The National Post is Canada’s second largest national paper.
Yuen Pau Woo is president and CEO of the Asia Pacific Foundation of Canada.
A few state takeovers like Nexen deal won’t destroy market
As the clock ticks on the 45-day review period for the proposed CNOOC-Nexen acquisition, at least one thing has become clear: Critics on the left are in rare alignment with critics on the right in their uniform opposition to the deal.
The arguments are of course different. While economic nationalists call for government to block the sale of a private asset, free-market champions oppose the deal precisely because the acquisitor is a government-linked entity. In other words, those who traditionally favour a larger role for the state in the economy oppose a state-owned entity (SOE) buying this asset, and those who traditionally resist intervention in the marketplace support a government decision to block the sale.
At the heart of this puzzle is the fact that CNOOC is a state-owned company from a country that has an economic system that is described confusingly as “market socialism.” The Chinese economic model may not be everyone’s cup of tea, but it is the chosen model in China and there is little likelihood that SOEs will be dismantled in the foreseeable future.
It so happens that when it comes to the oil and gas sector, China’s preference for state ownership is not unique. State-controlled companies account for nearly 80% of the world’s oil and gas reserves. Many of them are already operating in Canada, for example Statoil, Japan Oil, Gas and Metals National Corp., Korea Gas Corporation, CNOOC Ltd., Petronas, and PTT Exploration and Production Public Company Ltd..
Canada chose a different route 21 years ago with the privatization of Petro-Canada. Many in this country who fought so hard for the divestment of government from industry now see the threat of foreign SOE investment in Canada as a kind of back-door nationalization. The concern is on two fronts: that foreign SOEs have a lower cost of capital and hence can outbid private firms for assets in Canada; and that state-run companies underperform private firms in the long run.
If CNOOC was a Canadian state-owned company, I would be unhappy about my tax dollars subsidizing its perhaps too-rich offer to buy Nexen. Chinese citizens may well be upset about the deal, but that is for the Chinese government to worry about. If CNOOC is indeed paying too much for Nexen, hooray for Nexen shareholders. As for whether or not CNOOC has outbid another buyer through its unfair use of government subsidies, there are two points to consider: Nexen has been the subject of acquisition rumours for a long time, including a failed deal with Total of France in 2009, and many other potential buyers would have been state-owned companies as well, given their domination of the oil and gas industry.
It may be true that state-owned companies in general underperform private firms, but research on national oil companies has found very wide variation in their performance, depending in part on the nature of their assets, governance, quality of human resources, and the degree of political interference that they are subject to.
For the rest of this column, please go to the National Post website: http://opinion.financialpost.com/2012/09/13/muddled-thinking-on-soes/