Legal and Operational Framework of Public Enterprises in the Philippines

In this, we will discuss the history of the legal and operational framework behind public enterprises
in the Philippines from the national constitutions of 1935, 1973 and 1987, to the proclamations,
memorandums and executive orders made in recent decades.
Today public enterprises in the Philippines are officially known as government-owned or controlled
corporations (GOCCs), as is their designation under Presidential Decree (PD) No. 2029 (1986)
and restated in Administrative Order (AO) No. 59 (1988):
…corporation which is created by special law or organized under the Corporation Code in which
the Government, directly or indirectly, has ownership of the majority of the capital or has voting
control…
Public enterprises, however, existed long before the official establishment of this term and
definition, as will be discussed in a later section of this paper. The earliest legal basis for the
establishment of public enterprises was in Article II, Section 5 of the 1935 Constitution. It
outlined that one of the principles of the Philippine state was the “promotion of social justice to
insure the well-being and economic security of all people…”.
In addition to this, Article XIII, on the use and conservation of natural resources, stated that all
the country’s natural resources belonged to the state and that their use or development was to be
limited to Philippine citizens or to corporations with a majority of at least 60% ownership by
Philippine citizens.
These constitutional provisions formed the basis for the creation of the earliest Philippine public
enterprises in that they set the particular goals of social justice and ownership of the national
economy/resources by the Filipino people. These broad themes would be replicated and
elaborated upon in subsequent constitutions.
The 1973 Constitution elaborated more on the state policy on the establishment of public
enterprises, specifically under Sections 4-7 of Article XIV on the national patrimony.
Section 4 of Article XIV states:
The National Assembly shall not, except by general law, provide for the formation, organization,
or regulation of private corporations, unless such corporations are owned or controlled by the
government or any subdivision or instrumentality thereof.
Section 5, reiterated the theme of national ownership of the economy by stating that operation of
public utilities can only be undertaken by Filipino citizens.
Section 6 set a general policy framework on how public enterprises were to be created and
utilized by the government. It states that:
The State may, in the interest of national welfare or defense, establish and operate industries and
means of transportation and communication, and upon payment of just compensation, transfer to
public ownership utilities and other private enterprises to be operated by the Government.
Section 7 outlined the power of the state to, in the case of a national emergency, temporarily take
over private enterprises affected with public interest should it be deemed necessary and in the
public interest. A keyword in this particular provision is temporary, in that it implies that any such
businesses taken over by the government should eventually and rightfully be returned to the
private sector. This, together with Section 4, implies a state policy favoring free enterprise, at least
in times of normalcy.
Thus, public enterprises during the 1970s and early 1980s were created primarily for economic
development, protection of the national interest, and in response to specific problems. This policy,
however, was rather unspecific with regard to the boundaries between the state and the market.
This ambiguity, coupled with the patronage inherent in the system during the martial law years,
led to the proliferation of public enterprises as well as quite a number of issues and challenges to
the public sector.
These problems led the Marcos government to create the Special Presidential Reorganization
Committee (SPRC) in 1985 with its view of rationalizing the government corporate sector. This
committee recommended limiting the use of the government corporate form to certain areas and
activities, the institutionalization of effective supervision, the coordination and control of
government corporations, and the abolition/privatization/merging and/or retention of existing
GOCC9s. These reform efforts, however, were overtaken by the political upheaval that occurred
in 1986.
During the subsequent Aquino administration, a new framework was drafted for limiting the use
of the government corporate form to those activities usually considered to be natural monopolies,
those that require large and physically indivisible capital investments, those characterized by long
and uncertain gestation periods, and those deemed essential from the point of view of national
defense, security and welfare.
The plan also proposed that the following criteria should govern the use of the government
corporate form: a. flexibility and autonomy in operations; b. financial viability; c. limited liability of
the national government, and; d. the possibility of private sector participation.
Subsequently, Administrative Order (A.O.) No. 59 was issued in February of 1988 for the
purposes of providing principles and standards to be followed in the creation, management,
administration, supervision and liquidation of GOCCs, defining the guidelines in determining the
areas or activities in which the government corporate form could be utilized, and establishing
policy measures to improve the organizational and functional capabilities of GOCCs.
Section 3 of A.O. 59 stated that the government should be engaged in the provision of goods
and services only if said goods and services are “vital to society and if “the private sector is unable
or unwilling to provide the same” , or if market intervention is “justified by the need to create a
bias in favor of disadvantaged sectors of society.
In addition to these guidelines for state intervention, the order also recommended that the
corporate form only be used if the nature of the good or service provided or the market structure
for those goods/services required the operation of a less restrictive organization than a regular
government agency, if it is intended to limit the liability of government to its direct equity exposure,
or when the enterprise could be reasonably expected to be able to financially sustain itself.
Lastly, A.O. 59 mandated that all proposals for the acquisition, creation, and dissolution of GOCCs
would be reviewed and evaluated by the Government Corporate Monitoring and Coordinating
Committee (GCMCC) established in 1986 through Memorandum Circular No. 10. This committee
was further empowered by Executive Order (E.O.) No. 236, issued on in July 1987, to be the
central monitoring, coordinating and performance evaluation unit for all GOCCs.
The GCMCC filed legislative bills aimed at standardizing the general features of the charters of
GOCCs such that the management of GOCCs were vested on its chief executive officer, the
members of the Board of Directors were required to have recognized competence and experience
relevant to the GOCCs operations. This was aimed at professionalizing the management of the
GOCCs. However, the system of departmental attachment of GOCCs was maintained together
with their inter-departmental supervision by the GCMCC and other service wide agencies like the
COA, CSC, the Department of Budget and Management (DBM), the NEDA and others.
Another major development during the first Aquino administration was the establishment of the
government9s privatization program. In December of 1986, President Corazon Aquino issued
Proclamation No. 50. Under this program, the government would divest itself of two types of
assets, the 122 GOCCs recommended to be privatized and non-performing assets (NPAs) that
were earlier transferred by the PNB and the DBP to the national government. Proclamation No.
50 created the Committee on Privatization (COP) and the Asset Privatization Trust (APT). The
COP was a cabinet-level committee that was primarily tasked to oversee the privatization
program. Furthermore, it was put in charge of formulating the policies and general guidelines on
issues of privatization, approving the sale and disposition of GOCCs, NPAs and other assets, and
monitoring the progress of privatization actions.
On December 31, 2001, the COP and the APT became defunct and were succeeded by the
Privatization Council (PC) and the Privatization Management Office (PMO) under Executive Order
No. 323 issued by then President Estrada. These bodies continued the work of their
predecessors.
The most recent additions to the governance framework for the public enterprise sector are
Executive Order No. 24, which prescribes a framework of rule to govern the compensation of
members of the board of directors/trustees of GOCCs, and the subsequent Republic Act (RA)
No. 10149, or the GOCC Governance Act of 2011. Both of these were the result of the current
Aquino administration9s anti-corruption campaign. E.O. 24 in particular was aimed at what were
perceived to be unusually high benefits accrued to executives in GOCCs. Of these, the Local
Water Utilities Administration (LWUA) was notably scrutinized due to the alleged purchase of
capital stock of Express Savings Bank, Inc. by its former chairman Prospero Pichay, Jr.. However,
due to the inability of an executive order to override the charter of the LWUA, the GOCC
Governance Act was rushed through Congress and passed in the middle of 2011.
R.A. 10149 introduced sweeping changes in the public enterprise sector, specifically it established
a Governance Commission for GOCCs (GCG), put into law a revised renumeration system for
positions within GOCCs, called for a new performance evaluation system, put obligations and
appointment guideline on directors/trustees/officers of GOCCs, mandate disclosure requirements
for all GOCCs, and set guidelines for the creation or acquisition of GOCCs. By itself, the act
constitutes the single most significant change in public corporate governance in recent years. The
implications of this law could have been substantial, however a lack of commitment and half-
hearted implementation on the part of the Aquino administration resulted in very little genuine
change in the actual governance of the public enterprise sector.
From his own experience working the Home Development Mutual Fund (Pag-IBIG Fund), the
author got the impression that the GCG was perceived not so much as a pilot agency strategically
leading the public sector but rather as yet another oversight body, one who9s purpose was
primarily to rubber stamp performance targets set by the GOCCs themselves and collect annual
reports. Even more discouraging to the author was his discovery from one of his professors that
the GCG, about four years after its establishment, was still no more than a small government
office with only a few dozen personnel.
These laws provided specific details on how public enterprises operate and the expected
output/service to be delivered to the people. The laws also provide the mechanism in which
accountability is to be observed. Indeed, public enterprises have the key role to perform for
country9s fast pace of growth and development by performing the expected service from them.

ACTIVITY:
Make a summary matrix of the 1987 Philippine Constitution pertinent and relevant to the
operations of public enterprise.