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Industry spotlight: out of the service area

Canada continues to reject foreign ownership in telecom industry
|Written By Donalee Moulton

The telecommunications industry in Canada is big business. And for wireless and wireline companies, it is exclusively Canadian.

Foreign-ownership restrictions, under s. 16 of the Telecommunications Act, require carriers to be definitively Canadian-owned and controlled. At least 80 per cent of shares must be in the hands of Canadians and at least 80 per cent of the members of the board of directors must be Canadian.  

Those restrictions can be traced back to two concerns, says Kirsten Embree, a partner with Fraser Milner Casgrain LLP in Ottawa and head of the firm’s communications law practice group. “They seem to stem largely from a desire to have Canadians controlling Canadian infrastructure, and there were security issues as well. I don’t think those considerations are relevant today,” she says. “I’m not a supporter of those rules.” Embree is not alone. At least three recent reviews of the telecommunications sector in Canada have concluded it is time to axe foreign-ownership restrictions.

In its “Review of Regulatory Reform in Canada in 2002,” the Organisation for Economic Co-operation and Development determined, “the elimination of foreign ownership restrictions in the telecommunication sector is a key requirement in Canada. “Canada is one of six OECD countries that have restrictions on investment and ownership in public telecommunication operators,” the report said. “These restrictions can impact negatively on the development of competition in Canada in that they effectively limit investment in the sector, increase the cost of capital, and can delay the diffusion of new technology.”

Of the telecommunications companies contacted for this article only Bell Aliant responded. They declined to comment.

Indeed, much of the interest in doing away with foreign-ownership requirements has to do with improving the sector and service to Canadians. “The principal benefit of increased foreign ownership in the telecommunications sector is, of course, greater access to foreign capital. This is particularly important for entrants, who have historically had a higher cost of capital than incumbents,” says Michael Koch, a partner with Goodmans LLP in Toronto. “This is an issue that government should take a serious look at if it wants to ensure that our infrastructure in this country remains a leading one and can contribute to Canada’s productivity and international competitiveness.”

This may also mean happier shareholders. “The benefit to telecom shareholders is clear. More people available to buy their shares will increase their share prices,” says Andrew Roman, a partner with Miller Thomson LLP in Toronto. “The benefit to the public either way is subtle and unclear,” he says. “Unlike broadcasters, who produce Canadian shows, does it matter much who owns a bunch of Canadian wires or transmitters that provide telecom service?”

Many people argue it does, for innovation’s sake. “Companies are not innovating,” says Embree, adding the dominant players in the marketplace are comfortable. “If they were truly competitive they would be racing to get more services and products out there.”

The comfort zone would be given a nudge if new companies with new ideas and new approaches entered the market. In its report, “Compete to Win: Final Report – June 2008, the Competition Policy Review Panel” said, “there is considerable evidence that liberalizing foreign investment restrictions brings demonstrable economic benefit through increasing competitive pressure on all participants in the market.” 

The Competition Bureau of Canada couldn’t agree more. Foreign-ownership restrictions have been a thorn in its side for years. In a speech to the C.D. Howe Institute two years ago, Sheridan Scott, commissioner of competition at the time, reiterated the bureau’s commitment to eliminate these restrictions. “We will continue to advocate for the removal of any barriers to entry by new players, including foreign entrants, who would provide Canadians not only with the benefits of an additional competitor or competitors, but also with access to the innovative services and business acumen that characterize their success.”

She pointed to a report by the McKinsey Global Institute in San Francisco, Calif., which included in-depth case studies in three countries of 20 industries, including telecommunications. “And they reached a conclusion guaranteed to warm the heart of any competition lover,” said Scott. 

The report said, “in sectors where competition was promoted, through the dismantling of regulatory constraints, primarily, innovation flourished and productivity soared. But wherever regulation or other forces warped the competitive environment, competitive pressures eased, innovations failed to develop or to spread rapidly, and productivity growth slackened.”

Allowing for foreign telecom providers may mean lower prices and better service for consumers, says Koch, who served a secondment to the CRTC as legal counsel in 1993 and 1994. “Wireless, for example, is one segment where the greater ability for foreign ownership might have led to the entry by larger international players, bearing powerful brands, who could have driven prices down and offered more options to Canadians. 

“The open question is whether the foreign ownership restrictions effectively prevented these players from entering the Canadian market or whether they could have still done so through investments in Canadian entrants under the existing rules, but chose not to do so for their own reasons. You will find people on both sides of that debate.”

Proponents of foreign-ownership requirements believe there are strong, indeed vital, reasons for leaving s. 16 in the Telecommunications Act. In its submission to the Competition Policy Review Panel last year, the Communications, Energy and Paperworkers Union of Canada highlighted eight key reasons why control of the sector should remain in the hands of Canadians. The CEP contends foreign ownership is a bad idea because it threatens Canadians’ privacy and security rights, it leaves Canada’s telecommunications system vulnerable to external shocks, Canadian law does not apply to foreign investment disputes, and it is not required to increase capital investment. The latter is certainly contentious. “It is unrealistic to expect entrants in the market to rely solely on Canadian sources of funding. There is only so much of that you can do,” says Embree.

Industry Canada recently announced it was opening up the wireless market to new Canadian entrants and the first of those are expected to hit the marketplace as early as October. When the government auctioned off part of the wireless spectrum in 2008, it anticipated drawing $2 billion into its coffers. It raised double that. Those in favour of Canadian ownership view the auction as a vindication that outsiders are not needed for a vibrant industry. Advocates of foreign ownership ask how much more could have been raised.

There is little doubt that the telecommunications industry in Canada is healthy. According to Industry Canada, the information and communications technologies sector had revenues of $59.2 billion last year, a 2.7-per-cent increase from the previous year. Indeed, growth in the sector outpaced that of the Canadian economy. The share of the Canadian gross domestic product attributable to this sector has continued to grow. In 2008, it was the source of 4.8 per cent of Canadian GDP, a figure that has risen in each of the past six years.

Given the economic impact of the industry, it is not surprising that at least three reports have explored foreign ownership recently. What is surprising is the apparent lack of interest to address recommendations for a relaxed regime. “This was a bigger issue when the wireline market was originally opened to competition in the ’90s and there was greater hope for the building of competitive networks,” says Koch. “Since that time, most of those foreign entities with a major presence in Canada have left, whether they be Sprint, AT&T, or BT [formerly British Telecom]. Today the industry is more entrenched, largely along the lines of a wireline duopoly between telcos and cable. It is less clear how increased foreign ownership, per se, would result in changes to the industry structure that we are currently seeing, although there might be some entry in specific niche markets.”

Ultimately, says Roman, “this is really a matter of legislation and government policy preventing non-Canadians from owning Canadian telecoms, not a matter of industry preference.”

Such legislative amendments are unlikely, at least in the near future. “The most direct way to eliminate the rule is to amend the Telecommunications Act, [but] it just doesn’t grab anyone,” says Embree. “Most politicians won’t want to stick their neck out on this one.”