In a bid to revitalise its economy by boosting market competition, the Philippines has taken a major step towards granting full foreign ownership in certain public infrastructure sectors, including airports, railways, expressways, and telecommunications.
The government hailed the implementing rules and regulations (IRR) for the law amending the Public Service Act (PSA) as a "landmark reform" set out to transform the Southeast Asian country into an "ideal investment hub" hoped to create more employment opportunities and economic benefits for Filipinos. Previously, foreign ownership in those industries was limited to 40 percent.
Lawyers in the Philippines have generally welcomed the IRR for providing better clarity in the government's approach to foreign investment in public sectors. However, they are also cognizant of Manila's objectives in prioritising national interest, which is believed to call for closer examination of cross-border transactions involving foreign elements.
WHAT ARE THE NOTABLE CHANGES?
Joselito Bautista, a corporate partner at Manila-headquartered Angara Abello Concepcion Regala & Cruz (ACCRALAW), says the IRR has showcased the government's commitment to striking a balance between its economic objectives and the protection of national interests.
"This commitment is manifested in two ways: first, by liberalising foreign ownership in key public sectors to stimulate market competition and generate employment opportunities; and second, by implementing safeguards to address national security concerns," notes Bautista.
He highlights the clear distinction between eligible public services from public utilities as one of the most significant reforms set by the new regulations.
The Philippine Constitution binds foreign ownership in public utilities at 40 percent. Public utilities, defined by the amended PSA, "as a public service operating in identified sectors like electricity transmission and distribution, water pipeline distribution, petroleum pipelines, seaports, and public utility vehicles," explains Bautista.
However, the Amended PSA lacks a specific definition of "public services," which could create ambiguities as to in which public sector full foreign ownership is allowed under the current law.
"The IRR addresses this by referring to CA 146, the original law, which enumerates what falls under 'public services' such as telecommunications systems and railways. This clarification indicates that the foreign equity limitation will continue for public utilities as defined in the Amended PSA, while public services not classified as public utilities will enjoy liberalised foreign ownership," notes Bautista.
HOW DOES NATIONAL INTEREST COME INTO PLAY?
Apart from the much-needed clarification, the Philippine government has also heightened scrutiny on investment elements concerning national security, in a move in line with the strategies of many Western jurisdictions, including the U.S., amid rising geopolitical tensions.
Specifically, although the IRR enables full foreign ownership of some public services, it prohibits investments from an entity controlled by or acting on behalf of a foreign government or state-owned enterprises. The IRR also has provisions protecting investments from national security concerns that may arise from these cross-border transactions.
"The IRR specifies that the president's powers to suspend or prohibit transactions or investments shall be based on the review, evaluation, and recommendation conducted in accordance with the national security review by the National Economic and Development Authority (NEDA) either motu proprio or upon request by the relevant administrative agency," Bautista points out.
"Investment transactions in public services will undergo a national security review if they involve granting control to a foreign entity with national security implications, such as classified contracts, critical infrastructures, sensitive technologies, or proximity to areas of national security significance, while considering the investor's background, relevant legal cases, and similar circumstances," he adds.
To effectively guide clients through the updated regulatory landscape, Bautista believes law firms should first identify public services that now can enjoy full foreign ownership, conduct in-depth due diligence on foreign investors, investment structures and potential risks, and provide tailored advice on investment structuring within the public service sector.
HOW HAS THE MOVE BEEN RECEIVED BY CLIENTS?
As a result of the promulgation of the IRR, Bautista has observed an uptick in legal demands pertinent to operations and transactions within the public service sector.
"We have been receiving queries from clients seeking guidelines on restructuring their companies within the public service sector. This restructuring primarily aims to accommodate increased foreign investments above the previous 40 percent limit," says Bautista.
"We have also received inquiries from foreign clients seeking legal opinions on various matters, including the legality of their proposed business ventures in the public service sector, the prerequisite licenses and approvals under the Amended PSA, the necessary permits for their intended transactions, and relevant legal restrictions," he adds.
Going forward, Bautista expects more legislative complementation to the IRR to provide more clarity, including the reclassification of a particular public service as a public utility, which falls under the scope of the new regulations.
In addition, "We anticipate that legislative developments in relation to the IRR will tackle the introduction of new investment promotion initiatives, incentives, or tax reforms aimed at encouraging foreign direct investment," says Bautista.
"Law firms in the Philippines can strengthen synergies with in-house legal departments by fostering open communication channels and organising regular strategy sessions," he adds.
