DOJ Opinion No. 100, s. 1994

DOJ OPINION NO. 100 , s. 1994 July 13, 1994 Chairman Victor A. Lim Bases Conversion and Development Authority 2/F Rufino Center, Ayala Avenue Makati, M.M. Sir : This has reference to your request for opinion on whether or not Johan Holdings Berhad-George Kent (Malaysia) Berhad (JHB), a foreign-owned corporation, is qualified to undertake for the Bases Conversion and Development Authority (BaseCon) a proposed project for the sourcing, development, processing and provision of water supply, hereinafter referred to as the "Project" for the communities within and the surrounding areas of the former U.S. facilities, specifically Tuba in Benguet, Club John Hay in Baguio City, Poro Point and Cadaclan in La Union and Clark Field in Pampanga. You state that the JHB proposes a Build-Operate-Transfer (BOT) arrangement pursuant to R.A. No. 6957, as amended by R.A. No. 7718, with the following salient features: 1. JHB will finance and/or secure foreign financing for the Project; 2. JHB will supply technology and know-how for the design, construction, operation and management of the Project; 3. JHB will procure all the equipment and materials required for the Project; 4. JHB will construct on private or public lands, as the case may be, the dams, reservoirs, pumping stations, water treatment facilities and pipelines (collectively named "Facilities) required for the Project; 5. JHB will operate the facilities for a fixed period of time by taking, diverting, pumping, storing and treating water; 6. The entire output of treated water from the facilities will be sold solely to the BaseCon or a qualified public utility, which in turn shall sell the water to final consumers, BaseCon or a qualified public utility will thus obtain revenues from the final consumers; 7. JHB will recover its investment and operating expenses in the Project through the payment to be made by BaseCon or a qualified public utility during the period; and 8. At the end of the period, JHB shall transfer control and ownership of the facilities to BaseCon. You further state that the said detailed proposal was submitted pursuant to the BaseCon and the JHB Memorandum of Understanding of February 3, 1994. You raise the herein query on the qualification of the JHB to undertake the Project in view of the provisions of Article XII of the 1987 Constitution quoted hereunder: "Sec. 2. All lands of the public domain, water , minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources shall not be alienated. 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, of corporations or associations at least sixty per centum 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 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. . . ." "Sec. 11. No franchise, certificate or other form of authorization for the operation of the public utility shall be granted except to the citizens of the Philippines or to corporations or associations organized under the laws of the Republic of the Philippines at least sixty (60) per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a period longer than fifty years". However, on June 27, 1994, we received another letter from you providing us additional information about the Project which we quote: "(1) The first step is to organize the Tuba Water District which would have jurisdiction over the Budacao Water Falls, subject of the water works development. George Kent Bhd, would then undertake to install the water processing system including pumping equipment and pipeline in conjunction with the Tuba Water District. "(2) The formal arrangements would be for the Tuba Water District to contract George Kent for the processing of water after which Taba Water District for the processing of water after which Tuba Water District would distribute the processed water to the users. The bulk user would of course be Club John Hay (CJH) and Baguio City. "(3) In order to ensure the payment for processing which would be in effect a BOT type arrangement, Bases Conversion and Development Authority (BaseCon) and CJH could pay George Kent directly in behalf of the Tuba Water District for at least a part of the fee for processing. This arrangement would also reserve maximum benefits to municipality of Tuba, not only for its own water requirements and those of its surrounding municipalities but also yield employment, livelihood and income to Tuba and its constituents." From the activities that the JHB has envisioned to undertake for the BaseCon as adverted to in your second letter it appears that it is still the BOT scheme that is being contemplated. Section 2 of R.A. No. 6957, as amended by R.A. No. 7718 defines the BOT arrangement as follows: "(b) Build-Operate-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 operated 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." While generally the envisioned activities are not inconsistent with R.A. No. 6957, as amended, we have misgivings about item 5, contained in your earlier letter, stating that JHB will operate the facilities for a period of time, among others, by "taking", "diverting", and "pumping" water. We note however, that your second latter dated June 27, 1994 stated that the Tuba Water District which is still to be organized would have jurisdiction over the Budacao, Water Falls, the subject of the water works development. We take it from your later communication that the extraction of the water from its source will not be done by the foreign corporation (JHB) but the Tuba Water District which is to be organized locally under existing Philippine Law. This feature of the Project is relevant in view of the afore-quoted Section 2 of Article XII of the Constitution. Water is a natural resource, the development, exploitation of utilization of which is reserve for citizens of the Philippines, or corporations or associations at least 60% of the capital of which is owned by such citizens (Opinion No. 243, Secretary of Justice, s. 1989). Moreover, under the Water Code of the Philippines (P.D. No. 1067), only citizens of the Philippines as well as juridical persons, who are duly qualified by law to exploit and develop water resources, may apply for water permits (Art. 15) A water permit is the documentary evidence of the grant by the Government of a water right or privilege to appropriate and use water (Art. 13, id.). The appropriation of waters is the acquisition of rights over the use of waters or the taking or diverting of waters from natural source in the manner and for any purpose allowed by law (Art. 9, id.) It may be observed, however, that while the Water Code imposes a nationality requirement for the grant of water permits, the same refers to the privilege "to appropriate and use water" We have consistently interpreted this mean the extraction of water directly from its natural source. However, once removed therefrom, they cease to be a part of the natural resources of the country and are the subject of ordinary commerce and they be acquired by foreigners (Sec. of Justice Opn. No. 55, s. 1939; No. 173, s. 1984; No. 243, s. 1989). In view of the peremptory provisions of the Constitution and the Water Code above-cited, JHB may not be qualified to operate the facilities if it will take, divert, and pump water directly from its natural source because of the nationality requirement, but it may legally process or treat the water after it is removed from the source by a qualified person. Please be guided accordingly. Very truly yours, (SGD.) FRANKLIN M. DRILON Secretary