Industry Committee on May 13th, 2010

[The Chair, Conservative, Michael Chong]

Welcome, members and witnesses, to our sixteenth meeting of the Standing Committee on Industry, Science and Technology, on this thirteenth of May, 2010. For the first 45 minutes of our meeting today, we are here pursuant to Standing Order 108(2) for a study of Canada's foreign ownership rules and regulations in the telecommunications sector.

For that 45-minute period, we are happy to have in front of us the Honourable Tony Clement, Minister of Industry, along with two of his officials, Deputy Minister Dicerni and Senior Associate Deputy Minister Boothe.

Welcome to all three of you. We'll begin with an opening statement from the minister.

[Tony Clement, Conservative, Minister of Industry]

Thank you very much, Mr. Chair.

Thank you for this opportunity.

Hello everyone.

Before turning to the specific issue of foreign investment restrictions, I'd like to put a little bit of context before this committee if that's all right.

In March, the government set out its agenda in the Speech from the Throne. One of the themes it set out was that of “building the jobs and industries of the future“, under which a number of forthcoming initiatives were referenced. I would like to touch on two of these.

First is the launch of the digital economy strategy to drive the adoption of new technologies across the economy and the country. Second is opening Canada's doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need.

Mr. Chairman, I highlight these, as they share an important linkage. The telecoms industry is a key player in the modern digital economy. In fact, the telecoms infrastructure can be seen as the platform on which the digital economy operates.

As you may know, on May 10 we launched the public consultation to help inform the development of Canada's digital economy strategy. In doing so, we'll be addressing some important questions.

How can we improve the adoption and the use of digital technologies in the rest of the Canadian economy?

What kind of digital infrastructure will we need for the 21st century?

What is needed in terms of investment, research, and skills to grow the size of the ICT industry and the number of ICT firms headquartered in Canada?

How can we develop digital media and content to promote a digital economy?

How can we ensure the necessary skills development for active participation by all Canadians in a globally competitive digital economy?

This is a critical time in Canadian telecommunications. Private sector decisions on massive capital investments are being made for all forms of telecommunication services.

As a government, we need to ensure that the right regulatory framework is in place to incent investment and to create a competitive marketplace.

The government has encouraged competition in the wireless sector. In 2008, as you know, we held an auction for radio spectrum licences for new wireless services. To encourage competition, we set aside specific frequencies that only new market entrants could bid on.

We're very pleased that a number of new players responded to this mechanism by bidding successfully and acquiring licences. Only one of these providers has actually launched service--as we know, it's Globalive--but others have announced plans to deploy later this year.

Mr. Chair, I know that many members have questions about the Globalive case, so let me explain a bit about what the government did. Last December, cabinet varied a CRTC decision that found that Globalive was not Canadian-owned and controlled.

Now, why did we do that? We did that because the government concluded that the company was a Canadian company that met the Canadian ownership and control requirements as specified in the Telecommunications Act. The government's decision was based on the specific facts of the case, and it meant that the company could begin operating without delay. In light of the court proceeding now in place--there is, obviously, a court challenge--I cannot comment further than I have on the details.

Let me finally turn to the issue of telecommunications foreign direct investment and the government's commitment to “open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries”.

Now, you might ask why we are doing this. Well, there's already considerable economic research on how foreign direct investment, or FDI, as the economists call it, benefits an economy. Many studies show that FDI drives firms to be more productive and innovative. Empirical studies have found that FDI has a net positive effect on overall productivity growth. There is also empirical evidence that shows that foreign-owned firms are as productive as the most productive Canadian firms and thereby contribute to raising the productivity of Canadian industries.

FDI contributes to productivity growth not only by making productivity-enhancing technology transfers to Canada but by providing positive spillovers to the adoption of advanced technologies by Canadian industries. So Mr. Chair, that's a tangible, positive contribution to the standard of living right here in Canada.

Foreign investment helps firms compete in an increasingly global economy, which is essential for Canada's prosperity as a trading nation. Foreign investment provides access to international management expertise and to global supply chains and networks.

Now, Canadian satellite providers face an immediate challenge. Canada allows foreign satellites to offer service in Canada in direct competition with Canadian suppliers. This has created an uneven playing field, because Canadian providers must compete against these foreign providers both in Canada and abroad. The problem is that the foreign providers are not subject to investment restrictions either in Canada or at home.

The satellite industry is global in nature. Removal of foreign ownership restrictions will allow Canadian firms to access foreign capital and advanced technologies. It will allow them develop strategic global relationships that will enable them to achieve economies of scale and to participate fully in foreign markets.

I have followed with great interest the committee's proceedings on these matters. There has been a comprehensive and broad range of testimony from academics, incumbent and new entrant telecommunications companies, content producers, cultural groups, and others, of course. This testimony has conveyed the full range and complexity of the issues at hand, including: rapidly changing business models and technologies; integrated networks and product offerings; carriage; broadcasting; content; and, of course, culture.

With respect to broadcasting, I can tell you that we will not consider anything that might impair our ability to pursue our Canadian culture and content policy objectives, period, full stop.

I am pleased that the committee has decided to look at this important issue as it has provided me with valuable information and insight. We have followed the work of the committee very closely and look forward to receiving your report.

Thank you.

Merci beaucoup.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Minister.

We have 35 minutes remaining for members to ask their questions or make comments.

We will start with Mr. Garneau.

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

Thank you, Mr. Chairman.

Thank you, Minister, for being here this morning.

I think it's widely acknowledged that the spectrum auction of 2008 was mismanaged. It was mismanaged primarily because of what happened to Globalive, which initially paid some $400 million to obtain a portion of the spectrum. Then, later on, the question of foreign ownership was examined and, as you know, the CRTC decided it did not satisfy the requirements with respect to Canadian ownership.

You reversed that decision. You spoke briefly about it in your opening statements. What you're saying, effectively, is that the CRTC was wrong in its interpretation. Am I correct in saying that?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

That's correct.

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

Am I also correct in saying that because you have reversed the decision of the CRTC there's obviously some confusion about the interpretation of what constitutes foreign ownership? Does this mean that you are going to make changes to legislation or regulations to more clearly define what you consider to be Canadian ownership requirements?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

Let me respond to the characterization and I guess respectfully disagree with some of the elements of that, Mr. Garneau.

I would say that in this particular case of Globalive, reasonable minds could differ. The CRTC came to a conclusion for the purposes of the Telecommunications Act that Globalive was not Canadian controlled; we came to a different interpretation.

When we looked at the facts of the case, at the structure of the board of directors, the structure of the voting shares in the company, and, most importantly, the structure of the day-to-day management of the company, in each of those cases, you could conclude, responsibly and reasonably, that it was not foreign controlled.

So there was respectful disagreement. Sometimes that happens in public policy. It was not meant as any disrespect to the CRTC. Based on the facts of the case, we came to a different conclusion, which we think is defensible and correct.

Having said that, in answer to the second part of your question, we have been studying very closely the CRTC's submission to this committee, where they called for changes to legislation as well as content requirements. We're studying that. That all goes into the hopper.

The government has not made any decisions on how exactly to move forward on liberalization of telecom ownership and investment, so anything this committee decides will also go into the hopper.

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

Thank you.

Obviously the CRTC had a different interpretation. I would encourage you to provide clarification in the regulation so that hopefully in the future the CRTC's decision is not going to be challenged. As you know, the other contestants in the spectrum auction also feel quite strongly that this was not a level playing field in terms of the outcomes. They had a different interpretation of what constitutes Canadian ownership.

I'd like to switch to another question, the question of FDI, foreign ownership. You have said that foreign ownership is a good thing. You have said that the Broadcasting Act is not going to be changed. What specifically are you planning with respect to foreign ownership regulations in the telecommunications sector?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

Well, liberalization to allow more foreign investment, as I said, empirically in Canadian studies indicates all of the positive attributes I described in my remarks.

You're asking for a specific plan of action. The fact of the matter is that the first thing we're going to do is consult. We're going to consult with the public, we're going to consult with the players in the industry, and we're going to consult with this committee. As I say, we are reading very closely the testimony before this committee on these issues and we will continue to do so. That will help to animate the various suites of options that are available to the government in terms of liberalization.

At this point I'm not in a position to tell you exactly what is planned. Quite frankly, I think the first step we have to do is consult, and then, again, arrive at a series of options and decide on the best option for Canada.

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

I have to take advantage of your presence here to ask you about another issue.

In 2009 in the budget you announced $225 million towards increasing broadband access across the country. You came out 14 or 15 months later, last week, with a number of projects.

Is it your feeling that the $225 million is going to provide access to broadband to the whole country? Or are you of the opinion that it will go a little bit further but that there's still more funding required to provide broadband access to all Canadians?

You must have done studies on it to estimate how much it would cost to provide it for the whole country.

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

Sure. Fair enough. The announcement that I made on Sunday was the first tranche of a series of rolling announcements over the next several weeks on further expansion of broadband based on that fund you mentioned.

The fact of the matter is, Mr. Garneau, that you cannot look at the fund from the government to expand rural and remote broadband in isolation; it's part of a whole series of changes going on in broadband access in our country. The private sector is investing billions of dollars into broadband expansion as well as increasing the amount of throughput that is possible through the pipes. When you combine that with what the government is doing, we of course foresee the day when all of Canada will be covered.

One of the things that I did with the federal money was put it in the areas that are most needy first--not necessarily the areas that are closer to urban areas, but the areas that are actually more remote than that.

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

But will that $225 million do it?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

No, and $225 million was never going to do it, because it's not just a federal government issue. The provincial governments are investing. The private sector is investing. So--

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

The client effect--

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

Yes, your question is predicated...I hope it isn't predicated on the belief that the federal government can solve all of this problem by its own; it's with the provinces, with the private sector, and with the federal government that we will get to where we have to get to.

[The Chair, Conservative, Michael Chong]

Thank you very much, Minister Clement and Mr. Garneau.

We now go to Mr. Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chairman.

Mr. Minister, gentlemen, welcome to our committee.

If I were the chairman of the CRTC, knowing full well that Globalive has already paid $442 million to the government, an amount that is more than relatively significant, I would certainly not make my decision lightly.

Let us refer to the decision made by the CRTC, specifically at paragraph 116, which I am going to quote:

Notwithstanding these additional changes, significant concerns remain with respect to the control in fact of Globalive by Orascom. In the present case, the record shows that Orascom, a non-Canadian: holds two thirds of Globalive's equity; is the principal source of technical expertise; and provides Globalive with access to an established wireless trademark.

Do you believe that Orascom does indeed hold two thirds of Globalive's equity?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

Allow me to answer in English since there are issues that require me to be very precise.

So let me just say a couple of things.

First of all, no. We looked at this very, very closely, with a lot of good legal advice.

There's no question: if you look at the structure of the board of directors, if you look at the voting shares of the company, at who holds the voting shares, and if you look at the day-to-day management decisions, we came to, I believe, a reasonable, fair, and accurate conclusion that it meets the test in the Telecommunications Act to be Canadian controlled--or in one case, the case of the board, not foreign controlled.

So yes, we feel very comfortable on the facts of this particular case that it met the test of the Telecommunications Act.

[Serge Cardin, Bloc, Sherbrooke, QC]

I was referring to two thirds of equity, whether it be owned directly or indirectly, of course.

I would like you to explain to me what control in fact means to you. In order to have real control, one must obviously hold directly more than 50% of the shares. How do you interpret the concept of control in fact in the telecommunications industry?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

I will repeat what I already said. Looking at this specific case, it is clear to us that this company is controlled by Canadians. Day-to-day decisions are made by Canadians and not by foreigners. In our view, the decision-making in this company is not determined by foreigners. It is clear that the Telecommunications Act test has been met. There is nothing more I can say.

[Serge Cardin, Bloc, Sherbrooke, QC]

In the Speech from the Throne, the government clearly stated its intent to amend the Telecommunications Act, specifically regarding ownership. Stating this intent does not reflect the fact that the Order in Council made at the time was contrary to the spirit of the Telecommunications Act — which is obvious when you look at all aspects of the case.

Having reviewed the case, I am convinced, like many others, that it is imperative for the government to rectify the situation, following this Order in Council, by announcing that it would amend the Telecommunications Act. Are you planning to do it soon?

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

I would disagree with your characterization. I don't think the two are connected at all.

The first decision on Orascom and Globalive was made on the facts of that particular case. The decision to consider liberalization and more access to foreign capital in the telecom industry was made as a public policy decision that would be advantageous to Canadians.

More choice and more quality service are things people expect in telecom. We think liberalization would be helpful in that regard. The two are not connected.

[The Chair, Conservative, Michael Chong]

Thank you.

Mr. Bouchard, do you have a question?

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Thank you for being here, Mr. Minister. I also thank the deputy ministers.

Mr. Minister, you stated that foreign investment has an impact on productivity, that foreign investment increases competitiveness. Finally, you have a very positive view of foreign investment.

In my area, we have lived through an experience. Rio Tinto has taken over Alcan. The first thing Rio Tinto did in my area — and even outside of it — was to sell off its processing business. Decisions are being made in London. This company, which is headquartered in London, is much less sensitive to the impact on the people and the demands of the people in my area or from outside.

I would like to draw a parallel with telecommunications and foreign investment. Do you agree that what I just described could also happen in the industry under discussion here? Foreign companies, foreign investment in telecommunications means we, Quebeckers and Canadians, largely lose control over the Quebec and Canadian cultural content we want to protect.

[Tony Clement, Conservative, Parry Sound—Muskoka, ON]

It is difficult to draw such conclusions at this time, since we do not yet really know the context. However, I can say that I read very convincing studies showing that foreign investment is conducive to greater productivity, greater competitiveness, greater job creation and better choice in the Canadian marketplace. The government of Canada has not yet made a decision as to the provenance of these investments. Obviously, it is an issue for this committee, but the government has not yet made any decision.