Debate swirls around foreign telco ownership

After an arduous experience sourcing communication services for his company, Nick Rallis says he learned first hand the ugly truth about competition in Canada’s telecom industry: it doesn’t exist.

Rallis, the director of procurement and IT services at Coretec Inc., a printed circuit board manufacturer headquartered in Toronto, took on the ostensibly simple but practically frustrating task of consolidating the firm’s communication systems.

“We were looking at cost reductions,” Rallis said. “When I did my analysis, we were spending a lot of money with a lot of companies to provide our voice and data services.”

Going with one service provider made more sense. So Coretec invited proposals from its current communication providers: AT&T Canada Inc., Bell Canada and Group Telecom Inc. (GT). AT&T provided the company with a T-1 line, Bell brought the telephone service and GT linked the firm’s manufacturing locations to the engineering department with fibre optic lines. Rallis figured they’d each have an equal shot at serving Coretec alone.

He was wrong. Between the three competitors, GT was the only one with a viable option, Rallis said. It’s as if the others didn’t even try.

“AT&T took a while, but eventually came to the table. They said it’s just going to cost too much to get set up. For them the cost of entry – of laying fibre optics – was iffy from an ROI (return on investment) point of view. They didn’t show a lot of interest.”

The situation with Bell was even worse, he said. “We never got a proposal out of them.”

GT, Rallis said, stood apart.

“They had the infrastructure in place, they were able to provide a very cost-effective solution, but more importantly, they were able to present a solution very quickly,” Rallis said, adding that although he’s happy with GT’s service, he’s also disgusted by the way AT&T Canada and Bell treated Coretec. “This whole (telecom) sector is very disheartening, with the level of service it provides.”

Part of the problem, he said, is a lack of competition. “In any market you need two or three viable alternatives – companies that can offer you the same class of services,” and not, for example, one out of three.

Competition has long been a problem in this country’s telecom landscape. Even though the Canadian Radio-television Telecommunications Commission deregulated the local phone service industry in the late-’90s, few newcomers – known as competitive local exchange carriers (CLECs) – survived past 2001.

“I think a lot of the people who went out of business had unrealistic expectations,” said Robert Yates, co-president of Lemay-Yates Associates Inc. (LYA), an industry research firm in Montreal. “The telecom industry always had five to 10 per cent growth when the economy had two to three. For some reason, from ’98 to 2000 everybody went wild thinking these things were going to grow at 40 per cent.”

But the CLECs said the deck was stacked against them. For example, foreign ownership restrictions make it difficult to secure financing from investors outside of Canada. According to the rules, telecom companies cannot invite more than 46.7 per cent from foreign investment.

If the foreign ownership restrictions were removed, some say, the CLECs would have an easier time winning capital and, ultimately, an easier time competing with incumbent local exchange carriers (ILECs) like Bell and Telus Corp. After all, The ILECs have plenty of cash. CLECs should have access to deep pockets, too, the newcomers argue.

“Because of the foreign ownership restrictions, our opportunity to raise equity is limited, so we’re forced to raise more debt, which is more expensive,” said Fiona Gilfillan, GT’s vice-president of regulatory affairs in Ottawa.

The foreign ownership restrictions affect the entire telecommunications industry, said Yates. Investors stay away from restricted markets.

“If I (as an investor) go to Canada, I’m limited, which means my return is limited and I might not be able to sell. It adds to the cost of doing business.”

That’s why even Bell is calling for a review of the rules. “We favour relaxation of anything that pertains to trade barriers,” said Bernard Courtois, executive counsel to Bell and its parent company BCE Inc. Courtois advises the firms on strategic and public policy issues.

But Bell and GT disagree on a method of regulation withdrawal. Although CLECs and ILECs alike say it’s time Industry Canada considered removing foreign ownership rules, the two camps remain at odds about the next step.

GT’s Gilfillan said the rules are outdated and deserve to be tossed immediately. Sure, they’re supposed to help keep Canada’s telecom infrastructure in Canadian hands, but they’re in fact killing the industry, she said. “Had the foreign ownership regime not been in place, I think there would be more (CLECs) around today.”

The restrictions are like misplaced patriotism, Gilfillan said. No matter who owns a telecom firm, “it becomes an asset for all Canadians.”

But Courtois said Canadians are concerned about who owns the communication pipes. “If you go ahead and do something without addressing where Canada’s interests lie, you’re going to find yourself disconnected from the population.”

From Bell’s perspective, the government should remove the restrictions slowly. “We believe it’s more likely that Canadians would like us to take a more gradual approach, not give up control of this sector overnight,” Courtois said.

But if the goal is increased competition, perhaps speed is of the essence, said Coretec’s Rallis. “I don’t think it’s necessarily important to be all-Canadian; I think it’s important that we look at these companies [and see if they] can be viable.”

Courtois said if it’s competition you’re after, just look around. Rallis didn’t find satisfaction with Bell so he went with GT, Courtois pointed out, so there must be options.

“For the local business market there are five players,” he said, naming Bell, AT&T Canada, Call-Net Enterprises Inc., GT and Telus. Even if the investment restrictions were removed, “it’s not clear that you would have more players attracted to this market, because many people think five is already too many.”

Besides, “it’s not as if there’s money waiting to come into this sector,” Courtois said. “I don’t sense urgency among the players, because there’s a fair amount of room to finance.”

According to LYA’s recent report on telecom foreign ownership, Canadian companies on average have 30 per cent foreign investment, well below the maximum 46.7 per cent figure. “So why do you need to increase the per cent?” Yates asked.

Courtois said international trade realities also enter into the picture.

“If you’re going to be negotiating in trade matters, you don’t open up unilaterally without getting your trading partners to give you something in return.” The go-slow approach makes more sense, he said. Courtois added that Industry Canada is considering raising this debate to a parliamentary level.

Judging by his words, foreign ownership is complicated. But for Rallis, it’s simple: the regulations are outdated and they hinder competition in an industry that desperately needs some new blood. It comes down to choice, he said. Fewer foreign ownership restrictions spell greater access to capital and potentially more service providers; that means more competition and, in the heat of battle for Coretec’s business, better service. For Rallis, quality service is what matters most.

“The last thing I want is to get is a phone call saying our communications are down and we can’t produce product,” he said.