Industry Committee on April 13th, 2010

[The Chair, Conservative, Michael Chong]

Welcome, members, to the eighth meeting of the Standing Committee on Industry, Science and Technology, on April 13, 2010. We are here today pursuant to Standing Order 108(2) for a study of Canada's foreign ownership rules and regulations in the telecommunications sector.

Today our meeting has been divided into two separate sections so that we can hear from two separate witnesses.

The first witness, whom we will hear from for the next hour, is Mr. Dimitri Ypsilanti, who is the head of the information, communications, and consumer policy division of the directorate on science, technology, and industry for the Organisation for Economic Co-operation and Development.

He is available to us today through video conference from Paris. He has asked for translation. I want to highlight for members that there will be a delay, not only in the translation, but also in the video feed.

Without further ado, we'll begin with an opening statement from Mr. Ypsilanti.

[Dimitri Ypsilanti, Head, Information, Communications and Consumer Policy Division, Directorate on Science, Technology and Industry (Paris), Organisation for Economic Co-operation and Development]

Good morning, Chairman. I hope you can hear me.

[The Chair, Conservative, Michael Chong]

You're loud and clear.

[Dimitri Ypsilanti]

I will be speaking in English. Is that your understanding?

[The Chair, Conservative, Michael Chong]

You can address us in either English or French.

[Dimitri Ypsilanti]

I have sent a paper. I'm not sure if it was distributed. It was sent in English and could have arrived a bit late for you to have it in both languages.

Let me begin by benchmarking Canada's foreign investment restrictions in the context of the OECD. There are 30 OECD member countries, and only three countries have investment and ownership restrictions that apply to all public telecommunication operators. These countries are Canada, Mexico, and Korea. Of the three countries, Canada has the most severe restrictions.

Some of the other OECD countries have restrictions in the sense that the state has to be a majority owner of the incumbent telecom carrier. For example, in Switzerland, the Swiss confederation must have majority ownership of Swisscom. France is required to have partial ownership of France Télécom, but not necessarily majority ownership. In the case of France, the state shares are down to about 23%. Canada is the most restrictive in terms of foreign investment in the telecom sector.

For me, the most important questions to address regard the benefits of these restrictions and, if there are benefits, how you can ensure that these benefits do not require a heavy regulatory burden. In fact, if I try to find arguments in favour of maintaining these restrictions, I've only come across two main arguments that are fairly general.

The first states that telecommunications is very sensitive, that the communications sector is sensitive, and to me it's unclear what in fact this refers to.

The second argument is that if Canadian control is not maintained there will eventually be an impact and a threat to Canadian culture and the creation of Canadian content. This is, in practice, an idea that there's a sort of domino effect that goes from the telecom sector to the broadcasting sector and then has a negative impact on culture and content.

With respect to the sensitivity of the telecommunications sector, in all OECD countries the telecom network is considered to be critical information infrastructure, and all countries have regulations in place to protect that infrastructure. However, these regulations do not actually need to prevent foreign entities from investing in those countries. There are more direct regulations to ensure that there is a protection of the infrastructure. Obviously in cases of national emergency, all countries have laws that give governments significant powers to ensure adequate control of networks, so the argument about sensitivity is, to my mind, fairly spurious.

What about the link to cultural issues and values? Telecom networks are carriers of content. The regulations that govern network development and the offer of communications services to the public are quite different from those regulations that govern the provision of broadcast content. In my mind, there is no reason to believe that foreign telecom network operators will necessitate a change in regulations governing the diffusion of online content.

Canada is, in fact, one of many OECD countries that have regulations favouring local content and the diffusion of domestic broadcast content, yet these other countries do not seem to find the need to restrict investment in the telecommunication sector. If they want to protect the content sector, they do so directly with other laws and regulations.

What about the costs of foreign investment restrictions on the telecommunication sector? I believe these costs are quite high. First, there's a higher cost of capital and the potential difficulty for new entrants to get access to equity capital. Canada, relatively speaking, has a fairly small capital market, and in a capital-intensive sector such as telecommunications, it is important for companies, even if they're Canadian-based companies, to go outside to obtain equity capital.

Lower investment performance also has implications for the development of competition in the telecommunications sector. I believe that by limiting investment only to Canadian-owned/controlled companies, you're actually reducing the level of competition in the telecommunication sector in Canada. This has implications in terms of higher prices for businesses and the competitiveness of businesses, both in Canada and overseas, and of course there is a negative impact on consumers and a slower diffusion of new technologies.

The foreign investment restrictions, I believe, also go against government objectives such as improving connectedness, enhancing innovation, or improving productivity.

In conclusion, Chairman, I would in fact argue that there is a greater danger to national welfare in Canada and to Canadian cultural heritage by slowing down the process of investing in high-speed ubiquitous networks, which results from limiting foreign investment in Canada. There is a danger to Canada and Canadian welfare from higher access and usage costs in the telecommunication sector than would occur in a more competitive market. I believe that Canadian culture will thrive much more in a market where access and use of network resources is cheaper and where users have more choice among service providers.

Thank you very much for this opportunity, Chairman.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Ypsilanti, for your opening remarks.

We're going to have about 50 minutes of questions and comments from members of this committee to you about the subject matter, beginning with Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you, Mr. Ypsilanti, for joining us this morning. It was most interesting.

My riding is in a rural area of Canada. That often concerns me. You mentioned in your presentation that because of Canada's small population and large geographical size, there's a small capital base and equity is limited. As I mentioned, population is not just limited, but spread across a large part of the country.

The argument I've been hearing most often is that if we open up competition and open up to foreign ownership, we'll have more competitors coming into the market and offering more service. Now, I've dug around a bit, and what I've seen on the OECD website is that most OECD countries, if I'm not mistaken--and maybe you can comment on this--have three or fewer networks by the time all is said and done and the dust has settled.

Maybe you can comment on that and on how it would help Canadians to have better service. It seems to me that if we have two or three now and we open it up, all that will happen is that rather than having new competition coming in, we will end up with buyouts.

Is that something you've looked into?

[Dimitri Ypsilanti]

That's an excellent question. Of course, as I said, the construction of networks is expensive. We are moving away, in many countries, from the copper network to a fibre network, and it is even more expensive to put in fibre networks.

Nevertheless, I believe that what competition does is that, first, it forces the incumbent to improve service, and obviously it reduces prices, but then it clearly puts pressure on them to reach out. Because they do have coverage in the urban areas, but they want to extend coverage. They want to get a bigger part of the pie, if you wish, and they do tend to extend coverage.

The same goes for any new entrants that have networks. If they want to compete, they need the capital to compete. Therefore, they need capital from overseas, in many cases,to compete. They may need know-how from other national telecom operators if they're moving, for example, to a fibre network. I think the key point here is how investment creates better competitive conditions in the country.

Let's look at the mobile sector in many European countries. Granted, a country such as France is about 500,000 square metres in size, so there are at least 10 Frances in Canada; for example, I believe two Frances could fit into Ontario. Obviously the size of Canada is a factor, but there is virtually 100% coverage in the mobile sector in France. You have very few of what I would call “white spots” where you get no signal. That comes from having three operators and a number of virtual network operators, so competition is a key factor.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you for those words.

I look at France, and I can tell you that my riding alone is 16,000 square kilometres, with a population of about 100,000 people, so you can understand the challenges of getting service to people. Some would say that the business case—and I would argue the same way—says to just ignore that, to leave it alone and go to larger centres like Toronto and Montreal, the centres where it's lucrative.

You've made the argument that with competition the same level of service would come, regardless of where you are in Canada. I'm not sure if you're saying that competition would take care of this or that we would have to mandate it as a government in non-lucrative areas.

What we've found in the past is understandable, but just not acceptable: that cities would get prime technology and prime service. Yet when we look at rural areas, not only is the response slower, but the quality of what comes out there is lower, and the service offering just isn't there.

So when we look at establishing mobile networks, I don't understand why a company or a corporation.... I know you mentioned that they want to reach out, but the real money is in the big centres, and we understand that. I'm not sure that deregulation and opening up to a foreign owner who is trying to maximize his profit could guarantee service to rural areas and coverage in areas that are not densely populated.

[Dimitri Ypsilanti]

Let's put the question the other way. You seem to be saying that you have very little service in your particular riding despite having restrictions on foreign investment. Clearly, Bell Canada, or whoever the service provider is, hasn't spent much time there because they themselves are spending time in Toronto and the larger cities. That will always be a problem. You are correct when you say that a new entrant, in order to get revenue and the profits to continue investing, will always go into the larger urban centres to invest.

I guess my point is that over time there's much more of an incentive, when there is vibrant competition, to go out to some of the less populated areas. I think that all OECD countries have areas like yours where, at the end of the day, there is a need to find alternative means to provide service. That's whether it's through government subsidies, municipal networks, or what have you.

There are certain countries that have an auction, for example, and it's a reverse type of auction. The government states that they'll make this area available and they're asking for operators to come and state what kind of subsidy they need to go there. The more players you have in the market, the better chances you will have that someone will decide to go there.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Rota and Mr. Ypsilanti.

Mr. Cardin, you have the floor.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you. Good morning Mr. Ypsilanti.

First of all, I would like to get back to a question that was asked on population density. There are 3.29 Canadians per square kilometre. So, you can imagine how great a distance 9,984,000 square kilometres will be to cover. I would like to know whether your study takes into consideration the territory and population density.

[Dimitri Ypsilanti]

Obviously you need to look at two parts of Canada, because the U.S. border area--let me call it that--has a population density that is quite high. Certainly in parts of Ontario, and in parts of Quebec, the density will be higher than it is over here in France. I'm talking about the belt along the lakes and along the St. Lawrence. There shouldn't be any problems in terms of telecommunication service there.

If you move further north in Canada, obviously the revenue potential for companies is much lower. It's easier, for example, to provide mobile in certain areas. But my experience with Canada is that even in areas that I wouldn't call sparsely populated, there have been difficulties in the past in getting mobile signals. I take it that there is insufficient competition between operators to try to provide better service for customers.

But you are correct: in areas that are sparsely populated, the cost of providing networks will be difficult. It is important for governments to designate these areas and to try to ensure that networks are built there. As I said in my earlier question, the greater the number of operators you have, the more chances you have of ensuring that you find someone to build the networks there at the lowest cost.

[Serge Cardin, Bloc, Sherbrooke, QC]

Given that we are referring to companies' profit margins, you mentioned that foreign investments could increase the competitiveness of Canadian corporations. Given the margins, I believe our corporations are able to invest. In fact, Bell Canada invests more in R&D than AT&T per dollar of sale.

If you are to compare innovation or technology, could you tell us what technology Canada does not possess which could be rectified or could benefit from foreign investments?

[Dimitri Ypsilanti]

I mentioned fibre investment. I'm not sure if you got the small paper I sent, but a graphic there shows the development of fibre to the home networks across the OECD.

Canada, if it has any fibre to the home—I'm not talking about fibre backbone networks, but fibre to the home—has an extremely small percentage, whereas if we look at Korea, Japan, and some of the other OECD countries, investment in fibre to the home technology has been diffusing much more quickly.

What is important is how quickly these technologies diffuse to the public. It could be fibre to the home or it could be fourth-generation high-speed mobile technology. I believe Canada has been quite slow. For example, in broadband, if you look at Canadian speeds offered to the public, they are relatively slower than the speeds you get when you access the Internet here in France, for example, or in other countries in Europe.

[Serge Cardin, Bloc, Sherbrooke, QC]

Overall, witnesses have told us that Canada was not lagging from a technological standpoint. How would you explain the urgency of opening the telecommunications market to foreign investors in Canada when, if we look at corporations, we realize that no major Canadian corporation has reached its allowable foreign capital limit, except for Globalive which has reached it and in fact gone beyond? Currently, that company is already going beyond regulations.

[Dimitri Ypsilanti]

I'm not sure of the question. Could you repeat it, please?

[Serge Cardin, Bloc, Sherbrooke, QC]

At this point, Canadian companies have not reached the foreign investment limit. Some are quite a bit below it in fact. There does not seem to be any interest in that. How would you explain this situation?

[Dimitri Ypsilanti]

You seem to be implying that a foreign company would want to come into Canada and take 100% control of a domestic telecom company. I don't think that's the case. I think they would like to partner with companies. They would perhaps not be interested in 100% ownership.

If we look across the OECD countries that do not have restrictions on foreign investment in the telecom sector, we see that very few foreign companies have actually tried to get total control over a domestic operator. There are certain cases, but in most cases they are content to be minority stakeholders. This is the case in the mobile sector, where foreign companies have come in and have helped to develop the sector, but through a minority shareholding.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Ypsilanti.

Thank you, Mr. Cardin. We will now continue with Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

Thank you for joining us today, sir. I have just a few questions for background.

Is the OECD report something that's done on a regular basis or is this a one-time event? Will you be revisiting this report in the future in terms of studying the international marketplace for foreign investment in telecommunications?

[Dimitri Ypsilanti]

No. My comments are based on the outcomes of a number of different reports.

We monitor policies in terms of foreign investment every couple of years in a report called “OECD Communications Outlook”, but we do undertake a number of other reports, whether that's in the mobile sector, or looking at Internet, or in broadband. We do benchmark countries in terms of prices and penetration rates for number of subscribers in the telecom sector. My remarks are a cumulation of different facts.

[Mike Wallace, Conservative, Burlington, ON]

I appreciate that background.

Here is my first question for you. In Canada we started the foreign investment restrictions in the late 1980s or early 1990s. Those restrictions were put into the legislation. You indicated to us that we're one of only three out of thirty with restrictions. Did the other countries within that study start with restrictions and loosen them or were they in that vein from the beginning?

[Dimitri Ypsilanti]

Most of them, in fact, started with a total restriction because they had a state-owned monopoly telecom carrier. They had a single telecom carrier when they opened up their market to competition. That happened basically when, under the WTO at that time, the General Agreement on Trade in Services came into effect.

They opened up their market to competition and new entrants came into their market. The state holding of the incumbent carrier over time was reduced and, in many cases, totally eliminated. In fact, if you look historically at the situation, they started off in a much more restrictive position than Canada did. As they were liberalizing, Canada actually started to be slightly more restrictive.