Philippines: Tax perks, easier permitting, cheaper electricity to boost manufacturing, jobs

Manila: The Philippines was once dubbed as the “Silicon Valley of Southeast Asia”.

It’s a throwback to a period in the 1990s when the country was a major player in global electronics manufacturing.

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Then, its position began to wane. In 2009, Intel left (it set up shop in 1974).

The country still hosts seven of the world's top 20 chipmakers, which comprise 10 per cent of the global semiconductor manufacturing and supply. Electronics exports still account for more than 60 per cent of the country's exports by value.

But neighbouring countries like Malaysia, Thailand, and eventually, Vietnam, began offering more competitive packages.

Today, while the Philippines still contributes to global supply chains, especially in semiconductors, it no longer holds the top spot as the regional tech hub.

What happened?

A confluence of factors: political instability, high power cost and outages, a slow-moving bureaucracy, among others. But all is not lost. 

Now, with a fresh push to regain its old manufacturing glory, could the country recapture some of the sheen from its "Silicon Valley of Southeast Asia" days?

Reforms

The Philippines, long grappling with the highest power costs in Southeast Asia, is making a dramatic shift with unprecedented reforms.

The ultimate aim: lure manufacturers back into its fold – by significantly slashing overall costs for the sector. The moves go beyond mere corporate tax breaks, with bold steps to enable the country to become a competitive hub for production.

Until recently, this seemed like a moonshot. But the country has been tweaking its tax laws, alongside updates to archaic regulations to keep it in lockstep with more competitive neighbours.

High power rates

A big headscratcher: the country's high power rates. According to Energy Tracker Asia, the Philippines has between 25 per cent and 87.5 per cent higher electricity rates than some of its Asean neighbours.

Electricty forms a huge part of industrial sector input: it is used to operate industrial motors and machinery, lights, computers and office equipment, as well as for heating, cooling, and ventilation.

According to an Ateneo study, despite two decades of EPIRA (Electric Power Industry Reform Act of 2001), which restructured the country's power industry and sought to better regulate the sector, electricity rates in the Philippines are still among the highest.

EPIRA's goals were to make electricity more reliable, affordable, and competitively priced. It also aimed to accelerate electrification.

“There are many potential causes of high prices, including low generation capacity, governance failures, bureaucratic hurdles, and limited competition,” as per the Ateneo report.

A median Filipino family spends more than 10 per cent of their monthly income on electricity.

In September 2024, Meralco, the power utility serving Manila and surrounding provinces, increased its electricity rate to 11.7882 per kilowatt-hour (kWh) for a typical household, an increase of 0.1543 pesos per kWh from the previous month.

One of the most direct outcomes of low power generation is high electricity prices. Another impact: frequent brownouts and power outages, especially during peak demand seasons or when there is a supply disruption.

This energy insecurity affects households, industries — and jobs. It disrupts manufacturing operations and reduces productivity and impairs overall competitiveness.

It's not all bad news

Amid these challenges, certain industries proved their resilience, including steel. And the country, weighed down by natural calamities, has seemed to have awakened from decades of slumber.

The investment landscape does offer noteworthy advantages: free trade zones or special economic zones, and a large, educated, English-speaking, and relatively low-cost workforce.

But to do with high cost of electricity, which remains a major disincentive for investors?

High energy price had been a persistent thorn in the side of businesses.

Now, a raft of new measures could reshape the country’s industrial landscape: A sweeping new law, dubbed CREATE MORE Act (which amends Republic Act 11534).

Pro-manufacturing measures

The Finance Secretary, Ralph Recto, announced the game-changing provisions on Tuesday (November 12, 2024) which allow companies to enjoy the following:

This aggressive move to court investors won't come cheap. A presidential briefing paper projects a staggering $100.6 million in revenue losses for the government over the next three years.

CREATE MORE Act also nods to the new age of work culture, allowing businesses to implement "work-from-home" setups for up to half of their employees.

Will it make a dent? The country saw FDI inflows of $6.2 billion in 2023, according to the United Nations Conference on Trade and Development (UNCTAD).

From January to May 2024, the Department of Trade and Industry's Board of Investments (BOI) has recorded 640.22 billion pesos ($11.4 billion) worth of approved investments, an 84 per cent jump for first 5 months of 2024 compared to the entire 2023 FDI data.

The number is expected to jump further before the year is out.

Ready to compete

With these bold moves, the Philippines is throwing down the gauntlet signaling its readiness to compete on the global stage, especially in the electronics manufacturing sector.

Finished electronic products cluster is a big sector in the Philippines. It is comprised of consumer/communication products, computer/storage/office equipment, industrial equipment, consumer appliances, and medical equipment — which accounted for $10.5 billion in 2014 export. It consists of approximately 320 firms, according to official data.

The sector also provides local demand for the electronic component cluster, aside from final demand from final products manufacturers or OEM plants abroad.

In 2016, electronics exports hit $28.6 billion, accounting more than 50 per cent of the country’s exports.

In 2023, the Philippines exported $41.91 billion worth of electronic products, or 56.9 per cent of the country's total exports and a 3.4 per cent drop ($955 million) from 2022.

As of April 2024, the country’s electronics exports hit $3.84 billion, or 61.74 per cent of the $6.22 billion total Philippine exports during the month, according to the industry group SEIPI.

Here’s how the current leaders are addressing the manufacturing disincentives:

Tackling high electricity cost

With among highest electricity prices in Southeast Asia, over-dependence on imported fossil fuels (60 per cent of energy comes from coal), limited local energy production, high transmission and distribution costs as well as logistical challenges and infrastructure deficits, the situation remains dire.

It's the result of decades of “under-investment” in the energy sector and outdated laws.

Moreover, the primacy of electric cooperatives, which are not-for-profit but are notoriously inefficient (brown-out prone, with limited investment in modern infrastructure), has disincentivised manufacturing in the areas they serve (most of the country).

Here's one example of underinvestment in power generation: the country’s first (and only) pumped-storage hydroelectric power plant, the Caliraya-Botocan-Kalayaan (CBK) complex, had an original design capacity of 300 MW) when it came online in 1983.

It's the first such project in Southeast Asia.

It's still going strong.

CBK's power generating capacity was significantly bumped up to 796.64 MW, following a rehab job done by a private concessionaire covered by a 25-year PPP deal.

This facility surpasses the vaporware capacity of the mothballed Bataan Nuclear Power Plant (BNPP), a $2-billion white elephant completed in 1984 (construction started in 1976), that never produced a single watt of electricity amid allegations of kickbacks and design flaws that reportedly made it unsafe.

Fast forward 41 years, and no project similar to CBK was built in the Philippines.

Why?

The reasons are many: a lack of sense of urgency, tough permitting issues, right-of-way snag, environmental activism, meddling by local politicians, and the weaponisation of restraining order by local courts.

The elephant in the room: a lack of investor interest.

The latter has been solved, somewhat: as of July 2024, five advanced pumped-storage hydroelectric facilities are in the permitting stages. Local environmentalists, as expected, have assailed these projects for alleged (and still unrealised) ecological damage.

But the build-rehabilitate-operate-transfer (BROT) deal between CBK Power Co. Ltd. and the National Power Corp (Napocor) that made CBK a win-win engineering project is a shining example of how to tackle the country's power generation challenge, building the most efficient liquid battery (using water), while dealing with nature's wrath of constant flooding.

CBK’s 25-year concession is set to expire in 2026 – potentially providing fresh revenue for the government.

The Philippines has set an ambitious goal: triple renewable energy capacity by 2030, build at least 20 more dams, and produce an additional 8,700 MW of hydropower.

Ownership limits

This is a big stick, especially for foreign investors.

Historically, foreign ownership in strategic industries in the Philippines was highly restricted – due to constitutional provisions aimed at protecting domestic interests. The 1987 Philippine Constitution limits  foreign ownership in key sectors, including:

These restrictions, driven by ultra-nationalistic sentiments, have been removed or toned down with recent legislative changes.

Reforms and changes (post-2018)

Significant policy reforms had been made, including the following:

Amendments to the Public Service Act (PSA)

In 2022, the Public Service Act was amended, redefining "public utility" to exclude certain services like:

This legal update exempted the above industries to the 40-per cent ownership limit for foreigners.

Now, a 100 per cent foreign ownership could see a significant boost to competition and efficiency in these capital-intensive sectors.

Retail Trade Liberalisation Act

The Retail Trade Liberalisation Act of 2000 was revised in 2021 to lower the minimum paid-up capital for foreign investors from $2.5 million to $500,000. This change was made to encourage more foreign small and medium enterprises (SMEs) to enter the retail market.

Foreign Investments Act

Amendments to the Foreign Investments Act in 2022 allow for 100 per cent foreign ownership in export enterprises and relaxed the entry requirements for foreigners interested in setting up small and medium-sized businesses in the Philippines.

Renewable energy sector

In 2022, the government lifted restrictions on foreign ownership in the renewable energy sector, allowing 100 per cent foreign participation in projects such as solar, wind, hydro, and tidal energy. This move is part of the effort to meet the country’s renewable energy targets and attract significant foreign investment in green projects.

BOT Law and Public-Private Partnerships (PPP)

The Manila government has also revised guidelines for public-private partnerships, enabling greater foreign participation in infrastructure projects through more favourable, and clearer, terms in the Build-Operate-Transfer (BOT) Law amendments.

Cutting corporate taxes:

Before the recent reforms, the corporate income tax in the Philippines was one of the highest in Southeast Asia.

This made the country less competitive compared to neighbouring countries, which offer more attractive tax rates to investors.

Complex and inconsistent regulations, along with burdensome bureaucratic processes, also made it difficult for businesses to operate efficiently.

Now, obtaining permits and dealing with compliance requirements should be a breeze, thanks to Executive Order (EO) 59, which President Ferdinand R. Marcos Jr signed on April 30, 2024. It's a pivotal move that aims to expedite the implementation of the country's Infrastructure Flagship Projects (IFPs), including energy production.

It mandates a "One-Stop Shop" for infrastructure Flagship Projects (IFPs), in which all relevant government agencies must provide frontline services to applicants who are securing licences, clearances, permits, certifications or authorisations for IFPs, "subject to existing laws, rules and regulations", within 60 days.

Removing never-ending court drama and local politics from the permitting process for strategic projects of national significance is seen as a “game-changer”.

Labour cost

While labour in the Philippines is relatively cheap compared to Western countries, it is higher than in some neighbouring countries like Vietnam.

Given the skills mismatch, where the workforce may not possess the necessary skills for high-tech or specialised manufacturing sectors, it has limited the potential for certain industries to thrive.

Solution: The Technical Education and Skills Development Authority (TESDA) works to enhance the employability of the Filipino workforce by aligning skills training with industry needs. The agency provides a range of programmes to upskill individuals to meet labour market demands, especially in emerging industries and critical economic sectors.

TESDA has scaled up its Online Program (TOP) as part of workers re-tooling, with focus on lifelong learning and skills upgrading. Programmes like Training for Work Scholarship and Special Training for Employment Program (STEP) offer opportunities for people to enhance their skills or transition to new industries.

TESDA has a “Specialists Desk” to bring TESDA services closer to communities. Its “Green Skills Program” provides training in green technologies and renewable energy. The Philippines also has a budding engineering workforce, producing over 50,000 graduates yearly.

Takeaways

Timeline