I. Introduction

This memorandum provides an exhaustive analysis of the franchising power of Local Government Units (LGUs) in the Philippines, with particular focus on its application to tricycles and public utilities. The inquiry centers on the scope, source, and limitations of this power as delineated by the 1987 Constitution, statutory law, and pertinent jurisprudence. The analysis will clarify the distinction between the national government’s authority over public utilities and the devolved franchising power of LGUs over local services, a distinction that often generates legal and operational conflicts.

II. Statement of Issues

III. Sources of Franchising Power

The franchising power of LGUs is not an inherent power but is expressly devolved by the 1987 Constitution and statutory enactments. The primary sources are:
a. The 1987 Constitution: Article X, Section 5 provides that each LGU shall have the power to create its own sources of revenue and to levy taxes, fees, and charges, subject to guidelines and limitations set by Congress. This fiscal autonomy is the bedrock for local regulatory fees, including those for franchises. More directly, Article X, Section 11 mandates that Congress shall enact a Local Government Code which shall provide for, among others, the powers and responsibilities of LGUs.
b. The Local Government Code of 1991 (Republic Act No. 7160): This is the principal statute that operationalizes local autonomy. Specific provisions grant franchising power:
– Section 458(a)(3)(vi) (for cities) and Section 468(a)(3)(vi) (for provinces): Grant the Sanggunian the power to “grant franchises, enact ordinances authorizing the issuance of permits or licenses, or enact ordinances levying taxes, fees, and charges upon such conditions and for such purposes intended to promote the general welfare of the municipality and its inhabitants, pursuant to Section 16 of this Code, and subject to the provisions of Book II of this Code.”
– Section 447(a)(5)(vi) (for municipalities): Contains an analogous provision.
– Section 16, the General Welfare Clause: Empowers LGUs to enact measures that enhance the right of the people to a balanced ecology, promote health and safety, maintain peace and order, and preserve the comfort and convenience of their inhabitants. This police power is the substantive basis for regulating local businesses and services through the franchising mechanism.
c. Executive Orders and Circulars: Issuances like Department of Transportation (DOTr) Department Order No. 2017-011 (for tricycle modernization) and Department of the Interior and Local Government (DILG) Memorandum Circulars provide implementing rules and policy guidance.

IV. Franchise for Public Utility vs. Local Franchise/Permit

A critical distinction must be made between a national franchise for a public utility and a local franchise or permit.
A Public Utility Franchise is a special privilege granted by the State through Congress, pursuant to Article XII, Section 11 of the 1987 Constitution, which states that no franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens. This franchise is a legislative act (or via delegation to regulatory bodies like the Land Transportation Franchising and Regulatory Board (LTFRB) for land transport) that allows an entity to operate as a public utility, affecting public interest on a national scale (e.g., buses, trains, electricity distribution, telecommunications).
A Local Franchise or Permit is an authorization granted by an LGU, pursuant to the Local Government Code, allowing a person or entity to operate a business or service within the territorial jurisdiction of the LGU. It is an exercise of local police power and regulatory authority for the general welfare. It does not confer the status of a national public utility. The operation of tricycles, for example, is primarily a local transport service regulated by the Sanggunian through ordinances, not a national public utility franchise under the LTFRB’s primary jurisdiction, as clarified in Mateo v. City of Manila.

V. Franchising Power Over Tricycles

The regulation of tricycles is a quintessential example of devolved franchising power. The legal framework is as follows:
a. Primary Authority: Section 458(a)(3)(vi) of the Local Government Code explicitly authorizes city Sanggunians to “regulate the operation of tricycles and grant franchises for the operation thereof within the territorial jurisdiction of the city.” Similar powers are granted to municipal Sanggunians under Section 447(a)(5)(vi).
b. Limitations and Guidelines: This power is not absolute. It is subject to:
– Department of Transportation (DOTr) Guidelines: While franchising is local, the DOTr, through Department Order No. 2017-011 and its precursor Letter of Instruction No. 1182, sets national policy, safety standards, and emission control guidelines (e.g., the Public Utility Vehicle Modernization Program). LGUs must conform their ordinances to these broad national standards.
– Territoriality: The franchise is valid only within the granting LGU’s jurisdiction. Inter-municipality or inter-city operations require separate permits or agreements.
– Due Process and Equal Protection: The process for granting franchises must be fair, non-arbitrary, and based on reasonable criteria (e.g., driver qualifications, vehicle roadworthiness, demand).
c. Nature of the Grant: The LGU grant is often termed a “franchise” in ordinances but operates more precisely as a privilege license or permit. It is revocable pursuant to the LGU’s police power for violations of terms, ordinances, or for public safety reasons.

VI. Franchising Power Over Utilities

LGU authority over utilities is more circumscribed due to the national character of public utilities.
a. Local Utilities: For utilities that are inherently local in scope and operation, such as waterworks systems (unless operated by a large concessionaire like Manila Water), public markets, slaughterhouses, and cemeteries, LGUs have direct franchising or licensing authority under the General Welfare Clause and the Local Government Code. They may grant concessions or operate these services themselves.
b. National Public Utilities: For entities holding a congressional franchise or a certificate of public convenience from national agencies (e.g., National Electrification Administration, Energy Regulatory Commission), the LGU’s role is limited to:
– Regulation via Police Power: LGUs can enact ordinances regulating the location of facilities (through zoning), construction standards (through building permits), and business operation (through mayor’s permits and local business taxes) to ensure public safety and order.
– No Power to Franchise: An LGU cannot grant a competing franchise to operate a public utility that requires a congressional franchise. It cannot impede the operations of a nationally franchised entity unless its regulations are a valid, non-discriminatory exercise of police power. The case of Tatel v. Municipality of Virac illustrates that a municipal ordinance cannot prohibit an entity with a legislative franchise from operating, but it can impose reasonable conditions for local operation.
c. Public-Private Partnerships: LGUs may enter into contracts with private entities for utility services under the Local Government Code and the BOT Law, but such contracts are distinct from a legislative franchise.

VII. Comparative Analysis: LGU vs. National Franchising Power

The following table compares the key attributes of the two distinct franchising authorities.

VIII. Doctrinal Limitations and Legal Conflicts

The exercise of franchising power by LGUs is bounded by established legal doctrines, leading to specific conflicts:
a. Doctrine of Pre-emption: When Congress has intended to occupy a particular field (e.g., regulation of national railways, airlines), local legislation on the same subject is pre-empted and is void. LGUs cannot grant franchises in pre-empted fields.
b. Doctrine of Superiority of National Law: An LGU ordinance must not contravene an existing statute. If a national law, like the Public Service Act (prior to its amendment) or a specific charter, provides a comprehensive regulatory scheme, conflicting local franchising ordinances may be invalidated.
c. Non-impairment of Contracts: An LGU cannot revoke a validly issued franchise or permit in a manner that impairs the obligations of contracts, unless done under its police power for a paramount public purpose and with due process.
d. Common Legal Conflicts:
1. Jurisdictional Overlap: Conflict between LTFRB (for UV Express services) and LGUs (for tricycles) over the classification of vehicles.
2. Ordinance vs. National Franchise: Cases where an LGU refuses to issue a mayor’s permit to a nationally franchised utility, citing local ordinances.
3. Territorial Disputes: Tricycle franchises operating along boundary routes of adjacent LGUs without proper inter-LGU agreements.
4. Abuse of Discretion: Allegations of graft, favoritism, or arbitrary caps on the number of franchises granted, violating the equal protection clause.

IX. Procedural Requirements for Valid Exercise

For an LGU’s franchising ordinance or permit to be valid, it must comply with the following procedural mandates:
a. Ordinance Enactment: The franchising system must be established through a valid ordinance enacted by the Sanggunian in a session complying with quorum and voting requirements under the Local Government Code.
b. Public Consultation: Section 59 of the Local Government Code encourages consultation with concerned sectors. For tricycle franchises, consultation with operators and drivers’ associations is a practical and often required step.
c. Publication and Posting: The ordinance must be published and posted as required by law (Section 59, Local Government Code) to take effect.
d. Fair and Objective Criteria: The ordinance must establish clear, objective criteria for the grant, denial, renewal, or revocation of the franchise or permit (e.g., citizenship, residency, moral character, vehicle condition).
e. Due Process in Revocation: Revocation of an existing franchise or permit must be for cause, with prior notice and hearing afforded to the grantee.

X. Conclusions and Recommendations

a. Clearer National-LGU Guidelines: The DOTr and DILG should issue more precise joint memorandum circulars delineating the coverage of LGU-based transport franchises versus LTFRB-regulated services.
b. Standardized Ordinance Provisions: DILG should develop model ordinances for tricycle franchising to ensure compliance with due process and national standards.
c. Inter-LGU Cooperation Mechanisms: LGUs should be encouraged to formalize agreements for boundary routes to resolve territorial disputes.
d. Judicial Clarification: The Supreme Court may need to further elucidate the metes and bounds of LGU franchising power in the context of modern transport networks and utilities to provide definitive guidance.