Ownership restrictions are outdated and hinder Canadian success, report states

Canada’s foreign ownership limits in the telecommunications sector need to be changed, but the healthy state of the industry has caused that fact to be overlooked. That is the focus of a study from Wall Communications Inc commissioned by nine telcos. "Current ownership restrictions have imposed unwarranted costs to the Canadian economy in terms of infrastructure development, competitiveness and the government’s connectedness agenda," according to the Policy Study of the Canadian Telecommunications Foreign Ownership Regime. The 100-page report was commissioned by AT&T Canada, Telus Communications, Call-Net Enterprises, Clearnet Communications, GT Group Telecom, Microcell Telecommunications, Optel Communications (now Axxent), PageMart Canada and Vidéotron Communications. The report was completed in January, and just recently released publicly. The study doesn’t challenge the rationale behind the rules, but rather whether the restrictions have been effective in ensuring that the telecom sector would benefit Canada through job creation and economic well being. The federal government did not impose any regulations when it originally legislated the telecom industry, but relied on an unofficial limit of 20 per cent foreign ownership. These guidelines were made into law with the passage of the Telecommunications Act in 1993 and the Canadian Telecommunications Common Carrier Ownership and Control Regulations the following year. But the report concludes the rules have not worked out as originally planned and, in fact, serve to undermine the achievement of those goals. The study notes that the only OECD nations that restrict foreign ownership are Canada, Mexico, Poland, South Korea and Turkey. The survey quotes from a 1999 Statistics Canada report that polled all telecom service providers (carriers and resellers) on the foreign ownership issue. Companies were asked what percentage of the voting shares were held by non-Canadians and what percentage of the parent company’s voting shares were in foreign hands. Because of federal limits, the Canadian telecom industry is generally run by people and companies living in this country. Statistics Canada found that only eight per cent of telecom service providers in Canada are controlled by offshore interests. They are primarily resellers, which are not governed by the ownership rules. But their economic importance is greater, since they account for above average percentages of revenues, employment, salaries and assets (see chart). Wall Communications was not asked to advocate one side or the other in the debate on foreign ownership. It stresses its findings are its own assessments and do not necessarily reflect the viewpoint of any of the nine sponsors. But even with that proviso, the researchers found several reasons for eliminating the restrictions. It notes that Canadian companies pay a higher cost of capital than comparable foreign firms do. Canadians are forced to rely on high-yield debt financing rather than equity financing. Global comparisons suggest nations with heavy ownership limits have lower telecom investment per capita than countries with more liberal investment policies. Canada has done reasonably well on the investment front, the study says, but it pales when compared with the United States, Australia, Japan and some of the states in the European Union. The report contends that companies that trade on the stock market are adversely affected by the system. Canadian telecom shares trade at a lower level than similar firms in other countries. This reduces the overall market value of the Canadian outfit. "The lower market value affects not only the rate at which the company can borrow, but also what it can afford to pay its staff, particularly those at senior levels," the study notes. "In today’s environment, where senior staff compensation often involves compensation through stock options, lower share values directly impact the ability of Canadian companies to attract and retain the best human resources." Similar difficulties arise when it is time for the IPO to be issued. A Canadian IPO tends to have lower value than a similar American one. This results in the Canadian firm having less capital to use than its southern counterpart. "This will manifest itself through a lower ability to hire and retain the best staff," the study states. IPOs and secondary placements in the industry amount to about $650 million per year on average. Some of these funds have been raised by non-telecom firms in other segments of the communications industry. Companies in Canada are also forced to engage in costly and time-consuming monitoring activities to insure rules regarding foreign ownership have not been breached. Not all fears about foreign ownership limits are grounded in fact, however. Some critics of the rules have pointed to anecdotal evidence suggesting that many companies prefer to locate their R&D operations near their headquarters. They argue that the restrictions drive corporate headquarters and research jobs out of the country. Wall Communications isn’t convinced by the argument."We uncovered no formally conducted research which verified the claim," the study states. "We would also note that the anecdotal evidence we examined on the location and clustering phenomena was specific to equipment manufacturers rather than telecom service companies. Telecom research and development is largely undertaken by manufacturers, not service providers." ILECs leading in revenue growth The report concludes that Canada’s telecom industry, as a whole, is profitable. But it adds that, "it is important to recognize that this is largely due to the consistently positive performance of the incumbent telephone companies. In contrast, new entrants have continually struggled to become profitable. This persistent trend in the industry creates concerns for the long term viability of competition in the Canadian marketplace." Relaxing the foreign ownership limits won’t guarantee prosperity for Canadians, but it will help, the report concludes. "We are convinced, however, that failing to respond immediately to existing investment impediments will materially impact the economic potential of the country." (Wall Communications president Gerry Wall is also publisher of Decima Publishing.)

Ownership restrictions are outdated and hinder Canadian success, report states

News | 07/16/2000 4:00 am EDT

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