Ottawa's Handling of Foreign Ownership Rules | The Canadian Encyclopedia


Ottawa's Handling of Foreign Ownership Rules

Anthony Lacavera arrived on Canada's wireless scene with a sunny attitude and a promise to shake up the industry. But after spending the past two years bogged down in regulatory and legal proceedings, the once-optimistic CEO of Globalive Communications is beginning to sound like a different man.

This article was originally published in Maclean's Magazine on December 26, 2011

Ottawa's Handling of Foreign Ownership Rules

Anthony Lacavera arrived on Canada's wireless scene with a sunny attitude and a promise to shake up the industry. But after spending the past two years bogged down in regulatory and legal proceedings, the once-optimistic CEO of Globalive Communications is beginning to sound like a different man. Though he remains "bullish" on upstart Wind Mobile's chances, Lacavera says he's been forced to abandon his original game plan as dark clouds begin to gather over Wind and other new entrants.

It's been a long, see-saw battle: Industry Canada, which paved the way for new wireless start-ups by preventing giants like BCE INC., Telus Corp. and ROGERS COMMUNICATIONS INC. from bidding on certain licences during a 2008 auction, approved Globalive's corporate structure only to have the CANADIAN RADIO-TELEVISION TELECOMMUNICATIONS COMMISSION reject it over concerns that the involvement of a giant multinational telecom and its Egyptian billionaire founder violated foreign ownership laws. Embarrassed, then-industry minister Tony Clement scrambled to have cabinet overrule the regulator and then promptly lost a legal challenge in federal court. The decision was later reversed on appeal and could possibly be overturned yet again if the SUPREME COURT OF CANADA decides to look at the case.

"It's a ridiculous set of events," a weary-sounding Lacavera says. "And it was all very high profile. So now any investor thinking of investing in Canada sees that on the radar screen and would be saying, 'Do I really want to risk my money?' "

Though investors have been grumbling about Canada's restrictive foreign ownership climate for years, critics say the situation has taken a turn for the worse under the current government, which has added an element of unpredictability to the mix. The handling of the Globalive file raised serious questions about whether the government is picking winners. Meanwhile, there's a growing call for clarity on Ottawa's stance on foreign takeovers after last year's decision to reject Australian mining giant BHP Billiton's proposed--and unpopular--$39-billion takeover of Potash Corp. of Saskatchewan. Just last week, Industry Minister Christian Paradis said he was "open" to looking at possible improvements to the Investment Canada Act following a meeting with investors in New York.

"The government is struggling to find the right balance between a principled approach and a more populist notion of just going where the wind blows," says Werner Antweiler, a professor of economics at the University of British Columbia's Sauder School of Business. "There's too little looking at what's good for the Canadian economy and consumers and too much looking at what's good for short-term gains with voters."

Paradis is now attempting to offer investors the certainty they crave by finding a way to relax foreign ownership rules for telecom companies, which are currently capped at 46.7 per cent. Some say the move is necessary to help struggling upstarts like Wind, Mobilicity and Public Mobile secure access to more foreign capital--without risking a run-in with regulators. The three new, independent players have captured a meagre three per cent share of the market over the past two years. Some blame operational missteps, including a decision by the new entrants to forego handset subsidies in favour of cheap, "unlimited" talk and text plans, but Amit Kaminer, an analyst at telecom consultancy the Seaboard Group, says the new entrants are also being hamstrung by regulatory red tape. "These things take time," he says. "Especially when you have to build networks and fight it out in regulatory courts at the same time that you're fighting it out in the streets."

Though some had hoped Paradis would outline the new rules before Christmas, the minister said during a recent speech in Ottawa that there would be no quick decisions. Among the options Paradis is said to be considering are lifting foreign ownership restrictions completely for telecoms with less than 10 per cent of the market or raising limits to 49 per cent across the board. Rogers (which owns Maclean's) has urged the government to ensure that any changes are applied equally to all carriers. The new framework will set the stage for another auction of wireless airwaves next year or in 2013, which Lacavera says is needed to serve less densely populated areas of the country. The industry is growing impatient. Naguib Sawiris, the Egyptian billionaire backing Globalive, recently told the CBC that he regretted investing in Canada, calling it "a bad idea." This from a man whose company, Orascom Telecom (now majority owned by Russia's VimpelCom) operates throughout the Middle East and Africa and North Korea.

Similarly, critics warn that the government's foot-dragging and erratic handling of key files risk creating the one thing investors despise: uncertainty. Whether it's the strange decision to scrap the long-form census or the repeated meddling in Air Canada's labour negotiations to avoid an unpopular strike, Antweiler says, "what's missing is the red line that goes through industrial policy that says, 'here are clear rules.' " For example, he says that Ottawa could have avoided a lot of headaches if it had changed the pertinent regulations on foreign ownership before--not after--launching an initiative to remake the telecom sector. "They tried to open the back door instead of opening the front door," he says.

But nowhere is the federal government's policy more unclear than on foreign takeovers of Canadian assets following last year's Potash decision, which was only the second time in a quarter-century that Ottawa has failed to approve such a foreign transaction under the Investment Canada Act (the other was when the Harper government turned down the proposed 2008 sale of satellite-maker MacDonald, Dettwiler and Associates Ltd.'s information systems businesses to a U.S. company).

Though the official reason for quashing BHP's bid was a concern about jobs, future investment and Canadians' control of a key resource, many believe that politics played a prominent role after Saskatchewan Premier Brad Wall led a vocal campaign against the deal. "They were fearful of losing support in Saskatchewan where they had 13 Conservative MPs at a time when an election was on the horizon," says Colin Boyd, a professor of management at the University of Saskatchewan's Edwards School of Business. (Tony Clement, now Treasury Board president, has denied that political considerations factored into the decision.) Regardless, Boyd says, "It's kind of put Potash Corp. into a very weird position because I don't think anyone else could make a takeover bid for this company now." That's not great news if you're a Potash shareholder. After a brief climb earlier this year, the company's stock has dipped below BHP's offer price of $130 a share in recent weeks (the shares currently trade at about $42.65 after a three-to-one stock split last February).

A recent report by the C.D. HOWE INSTITUTE argues for an overhaul of the "net-benefit" test Ottawa now uses to evaluate foreign purchases of Canadian companies, suggesting it may be among the reasons foreign direct investment has declined over the years. "The current test is highly subjective and unpredictable," the authors wrote, noting that the OECD ranks Canada as one of the most restrictive places in the world for foreigners to invest.

It's not just a domestic issue. Canada's growing reputation as an unpredictable place to do business also threatens Canadian firms trying to expand overseas. "There are backlashes to these sort of attitudes," says Antweiler, who urges the government to take advantage of its majority status and build a more open and transparent regime. In the meantime, entrepreneurs like Lacavera have little choice but to keep an army of lawyers at the ready, guessing what Ottawa plans to do next.

Maclean's December 26, 2011