Trade and Industry Undersecretary Elmer C. Hernandez, who is also managing head of the Board of Investments, said that following the Cabinet’s approval, the President is expected to sign an Executive Order signalling the country’s readiness to grant a package of incentives to investments in these preferred areas of activities.

In the case of cement projects, Hernandez explained that if the project is up to the production only of clinker, the raw material in cement manufacturing, this should only be granted with the incentives under the Mining Act, a among the mandatory inclusions in the IPP.

The law grants a better package of incentives to mining activities including clinker production activities aside from the incentives under Executive Order 226.

These additional incentives are provided under the Mining Act under Sections 91, 92 and 93.

Section 91 provides incentives for pollution control devices acquired, constructed or installed by contractors shall not be considered as improvements on the and or building where they are placed, and shall not be subject to real property and other taxes or assessments.

Section 92 provides for income tax-carry forward of losses, wherein a net operating loss without the benefit of incentives incurred in any of the first ten (10) years of operations may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds the taxable income of such fist year shall be deducted in like manner from the taxable income of the next remaining four (4) years.

Section 93 provides for income tax-accelerated depreciation wherein fixed assets may be depreciated as follows: (a) To the extent of not more than twice as fast as the normal rate of depreciation or depreciated at normal rate of depreciation if the expected life is ten (10) years or less; or b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income.

But if the activity already involves clinker production and cement manufacturing, Hernandez said this would be granted incentives under EO 226 only that includes income tax holiday, preferential duty-free importation of capital equipment, employment of foreign nationals among others.

The BoI has decided to restore incentives to new cement projects to encourage new investments in this sector, which is expected to avert a shortage in supply by 2010.

The BoI based its supply-demand projection on the 12 percent growth on the construction industry as projected under the Medium Term Philippine Development Program (MTPDP).

According to BoI, CeMAP data showed that total industry’s kiln capacity is placed at 462 million bags a year. Local cement demand in 2005 was at 265 million bags.

Based on the 12 percent annual growth of the construction industry, demand is expected to reach 468 million bags by 2010 as against total industry capacity of 462 million bags.

This means that while there is a surplus in local cement supply until 2009, shortage in supply is expected by 2010. Cement consumption is based on the growth of the construction industry.

The BoI has also taken into consideration the long gestation period of between three to three and a half years to construct a cement plant.

It could be recalled that since the delisting of cement production in the IPP three years ago, no new cement plant was put up.

What happened was pure acquisitions of existing plants by global players such as CEMEX, Lafarge and Holcim. What remains now are two small cement plants, the Northern Cement and Pacific Cement in Surigao.

The industry has also enjoyed government protection against imports with the imposition of safeguard measures a couple of years back.

An estimated investments of $ 1 billion have been poured by the three global cement plants to gobble up local cement plants.

Among the big three cement players, Lafarge has the biggest capacity with 7.7 million MT with its seven plants, Holcim’s four cement plants have a combined capacity 7.238 million MT and Cemex with 4.6 million MT.

The BoI move to restore incentives to cement production was also supported by the Chamber of Real Estate Builders Association and other local construction organizations.

But domestic cement producers have strongly opposed the BoI decision saying the annual 12 percent assumed growth in the construction industry for the next five years as basis for the reopening of the industry and the granting of incentives to new entrants.

In a letter to the Department of Trade and Industry, the Cement Manufacturers Association of the Philippines (CeMAP) Inc. said the 12 percent annual growth projection in the construction sector is too optimistic.

CeMAP president Ernesto M. Ordonez explained the assumption of 12 percent growth of construction for the next five years is most probably current and not constant economics.

"This very optimistic projection can be compared to the actual performance of 6.4 percent growth in current economics and 0.2 percent growth in constant in the last 6 years," Ordonez said.

CeMAP explained that given the data from 2000 to 2005, construction growth at current economics of 6.4 percent showed cement growth actually declining at negative 1.1 percent.

"If we assume that for every 6 percent construction growth in current economics, there is a 1 percent growth in cement even though the last 6 years shows a decline, then a 12 percent growth in construction will be accompanied by a 2 percent growth in cement," Ordonez said.

The letter further added that the country’s current cement capacity utilization is only at over 60 percent.

Assuming the high rate of 12 percent growth in current economics for construction in the next five years, cement, at a 1:6 ratio with construction, will grow only at 2 percent annually.

Capacity utilization therefore by the end of five years will still be 72 percent of the existing total capacity of the local cement producers.

"There is no way that we will have inadequate cement capacity in 2010," the CeMAP letter said.

By granting incentives to new cement projects, CeMAP said, only places at a disadvantage those who have already invested in cement, whose capacities will still be underutilized in 2010.

According to CeMAP foreign investors in existing local cement plants have not recovered yet their expected return on investments.

"We will further aggravate their situation if we give tax incentives to new entrants in cement, a punishment to these investors who came in to help us in our cement industry which is still having serious difficulty with their low capacity utilization today," CeMAP said. (BCM)