Republic Act No. 11659, amending Commonwealth Act No. 146 or the Public Service Act, (the “Amended PSA”), was passed into law last 21 March 2022, with the intent to, among others, expand investments into the public services sector, a sector that has been generally considered as “highly regulated.”
With the passing of the Amended PSA, clarification as to what are considered as public utilities was made, enumerating such to cover distribution of electricity; transmission of electricity; petroleum and petroleum products pipeline transmission systems; water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; seaports; and public utility vehicles. For these public utilities, a requirement for a legislative franchise and a forty percent (40%) maximum foreign equity threshold was confirmed. In carving out the public utilities from the greater set of public services, the ambiguity on what public utilities are covered within the realm of public services has somewhat been eradicated.
While the Amended PSA has been lauded as legislation that finally opens a market long been ripe for foreign investments, in the same breadth, the Amended PSA introduced industries considered as “critical infrastructures”, over which a specific set of rules apply. Under the Amended PSA, a critical infrastructure is defined 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.”
On its face, “critical infrastructure” has a broad definition, one that grants the President discretion to identify industries as critical infrastructures, as long as such industries fall under the general definition of a public service under Section 13(b) of the Amended PSA. As of this writing, only telecommunications has been identified in the Amended PSA as a critical infrastructure, with the caveat that “no other public service shall be considered critical infrastructure unless declared by the President.” In relation to that caveat, the Implementing Rules and Regulations of the Amended PSA (the “IRR”) allows the President to identify additional critical infrastructures through executive orders, and further allows the National Economic Development Authority (“NEDA”) or the applicable administrative agency, such as the National Telecommunications Commission for telecommunications, to recommend to the President additional industries as possible critical infrastructures.
Although the NEDA issued the IRR in June of this year, seeking to further contextualize the broad strokes made in the Amended PSA, the ambiguity with respect to critical infrastructures remains present.
What are the possible issues that comes with investing in critical infrastructures? At the outset, foreign investors seeking to invest into industries considered as critical infrastructures must consider the limits on equity ownership in such industries. As a general rule, foreign nationals (natural or juridical) cannot own more than fifty percent (50%) of the capital of entities considered as a critical infrastructure, unless reciprocity is accorded to Filipino nationals. This reciprocity is satisfied when Philippine nationals are allowed to own more than fifty percent (50%) of capital stock in any activity related to agriculture, industry, and services in the home country of the foreign investor; or if the home country of the foreign investor allows Philippine nationals to invest the same value of capital in any economic activity related to agriculture, industry, and services [IRR, Section 45]. More importantly, foreign investors should consider the latitude of the discretion granted to the President that poses a risk to investors. For one, commercial decisions are not done in a few days. The decision to invest in any industry, especially by foreign investors, is painstaking and deliberate. As such, the identification of “critical infrastructures” and the latitude granted to the President to determine them, leaves these investors in a bind. To drive this point home, imagine a foreign investor who has prepared for months and raised funds to invest in a certain entity engaged in industry, only to later have the President declare such industry as a critical infrastructure. What will happen to that investment? What if the foreign investor has breached the maximum foreign equity limits, or the home country of that investor does not grant reciprocity to Filipino nationals? The potential capacity of that investment to revitalize that industry is all but hampered.
In some way, foreign investments in industries likely to be considered as critical infrastructure poses risks that can only be limited through further identification of what industries these are, through an executive order issued by the President identifying additional critical infrastructures. Perhaps by limiting the list of industries considered as critical infrastructures, investors can find guidance on the type of industries potentially to be classified as such. Until such time, investors will have to take the risk in respect of investing in sensitive industries and will need to manage the timing and extent of their investments in the same.
This article is for general information and educational purposes only and not offered as legal advice or opinion.
Roilan Rigil Kent A. Alonzo is an Associate of the Corporate and Special Projects Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).