Public-Private Partnership in the Philippines

Public-Private Partnership (PPP) in the Philippines was institutionalized through R.A. No. 6957, entitled “An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for the Other Purposes”. It was meant to recognize the indispensable role of the private sector as the main engine for national growth and development. In 1994, R.A. No. No. 7718 amended R.A. 6957 in to expand the modalities of partnership between the government and the private sector.

In 2010, the Office of the President issued Executive Order No. 8, entitled “Reorganizing and Renaming the Build-Operate and Transfer Center to the Public-Private Partnership Center of the Philippines and Transferring its Attachment from the Department of Trade and Industry to the National Economic and Development Authority and for Other Purposes”, which designates the PPP Center as the central coordinating body for all PPP projects.

It must be noted that despite the creation of the PPP Center, National Government Agencies (NGA), Government-Owned and -Controlled Corporations (GOCC), and Local Government Units (LGU) with infrastructure and development projects remain to be the owners and implementing agencies of the PPP projects.

Example of awarded projects under the PPP include the DaangHari – SLEX Link Road, PPP for School Infrastructure Project (Phase I), NAIA Expressway Project, PPP for School Infrastructure Project (Phase II), Modernization of the Philippine Orthopedic Center (MPOC), Automatic Fare Collection System (AFCS), and Mactan-Cebu International Airport Passenger Terminal Building.

The following projects are currently in the pipeline:

1. Manila Heritage and Urban Renewal Project

2. Clark Green City Food Processing Terminal

3. Central Spine Roll-on/Roll-off (RoRo)

4. Manila-East Rail Transit System Project

5. R1-R10 Link Mass Transport System Development Project

6. LRT Line 4 Project

7. Central Luzon Link Expressway (CLLEX) Phase II, Cabanatuan-San Jose Section and Operation and Maintenance of Phases I (Tarlac- Cabanatuan, Nueva Ecija) and II Project

8. Improvement and Operation & Maintenance of Kennon Road and Marcos Highway

9. Rehabilitation of National Center for Mental Health

10. NLEX East Expressway

11. Camarines Sur Expressway Project

12. PPP for School Infrastructure Project (PSIP) Phase III

13. Sucat Gas Power Plant

14. Duty Free Retail Development Project

15. Motor Vehicle Inspection System

16. Laguna Lakeshore Expressway-Dike Project

17. Clark International Airport Project

18. San Ramon Newport Project

Respicio & Co. can help interested investors participate in the bidding of these projects.

Foreign Equity Limitations

Foreign equity limitations provide the maximum percentage shareholding by foreign stockholders in corporations engaged in partially nationalized economic activities, such as public utilities. Section 2 of SEC Memorandum Circular No. 8 series of 2013 states that “the required percentage of Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.”

To illustrate, a telecommunications company is allowed to have a maximum of 40% of its capital owned by foreign stockholders. However, capital can be in the form of voting or common shares and non-voting or preferred shares. To comply with the foreign equity limitation, the 40% maximum must be observed not only on the basis of total outstanding shares—i.e., both voting and non-voting shares—but also on the basis of voting or common shares.

Hence, a company with 35% foreign equity on the basis of total outstanding shares, but with 41% foreign equity on the basis of voting shares, violates the 1987 Constitution on the 60-40 maximum equity allocation between Filipino and foreign stockholders in public utility corporations.

The Supreme Court in Gamboa vs. Teves articulated the rationale for this rule, as follows:

The Constitution expressly declares as State policy the development of an economy “effectively controlled” by Filipinos. […] [T]he right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the letter and intent of the Constitution. Any other meaning of the term “capital” openly invites alien domination of economic activities reserved exclusively to Philippine nationals

Respicio & Co. Law Firm can help you establish your business in the Philippines.

Foreigners Doing Business in the Philippines

A foreign corporation must be licensed by the Securities and Exchange Commission (SEC) to do business in the Philippines. Section 133 of the Corporation Code of the Philippines (B.P. No. 68) provides the adverse legal effect of doing business without license, as follows:

No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

In other words, an unlicensed foreign corporation shall have no recourse in the courts to enforce its rights against other persons and corporations in the country. Section 3(d) of the Foreign Investments Act of 1991 (R.A. No. 7042) provides examples constituting the act of “doing business”, as follows:

1. Soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches;

2. Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more;

3. Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and

4. Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.

The same Section also defines what shall not be deemed as “doing business”, as follows:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor

2. Having a nominee director or officer to represent its interests in such corporation; and

3. Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

Respicio & Co. Law Firm can help you establish your business in the Philippines.

Overview of Foreign Investment Laws

In order to successfully establish a sound and legal business in the Philippines, the foreign investor must comply with several foreign investment laws. The following provides an overview of the most important legislation on the subject.

The Omnibus Investments Code of 1987 (Executive Order No. 226) provides the general rules and regulations for foreign investments in the Philippines, with provision on grant of incentives in particular industries and sectors. The Foreign Investments Act of 1991 (Republic Act No. 7042, as amended by Republic Act No. 8179) provides the regulatory framework of foreign investments without incentives. Those providing incentives to foreign investments are: Bases Conversion and Development Act of 1992 (Republic Act No. 7227), which provides incentives to enterprises with plants and offices located within the Subic Bay Freeport Zone; Special Economic Zone Act of 1995 (Republic Act No. 7916), which provides incentives to enterprises which are located in the Special Economic Zones; and Export Development Act of 1994 (Republic Act No. 7844), which provides incentives to export industries.

Republic Act No. 7721 is a law liberalizing the entry and operations of foreign banks and financial institutions. The Investor's Lease Act (Republic Act No. 7652) allows foreign investors to lease private lands for a period of 50 years, which may be renewed for another 25 years. The Build-Operate-Transfer Act (Republic Act No. 7718 as amended) established various Public-Private Partnership schemes.

The following are agencies enforcing relevant to foreign investments regulation: (i) Board of Investments, for the enforcement of the Omnibus Investments Code, (ii) Securities and Exchange Commission, for the registration of corporations and partnerships, as well as the enforcement of securities regulation and the Foreign Investments Act, (iii) the Philippine Economic Zone Authority, for the enforcement of the Philippine Economic Zone Authority Law, (iv) the Subic Bay Metropolitan Authority, for the enforcement of the Bases Conversion and Development Act, (v) the Bases Conversion Development Authority, also for the enforcement of the Bases Conversion and Development Act, and (vi) Bureau of Internal Revenue, for the enforcement of the National Internal Revenue Code of 1997.

Respicio & Co. Law Firm can help you establish your business in the Philippines.

Forms of Business Organizations for Foreign Investors

Foreign companies may do business in the Philippines by establishing any of the following forms of business organizations: (i) regional headquarter, (ii) regional operating headquarter, (iii) representative office, or (iv) branch.

A regional head quarter or RHQ must be endorsed by the Board of Investments to the Securities and Exchange Commission (SEC). It also needs to be registered with the SEC for its legitimate existence. It must have an annual minimum inward remittance of at least USD 50,000. One condition for approval relates to its functions, which must be relevant to (i) supervisory role, (ii), communication, or (iii) coordination. Another condition is that it does not earn income in the Philippines.

A regional operating headquarter or ROHQ, like the RHQ, must also be endorsed by the Board of Investments to the SEC. Also like the RHQ, it must be approved and registered with the SEC. It must have a minimum inward remittance of at least USD 200,000. The condition for approval and registration in terms of function is that it must perform qualifying services to its affiliates, subsidiaries, and branches. The second condition is that it earns income from such qualifying services. The income earned is subject to 10% tax.

A representative office needs SEC registration as a representative office. It is an extension of the personality of its mother company. Its activities are limited only to liaison work between mother company and its clients. It does not derive income. A representative office must have an initial minimum inward remittance of USD 30,000 to cover its operating expenses.

A branch is a foreign corporation organized and existing under foreign laws that carries out business activities of the head office and derives income from the host country. A branch needs SEC registration as a branch. It carries out the business activities of the parent company. It must have an assigned capital from the head office of at least USD 200,000, which can be reduced to USD 100,000 subject to conditions. These conditions are: (i) the activity involves advanced technology, or (ii) the company employs at least 50 direct employees.

The Foreign Investments Act provides an exception to the USD 100,00 and USD 200,000 capital requirement. This exception is applicable for businesses that are classified as export enterprises. An export enterprise is one which has 60% export sales. It is immaterial whether these are sales of goods or sales of services. These enterprises include foreign-owned branches in the Philippines that function as an outsourcing operation.

Respicio & Co. Law Firm can help foreign companies do business in the Philippines.