BCE proposes raising foreign ownership limits to 49% of holding companies

Communications giant BCE Inc. didn’t surprise anyone when its chief executive came out for limited liberalization of foreign investment limits in the telecom sector before the Parliamentary committee studying the contentious issue. The testimony of BCE president/CEO Michael Sabia before the House of Commons Standing Committee on Industry, Science and Technology last week showed that the telecom behemoth is advocating freedom with footnotes. "Bell Canada Enterprises supports the relaxation of foreign ownership rules for the telecom sector," the executive told a packed hearing room on February 18. "Allowing for greater flow of capital is always a positive move. Indeed, we believe the complete removal of ownership restrictions is likely inevitable given the globalization of the world’s economies. That was the easy part. Knowing where we have to go. The hard part is figuring out how we are going to get there." As a first step, BCE suggested an easing of the investment restrictions. The corporation proposed increasing the level of investment in holding companies to 49% from the current 33%, while maintaining the 20% threshold on operating companies. This could be achieved without legislation, Sabia told the committee. After his testimony, the BCE chief, who has been in the position since last April, told reporters the effective ownership rate would increase from 47% to 59% were his plan to be adopted. He stressed that other safeguards would remain for the short term. "In order to keep the issue relatively simple for near-term action, we would leave some of the Canadian control tests in place," he stated. "That is a starting point. It is not a final position, not by any means, but it’s a starting point and it’s better than where we are today." Unions representing many of his employees took a vastly different tack. The day after Sabia’s testimony, the National Alliance of Communications Unions (NACU) appeared before the MPs. The group is a coalition from the Communications, Energy and Paperworkers Union of Canada (CEP), the Telecommunications Workers Union, the Atlantic Communication and Technical Workers’ Union, and Canadian Auto Workers Local 2000. Among them, the organizations represent telecom workers at the five major ILECs as well as AT&T Canada. They are vehemently opposed to changes in the current investment regime. "Loss of economic activity, destruction of jobs and degradation of service are not in Canadians’ best interests," the NACU position paper said. "Lifting foreign ownership restrictions will predictably lead to bigger mergers, greater centralization and consolidation, further job loss, greater deterioration of customers’ service and the relinquishing of direction and control of our industry to business interests headquartered in the U.S." To bolster their case, the unions cited the example of New Zealand, which opened up its telecom market in 1990. Following the move, American telcos SBC Communications Inc. and Verizon Communications bought a majority stake in Telecom NZ. The two firms slashed jobs, sold subsidiaries, and moved profits back to North America. In 1998, a New Zealand government report noted that customers paid too much for local service and that competitors paid interconnection charges that are five times the cost of supplying them. Sharing the podium with the unions, although not their opinions, was McGill University political scientist Richard Schultz. He put forward three points. "The fear of negative consequences that presumably flow from foreign investment in telecommunications has been greatly exaggerated, unsubstantiated and contradicted by Canadian telecommunications history," he told the committee. "The second is that the existing restrictions are not only demonstrably harmful for some of the current and potential players, especially new entrants, but more importantly may undermine the development of a vibrant, sustainable competitive telecommunications system in Canada. If this happens, it is my submission, the government’s innovation strategy will be hostage to the few telecommunications providers that remain. My final argument, not surprisingly, is that the current restrictions should be removed and as expeditiously as possible." The contrasting views at the February 19 proceeding provided the liveliest discussion since the hearings began at the end of January (NL, Feb. 10/03). The volleys between the protectionists and professor illustrated the broadest range of opinions presented to the committee thus far. (Emotions ran so high that committee chair Walt Lastewka frequently asked witnesses to lower their voices lest they disturb the recording system. Schultz volunteered to deliver his testimony from the nearby hallway; CEP administrative VP Ron Carlson quickly added, "I’ll be right behind you.") Schultz strayed from the position held by many pro-liberalization forces when he advocated implementation of a tiered system. He proposed a system, subject to time limits, whereby companies below a yet-to-be-determined market share threshold would have ownership restrictions removed. Those telcos would still be subject to regulatory monitoring by the CRTC. He disagreed with those who maintain such a regime would give smaller competitors an unfair advantage while depriving ILECs of foreign capital. "If an experiment based on market share is not acceptable, the only alternative then is to introduce a licensing scheme for all industry players," the McGill professor continued. "This would have to be a fairly rigorous system, based on explicit public policy objectives presumably based on the articulated fears of negative consequences, with meaningful tests and guidance for the licensing authority. It would also require monitoring and annual public reporting by that authority." The CRTC would be the best vehicle for such monitoring, he added. The day before Schultz made his proposal, Sabia had rejected such an idea. "Licensing raises the prospect of uncertainty and added burdens which tend to discourage rather than attract investment," the BCE head told the committee. "Tiering is both arbitrary and discriminatory. It discriminates against the shareholders of those firms selected for restrictions by artificially limiting the market for their shares. And it reduces these firms’ incentive for investment in new facilities." Throughout the hearings, witnesses have stressed that foreign capital is just one piece of the puzzle. CLECs, ILECs and others have stressed the need for regulatory reform. Sabia added his voice to the discussion. "I think foreign ownership is a piece and no more than a piece of what has to be done in terms of securing the future of tele-communications in Canada. I think the regulatory regime is extremely important. I think it’s fundamental," he told Network Letter. "I think maintaining a clear focus on facilities-based competition, which is based on real economics, that’s how we built the quality of telecommunications in Canada that we have. That’s how we built the level of competition in these markets that we have today. That is a global success story and we ought not to change it." A few minutes after Sabia testified, the committee heard a concrete example of the complications the current restrictions are placing on companies. Anthony Keenleyside, a partner in the Ottawa office of law firm McCarthy Tétrault LLP, spoke on behalf of American utel Dominion Telecom Inc. About a year ago, the Virginia company acquired the assets of bankrupt telco Telergy Inc. through an indefeasible right of use (IRU) agreement. The network included backbone running from Montreal to Albany. "To put the Telergy acquisition into a Canadian perspective, that purchase raised Dominion’s route miles to a total of nearly 10,000 (or more than 16,000 km)," Keenleyside explained in prepared remarks. "The Montréal to Albany fibre – which is the only asset that Dominion has in Canada – is a total of 48 route miles (or about 77 km). This is less than 0.5% of our total system by route miles and less than that in terms of valuation, given the low purchase price of the Telergy assets." Dominion said it is not looking to expand its operations in this country, but it would like to exploit them as best it can, acting as a carriers’ carrier. "Unfortunately, it appears that Dominion may have inherited a possibly illegal situation from a non-Canadian vendor, who itself apparently may have been offside the Canadian ownership and control requirements," it said. Under questioning from the committee members, Keenleyside reminded them that the CRTC does not have the ability to change the laws. Opportunities could exist for utels if the regulations were amended. One MP asked the Ottawa lawyer if Dominion is unique or if other firms are in the same boat. "I can’t give a broad answer," he replied, "but ask any telecom lawyer in Canada and he’ll say ‘yes.’" The scheduled witnesses for this week are the CRTC, Competition Bureau commissioner Konrad von Finckenstein, the Canadian Cable Television Association, l’association québécoise de l’industrie du disque, du spectacle et de la vidéo, l’Université du Québec à Montréal, and trade consultant Gerry Shannon.

BCE proposes raising foreign ownership limits to 49% of holding companies

News | 02/24/2003 5:00 am EST

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