Industry Committee on April 20th, 2010

[The Chair, Conservative, Michael Chong]

Madame Wood, go ahead.

[Andrea Wood]

I think it's incorrect to say that 100% of our financing is foreign. Our Canadian shareholder has contributed some money to our capital structure.

[Alek Krstajic]

Do you mean actual dollars?

[Andrea Wood]

It's a contribution in the way of value.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

The reason I ask is that it seems to be a very good response on what the level of foreign capital investment can be as it currently exists, but I'd like to find out more from Globalive. Obviously the decision by the CRTC varied on the question of controlling content and not so much in the question of the allocation of assets, but I am still troubled. I think this committee is going to have a lot of difficulty making a decision predicated on the belief that somehow there's no capital available in Canada and that the shortest course to more consumer involvement is to open up the floodgates. That may be the way other parts of the world work, and that's great, but I and many others believe that with the United States just south of the border, you're not just dealing with a question of ceteris paribus among other players.

Let me put it very succinctly: if Parliament decides, and the minister's decision to proceed with foreign investment in the telecommunications sector is allowed, do you see expansion into areas you currently don't serve? For instance, do you see expansion into rural areas of the country?

[Simon Lockie]

I'll ask Ms. Wood to speak to this as well.

There are several layers to your question. On what is permissible under the existing regime, as you noted and Alek expanded on, there are no fixed limits on the amount of capital that can be injected. It's a question of the structure and the terms of that capital investment. There is some real ambiguity about the hard lines in caps on that. Obviously there's a subjective component to the existing regime that's been decided differently by Industry Canada than by the CRTC, and ultimately by cabinet.

To speak to your specific question, we're trying to raise capital within Canada and externally.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. McTeague.

We'll now give the floor to Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair. Madam, gentlemen, good morning and welcome.

I will continue in the “conservative” vein by sharing a survey that came to the following conclusion: “Most Canadians (68%) believe that broadcasting and communications are too important to our national security and cultural sovereignty to allow foreign control of Canadian companies in these sectors...”

This was a survey conducted by Harris/Décima, and it shows a somewhat more conservative side of Canadians in the fact that they do not want foreign owners to have control of our companies. However, on a slightly less conservative note, the survey also concluded, and I quote, once again: “...that 64% of Canadians are more likely to vote for candidates who oppose giving control of Canadian media to foreign interests...”

It would appear that Canadians are against foreign control of our media for various reasons. Today's meeting is rather special because representatives of Globalive and of Public Mobile are together here testifying before us. However, there hasn't been much said about what has happened. That is why the committee was struck.

My question is for the Globalive representatives. When you bought $442 million worth of spectrum, were you aware of the fact that the CRTC could block the transaction?

[Simon Lockie]

Certainly we were aware and well advised of the foreign control restrictions found in the Radiocommunication Act and the Telecommunications Act. We knew we would have to comply with them, so we made accommodations at the Industry Canada level. We made further accommodations with the CRTC. Ultimately, on the basis of those changes, cabinet deemed we were in control. So we were aware and had every intention right from the outset of complying. We remain very comfortable that we are in compliance.

[Serge Cardin, Bloc, Sherbrooke, QC]

However, while the CRTC is the body that issues spectrum licences, Cabinet decided, after the purchase, to bypass even the House of Commons and apparently also to go against the Telecommunications Act. Were you, in one way or another, certain after you were issued spectrum licenses that the CRTC would authorize the transaction regardless of the means used, whether the approval came from the CRTC or the government?

[Simon Lockie]

The process we went through with Industry Canada that resulted in the issuance of our licence required certain changes to our initial structure, and we made them. We didn't get any input from the CRTC until the hearing, and when we did we made changes to address their concerns.

With all respect, we think they got it wrong--not that cabinet went above the House of Commons or said the act didn't apply to us. I think Tony Clement has been very clear, and it's a very carefully and thoughtfully drafted decision on their part. They're exercising a right they've always had, under section 12 of the Telecommunications Act, which predates Globalive, to vary a decision of the CRTC where they feel the wrong decision has been reached. That's what occurred here.

[Serge Cardin, Bloc, Sherbrooke, QC]

Despite the fact that a foreign company appeared to have control, if other companies had known at the time that it was possible to buy spectrum and secure licences, would that not have made competition somewhat fiercer? For instance, companies like Public Mobile could have also had access to foreign capital. I think that this is in fact the argument you are using to support your position. In what way do you feel penalized?

[Alek Krstajic]

Sir, you actually position it very well. There are really two parts to this. If we had known that we could have a different structure, with almost all of our money coming from foreigners, we would have been able to bring on more capital and buy more spectrum. We could have bought spectrum in Vancouver. The good news is that we're in Ontario and Quebec, the most densely populated areas of Canada. So we have 19 million people we can serve. We would have been on more spectrum if we had access to more capital.

However, more importantly, in our mind, we believe that what the government did amounts to a change in the law, which is why we've asked for a Federal Court ruling on this. All we're asking for is that the same rules be applied to us.

I don't want to make any more political gaffes in terms of the parties, but let's deal with something that we all know, whether we are from Quebec, Ontario, or B.C. This is like a hockey game, and in a game of hockey there are rules, and they say you're allowed to put five players on the ice. My colleagues agree with me: capital is the lifeblood. Capital is what allows you to grow and play the game harder. By allowing foreign capital or a higher degree of foreign capital for Globalive, you're allowing them to have six players on the ice, and you're causing Public Mobile and everybody else in the game to have only five players on the ice. That's just wrong. It's not just wrong for us, but here's why it's wrong in the long run.

Investment in this country is going to be driven by a level of certainty. Certainty is going to drive more investment. What we actually have in Canada right now is a situation where there's uncertainty. There's uncertainty because sometimes we apply the rules and sometimes we reverse the rules, and sometimes we don't apply the rules. So let's decide what the rules are and let's apply them fairly to all players. We want six players on the ice, if that's what's allowed.

[Serge Cardin, Bloc, Sherbrooke, QC]

Evidently, we need to clearly define the rules. However, almost no one has taken full advantage of foreign ownership. Ms. Wood was saying that if we were to increase those numbers and open our market to foreign ownership, people would have to be interested in controlling companies using foreign capital.

You say that soon there will be nine players in the small field of Canadian telecommunications. Consequently, if the competition has financial weaknesses, it will crumble before long. Foreign companies that want control will want to control our companies. So, they will not found new companies, but rather buy existing ones. At some point, fewer players will remain in the game, and we will have to say goodbye to competition. So, I do not understand.

How can you be sure that, if you open the market completely to foreign interests, investors from abroad will actually invest, if only to gain as much control as possible over telecommunications, and eventually also over broadcasting?

[Alek Krstajic]

That's another very valid point. I can't tell you that you won't run that risk in the long run by changing the rules. If you just opened the rules completely and said we can have 100% foreign ownership of Canadian telecom, I think you would run the risk of some large international players coming in. You're going to have more sustained competition for a period of time, but if there is a consolidation, you do run the risk of re-monopolizing the entire sector again. So you're 100% correct on that.

I think the point that we're here today to make, though, is that we can't tell you whether changing the rules today is the right thing to do in the long run for all of the different stakeholders and parties concerned in Canada. I can tell you that by allowing more foreign capital, you'll have more sustainable competition in the short run. And I can tell you that it's a travesty to allow one player to bring on foreign capital and not another. I'm not talking just as a new entrant here; I'm talking across the board.

So have a set of rules, be finite in what those rules say, and then apply the rules.

[Simon Lockie]

If I could speak to a few points very briefly, the first and most obvious issue I'd like to address is this idea that there isn't a level playing field, to use a different sports analogy. In the process we went through, every telecom and broadcast company in Canada structures—

[The Chair, Conservative, Michael Chong]

Just a moment. I'm not getting the French translation.

[Serge Cardin, Bloc, Sherbrooke, QC]

I can hear it.

[A voice]

I can too.

[The Chair, Conservative, Michael Chong]

Go ahead.

[Simon Lockie]

Every entity regulated by these acts governs itself according to these restrictions. There are two components, as I think everyone knows. There's the “bright line” legal test—the number of voting shares, that sort of thing. Everyone meets them. The “subjective control in fact” test is something that is assessed by the CRTC, and the ability of cabinet to vary their decision is already present. Everyone has the right, within the confines of the legal restrictions, to structure however they like and to bring in as much foreign capital as they like on terms that respect those rules. None of the other new entrants, including Public Mobile and DAVE, has received approval from the CRTC as we sit here today. They still have to go through that process.

They've both been under review for some time now. If the CRTC in its wisdom determines that they are controlled in fact by non-Canadians, cabinet can either of its own initiative, as they did with us, reverse that decision, if they think the CRTC got it wrong, or the company can petition cabinet to do it. Everyone has the right to structure themselves and to bring in as much capital as they possibly can in a way that respects the rules.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Cardin. Thank you, Mr. Lockie.

Mr. Wallace, you have the floor.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair, and I thank our guests for coming today.

I'm going to put it right on the table: we're not here to hear the arguments back and forth. You guys can compete on the street, but don't compete in here.

I think Mr. Lockie's summation of what's available.... The rules weren't changed or varied. Those rules have existed for many years, and the cabinet decided that to overrule the COC decision of the CRTC. So it's available, it's done, and we're looking today.... I think the motion is really about foreign investment.

You made a couple of points I'd like to follow up on. I'll start with Globalive.

You talked about phased-in liberalization. What is your definition of “phased in”? Have you thought about it? What does it mean? Without giving away competitive secrets, what kind of money are we talking about by way of investment? How big are the investments we're talking about?

Finally, for you, and then I'll come to your colleagues, there's the question of expense of that investment. You are claiming—and I tend to agree, but I want to know what your view is—that foreign investment, or additional opportunities for investment from outside of Canada, may have driven down the price that it costs. Do we have a sense of how much that is and what difference it can make in your business plan?

[Simon Lockie]

Thanks very much, Mr. Wallace.

To answer your first question, the phasing-in question, we have thought about it, as you can imagine. What I would point to is that the Red Wilson report, and before his report the TPR report, spent over a year looking very carefully at these issues. Our recommendation and our endorsement is of the phased-in approach recommended by those reports. The idea would be that the initial, immediate step would be to provide cabinet with the ability to waive these restrictions with respect to telecom only—not broadcast, not BDUs, not content, but telecom pipelines only—and to have a presumption, and we can speak to this, if you want, for entities with less than 10% of market share, that such transactions are in the public interest. You'd still have the ability, if you owned more than 10%—as we know, there are three parties in that category—to do any transaction you want; it's just that the presumption isn't there. If it's in the public interest, you could still do it.

So the “phased-in approach” is really saying you don't have to solve or answer the broadcast question. You can have a very careful, considered discussion around that point. You don't have to wait to create real competition or to open up foreign capital to telecom while you're having that discussion. That's the first point.

The second point is that there's a very sliding scale for the terms of capital. There are a bunch of different components to any business negotiation, as I'm sure you can appreciate. The amount of capital available and the flexibility with respect to terms is something that will drive the cost down. We talk a lot about competition in wireless. It's no different from a capital perspective: the bigger the pool and the fewer the restrictions structurally on how it can be invested, the more the cost will go down. And the more you can de-risk—the more successful you become, having revenues, having subscribers—the more attractive it becomes.

I'm not an economist—that's the other point—but it's very difficult to pin down what exact effect it will have on terms. But they will certainly come down.

As far as our own capital requirements are concerned, frankly, we're not very comfortable talking about that question, but it's a lot.

[Mike Wallace, Conservative, Burlington, ON]

I have one follow-up and then I'll move on.

The government's move to open up the opportunities to attract capital from outside Canada is, I think, applauded. We believe it will create more competition and drag down prices. As a policy-maker, if I change policy to allow for more investment from foreigners and drive down capital, how much assurance do I have that the savings will be passed on to actual consumers?