Submission by Bell Aliant to the Consultation on a Digital Economy Strategy for Canada

Summary

Bell Aliant, as a leader in providing broadband to rural and smaller urban markets, provides an important perspective on Canada's opportunity to be a world leader in the digital economy. Like Government, we believe that greater involvement by Canadian business in the digital economy will build a stronger and more competitive Canada.

To help achieve this, Canada needs a policy environment that encourages investment in infrastructure while at the same time stimulating the adoption of digital technology by Canadian consumers and businesses.

Specifically, this submission provides a number of recommended actions for Government which will facilitate such an environment. In order to encourage continued investment in infrastructure, Bell Aliant recommends the following:

1. Repressive regulatory regimes such as mandatory wholesale access to Next Generation Networks are a disincentive to investing and create distortions in the marketplace. The Government's digital economy strategy should adopt a policy of encouraging investments in Next Generation Networks by ensuring that access by competitors to such networks is not mandated by regulation.
2. The digital economy strategy should continue to employ government subsidy programs in those pockets of the country where investment in broadband may be uneconomic. Proceeds from wireless spectrum fees and auctions could be one source of such government funding. Objectives of these programs must be realistic to ensure investment is properly managed and the programs must be designed so as to minimize administrative and operational complexity.
3. The government should consider the introduction of tax incentives to encourage investment in broadband infrastructure. For example, acceleration of capital cost allowance for assets used in the deployment of broadband networks would be a competitively neutral and efficient means of encouraging private sector investment in such networks. The government could also consider even further accelerated capital cost allowance for broadband assets deployed in small or underserved markets. The government should also re–examine its current SR&ED tax credit program to ensure that it is administered so as to maximize the opportunity to encourage investment in ICT, including software and applications.
4. Regarding the possibility of government establishing targets, the Government should be wary of setting targets, especially related to ICT infrastructure. Such targets can become quickly outdated and even harmful.

In order to encourage adoption of ICT, particularly by small and medium enterprises (SMEs), Bell Aliant recommends the following:

1. More research should be conducted to better understand the relatively slow pace of ICT adoption by Canadian SMEs.
2. Consideration should be given to tax policies to encourage adoption of ICT technology by Canadian SMEs. Specifically, consideration should be given to implementing a refundable investment tax credit for Internet connected devices.
3. Government should become a lead adopter of ICT within its agencies and departments. As part of this initiative, government should examine its procurement practices to ensure they encourage the use of innovative ICT solutions.
4. Government should develop policies and programs to address the shortage of ICT workers in Canada.

Submission

1.0 Introduction

Bell Aliant is one of North America's largest regional communications providers. We serve customers in six Canadian provinces (Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island and regions of Ontario and Québec) with innovative information, communications and technology services, including voice, data, Internet, television and value–added business solutions.

Bell Aliant brings an important perspective to the discussion on Canada's digital economy strategy. Bell Aliant is very much a rural service provider; generally even the urban centres we serve are small in comparison to the rest of Canada. Our territory is geographically diverse, ranging from urban centers such as Halifax, Nova Scotia and Sudbury, Ontario to more rural and remote communities including Senneterre, Québec and Nain, Newfoundland and Labrador. We cover a population of 5.3 million Canadians across 1.5 million square kilometres of some of the most rugged territory in the country. The challenge of serving Canadians in rural and remote parts of our country is one we meet every day.

Despite the vast geography and dispersed population we serve, we are a leader in Canada in the deployment of fibre and fibre–based services to the home. Bell Aliant is currently building a fibre optic network to deliver premium Internet speeds to our customers and a comprehensive line–up of fibre–based services including local phone, long distance, Internet, and 100 percent digital TV. We have the distinction of being the first communications company in Canada to cover an entire city — two cities in fact, Fredericton and Saint John, New Brunswick — with fibre–to–the–home (FTTH) technology. By the end of 2010, we will expand our FTTH network to include other major cities in New Brunswick and Nova Scotia. By 2012, Bell Aliant plans to invest over half a billion dollars to make fibre–to–the–home available to over 600,000 homes and businesses.

However, having world–class infrastructure is only part of the equation. Canadians have yet to embrace the full potential of this investment. We note the conclusions of the Expert Panel on Business Innovation (the Innovation Panel)¹ and the Institute for Competitiveness & Prosperity², that Canada's productivity growth lags that of other countries and that information and communication technology (ICT) spending levels account for over half of the gap in productivity growth. While we believe that Canada's ICT infrastructure is among the best in the world, the rate of ICT adoption by Canadian business, particularly by SMEs, is in need of improvement if Canada is to close the productivity gap.

It is our belief that Canadian business has an opportunity to dramatically increase innovation through the wider adoption of digital technologies, primarily ICT. Benefits of this innovation include increased payoff from R&D, improved business models, more efficient work practices, continuous improvement and application of leading–edge technology.³

We believe that there are two important issues which should be cornerstones of a Canadian Digital Economy Strategy: first, ensuring the continued supply of ICT through ongoing investment in infrastructure; and second, encouraging the use and adoption of digital technologies by Canadian business. Two of our own strategic objectives at Bell Aliant, to grow broadband and to retain our customers, align closely with these issues. Therefore the Consultation Paper's themes of Building a World–Class Digital Infrastructure and Capacity to Innovate Using Digital Technologies are the focus of our submission.

2.0 Building a World–Class Digital Infrastructure

Bell Aliant has a history of innovation and industry firsts in the deployment of world–class networks. From having implemented the first all–digital switched network to serve a province, to having deployed the first commercially available high–speed Internet service in North America, to being the first in Canada to cover an entire city with fibre–to–the–home technology, Bell Aliant is committed to network investment and innovation.

With our investment in a new fibre network, Bell Aliant has acknowledged the importance of digital networks in the vitality of communities and the delivery of services to enhance business and quality of life. The continued expansion and evolution of broadband networks is a key focus area within Bell Aliant and is fundamental to our service delivery strategy.

Bell Aliant has made massive investments in highly competitive markets through our fibre–to–the–node (FTTN) and FTTH programs. However, significant additional investments from the private sector will continue to be required to roll out next generation broadband (FTTH, wireless LTE, cable network upgrades to DOCSIS 3.0). A public policy and regulatory environment that encourages these investments is critical to Canada's continued success.

As Bell Canada has described well in its submission, despite some flawed studies that may suggest otherwise, the facts are that market forces in Canada have achieved remarkable success in ensuring that we have world–class infrastructure despite the challenges of our geography and population density. Nonetheless, there are (and will continue to be) challenges in more rural, low density areas for the private sector to invest in financially viable broadband networks. Government subsidy programs, when effectively structured, can improve the viability of private sector investment within these regions.

Bell Aliant has among the highest broadband coverage in North America despite the relatively rural demographic of the population we serve. Consistent with the recommendations from the Federal Government Broadband Task Force Report in 2001, Bell Aliant and its predecessor companies have embraced the importance of expanding broadband networks into higher cost areas made possible through various government subsidy programs. It is clear that these programs have significantly advanced the rollout of broadband capabilities into lower density areas.

While the continuation of government subsidy programs obviously comes at a price to taxpayers, this is money well spent, provided that programs are well designed and administered. Moreover, the federal government has a unique opportunity to use funds collected from wireless spectrum fees and auctions as one source of funding for such programs.

Of course, cost/benefit assessments must be reviewed to ensure subsidy programs are focused on investments that have the greatest impact in positioning Canada within the global digital economy. Technologies used to deploy broadband networks will continue to vary based on geography, population density and service requirements. Technologies deployed in one area may differ from other areas based on competitive market pressures and cost to deploy. Although the industry continues to advance speed and functionality of wireline, fixed wireless, mobile and satellite networks, each of these technologies can play a role in broadband service delivery in rural markets.

Moreover, government subsidy programs should be designed so as to minimize costs as well as administrative and operational complexity. Simplified programs (similar to the BRAND program of several years ago) allow for rapid deployment of networks, thus maximizing the benefits to Canadians.

Another area of critical importance to ensuring Canada's continued success in deploying world class infrastructure is regulatory policy. Organizations like Bell Aliant are risking massive amounts of capital to build brand new "next generation" networks using new technologies such as fibre–to–the–node and, more recently, fibre–to–the–home. However, the CRTC is currently considering requiring companies like ours who build such networks to make those networks available at regulated prices to smaller providers who choose not to take the risk and invest in infrastructure. For reasons which we have well explained during CRTC proceeding, such a policy would be counter–productive and a serious miss–step.

Mandating access in this fashion would undermine the incentive for companies who are building advanced networks to continue to invest in such networks. Such access would increase the risk and reduce the returns from an already challenging business case. And smaller markets such as those that Bell Aliant serves would be particularly vulnerable.

A CRTC decision on this matter is expected by September 1 this year. Of course, government has the ability to change any such decision if necessary and Bell Aliant urges the government to monitor this decision closely to determine whether and to what extent changes may be warranted.

Another area where government can play a role to encourage investment in infrastructure is that of tax policy. For example, acceleration of capital cost allowance for assets used in the deployment of broadband networks would be a competitively neutral and efficient means of encouraging private sector investment in such networks. The government could also consider even further accelerated capital cost allowance for broadband assets deployed in small or underserved markets. The government should also re–examine the administration of its current SR&ED tax credit program to ensure that it is administered consistently and liberally so as to maximize the opportunity to encourage investment in ICT, including software and applications.

Finally, the Consultation Paper has raised the issue of whether the government should set targets for Canada's digital economy strategy. While there is no doubt that establishing targets has some appeal on the surface, Bell Aliant believes such an exercise would be fraught with difficulty in practice.

We are living in an incredibly fast–changing environment. Any targets set today would no doubt be out–dated tomorrow. Trying to anticipate the future, on the other hand, is equally problematic, as both customer needs as well as technology are changing in ways that cannot be predicted. Targets set today can become irrelevant or even harmful tomorrow. As an alternative, Bell Aliant recommends continued monitoring by the government of Canada's performance, including infrastructure deployment.

3.0 Capacity to Innovate Using Digital Technologies

As stated by the Innovation Panel, the performance of innovation is a critical factor causing Canada's lagging productivity growth: "The analysis demonstrates that the persistent weakness of productivity growth in Canada is rooted in sub par business innovation."⁴ They go on to attribute a large portion of Canada's lower business innovation to lower levels of investment in ICT by businesses, particularly small and medium business,⁵ in comparison to counterparts in the USA.

There are a number of factors which may go some way towards explaining some of the gap in ICT investment. For example, there are differences in national economies such as the larger contribution by Canada's resources sector to GDP⁶, when compared to the US, a sector where investment in ICT is not needed to the same extent as other industries; smaller scale of markets which limits returns on ICT investment, smaller firm size, a greater proportion of SME's versus large enterprises in Canada, fewer Canadian head offices where ICT purchases are made. In addition, the ICT education and background of senior managers and the number of technical workers can all impact adoption ICT rates as can financial conditions, tax rates and government incentive.

Sixty one percent of SME's⁷ have not adopted ICT to industry expectations⁸ due to significant obstacles such as capital funding, capital costs and limited resources (people and equipment). In many ways, the recent recession appears to have placed SME's into a highly risk averse survival mode.

While the above are possible explanations for the relative lack of ICT adoption by small and medium sized Canadian businesses, it would appear that more research might help further explain the factors affecting this outcome and thus inform the appropriate policy response.

As for larger businesses⁹, there is a higher ICT adoption rate of sixty percent¹⁰ by such organizations. These large organizations have innovated through ICT investment in ICT connected solutions over the last decade. For example, a leading national grocery retailer over a five year period launched a concerted effort to enable tighter cost control through automated supply chain, in–store loyalty programs and enhanced video conferencing. Also, a well known natural resource company invested in increased communications systems throughout their processes to virtually eliminate inventory and waste costs.

Many of the tools and applications used in the above examples are already commercially available at retail. A visit to any home electronics retailer and or application store of leading companies such as Apple, RIM, Yahoo and Microsoft offer a wide range of Internet connected devices and applications for consumers and businesses alike. For organizations with more complex needs, vendors such as Cisco Systems, HP and IBM offer higher end solutions.

As one potential measure to create incentives for the adoption of ICT solutions by SMEs, we recommend that consideration be given to offering a refundable Investment Tax Credit on qualified expenditures for Internet Connected Devices. We recommend that businesses be able to bundle in the integration costs of such devices in to the device acquisition cost. ICT suppliers such as Bell Aliant can then demonstrate the value proposition to businesses to overcome any entrenched risk aversion. Such an Investment Tax Credit would offer Government the added benefit of a tool for targeted tax relief for small businesses located in rural and/or smaller markets.

In addition, the adoption of ICT within Canada's digital economy can be greatly influenced by Government's own use of these applications and technologies in the delivery of government services such as in the fields of health and education. It is therefore critical that Government not confine its focus to access to broadband but also to champion online service delivery and application innovation within its agencies and departments.

Government can leverage its role as one of the largest buyers of ICT in Canada to stimulate innovation. As a top ICT user, Government could implement a procurement initiative which identifies and implements innovative ICT to improve Government operations and services. Specifically, Government could

1. Identify ICT intensive projects with the potential to stimulate innovation;
2. Structure requests for proposal to support the creation of ICT solutions; and
3. Evaluate the proposals based on the innovativeness of the solution so the more innovative the solution, the higher the assessment of the proposal.

Following this approach would allow Government to become a lead adopter of ICT and take on a leadership role in the innovation process to the benefit of both government and suppliers. ICT providers will be encouraged to develop leading–edge solutions, which require technology and process innovation while engaging their suppliers and partners to enhance capabilities to design and implement the solutions.

Government services will also be provided in a more efficient and effective manner and operating costs will decline while service levels improve. As a result Canadians will enjoy higher quality and more accessible Government services. Finally, it will be possible for the solutions created by the ICT suppliers in fulfillment of the Government projects to be adapted and/or replicated for Canadian businesses, other branches of Canadian government or exported to international customers, multiplying the positive economic benefits.

The report "Innovation and Business Strategy: Why Canada Falls Short"¹¹ concludes in part that Canadian productivity, output and innovation lags that of other countries due to the lack of widespread ICT in small and medium businesses. We believe that rapidly increasing SME ICT investment ratios towards those of large enterprises will deliver tremendous, long term, sustainable economic and social benefits to Canada. We believe this Digital Economy Strategy and our investment in next generation networks, in particular, are the means to championing ICT in SME.

Finally, it would appear that Canada is facing challenges in the supply of skilled ICT workers. This is another area that should be addressed as part of any digital economy strategy intended to encourage adoption of ICT in Canada. Bell Canada has addressed this issue at some length in its submission and Bell Aliant fully supports its analysis and recommendations in this regard.

4.0 Conclusion and Summary of Recommendations

Bell Aliant believes that ICT organizations such as ours are critical to the success of Canada's digital economy. We enable technologies used by all sectors through ongoing capital investments and by encouraging the simultaneous adoption of ICT by business and consumers alike. We help stimulate innovation and productivity growth and are doing our part to build a sustainable competitive advantage for all Canadians.

A successful digital economy strategy is one which will allow organizations like Bell Aliant to continue to leverage our strengths in building networks and enabling innovation.

At the same time, the Government of Canada has an important role to play in creating a policy framework that promotes investment in and adoption of ICT infrastructure. Any such policy framework should be guided by the following principles:

1. Both infrastructure and innovation require significant investment by the private sector. Government policy should support, not discourage, such investment by relying on market forces wherever possible.
2. In geographic areas where development may be uneconomic, government programs and/or incentives should be implemented.
3. Government should work to establish incentives for adoption of ICT.

Specifically, we recommend a number of actions for Government which will facilitate such an environment. In order to encourage continued investment in infrastructure, Bell Aliant recommends the following:

1. Repressive regulatory regimes such as mandatory wholesale access to Next Generation Networks are a disincentive to investing and create distortions in the marketplace. The Government's digital economy strategy should adopt a policy of encouraging investments in Next Generation Networks by ensuring that access by competitors to such networks is not mandated by regulation.
2. The digital economy strategy should continue to employ government subsidy programs in those pockets of the country where investment in broadband may be uneconomic. Proceeds from wireless spectrum fees and auctions could be one source of such government funding. Objectives of these programs must be realistic to ensure investment is properly managed and the programs must be designed so as to minimize administrative and operational complexity.
3. The government should consider the introduction of tax incentives to encourage investment in broadband infrastructure. For example, acceleration of capital cost allowance for assets used in the deployment of broadband networks would be a competitively neutral and efficient means of encouraging private sector investment in such networks. The government could also consider even further accelerated capital cost allowance for broadband assets deployed in small or underserved markets. The government should also re–examine its current SR&ED tax credit program to ensure that it is administered so as to maximize the opportunity to encourage investment in ICT, including software and applications.
4. Regarding the possibility of government establishing targets, the Government should be wary of setting targets, especially related to ICT infrastructure. Such targets can become quickly outdated and even harmful.

In order to encourage adoption of ICT, particularly by SMEs, Bell Aliant recommends the following:

1. More research should be conducted to better understand the relatively slow pace of ICT adoption by Canadian SMEs.
2. Consideration should be given to tax policies to encourage adoption of ICT technology by Canadian SMEs. Specifically, consideration should be given to implementing a refundable investment tax credit for Internet connected devices.
3. Government should become a lead adopter of ICT within its agencies and departments. As part of this initiative, government should examine its procurement practices to ensure they encourage the use of innovative ICT solutions.
4. Government should develop policies and programs to address the shortage of ICT workers in Canada.

Organizations with extremely efficient processes and systems that deliver competitive products and services globally are the hallmarks of a thriving digital economy. At Bell Aliant, we are committed to doing our part to ensure consumers and businesses alike realize the benefits of a full digital economy, which delivers a competitive advantage for Canada.

To achieve this, we look forward to a Digital Economy Strategy which provides a policy environment that encourages private sector investment and supports the adoption of ICT by Canadian users.

¹ Innovation and Business Strategy: Why Canada Falls Short, Report of the Expert Panel on Business Innovation, Council of Canadian Academies, June 2009.

² Beyond the recovery, Institute for Competitiveness & Prosperity Report on Canada 2010, June 2010.

³ Innovation and Business Strategy: Why Canada Falls Short, April 2009 – the report from the Expert Panel on Business Innovation, operating under the auspices of the Council of Canadian Academies.

⁴ Innovation and Business Strategy: Why Canada Falls Short, Council of Canadian Academies, April 2009, page 26.

⁵ This is also the central theme of a March 2007 report by the ICTC entitled: Enhancing the Productivity of Small and Medium Enterprises through Greater Adoption of Information and Communication Technology by Roger L. Martin and James B. Milway.

⁶ Natural resources contributed 12% of Canada's GDP in 2008 (Natural Resources Canada)

⁷ Defined as payrolls of less than 500 employees — Small Business Administration (US) and Broadband.gov Website

⁸ IDC, Fine Tuning Your Strategy During an Age of Uncertainty: A Customer Segments View, 2008

⁹ Defined as companies with payrolls greater than 1,000 employees — Small Business Administration (US) and Broadband.gov Website

¹⁰ Yankee Group, Economic Downturn Sparks Upturn in UC, 2009

¹¹ Innovation and Business Strategy: Why Canada Falls Short, April 2009 — the report from the Expert Panel on Business Innovation, operating under the auspices of the Council of Canadian Academies