Recent developments

On 20 March 2023, National Economic and Development Authority (NEDA) issued the implementing rules and regulations (IRR) of Republic Act (RA) 11659, which was approved by 21 government agencies, including the NEDA itself.

Please read our earlier client alert on RA 11659 for further context on the developments leading to its enactment.

Salient provisions

1. Foreign equity restrictions on certain public service companies remain the same. 

• The IRR is consistent with the provisions of RA 11659 in considering the following services as 'public utilities' and subject to the 40% foreign ownership limitation under the Constitution: (a) distribution and transmission of electricity; (b) petroleum and petroleum products' pipeline transmission systems; (c) water pipeline distribution systems; (d) wastewater and sewerage pipeline systems; (e) seaports; and (f) public utility vehicles.

2. The IRR provides the definition of 'control' under the amended Public Service Act.

• The IRR defines "control" as the ability to substantially influence or direct the actions or decisions of an entity. Control exists when a parent company or entity: (a) owns directly or indirectly more than 50% of the capital, taking into account voting power and beneficial ownership of an entity; or (b) controls, through ownership interests, the exercise of more than 50% of the voting rights. This is unless an entity can clearly demonstrate that such ownership does not constitute control.
• The IRR clarifies that control may still exist in limited circumstances even if the entity owns 50% or less of the voting power of another entity, where there is power, ability, or right to confer decisive influence on the decisions of another entity, or interfere with its management, operation, administration or control.
• The IRR provides that its definition of control is subject to existing or subsequent jurisprudence on the determination of control.
• The IRR's definition of "control" affects the Public Service Act's definition of what a "Foreign State-Owned Enterprise" is (discussed below). It also possibly affects the extent of what may be considered a public utility, since a public utility refers to a "public service" that "controls for public use" any of the public services enumerated under Section 4 of RA 11659.

3. Only public services engaged in the provision of telecommunications services are considered as critical infrastructure, until further action by the President. 

• RA 11659 says that public services engaged in the operation and management of critical infrastructure may be owned by foreign nationals by more than 50%, subject to reciprocity requirements. Such public services are required to act on customer complaints or provide an action plan within 10 days and need to submit monthly reports detailing service interruptions, complaints and actions taken on each complaint. RA 11659 says that only public services engaged in the provision of telecommunications services are considered critical infrastructure, unless otherwise declared by the President of the Philippines. The IRR does not change this. 
• The IRR categorically says, "No other public service shall be considered critical infrastructure unless declared by the President." The IRR specifies the process by which the President can declare a public service as a critical infrastructure. According to the IRR, this declaration is done through the issuance of an executive order, and NEDA may recommend to the President that a public service be classified as critical infrastructure on its own accord or upon request of the relevant administrative agency. 

4.  NEDA has the power to review reclassification of public services as public utilities.

• RA 11659 provides that upon the recommendation of NEDA, the President may recommend to Congress the classification of a public service as a public utility. A law is required to classify a public service as a public utility. The IRR further provides that NEDA shall have the power to review the reclassification of a public service whether on its own or upon request of the relevant administrative agency.
• RA 11659 provides that being a natural monopoly is one of the factors for reclassification of a public service, and a "natural monopoly" exists when the market demand for a commodity or service can be supplied by a single entity at a lower cost than by two or more entities. The IRR states that other considerations for a natural monopoly include economies of scale, high fixed cost, industry, insufficient industry or market demand to support two or more firms, and monopoly power not being due solely to regulatory or legal restrictions.

5. The IRR provides additional qualifications on investment by foreign governments and foreign state-owned enterprises.

• Under RA 11659, companies controlled by or acting on behalf of a foreign government or foreign state-owned enterprises are prohibited from owning capital in any public service classified as a public utility or critical infrastructure. RA 11659 defines a "foreign state-owned enterprise" as an entity in which a foreign State: (a) directly or indirectly owns more than 50% of the capital taking into account both the voting rights and beneficial ownership; (b) controls, through ownership interests, the exercise of more than 50% of the voting rights; or (c) holds the power to appoint a majority of members of the board of directors or any other equivalent management body. In short, a foreign state-owned enterprise is one which is controlled by a foreign state.
• The IRR further states that the criteria for a "foreign state-owned enterprise" under RA 11659 also apply to the mode of acquisition of the holding or parent enterprise of subsidiaries of a foreign state-owned enterprise.
• RA 11659 prohibits foreign governments or foreign state-owned/controlled enterprises from investing additional capital after the law's effectivity. The IRR clarifies that such entities with existing investments or capital ownership in public services or utilities classified as critical infrastructure prior to the effectivity of RA 11659 may maintain them.

6. National security reviews may be done by the government on its own, or upon voluntary declaration by a party to a transaction/investment. 

• RA 11659 gives the President of the Philippines the power to suspend or prohibit merger or acquisition transactions or any investment in the interest of national security. The IRR provides the factors to be considered in conducting a national security review. Essentially, the IRR says that the transactions or investments subject to suspension/prohibition are those that result in a grant of direct or indirect control to a foreign entity and have national security implications.
• Based on the IRR, the criteria for reviewing investments are, as follows: (a) impact on national security; (b) applicability of other Philippine laws and policies; (c) implication of any national security risk arising from the investment on the Philippine economy and community; (d) whether the investment will affect the ability of the Philippines to protect its strategic and security interests; and (e) nature, history, and previous business transactions of the investor and any cases filed against the same, in their country of origin, or in any other country or state where the investor is involved.
• The national security review process may be undertaken by the relevant government department or administrative agency on its own accord or upon voluntary declaration by any party to such merger or acquisition, transaction or investment in a public service.
• Parties to these transactions or investments are not prohibited from consulting with the relevant administrative agency prior to filing a voluntary declaration and, if appropriate, filing a draft declaration to aid in understanding the transaction and providing an opportunity for the administrative agency to request additional information to be included in the declaration.
• Any information or document filed with a government agency relating to a pre-declaration consultation or national security review shall be exempt from disclosure, and no such information or document shall be made public, except under limited circumstances.

7. The IRR provides the criteria for satisfying reciprocity requirements.

• RA 11659 provides that foreign nationals are allowed to own more than 50% of capital in public services engaged in the operation and management of critical infrastructure, but only if the country of such foreign nationals accords reciprocity to Philippine nationals under foreign law or a treaty. Reciprocity may be satisfied by according rights of similar value in other economic sectors for this purpose, and the NEDA shall promulgate rules and regulations in relation to reciprocity requirements. 
• The IRR provides that reciprocity requirements are deemed satisfied if: (a) Philippine nationals are allowed to own more than 50% of capital stock in any activity related to agriculture, industry and services in the home country of the foreign national; and (b) the home country of the foreign national allows Philippine nationals to invest the same value of capital in any economic activity related to agriculture, industry or services.
• In case an investment results in the ownership by a foreign national of more than 50% of the capital stock in critical infrastructure services, such entity and the relevant administrative agency should ensure that the country of the foreign national accords reciprocity to Philippine nationals.

8. The IRR requires information security certification for retention of franchise.

• Except for micro, small, and medium enterprises (MSMEs), persons and companies engaged in the telecommunications business shall obtain and maintain certifications from an accredited certification body attesting to compliance with relevant ISO standards on information security, as prescribed by the Department of Information and Communications Technology. The maintenance of these certifications shall be a continuing qualification for retention of franchise or other authority to operate. 

Why the IRR of RA 11659 is relevant to you

The IRR clarifies and provides additional guidelines for the implementation of RA 11659. The IRR also elaborates on the various processes and procedures outlined in the law, particularly those in relation to classification of public services and national security reviews. 

Existing businesses in the public services sector will need to exercise heightened vigilance in ensuring compliance with the law and the IRR. This is especially true for businesses that are considered public utilities or critical infrastructure (i.e., telecommunications services), given the additional scrutiny by the government and responsibilities imposed upon them.
 

*Authored by Quisumbing Torres, a member firm of Baker & McKenzie International, a Swiss Verein. Please contact QTInfoDesk@quisumbingtorres.com for inquiries.

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