Declassifying public utilities

A bill was recently passed in the House of Representatives seeking to amend the 81-year-old Public Services Act to provide a statutory definition of a public utility. It’s an important step, as through the years most have used the terms “public service” and “public utility” interchangeably. The present use of these terms is a strong contributor to the weakness of our public services.

Section 11, Article XII of the 1987 Constitution provides that the operation of a public utility shall be reserved for citizens of the Philippines or corporations or associations at least 60 percent of whose capital is owned by Filipinos. But the Constitution does not define “public utility,” and the term has been interpreted broadly to encompass all public services.

Public utilities are only a subset of public services, which cover a wide range: transportation, infrastructure, water and power, sewerage, even broadcasting. Not all public services should be considered public utilities. Under the proposed amendment, the definition will be limited to power transmission and distribution, water distribution, and the sewerage system. Power generation and supply, crude oil and petroleum products, transportation, broadcasting, telecommunications and value-added services are expressly excluded.

While we do not discount the competence of Filipino-owned corporations, we have to acknowledge the potential significant economic contribution of foreign investments through capital and knowledge transfers. As it is, the Philippines’ foreign direct investments (FDI) have fallen behind its peers in the Asean-6, and the picture is not getting any rosier.

As we observed in Economic Snapshots, a quarterly publication of Stratbase ADR Institute, FDI totaled only $3.6 billion for the first semester of the year. This is 14 percent lower than the $4.2 billion posted in the same period in 2016. The decline can be attributed to the 90.3-percent decline in net equity capital. Most equity capital inflows, coming from the United States, Japan, Singapore, Hong Kong and Taiwan, are funneled into real estate, financial and insurance, manufacturing, electricity, gas, steam and air conditioning supply, and wholesale and retail trade activities.

Some voices in this administration are pushing for reforms to liberalize the economy, and these should be magnified. As I wrote recently, the administration’s economic managers are now reviewing the Foreign Investment Negative List, which details sectors where foreign participation is excluded. The new list is expected to be released sometime in the next quarter. Socioeconomic Planning Secretary Ernesto Pernia has said that he aims to open up retail trade, professions, public utilities, and contractors for more competition. At the very least, the government is planning to remove the cap on foreign contractors participating in public construction projects to support its infrastructure drive. The current cap is 40-percent stake.

The next important reform to tackle is the Public Services Act. Simply by defining public utilities, the country will be able, in one fell swoop, to promote a far more open and competitive market, characterized by increased FDI and, ultimately, better public services. Moreover, as far as reforms go, this is low-hanging fruit for Congress to pick. Amending the Constitution to remove the foreign equity restriction on public utilities will involve a slow and tedious process. Amending the Public Services Act by inserting a clear definition of a public utility does the job.

It is time to reconsider the rationales behind the policy regarding foreign equity restrictions, and ease such restrictions. As I have pointed out repeatedly in pursuit of our advocacy to liberalize the economy, the entry of foreign players fosters more competition, pumps in more capital, facilitates technology transfers, and generates more jobs, all of which are key to attaining more inclusive growth.

Dindo Manhit is president of Stratbase ADR Institute.