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Sectroal Regimes

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As part of its core mandate, the Panel was asked to review Canada's sectoral restrictions on foreign direct investment having regard to their impacts on competition and other economic, social or security goals as well as the compatibility of Canada's policies with those of other countries. Canada has a multitude of laws and regulations governing ownership in specific sectors as well as a number of company-specific statutes. Many company-specific statutes had their genesis in the mid-1980s to early 1990s, when they were enacted for the purpose of privatizing former Crown corporations.19

The Panel's mandate includes a focus on sectoral foreign ownership restrictions, which led to our review of the air transport, uranium mining, telecommunications and broadcasting, and financial services sectoral regimes. Directly or indirectly, each one of these ownership regimes has an impact on the degree of foreign investment in these sectors and the overall economy. Liberalization of existing sectoral ownership restrictions raises complex questions about domestic control of some of Canada's largest and best known companies and the integrity of other economic, security and cultural policies deemed essential for the nation.

Each sectoral ownership regime was established to address particular policy objectives, originated at different times, and has undergone varying degrees of regulatory and policy changes over the past three decades or so. Each of these sectors is heavily influenced by technological change and globalization. Consequently, the Panel welcomes the opportunity to review each sector from the perspective of advancing Canadian competitiveness.

As discussed elsewhere in this report, other countries maintain formal as well as informal controls on ownership in these as well as other industry sectors. The long-term trend internationally has been to liberalize market access by various means, including reducing restrictions on foreign ownership. Other countries have realized substantial economic benefits where greater market access has led to increased competition, innovation and investment and has attracted new talent.

The Panel notes that, for liberalization to achieve these positive outcomes, it must result in greater competitive intensity and bring new technology, know-how and entrepreneurial spirit. The Panel takes a realistic approach to sectoral regimes. We advocate liberalization where and to the extent that we are satisfied it will enhance Canada's competitive advantage.

A number of oral and written submissions maintained that Canada will eventually have to reduce certain sectoral ownership restrictions because other jurisdictions may adopt reciprocal policies or take other measures that could have an adverse impact on the ability of Canadian companies to compete abroad. Indeed, some argued that Canada should unilaterally and pre-emptively reduce or eliminate its ownership restrictions without obtaining any corresponding market access concessions on the part of other countries. However, the Panel questions whether it is appropriate for Canada to change the playing field in a way that disadvantages Canadian companies or competitiveness in Canada while foreign governments protect companies in the same industry from takeovers by Canadian investors. The Panel believes that reciprocity may be a relevant consideration for the assessment of liberalization in some sectoral regimes.

Other than with regard to the Bank Act, there has been no regular or comprehensive public review of these sectoral ownership restrictions for some time. The submissions received by the Panel and our work underscore the wisdom of mandated periodic reviews.

The Panel recommends that:

6. Individual ministers responsible for the sectors addressed in this report should be required to conduct a periodic review of the sectoral regulatory regime with a view to minimizing impediments to competition as well as updating and adapting the regulatory regime to reflect the changing circumstances, needs and goals of Canada. This review should be modelled on the Bank Act process and should occur on a five-year cycle. Ownership restrictions should be reviewed on the basis of:

  1. a statement of policy goals that reflect the current Canadian reality;
  2. an understanding that limitations on competition and investment may be required to address a market failure, a paramount social policy or a security objective;
  3. an understanding of the costs and benefits of any such restriction on competitive intensity; and
  4. an evaluation of whether existing restrictions — or alternative approaches — are the optimal means of achieving the stated policy goals.

Air Transport

Since the 1980s, the federal government has deregulated many economic aspects of the air transportation industry. The industry continues to be regulated with respect to public safety and security.

Canada limits foreign ownership of Canadian air carriers to 25 percent of voting equity. In addition, foreigners may own non-voting equity subject to the overall requirement that they are not permitted to control a Canadian air carrier. Basically, the same restrictions are in place in the US. Some countries have eased restrictions to allow up to 49 percent foreign ownership of their carriers. A few (e.g., Chile) have no restrictions on foreign ownership of their air transport industry. Still others permit 100 percent foreign ownership for carriers offering domestic services only, referred to as a "right of establishment." Right of establishment carriers are currently permitted in Australia and New Zealand. As well, the European Union (EU) functions as a common market in air transport. There are no ownership restrictions governing investment in air carriers between member states, whereas a 49 percent limit is applied to foreign ownership by non-EU investors.

Table 2 — Foreign Ownership Limits, Selected Countries, 2002
Jurisdiction Domestic Routes (%) International Routes (%) Special Rule for Flag Carrier
Australia 100 49 n/a
New Zealand 100 49 n/a
Korea 50 50 n/a
China 35 35 n/a
Japan 33 33 n/a
Taiwan 33 33 n/a
India n/a 40 26
United States 25 25 n/a
Canada 25 25 15
Brazil 20 20 n/a
Source: Chang and Williams (2004) as cited by David Gillen, "Foreign Ownership Restrictions in the Canadian Aviation Industry: A Review and Assessment," research paper prepared for the Competition Policy Review Panel, March 2008.

Notwithstanding ownership restrictions, integration through marketing alliances among international air carriers (e.g., Air Canada is a member of the Star Alliance) allows participating air carriers to use common reservation systems and serve a larger range of international destinations. More formal integration involving mergers of national flag carriers, such as the recent takeover of Swiss Air by Lufthansa and the merger of Air France and KLM, is creating larger global air carriers. The legacy of flag air carriers has contributed to industry overcapacity. There are over 1000 airlines globally. Industry experts predict a wave of consolidation in the large US and EU markets.

Internationally, air transportation is largely governed by bilateral agreements that include flyover, in-transit and landing rights between nations. Canada has concluded bilateral air transportation agreements with approximately 75 countries.

There is a nascent international trend of entering into "Open Skies" treaties, which provide for expanded landing rights on international routes. The EU and the US "Open Skies" agreement came into force in March 2008 and is expected to increase the degree of competition on intercontinental flights.20 As a second stage in this liberalization process, the US and the EU are scheduled to embark on discussions regarding reciprocal reductions on foreign ownership restrictions in air transportation in 2008. The market integration effects of "Open Skies" agreements, particularly if combined with efforts to allow foreign ownership beyond 49 percent, will provide further impetus for consolidation among international air carriers.21 Maintaining the existing 25 percent foreign ownership restriction could exclude Canadian air carriers from future consolidation transactions that would result in global carriers.

Air transportation facilitates social and business transactions, thereby increasing economic advantage and opportunity. An air transport sector characterized by competitive choices, fares and costs will be critical for Canadian businesses to realize their ambitions in foreign markets. The Panel was presented with no evidence that foreign-controlled airlines would be any more or less inclined than Canadian firms in servicing Canadian routes; airline capacity typically matches the economic opportunities available in a community whether they are large or small.22

Many industry participants have expressed concerns with respect to government policies that increase industry costs.23 Ultimately, the benefits of lower industry costs could be passed on to the public in lower fares and better service in a competitive environment. Improving productivity in the industry is important for Canada's economic future. In line with Recommendation 6, fiscal arrangements affecting the competitiveness of the industry should be reviewed every five years.

There is a trend internationally toward greater liberalization of domestic aviation markets and a somewhat slower trend of international market liberalization. Both have yielded substantial economic benefits. The Panel is satisfied that increasing the level of foreign investment permitted in the air transportation sector would increase sustainable competition in the Canadian industry.24 Appropriate safety and security measures that would apply to all airlines regardless of ownership are in place to protect the public. Other objectives, such as service to remote regions, are best met by an efficient and competitive private aviation sector. However, unilaterally eliminating foreign investment controls for Canada's international carriers would impact Canada's relationships with other countries with whom we have bilateral air transportation agreements. Complete liberalization of ownership restrictions would require a reciprocal or multilateral effort involving Canada and other countries.

The US is further advanced than Canada in securing "Open Skies" treaties. In practice, Canadian international air policy is still relatively restrictive. The Canadian industry now faces an increased risk of reduced intercontinental passenger traffic due to the stronger competitive position of the US industry stemming from its recent treaty with the EU. Successfully completing the "Open Skies" negotiations with the EU, which started in November 2007, has an economic importance for the nation.

The Panel recommends that:

7. The Minister of Transport should increase the limit on foreign ownership of air carriers to 49 percent of voting equity on a reciprocal basis through bilateral negotiation.

8. The Minister of Transport should complete Open Skies negotiations with the European Union as quickly as possible.

9. The Minister of Transport, on the basis of public consultations, should issue a policy statement by December 2009 on whether foreign investors should be permitted to establish separate Canadian-incorporated domestic air carriers using Canadian facilities and labour.

Uranium Mining

The uranium industry is unique among the sectors with restrictions on foreign ownership that the Panel has been asked to review. Indeed, it is unique among the mineral and energy industries. Uranium has only two uses of consequence, namely, as an essential component of nuclear weapons and as a fuel for the generation of electricity.

Today the Canadian uranium mining industry is centred in Saskatchewan, and there is a mine development proposal situated near Baker Lake, Nunavut. Canada is the world's largest primary uranium producer, and ranks third in known and reported reserves after Australia and Kazakhstan. Canadian uranium deposits are the richest in the world in terms of percentage content.

Development of Canadian uranium resources for civilian purposes began in the 1970s, and has been subject to foreign ownership controls since 1970. The current regime, known as the Non-Resident Ownership Policy (NROP), was established in 1987 by the Minister of Natural Resources. It provides:

  • a minimum level of resident ownership of 51 percent in uranium mining
  • resident ownership of less than 51 percent to be permitted if Canadian control in fact can be established as defined in the Investment Canada Act
  • exemptions to be granted if Canadian partners in a mining development cannot be found.

There are no ownership restrictions on foreign participation in exploration.

Canadian production is dominated by the two largest uranium mining companies in the world, Cameco and Areva SA.25 Cameco is Canadian controlled and has mines in Canada, the US and Kazakhstan as well as first-stage, value-added processing in Canada.26

The NROP also refers to the management of security and environmental issues through the Canadian Nuclear Safety Commission27 and the Department of Foreign Affairs and International Trade. Concern over the potential proliferation of nuclear weapons from the beginning of the nuclear era has led to a high level of government involvement with the industry, including direct ownership. It has also led to high levels of regulatory and policy control at both the national and international levels. Canada has been a world leader in the development of an increasingly stringent and effective Nuclear Non-Proliferation Policy and accompanying export control regime. We now have more than 30 years of experience in ensuring that Canadian exports of nuclear material (including uranium), equipment and technology are used only for peaceful, non-explosive purposes.28

In order for uranium to be used in the operation of a nuclear power plant, additional processing steps are required, involving conversion of uranium ore, enrichment and fuel fabrication.29 Production is heavily concentrated in very few countries. In 2006, six countries produced 82 percent of the world's primary uranium production. Enriched uranium trades at much higher prices than primary uranium or uranium that has been processed to fuel at the first stage of conversion.

Security of supply considerations has led some countries to intervene in the market. Intervention ranges from policy support and fiscal incentives to the development of state-owned enterprises for uranium production and processing. Many of these countries also have realized the economic benefits of developing domestic fuel processing capabilities and advanced processing has become part of their national industrial policy. Three of the world's largest economies — the United States, France and Japan — are heavily dependent on imported energy resources. It is no coincidence that they have become heavily reliant on nuclear energy. Those countries and others have integrated national nuclear policies designed to provide stable low-cost electricity, foster development of production facilities, secure the raw energy inputs, add value through domestic fuel processing capability, and develop and protect domestic technology. It appears unlikely that these policies will be dismantled in the face of rapidly increasing energy demand.

International concerns with the spread of "sensitive technologies" led to a 2004 proposal by the US to ban the sale of enrichment and reprocessing equipment or technology to any state that does not already possess full-scale, functioning enrichment and reprocessing plants. While the proposal is rooted in nuclear proliferation concerns posed by other countries, the practical effect of this proposal is the restriction of the development of uranium enrichment technology in Canada. Discussion of this proposal has been on the agenda of G8 Summits since 2004. Canada has never accepted the necessity of having a permanent moratorium on the development of uranium enrichment technology in Canada. There has been some progress in multilateral discussions in 2007 and 2008; however, a resolution of Canada's concerns has yet to be achieved.30

It would be a natural progression for Canada, as the world's leading uranium producer and converter, to develop the capacity to compete in this large and lucrative segment of the nuclear fuel market.

In summary, Canada's uranium resource base gives it a strategic advantage in global nuclear energy markets. In considering a more open ownership regime for the uranium sector, the Panel concludes that liberalizing the NROP should be on the condition that Canada receives some reciprocal benefits in return. This could take the form, for example, of requirements that the country provide reciprocal access to its markets. Alternatively, Canada might want to secure access to certain technologies (e.g., enrichment) not otherwise available to it as a condition of granting improved access.

Unilateral liberalization of the policy would respond to the concerns of foreign investors and their governments. It is important to note that the vast majority of countries have ownership restrictions governing their uranium industries that are more restrictive than the NROP. Unconditional liberalization would do nothing to create a level playing field for Canadian companies that face investment and, in some cases, export restrictions or prohibitions in other countries, not only at the uranium mining stage but also at other stages of the nuclear fuel cycle.

Unilaterally lowering ownership restrictions without obtaining concessions from other countries that limit foreign competition or Canadian investment abroad would not be grounded in a hard-headed appraisal of Canada's national interest.

The Panel recommends that:

11. The Minister of Natural Resources should issue a policy directive to liberalize the non-resident ownership policy on uranium mining, subject to new national security legislation coming into force and Canada securing commensurate market access benefits allowing for Canadian participation in the development of uranium resources outside Canada or access to uranium processing technologies used for the production of nuclear fuel for nuclear power plants.

Telecommunications and Broadcasting

Canada has developed a strong cadre of businesses in the telecommunications and broadcasting sectors, which have grown to their present position in a highly regulated domestic Canadian market. Today, these businesses operate in Canadian and global markets characterized by continuous product innovation and under increasingly liberalized national regulatory regimes. In this context, the Panel believes that the competitiveness of these industries can and should be strengthened through liberalizing foreign investment restrictions that apply to them.

Twenty years ago, Canada's telecommunications and broadcasting industries were distinct sectors. Telecommunications carriers were in the business of carriage, not content. Cable television companies distributed broadcasting and provided no telecommunications services. Wireless (cellular telephone) communications were in their infancy, as was the Internet.

The Internet and other information and communications technologies have changed the business landscape for these industries. In essence, with convergence, it is increasingly difficult to define distinct "telecommunications" and "broadcasting" industries or sectors, particularly when it comes to delivery or distribution networks. For example:

  • fixed wire telecommunication carriers, wireless carriers, and cable television companies now compete directly with one another in the delivery of voice communications, Internet (data) services and video services
  • telecommunication and broadcasting services increasingly overlap; when a subscriber accesses the Internet through a mobile phone, he or she may download an email, a text message or a video clip of a television show
  • major telecommunications carriers are investing in technology to deliver advanced video services, and large cable television companies already offer voice services and are upgrading their Internet capacity; wireless carriers are delivering voice and data and investing in new video services.

To some extent, the current Canadian regulatory regimes for these two sectors reflect the past rather than the present. We continue to have one regulatory structure for telecommunications and another for broadcasting, even though industry boundaries between the two are disappearing.31 Some companies, because of the scope of their telecommunications and broadcasting activities (such as Bell Canada, Rogers, and TELUS), are subject to both regulatory regimes.

Both the Telecommunications Act and the Broadcasting Act contain restrictions on foreign investment that are largely similar in form. The Telecommunications Act states that one objective of Canadian telecommunications policy is "to promote the ownership and control of Canadian carriers by Canadians."32 The Broadcasting Act states, "The Canadian broadcasting system shall be effectively owned and controlled by Canadians."33 The foreign investment rules to achieve these objectives are similar under both acts and related regulations. In summary, they restrict the number of voting shares that can be held by non-Canadians in a telecommunications or broadcasting business as well as the number of board members who can be non-Canadian, and require the Canadian Radio-television and Telecommunications Commission (CRTC) to ensure that non-Canadians cannot exercise "control in fact" over the business. With respect to either a telecommunications company or a broadcast licensee, the rules limit the holding of voting shares by non-Canadians to 20 percent at the operating company level and to 33.3 percent at the holding company level.34

There is considerable evidence that liberalizing foreign investment restrictions brings demonstrable economic benefit through increasing competitive pressure on all participants in the market.35 This is as important in new and emerging markets (including Internet-based communications platforms) as in well-established markets. Foreign investment restrictions reduce competitive intensity in a number of ways that are well known. In relation to telecommunications markets, they include placing potential new entrants (to the extent they can enter markets in the first place) at a cost disadvantage relative to incumbents, limiting the sources of finance available to existing incumbents, distorting optimal financing structures, preventing the transfer of the latest technology into the marketplace and, perhaps most fundamentally, removing pressure on existing firms to reduce or eliminate inefficiencies in their business practices and activities and to be world-class (rather than best-in-country-class) competitors.36

These arguments in favour of foreign investment liberalization are applicable across many economic sectors. However, submissions to the Panel provided a number of different views on the merits of liberalizing foreign investment restrictions in relation to telecommunications and broadcasting.37 The Panel took account of these views and the following considerations in its assessment of foreign investment restrictions in telecommunications and broadcasting.

First, Canada is already reorienting its policies for telecommunications and broadcasting to place greater reliance on market forces in a number of specific areas other than foreign investment. In 2006, the federal government issued a Policy Direction to the CRTC to regulate in telecommunications in a manner that interferes to the minimum extent necessary with competitive market forces.38 More recently, the Minister of Industry launched the Advanced Wireless Services radio spectrum auction which includes a set-aside of some spectrum exclusively for new entrants in the wireless market in order to stimulate greater competition and innovation.39 In this context, it appears incongruous to retain existing foreign investment restrictions that prevent Canadians from capturing the full benefits of these and other regulatory policy changes for telecommunications and broadcasting industries.

Figure 9 — Cellular Mobile Penetration Rates, 2005

Figure 9 — Cellular Mobile Penetration Rates, 2005

Source: OECD Communications Outlook 2007.

click here if you would like the text equivalent of image

Second, the number of entrants in the marketplace has a bearing on increasing competitive intensity and achieving better results for consumers. The Canadian telecommunications market is characterized by the presence of a limited number of integrated wire line and wireless carriers. If foreign investment liberalization results in only a shift in control of these existing Canadian firms to foreign owners with no increase in competitive pressure, then no significant change to current competitive circumstances will necessarily ensue. The Panel believes that measures to liberalize foreign investment should provide an opportunity to promote the growth and development of new entrants rather than merely provide an opportunity for a shifting of corporate control between existing market participants.

Finally, the Panel is well aware that Canada's telecommunications policy and regulatory frameworks were subject to an extensive review during 2005–2006 by the Minister of Industry's Telecommunications Policy Review Panel (TPRP) chaired by Dr. Gerri Sinclair.40 The TPRP received almost 200 written submissions and drew on the results of extensive consultations with Canadian stakeholders and experts in Canada and from abroad. The TPRP's final report, issued in March 2006, concluded that liberalization of the restrictions on foreign investment in the Canadian telecommunications sector "would increase the competitiveness of the telecommunications industry, improve the productivity of Canadian telecommunications markets, and be generally more consistent with Canada's open trade and investment policies."41

Taking these considerations into account, the Panel finds that the TPRP's proposed phased liberalization of foreign investment rules for telecommunications and broadcasting has merit. In the first phase, for a period of five years, foreign investment would be permitted on a greenfield basis or by acquiring an incumbent Canadian telecom company with a market share of 10 percent or less. In a second phase, beginning at the end of the five-year period, there would be a broader liberalization of the foreign investment rules for both telecommunications and broadcasting. With respect to broadcasting distribution, in this second phase, liberalization would apply to the carriage side of broadcasting distribution, while broadcasting policies would focus any necessary Canadian ownership restrictions on "content."42

As pointed out by the TPRP, this approach should be competitively neutral for telecom carriers and holders of licences for broadcasting distribution undertakings.43 However, of greater importance from the Panel's perspective is the increase in competitive intensity in markets through its initial focus on encouraging new entrants and potentially strengthening smaller competitors. Moreover, it would allow Canadians to derive greater benefit from the many other regulatory changes that are under way in telecommunications and broadcasting markets. For example, it would work with, rather than against, the new spectrum auction policy to encourage new wireless entrants. Finally, and with specific regard to the cultural policy concerns associated with broadcasting, it would enable the federal government to focus its attention and resources on how to more effectively meet the challenge of strengthening a Canadian presence in an increasingly open system for the production and consumption of Canadian content.

The Panel recommends that:

11. Consistent with the Telecommunications Policy Review Panel Final Report 2006, the federal government should adopt a two-phased approach to foreign participation in the telecommunications and broadcast industry. In the first phase, the Minister of Industry should seek an amendment to the Telecommunications Act to allow foreign companies to establish a new telecommunications business in Canada or to acquire an existing telecommunications company with a market share of up to 10 percent of the telecommunications market in Canada. In the second phase, following a review of broadcasting and cultural policies including foreign investment, telecommunications and broadcasting foreign investment restrictions should be liberalized in a manner that is competitively neutral for telecommunications and broadcasting companies.