The liberalization of foreign ownership – a false dilemma

The existing restrictions on direct foreign investment in the telecommunications sector are without merit. The rules create a disincentive for investment in transmission (read local broadband) facilities; they increase the cost of capital for Canadian firms; and they are detrimental to healthy domestic competition in telecommunications. Moreover, the rules do not serve any public policy objectives that cannot be otherwise achieved through other means. These are strong statements that will no doubt elicit a response from economic nationalists who will no doubt argue that Canadian ownership is itself a valid and important policy objective. A more careful examination of the issue by reasonable people will, in my view, confirm that the above statements are correct and that the government must act on the issue sooner rather than later. While the concept of sovereignty is hard to define in economic terms, economists have suggested that in the broadest sense it can be understood as a desire by governments to pursue social policy objectives through the control of domestic corporations — controls that often involve income distribution or other re-distributive policies. A second element of sovereignty relates to the issue of security in critical infrastructure industries such as telecommunications, transportation and financial services. The simple truth is that these concerns can be – and are – addressed through domestic regulation of the industry. Restrictions on the beneficial ownership of a commercial enterprise add no further benefit. In fact, quite the contrary is true. The effects of limiting ownership are detrimental to the industry. Two examples of this are as follows: The first is that by applying ownership restrictions to Canadian carriers and not to resellers of services (who own no facilities), we have established an incentive for foreign firms to compete in the Canadian market but not to invest in the construction of facilities. A second example relates to the financing requirements of Canadian carriers. Canada’s own public policy objective of leadership in information technology and Industry Canada’s "Connectedness Agenda" are dependent on investment, access to capital and technology, which in turn are affected by the presence of foreign ownership restrictions. In the next few years, billions of dollars will be needed to add further network capacity for both wireless and wire line services and to develop and introduce new telecommunications services for Canadians. There is also the explosive potential of the Internet, electronic commerce and new media services. As the industry makes the massive switch to IP-based networks, the transformation will require enormous amounts of capital and access to the technology. Cost of capital inflated Unfortunately, Canada represents only two to three per cent of world capital markets and this is insufficient for the realization of the full potential of the Canadian telecommunications industry. Current foreign ownership rules cannot support the size of the investments required in Canada or the flexibility required by companies determined to be viable competitors at home and internationally. The complex ownership structures that currently exist are not attractive to foreign investors or potential strategic partners. As a result, many Canadian carriers have an inflated cost of capital. Higher cost of capital is disadvantageous to all Canadian carriers, but it is particularly harmful to newer and smaller entrepreneurial companies. So what should be done and what rules are required? The government should remove all restrictions on foreign ownership of Canadian carriers in order to promote investment in facilities and to encourage more healthy domestic competition. As stated earlier, domestic regulation by the CRTC is sufficient to ensure Canadian sovereignty over telecommunications. All Canadian carriers are subject to the commission’s jurisdiction and government policy objectives – social and economic – can be attained through regulation. If other legitimate public policy objectives are identified (for example, law enforcement issues or national security), they too can be addressed through government regulation under the appropriate statute without the need to impose ownership restrictions. Policy more restrictive Nor is it appropriate to delay liberalization of the current regulations for trade policy reasons. It makes little sense to maintain a policy that is detrimental to the domestic industry in order to obtain concessions in future multi-lateral or bi-lateral trade negotiations. This is particularly true given that Canada’s policy is much more restrictive than those of our major trading partners, and they are unlikely to make any meaningful concessions. Indeed, they obtain an economic advantage if the rules are maintained. The time has come to abandon a policy that has served its purpose. Ian Scott is VP government affairs for Call-Net Enterprises.

The liberalization of foreign ownership – a false dilemma

News | August 13, 2001

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