INST Committee Report

Canada is a world leader in the telecommunications equipment and services sectors. According to the OECD, Canada’s relatively high standing in telecommunications services is attributable in large part to the regulatory policy frameworks governing the sector. Despite this accolade, the OECD notes that some reforms to the regulatory framework governing the sector are required; in particular, the OECD recommends that Canada eliminate the restrictions on foreign direct investment in the sector since they likely harm the development of local facilities-based competition.⁶ A number of Canadian telecommunications experts, as well as many industry participants, agree with this conclusion and suggest that these restrictions have reduced the availability of investment dollars for building a modern telecommunications infrastructure, retarded the deployment of broadband services, and lengthened the transition period from what was once a monopoly industry to a more competitive structure. Since such adverse impacts run counter to other policy objectives of government — namely, maintaining a modern telecommunications sector and fostering innovation, as well as promoting broadband deployment —policy-makers must be kept apprised of these collateral impacts and should periodically review the policy options available to properly balance all these government objectives.

With this task in mind, the Committee begins with an evaluation of the evidence concerning the alleged adverse impacts of Canada’s foreign ownership restrictions on investment in telecommunications. We will first attempt to determine whether or not these restrictions are a significant impediment to investment in telecommunications, as well as looking to the statistics to see if they are a binding constraint on the balance sheets of key telecommunications companies. The Committee will also consider the impact of these restrictions on the financial stability of the sector. Finally, the Committee will address other influential factors that affect investment decisions in Canada’s telecommunications sector and industry structure, notably the regulatory framework.

Foreign Ownership Restrictions and Foreign Direct Investment

A.    The Statistical Evidence

The Committee was provided with statistical evidence that investment in Canada’s telecommunications sector has grown continuously throughout the 1990s in nominal terms, but has languished in both real and relative terms during this time — a period that coincides with the application of Canada’s foreign ownership restrictions in the telecommunications sector. Figure 2.1 points out that capital expenditures made by wireline and wireless telecommunications services providers rose modestly in the late 1990s, spiked in 2000 and 2001, but plummeted in 2002. The capital expenditures of wireline and wireless telecommunications companies in 2002 were no greater than those of 1997 levels in real terms (i.e., discounted for inflation).

Figure 2.1

Figure 2.2 is even more discouraging. Between 1981 and 1993, Canada was by far the leading destination for investment in telecommunications throughout the OECD. Since then, Canada has lost its top ranking to the United States, and has only slightly outperformed the rest of the OECD.

Between 1981 and 1993, per capita investment in the Canadian telecommunications sector was 31% higher than the average in OECD countries (excluding Canada and the United States) and 15% higher than in the United States. Of particular interest here is that Canada continued to outperform both the United States and all other OECD countries by more than 15%, on average, between 1990 and 1993 in spite of enduring a more severe recession — both in terms of its depth and duration — than did most of these countries. Between 1993 and 2001, however, investment in the Canadian telecommunications sector per capita was 49% lower than that of the United States, although it was still 8% higher, on average, than that of all other OECD countries.

Figure 2.2

Clearly, the United States has proven to be the leading magnet for investment in telecommunications infrastructure since 1993. The United States is more rapidly transforming and preparing itself for the knowledge-based economy than are other OECD member countries. Yet some industry analysts argue that the United States has over-invested in the telecommunications sector. In any event, if this trend continues, the Committee is concerned that Canada, whose primary competitor country is the United States and not other OECD countries, will become a laggard in telecommunications infrastructure and services, which could further hinder Canada’s industrial competitiveness in the years to come.

The above data suggest that problems in attracting investment in Canada’s telecommunications sector transcend the business cycle; there are structural forces at play. Although Canada’s poor performance in attracting investment relative to the United States coincides with the period in which foreign ownership restrictions were in force, the Committee does not attribute this deterioration solely to foreign ownership restrictions. Other factors such as population density and distribution, productivity issues, tax levels and structure, regulatory policy and fiscal policy may also have had an impact. The Committee will now look to supporting anecdotal evidence.

B.    The Anecdotal Evidence

The Committee heard from all types of telecommunications common carriers. Wireless companies, incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs), and cable television companies recounted their unique experiences in raising investment capital under the current foreign ownership regime. The Committee will cite some of the anecdotes from each class of competitor, but it may be useful to precede them with an indication of the foreign composition of each company’s shareholdings.

Table 2.1
Foreign Ownership in Canadian Wireline and Wireless Operators

Table 2.1 indicates that, of the six leading wireline telecommunications carriers in Canada by 2001, only AT&T Canada had reached its maximum allowable direct and indirect foreign ownership, though Call-Net Enterprises and GT Group Telecom may have reached the maximum allowable direct ownership limit. For the most part, direct and indirect foreign ownership together varied between 25% and 31% in 2001. Foreign ownership restrictions were, therefore, a binding constraint on only one operator in 2001, and there was ample foreign investment “headroom” remaining then. Unfortunately, the data are more than two years old, and a lot has changed since then. The sector has seen a number of bankruptcy filings and capital restructurings, with the result that the data may be misleading.

Wireless telecommunications companies not affiliated with an incumbent wireline company were emphatic that Canada’s foreign ownership restrictions are an impediment to realizing their investment plans. Recent new entrants such as Microcell Telecommunications argued that strategic investors were essential to their investment plans, not only for the badly needed capital they would provide, but also for their managerial expertise, operational know-how and technology transfers; in turn, Canadian institutional investment is often conditional on there being such a strategic investor. Microcell claims that Canadian capital markets do not have many of these strategic investors, at least not in sufficient number to meet Microcell’s and other telecommunications companies’ financial needs. In its pursuit of foreign strategic investors, Microcell was, on a number of occasions, turned away when it could offer only non-voting stock, something in which strategic investors have little interest. Strategic investors demand a say in the operations of the companies in which they invest, a say that is commensurate with the size of investment they make. Foreign ownership restrictions have thus curtailed Microcell’s investment agenda and the roll-out of its services.

Rogers AT&T Wireless echoed many of the frustrations Microcell expressed. For Rogers AT&T, a traditional wireless company with 20 years of history, the impact of Canada’s foreign ownership restrictions was felt hardest on its cost of capital and, therefore, mostly on its “bottom line,” which has yet to show a positive balance. The removal of the foreign ownership restrictions would allow it to pursue a more aggressive deployment in third-generation (3G) wireless technologies.

AT&T Canada and Call-Net told almost identical stories. These wireline companies are in direct competition with the incumbents, and foreign ownership restrictions are just one of a number of impediments they face in making inroads against their well-established rivals. The type of investors they seek cannot easily be found in Canada, but they can be found in the United States and possibly in other foreign capital markets. The case of AT&T Canada was particularly telling, as it recently lost AT&T Corporation of the United States as an investor subsequent to the Canadian company’s capital reorganization, which saw many creditors become equity investors.

According to Call-Net, the removal of the restrictions by themselves will be of little value to wireline competitors. Indeed, Call-Net claims that the removal or relaxation of the foreign ownership restrictions without further reforms to the regulatory framework might put it at a greater competitive disadvantage with incumbents, such as Bell Canada and TELUS Corporation, rather than improve its relative situation. Therefore, AT&T Canada and Call-Net have called for the immediate removal of the foreign ownership restrictions as the first step in a multi-stage reform of the regulatory framework. They claim that, once these reforms are in place, AT&T Canada and Call-Net will be attractive higher-risk investment opportunities for foreign investors.

Bell Canada Enterprises (BCE) and TELUS Corporation recounted very different experiences than their much younger competitors. Neither incumbent claimed to have been constrained in any way by the foreign ownership restrictions, which apparently have not imposed any impediment to their investment plans. Both companies successfully raised equity capital in the past year in spite of considerable turmoil in the capital markets. Moreover, since 2000, both companies were able to reduce their foreign equity participation.

Both BCE and TELUS favoured the removal of Canada’s foreign ownership restrictions provided a number of conditions were met, including, most importantly, the rejection of tiering or licensing regimes in their stead. While both companies were sceptical that such a move would spur any significant new FDI in the near term — because of prevailing financial uncertainty — they believed that Canada would benefit from a liberalized investment framework in the longer term.

Where these two companies differed was on the issue of regulatory reform. TELUS expressed concern over the regulatory regime in Canada, as it believed that, for different reasons than AT&T Canada and Call-Net, recent decisions by the CRTC cast doubt on the investment climate. BCE expressed concern over alternative regimes, such as that of the United States, and advised caution in terms of regulatory reform of what is, in its opinion, one of the best regulatory frameworks in the world.

The cable television industry brought up a number of administrative complexities created by foreign ownership restrictions. Its representatives also came armed with a complete impact statement of these restrictions on the incumbent telephone and cable television companies. According to the industry’s research, the restrictions add 76 basis points to a telephone company’s weighted-average cost of capital (WACC) and 189 basis points to a cable television company’s WACC. Given that the asset base of the combined telecommunications and cable television sector approaches $67 billion, the total cost of the foreign ownership restrictions is estimated at $675 million per annum. Rogers Cable, Shaw Communications and COGECO Inc. then emphasized the point that the removal of the foreign ownership restrictions could lead to much-needed and improved profitability in the telecommunications sector, lower pricing of its services, and/or an extension of broadband networks into less densely populated regions.

Cost of Capital and Financial Stability

Statistical evidence demonstrates that investment in Canada’s telecommunications sector relative to that of other OECD countries has declined in the past decade. This decline coincides with the application of Canada’s foreign ownership restrictions. The anecdotal evidence, as provided by the telecommunications companies themselves, further suggest that these restrictions are at least partially linked to Canada’s relatively poor investment record in the telecommunications sector. The companies claim that the link between foreign ownership restrictions and relatively poor investment is the cost of capital. Simply put, foreign ownership restrictions limit the pool from which telecommunications companies can draw investment, and the resultant reduced supply of investment capital raises the cost of equity capital. Particularly hard hit are the new entrant firms or CLECs that are forced to substitute debt capital for equity capital, thereby raising their debt-equity ratios to realize their investment plans. Higher debt-equity ratios among the new entrants mean greater financial leverage and increased vulnerability to failure, particularly in economic downturns. In a world of increasingly risk-averse investors, higher debt-equity ratios also mean a higher WACC, and a higher WACC means less investment.

Investments can also be financed by internal sources of capital. The incumbent telecommunications companies have greater access to internal sources of capital than new entrants. Incumbent telecommunications companies, with more than 100 years’ head start in the deployment of infrastructure, have also acquired the necessary technical and managerial expertise and have built a solid reputation for providing a satisfactory return on investment. These factors also influence a company’s cost of capital. Canada’s foreign ownership restrictions cannot, therefore, be the sole cause of the imbalance in the cost of capital between ILECs and CLECs, nor can their removal be a complete remedy to the sector’s capital woes.

Evidence supports the theory that foreign ownership restrictions raise the cost of capital which, in turn, reduces capital investment. The Committee was told that, in late 2001, BCE’s average cost of capital was about 6.3%, while the cost of capital for a typical wireline CLEC, e.g., GT Group Telecom, was in the order of 20%. In a case where both BCE and GT Group wanted to raise and invest $1 billion, the nearly 14% differential in the cost of capital between the two companies would have required GT Group to bear nearly $140 million in additional financing costs each year. As it turned out, this differential was unsustainable, and not surprisingly, in mid-2002 when the financial bubble in telecommunications burst, GT Group sought court protection from its creditors. Although the Committee realizes that this episode fits the scenario described above, more evidence — industry-wide evidence — would be helpful.

A much broader examination of the cost of capital impact of Canada’s foreign ownership restrictions was provided to the Committee. Network Research Inc. conducted a study of the impact of Canada’s foreign ownership restrictions in telecommunications that included Aliant Telecom, Bell Canada, Manitoba Telecom Services (MTS), SaskTel, TELUS, COGECO Cable, Rogers Cable, Rogers Communications, Shaw Communications, Videotron Cable Systems and Vidéotron Ltée.⁷ The researchers estimated the cost of capital for Canadian incumbent telephone companies and Canadian cable television companies to be 8.9% and 10.37%, respectively. These estimates were obtained using 25-year equity market returns, adjusted for stock betas to account for perceived risk and market volatility. The study’s two main findings were:

The debt-equity ratio profile of the industry, as suggested above, is also borne out by research. Before the recent restructurings of Call-Net, AT&T Canada and GT Group, the book equities of these companies were negative, so a debt-equity ratio calculation was not even possible. In its place, the Committee refers to data in Lemay-Yates Associates Inc.’s study of the sources of financing of five major telecommunications carriers between 1998 and 2002 (see Figure 2.3). The incumbents clearly have a decisive advantage over new entrants in terms of the diversity of sources of financing. While the Committee believes that Canada’s foreign ownership restrictions have contributed to the scale and profile of debt-equity ratios across the industry, it cannot determine its exact contribution because new entrants in capital-intensive operations typically have higher debt-equity ratios than their incumbents; these two factors, along with others, cannot be separated out.

Figure 2.3
Sources of Financing of Major Telecommunications
Carriers in Canada — 1998-2002

Investment, Industry Structure, Legislative Framework and the Regulatory Environment

A recurring theme in the Committee’s hearings was that Canada has modern telecommunications infrastructure, and that Canada is a world leader in both the telecommunications equipment and services sectors. Consequently, Canadians enjoy some of the highest quality telecommunications services at the lowest prices in the world. The Committee recognizes that Canada’s current position as a world-leader in this industry is in part due to a modern regulatory framework. In the words of the OECD:

The regulatory framework is transparent   and allows for full participation of all interested parties. Consensus building has been a key factor in the development and implementation of regulations.⁸

It is clear to the Committee that the telecommunications landscape is changing rapidly and that the private sector is adapting well to the introduction of new, innovative technologies and is investing for the future (see Chapter 4). The Committee is not convinced, however, that Canada’s legislative framework in telecommunications services sector is showing the same flexibility. For example, while the OECD is generally supportive of Canada’s regulatory framework, it is critical of Canada’s reliance on foreign ownership restrictions in telecommunications to address sovereignty and security concerns in a period when many other OECD countries have modified their regulatory regimes to address these concerns in other, less discriminatory ways. The Committee believes that it is essential that the federal government and Parliament keep abreast of technological and industrial changes in the telecommunications services sector. The legislative framework governing the sector should reflect, and even anticipate, change in order that growth and innovation is not constrained by outdated legislation. The Committee therefore believes that there should be routine parliamentary review of the Telecommunications Act. Accordingly, the Committee recommends:

1.  That the Government of Canada amend the Telecommunications Act to require a mandatory five-year review of the Act by a parliamentary committee.

Foreign ownership restrictions are a barrier to entry into telecommunications, through their effect on a new entrant company’s cost of capital. A higher cost of capital slows the rate of capital investment and, in turn, the roll-out of competitive services. However, foreign ownership restrictions are not the only barrier to entry into the telecommunications sector. There are a number of competition-related issues, each probably more important than foreign ownership restrictions that must be worked out before any appreciable investment, foreign or domestic, will be directed towards Canadian telecommunications companies and the expansion of their infrastructure.

The Committee was told of a number of such barriers to entry into the local services market. They include local residential and business prices set below their costs, the determination and pricing of an “essential facility” of an ILEC, and problems related to the co-location of a CLEC’s facilities with those of an ILEC. The Committee also recognizes that there may be other barriers than those listed here. Together, they may explain the lack of any appreciable telephone wireline competition in the local services market.

Beginning with the pricing barrier — whereby prices for local telephone services in some areas are sometimes lower than their cost — there is clearly a conflict between public policy objectives. Prices are kept low by regulation and are financed by cross-subsidy policies among different services to fulfil the objective set out in section 7(b) of the Telecommunications Act, “to render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada.” The Committee has no quarrel with the balancing act that the CRTC has chosen here. Recent rate-rebalancing decisions of the CRTC have managed this issue well.

In dealing with the other barriers, the CRTC has made a number of decisions that it believes are consistent with its preference for “facilities-based competition.” In the CRTC’s opinion, over the long term, facilities-based competition will best achieve the objectives set out in the Telecommunications Act. The CRTC also recognizes that a transition period to a facilities-based competition era is needed and requires acceptance of a hybrid approach, whereby CLECs will use a combination of their own telecommunications facilities and those of an ILEC. The hybrid approach combines facilities-based competition and resale competition, and is justified as a means to accelerate the realization of full-fledged facilities-based competition.

A number of interveners challenged the CRTC’s interpretation of the Telecommunications Act and a number of its consequential decisions. AT&T Canada, Call-Net, the Competition Bureau and a number of telecommunications experts focused their complaints on what they see as the CRTC’s pursuit of facilities-based competition to the exclusion of all other forms of competition. AT&T Canada and Call-Net also contested CRTC decisions on what constitutes an “essential facility” at this early stage of competition and on the pricing of such ILEC facilities. AT&T Canada and Call-Net prefer a much broader definition of an essential facility than determined by the CRTC, as well as pricing of such facilities at a wholesale price — not retail.

The Committee notes that nowhere in the Telecommunications Act is a limit placed on the form of competition required to achieve its stated objectives as described in section 7(f), “to foster increased reliance on market forces for the provision of telecommunications services …” and in section 7(g), “to encourage innovation in the provision of telecommunications services.” In the Committee’s view, Canada should embrace all forms of competition, not just “facilities-based competition.” Although facilities-based competition is viewed by many (including the OECD) as the only form of competition in the telecommunications industry that is “sustainable and effective,”⁹ Canada’s vast geography and low population density pose particular challenges to this model. In Canada, facilities-based competition is unlikely to be feasible in a large number of communities in Canada, and resale competition may be the only form of competition that some remote and rural regions of Canada are ever likely to see. Facilities-based competition in Canada is, as put succinctly by the Commissioner of Competition, “pipe dreaming.”

At the same time, the Committee understands that facilities-based competition, rather than resale competition, would better promote innovation in telecommunications over the longer term, because innovators will be better able to reap the benefits of their innovations. The goal of facilities-based competition is laudable and probably achievable in many urban areas of Canada.

The Committee also takes issue with SaskTel’s view that “it is far too early to conclude that local competition has failed in Canada and further regulatory intervention is required” [Donald Ching, SaskTel, 24:16:20]. When the incumbents maintain 92.2% of the local business lines and 99.4% of the local residential lines for a total 96.8% of all end-user phone lines six years into the transition from monopoly to competition,¹⁰ something is demonstrably wrong.¹¹ At the same time, the Committee recognizes that this same pattern (competition developing more rapidly in the long-distance market than in local markets) has been witnessed throughout the OECD, and that, on average, overall competition has built up more rapidly in Canada than in other OECD countries.

The Committee understands that the CRTC has a difficult role. Moreover, the Committee is aware that there are already a number of mechanisms or processes in place to deal with these differences of opinion. Cabinet appeals are already under way and the Committee does not want to interfere with the regulatory process.

Restrictions on foreign investment, far from contributing to Canada’s telecom policy, are in fact limiting our industry. The rules may in theory apply equally to all, but in practice a two-tier system of access to capital has been established. Restricting foreign investments has a particularly negative effect on new entrants, the very players who are driving innovation. [André Tremblay, Microcell Telecommunications Inc., 13:15:55]

[A]ccess to capital is essential for dynamic and efficient industry and squeezing out foreign capital is inconsistent with an effective capital market. [Konrad von Finkenstein, Competition Bureau, Industry Canada, 23:16:50]

It’s imperative that Canada complete the transition to competition. … Absent robust, extensive and intensive competition the telecommunications system cannot be the enabler of economic activity, productivity and employment that it must become. [Richard Schultz, McGill University, 21:16:05]

The foreign investment restrictions are also contradictory to other government policies, in particular, development of broadband access and interestingly, the promotion of foreign direct investment. [Robert Yates, Lemay-Yates Associates Inc., 26: 9:20]

Purely risk capital in Canada is a $2.5 billion industry per year. Bell Canada spends twice that in cap ex every year. You’re not going to build an industry to compete with Bell Canada on a $2.5 billion risk capital business. [Robert Yates, Lemay-Yates Associates Inc., 26:10:05]

Foreign capital is not just about bringing cash to Canada but involves bringing outside financial ideas, financial influence, sources of technology and managerial efficiency to Canadians. [Konrad von Finkenstein, Competition Bureau, Industry Canada, 23:16:50]

Our experience over the last 15, 20 years has certainly been that inward investment has been a stimulus, far beyond just the stimulus of the finance that has come in, which is considerable — we get some $50 billion a year inward investment — but a stimulus in terms of ideas and activity. It has been of tremendous benefit to a very small island. [Claire Durkin, Department of Trade and Industry, Government of the United Kingdom, 22:9:50]

Staying strong and healthy at home in Canada requires unfettered access to both Canadian and international capital markets. [Leonard Asper, CanWest Global Communications, 26:9:15]

Like other competitors, Microcell has had some success in attracting foreign investment. But our experience is that the legal limits on permissible foreign holdings, especially for equity, are reached quickly, often well before financing needs are met. After the limits are hit, foreign investment must be restricted to non-voting equity. [André Tremblay, Microcell Telecommunications Inc., 13:15:55]

[T]he bulk of higher risk capital comes from beyond our borders … [b]ut more than just the pure dollars, in order for us to successfully compete against the large goliath incumbents Bell Canada or TELUS, competitive providers like us need to be able to align ourselves strategically with international partners who expect to have the ability to exert influence commensurate with their committed risk, certainly not an unreasonable requirement. [John McLennan, AT&T Canada, 14:15:50]

Canadian private equity investors … were only interested in participating if a knowledgeable telecom investor came along, or, more important, if a strategic investor came along. In talking to those knowledgeable investors, certainly what we found was that the restriction on foreign ownership in Canada is a tremendous impediment to entering the market. [Edward Giacomelli, Microcell Telecommunications Inc., 13:17:00]

The ability to obtain financing under the present investment restrictions is starkly asymmetrical. The ILECs can fund their day-to-day operations from internally generated cash flows and do not need risk capital. Competitors, on the other hand, which are building new businesses and new networks are highly dependent on external sources of financing … [Robert Yates, Lemay-Yates Associates Inc., 26:9:20]

[T]he restrictions on foreign investment serve to shut out a major potential source of financing for the telecom competitors in Canada. The restrictions do not do this for the ILECs, for the large telephone companies. The large telephone companies have many diverse sources of financing for their activities. [Robert Yates, Lemay-Yates Associates Inc., 26:9:20]

If I may be permitted to borrow a phrase from George Orwell’s Animal Farm, “All animals are equal but some animals are more equal than others.” [André Tremblay, Microcell Telecommunications Inc., 13:16:05]

In the context of our high capital costs, the current obstacles to foreign capital are an impediment. If such restrictions are eliminated, Rogers Wireless will have better access to foreign capital at a lower cost. Removing the restrictions will enable firms like Rogers to obtain equity funds at a reasonable cost, to be less dependent on its debt and to make the network investments required to meet consumers’ needs. [Francis Fox, Rogers AT&T Wireless Inc., 13:15:40]

[A]s a result [of the foreign ownership restrictions], whatever kind of shares we … issue …, they will be devalued by virtue of those rules, and therefore, the cost to us to go out and raise money … is higher. We’re either paying more to borrow money or we’re paying more indirectly to issue equity because we’re selling that equity at a substantial discount compared to our American compatriots who are in the same business. [John Tory, Rogers Cable Inc., 25:16:00]

Leading with such a review [on foreign ownership restrictions] is like trying to fix your four flat tires on your car by filling up the gas tank. Until you have fixed the real problem, the one preventing you from moving forward, you are not going to go anywhere. More foreign capital won’t get competition moving. It won’t level the playing field. It won’t reduce the inflated rates that we pay to the incumbents for access to their networks that they inherited from a 100-year monopoly. [William Linton, Call-Net Enterprises Inc., 14:16:00]

If we were to list the three most urgent areas of attention for us as a competitive telco, foreign ownership might come in a distant fourth. Do we support the liberalization of the restrictions? Yes. But in the absence of domestic telecom policies that clearly encourage competition to us this is a dead issue right now. [William Linton, Call-Net Enterprises Inc., 14:16:00]

[C]hanging the foreign ownership restrictions is necessary. It’s not the total solution to the problem. It’s a piece of the puzzle, so please let’s get on with it. [John McLennan, AT&T Canada, 14:16:25]

From the point of view of corporate governance … [l]imitations on the type and amount of allowable foreign investment have the serious consequence of driving up the cost of financing. [André Tremblay, Microcell Telecommunications Inc., 13:16:00]

[I]nvestors, foreign or domestic, can clearly invest in ILECs and expect a predictable return and dividends. ILECs do not attract and in fact do not need risk capital. Competitors on the other hand are dependent on the availability of risk capital, which is a severely limited resource if only Canadian sources are considered. [Robert Yates, Lemay-Yates Associates Inc., 26:9:25]

[I]nvestors are influenced in their assessment of where to invest by the certainty of a company’s cash flow. … Free cashflow and its relationship to debt levels has emerged as a major credit rating determinant. It’s these ratings that drive investors’ perception of risk and subsequently the cost of debt and equity. [James Peters, TELUS Corporation, 16:15:40]

Our foreign ownership rules haven’t protected Canada from instability in the marketplace. Per capita, we may have had even more instability than the U.S. We’ve had a number of bankruptcies; all the major competitors have either restructured or are going through restructuring … [Larry Shaw, Industry Canada, 12:11:20]

[I]t’s not about selling a business, it’s about selling equity at fair prices, so that you can keep a healthy balance between debt and equity. Indeed, the markets are too narrow in Canada. [Louis Audet, COGECO Inc., 25:16:00]

We could open the floodgates tomorrow and invite every international investor we can find to invest as much as they would like in the Canadian telecom industry, but why would anyone who could so much as balance a chequebook choose to invest in a sector that has claimed so many victims [Group Telecom, Accent, C1 Communications and Connect, 360 Networks and MaxLink] and seen so many investments disappear? [William Linton, Call-Net Enterprises Inc., 14:16:00]

Although the competitive telecom industry landscape is certainly mired with failures and exits, as we all know, experience from the past indicates that foreign entities are interested in investing in the Canadian market and in telecom competitors. [Robert Yates, Lemay-Yates Associates Inc., 26:9:20]

These rules … have a very asymmetric effect because the very companies that could be doing the new things and the dynamic things are the ones that get impacted most by the rules. [Robert Yates, Lemay-Yates Associates Inc., 26:10:05]

It is clear that the two major area monopoly providers who do a good job have strong balance sheets and are well funded to move forward. Their competitors are not in the same set of circumstances and as a consequence this creates certainly not a level playing field in terms of serving the best interests of Canadians.[Vic Allen, Upper Canada Networks, 14:15:35]

[G]iven the limitation on foreign equity participation, competitors have ended up with very high debt levels typically 70% or more of financing which is far higher than the ILECs. [Robert Yates, Lemay-Yates Associates Inc., 26:9:25]

Because of their monopoly legacy and the fact that they continue to control well over 90% of their local markets and the attendant certainty of revenue earnings and cash flow, I call them near monopolies. [John McLennan, AT&T Canada, 14:15:55]

The best example in Canada is look at long distance … it must be 10% of the cost of what it was. … It’s been a wonderful example of what competition can do in an area. We just want to extend that to local services for residential. We want to extend it to business services and to do that we need a few changes to the current policies set in place. [William Linton, Call-Net Enterprises Inc., 14:17:10]>

[T]he telecommunications service rates in effect in Canada are among the lowest in the world, and, in many cases — and this is often the problem — the services are provided at a loss. [Jean-François Hébert, Association des Compagnies de Téléphone du Québec, 16:15:30]

The most important change is the requirement for competitors … to have access to those parts of the network that will not be duplicated. They are called essential parts of the network. So for example, the drops that are into your house will never be duplicated. … We need reasonably priced access to those services … [William Linton, Call-Net Enterprises Inc., 14:16:05]

You are not going to overbuild the telecommunications infrastructure, especially the local part of the infrastructure. Nobody is ever going to finance that. … [W]e need access to that, not below the incumbent telcos’ costs but at a reasonable reduction in price from retail … [John McLennan, AT&T Canada, 14:16:10]

The Commission believes that in time, … facilities-based competition will best achieve the objectives set out by Parliament … in the Telecommunications Act. However, … it is necessary to have a period of transition … characterized … by a hybrid approach that allows new entrants to use the facilities of the incumbent telecommunication companies that are deemed to be essential ... [Charles Dalfen, Canadian Radio-television and Telecommunications Commission, 23:15:25]

The decision that came out from the regulator … very specifically said that they want facilities-based competition and facilities-based competition only. We have tried to make the point quite a number of times that there is no capital in the world available to overbuild a local telephone network. [John McLennan, AT&T Canada, 14:16:30]

I think it's too optimistic, too utopian to think that we can have pure facilities-based competition in Canada, we just don't have the sufficient people and density and [we have] the great geographic distances. [Konrad von Finkenstein, Competition Bureau, 23:17:35]

On the specific issues of access to capital in the telecom sector, TELUS strongly believes that the government must also undertake a timely review of the Canadian telecommunications regulatory regime as called for by the innovation strategy to ensure that the CRTC decisions are also instilling investor confidence and promoting investment. [James Peters, TELUS Corporation, 16:15:40]