Liberalize foreign ownership in telecom

By Andrea Wood | Published December 7, 2011
The past few weeks have seen renewed speculation that Canada is about to liberalize restrictions on foreign direct investment in the telecom sector. If the rumours are true, it would signal a positive development for Canadians and competition in Canada.

Canada's foreign ownership rules in the sector are among the most restrictive in the world, and have repeatedly and consistently been identified by experts as limiting Canada's competitiveness and depriving Canadian consumers and businesses of lower prices and greater innovation.

After decades of study and expert reports supporting liberalization, the time to act has come. With the rules for upcoming spectrum auctions about to be announced, it is critically important for the government to act now to liberalize and clarify restrictions on foreign investment in the sector. 

The current rules were enacted at a time when most telecom markets in developed countries were closed to foreign investment. The rules effectively limit the amount a foreign entity can invest in a Canadian telecom carrier. The rules also provide that a Canadian telecom carrier that meets the other more objective tests limiting foreign ownership and control cannot otherwise be "controlled in fact" by a non-Canadian.

Since Canada's foreign ownership restrictions were introduced in 1993, most countries have opened their markets to foreign investment. According to the OECD, of 30 member countries, only three have foreign ownership restrictions that apply to all telecom operators: Canada, Mexico and Korea. And "of the three countries, Canada has the most severe restrictions."

Over the years, experts have studied the rules and arrived at the same conclusion: Canada needs to open up its telecom markets to greater levels of foreign investment. In 2003, the House of Commons Standing Committee on Industry, Science and Technology released a report in which it recommended that restrictions on foreign investment in the sector be removed entirely. In 2006, the Telecom Policy Review Panel recommended a phased approach to liberalizing foreign investment restrictions. And in a 2008 report, the Competition Policy Review Panel also recommended liberalization in phases.

Why? The conclusion reached by these experts was that Canada's telecommunications market was not sufficiently competitive, and the lack of competition was hurting Canadian consumers and businesses because it was contributing to higher prices and lower levels of innovation in the sector. Given the importance of the telecom industry to the economy generally, this was, and continues to be, troubling. 

The government responded to these studies by taking steps to introduce greater competition to the sector. In the 2008 spectrum auction, Industry Canada established several rules, including a spectrum set aside for new entrants that enabled Globalive Wireless Management Corporation and other new players to enter the wireless market. The result of that decision has been substantially lower prices and greater choice for Canadian wireless consumers.

Meanwhile, Canada's incumbent carriers are actively preparing to participate in upcoming spectrum auctions, likely to be held in 2012. If the current restrictions are not lifted soon and in sufficient time to enable prospective bidders to approach investors and negotiate financing on reasonable terms, smaller players may be unable to participate meaningfully in the auction. Spectrum is the lifeblood of the wireless business. Without additional spectrum, new entrants such as Globalive will be unable to compete effectively with incumbent carriers and all of the benefits associated with the introduction of competition in the sector through the last spectrum auction could be lost.

Globalive entered the wireless market after having successfully participated in the 2008 spectrum auction with substantial financial backing from an Egyptian telecom company, Orascom Telecom. After the auction and having paid the Canadian government $442 million for spectrum, Globalive established to Industry Canada that it satisfied Canada's rules relating to Canadian ownership and control. It immediately began the arduous and expensive task of building a wireless network.

Unfortunately for Globalive, its competitors were able to persuade the CRTC that Industry Canada was mistaken in concluding that Globalive satisfied Canadian ownership rules. After conducting an unprecedented public review of Globalive's ownership structure, the CRTC concluded that Globalive was "controlled in fact" by its foreign shareholder, a conclusion that rendered it ineligible to operate as a Canadian telecom carrier. 

After many months of uncertainty, the Harper government issued a Cabinet order overturning the CRTC decision and allowing Globalive to launch its business and to challenge incumbent telecom carriers to offer better service and lower prices to Canadian consumers, but it has not been enough to save Globalive from continuing regulatory uncertainty. To this day, the legal fight continues. 

Public policy shouldn't be dictated by the needs of one company and we are not suggesting otherwise. What we do suggest is that any law that is so vague that it can be interpreted differently by two sets of regulators (with consequences that from Globalive's perspective can only be described as disastrous) needs to be amended.

In this case, not only does the law in our view need to be clarified, its fundamental assumption that foreign investment in telecom is undesirable needs to be revisited. If we were alone in making this suggestion, a reader could be forgiven for concluding that our suggestion is motivated solely by self-interest. But we are not alone and the experts cannot be collectively wrong on this issue. Canada needs to liberalize restrictions on foreign ownership in the telecom sector and needs to do it now.

http://www.embassymag.ca/page/view/telecom-12-07-2011