DOJ Opinion No. 014, s. 1995

DOJ OPINION NO. 014 , s. 1995 February 20, 1995 Mr. Alfonso L. Albano Board Chairman Metropolitan Cebu Water District M.C. Briones P. Burgos Streets Cebu City Sir : This has reference to your request for our confirmation of your opinion that the nationality restrictions imposed by Section 2 and 11, Article XII of the Philippine Constitution for the exploration, development and utilization of natural resources and the operation of public utilities will not be applicable to a 100% foreign-owned project proponent ("X Co.") in the proposed water supply and infrastructure project of the Metropolitan Cebu Water District (MCWD), to be implemented under the provisions of Republic Act No. 6957, as amended by Republic Act No. 7718 (the "Expanded BOT Law"). You state that the "principal objective of the aforesaid project is the supply of [tested or potable] water to MCWD for eventual distribution by the latter to its consumers/end-users through MCWD's waterworks distribution system." Further, to achieve the aforesaid objective, MCWD and X Co. proposed to enter into a contractual arrangement with the following principal features, which we quoted from your letter: "1. X Co. will be responsible for the construction of various waterworks facilities consisting of (i) the reservoir, dam, and auxiliary facilities (collectively, the "Dam"), and (ii) a treatment/processing plant, the pipeline and tunnel linking the Dam to the treatment/processing plant, and auxiliary facilities (collectively, the "Plant). In this regard X Co. will supply the technology and know-how for the design, construction and operation of the facilities, as well as obtain the necessary foreign and/or local financing for the project." prcd "2. X Co. will undertake to procure all the materials, machineries and equipment needed for the construction of the waterworks facilities." "3. After completion of the construction of the Dam, X Co. will deliver control and possession of the Dam to MCWD for the latter's management, operation and maintenance. MCWD shall secure or procure the necessary water permit to appropriate raw water at the site of the Dam, and will own the water rights thereto. X Co. and MCWD will, however, enter into an agreement whereby the former (directly or through its nominated company or designated subsidiary/affiliate) will undertake to provide the latter consultancy services and technical assistance relative to the proper maintenance of the Dam." "4. On the other hand, after completion of the construction of the Plant, X Co. (directly or through its nominated company or designated subsidiary/affiliate) will undertake to manage, operate and maintain the Plant for the duration of the contract period, for the treatment of all raw water appropriated and collected by MCWD at the Dam. The Plant's entire output of treated water will be delivered to/taken by MCWD for distribution through MCWD's waterworks distribution system." "5. X Co. will retain ownership of the Dam and Plant facilities constructed by it for the duration of the contract period, but will transfer title and ownership over the same to MCWD upon expiration of the contract period." "6. X Co. will recover its capital investment through tariffs assessed on MCWD based on the volume of treated water generated by the Plant. Based on the foregoing proposed contractual arrangements it is your view that: "I. X Co. Will Not Be Engaged in the Operation of a Public Utility"; and "II. X Co. Will Not Be Engaged in the Exploration, Development and Utilization of Section 2, Article XII of the 1987 Philippine Constitution." I The nationality requirement for the operation of public utilities is provided for in Article XII of the Constitution, the pertinent provision of which is quoted hereunder: "Section 11. No franchise, certificate, or any form or authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so required, . . ." (Emphasis supplied) In relation thereto you advert to the definition of "Public Utility Projects" contained in Section 1.3 of the Implementing Rules and Regulations (IRR) of Republic Act (R.A.) No. 6957, entitled "An Act Authorizing The Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes", as amended by R.A. No. 7718 [Approved May 5, 1994]. The aforesaid term is defined as follows: "r. Public Utilities Projects Refers to projects including public roads and thoroughfares, railways and urban rail mass transit, electricity and gas distribution systems, city and municipal water distribution and sewerage systems, and telecommunication systems serving the general public, and such other public services as defined under the Public Service Act, as amended". It is your position that the above-quoted definition provided in the IRR is merely a descriptive enumeration of the project that may qualify the MCWD or its infrastructure projects under the expanded BOT law (R.A. 6957, as amended by R.A. No. 7718) and that the "IRR cannot definitively declare what are public utilities subject to nationality restriction, without regard to the nature of the service or activity." Subject to an extended discussion set forth hereunder, we agree with your position in view of the clear language of the aforesaid law and its IRR. Section 2 of R.A. No 6957, as amended by R.A. No. 7718, hereafter referred to as the "Law" provides in part: (a) . . . "For the construction stage of these infrastructure projects, the project proponent may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino contractor: Provided . That, in case an infrastructure or a development facility's operation requires a public utility franchise, the facility operator must be Filipino or if a corporation, it must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos: Provided further, That in the case of foreign contractors, Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available . . ." (Emphasis supplied) "b) Build-operate-and transfer A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years: Provided, That in case of an infrastructure or development facility whose operation requires a public utility franchise, the proponent must be Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos . . ." With reference to the meaning of the term "Facility operator", the same Section 2 of the law provides as follows: "(m) Facility operator-A company registered with the Securities and Exchange Commission, which may or may not be the project proponent and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users: Provided, That in case the facility requires a public utility franchise, the facility operator shall be Filipino or at least sixty per centum (60%) owned by Filipinos." . . . The IRR likewise provides: "Sec. 1.3. Definition of terms . . . "h. Facility operator-refers to a company registered with the Securities and Exchange Commission, which may or may not be the project proponent, and which is responsible for all aspects of operation and maintenance of the infrastructure or development facility, including but not limited to the collection of tolls, fees, rentals or charges from facility users." "Sec. 5.4. Prequalification Requirements . To prequalify, a project proponent must comply with the following requirements. a. Legal Requirements. i. For projects to be implemented under the BOT scheme whose operations require a public utility franchise, the proponent and facility operator must be a Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos. ii. For projects to be implemented through a scheme other than the BOT and requiring a public utility franchise, the facility operator must be a Filipino or, if a corporation, must be duly registered with the Securities and Exchange Commission and owned up to at least sixty percent (60%) by Filipinos." Pursuant to the aforesaid provisions of the Law and its IRR, the nature of the activity or the service is the factor determinative of whether or not the nationality requirement applies. Thus, Sec. 2(a) of the Law refers to the "operation" of the infrastructure or development facility, requiring a public utility franchise. Sec. 2(m) of the same Law also imposes the nationality requirement specifically on the "facility operator", not the project proponent where the facility requires a public utility franchise. Moreover, under Sec. 5.4 of the IRR with respect to projects whose "operations" require a public utility franchise, a distinction is made based on the contractual arrangement or scheme involved, that is whether it is a Build-Operator-Transfer (BOT) scheme or any another scheme defined in the Law. The contractual arrangement or scheme determines the type of activities that the project proponent shall perform thereunder. There are schemes where only the facility operator not the project proponent, is covered by the nationality requirement. The term "Project proponent" is defined by Section 2 of the Law as follows: "(k) Project proponent The private sector entity which shall have contractual responsibility for the project and which shall have an adequate financial base to implement said project consisting of equity and firm commitments from reputable financial institutions to provide, upon award, sufficient credit lines to cover the total estimated cost of the project." The application of nationality requirement is not determined solely by the fact that the project is a public utility project, as defined in the law, but in addition it depends on a determination of whether the scheme is a BOT scheme or any other scheme contemplated by law and whether the person or company concerned is a "project proponent" or a "facilities operator." With respect to the construction of the Dam, the proposed scheme requires that the control and possession of the Dam upon its construction is turned over to the MCWD for its management, operation and maintenance. X Co. will retain ownership of the DAM until the end of the contract period. X Co.'s participation is limited to the construction of the Dam and thereafter to the provision of consultancy services and technical assistance relative to the proper maintenance of the Dam. This portion of the proposed project would not fall under the BOT scheme, and therefore the nationality requirement applies only to the facility operator. (Sec. 2[b] of the Law and Sec. 5.4[ii], IRR) Since it will be the MCWD which will perform the function of the facility operator which is to extract/appropriate water at the site of the Dam. The nationality in this instant requirement poses no problem. The MCWD is deemed as "government-owned or controlled corporation with original charter". (Davao City Water District vs. Civil Service Commission, 201 SCRA 593, 606 [1991]. Regarding the construction of the Plant, the proposed scheme requires that X Co. (directly or through its nominated company or designated subsidiary affiliate) will undertake to manage, operate and maintain the Plant for the duration of the contract period, for the treatment of all raw water appropriated and collected by MCWD at the Dam. The Plan's entire output of treated water will be delivered to/taken by MCWD for distribution through MCWD's waterworks distribution system. X Co. will also retain ownership of the Plant during the contract period, after which title and ownership shall be transferred to the MCWD like in the case of the Dam. X Co. will recover its investment through tariffs assessed on the MCWD based on the volume of treated water generated by the Plant. This is similar to the BOT scheme, except that the project proponent shall own the Plant during the contract period. While under the BOT scheme both the Project proponent and the facilities operator are subject to the nationality requirement (Sec. 2[m], R.A. 6657, as amended and Sec. 5.4[i], IRR), the prejudicial question to be resolved is whether the "operations" of the Plant for the treatment of raw water requires a public utility franchise. The aforestated question is answered in the negative. The treatment of raw water should be distinguished from water distribution which is covered by the definition of "Public Utility Project" in the IRR cited above and from "water supply and power" under Section 13(b) of the Public Service Act (C.A. No. 146, as amended). Hence, the project proponent and facility operator for the treatment of raw water is not subject to the nationality requirement for the operation of a public utility. II Under the proposed contractual arrangement the extraction of water from its source will not be undertaken by X Co., a foreign corporation, but by MCWD, an entity locally organized under Philippine law. This feature of the contract is decisive in the light of Article XII of the 1987 Constitution, which, insofar as pertinent, reads: "Sec. 2. . . . The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production sharing agreements with Filipino citizens or corporations or associations at least sixty percentum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant." In our earlier opinions, we held in no uncertain terms that water is a natural resource, the development, exploitation or utilization of which is reserved for citizens of the Philippines, or corporations or associations at least 60% of the capital of which is owned by such citizens. (Secretary of Justice, Op. No. 243, s. 1989; No. 100, s. 1994). Significantly, only citizens of the Philippines, as well as juridical persons duly qualified by law to exploit and develop water resources, may apply for water permits. (Article 15, P.D. No. 1067 [The Water Code of the Philippines]) A water permit is the documentary evidence of the grant by the Government of a water right or a privilege to appropriate and use water (Art. 13, id ) The appropriation of water is the acquisition of rights over the use of water or the taking or diverting of water from a natural source in the manner and for any purpose allowed by law. (Art. 9, id .) The nationality requirement imposed by the Water Code refers to the privilege "to appropriate and use water." This, we have consistently interpreted to mean the extraction of water directly from its natural source. Once removed from its natural source the water ceases to be a part of the natural resources of the country and may be subject of ordinary commerce and may even be acquired by foreigners. (Secretary of Justice Op. No. 173, s. 1984; No. 24, s. 1989; No. 100 s. 1994). In fine, we reiterate our earlier view that a foreign entity may legally process or treat water after its removal from a natural source by a qualified person, natural or juridical. Very truly yours, (SGD.) DEMETRIO G. DEMETRIA Acting Secretary