PE2 asks House panel to exclude EE incentives from rationalization scope of TRAIN-2 bill

HOUSE OF REPRESENTATIVES, QUEZON CITY, 30 May 2018 -- The Philippine Energy Efficiency Alliance (PE2) manifested its position of excluding energy efficiency and conservation (EE&C) projects from the rationalization of fiscal incentives under House Bill 7458, otherwise known as TRAIN-2 bill, during the initial deliberations on said measure by the House Committee on Ways & Means held here earlier today. The committee hearing was chaired by Rep. Dakilo Carlo E. Cua, while PE2 was represented by its president, Alexander Ablaza. Leading the resource persons from the executive branch of Government were senior officials of the Department of Finance, the Board of Investments and the Philippine Economic Zone Authority.

Consistent with the PE2 position letter of 9 May 2018, the Alliance presented the following justifications to exclude EE&C projects from the scope of Government’s rationalization of fiscal incentives under TRAIN-2:

1. Energy efficiency and conservation should be treated as the “first fuel” of the economy, being the cheapest, fastest and most untapped energy resource in our energy mix to slow down the rise in energy prices by deferring some 45,900 MW of energy infrastructure upgrades (power and non-power) through 2040. Consistent with the Department of Energy’s (DOE) approved Energy Efficiency & Conservation Roadmap for 2017-2040, PE2 believes that the economy will have to proactively shave off at least 182 Mtoe in energy demand in the next 22 years to meet the 2040 targets and save our economy some PHP 36 trillion in energy purchases, grow GDP incrementally, create green jobs, increase tax revenues from energy savings, reduce dependence on imported fossil fuels, and contribute significantly to the regional energy intensity reduction targets of ASEAN and APEC, as well as our country’s greenhouse gas reduction obligations under the Paris climate agreement.
2. The Philippines is believed to be the only ASEAN country without a mandatory EE&C policy framework or mainstreamed fiscal incentives for EE&C investments. PE2 also believes that the Philippines may be the only country in the world which has fiscal incentives for renewable energy, but no fiscal incentives perpetuated by law for EE&C projects. While the Alliance remains thankful that the Board of Investments (BOI) has published approved specific guidelines for energy efficiency projects on 8 March 2018, and that a pending EE&C bill is being deliberated upon by the House Committee on Ways & Means (after approvals by the House Committees on Energy and Appropriations, and final reading of the counterpart measure in the Senate), much work remains to be done to ensure that incentives are effectively able to catalyze capital flows toward EE&C projects over the long haul.
3. For the Philippines to meet DOE’s 2040 annual savings target of 10,000 ktoe under its approved 2017-2040 EE&C Roadmap, an estimated PHP 12 trillion in investments will have to be realized in EE&C technology deployment across end-use sectors. Almost two-thirds of this capital requirement will have to be financed from third-party sources such as energy service companies (ESCO), public-private partnerships (PPP), equity vehicles, and development or climate funds. Private sector capital investments will need to be made commercial-grade by increasing equity returns through “TRAIN-friendly” fiscal incentives. The full suite of tax-based fiscal incentives renders off-balance sheet EE&C investments commercially viable – raising average after-tax internal rate of return from 5.9% to 14.6%. Without the full suite of tax-based fiscal incentives (that is, duty-free importation, six-year income tax holiday and zero-rated VAT), an estimated maximum of 34% of the capital requirement through 2030, or no more than PHP 4 trillion, can be mobilized through the business-as-usual self-financed and debt-financed mechanisms for the energy end-use sectors to comply with the enforced energy efficiency market regulation.
4. Every PHP 1.00 that the Government invests through tax-based fiscal incentives for off-balance sheet EE&C investments can flow back to the National Treasury as PHP 2.31 in additional tax revenues. Conservatively excluding the social, economic and environmental benefits just for this analysis, a portfolio-based financial model confirms that every peso in tax expenditures through a package of tax-based fiscal incentives which includes duty/tax-free importation of capital equipment, zero-rated valued added tax and six-year income tax holiday, can be fully recovered and multiplied by 231% through the economic life of the EE&C equipment assets.
5. EE&C is a new project type, economic activity or asset class that has not yet benefited from Government fiscal incentives and should therefore not be subject to Government’s incentive rationalization efforts. Although the Alliance is now in discussions with Congress and BOI to expand the incentive package in addition to the BOI guidelines published on 8 March 2018, it can be clearly said that EE&C investors or developers have not yet meaningfully tapped incentives to mobilize third party capital investments in EE&C projects.

Ablaza pushed the following recommendations of the Alliance to the committee during the hearing:

1. EE&C projects will need at least six (6) years of income tax holiday (ITH) availment, based on the entire cost of the EE&C project (and not just a portion of the cost of capital equipment), and therefore excluded from the three (3) year ITH limit set in the proposed bill. (PE2 emphasized that renewable energy projects are entitled to 7 years in the Philippines, and that EE&C projects in Thailand are entitled to 8-year ITH.) Aside from the other tax incentives listed in the bill, EE&C projects shall be entitled to customs duty incentives and zero-rated valued added tax through the limited life of the energy services agreement, typically up to ten (10) years in contract term. The commercial viability of third-party capital flows toward EE&C projects remains critically dependent on this comprehensive tax-based incentive package.
2. The Fiscal Incentives Review Board (FIRB) and the various Investment Promotion Agencies (IPAs) will need to expressly identify EE&C projects as an economic activity qualified in the Strategic Investments Priority Plan (SIPP) for a period no shorter than fifteen (15) years, to be able to jumpstart private sector capital flows through the next 22 years of EE&C roadmap implementation.
3. Unlike Article 32 of E.O. 226, series of 1987, the TRAIN-2 bill should be clear in allowing up to 100% Filipino or foreign ownership of EE&C projects as registered enterprises eligible for fiscal incentives, especially because EE&C projects are, by nature, not public utilities.

The committee hearing was convened on 30 May 2018 to deliberate on the following pending House Bills (HB):

• HBs 36, 1537, 1658, 2379, 3835 & 5384 – Reducing the corporate income tax rate, amending Sections 27 and 28 of the National Internal Revenue Code of 1997, as amended (Reps. Arthur Yap, Bernadette Herrera-Dy, Bellaflor Angara-Castillo, Deputy Speaker Romero ‘Miro’ Quimbo, Reps. Manuel Zubiri and Luis Raymund ‘LRay’ Villafuerte Jr.)
• HBs 231, 3359 & 7364 – Rationalizing the grant and administration of fiscal incentives (Deputy Speakers Eric Singson and Sharon Garin)
• HB 6037 – Providing for fiscal investments for corporations with business enterprises duly established and located in the Island of Mindanao (Rep. Alfredo ‘Albee’ Benitez)
• HBs 7214 & 7458 – Amending certain sections under Chapters I, II, III, IV, V, and VI of the National Internal Revenue Code of 1997, as amended (by lowering of corporate income tax rate, reforming the corporate income tax system, and broadening the tax base) (Reps. Horacio Suansing Jr. and Dakila Carlo Cua)