A PSA on the Public Services Act

The World Economic Forum ( WEF) released its 2017-2018 edition of the Global Competitiveness Index last week, and the results are hardly surprising. The Philippines’ overall ranking stagnated at 56th place, trailing — as usual — most of the ASEAN-6. Unfortunately, the country fared much worse, at 97th, on the WEF indicator that measures the extent to which rules and regulations impact foreign direct investment or FDI. This puts the Philippines in the second-to-last spot among other ASEAN-6 countries. Vietnam had the 105th spot.

For the first half of the year, FDI inflows sank by 14%. Total inflows amounted to around $3.6 Billion. The central bank explained the decline to a steep drop in net equity capital, or foreign companies’ stakes in local businesses. Total approved foreign investment ( prospective investments from foreigners) also contracted, by an even worse rate of 36.4% during the same period. If this decline is not surprising, it’s because the writing was on the wall at around this time last year, when a Standard Chartered Bank survey reportedly revealed that investors looking at Southeast Asia preferred to locate in Vietnam and Cambodia over the Philippines. In that survey, only 3% of executives had said they were interested in the Philippines. Needless to say, the country’s FDI inflows still lag behind our counterparts in the ASEAN-6.

AMENDING THE PSA IS TAKING A LARGER STEP FORWARD

In line with the administration’s 10-point socioeconomic agenda,

The Public Services Act must be amended to cater to the demands of the present.

the country’s economic managers have sought to relax restrictions on foreign ownership in an effort to increase our attractiveness to investors. Currently, the final draft of the 11th Regular Foreign Investment Negative List (RFINL), which lists the sectors that are off-limits to investors, is under review.

In the last two decades, notable changes to the list have usually been limited. To date, major reforms include allowing foreign investments in retail trade with a minimum capital above $2.5 million and permitting 100% foreign equity in banking and insurance.

In contrast to the conservative changes to the RFINL in the previous administrations, Cabinet secretaries under the Duterte government have already pledged that they will relax the RFINL as much as possible. Finance Secretary Sonny Dominguez promised a “very liberal” RFINL. Economic Planning Secretary Ernesto Pernia pushed for further revisions to an earlier draft of the RFINL as he wanted it to be “more aggressive.” As reported in the regional press, both Secretary Dominguez and Secretary Pernia reiterated their preference for further liberalizing the investment environment during their recent visit to China.

However, while these statements are encouraging, the executive branch can only do so much. Certain items on the negative list can only be relaxed by Congress.

The RFINL, for example, still limits foreign investments to 40% on the operation of public utilities, as indicated in the 1987 Constitution. However, the constitution does not have a statutory definition of a public utility. The Public Services Act (PSA), crafted during the Commonwealth era, defines public services, but not public utility, failing to distinguish the two terms.

Under the archaic law, public services broadly include transport, power and water supply, and telecommunications. Both terms have been used interchangeably since, prohibiting foreign participation in sectors such as transportation and telecommunications.

Capital and technological infusions for transport and telecommunications are particularly crucial. Ride- sharing services, for example, have proliferated due to the inadequacies of the public transport system. As colleagues from the Foundation for Economic Freedom have argued, there is a need to account for this wave of technology-enabled transport services in order to serve and protect the public better.

PROSPECTS FOR THE PSA

The PSA was crafted in 1936 — it’s older than our Republic! — and may have served the purposes of its time. However, the law must be amended to cater to the demands of the present. This calls for an amendment of the Public Services Act to update the definition of public utilities to allow for more foreign participation in key sectors.

In August, the LegislativeExecutive Development Advisory Council ( LEDAC) included the amendment of the PSA as one of its 28 priority measures. So far, the bill has made progress in Congress. Thankfully, House Bill 5828 recently hurdled the third hearing in the House of Representatives.

Under the proposed bill, public utilities are defined and limited to the distribution and transmission of electricity, as well as the distribution of water and sewerage. Hopefully the Senate can take this up soon.

Our country’s rapid economic expansion has failed to convert into faster investment inflows. To be sure, our dismal FDI performance is also rooted in longstanding concerns including inefficiency in the bureaucracy, corruption and red tape, and poor infrastructure quality. Taking on these reforms and reaping its benefits will take years.

In the meantime, pushing for legislative amendments is a relatively faster remedy to our restrictive FDI environment. The simple act of defining public utilities allow for greater competition in the market by opening it to more players. This will result to an improved quality of services and lower prices. Local firms will not lose out, they will simply be more incentivized to innovate continuously in the face of stiffer competition, ultimately making them more competitive in the global arena.