Commentary: Less regulation key to Canada becoming a leader in the digital economy

The debate around Canadian rules governing foreign ownership and control in the telecom sector has been reignited by the federal government's recent decision which allowed mobile services provider Globalive to enter the Canadian market, overruling a CRTC determination that the company is not under Canadian control. The government's action highlights the fact that Canada has long been criticized for having amongst the most restrictive rules in the world and raises questions about the need for greater liberalization of the existing restrictions. For almost a decade now, there have been calls for reform. In 2003, the House of Commons Standing Committee on Industry, Science and Technology recommended that the Canadian ownership requirements relating to telecommunications carriers be completely abolished, including the prohibition against foreign control. Three years later, following a comprehensive review of the sector, a blue ribbon panel chaired by Dr. Gerri Sinclair expressed concern that the existing ownership restrictions were preventing Canada from reaping the benefits of greater foreign investment. These include transfers in technological expertise, improvements in management and marketing know-how, and reduced costs of capital, all of which lead to better quality and pricing of telecom services. In light of these positive considerations, the Telecom Policy Review Panel recommended an initial loosening of the rules, to facilitate greater investments, in particular by new players. Most recently, the Competition Policy Review Panel, chaired by "Red" Wilson, reached a similar conclusion, noting that the existing restrictions are inconsistent with Canada's current economic policies in favour of greater reliance on market forces and that they discourage the competitive intensity that is likely to bring benefits to consumers, including lower prices and greater innovation. They called upon the government to proceed with the phased approach recommended in the Sinclair Report, with its focus on strengthening new competitors. So given these calls for reform why has there been no legislative response? At the time of the Wilson Report, some concern was expressed that foreign investment was resulting in a "hollowing out" of Canada as well as reduced R&D spending and the loss of skilled workers to other countries. This issue is not specific to the telecom sector, however, and must be traded off against the benefits that global competition can bring, such as the opening of new markets to Canadian corporations and the potential for attracting new investments and expertise to Canada. In the end, the panel noted that a growing number of top ranking companies are Canadian-owned and headquartered and concluded that Canada is better served by opening its markets to competition. Second, and more directly related to the telecom sector, is the question of public safety. Communications infrastructure can play a key role in national security and many nations, such as the United States, Japan and France, have longstanding processes for reviewing foreign investment for national security concerns. In March of this year, the Canadian government took a similar stance when it amended the Investment Canada Act to provide for a specific Cabinet review of foreign investments on national security grounds. All transactions can now be viewed through this lens, regardless of the size and nature of investment. While the scope of this review has not yet been fully tested, it should provide a mechanism to address potential security issues. The third and perhaps most challenging issue relates to the implications of liberalization for the broadcast sector. Cable companies and telephone companies compete increasingly in the same markets and fairness would seem to dictate that both should have equal access to foreign capital. Opening up the market under the Telecommunications Act might therefore lead to parallel changes under the Broadcasting Act resulting in the liberalization of the entire broadcast sector. Indeed, this possibility led the Standing Committee on Canadian Heritage to reject the Industry Committee's call for changes to the telecom rules, on the grounds that this could have a serious impact on broadcasting content and do irreparable harm to the Canadian broadcasting system. Leaving aside the question of whether Canadian content rules could be adequately enforced against foreign-owned companies, there is an important distinction to be drawn between the creation of content and the carriage of content, with the latter having significantly less impact on cultural expression and national identity. The Europeans have recognized this difference by separating their "content" rules from their "carriage" rules. Such an approach might provide a useful framework for considering liberalization of foreign ownership rules in the communications sector, one that could take on considerable significance if Canada decides to move ahead more aggressively in pursuing a strategy for the digital economy. The importance of developing such a strategy cannot be overemphasized. According to the British Prime Minister, the move from analogue to digital technology is an essential part of building Britain's future. The Australian Minister for Broadband, Communications and the Digital Economy has characterized the digital economy as key to Australia's productivity, global competitive standing and improved social wellbeing. A central feature of this strategy, in the case of both these nations, is providing current broadband services on a universal basis and moving quickly to invest in next generation infrastructure. In some cases, this will bring speeds that are 100 times faster than current standards. This focus on communications networks is not surprising given the benefits that have been documented by several organisations. A 2009 study by the World Bank, for example, suggests that an increase of 10 per cent in broadband penetration in high-income countries correlates with GDP growth increases of 1.2 per cent. The development of next generation networks comes with a sizeable price tag. The Australian government, for example, has committed to invest up to $43 billion (Australian) in upgrading broadband networks through a partnership with the private sector and, in the United States, AT&T intends to spend more than $11B this year to expand its broadband network while Verizon plans to spend over $23B on fibre over the next seven years. Given the size of these investments, Canada may find that any desire to move aggressively in this direction could be hampered by its foreign ownership restrictions, causing it to fall further behind on this critical investment in the future. Liberalizing the rules only for those companies engaged in carriage activities may require cable companies and others to modify their corporate structure somewhat to maintain Canadian ownership and control for any of their content activities, such as specialty services. However, it would also give them access to a much broader pool of capital and increase Canada's chances of encouraging the types of expenditures that we will need to make if we wish to be leaders in the digital economy. Sheridan Scott is a partner in Bennett Jones LLP and former commissioner of the Competition Bureau.

Commentary: Less regulation key to Canada becoming a leader in the digital economy

Broadcast | January 13, 2010

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