Liberalizing public services a delicate balancing act

THINK tanks, government officials and business groups have stressed the need to bring in more foreign direct investments (FDI), especially at a time when a country is battling an enemy strong enough to send it to an economic recession. FDIs are expected to generate more employment and revenues—both of which are on the top of the must-have list of the country.

This is what the move to amend the 80-year-old Public Services Act (PSA) is seeking to achieve. It limits the industries considered as public utilities—or those sectors that, if destroyed, will adversely impact national security. As a result, the industries outside of the scope will not be subject to the 40-percent foreign equity restriction of the 1987 Constitution, like public utilities are, thereby liberalizing the said sectors.

The bill identifies the distribution of electricity; transmission of electricity; and water pipeline distribution systems and sewerage pipeline systems as public utility. But other public services may be considered as public utility given certain criteria, including them being a natural monopoly.

This caveat brings worries to the business sector, however, as this may expand the list of public utilities in the country, which means more may be subject to foreign equity restrictions. As such, foreign investors may be discouraged to set up shop here.

Competition body

Johannes Bernabe, commissioner at the Philippine Competition Commission (PCC), noted that the list of public utilities has been amended and expanded under the Senate Committee report, including petroleum and petroleum products pipeline distribution/transmission systems; airports and seaports; and public utility vehicles (PUVs).

PCC is among the agencies being consulted in classifying public utilities.

“The inclusion of the items on petroleum seems logical enough, from an economic standpoint, as these would seem to be natural monopolies,” he told the BusinessMirror. “Airports can also be justified as they are also natural monopolies (or at least, arguably should not be redundant) within a certain geographic area.”

He said, however, that “seaports are probably less of natural monopolies, since they can be constructed adjacently along the foreshore.”

In addition, the PCC official said PUVs cannot be justified as a natural monopoly because multiple operators can ply a route. However, he explained that the inclusion of such may be for the protection of the micro and small operators.

“Theoretically, any foreign equity-based limitation can discourage foreign investments,” Bernabe said. He reiterated that it is justified for sectors with natural monopolies.

“For other business activities, however, particularly those where huge capital outlays are necessary [and such capital, or the propensity to invest such capital, is not necessarily available in the Philippines], we should be promoting rather than discouraging foreign investments,” he added.

Bernabe explained that the foreign ownership cap has been a “de facto disincentive and a legalized barrier to entry of foreign investors.” It is among the reasons why the FDIs in the Philippines have not yet reached maximum potential, he added.

National security

While liberalizing the economy, the PSA amendments also seek to protect the national security. This is where the government is expected to perform a balancing act: FDIs on one end and national interest on the other.

“The proposed PSA amendments already provide for certain safeguards with respect to business activities that will be liberalized,” Bernabe said.

The measures, he noted, include subjecting foreign investments in public services listed as critical infrastructure to scrutiny by the National Security Council and prohibiting foreign state-owned enterprises from having equity or increasing their existing equity in such critical infrastructure after the passage of the proposed amendments.

In addition, he said the proposal prohibits sovereign wealth funds or pension funds from a single country from owning more than 30 percent of the equity of such critical infrastructure.

“These safeguards should allow us to balance the need to liberalize the economy and protect national security,” said Rizalina Mantaring, Management Association of the Philippines (MAP) national issues committee chairperson, in an interview with the BusinessMirror.

However, the safeguards could still be improved, Bernabe said.

The PCC commissioner said he reached out to Sen. Grace Poe, primary sponsor of the bill, suggesting considering foreign entities which receive substantial subsidies from their government as state-owned enterprises. This excludes them from having a stake in critical infrastructure.

“Further, standards and principles that will guide the pertinent regulatory agency in establishing the qualification and licensing requirements, as well as technical standards, may also be additionally included in the amendatory bill so that regulatory agencies [particularly those which may be weak or prone to ‘regulatory capture’] may already be constrained in their discretion,” Bernabe said.

Avoid protectionism
–biz groups

Financial Executives Institute of the Philippines (Finex) President Francis Lim agreed that the Philippines should follow the lead of other countries and further open up its economy to foreign investors. He noted that the Philippines is the third most restrictive in the world, next to Palestine and Libya.

“Let’s forget about protectionism as it has been anathema to making our country an attractive investment destination to the prejudice of our people,” the Finex official said.

As such, liberalizing the public-service sectors will allow the Philippines to “catch up in the race for global investment,” Makati Business Club Director Francisco Alcuaz Jr. told the BusinessMirror.

Mantaring added that FDIs will also bode well for the consumers and competition in the country.

“Foreign capital also often brings in newer technologies which allow for better service at lower costs, and forces the industry to similarly invest in modernization and provide better and more competitive services to consumers,” she said.

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