Issue link: https://digital.shearman.com/i/1425143
4 2 Under the 1987 Philippine Constitution, no franchise for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under Philippine law that are at least 60 percent owned by Filipino citizens. What constitutes a public utility, however, is not defined in the Constitution. Instead, it has been indirectly defined by the legislature in the Commonwealth Act No. 146, also known as the Public Service Act ("PSA"), and by the judiciary in case law. The concepts of public service and public utility are used interchangeably when interpreting the provision in the Constitution, and the term "public services" is defined in the PSA. The Supreme Court, in a landmark case in 2003, held that "the term 'public utility' implies public use and service to the public." As a result of the interpretation of the two terms, foreign investment in a Philippine corporation has been limited to 40 percent in several key infrastructure sectors. In a bid to attract foreign investment, several bills have been filed before the Philippine Congress, which seek to amend the PSA. The latest version of these bills are House Bill No. 78, which was passed by the lower House of Representatives on March 10, 2020, and is being deliberated upon by the Philippine Senate, and Senate Bill No. 2094, which was filed on March 11, 2021. The bills seek to limit the definition of "public utility" to persons who are engaged in electricity distribution and transmission and water pipeline distribution or sewerage pipeline systems. The objective of the amendments is to seek to open other sectors to foreign investment up to 100 percent. If the bills are passed into law, only those persons that fall within the definition of a "public utility" will be subject to the foreign ownership restrictions on public utilities under the Constitution. Both bills stipulate that no other person will be considered a public utility unless otherwise subsequently provided by law. While promising, the longer-term impact of these changes remains to be seen. SB No. 2094 appears to balance the liberalization of the ownership of certain industries with the protection of critical businesses from foreign ownership by introducing various protective mechanisms. Subject to certain exceptions, these include: 1. a limit on the number of foreign nationals employed by a public service to 25 percent of total employees; 2. establishing that no competent, able and willing Philippine national is available for employment by the public service entities; 3. a prohibition on foreign state-owned enterprises from owning capital in any public service classified as "critical infrastructure"; 4. a 40 percent foreign ownership limitation on public services engaged in the operation and management of critical infrastructure unless the country of the foreign investor grants the same privilege to Filipinos; and 5. a national security review of foreign government-controlled transactions which would result in control of critical infrastructure. 07 Proposed Easing of Foreign Investment Restrictions in the Philippines INSIGHTS