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Don’t ease telecom foreign investment rules, NDP warns by Rita Trichur

Jan 19, 2012

Source: Globe and Mail

The federal government should not liberalize Canada’s foreign investment rules for the telecommunications sector, not even for smaller companies, because there is little proof that doing so would benefit consumers, says the NDP.

The official Opposition argues the benefits of foreign ownership have been overstated. Moreover, it says relaxing the rules for only small telecom players would be “very problematic” because it would create an uneven playing field within the industry.

“There are many complications, and we don’t feel the case has been made for foreign ownership so far,” said Guy Caron, the NDP’s industry critic.

Mr. Caron’s declaration of his party’s position comes at a time when the Conservative government is mulling potential changes to the industry’s foreign investment rules. While current law restricts direct and indirect foreign investment in telecom companies to a combined total of 46.7 per cent, Ottawa is considering whether to allow 100 per cent foreign ownership of telecom firms with a market share of 10 per cent or less.

(A similar proposal was advocated by the Telecommunications Policy Review Panel in 2006 and the subsequent Competition Policy Review Panel in 2008. Both panels concluded that liberalizing the restrictions on foreign investment would boost competition in the sector.)

Industry Minister Christian Paradis is widely expected to announce the government’s intentions on foreign investment along with its long-awaited auction policy for the coveted 700 MHz frequency in the coming weeks.

The Conservatives signalled their desire to ease foreign investment restrictions for telecom during the 2010 Speech from the Throne, but the industry is still waiting for clarity on the government’s plans.

Although the government has also consulted the industry on other options, including a complete removal of all foreign ownership restrictions, experts say that outcome would be unpalatable to voters.

There are fears that allowing foreign takeovers of the big three incumbents – Rogers Communications Inc. (RCI.B-T39.47----%), BCE Inc. (BCE-T42.14----%) and Telus Corp. (T-T55.99----%) – would result in massive job losses and reduced competition.

The NDP concurs with that assessment but also questions the rationale for potentially easing the rules for smaller companies, which are actively lobbying for such a change. For instance, Mr. Caron wonders what would happen if a smaller company (wholly owned by foreigners) is eventually the target of a takeover and then sees its market share exceed the 10 per cent threshold.

Additionally, he notes such concessions for smaller players are bound to spark howls of protest from the big three, who’ve already argued that an asymmetrical reform of foreign investment rules would put them at a disadvantage when raising capital. Some industry observers suggest that outcome might trigger consolidation among larger players, perhaps even reigniting merger speculation about Telus and BCE.

Among the most vocal proponents for changes to foreign investment rules is Globalive Wireless Management Corp., which operates under the Wind Mobile brand name. The company is backed by Egyptian billionaire Naguib Sawiris and Amsterdam-based carrier VimpelCom Ltd.

Wind and other wireless newcomers, like Mobilicity and Public Mobile, are widely credited for driving down wireless prices in recent years. Analysts, however, say current pricing levels are unsustainable.

Following a spate of aggressive holiday promotions by industry players, Mobilicity, for instance, upped the ante again this month by launching a $50 port-in credit and free data offers on some of its plans. “No signs of more rational w’less (sic) pricing yet,” wrote Phillip Huang, an analyst with UBS Securities Canada Inc., in a note to clients this week that detailed the development.

For his part, Mr. Caron argues there are faulty assumptions about high mobile pricing and weak competition in Canada. Much of the confusion, he argues, stems from an Organization for Economic Co-operation and Development (OECD) pricing study that suggests Canada is plagued with some of the highest mobile prices in the world.

Mr. Caron, however, argues the study is flawed because it does not take into account that Canadians’ average monthly use of mobile services exceeds that of consumers in other OECD countries.

As a result, Canada’s poor ranking generally results from the OECD “comparing oranges and apples,” he said. If one is looking at Canadian consumption of text, voice or data and comparing it to that of other OECD countries for similar consumption levels, then “our prices are actually competitive,” said Mr. Caron, who has previously studied the issue as an economist with the Communications Energy and Paperworkers Union of Canada.

Instead of fiddling with foreign investment restrictions, the NDP argues that Ottawa should set aside, or reserve, wireless licences in the next spectrum auction for smaller telecom players to ensure they remain competitive. The government used a set-aside in a previous auction in 2008.

 “We want to make sure that new entrants are at the table,” said Charlie Angus, the NDP’s digital affairs critic. “The question is, there [are] various elements of the spectrum and on what parts of the spectrum do we set aside?” Another chief consideration, the NDP says, is determining which blocks of spectrum are best suited for rural network expansion by the incumbents, while also ensuring that some wireless licences are also reserved for use by first responders including police, fire and emergency medical services.

“In terms of the spectrum auction, we have a number of issues that we think needs to be looked at,” said Mr. Angus, adding ensuring competition, rural connectivity and public safety need not be viewed as conflicting priorities.

Globalive, Mobilicity and Public Mobile have all argued that a set-aside is the best option for the coming auction for the 700 MHz frequency.

“I’m glad to see the NDP understand our industry well enough to know that without 700 (MHz) set-aside, competition is dead,” said Globalive chairman Anthony Lacavera in an interview on Thursday. “I’m shocked that they could understand that but then somehow miss the reality that foreign capital has been a major contributor to the improvement in customer service and pricing and choices that consumers enjoy currently in the wireless market.”

Mr. Lacavera, who is also chief executive officer of Wind Mobile, said one just needs to take a stroll in a local mall to see how competition is flourishing at the various mobile kiosks and stores thanks to the presence of foreign capital in telecom.

The problem, he said, is that leaving the existing foreign investment restrictions in place, especially given Globalive’s recent history, would create an insurmountable hurdle to raising the enormous capital needed to create and sustain that competition.

“The NDP supporting the set-aside and opposing removing these antiquated foreign ownership restrictions is like setting up a great buffet at a party, and then locking the door so no one can come in and enjoy it,” said Simon Lockie, Globalive’s chief regulatory officer.

Foreign financiers, meanwhile, have been left guessing about their rights as investors under the current system. For example, Wind’s lawyers have spent a lot of time in court since its launch to defend against accusations that its foreign backers exerted too much control.

The federal government, meanwhile, has been accused of rewriting foreign investment rules on the fly to favour Globalive. In 2009, Cabinet overruled a decision by the Canadian Radio-television and Telecommunications Commission, which had deemed Globalive insufficiently Canadian-owned and controlled.

While the Federal Court of Appeal sided with the government in June, 2011, Public Mobile is seeking leave to appeal to the Supreme Court of Canada, arguing the industry remains confused about the rules. The Supreme Court has yet to decide whether it will hear the case.

At the same time, consumers are becoming increasingly curious about the future of wireless competition. A set-aside of wireless licences for new entrants is a position that is also being championed by OpenMedia.ca.

The activist group’s petition, entitled “Stop The Cell Phone Squeeze,” has garnered about 42,702 signatures since being launched just over a week ago. It argues that a set-aside is necessary to ensure the big three do not dominate the auction and use their relatively vast financial resources to squeeze out smaller players during the bidding.

This week, the NDP’s Mr. Angus tweeted his support for the OpenMedia.ca petition, urging Canadians to join the campaign.

“This has been one long drawn-out process without much clarity from the government, which is why having OpenMedia get out there and start beating the drum is raising awareness,” said Mr. Angus.

Rogers, BCE and Telus, meanwhile, are urging Ottawa to hold an open auction, arguing that smaller players no longer require special treatment, given current levels of competition. Telus, though, has also stated that it would also support caps that limit how much spectrum each company can purchase in the auction.

Last week, the Liberals' industry critic, Geoff Regan, posted an open letter on his website arguing the federal government should set aside a “reasonable amount” of spectrum for small and new entrants in the next auction. When asked on Wednesday whether he is endorsing the OpenMedia.ca petition, he replied: “I think our letter speaks for itself, and it is certainly very supportive of where they are coming from.”

The key concern, he said, is ensuring that Canada is on par or ahead of other countries on wireless costs, rural coverage and the roll-out of high-speed networks.

The Liberals, though, have yet to decide whether they support more relaxed rules for foreign investment, said Mr. Regan.

© Globe and Mail