Sunday, December 6, 2009

Is Cabinet about to get knee deep in the big muddy? "L'Affaire Globalive" is a sticky affair indeed.

This is the week Ottawa insiders are predicting that the Priorities and Planning Committee of Cabinet is expected to meet to discuss "L'Affair Globalive" and possibly overturn what is viewed as a fair and legal decision of the CRTC, all without either an actual appeal before it or any public process to justify such a review.

While the newspapers have covered parts of this ongoing saga, this is the kind of story that makes you wish for the days when media budgets were still large enough to do deep investigative journalism. Maybe I am too close to this mess but I think it's a great story. Consider the elements .

  • A public policy decision to add more entry in the wireless sector leads to an auction of public airwaves with the rules so distorted that it is estimated that all bidders ultimately paid 40% more for spectrum relative to similar values in the US.
  • While everyone was forced to pay more due to poor auction design, incumbents were forced to pay an extra 40% premium relative to new entrants for next generation wireless.
  • The auction distortions caused by government fiddling with auction design were so out of whack it is estimated that overpayments exceeded $2 billion. That's $2 billion now lost to support future industry investment or $2 billion that Canada's wireless industry now has to make up by reduced investment, or for some, higher costs of capital.
  • It then turned out that one of the most active bidders in the auction, Globalive, a company subsequently found by the CRTC to be controlled by Orascom an Egyptian wireless carrier and multinational, was ineligble to operate as a Canadian carrier (and according to the rules set by Industry Canada therefore ineligble to hold a licence).

What starts to turn this into such a good story is that Globalive actually got a licence from Industry Canada even though Industry Canada's own rules clearly prohibited foreign control of Canadian undertakings and even though it had one single shareholder, Orascom, controlling over 80% of Globalive's capital structure as well as controlling much of the Board structure and operational decisions .What is so remarkable is that the structure granted a licence by Industry Canada earlier this year was even more Orascom controlled than the structure the CRTC ultimately had no choice but to turn down in October.

Interestingly most people commenting on the issue of rule of law, including many who wanted Globalive to succeed, agree the CRTC had no choice but to find the Globalive structure violated the law. Moreover there is a very serious issue of precedent with respect to foreign ownership if this decision is overturned.

  • This begs the question as to how Industry Canada officials missed the call on this and why?
  • It begs a further question as to why this decision is being reviewed in Cabinet, even though there is no formal appeal of the decision before it?
  • Even stranger is the question as to why Orascom head Nagib Sawiris was heard at the Morgan Stanley investor conference in Barcelona to say the decision would be overturned and yet again repeat his comments November 16 at a press Conference in Cairo? All this before the Minister had even received comments he had requested from parties as part of his review.

Some answers are maybe not so hard to figure out.

  • Industry Canada did not expect it's auction was going to spiral out of control and the total of $4.3 billions that went into the Treasury was not something anyone at Finance or elsewhere were going to sniff at during a recession. That made it easy to claim victory and ignore the fallout for bidders that need to pay up on a $2 billion overpayment.
  • This was Globalive's problem. As one of the high bidders in the auction, Globalive faced an upfront bill for over $400 million as a consequence of bad auction planning and the fact that additional private equity had dried up as a result of the recession. Globalive now faced the same overvaluation problem numerous companies across the global economies faced and Cairo needed to keeps its piece protected .
  • My guess is Industry Canada decided to see this huge foreign capital outlay as something temporary in order to keep one of the largest new entrants in play. However there is no law that allows for temporary foreign ownership and as the CRTC found, no evidence to justify the level of control Orascom exercised under the law. Thus the hole kept getting dug deeper.

So why the rush to judgement and why the comments from Barcelona and from Cairo. Again not so hard to figure out.

  • Government policy has made of a big deal about promoting more competition in wireless and the CRTC which is already in its bad books was seen to have undermined that policy. Sheer nonsense, given new entry will be heavy with other "eligble Canadian alternatives" who played by the rules. But equally guaranteed that some people in power are pissed off with the Commission.
  • Industry Canada officials granted a licence to an ineligble company and now face the classic bureaucratic conundrum. If you identify that as a mistake, someone higher up will look for a sacrificial lamb. Ergo why we suspect the Department will recommend overturning the CRTC in the face of overwhelming evidence and fact in law to the contrary.
  • And no one likes to be sued. Its hard to believe that the statements from Barcelona and Cairo was not a pretty simple message. "You granted us a licence and we invested hundreds of millions of dollars in Canada .Fix it or face legal action". The issue is did someone tell Orascom not to worry?

In my view these scenarios explain a lot but there are still lots of questions unanswered. like:

  • Why is the government convinced that truly eligble bidder companies that constructed their legal affairs according to explicit rules of law and as directed by Industry Canada won't see the Cabinet overturning the CRTC as equally worthy of jusicial response?
  • And as a question of ethics, what is it that Cairo brings to the table that gets it a special pass and unfair advantage, based on the CRTC findings, when Canadian companies like Dave, Public Mobile, Eastlink, Quebecor and other bidders did not?
  • No matter what the bureaucracy may say to keep the lid on precedents, why would Cabinet support whatever convoluted legal analysis will be required to pretend that overturning the CRTC ruling will not gut our foreign ownership restrictions? Unless of course in a minority environment you might want to loosen the ownership rules.
  • But if you really want to loosen the foreign ownership rules why favor Orascom over Verizon, AT&T, T-Mobile or Orange. What is unique about the Orascom investors that requires the government to bend the rules on their behalf?
  • Orascom is owed no favors from government .They knew the rules and played a different game.Their bad.

Lot's of good questions to answer . Maybe if Cabinet overturns the CRTC this week or next those questions are finally going to get asked, as Canadian media begins to look closely at how Canada's first foreign controlled carrier under "the new rules" got a head start on the rest of the field . And why?

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