The legal and political sectors in the Philippines are electric with tension and excitement due to pending change. The economic future of this tiger economy and its people depend on it, writes John Church
In the Philippines these days, it seems, it’s all about politics. When Asia Business Law Journal wrote about plans to revive the nation through ambitious infrastructure projects almost a year ago, under maverick President Rodrigo Duterte’s “build, build, build” programme, lawyers were cautiously optimistic that change may be on the way, even though the Philippines’ track record in this area had been, at best, unremarkable for many years.
Now, there is the crackle of electricity in the political air. Duterte is pressing ahead with constitutional changes in a move that should herald a new wave of foreign investment into the country. However, he also has other plans – the most controversial being ushering in an era of federalism, with much of the government’s central power and authority decentralized to the provinces.
Critics of this fear a nation divided into dynasties and warring factions. Also under consideration, is the removal of term limits for elected politicians and a possible extension of incumbent politicians’ terms until federalism is established. This may mean Duterte’s term is extended – he would also be eligible for re-election as either president or prime minister – fueling fears of a return to authoritarian-style rule reminiscent of Ferdinand Marcos. In this regard, Duterte’s appalling human rights record is not helping to allay concerns.
The imminent vacancies of two key positions, the ombudsman and commissioner of the Securities and Exchange Commission, plus an impeached chief justice thrown into the mix creates an atmosphere that is truly charged for an intriguing year for law, business and politics.
On the brighter side, as Editha Hechanova, president and CEO of Hechanova Bugay Vilchez & Andaya-Racadio points out, the Philippines is one of the fastest growing economies in the world with GDP growth of 6.7% last year, and expected to increase to 7-7.5% this year. The low cost of doing business, the country’s friendly people, and educated and skilled English-speaking workforce as well as a young population are all positive factors for
There may be issues on corruption, political stability and infrastructure that remain as challenges to potential investors but efforts are under way to institute reforms to liberalize investment laws, consider changes in government systems to distribute power and resources, and cut down on the bureaucracy of business licence approvals. The recent TRAIN (Tax Reform for Acceleration and Inclusion) law is also envisioned to increase the purchasing power of consumers, and hopefully be good for prospective retail business.
“One of the goals of the Duterte administration is to amend the constitution and install a federal government in the Philippines,” says Hechanova. “In terms of commercial implications, this shift will enable federal states to impose their own tax laws on businesses within their jurisdiction. Fortunately, this will also enable them to enact their own tax incentives to attract investors. This competitive environment could prove beneficial to potential investors who are looking to branch out of Metro Manila.”
Patricia Bunye, senior partner at Cruz Marcelo & Tenefrancia, says any amendment to, or revision of, the 1987 Philippine Constitution may be proposed by:
- The congress through a constituent assembly;
- A constitutional convention; or
- Directly by the electorate, through initiative and referendum (amendment only).
Bunye says a constituent assembly is composed of all members of congress (both the senate and the house of representatives). It is convened to propose amendments to or revisions of the constitution. The amendments or revisions must be passed by a vote of three-quarters of all members of congress. The constitution is, however, silent as to whether the members of the senate and the house of representatives must vote separately or jointly. That issue is yet to be resolved and is currently subject to debate by government officials and law experts.
“A constitutional convention is a body distinct from congress, whose members are elected or appointed to propose amendments to, or revision of, the constitution,” Bunye says. “It is called by a vote of two-thirds of all the members of the Philippine Congress. The Philippine Congress, through a majority vote of all its members, may likewise submit to the Philippine electorate the question of calling such a convention.”
The amendments of, or revisions to, the constitution proposed by the constituent assembly or constitution convention must be valid when submitted to the electorate and ratified by a majority of the votes cast in a plebiscite.
“Theoretically, there is no limit as to the subject matter or number of amendments,” says JJ Disini, managing partner at Disini & Disini. “Hence, there should be no legal bar to shift towards federalism or to a parliamentary form of government.”
So the mechanics are reasonably clear, but actual amendments concerning federalism, foreign investment and other issues are uncertain.
Alfredo Molo, a partner at MOSVELDTT Law Offices, says the constitution does not need to be overly tinkered with. “If you look at the people concerned, for foreigners wanting to come in, ownership of land is not one of their priorities,” he says. “[Foreign investors] want it to be easy to come in; they want to be able to register the investment with the proper modes of control and not be hounded by the SEC if they do that; they want those metrics, rather than having a title on land beneath the factory. They’re fine with 50-year leases, according to these studies, but let’s see.”
Eric Puno, the managing partner of Puno and Puno Law, says the initiatives towards constitutional amendments have good intentions, particularly the shift from unitary presidential to federal parliamentary form of government, and the achievement of a long lasting solution to self-determination in majority Muslim Mindanao.
“On one hand, we can expect that with the achievement of peace in Mindanao, substantial investments are expected to enter the country, especially the long neglected parts of Mindanao,” says Puno. “On the other hand, those who oppose constitutional amendments have pointed out that the process for changing the constitution would come at a very high price, and might prevent the current administration from fulfilling its promise of a ‘golden age of infrastructure’.
“In addition, the revenue or taxation aspect of federalism must be thoroughly discussed and studied. The specter of double taxation, federal and state, for example, may discourage foreign and local investments in areas that need investments the most.”
Adds Rafael Morales, the managing partner at Morales Justiniano Peña & Lumagui: “The criticism is that all monies come from imperial Manila, so if a province is not in the same party as the administration, there is difficulty getting money for projects locally. We have an autonomy law already, but they want to make decentralization permanent.
“The amendment being eyed relates to the ownership of land. There are strict nationality restrictions in the constitution on land ownership. [So] we are waiting for the government. Duterte has a consultative council and they will draft the constitutional reforms for the constituent congress. The council should report to congress in the next few months.”
Christopher Stephens, general counsel of Asian Development Bank, shares his views on the pros and cons of the debate, saying: “Federalism is a system of government dividing governing responsibilities between municipal, provincial and national government. Ideally, all problems susceptible of resolution at the local level should be resolved at the local level. This is where the people most directly affected are also most able to engage their local government and officials, make their views known and have a hand in decisions and accountability.
“People feel distant and detached from centralized national governments, and often, over time, national leaders can lose touch with the minutia of facts and circumstances affecting local people and the issues that concern them. Government that is disconnected from its people and their concerns cannot govern effectively.”
But Stephens adds this caveat: “Effective federalism requires common purposes, values and objectives shared across the levels of government, and some level of co-operation between them. If vested interests commandeer the agenda or rent-seeking dominates decision-making, larger development agendas are rendered pointless.”
Arlena Maneja, a partner at Sycip Salazar Hernandez & Gatmaitan, says a general approach being mooted on constitutional change is to include the phrase “unless otherwise provided by law”.
“That basically opens the possibility that a law will be enacted providing for a different nationality restriction,” she says. “For example, public utilities are subject to a 40% foreign ownership restriction, ‘unless otherwise provided by law’.
“So I think constitutional change will not in itself automatically open the floodgates for more interest from foreign entities. There would still have to be some sort of enacting legislation, either specific to BOT [build-operate-transfer], or included in any of the PPP [public-private partnership] laws filed with congress, which now says that the operation of public utilities would be subject to maybe a lower, or no, foreign ownership.
“I’m a little skeptical because it doesn’t really solve the problem, it just says you can go to congress and lobby for a different one for your industry.”
Golden age or lead balloon?
Maneja believes the “golden age of infrastructure” is a long way off because to date there has not been much increased activity. “Recently the president said they are going to use unsolicited proposals [those initiated in the private sector] even for projects that are funded by the government, which I thought would be chaotic,” she says.
“I think they mean to issue unsolicited proposals even for government procurement, which is actually not something the law permits, so I’m not sure how they can operationalize that within current legislation.”
Bunye says the golden age will not be fully realized this year since the infrastructure/PPP projects of the government are still in their identification, procurement and construction stages.
She says projects currently under construction and expected to be completed during the term of President Duterte include: the PPP for school infrastructure project phase II; Mactan-Cebu International Airport passenger terminal building; Cavite-Laguna expressway; and Metro Manila skyway stage 3.
Puno says the Philippines is at a period of profound reforms under the current administration. Pro-investor reforms include: (1) ongoing revisions of the Foreign Investors Negative List to reduce areas of investment restricted to Filipinos; (2) pending legislation in congress to limit foreign ownership restrictions for areas traditionally regarded as public utilities; (3) further streamlining of government services to expedite acquisition of key government permits and approvals; and (4) tax system reforms.
As for legislative initiatives, he says a bill is being pushed in the senate that would clarify the definition of “public utility” to remove relevant industries from the classification and exempt them from foreign capital restrictions under the constitution.
“Infrastructure is among the top priorities of the Duterte administration with public spending on infrastructure projects targeted to reach PHP8-9 trillion from 2017-2022,” says Puno. “The ‘build, build, build’ programme is the comprehensive infrastructure development programme of the Duterte administration embodied in the Philippine Development Plan 2017-2022.”
The National Economic and Development Authority (NEDA) has indicated that a total of 1,313 region-specific infrastructure projects amounting to PHP157.44 billion (US$3 billion) included in the Three-year Rolling Infrastructure Programme (TRIP) 2018-20 will be rolled out in the next three years in the five regions that have the highest poverty rates. As of June 2017, NEDA has identified 75 infrastructure projects as flagship projects of the current administration.
Molo says the “golden age” is happening, but all hinges on foreign ownership. “One of the cases I’ve been litigating in the Supreme Court is one involving the restrictions on the participation of foreign contractors, precisely that impact the ‘build, build, build’ programme,” he says.
Molo’s firm won the case in the lower courts, but is now in the Supreme Court challenging the regulations that effectively disallow foreigners from participating in construction programmes on the same level as local contractors. “It’s become a sticking point,” he says. “Some of these projects are very technical. Under present regulations, foreign companies are forced to tie up with a local to do them, when it would be more efficient for a private developer to hire the best talent,” he says. “Hopefully, the Supreme Court will move on that pretty soon.
“The good news is that NEDA has taken our side and proposed changes in the negative investment list so that foreign contractors may come in, and even the Philippine Competition Commission (PCC) has filed an intervention in the Supreme Court, citing that present regulations are anti-competitive. The PCC has never intervened before. We are the first case.
“The BOT law is very restrictive, but there are some exceptions. The way that the Philippine Contractors Accreditation Board (PCAB), the government entity, applies this, the practical requirements are massive, unfair and anti-competitive.”
Molo says unless the PCAB amends the rules it issues, the so-called golden age may not materialize. “They’ve managed to fend off any attempts to change the regulations. It’s hard to convince regulators to open up. They are still of the view that it has to be strictly regulated against foreigners, but if Duterte is serious about his infrastructure programme, I believe he can open this up.”
Disini adds: “We believe this will happen. Already, many infrastructure projects are under way. Pending bills in congress will likely see the lifting of foreign ownership restrictions in the telecoms sector.”
And the work will follow, says Rommel Mercado, a partner at Siguion Reyna Montecillo & Ongsiako (SRMO) and a professor of law at the Ateneo de Manila University. “The economic policy of the present administration to ‘build, build, build’, which is also aimed at boosting the PPP programme of the government, will likely generate more activity among lawyers in the infrastructure sector,” he says. “Given the large size of these projects, joint ventures and consortiums have been and would continue to be forged among the largest local and foreign entities interested in pursuing and financing these projects. The plan of the government to do new or ‘hybrid’ forms of PPPs will likely introduce innovations to this area of law practice.”
Monalisa Dimalanta, a partner at Puyat Jacinto & Santos (PJS), sees continued and increased activity, particularly in the infrastructure sector, and M&A in general. “The ‘build, build, build’ programme has taken traction based on the number of proposals submitted by the private sector for the building/rehabilitation/operation of airports, as well as roads, rail and transportation,” she says, noting that Philippine conglomerates are leading the way in crafting project proposals, with foreign players forming part of consortia providing primarily the technical expertise required in these projects.
Maneja says that in the past year, when there were virtually no PPP projects, there had been a flurry of unsolicited proposals covering many different projects. “The government also seemed focused on obtaining official development assistance,” she says. “They have accepted offers from Japan, maybe China, maybe the Spanish government. As a firm we haven’t dealt with this, so we’re still trying to find our way, perhaps representing contractors who might be eligible to bid for these contracts.
“In the Philippines, if the government takes official development assistance, there is some level of additional requirement that money be used to fund projects, the contractors for which would be something like 50% coming from the country which offered the assistance. That’s a relatively new business area for us.”
According to Hechanova, the touchpoints of foreign investment that have produced the most inquiries are in the fields of renewable energy (solar, hydroelectric, bio-mass), as well as business process outsourcing (BPR).
The tax TRAIN
“In line with the planned increase in government spending on infrastructure projects because of new sources of tax funds from the TRAIN Law [Tax Reform for Acceleration and Inclusion], the construction industry should offer opportunities to potential investors,” she says.
While Package 1 of TRAIN focuses on lowering individual or personal income tax, Package 2 will be more focused on corporate tax reforms and incentives. A draft bill of Package 2 was submitted by the Department of Finance to congress on 16 January 2018, and the impacts on investors and business owners include:
- A slight increase in the tax on the sale of shares of stock, from 0.5% to 0.6%;
- An increase in the fringe benefits tax, from 32% to 35%;
- Expanding the value-added tax (VAT) base;
- Repealing the preferential tax rate previously given to employees of
- regional headquarters, regional operating headquarters, offshore banking units and petroleum service contractors/subcontractors;
- Increasing a documentary stamp tax, most notably on documents related to the shipment of goods and their storage;
- Increasing excise tax on industries like the automobile, soft drinks and fuel industries; and
- For real estate investors and buyers, the donor’s tax and the estate tax are now a flat 6%.
“With the passage of Package 1 and the expected passage of Package 2 this year, the government is expecting an additional PHP15.893 billion (US$305 million) in collections this year,” says Puno. “While the TRAIN will result in lower collections in relation to individual income tax, due to the increase in exemptions granted in favour of the lower income earner bracket and the decrease in the rates of individual income tax imposable, the TRAIN increased the rates of taxes on passive income, documentary stamp taxes and other excise taxes, thereby resulting in a net increase in collection.”
If sustained, Puno says, the steady flow of income can be invested by the government in various infrastructure projects under the “build, build, build” programme, which is designed to modernize infrastructure with a combined estimated investment cost of US$36 billion. “Considering that the TRAIN has just been enacted, and the fact that public bidding processes (including the Swiss challenge process that Duterte prefers) may have to be complied with, new projects may not be expected within this year,” he says. “We expect, though, that previous major infrastructure projects may get a boost and be expedited as additional funds are made available.”
Adds Mercado: “TRAIN is the first package of the Comprehensive Tax Reform Programme aimed at providing a simpler, fairer and more efficient tax system.”
A new commission
Since the Philippine Competition Act (PCA) was promulgated in 2015, the newly formed Philippine Competition Commission (PCC) has been very active in implementing and updating its rules of procedure, and issuing other regulations related to the PCA, ensuring that its enforcement is duly managed.
Puno says the PCC’s rules on procedure, which took effect on 9 December 2017, seek to consolidate all the related rules in the notification process, phase 1 and phase 2 reviews and other processes undertaken by the PCC, to serve as a guide not just for stakeholders but for the PCC itself.
“Without prior PCC approval, no merger or acquisition which meet the threshold of PHP1 billion may be implemented in the Philippines,” he says.
Notes Molo: “We have a new competition commission. It’s a really new field in the Philippines. I think these rules are not perfect but it’s a good start simply because nobody in the country or the industry and the legal side has actually dealt with competition issues before in the way they run things.
“So coming down too heavily might be too much of a shock to everyone, so I think these rules represent a compromise and maybe down the line it may be subject to some fine-tuning, but for now I believe there’s wisdom in the way the commission has approached it by coming out with these rules.”
Hechanova says the new rules for investigating and penalizing anti-competitive practices “should have a positive effect on new investors looking to enter industries dominated by big enterprises,” adding they should also benefit existing investors hoping to increase their market share.
“As far as other effects [it] may have on potential investors, the law also provides additional administrative requirements (i.e., compulsory notification) for mergers and acquisitions. Non-compliance will result in the imposition of fines.”
Healthy competition will, in theory, boost vital market sectors. Dimalanta foresees the energy sector remaining dynamic, as in previous years, and anticipates that movement will consist mainly of divestment and acquisitions as the market evolves into a more competitive environment. “This dynamism will also be shaped greatly as the roles of the Energy Regulatory Commission, vis-à-vis the PCC, become more clearly defined,” she says.
The legal sector
Before Duterte came to power, his NEDA, via its director-general Eric Pernia, had hinted in Asia Business Law Journal that the legal sector would open up to foreign firms as part of the general initiative of limitations to foreign participation, including on professions.
This is a work in progress, says Morales. “The integrated bar of the Philippines has already drafted the rules for the entry of foreign firms in the Philippines,” he says. “It’s quite similar to the initial entry point for the other countries in the region, that foreign firms be limited to practising transactions in which foreign law is the
“The problem is, in the constitution it says that the practice of professions will be limited to Filipinos unless prescribed otherwise by congress. So there is need for a law to be passed saying the legal profession is now open to foreigners, and the second step is for the Supreme Court to promulgate the rules for admission.”
Molo adds that it is an obligation under ASEAN integration that the nation opens up to foreign firms. “It’s actually a quandary faced by the legal profession here because we are obligated under that treaty to open up our industry,” he says.
“I would predict we would have no choice but to allow for some system for foreign lawyers to practise in the Philippines because the repercussions would be much worse keeping these restrictions. Philippine lawyers are allowed to practise in Singapore, Malaysia and Indonesia. If the Philippines becomes an economic hotspot, and there’s enough interest for FDI [foreign direct investment] and their preferred lawyers to come in, I would expect that under ASEAN’s integration system the other countries might demand that we respect the committee, since we can go there to practise.
“No-one’s going to admit it, but everyone in the legal industry is quite nervous about that.”
In-house counsel accolades
As part of our research into the Philippine legal sector we approached a number of in-house counsel for their views on the law firms they have worked with. It’s always a good indicator when firms have general counsel who will give praise for work well done.
Philip Ranada, general counsel, chief compliance officer, and chief privacy officer at Light Rail Manila Corporation, says he trusts MOSVELDTT Law Offices to handle some of his company’s most sensitive and complex matters. “They are invaluable when the problem involves multi-layered issues requiring practical solutions appropriate for a highly-regulated utility,” says Ranada. “I value their openness in discussing matters like alignment of objectives, pricing, and realistic work schedules – something that not a lot of firms are open to until now.
“I’m not surprised that in just a little over seven years, MOSVELDTT has been competing with the country’s top-tier firms in handling some of the largest transactions and disputes. In discussions with other GCs, we often list MOSVELDTT as a go-to firm along with the country’s top five, which are all at least 25 years older.
Ranada recommends partner Alfredo “John” Molo when he wants a fast, straightforward solution to a complex problem. “Incredibly thorough and well-connected, I rely on his guidance to navigate the minefield surrounding the Philippine regulatory landscape,” he says.
“As a general counsel, I’ve encountered lawyers who failed to appreciate the complex nature of our business and the industry, choosing to focus only on the Legal problem. John understands how business views things differently, allowing him to avoid the ivory-tower analysis one usually receives from lawyers. With our years of work, I am assured that he always puts the interests of my company before his and will never recommend an approach that only serves to increase his billables.”
Ranada also recommends Roddy Tuazon as a reliable resource in matters relating to labour and immigration. “When an external union was poised to complicate matters during a tense collective bargaining process, Roddy’s skills as a negotiator allowed us to avoid what would have been a costly and protracted dispute,” he says.
“Jerry Coloma is our go-to guy for corporate matters that involve a high-degree of complexity and for issues that intersect with multiple areas. Jerry’s years of experience in banking before becoming a lawyer gives him a distinct edge.”
Chris Miller, senior corporate counsel at Ampol Management Services in Singapore, says he is “very happy” with the services and expertise provided by Cruz Marcelo & Tenefrancia.
“I needed local law advice in the form of an opinion on short notice on a difficult issue,” Miller recalls. “Cruz Marcelo provided the advice clearly and in the timeframe required, noting that they had to work extremely late and through the weekend to deliver it. The advice was commercial, in plain English, clear and easy to follow.
“I wouldn’t hesitate to recommend Pancho Umali and Rosa Bagtas. They were responsive, able to provide clear, considered advice over the phone and follow that up with a well-reasoned, plain-English opinion.”
Pedro “Blue” Florescio III, the executive vice president and treasurer at BDO Unibank, says he is “satisfied and pleased” with the services of Morales & Justiniano Law Offices, because they:
- Take time to understand our need/objective;
- Give us straightforward opinions to our legal queries and help us find solutions to issues;
- Caution/advise us on areas which we may have missed out; and
- Are able to respond within a reasonably acceptable/short turnaround time.
“We recommend Rafael Morales,” says Florescio. “He is one of the country’s respected lawyers in banking and finance. He has authored several books and articles on Philippine banking and securities law. He provides insight/background on the origin of the Philippine law, which helps clarify the objective of the regulation, and tackles the issue from a perspective that goes beyond the literal interpretation of the law.”
Florescio also recommends Martinez Vergara Gonzalez and Serrano (MVGS Law). “We have worked with the firm for several years and they have also provided us with sound legal advice,” he says.
Nimfa Balmes-Pastrana, general counsel and first vice president at First Metro Investment Corporation, says she is “very happy and satisfied” with the services of Morales & Justiniano. “The firm’s partner, Rafael Morales, is a respected counsel with expertise in commercial law, specifically on banking/investment banking. The firm provides us with independent opinion on legal issues that require in-depth study,” says Balmes-Pastrana.
“Rafael Morales and Ranulfo Javellosa immediately respond to our queries and requests for opinions. Their pleadings are well written and based on thorough research.”
Balmes-Pastrana also recommends Picazo Buyco Tan Fider & Santos Law, particularly its senior partner, Gabriel Dee, who “has been a long time external counsel/firm providing legal services on our company’s investment banking transactions”.
Francis Wee, the head of real estate division whose remit encompasses all legal concerns for W Group Inc, says his company is satisfied with the work of Cruz Marcelo & Tenefrancia “because of their relatively fast turnaround time”.
“We’re using a few more law firms but our main one is CMT,” says Wee. “We recommend Pancho Umali for he has a fast turnaround, and is accessible and practical in his solutions.”