DOJ Opinion No. 030, s. 1995

DOJ OPINION NO. 030 , s. 1995 March 28, 1995 Mr. Cielito F. Habito Secretary of Socio-Economic Planning and Director-General National Economic and Development Authority NEDA sa Pasig, Amber Avenue Pasig City Sir : This has reference to your request for opinion relative to Executive Order No. 182 which provides for the "First Regular Foreign Investment Negative List" (RFINL) of the Foreign Investments Act (FIA) of 1991, that took effect on October 24, 1994. prcd You state that the RFINL enumerates the investment activities where foreign equity participation is limited (or prohibited); that some concerns/questions thereon have been brought to your attention with reference to: "(1) the foreign equity limitations on 'private domestic and overseas construction contracts' and 'construction of public utilities', in the light of the enactment of Republic Act No. 7718 [approved May 8, 1994] also known as 'The Expanded BOT Law' . . ." and "(2) the inclusion of manufacture, repair, storage and distribution of nuclear weapons and ordinances, and biological warfare components in List B of the RFINL"; and that the opinion of this Department is being sought on specific issues raised in connection therewith to enable your Office to make necessary amendments to E.O. No. 182. I You raise the following specific questions regarding item (1) of your query: "a) the interpretation of Section 2(b) of R.A. 7718 in relation to Section 2(a); specifically, if such could be interpreted as opening the construction stage of all infrastructure projects to foreign contractors with more than 40 percent foreign equity; and if the foreign equity restriction of 40 percent only applies to the project proponent of a build-operate-and-transfer scheme and facility operator for and infrastructure or a development facility where public utility franchise is required; "b) relatedly, if a contractor with more than 40 percent foreign equity, if allowed under RA 7718, should be granted a license by the Philippine Contractors Accreditation Board (PCAB) to undertake construction working the country; "c) if contracts for the construction or repair of public works are covered in the definition of private sector infrastructure development projects, such that the equity provisions of RA 7718 is now in effect, thereby superseding the provisions of the Implementing Rules and Regulations (IRR) of Presidential Decree No. 1594 and Letter of Instruction No. 630 which restrict equity of foreign contractors engaged in government projects, i.e., construction repair of public works to 25 percent; and "d) if the equity provisions of RA 7718 would also apply to private domestic and overseas construction contracts, such that the 40 percent foreign equity limitation, as stipulated in the IRR of RA 4566 is superseded; thereby, allowing contractors with more than 40 percent foreign equity to enter into constructive contracts in the country." The foregoing questions/issues are discussed in seriatim hereunder: Item 1 (a) The provisions of R.A. No. 7718, hereinafter referred to as the "Act", pertinent to the first issue are quoted hereunder: "Section 2. Definition of Terms . The following terms used in this Act shall have the meanings stated below: "(a) Private sector infrastructure or development projects The general description of infrastructure or development projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector, including but not limited to, power plants, highways, ports, airports, canals, dams, hydropower projects, water supply, irrigation, telecommunications, railroads and railways, transport systems, land reclamation projects, industrial estates or townships, housing, government buildings, tourism projects, markets, slaughterhouses, warehouses, solid waste management, information technology networks and database infrastructure, education and health facilities, sewerage, drainage, dredging, and other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act. Such projects shall be undertaken through contractual arrangements as defined hereunder and such other variations as may be approved by the President of the Philippines. "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: Provided , finally , That projects which would have difficulty in sourcing funds my be financed partly from direct government appropriations and/or from Official Development Assistance (ODA) of foreign governments or institutions not exceeding fifty percent (50%) of the project cost, and the balance to be provided by the project proponent. "(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. "The build-operate-and-transfer shall include a supply-and-operate situation which is a contractual arrangement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals." The engagement or hiring of a foreign contractor is expressly authorized for the construction stage of the "infrastructure projects" which are included in the specific enumeration of projects found in the first paragraph of 2(a) of the Act and "other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this Act". The nationality requirement is prescribed by the Act for both the project proponent and facilities operation or the facilities operation only, as the case may be, in projects requiring a public utility franchise. With respect to the foreign contractors, the Act imposes the condition that "Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available". The relevant provisions of the Implementing Rules and Regulations (IRR) of R.A. No. 6957, as amended by R.A. No. 7718 apply the foregoing provisions of the Act. In particular, the IRR provides: "Sec. 5.4. Prequalification Requirements . To prequalify, a project proponent must comply with the following requirement: 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. . . . iv. For projects to be operated by the project proponent itself or owned by the proponent itself or owned by the proponent but operated through a facility operator where operation of the facility does not require a public utility franchise, the project proponent or the facility operator may be Filipino or foreign-owned. v. If the contractor to be engaged by the project proponent to undertake the construction works of the project under bidding needs to be pre-identified as prescribed in the published Invitation to Prequalify and Bid and is a Filipino, it must be duly licensed and accredited by the Philippine Contractors Accreditation Board (PCAB). If the same is a foreign contractor, it must secure the necessary licenses from the PCAB required of foreign contractors wishing to engage in construction works in the Philippines ." (Emphasis supplied.) Accordingly, the questions/issues raised in item 1(a) are answered in the affirmative with the clarification that the "infrastructure projects" referred to are those specifically mentioned in Section 2(a) and "other infrastructure and development projects as may be authorized by the appropriate agency pursuant to this [the] Act". Item 1(b) You also ask whether or not a contractor with more than forty percent (40%) foreign equity, if allowed under the Act, "should" be granted a license by the PCAB to engage in construction work in the country. The PCAB is vested with the authority to issue, suspend and revoke licenses of contractors (Sec. 5, RA 4566 [approved June 1965]). Section 23 of R.A. No. 456 providing for the issuance of said licenses by the PCAB, reads: "Sec. 23. Issuance of licenses . Upon the payment of the corresponding fee and the filing of the application, and after examination and investigation as may be required, the Board within fifteen days after the approval of the application shall issue a license to the applicant permitting him to engage in business as contractor under the terms of this Act for the remaining part of the fiscal year." The licensing of the said foreign contractor is discretionary with the PCAB, which is vested by law to determine, to examine and investigate the qualification of the applicant for a license, even if the applicant is not subject to disqualifications by reason of foreign ownership under the Act. Item 1(c) P.D. No. 1594 is silent on the nationality requirement for contractors of government projects. This requirement is embodied in Letter of Instructions No. 630 [November 22, 1977] which directs all heads of departments, bureaus, agencies and offices, including government-owned or controlled corporations and local governments, as follows: "In order to encourage and promote the development of the domestic construction industry, the following instructions shall be strictly observed: 1. Unless specifically authorized by the President of the Philippines in exceptional cases , bidding award or negotiations of primarily civil works contracts shall be limited to Filipino individuals and to corporations, partnerships, or associations seventy-five percent (75%) of the capital of which is owned by citizens of the Philippines; . . ." The provision of the Implementing Rules and Regulations of P.D. No. 1594 [1978] "Prescribing Guidelines, Rules and Regulations for Government Infrastructure Contracts", subject of your query under this item, states: "IB 1 WHO MAY BE ALLOWED TO BID 1. The following may become contractors for government projects: a. Filipino (1) Citizens (single proprietorship) (2) Partnership or corporation duly organized under the laws of the Philippines, and at least seventy five percent (75%) of the capital stock of which belongs to Filipino citizens." The broad language of the Act (R.A. No. 7718) would cover "government contracts for infrastructure and other construction projects" referred to in Section 1 of P.D. No. 1594 which meet the definition of the term "private sector infrastructure or development projects" and of the term "construction" as contained in Section 2(a) and (p) of the said Act. Furthermore, the Act does not limit to 25% the foreign equity in a corporation involved in the said private sector infrastructure or development projects. The 40% foreign equity limitation is imposed and then only on projects requiring public utility franchise. Thus, this foreign equity limitation of 25% is not consistent with the liberal policy and express provisions of the Act. Item 1(d) The Act, specifically Section 29(a) thereof, brings within its scope "infrastructure or development projects normally financed and operated by the public sector but which will now be wholly or partly implemented by the private sector". Moreover, the State policy adopted and implemented by the Act is, among others, to "provide the most appropriate incentives to mobilize private resources for the purpose of financing the construction, operation and maintenance of infrastructure and development projects normally financed and undertaken by the Government". Hence, private domestic or overseas construction contracts do not come within the letter and spirit of the Act and are therefore subject to applicable rules and regulations. II With respect to item (2) of your query, you raise the following specific questions: "a) if the inclusion of nuclear weapons and ordinances, and biological warfare components in List B conflicts with the provision of the Constitution for a nuclear free Philippines and if such, is also a violative of international treaties (e.g. Nuclear Non-Proliferation Treaty, Agreements during the Biological Weapons Convention and Hague Convention of 1925, among others) to which the Philippines acceded; and "b) related to (a) above, should the said activity, if found violative of the Constitution and international treaties, be removed from List B and transferred to List A under the heading "No Foreign Equity", since List A, as mandated by the FIA covers activities whose foreign ownership is limited by mandate of the Constitution and Specific Laws; or be retained in List B, which covers defense related activities, among others, under a new heading "No Foreign Equity". You inquire whether the inclusion of nuclear weapons and ordinances and biological warfare components in List B of the RFINL is or is not in conflict with the Constitution and international agreements to which the Philippines has acceded, and if so, should said activity be transferred from "LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OF SECURITY DEFENSE, RISK TO HEALTH AND MORALS AND PROTECTION OF LOCAL SMALL AND MEDIUM-SCALE ENTERPRISES" to LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF THE CONSTITUTION AND SPECIFIC LAWS", under the sub-heading " No Foreign Equity " or should the same be retained under said List B under a new heading " No Foreign Equity ". In this connection, we take it that you have in mind Section 8, Article II of the 1987 Constitution, which provides: "The Philippines, consistent with the national interest , adopts and pursues a policy of freedom from nuclear weapons in its territory." (Emphasis supplied.) The foregoing provision declares and adopts the policy of freedom from nuclear weapons in the Philippines. The legislative intent behind the inclusion of this policy in the Constitution, as disclosed in the deliberations of the 1986 Constitutional Commission, is to ban nuclear weapons, including the stockpiling, possessing, controlling, manufacturing, testing, and dumping of the radioactive wastes thereof, in the Philippine territory: "Mr. AZCUNA.. . . In my sponsorship speech, I pointed out that this is a policy, albeit a basic policy because it is stated in the Declaration of Principles and State Policies in the Constitution. Consequently, what we are seeking here is primarily a statement of an orientation, a basic direction in the Constitution, that as a matter of policy, we are against nuclear weapons in our territory. As practiced by other states, that means prohibition not only of possessing, controlling and manufacturing nuclear weapons, but also of nuclear tests in our territory, as well as the use of our territory as a dumping ground for radioactive wastes. This is embraced in the policy against nuclear weapons in one's territory. As practised both in Latin America, under the treaty of Tlatelolco, as well as by the South Pacific countries that endorsed the Treaty of Rarotonga, passage of ships, whether nuclear-powered or nuclear-arms-bearing, is left to the determination of every state on a case to-case basis. It is not per se a violation of a nuclear weapons free zone to allow a ship that is nuclear-powered or bearing nuclear weapons to pass or enter one's territory. However, it has to be done in the light of a policy". (see 1986 Constitutional Commission, Vol. IV, p. 818) (Emphasis supplied.) In addition, the Philippines must keep and perform in good faith its binding international agreements/treaty. The inclusion of nuclear weapons and ordinances and biological components as items under List B of the present RFINL conveys the impression that they are available areas for investment in the Philippines, subject only to certain limitations. Transferring the items under any other list category in the RFINL will not in any way resolve this issue. Therefore, the only remedy is to exclude the controversial items from the RFINL. Please be guided accordingly. Very truly yours, (SGD.) DEMETRIO G. DEMETRIA Acting Secretary