This week BHP Billiton ended a disappointing chapter in its history in Canada. A history that, based on my knowledge of the company, will have many more chapters to come. In terminating its effort to acquire The Potash Corporation of Saskatchewan (PCS), it disclosed a summary of the undertakings it was prepared to offer Industry Canada. There is no doubt that, based on precedence, these undertakings should have been sufficient to allow Industry Canada approval.
That said, the transaction was unprecedented in size for Canada ($40 Billion) and impact on a single province, where Potash generates roughly 20% of the province’s annual revenue budget. On this basis the transaction was – as the Prime Minister has called it, “an anomaly.” Certainly previous transactions like Inco, Falconbridge and Alcan had negligible impacts on the provincial finances in Ontario and Quebec. Despite the fact that PCS had moved its head office to Chicago long ago, and even dropped the name Saskatchewan from its brand, Saskatchewan was unwilling to support any change to the status quo. BHP Billiton’s preference to move away from cartel pricing to the free market was pivotal in turning the province against the deal. Not willing to risk any loss of revenue or gamble on free market revenue increases, the myriad of BHP Billiton’s undertakings were spurned. While Federal Minister Tony Clement explained the federal opposition to BHP Billiton’s bid as being based on a net benefit test – Saskatchewan MPs and MLAs were spinning that their last minute intervention successfully persuaded the Federal Government to side with the Province.
So what are the consequences of this decision?
First of all, foreign investors will review Canada’s political risk profile. This was the world’s biggest business story over the past six months. Business media covering the story were surprised that a free market conservative government blocked the deal. A significant element of political risk will now have to be built into the acquisition plans of any foreign investor coming into Canada. I know of two potential transactions that have been altering investment plans because of the Potash decision.
Political risk has also been underscored by the government’s decision to change the Investment Canada Act. Minister Clement and the Prime Minister both want to make the negotiation of undertakings more transparent in the future so that investors can be held accountable. They also want to give greater guidance to foreign investors as to what constitutes net benefit. More on this in a future blog post! These objectives will be helpful, except that the bill will have to be passed in a minority parliament where other political parties with more hostile policies towards foreign investment have the ability to amend the bill. It will be a brave foreign investor who enters into this domestic uncertainty with a major transaction until the legislation is passed.
Secondly, the role of the provinces has to be more carefully considered before embarking on an investment. In addition to Saskatchewan – Alberta, Quebec and Manitoba all raised objections to the Potash transaction because of its impact on natural resource development. While natural resources are a provincial jurisdiction in Canada, it is not too much of a stretch to see Ontario attempting to exercise similar authority over high technology or Quebec over aerospace. The I.C. Act requirement to ‘consult’ the provinces may be evolving to an effective veto when ‘vital’ provincial interests are at stake.
Thirdly, I don’t think we should minimize the impact that the Federal Government’s decision will have on other countries’ investment policies. In times of economic uncertainty, governments often resort to protectionist measures. Saskatchewan and the Canadian Government used Australian examples where foreign investment was prevented in order to justify not approving the Potash acquisition. You can be sure that Potash will now become part of the protectionist narrative around the world and will be used to build the case that governments can pick and choose when investment in its best interests.
The Canadian government will want to reassure investors that Potash was an anomaly but the consequence of its historic decision are just beginning to be felt.