Industry Committee on April 15th, 2010

[Chris Peirce]

Okay.

After FIRA was dissolved, domestic ownership went up. Today, almost 50% of the industry is owned by Canadian-based companies that can freely access global capital, and many of those Canadian companies are globally competitive.

Today, most Canadians recognize that our economy has matured and that ideas and approaches that may have helped us in the last century won't work in the 21st century. Most Canadians understand that Canada can and should compete with the global community to attract the investment that leads to innovation, jobs, and long-term prosperity, while building Canadian entrepreneurs and companies that can compete at home and abroad.

We are the most reliant nation on foreign trade when measured against our GDP. It is in our DNA to be able to survive and thrive in the international marketplace. As essential as a modern and competitive telecommunications marketplace is to the digital economy, there is just no rationale for erecting barriers to the investment and foreign players that we require to achieve our own ambitions. Indeed, we should signal to the international investment marketplace that Canada, with its strong currency, enviable fiscal situation, vibrant labour pool, and access to the massive NAFTA marketplace, is committed to growth through investment and to being an incubator of next-generation communications networks and enterprises.

The investment equation for large incumbents versus competitors is very different. Competitor investment, which is crucial to greater competition, lower price, and greater choice, especially in the business market, is entirely risk-based. The stakes are higher, the risks are greater, and the necessary risk capital far less available from Canadian sources. As a result, competitors have often been reliant on foreign debt, and, for the past number of years, largely absent.

Conversely, the large incumbents, whose ubiquitous networks were in significant measure funded by the foreign capital now not available to competitors, can leverage their economies of scale and free cashflow to significantly but incrementally invest in their existing networks. This investment is inherently less risky and consequently inherently more attractive to Canadian sources of investment.

The consequences of this asymmetry are tangible. Our small and medium-sized business community in particular is characterized by lagging innovation and adoption of new technologies, which is directly linked to their lack of competitive choice for next-generation telecom services. For example, Canadian retailers lag their U.S. counterparts by about four years in online sales, according to Statistics Canada.

Our goal in opening up investment in our telecommunications industry is clearly to encourage the development of leading-edge infrastructure. In today's environment, that infrastructure transmits to Canadian consumers telecommunications services and TV signals. To be clear, the government can and should lift the foreign investment restrictions related to this carriage, while retaining the ability to regulate content, and indeed continue, if necessary, to restrict investment in broadcasters and programming licensees.

There is no slippery slope here. There is a clear line between content, on the one hand, and carriage on the other. Consequently, it is, in our view, indisputable that the proper policy, legislative, and regulatory tools can be employed in support of the important objectives of protecting and promoting Canadian content and culture.

No doubt, as when the government moved to open up the wireless market to greater competition, there will be resistance from those whose interests favour the status quo. However, the status quo doesn't serve our national interest or the interests of Canadian business and consumers. The status quo has led to higher prices, the slower adoption of new technologies, and less choice.

We commend you on your review of this important set of issues and urge you to take action to assist in Canada becoming a more competitive, productive, and innovative nation.

I apologize for my pace.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Peirce.

We'll now have an opening statement from TELUS Communications.

[Michael Hennessy, Senior Vice-President, Regulatory and Government Affairs, TELUS Communications]

Thank you, Mr. Chair. I will speak more slowly.

[Carole Lavallée, Bloc, Saint-Bruno—Saint-Hubert, QC]

You can speak French, wonderful.

[Michael Hennessy]

Thank you.

We appreciate this opportunity that you've presented to TELUS to give you our views on whether or not to liberalize the restrictions on foreign ownership of telecommunications. We would agree not only that this is an issue of national importance, but it's an issue that we believe Parliament, and only Parliament, can and should decide on.

Let me sum up our presentation in a few quick messages.

Premièrement, any new rules cannot advantage foreign investors to the detriment of Canadian companies. So we're saying fairness requires equal treatment for all Canadian carriers.

Deuxième, Parliament must recognize that communications today is an integrated business and you cannot effect change without changing the Telecommunications Act and parts of the Broadcasting Act at the same time.

Troisième, liberalization that does not include integrated companies not only will damage the competitiveness of Canadian companies but it will reduce the benefits of liberalization for all consumers.

Quatrième, culture is not impacted by liberalization because it is easy to separate the ownership of broadcast channels from the transmission of these channels on carrier systems.

For the record, TELUS has long supported liberalizations of the rules for all carriers, including cable and satellite companies, while still maintaining these restrictions with respect to the ownership of broadcast channels, radio and TV. The Canadian market, like the U.S. market, is unique in terms of a much greater degree of competition between cable and telecom carriers across all markets. Virtually every communications carrier in Canada today carries voice, video, and data traffic over integrated networks, and as a consequence there is no way to fairly change our ownership restrictions unless we liberalize both carriage, under the Telecommunications Act, and carriage, not content, under the Broadcasting Act at the same time.

We remain convinced that you can change the Broadcasting Act only on the carriage side to achieve the full benefits of competition without undermining our cultural objectives. All that is required is a rule prohibiting foreign-controlled carriers from owning broadcast stations or TV channels.

So with respect to investment, a principal argument supporting liberalization is that Canadian enterprises are not competing or investing sufficiently. Even though we support full liberalization, we reject this argument. Ten years ago, TELUS simply did not exist as a national company. TELUS was just another regionally based local telephone company operating out of Alberta and British Columbia and parts of eastern Quebec.

We now compete across Canada for wireless, for small business, for business enterprise solutions. We're Canada's leading video conference provider and we're Canada's number one e-health service provider, and we hold some of the major contracts in terms of business data services today.

In the west and eastern Quebec, TELUS competes head-to-head for phone, Internet, television, and wireless companies, and we have accomplished this because over the last ten years we have invested $20 billion in capital to grow from that regional telephone company into a multi-service national competitor in business, wireless, e-health markets. How much have we invested? TELUS has maintained over this period of time the highest wireline reinvestment rate among major North American companies and competitors. Our capital investments from 2001 across the entire business exceed 20% of total revenues. By comparison, if you look at Verizon or AT&T, they have not had a single year since 2006 in which their total capital investments reached 20% of their revenues.

We have invested in Canada, both when and where it counts, including areas of the country where no foreign investor is likely to ever consider investing, and in the depths of this recession we increased our capital spend by 13%, at a cost of lower share price. We increased it to $2.1 billion and built what is recognized as one of the largest and most advanced wireless networks in the world. In fact, our 3G wireless network, which is wireless broadband, now reaches 93% of Canadians with world-leading advanced services. In 2010 we're investing over $1.7 billion in a fibre-supported Internet TV build in western Canada and eastern Quebec, in order to increase competitive intensity in the cable and the Internet market.

So these investments have produced real competition, real jobs, and real consumer benefits where clearly none existed before.

We agree that full liberalization of the foreign direct investment restrictions on carriage can lower costs and increase choice and increase innovation as long as Canadian companies are treated fairly.

Where Canada differs primarily from the U.S. today is that we lack scale. More scale translates into lower costs, more investment, and more opportunity to reduce price. So for us, the issue is fundamentally one of scale. Therefore, any change that does not allow all Canadian companies to equally benefit from scale opportunities will be changes for the worse, since Canadian carriers still have the largest territory to serve and the smallest population, among the OECD countries, to fund investment. In fact, it has the smallest population of any of our trading partners.

That goes back to my point that any changes should ensure that companies that continue to invest in Canadian employees, Canadian infrastructure, and Canadian communities, rather than in only the most profitable businesses, such as wireline, or the biggest cities, such as Montreal and Toronto, are not harmed by these changes.

Canadian companies rely on integration, and the cross-subsidies that allows, to keep all our businesses viable. As much as we need scale to grow, we need integration. If asymmetric policies undermine that in the name of wireless competition or cultural protection by restricting domestic carrier growth, we think the integrated carrier model in Canada will begin to fall apart.

The Canadian system has always benefited from a level of cross-subsidy, be it from urban to rural or from growth business to high-cost segments. That remains true today. In Canada today, wireless is the growth engine that generates the revenues and the earnings that support reinvestment in next-generation broadband and telephone networks. This is a critical point to consider. Growth businesses, such as wireless or Internet, support declining businesses, such as telephony. That does not mean that growth businesses should be insulated from increased competition. That's why we support removing the rules. Rather, competition, and particularly foreign-based competition, should not be advantaged by handicapping Canadian companies.

Liberalization has to be as fair to Canadians as it will be to foreign entrants. That is why, we submit, Parliament should support liberalization for all carriers. Unless all carriers are able to benefit from liberalization, the opportunities from increased scale, such as lower prices or more investment, will be consequently diminished for many consumers and communities. That is also why fairness dictates that both broadcast distribution, the carriage element, and telecommunications carriage must be changed at the same time.

Merci. I look forward to your questions.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Hennessy.

We will have about 30 minutes of questions and comments from members of this committee, beginning with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

Thank you for your testimonials. I know that you were in the audience at nine a.m., so you're not going to be surprised by the questions I will address to you.

Again, if you can, please give me a short answer. In your opinion, did the government use a different set of rules when it decided that Globalive satisfied foreign ownership requirements with respect to the Telecommunications Act?

[Mirko Bibic]

I think the control-in-fact test has been around for quite a while in telecommunications and the airline industry, and it was fairly consistently applied with not too much controversy for many, many years. I think there was a departure from that in the Globalive case. But I believe, based on what the chairman of the CRTC has said, that in future reviews he will continue to use the precedents that have been established over many years.

[Chris Peirce]

I think the Globalive saga just demonstrates the unworkability of a qualitative test like control-in-fact. That is in addition to the concrete elements of the tests that exist today and the problem of two regulators interpreting a subjective test in succession. It's not the first controversial instance. We had one when we were Unitel that was similarly decided by the control-in-fact test. So I think that more than right or wrong or new or unusual, it just demonstrates that with a qualitative, subjective test, you are constantly going to have this possibility in front of you.

[Michael Hennessy]

Yes.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

My second question has to do with whether or not any of the three companies that I'm looking at right now are maxed out with respect to their foreign ownership limits, with respect to the Telecommunications Act.

[Mirko Bibic]

I'll give you an answer, but the answer allows me to explain why we think the 49% rule that was proposed by the CRTC--and that we endorse--would be much better than the rules we have today. The very short story is that Bell Canada is the operating entity, and under today's rules the maximum is 20%. BCE is the publicly traded company, and under today's rules the maximum allowable limit is 33%. You'd think that we'd been operating at our limit of 33% for all these years.

In fact we were not for this reason: BCE owned a broadcasting license, and for that reason was capped at 20%. The reason we owned the broadcasting license was that we wanted to take advantage of tax losses we were suffering in our TV business.

The short story is that we were forced to choose between more foreign investment or tax treatment. We chose tax treatment, and now we have a 33% limit because that's been resolved. We're nowhere near the 33% limit.

If we had the 49% rule we're endorsing today, we would have had the flexibility to manage the maximum foreign investment and manage any other benefits under the tax rules or anything else. That's why this is a much better model than what we have today.

[Chris Peirce]

We were maxed out as AT&T Canada when we had to choose between bankruptcy and survival. Consequently, all that foreign debt, in addition to the maximum foreign equity, was written off.

We're not maxed out now because foreign investment in terms of new entry in Canada is just not interested. You heard from Shaw, I think, on the previous panel that Canada is a small market to begin with, and the rest of the world in terms of capital markets has pretty much decided that in telecom, we're a closed shop.

We certainly discovered that in conversations before the wireless auction and in discussions with a number of potential funders or international players. It goes back to my message that a number of the existing players in Canada don't have the same need of foreign investment that new entrants or competitors would need. I'm speaking of our competitor end of things on the Allstream version.

[Michael Hennessy]

Yes. We're not right now, and I think I would agree with Mr. Peirce on a couple of points.

We have had higher levels of foreign ownership. But to the extent that people putting significant amounts of money into a company are not allowed to control that money, there's less incentive to do it. I think one of the bigger issues that is often overlooked is that if you have a good business case or business proposition to sell, you can get access to capital.

If you have a very high-risk business proposition--like we have seen for a lot of new entrants in the wireless business--then it's difficult to get access to capital regardless of what the ownership rules are.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

You have all indicated today--if I'm not mistaken--that it seems impossible to look at greater foreign ownership, if that was a decision taken by the government, without opening up both acts, or at least one part of the Broadcasting Act. They certainly pointed it out in their throne speech. Yet the government has said that the Broadcasting Act is not open for discussion at this particular point.

I tend to agree with you that it seems difficult to do it, given convergence today. The CRTC chairman floated the idea of unifying the three acts that we're all familiar with. I'd like to have your opinions on that.

[Mirko Bibic]

We endorsed the flexibility with increased liberalization of foreign investment at the 49% level, but that's a completely separate question from unifying the acts.

We could achieve greater liberalization, whether or not it's 49% or the models espoused by my colleagues without having to unify the acts. I don't think it's necessary.

[Chris Peirce]

There are two things that appear intractable in Canada. One is opening up broadcasting. I think broadcasting in this sense.... I don't know, but I'm wondering if the government was not referring to that big-picture broadcasting by which you mean culture, which I think both Mr. Hennessy and I referred to. It's the difference between carriage and content, content being culture.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

No. My interpretation is that the act is not going to be opened. That was what I was told.

[Chris Peirce]

In terms of the models that are put forward, there are certain other recommendations that are put forward where you might not need an amendment to the Broadcasting Act. Arguably, the recommendations in the Wilson report could be done at the first stage without opening up the Broadcasting Act.

But I agree that in terms of the infrastructure that's carrying things, you should be opening up both for BDUs and for carriage to really make the effort worth it. As I would say parenthetically, there is no point in liberalizing to get from an effective rate of 46% ownership to 49%. In my mind, it's just not worth the effort.

[Michael Hennessy]

I can think of nothing worse than a regime that continues to restrict broadcast carriage. The reason is that if all the carriers in the country are unable to benefit from this because they have integrated networks, then the benefits of this simply don't flow to consumers, because 90% of the market remains closed. So you end up in the same situation as this partial step whereby a limited number of what you would call new entrants--although I don't call companies with more subscribers than the population of Canada new entrants--Verizon, AT&T, Deutsche Telekom coming into the wireless business, eroding that market, which as I suggested is the primary source of subsidy for the declining telephone business, without any opportunity for Canadian companies to respond to play on the same playing field. So it's better to do nothing than to do something partial like that.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Hennessy and Mr. Garneau.

Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

Good morning, gentlemen, and welcome.

The problem when you go second is that a number of issues have already been addressed. To my mind, the government or the OECD has it all wrong when it says that we lack innovation. On the contrary, I think we are innovative. Certain reports, other than the government's and the OECD's, even say so, for that matter. Now we see we are front and centre and at the heart of the problem. What percentage of foreign investment should we allow, and to what extent?

TELUS recommended total liberalization. Bell, however, recommended liberalization up to 49%. The chairman of the CRTC was also in favour of the 49% threshold, but he did not mention anything with respect to broadcasting. So the issue could be debated rather extensively. One thing is certain: why go beyond the 49% threshold in telecoms when we know full well there is convergence? As my colleague said, the one who controls the medium also controls the content, when all is said and done.

I want to know what you, the other two stakeholders, think—it is somewhat innovative, but not necessarily without risk—of Bell Canada's proposal to open the market to foreign ownership up to a limit of 49%. That also includes all integrated carriers, which would mean a certain measure of equality as well as an impact on broadcasting companies.

[Michael Hennessy]

Yes, certainly.

As the OECD said the other day, broadcast is subject to very stringent regulation, and the nationality of the owner of the cable company really doesn't matter in terms of picking and choosing programs. If you had no regulation today, I'm sure the Canadian or American cable provider would end up choosing the most popular programming, which is often American in the English market, regardless of ownership.

[Serge Cardin, Bloc, Sherbrooke, QC]

That does not exclude good regulation in terms of broadcasting. You cannot say there would be no more regulation.

[Michael Hennessy]

Yes, and what I say is you can protect culture through good regulation, irrespective of which capitalist owns the company.