Balancing Act: the Amended Public Service Act
By: Atty. Victor Kenner (“Ken”) Galang
Republic Act (“RA”) No. 11659, or “An Act Amending Commonwealth Act No. 146, otherwise known as the Public Service Act, as amended”, was signed into law on March 21, 2022. On March 20, 2023, following extensive consultations with other government agencies and key stakeholders, the National Economic and Development Authority (NEDA) released the Implementing Rules and Regulations (“IRR”) of RA No. 11659, which came into effect 15 days after its publication, or on April 04, 2023.
RA No. 11659 is a significant legislative reform aimed to attract foreign investments thereby furthering the country’s efforts to become a global investment hub. It is complemented by other legislative measures such as the Retail Trade Liberalization Act (RA No. 11595) and amendments to the Foreign Investments Act of 1991 (RA No. 11647), among others. The government believes that these measures create an environment that would promote innovation, healthy market competition, generate employment opportunities, improve the delivery of goods and services, and most importantly, revitalize the country’s economy which has been severely battered by the COVID-19 pandemic.
Proceeding from the above, several questions come to mind: What are the salient amendments introduced by RA No. 11659 that will aid the government in realizing its objectives? In realizing its objectives, is the government compromising national security in favor of liberalization? Are there enough safeguards in place to ensure the country’s territorial integrity? What about the safety, security, and well-being of Filipinos and the interests of the private sector?
Key Amendments
One of the key features of RA No. 11659 is clearly defining the term “Public Utility”, thus rationalizing allowable vis-à-vis restrictions on foreign equity ownership. Section 4 of RA No. 11659 defines “Public Utility” by way of enumeration as “public services that operate, manage, or control for public use any of the following: (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”.
In relation thereto, Section 2 (u) of the IRR states that the term “Public Service” refers to those persons defined as such under Section 13 (b) of Commonwealth Act No. 146, as amended by laws and jurisprudence.
How is this significant?
Simply put, the introduction of the above definitions effectively limits the application of the nationality requirement contained in Section 11, Article XII of the 1987 Philippine Constitution (“Constitution”), or what is popularly referred to as the “60-40” rule, to public services classified as a Public Utility under RA No. 11659. Hence, foreign investors can now own up to 100% equity ownership in industries that are not classified as a “public utility” under RA No. 11659, examples of which include airports, railways, expressways, and telecommunications.
Note, however, that the definition of “public utility” by way of enumeration is not an exclusive listing. Congress may add, remove, or otherwise amend what constitutes “public utility” through a subsequent legislative enactment. Section 4 of RA No. 11659 also states that the President may recommend to Congress, upon prior recommendation of the NEDA, the classification of a public service as a “public utility” based on certain criteria provided under the law.
Lastly, Section 14 of the IRR in relation to Section 4 of RA No. 11659 provides that a public service that is not classified as a “public utility” shall be considered as a “business affected with public interest”. This means that the provisions of the Constitution, specifically on the temporary takeover or direction of operation of privately-owned public utilities or business affected with public interest during times of national emergency under Section 17, Article XII, and the transfer to public ownership of utilities and other private enterprises in the interest of national welfare or defense under Section 18, Article XII, shall apply.
Liberalization and National Security
There are noted risks in opening up certain sectors to complete or increased foreign equity ownership. In pursuing its economic objectives, the government gives primordial importance to national security. As such, RA No. 11659 contains safeguards meant to ensure effective regulation of public services and institutes processes for the protection of national security. These include:
- Power of the President to suspend or prohibit transaction or investment. Section 23 of RA No. 11659 empowers the President, in the interest of national security and after the review, evaluation, and recommendation of the relevant government department or administrative agency, to suspend and prohibit any proposed merger, acquisition, or any investment in a public service that effectively results in the grant of control (whether direct or indirect) to a foreigner, foreign corporation or foreign government, and if the proposed acquisition or investment has national security implications enumerated under Section 36, Rule IX of the IRR.
- Investments by an entity controlled by, or acting on behalf of a foreign government, or foreign state-owned enterprises. Section 24 of RA No. 11659 prohibits entities controlled by, or acting on behalf of a foreign government, or foreign state-owned enterprise from making any investment or owning capital in any public service classified as “public utility” or “critical infrastructure”.
Section 2 (e) of RA No. 11659 defines the term “capital infrastructure” as “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”.
Note, however, that Section 24 of RA No. 11659 also provides that the prohibition shall apply only to investments made after the effectivity of RA No. 11659.
- Information security for entities engaged in the telecommunications business. Section 26 of RA No. 11659 mandates entities engaged in the telecommunications business to obtain and maintain certifications from an accredited certification body attesting to compliance with relevant International Organization for Standardization (ISO) standards on information security, as prescribed by the Department of Information and Communications Technology (DICT).
Note that the maintenance of these certifications shall be a continuing qualification for retention of franchise or other authority to operate.
- Reciprocity clause preventing foreign nationals from owning more than fifty percent (50%) of capital in critical infrastructure unless the country of such foreign nationals accords reciprocity to Philippine nationals. Under Section 25 of RA No. 11659, foreign nationals shall not be allowed to own more than fifty percent (50%) of the capital of entities engaged in critical infrastructure except in cases in which the country of such foreign national grants the same rights to Philippine Nationals, whether by foreign law, treaty or international agreement.
- Annual Performance Audit to monitor cost, the quality of services provided to the public, and the ability of the public service provider to immediately and adequately respond to emergency cases. Lastly, Section 29 of RA No. 11659 mandates the relevant administrative agencies to ensure the conduct of an annual performance audit by an independent evaluation team to monitor cost, the quality of services provided to the public, the ability of the public service provider to immediately and adequately respond to emergency cases; and in case of critical infrastructure and public utilities, the performance audit shall include risk assessment, emergency response, and cybersecurity, among others.
The enactment of RA No. 11659 and its IRR is a testament to the government’s continuing effort and commitment to balance its economic objectives with safeguarding the interests of the country and its people.
Implemented effectively, RA No. 11659 and its IRR may possibly provide a renewed and revitalized investment paradigm in the Philippines. Fresh or increased direct foreign investments would certainly spur increased economic growth and development. The changes introduced by RA No. 11659 are seemingly a step in the right direction. However, only time will tell if this will lead to sustained economic growth over a significant period that will allow the Philippines to reclaim its title as Asia’s “rising tiger”.
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Ken is a Junior Associate and a member of the Mergers and Acquisitions, Corporate Services, Technology Media & Telecommunications, and Energy departments of the Firm.
Ken’s practice includes advising and assisting clients on various commercial matters involving mergers and acquisitions, joint venture partnerships, and private placements, among others. He provides corporate and commercial advisory services such as capital restructuring, drafting and review of commercial agreements, and incorporation and post-incorporation matters. He is also involved in several licensing and regulatory compliance applications before the Bangko Sentral ng Pilipinas, Securities and Exchange Commission, and the Department of Information and Communications Technology.
