to describe the Harper government’s recent response to offshore bids for Canadian assets, including the somewhat contentious takeover by Chinese government-controlled CNOOC of Calgary’s Nexen.

That’s because the issue of state-owned enterprises (SOEs) and their investments in Canada is much like a fly ball with an erratic and unpredictable trajectory. This is a case where the prime minister made the sprawling, last-second catch.

On Dec. 7, we saw the emergence of the Harper Doctrine relating to the new role and restriction on SOE investment in the Canadian oilsands. Up until then there was no explicit rule for the role of SOEs in their investment strategies in Canada. Our legislation requires that any investment by any foreign entity, whether non-government or a state enterprise which is larger than $320 million, be reviewed and be adjudicated as to whether it conferred a “net benefit” to Canada. This is largely a subjective test applied by the government of the day, as recent history bears out.

Most business and professional Canadians are aware that the Harper government, struggling with the “net benefit” test, refused a proposed investment by BHP Billiton, an Anglo-Australian company to acquire Potash Corporation of Saskatchewan, itself formerly a provincial SOE. No specific reason was given — only that the bid did not meet the “net benefits” test. Given the precipitous drop in the world price for potash since then, BHP is probably grateful and the shareholders of PCS are not.

The Harper government also declined to approve a bid from Alliant Techsystems, a large U.S. aerospace and defence company, to acquire the space technology division of MacDonald Dettwiler of Richmond, a major researcher and manufacturer of satellite and communications technology. Some suggestions were made that the sale would prevent Canada from future access to that company’s technologies under U.S. law.

The Harper Doctrine is the first SOE-specific policy to emerge, but I should note that it is not law. The Harper government will have to decide whether it is simply a public definition of an aspect of net benefits under current legislation or whether it requires new legislation to prevent a future review by the Courts of the definition of net benefits — something that might be brought forward by disappointed shareholders or by a disappointed provincial government.

In his Dec. 7 statement, which refers specifically to the oilsands and only implicitly to other resource industries, Mr. Harper left himself a “notwithstanding” clause. That is, he made clear that such investments in the oilsands by foreign SOEs might still be permitted in “exceptional circumstances.” The Alberta government predicts that oilsands development to 2022 will require some $120 billion of new investment so there may indeed be exceptional circumstances.

The Harper Doctrine is more than an investment doctrine. It is a position taken with respect to Canada’s bilateral relations with China. Today the Chinese media is citing the approval of the CNOOC acquisition of Nexen as an important step forward in the relationship. What is not emphasized is the disincentive to future investment.

Certainly it is not in China’s interest to broadcast a restrictive policy to the world, but it will be noted in China and elsewhere. It may be of interest to Canadians that restrictive policies in Australia to Chinese resource investments have significantly dropped the number of transactions. Whether coincidence or not, China is looking more actively at Africa, South America and Southeast Asia.

But back to that diving catch. In deciding in favour of the CNOOC acquisition, the Harper government made a commitment to maintaining its present policy of pro-China economic relations. What would have been the consequences to that bilateral relationship of a negative decision? In stating its opposition to controlling investment in the oilsands by foreign SOEs — and the Chinese are the major interested players — the Harper government has come down ideologically on the side of free market enterprise.

The Harper Doctrine is a positive step forward in ensuring that significant Canadian control is maintained in the oilsands sector in the face of strong investment interest by foreign SOEs. It is disappointing in that it says nothing about the situation with mixed government and shareholder companies, and we will shortly see their presence. And nothing is said about sovereign wealth funds, which are active entities of the Middle Eastern oil states. China itself has a $300 billion fund, the China Investment Corporation, which a few years ago invested $1.5 billion in B.C.’s Teck Corp.

New challenges are coming, and new decisions will be required. If Canadians want to maintain control, or at least have large participation, in the energy and resource sector, the Harper Doctrine is only the first step on a long road. Without private Canadian capital in play to maintain a reasonable Canadian presence in the energy sector, will the Harper Doctrine be able to catch the next ball hit its way?

Retired Canadian Senator Jack Austin helped establish the Jack Austin Centre for Asia Pacific Business Studies at Simon Fraser University’s Beedie School of Business, a joint venture of SFU and the Asia Pacific Foundation of Canada.

Click here to view the article in its entirety at the Vancouver Sun.