Thank you, Mr. Chair, and thank you for having us here with you today. I'm the assistant deputy minister of the strategic policy sector at Industry Canada. I would like to introduce Helen McDonald, who is the assistant deputy minister of spectrum, information technologies and telecommunications, and Ms. Anne-Marie Lévesque, who is our senior general counsel.
Before responding to questions, I would like to provide the committee today with an overview of Canada's telecommunications foreign investment restrictions and to talk a little bit about how they compare to other countries, what previous studies on this issue have been done, and what they've concluded.
Telecommunications is a $40 billion industry—a critical component of the modern day digital economy, and an integral part of society as a whole—we have all come to rely on broadband Internet access, BlackBerrys, text messaging and satellite delivered television.
Because of the importance of the sector, we need to assure ourselves that, from a regulatory perspective, we are doing all that we can to ensure that Canadians are receiving innovative services at competitive prices. In 2006, the government issued a policy directive to the Canadian Radio-television and Telecommunications Commission to rely on market forces as much as possible and to regulate telecommunications only where necessary.
In 2008, as part of the auction of radio spectrum, a portion of the spectrum was set aside for bidding by new market entrants only in order to encourage increased competition in the provision of mobile wireless services.
The government's objective has been to ensure that Canadians can benefit from increased competition and investment in the telecommunications sector, which will lead to greater innovation and more competitive prices and availability of services for consumers.
That brings me to the issue at hand: the telecommunications foreign investment restrictions. There is a concern that these restrictions are indeed impairing the growth and competitiveness of the industry to the detriment of consumers and the industry as a whole.
I would like to clarify up front that when I speak of foreign investment restrictions in the Canadian context, I am referring to the legislated Canadian ownership and control requirements, which I will detail later, but which take the form of restrictions on voting shares and on the control in fact held by foreign entities.
Canada's formal ownership and control restrictions for telecommunications are relatively new. While they were announced in 1987, they were not formally enacted until 1993. The decision to introduce these restrictions was made during the Canada-U.S. Free Trade Agreement negotiations to mirror existing U.S. restrictions and ensure that these could be grandfathered within the FTA.
In announcing the government's intentions in the House of Commons in 1987, the then Minister of Communications, Flora MacDonald, said that they were necessary to “ensure...national sovereignty” over this vital sector of the Canadian economy and for reasons of “national...security” and “economic, social, and cultural well-being”.
The Telecommunications Act containing these restrictions came into force in 1993. Section 16 of that act specifies that telecommunications common carriers need to be Canadian-owned and -controlled, and that to meet this requirement they must satisfy three criteria: that 80% or more of voting shares must be held by Canadians; that 80% of the board of directors must be Canadian; and that the corporation is “not otherwise controlled by persons that are not Canadians”, what many have come to call the control-in-fact test.
These provisions, like most of the Telecommunications Act, are administered by the Canadian Radio-Television and Telecommunications Commission, otherwise known as the CRTC.
The Telecommunications Act is supplemented by a set of regulations, the Canadian telecommunications common carrier ownership and control regulations of 1994. These regulations determine who can be considered to be Canadian for purposes of the act—for example, trusts, pension funds, and partnerships. In the case of corporations, the regulations require that at least 66 and two-thirds per cent of the voting shares must be held by Canadians and that the corporation not be otherwise controlled by non-Canadians.
I should point out that wireless carriers are subject to ownership and control requirements that are virtually identical to those imposed by the Telecommunications Act. This is done pursuant to the radio communication regulations under the Radiocommunication Act. This is the legislation governing the management of radio spectrum, which is administered by Industry Canada. Before issuing spectrum licences, Industry Canada must confirm compliance with these ownership and control requirements.
The next major development relative to these investment restrictions was the conclusion, in 1998, of the Agreement on Basic Telecommunications, as part of the World Trade Organization's General Agreement on Trade and Services. Canada was a signatory to that historic agreement. At the time of the negotiations, there was considerable pressure placed on Canada and other countries to allow foreign competition into their markets. In the end, most OECD countries committed to liberalizing their markets including removing barriers to foreign participation, but Canada did not. We did agree to liberalize for international services.
To implement this commitment, the Telecommunications Act was amended in 1998 to remove the investment restrictions from satellite earth stations and international submarine cables.
This initial large-scale liberalization of barriers to foreign participation in telecom markets was followed by further progressive liberalizations by other countries. The OECD maintains a biannual tabulation of this, for which the latest information is from 2008. As of that year, 18 of 30 OECD countries had no restrictions on foreign ownership in telecommunication sectors. Only nine countries had any significant restrictions, six of which were limited to restrictions on former state-owned monopolies.
According to the OECD, Mexico, South Korea, and Canada have the most closed markets with respect to foreign investment. However, since 2008 both Mexico and Korea began to ease restrictions. Mexico now allows complete foreign ownership of wireless, and a bill to liberalize the wireline market is before their Congress. Korea allows 49% foreign equity but may liberalize further in the context of its ongoing trade negotiations with the United States.
Of all OECD countries, Canada now has one of the most restrictive regimes for foreign investment in telecommunications. A number of groups have addressed this issue in recent issues. The first of these was this very committee, which undertook a thorough review in 2003. It found that telecommunications are a critical element of the global network knowledge-based economy. The committee found that the restrictions stifle Canada's productivity and economic growth performance, play a role in impeding capital investment by new entrants into the telecommunication sector, and inhibit the diffusion of new communication technologies and Canadian access to modern telecommunication services. The committee recommended the complete removal of Canada's foreign ownership restrictions specific to telecommunications common carriers.
The telecommunications policy review panel in 2006 was the next to look at this. Chaired by Dr. Gerri Sinclair, it was asked to review Canada's telecommunication policy framework and to recommend how to modernize it to ensure a strong and internationally competitive industry. It found that, among OECD countries, Canada has maintained one of the most restrictive and inflexible sets of rules limiting foreign investment in the telecommunication sector. This panel paid particular attention to the wireless sector. It found Canada to be one of the few OECD countries without a major international wireless provider and concluded that the quality, pricing, and availability of wireless services would improve significantly if Canada's foreign investment restrictions were liberalized. The panel recommended a phased liberalization, proposing that foreign investment in firms holding less than 10% of the Canadian telecommunications market be liberalized immediately, with full telecommunications liberalization being postponed pending the resolution of how to deal with the cable industry in the context of a review of Canadian broadcasting policies.
More recently, we have the competition policy review panel, which reported in 2008. This group looked at a wide range of issues, not only telecommunications, but it had a number of specific comments on the impact of telecom restrictions on the industry. It found that they affect new and existing firms by reducing competitive pressure to minimize or eliminate efficiencies in business practices and activities, by limiting sources of financing, distorting financing structures, and preventing technology transfer. The competition panel echoed the recommendations of the telecom panel in recommending phased liberalization.
Before turning the floor over to you, I would like to take a brief moment to speak to the particular challenge these restrictions pose for the satellite sector. As you are aware, Budget 2010 indicated the government's intention to remove existing restrictions on satellites.
Canadian satellite providers face an immediate challenge. I spoke earlier of the changes made in 1998 to liberalize international services. Since that time, a large number of foreign satellites have been approved to offer service in Canada and are in direct competition with Canadian suppliers such as Telesat. 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 increasingly global in nature. Removal of the restrictions on foreign ownership will allow Canadian firms to access foreign capital and know-how, invest in new and advanced technologies, and develop strategic global relationships that will enable them to achieve economies of scale and participate fully in foreign markets.
The Speech from the Throne has made a broader commitment. I quote:
Our Government will open 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.
This is an issue with significant potential implications for both the competitiveness of the Canadian telecommunications industry and the quality and prices of services made available to consumers. It's important that the government take time to consult and to fully consider the options before moving forward.
Thank you very much, Mr. Chair, for inviting us here today to discuss this important issue.
