by：Chikashi Kaneko、Vann Allen P. dela Cruz
1. What is the background of the revision?
The Philippine Constitution provides that the operation of a “public utility” shall only be granted to Philippine citizens or to corporations owned by Philippine citizens by at least sixty percent (60%). Thus, limiting foreign ownership over public utilities to a maximum of forty percent (40%). However, the Philippine Constitution did not define what is a “public utility” leaving the definition to government regulators or even the courts.
Based on previous rules, “public utility” and “public service” were interchangeable with each other. In the case of Republic of the Philippines v. Manila Electric Company (G.R. No. 141314, April 9, 2003), the Supreme Court held that “a public utility is engaged in public service.” This blurred line between the two has been argued to continually impede competition and foreign investment because under the Constitution, “public utilities” has a forty percent equity cap.
The Philippine Congress found it necessary to amend the 84-year-old Public Service Act (Commonwealth Service Act No. 146) because its antiquated provisions do not find anymore their relevance to the present concerns. The amendments were introduced in order to stimulate the economy by encouraging foreign investment, increase healthier competition in various industries, and to give the people better and improved quality of basic services.
In differentiating “public service” from “public utility,” the practical effect of the law is to release from the ambit of the constitutional foreign equity cap some industries or sectors (such as telecommunications, railways, subways, airlines, shipping sectors), thereby allowing full foreign ownership over them. In other words, since the Constitution expressly indicates that only “public utilities” will be subject to the limitation, R.A. 11659 will allow up to 100% foreign ownership of “public services” in the country.
Under the amended law, the list for industries considered to be under “public utilities” is provided. Any industry not in the list may be allowed up to 100% foreign ownership, subject to the other conditions the special laws primarily regulating them may so impose.
Those industries falling under “critical infrastructure” (i.e. 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, including telecommunications and other such vital services as may be declared by the President of the Philippines), despite forming part of “public services,” may also be denied full foreign ownership.
２. What are the details of the amendment?
Public utility is now defined.
The President has powers to suspend or prohibit any investment in a public service within 60 days of such recommendation “in the interest of national security.”
Foreign nationals and companies investing in telecommunications, one of the sectors now allowed full foreign ownership, must also undergo cybersecurity and ISO audits.
Apart from telecommunications, the newly signed measure allows 100% foreign ownership as well for railways, subways, and airlines.
The law also contains a reciprocity clause which bars foreigners from owning over 50% of capital of entities running critical infrastructure unless their host countries allow Filipino nationals to do this too.
RA 11659 also mandates administrative agencies to ensure independent performance audits are done annually.
３. The amendment will allow foreigners to hold shares in the subject business, will this affect the percentage of nationality on the board of directors?
Based on Section 11, Article XII of the Constitution, “[t]he participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.”
A liberal interpretation of the application of the amendment would be to allow full foreign participation in the management of the board of those not included in the “public utility” list. However, a conservative take is that it will still depend on the special law regulating it primarily. A case per case evaluation is recommended. These may be clarified if there are implementing rules and regulations to this effect.
４. When is the enforcement date?
Section 35 provides that the law will take effect fifteen (15) days after its publication in the Official Gazette or in a newspaper of general circulation. The law was uploaded in the Official Gazette website on 23 March 2022. It will take effect possibly on 7 April 2022 (earliest).
５. What do you think is the goal of the Philippine government in this amendment?
The amendments were introduced in order to stimulate the economy by encouraging foreign investment, increase healthier competition in various industries, and to give the people better and improved quality of basic services.
