A capital conundrum

“O Canada! Our home and native land! Foreign investors, stay out of telecom…”

OK, Canada does not have a new national anthem, and foreign investment is welcome in telecom, as long as foreigners don’t aspire to majority control. Why bother investing serious money if you can’t make serious decisions?

That’s the conundrum foreign investors face when thinking of investing in Canadian telecom companies. That’s the reality Canadian telecom companies take to market when searching for foreign dollars to help them roll out telecom infrastructure in a vast country that is sparsely populated, other than in the Windsor, Ont. to Quebec City corridor and several other urban pockets.

Canada’s Telecommunications Act of 1993 established foreign investment restrictions. To be eligible to operate in Canada, a telecommunications common carrier must be a “Canadian-owned and controlled corporation.” The Act specifies that a corporation is Canadian-owned if no less than 80 per cent of the members of the board of directors are individual Canadians and Canadians own not less than 80 per cent of the corporation’s voting shares issued and outstanding.

In 1994, the Canadian Telecommunications Common Carrier Ownership and Control Regulations set the minimum Canadian ownership level for ownership at the holding company level at 66 and two-thirds percent of voting shares.

Canada differs from much of the developed world in terms of foreign ownership restrictions. Austria, Belgium, Czech Republic, Denmark, Finland, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, Netherlands, Portugal, Sweden and the United Kingdom have no foreign ownership restrictions. In the United States, 20 per cent of capital stock of a common carrier radio licensee may be foreign-owned, a level that can be exceeded unless FCC determines that foreign ownership is not in the public interest. Wireline common carriers, however, are not subject to these restrictions.

Somehow, Canada ended up in the same camp as Turkey. After a telecom monopoly ends in Turkey next year, new licences will require not less than 51 per cent equity by Turkish citizens, according the Organisation for Economic Cooperation and Development.

In Canada, however, on April 28, the House of Commons Standing Committee on Industry, Science and Technology recommended removal of all restrictions on foreign ownership of telecom carriers and broadcasting distribution (mainly cable and satellite) companies. Has Canada found the political will to change what many regard as antiquated telecom foreign investment regulations?

Nobody is holding their breath in anticipation.

“News reports left the impression that the change is a done deal and will be implemented quickly. We doubt it,” telecommunication analysts Ian and Lis Angus wrote recently in Telemanagement, the Ajax, Ont.-based Angus Telemanagement Group’s monthly newsletter.

Even without the federal Liberal leadership race and the election that no doubt will follow, the Committee’s recommendations would still have to move through a slow-as-molasses political process and the passing of legislation before the government made and enacted a decision.

“We know the process. We are just not sure of the timeframe,” says Allan MacGillivray, a director in the telecom policy branch of Industry Canada.

Says Ian Angus: “While it’s never safe to predict what politicians might do, it seems very unlikely that the committee’s proposals will be put into effect this year.”

The committee’s recommendations, with which Angus agrees, apply to telecom and cable companies. This means proposed changes would require major amendments to the Telecommunications Act and the Broadcasting Act. “Changing one Act takes time; changing two takes longer,” Angus says.


Political and legislative time aside, there is, interestingly, no consensus among Canada’s telecom players as to what impact lifting foreign investment restrictions will have.

“Our position has been consistent since we addressed the Standing Committee,” says Bill Linton, president & CEO of Call-Net. The question of foreign ownership “is not the most pressing issue facing our industry today.” Access to capital is not holding back competition in Canadian telecom; the lack of opportunities to earn a return on investment is, he says.

Linton supports the liberalization of the ownership restrictions, in theory, but adds that in the absence of domestic telecom policies and regulation “that clearly encourages competition…a quick move to change the foreign ownership restrictions will have the opposite of the desired effect for existing competitors.”

Without a level playing field, lifting restriction will allow incumbent telecom companies to raise more money and further stifle competition. They have “thrived under the current regulatory rules,” he says. “A favourable decision would offer absolutely no short-term relief to companies like ours, because the issues facing competition are far more basic than access to foreign capital.”

If a competitor to the incumbent telecom companies opposes the lifting of foreign investment restriction, at least until there are other regulatory changes, then it should come as no surprise that one of the former monopoly players supports the initiative.

“Telus supports the adoption of any measures that will promote competitive markets, further the government’s telecom policy objectives and provide consumer benefits,” said Jim Peters, Telus Corp. executive vice-president, corporate affairs and chief general counsel. “Telus’s support for eliminating or relaxing the foreign ownership limits is, however, conditional upon symmetrical foreign ownership limits for all Canadian telecom companies and the complete harmonization of foreign ownership rules for both telecommunications and broadcast distribution.”

One might think, then, that Allstream (formerly AT&T Canada) would disagree with Telus and side with Cal-Net. However, Allstream welcomes the recommendation on lifting foreign investment restrictions. “We’re way behind the rest of the world. This is going to happen and when it does, it will be a huge positive,” says Chris Peirce, Allstream’s senior vice-president, regulatory and government affairs.

He goes further than Telus, calling for the lifting of restrictions on telecom investment separately from those on broadcast distribution so that Canada’s telecom policy does not get needlessly mixed up with the nation’s cultural policies.

In many countries, cable is dealt with in the same way telecom is, as long as it is a carrier of content, not a developer or broadcaster.

“If you want to preserve broadcasting foreign restriction for cultural sovereignty purposes, do so with integrity. Hive off the telecommunication part, especially for new entrants,” says Peirce, who agrees that the telecom market itself has to be more open to competition. “Foreign investment, along with regulatory framework, is what the government needs to get right. The time to move on investment and regulatory issues is now,” he says, vowing that Allstream will continue its pursuit of a “competitively neutral regulatory environment,” including the lifting of foreign investment restrictions.

The parliamentary committee clearly recognized that foreign investment restrictions had a disproportionately negative impact on new telecom entrants, Peirce says. Implementing the Committee’s recommendations and removing the restrictions would help companies such as Allstream pursue sources of investment capital they cannot access under the current rules. This will encourage a greater choice of suppliers, more innovative products and services and competitive prices, he says.

When it comes to raising capital, there is now an “unbalanced advantage” that favours the incumbents, he says. If BCE needs a billion dollars, they can sell off an asset, as the former monopoly did when Bell Canada sold its directories business for $3 billion to the U.S.-based buyout firm of Kohlberg Kravis Roberts (KKR) and the Ontario Teachers’ Pension Plan.

However, Bell also supports the relaxation of foreign ownership rules, and feels policy makers have the responsibility, the opportunity and the time to get the right long-term system in place. “Relaxation of Canada’s foreign ownership restrictions is likely inevitable, given globalization of the world’s economies,” says France Poulin, a Bell Canada spokesperson.


So will the government move on the Committee’s recommendations?

The Committee’s proposals represent the views of a small group of MPs, heavily influenced by advice from Industry Canada, a department that by its very nature favours increased investment of all kinds, in all industries, but other departments have interests and their views may be different, says Angus.

For instance, Canadian Heritage will be concerned about any change that might reduce Canadian control of cultural industries such as broadcasting. The Department of Foreign Affairs and International Trade will ask how a unilateral change in telecom ownership policy might affect Canada’s position in the next round of World Trade Organization negotiations.

Even if the investment restriction were lifted tomorrow, Canadian telecom companies would not see an immediate influx of capital, says Mark Quigley, research director, Yankee Group in Canada based in Ottawa. The market is stagnant, he says. Long term, Canadian telecom companies would be able to dive into deeper pools of capital to fuel expansion plans.

Even without the broadcast and cultural considerations, foreign investment is a complex issue, he says. With an increase in foreign investment, Canadian telecom companies could become branch plants in this country and decisions that have a direct impact on telecom and data services in Canada could be made in other countries.

For instance, a decision could be made outside Canada that an Alberta data line from Edmonton to Lloydminster is not profitable and should be cut. There would be very little recourse within the country to fight the decision.

Peirce, however, points out that the CRTC will be around to set rules and regulations and monitor such decisions.

That begs the question: Just as the FTA and North American Free Trade Agreement (NAFTA) have removed some of the government’s decision-making capability, will wide-open foreign investment in Canadian telecom companies turn the CRTC into a toothless tiger?

If it does, Cal-Net’s Linton might get the level playing field he desires: one with no restrictions and one in which the market decides the nature of telecommunication services in Canada.

But which market would call the shots? The telecom customers or the telecom companies left standing in a totally deregulated marketplace? It is, as many observers state, a complex issue. The hope is that the complexity of the issue will not lead to government inertia, as doing nothing seems to be the only non-viable alternative, not if Canada wants to maintain its telecom infrastructure and foster telecom competition from sea to sea.

Paul Lima is a business, technology and telecom freelance writer. He can be reach atwww.paullima.com.

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