Ottawa to outline options on foreign investment

The telecommunications industry will finally see this week what the Harper government has in mind for liberalizing foreign investment in the sector.

Industry Minister Tony Clement told a telecom conference in Toronto on Monday he will release a “relatively short” discussion paper with three options for allowing more direct offshore investment in wireline and wireless companies. He wouldn’t detail the options, but said there will be different ones for incumbent carriers and new entrants. This has been suggested by several reports in the past three years as a way of ensuring smaller companies can compete against giants like BCE Inc.’s Bell Canada, Rogers Communications Inc. and Telus Corp.

The goals of any changes are “increased innovation, increased competion, better service and better prices for consumers,” Clement said.

The government wants to introduce leglisative changes in the fall.

Exactly how the government will distinguish between an incumbent and a new entrant isn’t clear. For example, Bell, Rogers and Telus are clearly incumbents. But cableco Shaw Communications, which is has been a major Internet and local phone provider for years in Western Canada will be a new entrant in wireless when it launches service next year.

Clement told reporters after his speech to the Canadian Telecom Summit that he couldn’t present his options to the recent Commons Industry committeee hearings on foreign investment because they hadn’t been approved by cabinet.

The committee is expected to present its report on possible options before the month ends.

Clement said he wants to hear from the telecom industry and from ordinary Canadians about the government’s options. He said the consultation won’t be long.

The present Telecommunications Act specifies 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.

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.

Clement said his proposals will only deal with direct foreign investment.

In his speech, Clement said that “having a dynamic telecom sector is a must have,” that is “vital to our future prosperity.” But he noted a federal report on competition three years ago said the sector needs more investmemt to help it grow.

He emphasized that the Harper government believes the private sector and not government should determine business outcomes. In 2006, he reminded the audience, the government directed the federal telecom regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), that it must rely on market forces and put less emphasis on regulation. “I want to assure all of you today that we have not strayed from that approach,” he said.

But he then went on to mention a controversial area where the government did intervene, by setting aside spectrum in the 2008 AWS/PCS wireless auction for new entrants against the protests of incumbent carriers that there is already more than enough celluar competition in the country.

Clement said the debut of new entrants like Wind Mobile, Mobilicity and Public Mobile in the past five months is “good news for competition in the industry.”

Although some companies such as Rogers and Bell are broadcaster entities through their cable, satellite and IPTV operations as well as telecom carriers, Clement said the government`s proposals will only apply to the telecom side. That raises the possiblity that these carriers might split off their telecom assets to get foreign investment.

On the other hand, some industry and financial analysts are skeptical that there will be a big influx of foreign investment here in telecom unless the investors can have control of the companies.

One exception has been Egypt’s Orascom Telecom S.A.E., which invested heavily in Wind Mobile’s parent, Globalive Wireless Management Corp. The CRTC said the investment was deep enough that Globalive wasn’t Canadian controlled. However, the Harper cabinet overruled the commission.

Although the government said that decision wasn’t a precedent, it angered many in the industry who wondered what the investment rules are.
There have been a number of federal or parliamentary reports urging the government to liberalize foreign investment in the telecom industry. For example, in 2003, the House of Commons Industry committee urged the government to entirely remove the existing minimum Canadian ownership requirements on telecom carriers, including the requirement of Canadian control. Other reports have recommended liberalization only for carriers with less than 10 per cent of the market for five or 10 years to give them a chance to grow, after which the rules would be lifted for all carriers.

But incumbents have made it clear they want any liberalization to apply to call carriers regardless of size or market share.

In his speech Clement also said the government has no intention of touching the Broadcasting Act, under which cable and satellite companies are regulated. The industry is also puzzled by this approach, saying it doesn`t make sense to modify the investment rules in the Telecommunications Act but not ammend the Broadcasting Act which affects many telecom carriers.

After Clement made that declaration last month before the Industry committee Ken Englehart, Rogers` vice-president of regulatory affairs, said it was illogical because cable and phone companies each deliver voice, data and video over a single wired network.

Public attention has focused getting competitive investment in the wireless industry, where Bell, Rogers and Telus have more than 90 per cent of the market. However, other providers will welcome foreign investment changes as well. For example, in an interview at the conference Bryan Boyd, CEO of TeraGo Networks said liberalized foreign investment rules would lower the cost of capital to his firm. TeraGo provides fixed wireless braodband access to businesses in suburban and rural areas across much of the country. One of TeraGo’s initial investors was Dolphin Equity Partners of New York City.

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