Pandora’s box

For some time now, there had been talks about the need to amend certain economic provisions of the 1987 Constitution, in particular that pertaining to foreign ownership in public utilities.

Article XII, Section 11 of the Constitution states that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under Philippines laws at least 60 percent of whose capital is owned by such citizens.

In the landmark cases of Roy vs Herbosa and Heirs of Gamboa vs Teves, the Supreme Court had the occasion to elaborate on what the word “capital” in the said provision refers to.

According to the SC, the word “capital” under Article XII, Sec. 11 does not refer to the entire capital but only to the outstanding capital stock entitled to vote. And the term “ownership” here does not pertain to mere legal ownership but also to full beneficial ownership so that at least 60 percent of the outstanding capital stock entitled to vote must be owned and held by Filipino citizens.

But the High Tribunal also explained that Filipinos must also own at least 60 percent of all classes of shares and not only the shares with voting rights.

The Constitution also imposes a number of limitations on public utilities. Art. XII, Sec. 11 provides that the franchise, certificate or authorization granted for the operation of a public utility shall not be exclusive in character or for longer than 50 years, nor shall such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by Congress when common good so requires.

In the same constitutional provision, it is stated that the participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital and that all the executive and managing officers of such corporation or association must be citizens of the Philippines.

Meanwhile, Art. XII, Sec. 16 and 17 provide that privately owned public utilities may be subject to either temporary or permanent takeover by the State.

But what are public utilities?

Republic Act 11659 or the Public Service Act as amended did not provide for a definition of a public utility but instead gave an enumeration.

Section 4, which amended Sec. 13 of the old PSA, says that public utility refers to a public service that operates, manages, or controls for public use any of the following: (1) distribution of electricity; (2) transmission of electricity; (3) petroleum and petroleum products pipeline transmission services; (4) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; (5) seaports; and (6) public utility vehicles. The term “public utility vehicles” excludes transport network vehicle service (TNVS) providers.

Likewise, all concessionaires, joint ventures, and other similar entities that wholly operate, manage, or control for public use the above sectors are public utilities. RA 11659 likewise provides that no other person shall be deemed a public utility unless otherwise subsequently provided by law.

National requirements, it added, shall not be imposed by the relevant administrative agencies on any public service not classified as a public utility.

And because telecommunications companies are not included in the list, telcos are no longer public utilities and can now be 100 percent foreign owned. However, telcos were classified as critical infrastructure and under the new PSA, entities controlled by or acting on behalf of a foreign government or foreign state-owned enterprises shall be prohibited from owning capital in any public utility as well as public service classifies as critical infrastructure.

There are now proposals to amend Article XII Sec. 11 that would call for inserting the phrase “unless otherwise provided by law” in the said provision which in effect would allow Congress to pass a law reducing the minimum 60 percent ownership requirement by Filipinos in public utilities and allowing foreign investors to participate not only as members of the board of public utilities but even in the operation and management of such as executive and managing officers.

According to those who are pushing for its amendment, the current constitutional limitation to the ownership of public utilities has hampered the entry of badly needed foreign investments.

But doesn’t the new PSA already address that concern?

Congress can always amend the PSA to either add to the list of public utilities or remove sectors from the existing list.

A paper prepared by the Senate Economic Planning Office in 2021 or prior to the amendment of the 85-year-old PSA mentioned that in the 2020 edition of the FDI Regulatory Restrictiveness Index released by the Organization for Economic Cooperation and Development (OECD), the Philippines had the highest index rate among ASEAN countries excluding Timor Leste, indicating a highly restrictive investment environment compared to its neighbors.

But the same paper also noted that a number of countries including the Philippines have over the years come to recognize the need for some sensitive economic sectors and industries to be factored into the national security concerns of the country. For instance, ownership or control of a country’s water supply or electricity grid would have a tremendous impact on its national security.

It said that with the need to bring in investment to these sectors, particularly when the investment comes from foreign countries whose interests may not necessarily be aligned with those of the host country, there arises the need to place greater safeguards in these industries. The challenge, it emphasized, is to balance the interests of maintaining national security and protecting Philippine sovereignty without unnecessarily hampering the entry of much-needed investment and competition.

At present, given Art. 12 Sec. 11 of the Constitution and the new PSA, public utilities as enumerated in the PSA must be operated by entities at least 60 percent of the outstanding capital stock entitled to vote is owned and held by Filipinos. Congress, as I have already stressed, can always add and drop industries from the list of public utilities as well as public services industries classified as critical infrastructure. But the constitutional safeguard on control and ownership by Filipinos should always be there just in case we need to protect industries whose operation can impact heavily on national security.

Giving Congress the power to reduce or even do away with the minimum Filipino ownership in public utilities by the sheer expediency of legislation might just open a Pandora’s box.

As pointed out by the Supreme Court in the Gamboa case, Art. XII Sec. 11, which mandates the Filipinization of public utilities, is basically a reproduction of the provision in the 1973 and 1935 Constitutions on public utilities and is a recognition of the sensitive and vital position of public utilities both in the national economy and for national security.

“The evident purpose of this citizenship requirement is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest. This specific provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution to conserve and develop our patrimony and ensure a self-reliant and independent national economy effectively controlled by Filipinos,” the Court added.

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