Constitution amended by legislation

President Rodrigo Roa Duterte accompanies President Xi Jinping of People’s Republic of China as the latter is accorded foyer honors upon his arrival at the Malacañan Palace for his state visit to the Philippines on November 20, 2018. Malacañang Photo

Three months before it expires, the Eighteenth Congress accomplished what had begun in the Seventeenth: the amendment of the economic provisions of the Constitutions without having to pass a constitutional amendment.

When the time comes for it to be written, the genesis of the present effort, accomplished at the tail end of the Duterte administration, was hatched at the tail end of the Aquino administration: see my timeline, Charter Change: An Annotated Timeline 1934-2014.

At its heart is the amendment of Commonwealth Act. No. 146, or The Public Service Law. ACCRALaw has a useful briefer on the status quo before the amendments:

By way of background, the 1987 Constitution has adopted a Filipino First policy by giving preference to qualified Filipinos in the grant of rights, privileges, and concessions covering the national economy and patrimony. 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 the laws of the Philippines at least 60% of whose capital is owned by such citizens. The maximum 40% foreign equity participation in the operation of a public utility has been in place since the 1935 Constitution.

Neither the Constitution nor statutes define what a “public utility” is. Notably, the Supreme Court, citing American jurisprudence, had the occasion to define a public utility as “a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service.”

The PSA, approved in 1936, has entangled the concept of public utility with “public service”. It considers an entity as being engaged in public service if it “own[s], operate[s], manage[s], or control[s] in the Philippines, for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, railroad, street railway, traction railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line, pontines, ferries, and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine railway, marine repair shop, wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and power, water supply and power, petroleum, sewerage system, wire or wireless communications system, wire or wireless broadcasting stations and other similar public services.”

The PSA requires those engaged in any public service business to secure a certificate of public convenience or certificate of public convenience and necessity, except grantees of legislative franchises expressly exempting such grantee from the requirement of securing a certificate.

(In connection with the above, an insight into the thinking behind the Commonwealth Act can be found in a legal paper from the era: Statutory Definitions of Public Utilities and Carriers by Jacob Geffs, March 1, 1937). I’ve been following this story, literally, for years, in the context of China Telecoms and its bid to be the Third Player. See my columns from 11/22/2017, 2/14/2018, 7/17/2019 just for the saga of Dennis Uy. Two follow-ups after the Uy matter was “settled”: 4/14/2021 and 7/28/2021. (See this handy-dandy definition of public utilities; another useful document from the perspective of pro-privatization efforts can be found here: Competition in Public Utilities in Developing Countries).

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Again the importance of this scheme, which has been pushed from the earliest days of the present administration, is that the law which states telecoms are a public utility, is being amended to declare they are not. This means the Constitutional requirements then as now, of Filipino ownership of public utilities no longer applies. This means telecoms can now be 100% foreign-owned. But what Congress intends to do, while removing telecoms from the list of public utilities, is to retain the requirement of a congressional franchise which means telecoms as their franchises expire, have to lobby Congress for a new one. In a corrupt Congress this is a vastly lucrative requirement. But what the amendment of the law accomplishes in any case is sidestepping the previously-insurmountable problem of amending the Constitution and in that manner allows the project of allowing China Telecoms to come in, to proceed. This would allow at the very least Dennis Uy to reduce his stake in Dito Telecoms or the Zobels to reduce their stake in Globe: it would also allow PLDT to drop its pretenses of being Filipino-owned and reduce the risk of these corporations to a predictable one arising whenever its franchise is up for renewal. Both China and Japan could continue to duke it out over railways but this time establish full foreign ownership of whatever they build.

A February 3, 2022 report in BusinessWorld provides the following details:

Under the reconciled version of House Bill No. 78 and Senate Bill 2094, telecommunications, domestic shipping, railways and subways, airlines, expressways and tollways, and airports have excluded from the definition of public utility. 

Since these are no longer considered as public utilities, they will no longer be subject to the 40% foreign ownership cap under the Constitution…

Under the reconciled version, foreign state-owned enterprises are prohibited from owning capital in any public service classified as public utility or critical infrastructure. 

Also, the measure prohibits foreign nationals from owning more than 50% of the capital of entities engaged in the operation and management of critical infrastructure, unless his or her country accords reciprocity to Philippine nationals. 

The President is also given the authority to suspend or prohibit any proposed merger or acquisition, or investment in a public service that results in giving control to a foreigner or foreign corporation. 

The measure also states that “no person shall be deemed a public utility unless otherwise subsequently provided by law.” 

Under the measure, the definition of public utilities still includes distribution and transmission of electricity; petroleum pipeline transmission systems; water distribution systems; seaports and public utility vehicles. These will continue to be subjected to the 40% foreign ownership cap. 

An interesting take is in the investment banker-written blog, Heneral Lunacy which points out two caveats concerning his general approval of the new law:

The PSA will promote FDIs. Yet not all FDIs are created equal or even always good for the country. First, understand that FDIs are not permanent capital. The principal and profits thereof are eventually repatriated to their host country…

Two, FDIs do not per se always create new jobs or economic opportunities. If a foreign entity was to buy say Globe or PLDT, the only beneficiaries would be the already wealthy owners of these two companies not its employees nor the Filipino…

Three, certain FDIs can be harmful to our security interest. All developed nations have laws that restrict foreign ownership in strategic industries or companies with valuable intellectual properties. The PSA is said to provide for this by disallowing investment from so called foreign State Owned Enterprises (SOEs). Now we know that Governments like China have undue influence even over private enterprises. There is no such thing as a Chinese non-SOE as Alibaba and Tencent have discovered to their chagrin. 

Four, many foreign companies like the Middle Eastern and Chinese airlines are heavily subsidized economically by their host countries and have huge excess capacity allowing them to “dump” their services in the Philippines at lower than fair market prices putting local companies like PAL and Cebu Pacific at a competitive disadvantage. This will result in massive disruption, bankruptcies and loss of Philippine jobs…

The PSA requires reciprocity in allowing certain foreign investments i.e. foreigners can invest in the Philippines as long as we can invest in their host countries. This is an illusion. Local companies are not big enough nor dumb enough to invest in say a strategically important industry in China.

There are certain grey areas in the PSA where the sitting President can say who gets to invest in some of our key industries. Executive discretion is the mother of corruption.

Another noteworthy observation by the blogger which I’ve heard foreign investors mention in private:

On their side, good foreign investors want a level playing field; no corruption; simplification and speed of processes; protection from political interference; and consistency in the design and application of rules and policies. These are the concerns that ultimately will have a bigger impact on our economy. 

This is a legislative solution to the seemingly insurmountable problem created by the confusing provisions of the 1987 Constitution: how to amend it, when any possible political means available is guaranteed to create a politicial, because constitutional, crisis? The solution identified three terms ago (in the time of Gloria Macapagal-Arroyo, if i’m not mistaken) was to leave the Constitution alone but render its provisions inoperative by amending existing legislation.

Normally, lame duck congresses, which this one is, run out of steam by the start of the actual election year; but somehow, this measure made it through.

Incidentally, by way of comparison in terms of liberalizing ownership, see this briefer on Foreign ownership limits in Vietnam.

Manuel L. Quezon III.

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