LATEST AMENDMENTS TO THE PUBLIC SERVICE ACT: DEFINING PUBLIC UTILITIES (Philippines)

Background

The existing limitation on the foreign ownership of public utilities finds basis in the 1987 Philippine Constitution, which provides that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to Philippine citizens or to corporations organized under Philippine laws and at least 60% owned by Philippine citizens. However, the Constitution did not define the term “public utility” and in the absence of any clear statutory definition of such term, the Public Service Act, which was enacted in 1936 to regulate the delivery of public services, was relied on by authorities to determine what constituted public utilities.

Looking back, Section 14 of the 1936 version of the Public Service Act used the terms “public service” and “public utility” interchangeably. However, after several laws amending and renumbering Section 14 were subsequently passed※2, references to “public utility” no longer appeared in the definition of “public service”. By then, jurisprudence emerged tying the two concepts together and 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”. The Supreme Court has also repeatedly ruled that as its name indicates, the term “public utility” implies public use and service to the public, and that 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 which has a legal right to demand and receive its services or commodities.※3 As a consequence, businesses which qualified as public services under the Public Service Act were regarded as public utilities and were subject to the constitutional foreign ownership limitation of 40%. However, now that the Latest Amendments have defined what a public utility is, the application of such constitutional limitation will be qualified accordingly.

Highlights of the Latest Amendments

The key changes to the Public Service Act introduced by the Latest Amendments are discussed below:

I. Public utilities and critical infrastructure as new sub-classifications of public services

The Latest Amendments provide statutory definitions for public utilities and critical infrastructure, as specific classifications of public services.

a) Public utilities

The Latest Amendments added a new paragraph (d) to Section 13 of the Public Service Act, defining public utility as a public service that operates, manages or controls※4 for public use, any of the following:

1. distribution of electricity
2. transmission of electricity
3. water pipeline distribution systems, and wastewater pipeline systems, including sewerage pipeline systems
4. petroleum and petroleum products pipeline transmission systems
5. seaports
6. public utility vehicles※5, except transport vehicles accredited with and operating through transport network corporations

The above list of public utilities appears to be exclusive, since the Latest Amendments provide that “no other person shall be deemed a public utility unless otherwise subsequently provided by law”. Consequently, only entities engaged in the above businesses remain subject to the 40% foreign ownership constitutional limitation applicable to public utilities. However, note the discussion in Paragraph 1(c) below on the prohibition of entities controlled by or acting on behalf of the foreign government or a foreign state-owned enterprise from investing in public utilities.

b) Critical Infrastructure

Based on the Latest Amendments, critical infrastructure refers to any public service, which owns, uses, or operates physical or virtual 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. Such critical infrastructure includes telecommunications (except passive telecommunications tower infrastructure and components, and value-added services) and other such vital services as may be declared by the Philippine President.

The Latest Amendments provide that investments in critical infrastructure are subject to reciprocity requirements, and foreign nationals shall not be allowed to own more than 50% of the capital of entities engaged in the operation and management of critical infrastructure, when the country of such foreign national does not accord reciprocal rights to Philippine nationals. In addition, in case of interruption of services, entities engaged in the operation and management of critical infrastructure are required to (i) act on customer complaints within 10 days, or provide an action plan to be accomplished within a reasonable period, from the date the complaint was received, and (ii) file a monthly report to the appropriate regulatory agency detailing the service interruptions that occurred during the covered period, the complaints lodged before it, and the actions taken on each complaint.

Although the Latest Amendments have only identified the telecommunications sector as a “critical infrastructure” thus far, it should be noted the Philippine President has the power to add to the list of sectors that are considered as critical infrastructure through executive issuances.

c) Limitation of investment in public utilities and critical infrastructure

After the Latest Amendments take effect, an entity controlled by or acting on behalf of a foreign government or foreign state-owned enterprises are prohibited from owning capital in any public utility or critical infrastructure. Further, foreign state-owned enterprises (which already own capital in a public utility or critical infrastructure prior to the effectivity of the Latest Amendments) are prohibited from investing additional capital in such public utility or critical infrastructure. As an exception, sovereign wealth funds and independent pension funds of each state may still collectively own up to 30% of the capital of a public utility or critical infrastructure notwithstanding the above.

II. For “public service not classified as a public utility”, full foreign ownership now allowed

Given the amendments, investments in a public service not classified as a public utility, such as telecommunications, logistics, freight forwarding, shipping, air carriers and airports have been effectively liberalized and may now be up to 100% foreign owned, provided that reciprocity requirements are met for sectors which qualify as critical infrastructure (e.g., telecommunications).

The Latest Amendments expressly provide that nationality requirements shall not be imposed by the relevant administrative agencies on any public service not classified as a public utility, notwithstanding any law to the contrary. However, a public service not classified as a public utility shall still be considered a “business affected with public interest” for purposes of applying Sections 17 and 18, Article XII of the 1987 Philippine Constitution. Such constitutional clauses relate to instances when the State may temporarily take over private businesses※6, or nationalize industries.※7

Public services shall continue to be regulated and supervised by the relevant administrative agencies under existing laws, and such agencies are required to issue rules and regulations to implement the Latest Amendments.

III. Other notable provisions

a) Amendments affecting the telecommunications business

Considering the Latest Amendments, the following points are material to the telecommunications business:

• While telecommunications is not a public utility, it is still critical infrastructure. Thus, foreign ownership of telecommunications may still be limited to 50% in the event reciprocity requirements are not satisfied, or prohibited in the event the foreign investor is an entity controlled by or acting on behalf of a foreign government or foreign state-owned enterprise; and
• Persons and companies (except micro, small and medium enterprises※8) engaged in the telecommunications business are required to obtain and maintain certifications from an accredited certification body attesting to its compliance with relevant ISO information security standards, as may be prescribed by the Department of Information and Communications Technology. The maintenance of such certifications shall be a continuing qualification for the retention of a franchise or other authority to operate.

b) National security interest as basis to suspend or prohibit a proposed merger, acquisition or investment in a public service

In the interest of national security, the Philippine President may now suspend or prohibit a proposed merger, acquisition or investment in a public service that effectively results in the grant of direct or indirect control of such public service to a foreigner or foreign corporation. However, the Philippine President must exercise such power within 60 days from receipt of the recommendation of the relevant department or administrative agency. The National Economic Development Authority is directed to promulgate rules and regulations to implement such provisions.

c) Requirement when employing foreign nationals

Public services employing foreign nationals in industries to be determined by the Department of Labor and Employment, are required to implement an understudy/skills development program to ensure the transfer of technology/skills to Philippine nationals with the potential of succeeding the foreign national in the same establishment or its subsidiary.

Conclusion

The amendments to the 86-year old Public Service Act have been long overdue. With the Latest Amendments, the Philippines has taken great leaps to open up a number of sectors to full foreign ownership, and it is anticipated that this landmark legislation will significantly change the Philippine business landscape as it creates more opportunities for foreign direct investment and increases competition.