Overcoming legal barriers to FDI in infrastructure

By Ronald Dime, DLDTE Law Office
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PERHAPS THE SINGLE biggest challenge to developing infrastructure in the Philippines is the decision made long ago to carve foreign direct investment (FDI) restrictions into the provisions of the Constitution itself, rather than retaining flexibility through legislation.

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Ronald Dime
Managing Partner
DLDTE Law Office in Manila
Tel: +632 7595548
Cell: +639 175433211
Email: ronalddime@dldtelaw.com

These restrictions include ownership and control limits on foreign investments in public utilities, communications, mass media, advertising, educational institutions, property and the exploitation, development and utilization (EDU) of natural resources.

As the country seeks to sustain the past few years’ growth, it increasingly has to look abroad for additional capital and technology to continue fuelling expansion. External factors aside, the Philippine outlook remains positive overall but the country faces steep competition for FDI from other developing economies like Vietnam, Laos, Cambodia and even Myanmar.

PUBLIC UTILITIES AND ENERGY SOURCES

Short of amendment, the Constitution does leave policy makers and lawyers alike with room to exclude certain infrastructure services from the limitations applicable to “public utilities”. This is so because the term is not precisely defined by the Constitution or the Public Service Act (Commonwealth Act 146).

For instance, the Supreme Court ruled, in 2003, that a shipyard is not a public utility. Moreover, “the fact that a business offers services or goods that promote public good and serve the interest of the public does not automatically make it a public utility” (JG Summit v Court of Appeals, GR No. 124293).

Even earlier, the Electric Power Industry Reform Act unbundled the electric power industry into different sectors and expressly declared that power generation should not be considered a public utility. Consequently, it is exempt from the requirements of a national franchise (section 6, Republic Act 9136).

Taking these cues from the courts and congress, it may also be theoretically possible to seek clarification regarding other vague provisions in the Constitution. One potentially promising area for clarification is the definition of “all forces of potential energy” included in the enumeration of natural resources under article XII, section 2 of the Constitution.

Specifically, there is an argument to be made that energy derived from the use of solar photovoltaic (PV) technology should not be considered EDU of natural resources. This would not even require a legislative amendment, as there is actually no provision in the Renewable Energy Act [Republic Act 9153] itself which mandates the imposition of ownership restrictions for solar PV technology.

STRUCTURING OPTIONS

In many instances, the level of capital required from the foreign investor in developing a project does not appear to correspond with the level of participation the investor is allowed under the various laws.

Parties need to carefully structure their relationships in order to divide economic benefits equitably, without running afoul of nationality requirements.

Strategies built solely around some form of corporate layering scheme must now be closely examined or otherwise re-evaluated in light of the latest pronouncements on the proper meaning to be given to the term “capital” (Roy III v Herbosa, GR No. 207246 in relation to Gamboa v Teves, GR No. 176579).

The good news is that the courts recognize the foreign investor’s right to “recoup investments and costs” (La Bugal B’laan v Secretary, GR No. 127882]. In fact, judicial pronouncements provide guidance on what a foreign investor is allowed to do in view of the seemingly conflicting concerns arising from the protectionist prov-isions in the Constitution and the recognition of private sector’s contribution to developmental goals.

Using the ruling in Tatad v Garcia, GR No. 114222, for example, parties can structure their business relationship around the “distinction between … ‘operation’ of a public utility and the ownership of the facilities … used to serve the public”. Another example is in the case of hydropower dams, where the Supreme Court confirmed that utilization of water from the dam by a foreigner is not violative of the Constitution (Ideals v Psalm, GR No. 192008).

CLOSING THOUGHTS

The Philippines’ fast-growing economy provides the impetus for increasing the pace of infrastructure development. While the legal environment can be challenging, the Philippines retains many of the advantages that have always made it an attractive destination for investment.

Liberalization of trade restrictions, renewed focus on anti-corruption and the passage of critical legislation should only add to the appeal. As in most things, selection of partners and proper guidance are the keys to navigating the hurdles.


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DIME & EVIOTA (DLDTE) LAW OFFICE
3rd Floor, Patriarch Building,
Don Bosco cor. Don Chino Roces Avenue,
Makati City, Philippines
Website:www.dldtelaw.com


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