17 May 2022
Philippines

On 2 March 2022, President Rodrigo Duterte signed into law the amendments to the 85-year old Public Service Act (“PSA”). The amended PSA constitutes the third installment of the investment reform measures[1] that local and foreign business groups have been urging lawmakers to enact to accelerate the country’s economic recovery.[2] Notably, the amended PSA clarifies the long-existing confusion behind the terms “public service” and “public utility”, and correspondingly, the foreign equity limitation imposed by the Philippine Constitution on public utilities. In addition, the amending law also puts in place various safeguards that serve to protect the country’s national security and sovereignty.

The law has the following salient points:

  • Public utility is now clearly defined and distinguished from public service. Prior to the amendments, the Philippine Supreme Court had construed public utility to mean public service. However, with the passage of the amended PSA, it is clear that this can no longer be the case. Under the amended law, public utility is expressly defined as a public service that operates, manages or controls for public use any of the following services: 1) distribution of electricity[3]; 2) transmission of electricity[4]; 3) petroleum and petroleum products pipeline transmission systems[5], 4) water pipelines distribution systems and wastewater pipeline systems[6], 5) seaports[7], and 6) public utility vehicles[8]. On the other hand, public service has retained its original definition under the old PSA.[9] As such, it is now clear that public utility and public service do not refer to the same thing. To put maters into perspective, all public utilities are public services, but not all public services are public utilities.
  • Congress has the power to classify a public service as a public utility. Under the amended PSA, no other service shall be deemed a public utility. This notwithstanding, Congress is empowered by law to add to the classification of public utilities through the enactment of a statute.
  • The President may recommend to classify a public service as a public utility. The President, upon the recommendation of the National Economic and Development Authority (“NEDA”), may propose to the Philippine Congress the classification of a public service as a public utility, provided the following criteria are met:
    • The person or juridical entity regularly supplies and directly transmits and distributes to the public through a network a commodity or service of public consequence;
    • The commodity or service is a natural monopoly that needs to be regulated when the common good so requires;
    • The commodity or service is necessary for the maintenance of life and occupation of the public; and
    • The commodity or service is obligated to provide adequate service to the public on demand.
  • Administrative agencies are prohibited from imposing nationality requirements on public services not classified as public utilities. The amended PSA expressly prohibits administrative agencies from imposing nationality requirements on public services not classified as public utilities.
  • The President is bestowed with power to suspend or prohibit proposed mergers or acquisitions involving public services that would effectively give control to foreigners. Under the amended PSA, the President is given the power to suspend or prohibit any proposed merger or acquisition transaction, or any investment in a public service, which would effectively result in the grant of control to a foreign national.
  • Entities owned or controlled by foreign governments or state-owned enterprises are prohibited from investing in public utilities or critical infrastructure. Upon the effectivity of the PSA amendments, entities owned or controlled by foreign governments or state-owned enterprises will be barred from making new investments in any public utility or critical infrastructure[10], save for sovereign wealth funds and independent pension funds of states, subject to a 30% equity restriction.
  • Foreign nationals may invest in public services classified as critical infrastructure subject to reciprocity rules. A foreign national is not allowed to own more than 50% equity in a public service engaged in the operation and management of critical infrastructure unless the country of such foreign national extends the same privilege to Philippine nationals as may be provided by foreign law, treaty or international agreement.
  • Entities in the telecommunications sector must be certified compliant with ISO standards on information security. As a continuing requirement to retain their authority to operate as a public service, entities engaged in the telecommunications business are required to obtain and maintain certifications from an accredited body attesting to compliance with relevant ISO standards on information security. This requirement serves to protect the Philippines from cyber threats coming from foreign interests.
  • Public service entities are subject to an annual performance audit. Under the amended PSA, administrative agencies are mandated to ensure the conduct of an annual performance audit by an independent evaluation team for purposes of monitoring cost, quality of services, and the ability of public service providers to immediately and adequately respond to emergencies.

Implications for business in the Philippines 

Significantly, the amended PSA opens up multiple key sectors of the Philippine public service industry that were previously subject to the constitutionally imposed 40% foreign equity restriction on public utilities. In eliminating the confusion between the terms “public service” and “public utility”, the Philippine Congress has now made it clear that sectors like telecommunications, domestic shipping, railways and subways, airlines, expressways, tollways, and transport network vehicles services (“TNVS”)[11] should no longer be made subject to the equity cap provided under the Constitution. Thus, foreign nationals are now generally allowed to own up to 100% equity in businesses that offer these services. This being the case, the Philippines can expect to see an influx of foreign investments and players in these newly liberalised sectors.[12]

Conclusion

The entry of foreign investments and players into the newly liberalised sectors would undoubtedly contribute positively to improving the lives of Filipinos. The passage of the amended PSA can be expected to give rise to an increase in competition in the Philippine market which could lead to lower prices, higher quality goods and services, greater variety and more innovation.[13] For the ordinary individual, this would translate to cheaper telecommunication services, faster Internet speeds, and better infrastructure and transport systems. With the Philippine economy beginning to gain traction, Filipinos can remain optimistic about recovering from the devastating effects of the pandemic.

If you have any questions or require any additional information, please contact Felix Sy, Reeneth B. Santos and Dane M. Estepa of Insights Philippines Legal Advisors (a member of ZICO Law).


This alert is for general information only and is not a substitute for legal advice.

[1] The two other investment reform measures include the recently passed amendments to the Retail Trade Liberalisation Act (“RTLA”) and the Foreign Investments Act (“FIA”).

[2] Revin Ochave & Russel Ku, PHL, foreign business groups urge Congress to prioritise economic reform bills, available at https://www.bworldonline.com/phl-foreign-business-groups-urge-congress-to-prioritize-economic-reform-bills/ (last accessed 4 April 2022).

[3] Distribution of electricity refers to the conveyance of electric power by a distribution utility through its distribution system.

[4] Transmission of electricity refers to the conveyance of electricity through the high voltage backbone system.

[5] Petroleum and petroleum products pipeline transmission systems refer to the operation and maintenance of pipeline transmission systems to ensure an uninterrupted and adequate supply and transmission of petroleum and petroleum products to the public, and excludes petroleum pipeline systems operated exclusively for private or own use, or incidental to the operations of a distinct business.

[6] Water pipeline distribution systems and wastewater pipeline systems refer to the operation and maintenance of water pipeline distribution systems to ensure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes and the operation and maintenance of wastewater pipeline systems, except desludging companies and septic tanks.

[7] Seaport refers to a place where ships may anchor or tie up for the purpose of shelter, repair, loading or discharge of passengers or cargo, or for other such activities connected with water-borne commerce, and including all the land and water areas and the structures, equipment and facilities related to these functions, as defined by the charters of relevant authorities or agencies, such as the Philippine Ports Authority, Subic Bay Metropolitan Authority, PHIVIDEC Industrial Estate Authority, Cebu Port Authority, local government units, and other similar agencies or government bodies.

[8] Public utility vehicles refer to internal combustion engine vehicles that carry passengers and/or domestic cargo for a fee, offering services to the public, namely trucks-for-hire, UV express service, public utility buses, public utility jeepneys, tricycles, filcabs, and taxis. Transport vehicles accredited with and operating through transport network corporations shall not be considered as public utility vehicles.

[9] Public service includes every individual, copartnership, association, corporation, or joint- stock company, whether domestic or foreign, their lessees, trustees, or receivers appointed by any court whatsoever, or any municipality, province, or other department of the Government of the Philippines, that now or hereafter may own, operate, manage, or control in the Philippines, for hire or compensation, any common carrier, railroad, street railway, traction railway, subway, freight and/or passenger motor vehicles, with or without fixed route, freight or any other car service, express service, steamboat or steamship line, ferries, small water craft, such as lighters, pontines, lorchas, and others, engaged in the transportation of passengers or cargo, shipyard, marine railway, marine repair shop, public warehouse, wharf, or dock not under the jurisdiction of the Insular Collector of Customs, ice, refrigeration, canal, irrigation, pipe line, gas, electric light, heat, power, water, oil, sewer, telephone, wire or wireless telegraph system, plant or equipment, and broadcasting stations, when owned, operated, managed, or controlled for public use or service within the Philippines, whether the owner or operator be an individual, copartnership, association, corporation or joint-stock company, either domestic or foreign, or a trustee or receiver appointed by any court whatsoever, or any municipality, province, or other department of the Government of the Philippines, or any other entities.

[10] 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, including telecommunications and other such vital services as may be declared by the President of the Philippines.

[11] Transport network vehicle service refers to a Transport Network Company (“TNC”)-accredited private vehicle owner, which is a common carrier, using the internet-based technology application or digital platform technology transporting passengers from one point to another, for compensation. A TNC refers to a person or entity that provides pre-arranged transportation services for compensation using an internet-based technology application or digital platform technology to connect passengers with drivers using their personal vehicles.

[12] Revin Ochave, delayed impact expected from economic liberalisation bills, available https://www.bworldonline.com/delayed-impact-expected-from-economic-liberalization-bills/ (last accessed 4 April 2022).

[13] Heather Boushey and Helen Knudsen, Competition for the American Economy, available at https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-of-competition-for-the-american-economy/#:~:text=Basic%20economic%20theory%20demonstrates%20that,greater%20variety%2C%20and%20more%20innovation. (last accessed 4 April 2022).