Analysts slam foreign ownership restrictions


What’s the worst that will happen if a foreign company acquires the majority of voting shares of a Canadian telecommunications carrier? Will they pull the cabling and take it away? Outsource all the service jobs to China? No one seems to be able to answer this question, but for nearly 20 years, the Telecommunications Act has made it mandatory that 80 per cent of directors – and shareholders – of telcos be Canadian.

Brownlee Thomas, Montreal-based principal analyst with Forrester Research Inc., was surprised when the law was passed because it came into force around the time Canada signed the North American Free Trade Agreement.

“It appears to be very archaic on the part of Canada,” she said. “We talk about NAFTA when it’s convenient.”

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The issue reared its ugly head this week when the Canadian Radio-television and Telecommunications Commission (CRTC) found Globalive Wireless did not meet the federal foreign ownership rules.

The law

Telecommunications Act says a firm can operate as a “telecommunications common carrier” if it is Canadian owned and controlled.
Sub-section 3 of the Act stipulates that a corporation is Canadian if
• it is owned and controlled if -not less than 80 per cent of the members of the board of directors of the corporation are individual Canadians;
• Canadians beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than 80 per cent of the corporation’s voting shares issued and outstanding; and
• the corporation is not otherwise controlled by persons that are not Canadians.”
This is controversial because some companies believe they need to raise money from elsewhere in the world.
In April, 2003, when the Liberals were in power, the House of Commons Standing Committee on Industry, Science and Technology recommended that foreign ownership limits be lifted.
Three years later, a panel appointed by the federal government made a similar recommendation.

Status Quo

But the minority Conservative government has no intention of touching the issue.
A spokesperson for Industry Minister Tony Clement confirmed last month the government does not plan to review or change the law.
“If we applied the same foreign investment rules that we have in telecom to the oil patch, there wouldn’t be a barrel of oil coming out of Alberta,” said Eamon Hoey, senior partner at Toronto-based Hoey Associates Management Consultants Inc.

Hoey, who made his comments the day Calgary-based Harvest Energy Trust agreed to be bought by Korea National Oil Corp., said many Canadian companies in the insurance and petrochemical industries are owned by foreigners.

“The investment community in Canada does not have the resources to fund startups that require huge amounts of capital,” Hoey said. “If you’re Globalive, you’re DAVE or Public Mobile — much of that investment has been gathered from the U.S.”

Hoey was referring to three companies that spent millions on wireless spectrum licences from Industry Canada last year and plan to offer cellular service.

Data and Audio Visual Enterprises (DAVE), recently announced it got a $125 million loan from ING Bank of the Netherlands.

New entrants

As for Globalive, the majority of voting shares are held by its Canadian chairman Anthony Lacavera. But most of its funding was provided by Egypt-based Orascom Telecom Holding SAE, which loaned Globalive more than $500 million and has a say in major capital expenditures.

Incumbent carriers, including Telus, argued this flies in the face of the Telecommunication Act stipulation that a carrier which meets the Canadian ownership requirements not be “otherwise controlled by persons that are not Canadians.”

Orascom’s owner, Naguib Sawiris  insisted during testimonry before the CRTC that he does not control Globalive.

The veto power Orascom obtained over large expenditures resulted from his company’s legal team securing “minority shareholder protection rights,” Sawiris testified.

On Thursday the CRTC issued a ruling stating in part that it “finds that Orascom has the ongoing ability to determine Globalive’s strategic decision-making activities …  the Commission finds that Globalive is controlled in fact by Orascom, a non-Canadian.

It made the ruling on the grounds that Orascom holds two-thirds of Globalive’s equity, is the principal source of technical expertise and provides Globalive “with access to an established wireless trademark.”

Globalive’s lawyer, Hank Intven, told the CRTC during the hearings that a minority shareholder may have “influence” over a carrier provided it does not “dominate” the decision-making process.
Intven is a partner at law firm McCarthy Tetrault LLP and served on the federal government’s Telecommunications Policy Review Panel, appointed in April, 2005 when the Liberals were in power under Prime Minister Paul Martin.

The panel released its report in March, 2006, two months after a federal election brought the Conservatives to power in a minority government under Prime Minister Stephen Harper. The panel recommended a “phased liberalization” of the foreign ownership rules and that Cabinet review foreign investments using a “public interest” test.
The Industry Minister at the time, Maxime Bernier, responded by saying he would “carefully review” the report.
Last June, CRTC chairman Konrad von Fickenstein said during the annual Telecom Summit he could not see “how you can have a Canadian broadcasting system that is totally foreign owned.”
When asked whether telecom carriers, as opposed to broadcasters, should continue to have foreign ownership limits, von Fickenstein replied: “What’s the difference? We are in an age of convergence.”
But Thomas argued the government could stipulate that any time a foreign-owned telecommunications firm operated a broadcaster in addition to a telecom “common carrier,” that federal Broadcasting Act could apply.
When asked to respond to criticism of the law, Clement’s spokesperson simply reiterated that the government does not plan to change or review the law.
“Why those laws have not been repealed is a matter of political will,” Thomas said.
Hoey does not criticize the Conservatives for not moving on foreign ownership because they depend on the other parties in the House of Commons to remain in power.
“It raises the hackles of nationalists and this government is interested in retaining power as long as they can,” Hoey said. “If we had a majority we’d be talking a different tune.”
The Telecommunications Policy Review Panel was not the first government-appointed body to recommend a change to the foreign ownership rules.
In April, 2003, the House of Commons Standing Committee on Industry, Science and Technology released a report titled Foreign Investment Restrictions Applicable to Telecommunications Common Carriers.
Based on months of hearings, the report recommended the government mandate  a five-year review of the rules and draft a law removing the restrictions.
It cited testimony from competitive local exchange carriers and wireless providers who claimed they could not raise enough money in Canadian markets alone.
“Foreign ownership restrictions are just one of a number of impediments they face in making inroads against their well-established rivals,” the committee stated. “The type of investors they seek cannot easily be found in Canada, but they can be found in the United States and possibly in other foreign capital markets.”
Hoey said as it stands, the foreign ownership restrictions are a barrier to new entrants, an a barrier to competition in the wireless industry.

“The reason we’re paying high rates and the reason these carriers are unresponsive is they don’t have to be,” he said. ”In eight of the 11 regions in Canada we have one carrier that dominates that market, meaning (it has) at least 50 per cent of (total) subscribers.”