The Philippines – Game-Changing Economic Measure To Boost Foreign Investment

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1 – What are the key amendments to the Philippine Service Act (PSA) which allow 100% foreign ownership of public services?

The amendment to the Public Service Act (“Amendment”) is considered a game-changing economic measure as it lifts the foreign equity restrictions for a wide range of public services, except those considered as public utilities or critical infrastructure.

1) Public Utilities

The Philippine Constitution imposes a forty percent (40%) foreign equity restriction for entities engaged in the operation of a public utility (1987 Philippine Constitution, Section 11, Article XII). 

As there was previously no definition under law as to which sectors were considered a public utility, the former PSA imposed a  40% foreign equity restriction on public utilities for all entities engaged in the operation of a public service (Section 16, PSA). 

The Amendment introduced a definition for “public utility,” wherein it clearly provides that only the following sectors are considered as public utility and which are subject to the 40% foreign equity restriction:

  1. Distribution of electricity;
  2. Transmission of electricity;
  3. Petroleum and Petroleum Products Pipeline Transmission Systems;
  4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including sewerage pipeline systems;
  5. Seaports; and
  6. Public Utility Vehicles.

Notably, however, the Supreme Court has ruled that the categorization of businesses or sectors as public utility is a matter of judicial, not legislative, determination. The Supreme Court has defined “public utility” as a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service.” To constitute a public utility, the facility must be necessary for the maintenance of life and occupation of the residents. As its name indicates, the term “public utility” implies public use and service to the public. The principal determinative characteristic of a public utility is that of service to, or readiness to serve, an indefinite public or portion of the public as such which has a legal right to demand and receive its services or commodities. (JG Summit Holdings, Inc. v. Court of Appeals, et. al., G.R. No. 124293, 24 September 2003) 

As such, it will be interesting to see if any case will be elevated to the Supreme Court for its final determination of the definition of public utility as found in the Amendment. 

2) Critical Infrastructure 

The Amendment also introduced “critical infrastructure” as a new concept. It refers to any public service which owns, uses, or operates systems and assets that are so vital to the Republic of the Philippines such that the incapacity or destruction of such systems or assets would have a detrimental impact on national security. The Amendment specifically identified telecommunications as critical infrastructure. The authority was given to the President to declare such other public service sectors as critical infrastructure.

Foreign nationals may own more than fifty percent (50%) of the capital of entities engaged in the operation and management of critical infrastructure, provided that, the country of such foreign national affords reciprocity to Philippine nationals. Note, however, that reciprocity may be satisfied by according rights of similar value in other economic sectors. For this purpose, however, the rules and regulations of NEDA are necessary to clarify the guidelines on reciprocity.

The foreign direct investment restrictions on public service have been lifted to spur global capital investments and introduce new ideas to the public service sectors.

Atty. Ciselie Marie T. Gamo-Sisayan, Partner of DivinaLaw. 

2 – Why have The Philippines made these amendments?

The foreign direct investment restrictions on public service have been lifted to spur global capital investments and introduce new ideas to the public service sectors. This is also a measure to boost economic recovery during and after the COVID-19 pandemic.

3 – What sectors will remain restricted to foreign investors and why?

Foreign ownership to the following sectors shall remain restricted to 40%:

  1. Distribution of electricity;
  2. Transmission of electricity;
  3. Petroleum and Petroleum Products Pipeline Transmission Systems;
  4. Water Pipeline Distribution Systems and Wastewater Pipeline Systems, including sewerage pipeline systems;Seaports; and
  5. Public Utility Vehicles.

The restriction for public utilities is a recognition of its sensitive and vital position in the national economy and national security, and hence, there is a need to regulate these sectors for the common good. In fact, while the Amendment lifts foreign equity restrictions for other public sectors, it still provided safeguards to protect national economy and security. Among others, these include:

  1. The restriction on critical infrastructure (as previously discussed), which are sectors that may have detrimental impact on the territorial integrity of the country and the safety, security and well-being of Filipinos;
  2. The power of the President to suspend or prohibit, in the interest of national security, any proposed merger or acquisition transaction, or any investment in public service, that results to the grant of control to a foreigner or foreign corporation; 
  3. Prohibition of foreign government or foreign state-owned enterprises to own any capital in any public service; provided that sovereign wealth funds and independent pension funds of each state may collectively own up to 30% of the capital of public service corporation; and
  4. Prohibition for any entity controlled by or acting on behalf of a foreign government or foreign-owned enterprises from making any data or information disclosure or extending assistance, support or cooperation to any foreign governments, instrumentalities or agents.

4 – Which sectors will benefit the most from the amendments?

Sectors in the public service, which are no longer classified as public utility, will benefit from the Amendment. Among others, this include railways, subways, tollways, expressways and airports.

Telecommunications were also removed as a public utility, and hence, no longer subject to the 40% foreign equity restriction. However, as it was identified as a critical infrastructure, telecommunications is subject to the 50% foreign equity restriction, subject to reciprocity. This means that more than 50% foreign ownership may be allowed if the country of such foreign national accords reciprocity to Philippine Nationals as may be provided by foreign law, treaty or international agreement.

Note, however, that the definition of “critical infrastructure” is broad, and may include other public service sectors. The Amendment authorized the President to identify other sectors that will be considered critical infrastructure. This may be in the form of an Executive Order. The implementing rules and regulations may also provide further guidelines and clarification on this matter.

5 – Will these amendments potentially break up some of the long-standing monopolies in The Philippines? If so, how will The Philippines benefit from this?

It is anticipated that it will boost competition on public service. The Philippines’ antitrust agency, the Philippine Competition Commission, issued a statement welcoming the Amendment as it is anticipated to provide robust competition that will benefit the consumers with lower prices, better quality, and wider variety of choices. Further, it will promote job growth and accelerate technology transfer.

“ As these are still relatively new measures recently enacted by the Philippines and we are still waiting for its implementing regulations, it is still early to determine how the measures will affect the market. But as it removed restrictions on public service, it is anticipated that it will be easier for foreign nationals to enter into these Philippine sectors.

Atty. Ciselie Marie T. Gamo-Sisayan, Partner of DivinaLaw. 

6- What legal and regulatory challenges do investors need to overcome before taking advantage of the PSA amendments?

The country is currently waiting for the issuance of the implementing rules and regulations that will clarify the provisions and prescribe guidelines for its implementation.

Under the Public Service Act, it is required that prior approval of the appropriate administrative agency (e.g. Civil Aeronautics Board, Civil Aviation Authority of the Philippines, Department of Environment and Natural Resources, Land Transportation Office, etc.) be obtained to sell or register in the books of the corporation engaged in public service, if the sale or transfer will result to transferee’s ownership of more than 40% of its subscribed capital. Any transfer made in violation of this requirement for prior approval shall be void and of no effect and shall not be registered in the books of the public service corporation. 

Depending on the value of the transaction and parties involved, share acquisitions may also be subject to notification requirements to the Philippine Competition Commission.

Additionally, in the interest of national security, the President, with the recommendation of the administrative agency concerned, is authorized to suspend or prohibit any proposed merger or acquisition transaction or any investment in public service, that effectively results in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation.

7 – This is the latest of a long line of recent FDI initiatives undertaken by the Philippines in recent years. Have these reforms made it easier for foreign businesses to invest in The Philippines?

As these are still relatively new measures recently enacted by the Philippines and we are still waiting for its implementing regulations, it is still early to determine how the measures will affect the market. But as it removed restrictions on public service, it is anticipated that it will be easier for foreign nationals to enter into these Philippine sectors.