PHILIPPINES: An Introduction to Projects, Infrastructure & Energy

Philippines: Easing of Nationality Restrictions in Energy and Infrastructure Projects

The year 2022 has been a banner year for opening up by the Philippines to full foreign ownership in significant activities that are seen to drive economic recovery and attract much-needed inbound foreign investments. Key amendments to nationality restrictions affecting renewable energy, transportation infrastructure, construction and domestic market enterprises will substantially impact the growth and activities in the Projects, Infrastructure and Energy sector.

Relaxation of Foreign Ownership Limitation in Renewable Energy Generation

The Philippine government has taken a giant leap towards achieving energy security and sustainability goals through the issuance by the Department of Energy (“DOE”) of Department Circular (“DC”) No. 2022-11-0034 which removes the restriction for a Renewable Energy Service/Operating Contract to be awarded only to Filipinos or corporations at least 60% owned by Filipinos. Under DC 2022-11-0034 which took effect on 8 December 2022, a Renewable Energy Service/Operating Contract may now be granted to foreign citizens or foreign-owned corporations.

DC 2022-11-0034 was issued in order to help achieve the country’s ambitious target of a 35% renewable energy share in the power generation mix by 2030, and a 50% share by 2040. This development will certainly attract more foreign investors with both capital and technology to invest in the renewable energy space in the Philippines. A common roadblock faced by foreign investors had been the difficulty in finding a local partner with the right financial resources and know-how to match that of the foreign partner.

Previously, the DOE rules considered solar, wind, hydro and ocean/tidal energy resources as “natural resources” and “forces of potential energy” in the context of the constitutional restriction limiting foreign equity participation in the exploration, development and utilisation of natural resources and forces of potential energy to up to 40% only.

DC 2022-11-0034 follows the issuance by the Department of Justice (“DOJ”) of Opinion No. 21 series of 2022, which confirms that the development of solar, wind, hydro and ocean or tidal energy resources may be undertaken by non-Filipinos.

The DOJ Opinion posits that solar, wind, hydro and ocean/tidal energy resources are outside the nationality restriction on natural resources because these renewable energy sources are:

(1) incapable of appropriation, being res communes or common things that belong to all, and are not considered “property” that can be owned by the Philippines; and

(2) inexhaustible, and as such, applying nationality restriction on its development will be inconsistent with the purpose of imposing a limit on foreign participation to avoid depletion.

The DOJ further considers the subject of renewable energy sources as kinetic energy and, as such, outside the ambit of “forces of potential energy” reserved by the Constitution to Filipinos and corporations at least 60% owned by Filipinos.

The nationality restriction on the appropriation of waters direct from the source for purposes of power generation nevertheless remains subject to nationality restriction under the Water Code of the Philippines as reiterated in both the DOE Circular and DOJ Opinion. A water permit to harvest or extract water from the source for purposes of power generation may only be issued to a Filipino or a corporation at least 60% owned by Filipinos. Thus, while a Renewable Energy Service/Operating Contract for hydro and ocean or tidal energy may be granted to foreigners or foreign-owned corporations pursuant to DC 2022-11-0034, any required water permit for the project must be held by a Filipino or corporation at least 60% Filipino-owned.

The Philippines had already previously opened up biomass energy generation to full foreign ownership when the DOE issued DOE Circular No. DC2019-10-0013 in October 2019.

Foreign participation in large-scale geothermal energy projects has also been allowed, subject to meeting certain conditions, with the issuance by the DOE of DC2020-11-0024 in October 2020.

Liberalising Transportation Infrastructure and Other Public Services from Foreign Equity Restrictions

In a landmark legislation that amends the 86-year-old Public Service Act (“PSA”), the Philippine government passed Republic Act (“RA”) No. 11659 (“PSA Amendment”) which effectively relaxes the nationality requirement for certain industries or activities historically covered by the Constitutional restriction imposed on public utilities. The PSA Amendment took effect on 9 April 2022. Its implementing rules and regulations (“IRR”) have yet to be issued as of this writing.

The Philippine Constitution limits the ownership and operation of public utilities to Filipino citizens and corporations at least 60% owned by Filipinos. With the effectivity of the PSA Amendment, only the following remain as public utilities:

1. Distribution of electricity;

2. Transmission of electricity;

3. Petroleum and petroleum products pipeline transmission system;

4. Water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline system;

5. Seaports; and

6. Public utility vehicles.

All other public services which used to be considered as public utilities have been released from the 40% foreign equity limit under the Constitution. These include, but are not limited to, the following services:

1. Airports;

2. Railways and subways;

3. Telecommunications;

4. Logistics and freight forwarding;

5. Shipping;

6. Air Carriers;

7. Expressways and tollways;

8. Transport network companies.

Save for telecommunications, which is specifically classified as a “critical infrastructure” by the PSA Amendment, all other public services not considered as public utilities may now be 100% foreign-owned.

Nullifying Nationality-Based Licensing Regulations in Construction

The Philippine Supreme Court En Banc, via a unanimous decision on 10 March 2020, ruled in the case of Philippine Contractors Accreditation Board (PCAB) v Manila Water Company (GR No. 217590) that construction is not among the activities which the Constitution has reserved to Filipinos and struck down the regulation imposed by the Philippine Contractors Accreditation Board (“PCAB”) requiring applicants for regular contractors' licences to be at least 60% Filipino-owned. The court clarified that the PCAB does not have the authority to impose equity limitations unless provided by the Constitution or by existing laws and executive issuances.

In a Resolution dated 5 October 2021 and published on 3 March 2022, the court denied the motion for reconsideration filed by PCAB and petitions and motions for third-party interventions filed by various parties.

Once the decision becomes final, foreign-owned domestic corporations may qualify for a regular contractor’s licence without having to comply with the prohibitive equity requirement of at least One Billion Philippine Pesos for a Quadruple A licence.

Easing Barriers to Entry for Foreign SMEs 

Under the Foreign Investments Act (“FIA”), micro and small domestic market enterprises with paid-in equity capital of less than USD200,000 are generally reserved for Filipinos and corporations at least 60% owned by Filipinos.

With the amendment of the FIA through RA 11647 (“FIA Amendment”), a lower capitalisation threshold of USD100,000 may be availed of by the following non-Filipino enterprises:

1. Involving advanced technology as determined by the Department of Science and Technology, or

2. Endorsed as start-up or start-up enablers by the lead host agencies pursuant to RA 11337, also known as the Innovative Start-up Act, or

3. Employing at least 15 Filipino employees who represent a majority of the direct employees of the enterprise.

The FIA Amendment became effective on 17 March 2022.