Duterte giving public utilities to foreign capital

February 3, 2022

by Sonny Africa

Congress recently ratified the bicameral version of the bill amending the Public Service Act (PSA) and opening up domestic sectors to 100% ownership by foreign capital. This includes telecommunications, shipping, airports, airlines, railways, subways, expressways and tollways.

The proposed law bypasses 40% foreign ownership restrictions in the 1987 Constitution by defining “public utilities” narrowly to only cover the distribution and transmission of electricity, petroleum pipeline transmission systems, water and wastewater pipelines, seaports, and public utility vehicles.

Passing the amended PSA will be one-step-forward-two-steps-back for the country.

The Philippines of course badly needs to keep improving its utilities infrastructure as it develops. Which is not to say that the lack of infrastructure is the binding constraint to development. The lack of systematic government support for agriculture and industry is the real problem, and infrastructure is just one of the many elements of the support needed.

It could be one step forward if it spurs foreign investment and expands telecom, shipping, airports and airlines, and railways. Foreign business groups and their prospective local partners certainly seem extremely keen to have more opportunities for their profit-making.

It’s however two steps back because, first, increasing foreign capital’s share entrenches them and will make it even more difficult for Filipino enterprises to ever develop in these industries and, second, this threatens the long-term ability of the country to have communications and transport utilities secure from malign foreign activity.

The real metric of development is not more foreign telecommunications and transport infrastructure but rather more Filipino telecommunications and transport infrastructure. As in, as Filipino-built, -owned, and -managed as possible. This is the only way to get the economic benefits from providing technology-intensive utilities while preserving national security.

So, tempting as it is, increasing foreign investment per se shouldn’t be seen as a successful result of the proposed PSA amendments — nor even whatever increased employment and services are created. The public is bedazzled with promises of billions of dollars in foreign investment to come. Yet not only are these grossly inflated, they also actually miss the point.

The government should take the long view and instead see if the foreign investment transfers technology to genuinely increase domestic productivity, creates value chains and diversifies local production, and reduces our imports while increasing our exports. These are the real long-term benefits from foreign direct investments that we should be looking for and not just the immediate short-term investment and employment quantities.

Decades of growing foreign capital in the country since the 1980s has however conspicuously failed to deliver these because of the narrow-minded obsession with the wrong metrics of success.

The national security costs meanwhile are unquantifiable. Telecoms and transport are critical infrastructure that are prime targets for espionage, sabotage, and other self-serving interventions. We shouldn’t completely open up areas of the economy to foreign capital that we ourselves do not yet more fully grasp, control and provide.

The limited Filipino capacity in these utilities is also what makes the reciprocity provision – where foreign nationals cannot have more than 50% ownership in the operation and management of critical infrastructure unless their countries accord reciprocity – empty. Being granted reciprocity is meaningless if you have no capacity to begin with.

The fact that much more developed countries with much more developed domestic utility firms continue to protect these sectors stresses how important national control is even in the face of persistent globalization hype.

For instance, the US still restricts foreigners in telecommunications, shipping and airlines. China still has restrictions in telecommunications, airports, air and water transport. Singapore meanwhile only liberalized its telecoms market after first spending decades building up its state-owned telecommunications firms.

The 1987 Constitution’s restrictions are currently the best safeguard against foreign control. Non-equity ownership regulatory controls or leaving the definition of “public utility” to be protected to Congress only works if regulatory authorities and Congress have the requisite technical capacity, which they don’t, and are independent from vested foreign economic interests, which they aren’t.

The 1987 Constitution’s restrictions should be seen as giving the opportunity to develop robust Filipino capacity in telecoms, shipping, airports and airlines, and railways. Relaxing them in favor of foreign investors is a decision to forego developing this entirely with adverse long-term economic and national security implications.

The PSA amendment was certified urgent by President Rodrigo R. Duterte and will now be sent to Malacañang for his signature – marking his administration’s signal contribution to the country’s decades-long trajectory of neoliberal economic decline.