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The Foreign Ownership Policy Decision and the
Telecommunications Act
For most of Canada’s history, there has been substantial foreign investment in its telecommunications sector. Like most other capital-intensive industries in Canada, the telecommunications sector could not have developed as extensively and as quickly as it did if it were not for foreign capital, particularly American capital. Foreign ownership restrictions, or foreign direct investment restrictions, in telecommunications are a relatively recent phenomenon in Canada. Foreign ownership restrictions imposed on telecommunications common carriers first appeared in Canada in 1984 when the Department of Communications issued its first national cellular radio licence to Rogers Cantel Inc. The chosen limit was 20% of the voting stock in the corporation. In 1987 and then in 1991, the Teleglobe Canada Act and the Telesat Canada Act, respectively, placed foreign ownership restrictions on telecommunications companies — the two companies that bear these names. Also in 1987, the Minister of Communications issued a comprehensive policy document, entitled A Policy Framework for Telecommunications in Canada, in which the government stated “domestic ownership of Canada’s telecommunications infrastructure is essential to national sovereignty and security.” At this same time, the Minister announced that:
To harmonize Canadian policy with that of other countries and ensure our national sovereignty, security and economic, social and cultural well being, legislation will soon be tabled. The guidelines of Canadian control and 80 percent ownership for Type I carriers are effective from the time of announcement.
Although this rule came into effect in 1987, the specifics of its application were not embodied in law until the passage of the Telecommunications Act in 1993. Section 16 of the Act requires that in order to be eligible to operate in Canada, a telecommunications common carrier must be a “Canadian-owned and controlled corporation,” incorporated or continued under the laws of Canada.3 More specifically, subsection 16(3) of the Act defines Canadian ownership and control as follows:
| (a) | not less than eighty per cent of the members of the board of directors of the corporation are individual Canadians; |
| (b) | Canadians beneficially own, directly or indirectly, in the aggregate and otherwise than by way of security only, not less than eighty per cent of the corporation’s voting shares issued and outstanding; and |
| (c) | the corporation is not otherwise controlled by persons that are not Canadians. |
This domestic ownership requirement was later supplemented by an indirect ownership rule. In 1994, the Government of Canada promulgated the Canadian Telecommunications Common Carrier Ownership and Control Regulations, which set the minimum Canadian ownership level for ownership at the holding company level at 66⅔% of voting shares.4 Since 27 November 1996, section 10 of the Radiocommunication Regulations, pursuant to the Radiocommunication Act, requires that persons or entities eligible to be issued radio licences as radiocommunication common carriers must meet Canadian ownership and control requirements that are identical to those established for telecommunications common carriers.
Canada and the World
In 1987, the Government of Canada justified its imposition of foreign ownership restrictions on facilities-based telecommunications carriers in order “to harmonize Canadian policy with that of other countries and ensure our national sovereignty, security and economic, social and cultural well-being.” However, just 10 years later, Canada and many countries belonging to the World Trade Organization (WTO) adopted the Agreement on Basic Telecommunications (ABT), which has led to significant liberalization of trade and investment in basic telecommunications services. Under the ABT, many member countries of the OECD have reduced or eliminated their foreign ownership restrictions, and Canadian policy is out of step with that of the international community: almost all other OECD countries have more liberal telecommunications foreign investment regimes than Canada. Indeed, Industry Canada reports that only Turkey has tighter restrictions on foreign capital investment in basic telecommunications (see Figure 1.1). By the end of 2003, Canada’s FDI regime could be the most restrictive in the OECD.
Like Canada, many OECD countries have relatively small economies that are challenged by sovereignty issues. Some of these countries have concluded that the benefits of increasing access to foreign capital outweigh the implicit costs of any associated loss in sovereignty. Other nations have sought policy mechanisms other than industry-wide foreign ownership restrictions to resolve their sovereignty issues (see Appendix 4). For example, in New Zealand, there is a statutory 49.9% limit on foreigners owning shares in Telecom New Zealand, along with the government possessing a “golden share” or “Kiwi share”;5 all other telecommunications operators are not subject to any restrictions whatsoever on the foreign direct investment they obtain. In Australia, the once fully government-owned and leading telecommunications company, Telstra, will be subject to a 35% limit on total foreign ownership and a 5% limit on individual foreign ownership, while the rest of the sector must undergo a foreign investment approval regime which is applied to all sectors of the economy. Public ownership of the incumbent telecommunications provider is also a popular alternative.
Figure 1.1
International Benchmarking
Investment Restrictions in OECD Countries
The sovereignty issue, however, also concerns countries with large economies. The United States has established a licensing regime whereby the country’s regulator, the Federal Communications Commission (FCC), reviews all foreign mergers or takeovers within the sector that involve more than 20% of the voting stock of a telecommunications common carrier to ensure that they are in the “public interest.” Clearly, the experiences of these countries, in terms of striking the right balance between encouraging investment in the telecommunications sector and maintaining their sovereignty and security, are of particular interest to the Committee.
The ABT and WTO Negotiations
Foreign ownership regimes have been, and continue to be, a negotiating element in WTO negotiating rounds, the next round of which will take place sometime between 2005 and 2007. Canada should, therefore, consider any initiative to liberalize its foreign ownership restrictions in the context of overall trade policy. Canada might be able to extract concessions in telecommunication services or in some other important domain, such as agriculture, in return for liberalizing its foreign ownership regime in telecommunications.
Figure 1.2 maps out the relative positions of a number of ABT signatory countries in terms of foreign ownership restrictions and liberalized services. Canada places well in terms of liberalized services, but is among a handful of countries that impose broad foreign ownership restrictions (majority foreign ownership disallowed). Examples of the services covered by the ABT include voice telephony, data transmission, telex, telegraph, facsimile, private leased circuit services, fixed and mobile satellite systems and services, cellular telephony, mobile data services, paging, and personal communications systems.
Figure 1.2
Scope for Liberalization and Foreign Ownership
Restrictions: Partial List of WTO Signatories
The Committee heard from a number of trade experts, but none were able to shed any light on the prospects of extracting concessions in return for relaxing Canada’s foreign ownership restrictions. At first glance, most other signatories have already made such reforms, and have also liberalized their services. One country that would likely place a significant value on a less restrictive foreign ownership regime in Canada is the United States. Although some major U.S. investors, such as SBC Communications Inc. (the parent company of Southwestern Bell Telephone Company) and AT&T Corporation, have recently decided to withdraw their investments in Canada, the Committee cannot a priori rule out the possibility of gaining U.S. concessions if Canada liberalizes its foreign ownership regime.
Reforms recommended by the Committee, as laid out in this report, are necessary, and the sooner the better. Since WTO negotiations take many years to conclude — sometimes as much as a decade — only definite and substantive concessions could possibly justify delaying reforms to Canada’s telecommunications sector.
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Under the Telecommunications Act, telecommunications carriers that own or operate facilities are required to be Canadian owned and controlled. That means that Canadians must own not less than 80% of the corporation’s voting shares, 80% of the members of the board of directors must be Canadian, and the corporation must not be otherwise controlled by persons who are not Canadian. [Larry Shaw, Industry Canada, 12:9:50]
The regulations also permit up to one-third for an ownership of the voting shares of a telecom holding company. This is done by defining “What is Canadian” for the purposes of the Act. Obviously a Canadian citizen is a Canadian for the purpose of measuring Canadian ownership, but also a Canadian corporation or a qualified corporation … is defined as “Canadian”. To be a qualified corporation, it must have a maximum of one-third foreign ownership and be controlled, in fact, by Canadians. [Larry Shaw, Industry Canada, 12:9:50]
[F]or example, if we use BCE as the holding company, and Bell Canada as the operating company, there can be up to 20% direct foreign ownership of Bell Canada, and up to one-third foreign ownership of BCE. When you do the math and work it through, you end up with 46.6% combined direct and indirect foreign ownership. [Larry Shaw, Industry Canada, 12:9:50]
BCTel and QuebecTel were grandfathered under the Telecommunications Act when it came into force. However, since that time, the company has merged with AGT, or what became TELUS … is now below the ownership level so that TELUS is no longer grandfathered. It’s subject to exactly the same rules as every other company … [Larry Shaw, Industry Canada, 12:11:00]
[A]lmost all other OECD countries have telecommunications investment regimes more liberal than Canada. Only Turkey is more closed, but it too has indicated that when its monopoly for the state owned provider ends later this year, it will allow up to 49% foreign investment. [Peter Harder, Industry Canada, 12:9:40]
Golden shares are also a tool that is used to limit access to incumbents … these golden shares are held by governments in Italy, Hungary, Netherlands, Spain and Turkey. I should note that the European Commission has said that it will take action against member states that continue to maintain golden shares. [Dimitri Ypsilanti, Organisation for Economic Co-operation and Development, 19:15:40]
Australia has a system of prior approval, which most market players don’t view as being restrictive in that it’s automatically granted to WTO signatories, the signatories of the basic telecom agreement with the WTO. [Dimitri Ypsilanti, Organisation for Economic Co-operation and Development, 19:15:35]
New Zealand is an interesting case because they have a two-tier approach to limiting ownership in the incumbent. First, there’s an overall limitation of 10% on voting shares that any single party can hold without any prior consent. In addition, there’s a cap on foreign ownership. [Dimitri Ypsilanti, Organisation for Economic Co-operation and Development, 19:15:35]
There are no restrictions on the nationality of people who run a Telco. British Telecom is now actually run by a Dutchman. One of the mobile companies has a chief executive who is American. One of two deputy chief executives in BT is French; and we benefit hugely from the range of expertise that having these executives come into the UK has delivered. [David Edmonds, OFTEL, Government of the United Kingdom, 22:9:45]
We made significant contributions to liberalization in several areas of which you’re familiar while dodging the main bullet on removal or substantial reduction of foreign investment restrictions. [Gerald Shannon, International Trade Consultant, 24:16:00]
Canada has long been an influential member of the WTO … and it is always with some pride that I point out … the influence this country has had in shaping the new pro-competitive international telecommunications regime. I fear that if we do not finally act to remove restrictions on foreign ownership our influence will turn to embarrassment. [Hudson Janisch, University of Toronto, 16:15:55]
I would not be one who would argue that we should dismantle our regime until such time as we were in a negotiating mode and we would be really satisfied we would get something for our offering. [Gerald Shannon, International Trade Consultant, 24:17:30]
Now, a timetable for these broader changes … I think it could coincide with the current schedule for the WTO talks, which are scheduled to be concluded by January of 2005. So … it could be appropriate and indeed it might even enhance Canada’s negotiating position in the upcoming WTO round. [Michael Sabia, Bell Canada Enterprises, 20:9:25]
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