Are we ready for changes to foreign direct investment in telecom in Canada?

The recent Communications 2001 conference in Toronto featured a panel on the future of foreign ownership restrictions in Canada. Among the participants was Chris Peirce, VP regulatory and government affairs for AT&T Canada. An abridged version of his opening remarks appears below.It is fair to say that we like to tout ourselves as one of the most open, liberalized economies in the world. Indeed, Canada sets goals for itself in terms of the proportion of the world’s foreign direct investment we are able to attract. We understand the importance of capital and specifically foreign capital to achieving our national economic objectives and furthering our national interest. We more specifically describe ourselves and have as a goal to be a global leader in the new economy, to be a truly connected nation.We are also interested in Canada being thought of as extremely competitive in this new economy, not just the purveyors of natural resources to the world. And that makes sense: being seen as a leader in the new economy will facilitate growth in trade which is crucial to our continued economic well being. How will we capture such a leadership position? Well, amongst other things, by improving the means by which we communicate to the world about who we are, what we produce etc., by empowering our citizens and businesses as they seek out new markets and customers, and by empowering our citizens and businesses as they variously develop, acquire, use or market new technologies or products. Accomplishing that empowerment obviously involves continued investment in our communications network, in facilities, services and technologies that connect us with each other and with the world. The burden of proof should be on those who would retain the restrictions to justify why the national interest requires Canada to restrict investment in an industry so important to achieving our national goals through growth, investment and innovation. So the question shouldn’t be: Are any changes required? The question should be: Are the restrictions still required? So, in that context, what are the consequences of the restrictions for the telecommunications industry in Canada and more especially for the competitive providers of telecommunications services? And the effects of the restrictions need to be considered in the context of a competitive market in telecommunications. The government has chosen (rightly from our perspective) a competitive framework as its path to achieving our national goals in this area. As a result of the restrictions and the risk profile of all of the CLECs, we are effectively reliant upon foreign debt to fund our investment. How is the national interest served by forcing competitive Canadian carriers to rely upon foreign debt to fund their investment in Canada? CLECs, it is said, are too highly leveraged. Well of course they are, the restrictions require them to be. They can’t raise equity in Canada, can’t raise equity in U.S. without going offside restrictions. They are effectively forced into a debt profile. Debt for CLECs is already trading well below 100 cents on the dollar, because of risk and debt profile and continued restrictions on international partnering. Capital markets are effectively shut to new entrant telecom community. To compete with the ILECs (who have over 90% share of relevant markets) a ‘well funded’ strategy is required and CLECs can’t be too reliant on debt (to paraphrase expert testimony on behalf of the ILECs at Price Cap hearing). Well, restrictions require that to be well funded, a CLEC has to be reliant on debt. As Peter Harder indicated at a conference, the only OECD country with similar restrictions is Turkey. Clearly, the existing restrictions are not consistent with the face we want to display to the world. Countries that were behind us are now ahead The U.S. is the classic example here. We legislated our restrictions coming out of the free trade agreement negotiations, because the U.S. had similar restrictions then. Since then we’ve had the WTO created within the context of which many nations, including the U.S. but not including us, have liberalized restrictions as they relate to telecommunications. So effectively, we stepped back to come into line with the U.S. and they have now stepped forward and left us behind. We know that this new economy requires continued investment in telecommunications infrastructure. Even with the bandwidth glut, companies that want to compete in the communications space have to continue to invest to grow and to survive. Canada requires that investment. It is inimical to our national goals to prevent that investment from occurring. In fact we are falling behind in our per capita investment in exactly this type of infrastructure. One of the Prime Minister’s best quotes to my mind was when he referred to the fact that there was nothing so nervous as $1 million of potential capital investment. We are obviously scaring away that nervous money. So to those who would argue for the continuation of the restrictions, how are the restrictions in the national interest and why should they be continued? What about control over infrastructure? I suggest the task is ensuring a communications infrastructure that is state of the art and continues to be so. Canada’s national interest is in having that infrastructure available to access the globe with our products and services and vice versa. The very essence of this new economy and what Canada wants to be is that the value from the national perspective is in the enablement, the ideas, products, opportunity, knowledge that Canadians can send or access on the wire or fibre, it’s not in the physical wire or fibre. In fact, the debate if there is one, to my mind hearkens back to that age old Canadian paradigm we are trying to break out of: do we want to own and control the physical asset (hewers of wood and drawers of water) or do we want to leverage the physical asset to allow us to leap ahead in technology, innovation, knowledge. What of the loss of head offices? The short answer here is to note the place touted as the most entrepreneurial city in Canada with the second greatest number of head offices in Canada, after Toronto: Calgary. Are there ownership restrictions in the Canadian oil patch: no. And even with the spate of acquisitions over the last couple of years Canadian ownership is significantly greater than when restrictions existed. You create the environment that goes with what I think we mean when we refer to head office location and all that with critical mass, investment environment, tax policy, economies of scale, a host of things but it is surely past time when you do it by legislative fiat. This will be the slippery slope to opening up the broadcasting laws, some say. Not according to the rest of the world. The rest of the world has separated broadcasting from telecommunications and has in almost every case liberalized for telecommunications but maintained restrictions for broadcasting. In fact, I would argue this is the best means of strengthening appropriate restrictions over broadcasting. By clarifying and reiterating the restrictions on broadcasting, we make the same distinction the rest of the world has made. You would surely not be surprised to hear that most Canadians think AT&T Canada is already American. I would suggest that Canadians are savvy enough to know that most if not all major players in Canadian telecommunications have global partners. What Canadians will react to is the failure of competition attributable to government policy in a sector that touches far more Canadians than the airline sector. Canadians want choice (including the right to buy Canadian, no doubt), they want state of the art products and services, and they want the continued benefits of competition. We must proceed deliberately over the next few years. If the restrictions don’t serve the national interest, they don’t serve the national interest and should be removed. Is someone seriously indicating that they know the restrictions serve the national interest now but won’t in a few years? I suggest that type of positioning is a bit cute. Especially in this uncertain climate when we should be taking all sensible measures to encourage economic activity, we should not be letting that very uncertainty stem our willingness to act. The government has it right that we must still be committed to the innovation economy and to the ability of the Canadian economy to bounce back. But that logic has application well beyond the simple question of how much money the federal government is willing or able to spend or to use to bail out specific industries . . . it has obvious application to freeing up the private sector to invest what it can.

Are we ready for changes to foreign direct investment in telecom in Canada?

News | November 19, 2001

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Are we ready for changes to foreign direct investment in telecom in Canada?

News | November 19, 2001

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