Aris Gulapa, Charmaine Haw-Lim and Melissa Chavez-Dee of Gulapa Law discuss regulation of domestic and foreign contractors in Philippines and how the regime impacts the country’s construction industry
The construction industry in the Philippines is primarily regulated by the Construction Industry Association of the Philippines (CIAP), a government agency established through Presidential Decree No. 1746, series of 1980, as amended (PD 1746). The CIAP is composed of ex-officio members from different executive departments of the Philippine government such as the Secretary for Trade and Industry, Secretary for Transportation, Secretary for Public Works and Highways, and the Secretary of Department of Labor and Employment. In addition, PD 1746 also requires the appointment of a representative from the private construction sector to be part of the CIAP.
The main functions of the CIAP as provided in PD 1746 include evolving an overall strategy for the optimum development of the construction industry; monitoring and studying both domestic and international construction industries to identify areas where there can be improvement and to recommend and/or implement changes which support the development of the industry; and, formulating criteria for the classification and categorisation of contractors which reflect their contracting capacity and performance capacity (Section 2, PD 1746).
The CIAP implements its policies through the following government agencies which are under its jurisdiction: the Philippine Construction Accreditation Board (PCAB), the Philippine Overseas Construction Board, the Philippine Domestic Construction Board, and the Construction Manpower Development Foundation.
Aside from the CIAP, local government units also regulate the construction and renovation of buildings and structures within their territories by ensuring compliance with minimum safety standards under the National Building Code (Republic Act No. 6541). For the construction of condominiums and subdivisions, on the other hand, these are further regulated by the Housing and Land Use Regulatory Board.
Construction contractor licensing
All foreign and local entities intending to engage in the business of construction are required to secure a licence from the CIAP’s licensing arm, the PCAB. The PCAB was formed in 1965 pursuant to Republic Act No. 4566 (the Contractors’ License Law). Originally established as the Philippine License Board for Contractors, it was then redesigned as the PCAB upon the issuance of PD 1746. The PCAB performs regulatory and quasijudicial functions, and is tasked with the registration and licensing of contractors intending to engage in the construction business (see Section 5, Contractors’ License Law).
There are two types of licences usually issued by the Philippines’ licensing body: a Regular License or a Special License.
A Regular License authorises the licensee to engage in construction contracting within the scope and field of its licence classification for as long as the licence is valid (i.e., renewed annually, and not suspended, cancelled or revoked). The Regular License is reserved for domestic construction firms that are at least 60% owned by Filipinos.
A Special License, on the other hand, is issued to a joint venture, consortium, foreign contractor or a project owner, authorising the licensee to engage in the construction of a single specific undertaking or project. In practice, the PCAB usually issues a Special License to foreign contractors if the project, which is the subject of the Special License application, is either a foreign financed / internationally-funded project which requires international bidding or allows the participation of foreign contractors, or is a project implemented through Republic Act No. 7718, or the Philippine Build-Operate-Transfer (BOT) Law (see PCAB Resolution No. 214, Series of 1997).
In 2015, however, the CIAP issued Board Resolution Number 08, series of 2015, approving the PCAB’s proposed amendments to the Implementing Rules and Regulations (IRR) for the Contractors’ License Law. Through said amendment, the PCAB introduced a new licence sub-category under the Regular License category: Regular License with Annotation. Under the revised IRR, the CIAP Regular License with Annotation now allows corporations incorporated in the Philippines, irrespective of foreign ownership, to regularly engage in specific types of construction projects. In view of the introduction of a Regular License with Annotation, Philippine domestic corporations, which are majority or wholly-owned by non-Filipinos, are now allowed tolarly engage in more than one project - subject to several stringent requirements and only for specific types of constructions projects.
Despite the said amendment to the Contractors’ License Law IRR, the Philippines’ policies and mechanism for issuing licences to foreign contractors are still considerably restrictive when it comes to non-Filipino construction companies. Under the amendments to the IRR of the Contractors’ License Law, a foreign contractor may be issued a Regular License with Annotation provided that it is duly incorporated as a domestic corporation and has a capitalisation of at least P1 billion ($20 million) in cash. Further, a foreign contractor issued a Regular License with Annotation may only engage in ‘Vertical Projects’ (this refers to buildings such as offices or residential condominiums, hotels, malls, hospitals, schools, warehouses and the like; airport terminals, marine terminals, international transport terminals, power generation plants and manufacturing and assembly facilities; tourism resorts, country clubs and golf courses) that have a minimum contract value per single project of at least P5 Billion (around $100 million) and in ‘horizontal projects’ (this includes roads, expressways and toll road systems; light rail systems, heavy rail systems and monorail systems; water distribution system; bulk water systems; sewage and sewerage systems; power transmission system and power distribution system, telecommunications distribution system, bridges, flyovers, viaducts; overhead carriageways, piers, wharves and interchanges, tunnels, underground carriageways and storm cisterns; dams, dikes, seawalls and breakwater system; and reclamation) that have a minimum contract value per single project of at least P3 Billion ($60 million).
Foreign restriction in the Contractors’ License Law
It is interesting to note that the rule expressly reserving the issuance of Regular License for domestic construction firms that are at least 60% owned by Filipinos is only found in the Contractors’ License IRR, and not in the actual law itself. This is important in as much as it has been a consistent rule in Philippine jurisprudence that implementing rules of a law may not add to, or detract from, the provisions of the law it is designed to implement. This is because adding or changing some requirement through an implementing rule would have the effect of amending the provisions of law; and this is prohibited as the power to amend a statute is strictly limited to Philippine Congress (see Lim v. Gamosa, G.R. No. 193964, December 2, 2015).
In fact, the Contractors’ License Law itself expressly provides that while the PCAB is authorised to issue rules and regulations, it is required to exercise such power for the purpose of carrying out the provisions of the law (see Section 5, Contractors’ License Law). That said, until a court of law declares the Contractors’ License IRR to be void through a final order, from a practical perspective, contractors would have to follow the same.
Foreign investment negative list (FINL)
In addition to the lack of foreign restriction in the Contractors’ License Law, construction activities are also noticeably absent from the Philippines’ current FINL.
Republic Act No. 7042, or the Foreign Investments Act of the Philippines, as amended by Republic Act No. 8179 (FIA) governs foreign investments in the Philippines. It provides that foreigners can generally invest up to 100% equity in domestic market enterprises, except in areas of investment listed in the FINL (see Section 7, FIA).
The FINL - the latest version is the tenth - used to restrict foreign equity participation in private domestic and overseas construction contracts (see first regular FINL, Executive Order No. 182 series of 1994, and second regular FINL, Executive Order No. 362, series of 1996). The restriction, however, was removed in the third FINL (Executive Order No. 11, series of 1998). Since then, the closest references to foreign equity restrictions in construction activities in all subsequently issued FINLs are with regard to the 25% cap on foreign equity in entities carrying out: (1) contracts for the construction and repair of locally-funded public works, and (2) contracts for the construction of defence-related structures.
With respect to (1), the FINLs expressly exclude infrastructure/development projects covered in the BOT Law and projects which are foreign funded or assisted and required to undergo international competitive buildings.
In other words, under the FIA and the current FINL, construction companies that plan to engage in construction activities that do not involve contracts for the construction and repair of locally-funded public works, or contracts for the construction of defence-related structures may be 100% foreign owned. This has been expressly acknowledged by the Securities and Exchange Commission (SEC), the government agency tasked with approving corporate and partnership registration in the Philippines (see SEC Opinion dated April 18, 2001, SEC Office of the General Counsel (OGC) Opinion No. 14-27 dated October 2, 2014, and SEC OGC Opinion No. 23-09 dated August 11, 2009).
A construction company may be considered a domestic market enterprise. In this regard, there is a minimum capitalisation required for domestic market enterprises with foreign ownership under the current FINL. Under Philippine law, a ‘domestic market enterprise’ is one that produces goods for sale, or renders services to the domestic market entirely, or if exporting a portion of its output, fails to consistently export at least 60% thereof. Under the current FINL, foreign ownership of domestic market enterprises with paid-in equity capital of less than the peso equivalent of $200,000 is limited to 40%. So, a domestic market enterprise may be wholly owned by foreigners if its paid-in equity capital is at least the peso equivalent of $200,000. Theoretically, one may argue that construction companies engaged in private construction contracts, infrastructure/development projects covered in the BOT Law, and projects which are foreign funded or assisted and required to undergo international competitive buildings may be wholly owned by a foreign national provided that the $200,000 minimum capitalisation is satisfied. As mentioned above, however, to get a Regular License with Annotation from PCAB, the PCAB prescribes higher capitalisation requirements.
Early this year, the Philippine Competition Commission (PCC) raised several concerns regarding the nationality restriction imposed on construction activities. The PCC, which was created under Republic Act No. 10667 or the Philippine Competition Act, was created to promote and maintain market competition by regulating anti-competitive conduct in the Philippines. In its first policy note issued for 2017, the PCC raised concerns on how the nationality restrictions in the construction industry violate the Philippine Constitution’s policy against unfair competition. Article XII, Section 19 of the Philippine Constitution states that no combinations in restraint of trade or unfair competition shall be allowed. According to the PCC, the PCAB’s nationality requirement in the granting of licenses, as provided in the Contractors’ License Law IRR, ‘institutes a substantial barrier to entry of foreign contractors in the construction industry’. Accordingly, the PCC believes that these restrictions imposed on the granting of licences propagates an uneven playing field between local and foreign contractors, which discourages foreign construction groups from venturing into the Philippines.
While we leave the examination of the correctness of the PCC’s stance for another day, the PCC’s perspective seems to be affirmed by the evident lack of foreign construction groups which have attempted to obtain a Regular License with Annotation. According to the PCAB, since its introduction of the Regular License with Annotation, only two foreign players have applied for and been granted said licence. Further, based on the PCAB’s data as reported in the PCC’s policy note, out of all the Regular Licenses issued by the PCAB in 2015, only 12% of these were for new applicants (i.e., all other licences issued were renewals by existing domestic construction companies).
Effects of nationality restrictions on the Philippine construction industry
Since the launch of the Public-Private Partnership program in the Philippines, the growth and impact of infrastructure development on the country has been continuous, carrying over to the new government regime. In a recent forum presided over by President Rodrigo Duterte’s representatives and consistent with the ‘Build! Build! Build!’ programme of the current administration, a three-year rolling infrastructure pro- gram from 2018 to 2020 amounting to P3.6 trillion was presented. The programme is supposed to cover infrastructure projects for transportation, water resources, sewerage and sanitation, flood management, solid waste management, maritime, social infrastructure, energy, information communications technology and others.
A more diverse, competitive and technologically advanced construction industry would clearly be needed in order for the ‘Build! Build! Build!’ programme of the current administration of the Philippine Government to be successful. If the rules on foreign equity participation in the construction industry, however, remain the same and the current situation of repeated renewals of existing domestic construction companies persists to be the norm, the Philippines risks losing the benefits of increased competition within the industry, as well as much needed technological advancement that could be contributed by foreign contractors. This is because although the IRR allows foreign players to engage in construction industry in the Philippines through the Special License, or a Regular License with Annotation, the costs and impediments involved in acquiring either one of these licences may dissuade potential foreign entrants to the market.
To illustrate, if a foreign contractor were interested in participating in 10 construction projects in the Philippines, it would have to apply for a Special License on 10 separate occasions. Alternatively, a foreign contractor can apply for a Regular License with Annotation. While it will not be required to file an application for a licence every single time it decides to undertake a project, it would be required to have a minimum capital requirement of around $20 million. Further, a holder of a Regular License with Annotation would only be limited to multi-million dollar ‘vertical’ and ‘horizontal’ projects as described in the amended IRR, with no room to participate in smaller scale projects. Accordingly, if a foreign contractor were to consider entering the Philippine market, it would have to weigh its options and choose between the less costly but more laborious option of simply applying for a Special License for each specific project, or the more stable, but exceedingly expensive route of obtaining a Regular License with Annotation.
From a commercial perspective, the requirement to invest the equivalent of approximately $20 Million and incorporate a domestic enterprise in the Philippines, with no assurance of securing the required high value projects it is limited in performing, may serve as a deterrent to foreign construction companies. Evidently, it comes as no surprise that only two foreign contractors have applied for a Regular License with Annotation despite the amendment of the Contractors’ License Law IRR. Considering the risks and costs involved, it makes more commercial sense for a foreign player to operate in the Philippines through a Special License despite the burdensome application process.
Thus, while the PCAB has made progress in allowing the entry of foreign players in the construction industry through the introduction of a Regular License with Annotation, it would be beneficial for the country if the rules were further re-examined to accommodate more international players which can bring certain technology and know-how to the Philippine construction space.
About the contributor
Aris Gulapa owns Gulapa Law and heads the construction and real estate practices. He has assisted sponsors and lenders in relation to important infrastructure and construction projects in Manila, Singa-pore, Vietnam, and Tokyo. Prior to setting up Gulapa Law in Sep- tember 2015, Aris was a partner in Makati-based C&G Law, and was an associate in Anderson Mori & Tomotsune, Kelvin Chia Partner- ship, and SyCip Salazar Hernandez & Gatmaitan.
About the contributor
Charmaine Haw-Limis a partner in Gulapa Law. She graduated from Ateneo Law School in and was admitted to the Philippine Bar in 2011. She worked at SyCip Salazar Hernandez & Gatmaitan, C&G Law, and served as consultant to the Asian Development Bank under its Office of General Counsel – Sovereign and Non-sovereign Operations before joining Gulapa Law. Her experience includes assisting in the bidding process, providing advice on legal structure, and assisting in the implementation of government infrastructure projects, including airports.
About the contributor
Melissa Chavez-Dee is a senior associate in Gulapa Law. She obtained her law degree in 2011 from the Ateneo de Manila University School of Law, graduating with honors. She was admitted to the Philippine Bar in 2012. She worked at C&G Law before joining Gulapa Law. She has experience assisting in the bidding process, providing advice on legal structure, and assisting in the implementation of government infrastructure projects, including airports, terminals, and railways.