Finance Committee on May 30th, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 65th meeting of the Standing Committee on Finance. We have two panels this evening, colleagues.

I want to thank our witnesses for waiting for us. I apologize for the vote tonight.

During our first panel, we have five organizations presenting. We have BCE Incorporated and Bell Canada; the Communications, Energy and Paperworkers Union of Canada; Mobilicity; Public Mobile; and Wind Mobile. Welcome to all of you.

You will each have up to five minutes for an opening statement, and then we'll have questions from all members.

We'll start with Bell Canada.

[Mirko Bibic, Executive Vice-President, Chief Legal and Regulatory Officer, BCE Inc. and Bell Canada]

Good evening, Mr. Chairman and members of the committee.

Thank you for this opportunity to present Bell Canada's views on Bill C-38.

The government has said these changes, along with the proposed rules for the next spectrum auction, have three objectives. First, sustained competition in wireless telecommunications services. Second, robust investment and innovation in this sector. And third, availability of advanced services for all Canadians, including those in rural areas, in a timely manner.

Canada's wireless industry is admired around the world. We have three major national carriers with the scale to offer advanced wireless services, including the latest HSPA-plus and LTE technologies, to 97% of Canadians from coast to coast to coast. Counting the new entrants, many of whom are here today, major Canadian cities such as Toronto, Montreal, and Edmonton have no fewer than five wireless providers and up to 11 different brands to choose from. Even the U.S. can't claim such a level of competition, and the same is true of most other countries. In fact, Bell's service plans for the Apple iPhone and the Apple iPad are cheaper than AT&T's.

Another major reason Canada is a world leader is the almost $20 billion in wireless capital expenditures Bell, Rogers, and Telus have invested since 2003, generating more than $40 billion in total economic value annually and employment for almost 300,000 Canadians.

As to coverage, consider this: P.E.I. received 4G high-speed wireless services in 2009, before Chicago. It's no wonder many countries view Canada's wireless industry with envy.

Many countries also have a similar opinion of Canada's banking system, and we now take great pride in that, but there was a time not so long ago when many thought we had serious problems with our banks. Recent history has proven those views incorrect.

The same is true of our wireless industry, so Bill C-38 is a solution in search of a problem. Coupled with aspects of the proposed spectrum auction rules, it opens a Pandora's box of unintended consequences, including negative impacts on Canadian consumers, especially in rural areas.

Under Bill C-38, all foreign ownership restrictions would be lifted on telecom carriers with less than a 10% share of national telecom revenues. This will create a two-tier capital structure in Canada's telecom market, with one set of rules applying only to Bell, Rogers, and Telus, and another applying to all our competitors, including recent domestic entrants or foreign companies seeking to enter. These changes, together with the proposed auction rules, clear the way for any foreign giant to acquire two blocks of prime 700 MHz spectrum, while Canada's national carriers, those that invest billions in all areas of the country, urban and rural, are limited to just one block.

What does Canada get in return? Can you imagine the U.S. government ever allowing Bell Canada to have a more privileged access to the U.S. spectrum than companies like AT&T and Verizon? Can you imagine the U.S. ever implementing a two-tier capital structure that gives special advantages to foreign companies over domestic carriers? I don't think we can—yet that's exactly what Bill C-38 and the auction rules will do here in Canada.

Foreign companies that enter will be able to skim the cream from Canada's largest, most lucrative markets. Will executives in Texas or Germany invest first in Edmonton, Canada's fifth-largest market, or Phoenix, the fifth-largest in the U.S., with twice the population; Hamilton, Canada's eighth-largest market, or San Diego, the eighth-largest market in the U.S., with more than twice the population; or Rimouski, Canada's 72nd largest market, rather than Buffalo, the 70th largest in the U.S., with almost eight times the population?

Worse still, these entrants will have no obligation to serve rural areas.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Mirko Bibic]

Okay.

It would be a mistake to assume that Canada's national wireless carriers are impervious to such advantages being given to foreign companies. These advantages can and should be avoided, given the thriving competitive market we have in Canada today. There are two ways to achieve this. First, Bill C-38 could be amended to increase levels of permissible foreign direct ownership for all Canadian telecom and broadcasting companies to 49% from the current 20%. Second, at a minimum, the government must adjust its spectrum auction rules to reduce the risk of unintended consequences. This can be achieved by ensuring that all bidders for spectrum are subject to the same spectrum caps when large foreign companies enter the auction, instead of being subject to rules that give those massive foreign companies a 2:1 spectrum cap advantage.

All Canadians benefit from a strong and innovative Canadian-owned communications industry. To give large foreign companies special advantages over our own puts this at risk and that is neither sound public policy nor in the public interest.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We're going to go in the order I read, so we'll go next to Mr. Coles for his presentation.

[David Coles, President, Communications, Energy and Paperworkers Union of Canada]

Thank you very much. I do appreciate the opportunity to present to you.

I'm Dave Coles, the national president of the Communications, Energy and Paperworkers Union. We represent approximately 40,000 workers who work on all aspects of telecommunications for many employers. Our primary message to the government today and to this committee is that we are diametrically opposed to this kind of change to the telecommunications regulations being thrust into an omnibus bill.

You heard the representation from Bell about the amount of capital that's expended. It's a very serious issue. The sale of spectrum is complicated and not easily done. I'll present it to you in five minutes. Unless there's a paragraph or a page or so missing, this is the sum total of what's in the bill: this little piece of paper. That's it. This is far too serious. You need to break it out and deal with this. This is a huge economic driver for our country. It has a great impact on business, the economy, jobs, and culture. A whole wide range of issues can be dealt with, but they can't be dealt with when they're buried inside a bill like this.

When you look at the 10% rule, there are no rules on the 10% rule. What does it mean? Well, MTS is less than 10%. Carlos Slim could buy MTS with pocket change. He's the richest man in the world and he owns many telephone companies. He could buy MTS with all of its integrated services and compete directly against Canadian companies with no restriction. There is no limit on the amount of money. If Bell were to allow it, he could buy the independent company called BellAliant—less than 10% of the market with a full basis of services. A foreign company could buy an entire telephone company in Canada and have no restrictions. If you say there are restrictions, where are they? They're not here. I would just plead with you to break it out, to bring it in as a piece of legislation, and to have a national discussion on what is in the best interest of Canada, the economy, and our culture.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now go to Mr. Wong for his presentation.

[Gary Wong, Director, Legal Affairs, Data and Audio-Visual Enterprises Wireless Inc., Mobilicity]

Thank you very much for inviting us today. On behalf of Mobilicity I am very pleased to be here to submit this presentation.

I would like to start by giving Mobilicity's perspective on some of the challenges and difficulties of a small carrier starting up in Canada.

As you may know, Mobilicity was one of several new entrants that entered into the market for the supply of wireless telephone, messaging, and data services in Canada. For $243 million, Mobilicity obtained spectrum in the AWS auction in 2008 and its entry ticket to compete in the Canadian wireless industry. Many more millions of dollars and a few years later, Mobilicity now serves Ottawa, Toronto, Vancouver, Calgary, and Edmonton.

Like other startup companies, Mobilicity has had to overcome many challenges before seeing success: misinformed consumers who are locked into legacy contracts with outrageous termination fees; incumbents that create flanker brands or give their existing flanker brands a complete makeover just to avoid competing with us head to head using their main brands; mandatory regulations such as roaming and tower sharing that did not transpire exactly as planned because of mandatory rules, but negotiated terms. That is just to name a few.

Spectrum and capital are two common challenges that wireless startups face. How do we ensure that we acquire enough spectrum to minimize any capacity issues with respect to our customers and enable us to build our own next big thing—commonly known as LTE—the same way the incumbents have already done from the extra spectrum they acquired or were gifted years ago? Indeed, how do we scream above the loud voices of the incumbents who keep telling people they need more spectrum to meet capacity needs, when in fact they already hold more spectrum than most other carriers in the world?

If spectrum is the real estate land that one acquires in order to build a beachfront hotel, then one must raise enough capital to construct and promote this beachfront hotel. Millions of dollars are required to purchase spectrum, build networks and IT systems, and market the brand, just to name a few. I would like to mention that these millions of dollars must all be spent before Mobilicity sees a single dollar of revenue in return. After Mobilicity starts receiving revenue from its customers, millions of additional dollars will be required to purchase more spectrum, expand and build a faster network, improve capabilities of the IT systems, and for more marketing and promotions.

This only illustrates the capital intensiveness of the wireless business and the challenges Mobilicity faces as David battles three Goliaths on a day-to-day basis.

Mobilicity therefore supports, with open arms, the changes to foreign ownership rules. Easing foreign ownership restrictions can potentially make raising capital easier, or decrease some of the costs to capital. These two benefits are almost unique to new entrants when compared with incumbent carriers who already have unfettered access to low-cost capital through their many revenue streams, their bank accounts, or the abundance of lower-risk capital investors domestically.

Indeed, due to the higher risks to new entrants, it is only logical to expect that the costs of borrowing for new entrants are to be higher than for incumbents. If easing foreign ownership can lower the interest of borrowing—or the cost of capital—by one dollar for Mobilicity, this is one extra dollar that Mobilicity can use elsewhere to lower plan costs, improve the network, or bring better quality of services to Canadians.

Thank you for your time.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wong.

We'll now hear from Mr. Kirby, please.

[Bruce Kirby, Vice-President, Strategy and Business Development, Public Mobile]

Thank you, Mr. Chairman and honourable members. I'll try to be relatively brief.

We're here to support the changes to the legislation that are in Bill C-38.

Capital is critical to building a new wireless company in Canada, as Mr. Wong just said. I can agree with most of what he said. The two key ingredients for creating a competitive environment in the wireless industry are exactly that: capital and spectrum. This is one critical component of improving the situation for capital, to support investment in these companies.

Progress has been made, and I won't get into the debate here on how much has been accomplished on the spectrum side, but certainly in the last auction, through the set-aside, the government created an environment that allowed new entrants. The fact that three of us are sitting here today is an example that that has been an accomplishment. The fact that Vidéotron is operating along with us in Quebec as new entrants is an accomplishment that came about because of that policy.

Capital continues to be important. There's a real challenge in Canada with getting access to risk capital. We have an immature market for capital. It's not just a matter for wireless innovation or wireless investment, but it's a matter of, generally, innovation, the knowledge economy, and IT and broader sectors in Canada. The institutional investors that are very strong in the U.S. and very strong in some other markets are weaker in Canada, for historical reasons. A number of steps are being taken to address that, but a big step that could help in this case, which isn't an issue with some of those other areas, is enabling capital and investment to come in from outside the country, from foreign companies and foreign investors.

That's valuable, because when foreigners invest in new entrants like ours, they invest in Canada. Every single employee of Public Mobile is in Ontario and Quebec. This has nothing to do with the ownership structure. It has to do with the fact that our customers are in Ontario and Quebec, and our networks are in Ontario and Quebec, because that's where our licences are. That will continue independent of who ultimately owns the investment and equity in the company. That's where they're going to stay because that's where our business is and where it happens.

To the extent we're able to attract additional further investment from investors outside the country, that investment is coming in to provide jobs and to build infrastructure in Ontario and Quebec, where we operate today. That is all to the benefit of Canada, independent of who ultimately owns the company. It is something that is not only bringing more competition to Canadians and more choice to Canadian consumers, but is bringing additional jobs and so on to Canada, all of which is a benefit to Canada.

I always find it fascinating when Bell says this is bad because all these scary things will happen. Bell opposed competition in long distance because it would be bad for Canadians. They opposed competition in local because it would be bad for Canadians. They opposed steps to improve Internet access by competition because it would be bad for Canadians. They opposed setting aside spectrum in the last auction because it would be bad for Canadians. They opposed using caps to improve access to spectrum in the auction coming up because it would bad for Canadians. They've opposed better access to foreign capital for small or new entrants because they say it would be bad for Canadians.

In every case they have failed, and ultimately, the outcome has been good for Canadians, in the sense that in all those sectors, there has been more competition, better pricing, more options for Canadians, and, ultimately, more employment with new entrants that have come into these markets.

For all those reasons I think the bill should be supported as it stands.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Kirby.

We'll hear from Mr. Lockie, please.

[Simon Lockie, Chief Regulatory Officer, Wind Mobile]

Mr. Chair, members of the committee, good afternoon, or evening, I suppose, at this point.

I'm not working from prepared material, so I hope you'll accept my apology if I meander a little bit.

I want to acknowledge that we're in support of the bill. We think this is a critical, important precondition to fostering competition in an industry that is in dire need of it. We applaud the government for taking this initiative.

Wind's position in this area, as I'm sure you all know, has been very publicly kicked around for the last few years. We feel we're sort of specially qualified to talk to some of the negative consequences of the existing legislative regime.

The fact that our competitors put us through a regulatory proceeding that ultimately ended in vindication at the Supreme Court level doesn't eliminate the fact that the system allowed that to happen. It has to be acknowledged, as everyone has noted here, that the entirety of fostering competition, apart from some of the other policy initiatives, I'll call them, that have to be undertaken, the AWS set-aside being one example.... The recent spectrum policy that Mr. Bibic spoke to, in our view, actually didn't go far enough. But we don't intend to spend time on that today.

What we're talking about today is a necessary precondition, which is that you need to get capital into this company. It's a critical point just to understand the vast quantities of capital that are required, and also to understand that where that capital comes from should be and is irrelevant to government policy considerations.

The simple reality is that Canadian capital behind a Canadian company is not going to be deployed to roll out LTE in Parry Sound because that's where Bobby Orr is from. They are going to make commercial decisions based on economic factors, just like a corporation does that's funded by foreign capital.

The government has taken a cautious, incremental approach to resolving this issue, but they've done it where it matters most. And that's a conclusion that isn't something that came about in the course of the last couple of months. That's something the TPR came to. That's something the Red Wilson report came to. It is a necessary precondition to allowing the kind of capital to come in.

Let's just be very clear. This is not a magic bullet. This is not going to solve a massive competition issue in this country. You have an oligopoly, with 93% market share, a massive brand presence, a massive retail presence, and huge amounts of capital. They're snapping up all of the content in the country. Everyone recognizes that there is an issue. It's long been recognized. This doesn't solve it. It's a precondition to solving it.

I don't think there's any credible reason to say that we don't want that capital in this country and that we're going to artificially constrain the terms upon which it can be invested. That is a hurdle that simply won't be overcome.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll start questions by members with Ms. Nash, for five minutes, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you very much to the witnesses for being here today.

I know this is a very complicated subject. One issue I'm struggling with is that it seems that this change is creating different rules for different players in the telecom sector. I'm concerned that over the long term, some of the smaller operations, with less than 10% of the market share, can be bought up by foreign corporations and then may have a more dominant position going beyond the 10% threshold.

My question is to Mr. Bibic. Am I pronouncing your name properly?

[Mirko Bibic]

You are.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Can you tell me if I'm perceiving these changes in foreign ownership correctly, the different rules for different players in this sector? What impact could that have on the telecom sector in Canada?

[Mirko Bibic]

I'm going to take a step back. We appreciate and understand the balancing act the government had to put in place here. On the one hand, rules were set up in 2008 to allow for new entry. We have three examples of that here.

The government wants to make sure that can continue, that conditions can continue to be in place so that they can continue to operate. We are looking for a fourth national carrier, as you can tell from Minister Paradis' testimony yesterday at the Senate.

So on the one hand, they thought one way to do that was to lift the foreign ownership rules for small players. If that's the goal, then we say, okay, let's treat all players the same, rather than create the two-tier capital structure. That's one example of asymmetry.

The government also wanted, based on the statements of the minister and the policy, to ensure incumbents could continue to bid on spectrum and continue to invest massively, as we have. That was addressed by allowing us to bid on the upcoming spectrum auctions. We certainly don't quarrel with that.

The third thing the government wanted to accomplish was to make sure there was investment in rural areas.

And I don't quarrel with any of those objectives. But the one gap was the way it was done. If you have 10% or below revenue share, there are no foreign ownership restrictions, which means a company like AT&T, which obviously today has zero revenue share, could come in from scratch. It's a massive organization with—

[Peggy Nash, NDP, Parkdale—High Park, ON]

Let me just pursue that.

Mr. Lockie, as I understand it, the financial backer of Wind is VimpelCom. It is one of the largest global wireless services, with over 200 million subscribers and quarterly revenues five times larger than those of Bell.

What is it about the current structure that doesn't work for you, when clearly you do have access to capital?

[Simon Lockie]

Thank you. It's a fair question.

The short answer is that the capital invested at the early stage of this company's history—which is actually Orascom, which has since been acquired by VimpelCom, was intended to be short-term, very expensive capital with a view to bringing on third-party capital. To a limited extent, we've been successful, doing that with vendor financing and so on. The challenge is the terms and the cost of that capital.

It's very simple once you've lived it for a while, but appreciate—you have to understand that the more expensive your capital is, the more challenging it is to make a return on that investment. As that becomes less palatable, you have more trouble bringing in that capital.

The way I would characterize it is that we had a compelling investment proposition at the early stage, given that there is an enormous opportunity in Canada because there has been no competition for so long that is desperate for it, and we want to be that fourth national alternative.

We were able to raise capital on that basis. However, continuing to do so is simply not feasible. We're talking about massive amounts of capital, and that’s the issue.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I have 30 seconds left.

I want to raise the issue raised by the Department of Public Safety over security concerns when loosening foreign ownership, with the Chinese firm Huawei coming into Canada. What impact would that have on Canada's public safety and security? That's one question. Is there reciprocity with other countries? Are they opening their telecoms similarly, as we're doing in Canada?

I don't know if anyone wants to take that.

[The Chair, Conservative, James Rajotte]

Could someone answer briefly? Then we can come back to it if we like.

[Mirko Bibic]

On the second question, our fundamental quarrel is this: companies as large as AT&T or Verizon can come in and bid for two blocks of prime spectrum that will be put up for bid next year, whereas Bell is captive bidding for one block. We ask ourselves why we would set up a condition where companies like that could bid for more spectrum than we can. If we make a policy decision to allow them to enter, okay, but then let everyone compete for the same amount of spectrum.

[Simon Lockie]

Actually, I can answer the question.

[The Chair, Conservative, James Rajotte]

I'll allow this, but I would ask members to allow enough time for witnesses to respond.

Mr. Lockie, go ahead.

[Simon Lockie]

I can be very brief.

On the issue of the spectrum’s being set aside, it's actually a cap system. The incumbents have access to 75% of the good stuff; there's very little left over. What I would observe is that it is a bit rich to cry poor about the access in this upcoming auction, given that the incumbents have, collectively, about 400 MHz. Everyone else in the universe in Canada has about 45 MHz.

You still have a long way to go before you can start worrying too much about that.