Philippines prepares utilities for 100% foreign ownership – The Diplomat

Pacific silver | Economy | South East Asia

The Philippines has long led its Southeast Asian neighbors in the privatization of public services.

In 2020, the Philippine House of Representatives passed Bill 78, which would remove foreign ownership restrictions on assets classified as utilities. In the Philippines, there is a legal distinction between utilities and utilities. According to the Constitution, a public utility must be at least 60% owned by Filipino citizens. As Rappler reported last year, the bill restricts the definition of a utility to only entities engaged in the “distribution of electricity, the transmission of electricity, the distribution of water by pipe and the sewer line”.

Any activity that does not fall into these categories, including telecommunications, power generation, and transportation, would be considered a utility (rather than a utility) and would be eligible for 100% foreign ownership. The reason for this change is that a small number of Filipino companies currently dominate these sectors and such concentrated market power means that monopoly profits accrue to only a few key players. This results in higher consumer prices and less investment. In theory, the complete opening of these sectors to foreign capital will intensify competition and thus lead to lower prices for consumers and more efficient investments.

After sitting for more than a year, the Philippine Senate passed its version in mid-December. In the Senate version, airports and seaports are considered public utilities and therefore restrictions on foreign ownership remain, but other industries such as airlines, inland shipping and railways would be completely open. The Senate bill also contains provisions intended to protect the sovereignty of critical infrastructure assets, such as prohibiting equity ownership by foreign state-owned companies. The bills will now be reconciled and then forwarded to President Duterte for signing into law.

The House and Senate bills passed with fairly strong support. But the role of foreign capital in critical infrastructure, especially in areas like telecommunications, is a huge political minefield. It is very common for states to impose restrictions on foreign ownership in these sectors, and in Southeast Asia, states or state-linked companies often own and operate these assets themselves. The idea that a foreign company can own 100% of a telecommunications network or a railway is very controversial.

The Philippines, possibly due to its close ties to the United States, has often been ahead of the curve in Southeast Asia in privatizing public services and harnessing the power of markets to provide critical infrastructure. . They unbundled and privatized key services such as power generation and municipal water earlier and more successfully than their counterparts like Indonesia.

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There is, however, a sort of 22 trap when you privatize public services, which is that if you choose to go this route, you now let profit determine corporate investment and pricing decisions. on the supply side. This is one of the reasons why Filipino consumers often pay some of the highest rates in the region for their electricity and water. In order to prevent the market from exerting too much pressure on consumers, these sectors must be both well regulated and genuinely competitive. And it’s clear that Philippine lawmakers think they can’t really compete if domestic incumbents are able to hold monopoly positions and foreign competitors are limited to minority stakes.

Finding the optimal balance between domestic and foreign capital, while keeping an eye on the sovereignty of key national infrastructure, is very tricky. Many of the Philippines’ neighbors don’t even try, or only halfway, allowing state-linked companies to dominate critical industries precisely so they don’t need to make such trade-offs. .

But the Philippines has a stronger propensity for market-based solutions, and therefore pushes to broaden the definition of a public service and open it up more to private capital, whether from Filipino or foreign investors. Will this achieve the goals of boosting investment and lowering consumer prices, while ensuring the security of critical infrastructure? We don’t know, but it certainly contrasts with the status quo in many other countries in the region and it will be interesting to see how that plays out.