Industry Committee on March 25th, 2010

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

And thank you to the witnesses for coming today.

This is a very technical conversation, and I'm thinking about consumers who might want to look at this a bit more and ask questions like how this is going to impact their life in terms of the things they use every day. We've talked about opening the doors to more foreign investment, but if you're a Canadian consumer trying to follow this conversation, what areas might this impact? How is it going to make a difference to them?

[Marta Morgan]

In looking at the benefits of more competition and allowing more foreign direct investment, we have found, in general, that when we look across sectors and over time, foreign direct investment brings two kinds of benefits.

The first is that foreign investors bring assets. They bring technology and new technology. They bring people. They bring know-how to help increase productivity. These assets are of benefit to the country that is the host of the foreign direct investment.

The second thing that foreign investors bring is more competition. Foreign direct investment makes domestic firms compete harder. They make them innovate more. They put pressure on them to reduce inefficiency, reduce their prices to consumers, and increase their offerings.

When we look at the telecommunications industry in particular, there have been a number of studies on this issue, particularly one by the OECD, which showed that consumers in those countries that liberalized benefited from better services and lower prices. One of the things that we certainly see in Canada, for example, is that in the wireless industry the penetration of wireless service is much less than in the United States. It's a very similar market, similar consumers, but 85% of U.S. households have a cellphone or other wireless device, versus around 60% or 65% of Canadian households.

There's evidence, internationally, that there is room in Canada, both on the pricing and the availability of services side, for improvement.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I want to talk a bit about the Red Wilson report. It had extensive recommendations for the government.

I'm wondering if you could provide a bit of an outline of some of those recommendations as they relate to the telecommunications sector, more specifically what's already been done. What has been done in response to this report?It's been referenced a lot.

[Marta Morgan]

Sure. The Red Wilson panel was set up to look broadly at issues around competition in the Canadian economy. The reason for the Red Wilson panel was, I think, a view that the world is changing quickly, and Canada needs to remain competitive. The Wilson panel was tasked with looking across a range of sectors to see what we could do in terms of our legislative and regulatory framework and our policy framework to ensure that Canadian industry would have the best chance to compete in this global environment.

The Wilson panel, as you noted, looked at a number of sectors, and a number of actions were taken immediately after or shortly thereafter based on the recommendations of the panel, for example, to mend the Investment Canada Act, to modernize the Competition Act, and to reduce foreign ownership in air transportation investment restrictions.

The panel also made a number of recommendations with respect to telecommunications. They essentially picked up the recommendations of the telecommunications policy review panel of 2006, which had recommended a phased approach to liberalization of foreign investment restrictions in the telecommunications sector. Those are recommendations that were made by the Wilson panel, and the government's commitment in the SFT and the budget was related to the recommendations the Wilson panel made specifically on telecommunications.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

I have one other question. There's a lot of technical talk. We talked about this a little bit before. Again, for someone who wants to take a look at this and look at the transcript of our discussion today and who doesn't have that background, that expertise, could you differentiate between the Telecommunications Act and the Radiocommunication Act? I know there's some discussion about the Broadcasting Act, although I don't believe the changes we're talking about touch on that. Maybe for the average person looking in on this conversation you could differentiate between the different acts. I think to the average person they all sound the same.

[Marta Morgan]

The Telecommunications Act regulates the provision of telecommunications services, which I guess would be as clear as mud, but basically they are telephone services, broadband Internet services received in your home, and wireless services. These are regulated as telecommunications services. The Telecommunications Act regulates those services that consumers would recognize as what they receive.

The Radiocommunication Act regulates how we use the spectrum. The spectrum is what enables signals to be carried through the air. The spectrum is what is utilized by providers who provide wireless services, for example. That's why, in the case of the wireless auction, any company that wants to provide cellphone services to Canadians must use the spectrum. The Department of Industry regulates the use of the spectrum because it's a public resource, and it's very important that there not be interference among the users of the spectrum. It's the responsibility of the Minister of Industry to allocate that spectrum to users, including to companies that provide cellphone service.

[The Chair, Conservative, Michael Chong]

Thank you, Madam Morgan.

Thank you, Mr. Lake.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Chair.

Thanks for being here today and for doing such a great opening on such a complex issue, and for helping us to understand a portion of what's going on out there.

It's been claimed that foreign entrance may make for a more competitive telecom market with more efficient pricing and choice, particularly in markets if there was a duopoly. But if relaxation of foreign ownership rules leads to takeovers and mergers of existing Canadian firms, there's the potential that there may not be any changes. As we all know from various studies, Canada has some of the highest prices for wireless telecom services in the world. Has Industry Canada examined various telecom market models around the globe, especially in countries that have the lowest prices for wireless service, to see how effective competition is guaranteed? How are we going to guarantee effective competition?

[Marta Morgan]

Thank you, Mr. Chair.

This is obviously an issue that is very complex, and it will take some time for the government to look at particular options, particular models, and also to come forward with a process and a timeline for consulting with industry on a path forward on this issue.

I think in general, when we look abroad, we see different regulatory models. Different countries have different net telecommunications networks that have quite different features, so that drives them to different regulatory models. In the case of foreign investment in particular, the vast majority of OECD countries have completely lifted their foreign investment regulations, but a small number maintain them on their incumbent telephone providers. What we do see subsequent to the lifting of that, if we look over time at what happened after those restrictions were lifted and if we look over space—in other words, looking at Canada's situation compared to others—is we do see that most other OECD countries have at least one foreign wireless provider operating in their market. Often in the economic literature, those would sometimes be referred to as disruptive competitors who are in the market and really focus on providing low-price simple services for consumers. That's what we see in other countries.

Clearly that's not just a function of foreign investment restrictions. There is a whole regulatory framework around telecommunications. For example, the government's decision to set aside spectrum for new entrants into the wireless market in the advanced wireless spectrum option was a recognition of the potential benefits to consumers in encouraging new competitors to come into the Canadian market.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you.

You talked a little about the foreign competition. Has the department examined some of the consumer protections that are available in the United States, for example, and some things like basic service guarantees and basic price caps that exist in other countries, so that affordability and accessibility are ensured for all Canadians?

[Helen McDonald]

Certainly the CRTC has been looking at a number of those issues. I believe they have announced that they're having a hearing into universal service obligations. A number of countries have looked at that as a way of ensuring that on the lower cost, consumers, through their payments, can help subsidize the provision of very high-cost service. It's a system we have in place for telecommunications for plain telephone, but they will be looking at whether there should be an extension of this into broadband.

Some other countries, such as, I believe, some of the European countries, are talking about a universal right. If the Internet is so important, then perhaps there should be an obligation for the state to assure the provision of such services. The U.S., in their broadband plan, put an aspiration out that they wanted all Americans to have access to broadband at affordable prices, and they are proposing to look at their universal service fund as a way of funding this, while capping it at the same amount. So there are different ways in which countries try to look at the price, affordability, and, as Marta was referring to, how to encourage that spread to happen, the rollout to happen, as far as possible through market forces.

[Glenn Thibeault, NDP, Sudbury, ON]

We've seen that in the larger technology sector ownership determines where research and development take place. The carve-up and sell-off of foreign companies of Nortel's division have led to a significant setback in Canada's wireless research and innovation, some say an irreparable one due to the fact that just a few years ago Nortel was Canada's largest private funder of research and development. Has the department examined what the impact of foreign ownership would do to research and development spending in the wireless sector in Canada or for employment in this sector?

[Helen McDonald]

Perhaps we could answer this, but just with respect to Nortel.

We've certainly been looking very closely at what is happening in the west end of Ottawa with the various asset purchases. We want to ensure that the high-paying research and development jobs stay in Canada, that we maintain a critical mass. When we look at the various asset purchases by the various groups, I think about one-third of the employees have not been picked up by the new players.

I'm also starting to hear anecdotally that the employment in the Ottawa area is not changing in a way that you might think. When we had the dot-com bust in 2000-01, a lot of people who were leaving Nortel and other players created their own businesses or moved to others. So we know there are other firms in the west end who are picking up Nortel employees.

It's not simply that Nortel has gone and therefore everything has left Canada. A number of the new purchasers have been quite public about their desire to make the west end of Ottawa a centre of excellence for them to maintain a strong R and D presence here. It is something we look at, and it is something that we try to encourage with the provincial governments--to make sure that we can be as attractive as possible for those jobs to stay there.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Thibeault.

We'll go now to Mr. McTeague.

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

Thank you, witnesses, for being here today.

This might sound like a third or fourth generation question, but I've been on the committee off and on since 1995, so some of these things sound familiar. And at times I've missed the odd report; I was on the wrong side.

Fido, Clearnet.... I recall that company from my riding, Clearnet, successfully bidding for, in 1995-96, and getting, with relative ease of capital, the purchase of spectrum and the auction that took place then. It continues to be a question of whether or not foreign investment itself is really necessary. It seems to be a substantial pool of money that is made available. The question comes on foreign ownership, the control or not control of voting shares.

I'm just wondering, because we seem to give the impression that there are substantial restrictions to foreign investment, but that really is qualified, if I'm correct, simply on voting shares. Are those the restrictions that exist? You can have a company whose debt is technically 100% controlled by foreign investment. Is that correct?

[Anne-Marie Lévesque]

In the statutes there's no limit to the financial investments that a foreigner can have in a Canadian company. There are control issues that are raised in the statute, though, and they are twofold. The first one is voting shares and the second one is control in fact. So you're right in saying that there is no limit on the amount of money a foreigner can invest in Canada.

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

I suspect one of the reasons we're here today is because of the definition of how the control in fact is defined and exercised in practice. I suspect we probably wouldn't be here today if it was not for that.

What steps has your department taken to clarify this if there is to be a change in the Telecommunications Act?

[Anne-Marie Lévesque]

The position of the government is that there has been no change in the application of the control in fact test. The test has been laid out in jurisprudence, and the leading jurisprudence is the Canadian Airlines case that was decided by the Federal Court of Appeal in 1993.

Maybe I can put it in these terms: the challenge in applying the control in fact test is that it's essentially that. One has to look at all the facts and determine whether those facts taken together amount to control. It's not legal control but factual control. That's not an exact science; it's a subjective assessment of the facts. The law has not changed. The application of the law has not changed. That's what the government has decided in the Globalive decision.

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

Ms. Morgan, you earlier cited a study of OECD countries that have liberalized. Thank you for this.

I wonder if you could tell us what time period we're looking at. Is it just a general observation or is it specific? Are we talking short-term benefit for consumers with question marks as to the long-term implications for consumers and competition?

[Marta Morgan]

I would be happy to get you a copy of that study. My understanding is that it was at a point in time, as they normally are. It would have been looking backwards at the impacts of liberalization. But obviously it would have been done at a certain point in time.

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

Ms. Morgan, we'll hear hopefully from Red Wilson and those who were part of the commission. I suspect the raison d'être for that was to recognize that in Canada, in many respects, industries look highly concentrated and very intense with a lack of competition, notwithstanding the steps that have been taken over the past 20 or 30 years, or even going back to the Macdonald royal commission, to liberalize a number of other markets.

Has the department considered the scenario wherein existing towers and infrastructure built over the years through public funding suddenly are acquired by foreign investment, foreign entities? Perhaps it's a strategy of below-cost selling for a temporary period of time in which you wind up with only one or two dominant players who cherry-pick one or two areas of the country and simply leave the rest without any type of adequate service, and obviously without a modicum of competition. In other words, we arrive at a far worse situation in five to ten years than the one we have now.

[Marta Morgan]

I think it would be important to recognize that foreign investment regulations are but one element of the regulatory framework--that, and the policy framework that regulates telecommunications, the provision of telecommunication services in Canada. We have the CRTC, for example. We have spectrum allocation under the Radiocommunication Act. We have the Broadcasting Act. The issue of foreign investment restriction is one aspect of the regulatory framework, but there are other regulatory tools that the government and the CRTC have to ensure provision of services to Canadians, and those clearly would remain in place unless it was the will of Parliament to address them, even if foreign investment restrictions were lifted in some way.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. McTeague.

Mr. Brown.

[Gord Brown, Conservative, Leeds—Grenville, ON]

Thank you very much, Mr. Chairman.

It's my understanding that back in 2003 the industry committee studied foreign ownership. What was in that report? And did that report detail benefits for the liberalization of the communications industry?

[Marta Morgan]

Yes, it is in fact true that this committee, in 2003, did produce a report on this very subject, and that report made a number of recommendations. It looked at the issue of foreign investment restrictions from a variety of perspectives and it made a number of recommendations regarding minimum ownership requirements, changes to ownership and control requirements, and recommendations regarding a further review of the governance structure of both telecommunications and broadcasting in the area of technical convergence.