Backgrounder: Canada

The Harper government is keeping the lid on details its new planned strategy for loosening the rules covering foreign ownership and control of the telecom and satellite industry.

According to newspaper reports, Industry Minister Tony Clement told Ottawa reporters Wednesday that one step will be amending the Investment Canada Act, which allows the government to review foreign takeovers over a certain value, to include the telecommunications and satellite sectors.

But the government may also have to amend the Telecommunications Act and the Broadcasting Act, which have Canadian foreign ownership restrictions.

A look at these pieces of legislation and recent government reports on the industry, may give an idea of where the Conservatives are heading.

In the last seven years there’s been three reports urging Ottawa to take the restraints off  foreign investment in the telecom industry.

One thing the reports have in common is a belief that telecom companies have to be treated the same as cable companies, which are regulated under different laws: The Telecommunications Act for the former, and the Broadcasting Act for the latter. Major telcos such as BCE Inc.’s Bell Canada and Telus Corp. are regulated by both acts because they carry Canadian content over their networks are therefore broadcast undertakings in addition to being carriers. So the three reports condensed here call for changes in both acts to separate carriers’ distribution functions from Canadian content regulations.

In essence, telcos and cablecos would be treated equally for the purposes of foreign investment.

The 2008 competition panel

The most recent report came in 2008 from a federally-appointed panel chaired former BCE Inc. CEO Lynton Wilson asked to look into the country’s competition policy. In releasing the report, called Compete to Win, Wilson said “Canada needs to be more open to competition, as competition spurs the productivity enhancements that underpin our economic performance and ultimately our quality of life.”

To do that, the panel recommended the government follow a 2006 report (see below) and liberalize investment restrictions in the telecom and broadcasting sectors.

That included ammending the Investment Canada Act to reduce barriers to foreign investment by increasing the financial review thresholds (there’s an explanation of those limits later in this article); reversing the onus to require the government to demonstrate that an investment would be contrary to the national interest before disallowing a transaction; increasing transparency and predictability; and preserving a distinct approach for the cultural sector while also initiating a broad review of Canada’s cultural policies;

As the Industry committee recommended, the Wilson review believed the government should allow foreign firms to establish or acquire Canadian telecom companies with less than a 10 per cent market share, and, following a review of broadcasting and cultural policies, further liberalize investment restrictions in the telecom and broadcasting sectors;

 The 2006 telecom review panel

In 2006, the Industry minister appointed a three member Telecommunications Policy Review Panel to recommend a new policy and regulatory framework to ensure that Canada continues to have a strong, internationally competitive telecommunications industry.

Foreign ownership and control wasn’t part of the mandate, but the committee felt that as it was a related issue it couldn’t stay silent. So it penned an afterward on the subject.

Philosophically, the panel believed Canada should rely primarily on market forces to achieve its telecommunications policy objectives. If necessary, regulatory measures should be “efficient, proportionate to their purpose and interfere with the operation of market forces to the minimum extent necessary to meet their objectives.”

So it was no surprise that the panel recommended Parliament “amend the Telecommunications Act to permit the foreign acquisition of a Canadian telecommunications common carrier, if it is in the public interest to do so.”

It making the recommendation, the panel suggested the government avoid controlling telecom foreign investment under the Investment Canada Act, with its “net benefits test.” (For more on this test, see the section on the Investment Canada Act further on in this article.)

It suggested this be done in two phases: First, it noted that major telcos like Bell Canada and Telus Corp. are regulated both under the Telecommunications and Broadcasting Act because they are broadcasting content over the Internet. As a result, the government has to look at making certain changes to the Broadcasting Act so telecom providers aren’t caught when the Telecommunications Act is changed. The panel assumed that would have to be part of a broad review of the Broadcasting Act, which would take time.

Meanwhile, the panel said, the Telecommunications Act should be amended to give the cabinet authority to waive the foreign ownership and control restrictions on telecom common carriers when it deems a foreign investment or class of investments to be in the public interest.

There should be a presumption, the panel added, that investments in any new start-up telecom or in any telecommunications wired or wireless carrier with less than 10 per cent of the market are in the public interest. This presumption could be rebutted by evidence related to a particular investor or investment.

To encourage longer-term investment, foreign investors should remain exempt from the investment restrictions if they can grow the market share of their businesses beyond 10 per cent.

Once the broadcasting policy review is finished, the panel said there should be a broader liberalization of the foreign investment rules to treat all telecommunications common carriers — including cable telecom providers – the same way. There would still be Canadian ownership restrictions on broadcasters.

Finally, the cabinet would retain the authority to screen significant investments to ensure that they are consistent with the public interest.

The 2003 committee report

In 2003, after holding public hearings, the House Standing Committee on Industry, Science and Technology recommended completely removing all foreign ownership restrictions on both telecom carrier and cable broadcast undertakings.

However, the Industry Minister would still be able to reject foreign owners under the Investment Canada Act, which specifies a foreign take-over has to be of net benefit to the country. The CRTC would retain its power to ensure telecom services would be provided at “affordable prices” to rural and remote regions of the country.

In its report, entitled Opening Canadian Communications to the World, the committee concluded that “foreign ownership restrictions have played a role in impeding capital investment by new entrants in the Canadian telecommunications sector in the past decade. They have also been a factor in the recent financial instability of the industry, which saw a number of capital restructurings and bankruptcies. Moreover, since telecommunications is a critical element of the global, networked, knowledge-based economy, these restrictions are also likely stifling Canada’s productivity and economic growth performances.”

Reforms to Canada’s foreign ownership regime would be the first step in a multi-step reform of the telecommunications and broadcasting sectors in Canada, the committee said. Given the convergence between telecommunications and broadcasting, reform of the country’s governance structure for these sectors may also be required.

(Last month CRTC, the federal telecom regulator, issued a discussion paper on the impact of convergence it and the government faces.) 

The law

Canada’s policy on foreign ownership and control of telecom carriers began with the 1993 Telecommunications Act.

It specified that non-Canadians cannot control any telecommunications common carrier that owns or operates transmission facilities. It also limited holdings by non-Canadians to 20 per cent of the voting shares in an operating company and 33.3 per cent in a holding company.

Regulations set under the 1994 Canadian Telecommunications Common Carrier Ownership and Control Regulations set the minimum Canadian ownership level for ownership at the holding company level at 66.6 percent of voting shares. This means that a foreign company that holds 20 percent of the voting shares of a Canadian telecom operating company (direct ownership) can also hold a 33.3-percent stake in the voting shares of a company that holds the remaining 80 percent voting shares of the Canadian telecommunications operating company (indirect ownership), provided that the foreign company does not exercise control.

In essence that means that a foreign company can hold a combined 46.4 per cent of the voting shares directly and indirectly of a Canadian telecom operator.

The Investment Canada Act says the government can review and block foreign investment in specified industries, which includes telecommunications. The limit is $5 million for direct investments, and, starting Feb. 6, $299 million for investors from the 153 World Trade Organization member countries

The Industry Minister has to determine if a foreign investment is of “net benefit” to the country. Under law the factors he has to consider are:

–the effect on the level of economic activity in Canada, on employment; on resource processing; on the utilization of parts and services produced in Canada and on exports from Canada;

–the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada;

–the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;

–the effect of the investment on competition within any industry in Canada;

–the compatibility of the investment with national industrial, economic and cultural policies; and

–the contribution of the investment to Canada’s ability to compete in world markets

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