Public Service Act IRR to Take Effect on 4 April 2023

On 20 March 2023, the National Economic and Development Authority (“NEDA”) issued the Implementing Rules and Regulations (“IRR”) of Republic Act (“RA”) No. 11659 or the Public Service Act, as amended, to take effect on 4 April 2023.

The IRR expounds on the following matters: (a) factors to be considered by the NEDA in the review of reclassification of public services; (b) powers of the President to suspend or prohibit transaction or investment and the factors for national security review; (c) investments by an entity controlled by or acting on behalf of the foreign government, or foreign state-owned enterprises; and (d) reciprocity requirements for critical infrastructure. 

Factors to be Considered in the Review of the Reclassification of Public Services

The NEDA, upon request by the relevant administrative agency, shall review the reclassification of a particular public service to a public utility. After such review, the NEDA shall submit its findings and recommendations to the Office of the President, for appropriate action. In this regard, the IRR provides the following key factors to be considered by the NEDA in the review of the reclassification of public services:

1. The commodity or service can only be regularly supplied, transmitted, and distributed to the public through an infrastructure network, composed of nodes and links, specifically built to facilitate the delivery of the commodity or service;
2. The commodity or service is a natural monopoly based on, but not limited to, the following:
   
   
   1. Economies of scale characterized by declining average cost relative to output;
   2. High fixed cost;
   3. Industry or market demand is insufficient to support 2 or more firms; and
   4. Monopoly power is not due solely to regulatory or legal restrictions.
   
   
3. The commodity or service is necessary for the maintenance of life, livelihood, or employment of the general public; and
4. An uninterrupted market supply of the commodity or service is required to meet market demand, whether such market demand is actual or potential.

Powers of the President to Suspend or Prohibit Transaction or Investment

Under the IRR, the President is allowed, in the interest of national security, to suspend or prohibit any proposed merger or acquisition transaction, or any investment in a public service that effectively results in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation. The power of the President can be exercised after review, evaluation and recommendation of the relevant government department or administrative agency.

In relation to the above, Section 36 of the IRR provides that investment transactions in any public service satisfying both of the following conditions shall be subject to national security review:

1. Any proposed merger or acquisition transaction, or any investment in a public service entity, that will effectively result in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation, or a foreign government; and
2. The proposed merger or acquisition transaction, or investment in a public service has national security implications, such as but not limited to:
   
   
   1. Whether the public service entity performs or has previously performed in any contracts that have been classified as top secret, secret or confidential;
   2. Whether the investment transaction is a critical infrastructure or a public service that:
      
      
      1. Utilizes military or defense-related items, software, and technology that are specifically designed, developed, configured, adapted, or modified for military end-use, including all strategic goods identified in the national strategic goods list as provided in RA No. 10697, otherwise known as Strategic Trade Management Act;
      2. Utilizes items relating to chemical and biological weapons, nuclear technology, missile technology and other similar articles related to national security that are regulated by the Department of National Defense, Philippine National Police, Department of Health, Department of Environment and Natural Resources or any such appropriate government instrumentality with mandate pursuant to multilateral and international agreements; or
      3. Stores, maintains, or has access to personal information of defense, security and intelligence personnel, which if accessed or disclosed could compromise national security, excluding personal information of such personnel that are unconnected to their roles relevant to national security.
      
      
   3. Whether the public service entity is located in geographical areas critical to national security such as but not limited to areas near sensitive government facilities (e.g., military bases). The list of geographical areas critical to national security will be subject to the approval of the President as provided in the IRR of RA No. 11647 or the Foreign Investments Act;
   4. Nature, history, and previous business transactions of the investor and any filed cases against the same, in their country of origin, or in any other country or state that the foreign investor is involved with; or
   5. Other circumstances analogous to the foregoing.

Notably, the IRR provides that only a public service engaged in the provision of telecommunications services is critical infrastructure under RA No. 11659 and no other public service shall be considered critical infrastructure unless declared by the President through the issuance of an executive order. Upon such declaration, the provisions applicable to critical infrastructure shall apply prospectively to such public service.

Investments by an Entity Controlled by or Acting on Behalf of a Foreign Government, or Foreign State-Owned Enterprises

The IRR also enumerates the entities prohibited from making any investment or owning capital in any public service classified as public utility or critical infrastructure from the effectivity of RA No. 11659, to wit:

1. foreign government or foreign state-owned enterprises;
2. an entity controlled by a foreign government or foreign state-owned enterprises; or
3. an entity acting on behalf of a foreign government or foreign state-owned enterprises. An entity is considered to be acting on behalf of a foreign government or foreign state-owned enterprise if the latter has the ability to intervene in the management, operation, administration or control of an entity.

Investments or capital in public utility entities or public service entities classified as critical infrastructure prior to the effectivity of RA No. 11659 may be maintained by the above entities but no additional capital may be invested therein after the effectivity of RA No. 11659.  

Sovereign wealth funds (“SWF”) and independent pension funds of states may collectively own up to 30% of the capital of such public utility entity or public service entity classified as critical infrastructure. This ownership is subject to adherence with international best practices and the generally accepted principles of SWF management. Further, the total investment of such funds in the public service classified as public utility or critical infrastructure, regardless of source of fund, must not exceed 30% capital investment. 

Reciprocity Requirement for Investments in Critical Infrastructure

For foreign nationals to be allowed to own more than 50% of the capital of entities engaged in the operation and management of public service classified as critical infrastructure, the country of such foreign national must accord reciprocity to Philippine nationals as may be provided by foreign law, treaty, or international agreement. In this regard, the IRR provides that this reciprocity requirement shall be deemed satisfied if:

1. 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; or
2. If 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, and services.