House creates TWG to study bill to liberalize construction industry

THE House Committee on Trade and Industry on Thursday created a technical working group (TWG) to further study a bill seeking to remove barriers to the entry of new foreign players in the construction contracting services industry, which is seen to attract $216.1 million in investments.

Valenzuela Rep. Wes Gatchalian, panel chairman, said House Bill 7337 which he sponsored seeks to provide a level playing field and extend equal opportunities to eligible and qualified domestic and foreign contractors, while encouraging competition, transfer of technology and sharing of knowledge between Filipino and foreign contractors.

The TWG will be chaired by former Philippine Competition Commission (PCC) commissioner and now Marikina Rep. Stella Luz Quimbo.

“By having more industry players, there will be more competition that will lead to better quality workmanship, which benefits both contractors and their clients,” said Gatchalian in his sponsorship speech.

“Our country badly needs more investments in the construction and real-estate industry during this time especially because FDI inflows have declined by 18.3 percent during the first semester of 2020,” he added.

By amending the Contractors’ License Law and clarifying the government’s position, Gatchalian said, the country is sending a clear signal to foreign investors that the Philippines is open and is a safe haven for business.

Based on studies, the lawmaker said, the country expects foreign direct investment (FDI) inflows to increase from its current rate of $35.8 million to $216.1 million by opening up the construction sector.

“As a result, the construction sector’s share to total FDI is projected increase from 0.36 percent to at least 2.2 percent. With these expected inflows, job generation is expected to rise as well. Currently, there are around 3.8 million Filipinos employed in the construction sector. The liberalization of this sector is seen to generate 154,000 to 284,000 more jobs for Filipinos,” he said.

According to Gatchalian, the implementation of Republic Act 4566, or the Contractors’ License Law, was not able to promote competition because its implementing rules and regulations failed to properly translate the intent of the law. The IRR introduced nationality-based classifications, which are not found in the enabling law and acted as a barrier to the entry for foreign contractors.

“This was the situation of the construction industry when I filed House Bill 7337 during this 18th Congress. However, recent events, particularly, the Supreme Court’s [SC] decision in PCAB [Philippine Contractors’ Board] v. Manila Water Company, which was published only last August 28, 2020, changed the landscape completely,” he said.

In the decision, the SC struck down certain provisions of Section 3.1 Rule 3 of the IRR of the Contractors’ License Law for unduly discriminating against foreign contractors. According to the Supreme Court, PCAB exceeded the confines of the delegating statute when it introduced nationality-based license types under Section 3.1. The Court ruled that an administrative rule cannot amend the law.

PCAB had already filed a motion of reconsideration before SC last September 14.

“This decision has overtaken the primary purpose of this bill. With the deletion of the nationality-based license types, foreign contractors may now apply for a regular license with the PCAB because there is no law that prohibits foreign contractors from engaging in the construction business and the Constitution has not reserved the construction industry exclusively for Filipinos,” Gatchalian said.

But for all intents and purposes, Gatchalian said, the bill seeks to institutionalize the majority decision of the SC for purposes of clarity.

“By amending the law, we prevent any further misinterpretation that may occur and, in this regard, we will be able to give advantages to Filipino contractors by requiring foreign reciprocity before we welcome foreign contractors,” he added. Under the proposal, Gatchalian said a foreign contractor would only be granted a license to practice construction contracting if its country of origin specifically permits Filipino contractors to practice within its territorial limits on the same basis as nationals of said foreign country.

In addition, the bill will be requiring foreign contractors to duly establish their business in the Philippines and ensure technology transfer and capacity building of local contractors.

With these amendments, the lawmaker said, the country will be able to generate more FDI in the construction industry to spur economic recovery amid the Covid-19 pandemic.

Support

FOR its part, PCC Legislative and Policy Officer Faye Condes de Sagon said the commission is fully supportive of the measure as it clarifies ambiguity created by the RA 4566’s IRR.

She said nationality-based distinction hinders competition in the constructionindustry, creating an uneven playing field between local and foreign contractors.

The PCC official said a foreign firm spends 12 times more for license applications compared to a local firm.

With this, she added there were few special licenses being given, stunting the growth of an industry that can benefit from the foreign firms.

“It would provide alternative options of consumers or the needs for different kinds of construction projects. It will also invite new blood into the market,” Condes de Sagon added.

As a foreign firm may undertake only one project specified under its special license, the PCC said, it will be costly for it to undertake several projects as compared with a local firm that has continuing authority to engage in multiple projects under a regular license.

To illustrate, Condes de Sago said given an estimated potential cost of a license application of P147,301 and an average of 12 projects undertaken by a contractor in a year, a foreign firm will have to spend P176,760, which is 12 times the estimated potential cost for the application process alone to engage in the same level of activity as with the local firm.

Also, National Economic and Development Authority Assistant Director Richard Emerson Ballester said the Neda is supporting the passage of the measure as it is fully consistent with the strategic policy direction of the country in liberalizing, lifting and easing restriction on certain sectors with limited foreign participation.

Data on licenses issued annually by PCAB may indicate the restrictiveness of the nationality requirement on foreign firms, which showed that from 2013 to 2015, foreign participation in the industry remained limited, with new special licenses accounting for just 10 to 15 percent of total licenses issued during the period.

Rebalance

BUT PCAB Executive Director Herbert Matienzo said while the bill seeks to provide a level playing field, the proposal must be rebalanced to protect the country’s most vulnerable sector and work force particularly small and medium construction companies heavily impacted by the pandemic.

Matienzo said the country’s current law already allowed foreign contractors to participate in local projects.

“Also, foreign contractors are also allowed to participate in local project under a special license,” he added.

“In 2019, we issued more than 3,000 [special] license to foreign contractors. They were able to participate to projects amounting to more than P860-billion projects in 2019 alone,” he added.

For his part, Minority Leader Benny Abante said the bill will only open the floodgates to unregulated entry of foreign-owned construction companies.

“This will kill the local construction industry and the entry of unqualified foreign contractors pose a danger to the public safety. In order to ensure protection not only of the local contractors but of the public as well, it is crucial that appropriate safeguards be put in place by way of additional requirements for accreditation for foreign contractors who wish to enter the Philippine market,” Abante said.