Tax Articles

Ready. Set. INVEST!

By: Atty. Jomel N. Manaig

The colors red, yellow, and green are universal in each and every race. Red means danger or stop. Yellow means caution and yield. Green simply means go!

The same can be said for the Philippine efforts to liberalize the economy. For the proponents of the amendments to our investment laws, foreign investors see red when investing in the Philippines due to the supposed restrictions. In recent years, significant headways were achieved when the economic liberalization laws were passed. This seemingly signals a yellow light for foreign investors.

Among the laws passed were the amendments to the more than 80 year old Public Service Act (PSA). And now, a year from the passing of the law, the implementing rules and regulations (IRR) were issued. Let’s take a better look at some of the provisions of the IRR shall we?

One of the highlights of the amendments to the PSA was the determination of the six specific sectors considered as public utility. In effect, the 40% foreign ownership restriction is now limited only to those classified as public utilities. Public services that are not considered as public utilities are not covered by the foreign ownership restriction.

Though the six public utilities were expressly mentioned, the law did not close the door to adding more to it in the future. The IRR gave life to this by laying down the mechanism to review and reclassify public services into public utilities. Based on the IRR, the review may either be initiated by the relevant Administrative Agency or by the National Economic and Development Authority (NEDA) itself. Fortunately, the rules provide that a consultation is part of the procedure so the relevant stakeholders would be able to voice their support or opposition.

The IRR likewise shed some more light on the term “natural monopoly” which is one of the factors in reclassifying public services into public utilities. Under the IRR, there is natural monopoly when, among others: (i) the economies of scale is characterized by declining average cost relative to output; (ii) high fixed cost; (iii) demand is insufficient to support two or more firms; and (iv) monopoly power is not due solely to regulatory or legal restrictions.

In addition to public utilities, a public service engaged in the provision of telecommunications services is considered as a “critical infrastructure” which renders it subject to foreign ownership restrictions. However, unlike the 40% foreign ownership restriction for public utilities, the restriction for critical infrastructure is the total ban on investments by foreign state-owned enterprises and the requirement of reciprocity.

Though similar to public utilities, critical infrastructure is not limited to telecommunications. The IRR provided for the mechanism to allow the President to declare a public service as critical infrastructure. It would once again be initiated by the relevant Administrative Agency or by NEDA itself.

The IRR also provides for the mechanism for the conduct of a national security review for certain mergers and acquisitions either in the initiative of the relevant government department/Administrative Agency or by voluntary declaration.

With the IRR of the PSA in place, is the Philippines now a more attractive place to invest for foreigners? Are the red and yellow lights now over and we are now forging ahead with a green light over the horizon?

Hopefully, we are. We all want to see the Philippines finish the investment race in first place. Nothing is more satisfying than seeing the checkered flag of success being waved.