Published 8 April 2022, The Daily Tribune
In an amendment made in its Public Service Act (PSA), the Philippines opens certain sectors, previously considered public utilities, to full foreign ownership. President Rodrigo R. Duterte signed the anticipated Republic Act 11659 (PSA Amendment) on 21 March 2022 to further amend Commonwealth Act 146, otherwise known as the Public Service Act.
The PSA Amendment is the last of the series of legislative measures certified as urgent by the administration to liberalize the country’s foreign direct investment restrictions. The PSA Amendment was welcomed by the private and public sector alike as it is expected to stimulate investment flow to Philippine industries following the economic disturbance brought by the Covid-19 pandemic.
The most noteworthy change introduced by the PSA Amendment is its definition of “public utility,” which effectively allowed full foreign ownership of entities traditionally considered a public utility. These sectors include subways, airports, airlines, railways, expressways, and tollways.
Prior to the amendment, the Supreme Court defines “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. Further, the Supreme Court has repeatedly ruled that the categorization of a business or service as a public utility is a matter of judicial, not legislative determination.
The PSA Amendment limited sectors that are considered public utility to: (i) distribution of electricity, (ii) transmission of electricity; (iii) petroleum and petroleum products pipeline transmission systems, (iv) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems, (v) seaports, and (vi) public utility vehicles. Thus, any sector not included in the list shall not be subject to the 40 percent foreign equity restriction. PSA Amendment further emphasized the exclusivity of the list as it states, “[n]o other person shall be deemed a public utility unless otherwise subsequently provided by law.”
The liberalization is not, however, unattenuated by safeguards, particularly for public utilities and for those considered as critical infrastructure. Critical infrastructure refers to any public service which owns, uses, or operates systems and assets, whether physical or virtual, so vital to the Republic of the Philippines that the incapacity or destruction of such systems or assets would have a detrimental impact on national security or on the requirements or conditions necessary to ensure the territorial integrity of the country and the safety, security, and well-being of Filipino citizens.
The PSA Amendment clearly classified telecommunications, a sector previously considered public utility, as critical infrastructure.
One of these restrictions refers to investments that may be made by a foreign government or foreign state-owned enterprises. Section 24 of the PSA Amendment expressly prohibits investments on capital made by an entity controlled by or acting on behalf of the foreign government or foreign state-owned enterprises in any public service classified as public utility or critical infrastructure.
Foreign state-owned enterprises refer to an entity in which a foreign state: (i) directly or indirectly owns more than 50 percent of the capital taking into account both the voting rights and beneficial relationship, (ii) controls, through ownership interests, the exercise of more than 50 percent of the voting rights; or (iii) holds the power to appoint a majority of members of the board of directors or any other equivalent management body. This prohibition shall be applicable only for investments made after the effectivity of the PSA Amendment on 8 April 2022.
As an exemption to this restriction, sovereign wealth funds and independent pension funds of each state may collectively own up to 30 percent of the capital of such public service.
The PSA Amendment further prohibits, in the interest of national security, an entity controlled or acting on behalf of the foreign government or foreign-owned enterprise to disclose any data or information or extend assistance, support, or cooperation to any foreign government, instrumentalities, or agents.
It is anticipated that the PSA Amendment will bring the necessary boost toward building a robust Philippine economy.
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