Guidelines on the Innovation and Use of New Technology Criterion in the Ex-Ante Cost-Benefit Analysis (CBA)

August 25, 2022 FIRB ADMINISTRATIVE ORDER NO. 002-2022 FOR : All Heads of Investment Promotion Agencies SUBJECT : Guidelines on the Innovation and Use of New Technology Criterion in the Ex-Ante Cost-Benefit Analysis (CBA) SECTION I. Background . With reference to the FIRB Memorandum dated 23 June 2022, the ex-ante CBA scorecard shall include "innovation and use of new technology" as a new criterion under the target outcomes section of the ex-ante CBA. The new criterion will incentivize high-value and technology-oriented projects which will make use of Fourth Industrial Revolution (FIRe) technologies and Science, Technology and Innovation (STI) to promote advanced manufacturing, tech-powered services, precision agriculture, digitalization, and industrial transformation. SECTION II. Definition of Terms . 1. "Innovation and use of new technology" refers to the creation of new or significantly improved products, services, processes, and business models. Innovation happens when there is a new and significant improvement in the specifications or components, methods, and tools. To be considered new, (1) the resulting products, services, processes, and business models have not been produced in the Philippines on a commercial scale, or (2) the design, formula, scheme, method, process, or system of production or transformation of any element, substance or raw materials into another raw material or finished goods which is new and untried in the Philippines. 2. "High-value projects" refer to activities that produce goods or services that have a value addition 1 of at least 25% 2 and either (1) represent an upgrading towards high-value stages in the value chains and are often characterized as more complex goods and services produced using more modern operations including manufacturing, production, research and development, design, and a range of other services, or (2) produce goods or services that are predicted to be in high demand from a range of significant international markets. 3. "Technology-oriented projects" are projects with commercialized goods and services that have an intensive utilization of FIRe technologies and other state-of-the-art 3 technologies in their products, processes, or business models. 4. "Fourth Industrial Revolution or FIRe" refers to the latest wave of technological breakthroughs. FIRe is based on cyber-physical systems, 4 the merging of the physical and virtual worlds. This becomes possible through smart networked systems using embedded sensors, processors, and actuators that are designed to sense and interact with the physical world and support in real-time. 5. "FIRe technologies" build on the technologies utilized in the third industrial revolution mainly the use of automation and information, communication, and technology in production, such as the internet of things (IoT), 5 artificial intelligence, 6 robotics, big data 7 analytics, and cloud technology 8 spurring the development of new production techniques and business models that would transform global production systems, advanced digital production technologies, 9 nanotechnology, 10 biotechnology 11 and new and improved materials. AaCTcI 6. "Advanced manufacturing or smart manufacturing" is characterized by fully integrated, connected, and smart production processes, where information flows across operations and generates real-time feedback to support decision-making such as the use of smart sensors and machine-to-machine communication, cobots, 12 big data analytics, cloud computing, artificial intelligence, and 3D printing. 13 7. "Tech-powered services" are services innovated with the use of digital technologies to obtain a more efficient and effective provision of the service being offered. 8. "Precision agriculture" is the use of information communication technology (ICT) based and FIRe tools to efficiently use resources in crop production, livestock, dairy, fishing, aquaculture, and farming that would increase productivity. It is a new concept adopted throughout the world to increase production, reduce labor time, and ensure the effective management of fertilizers and irrigation processes. "Precision farming" refers to a highly controlled, accurate, and optimized agricultural production such as agrochemical application with AI-aided analysis targeting only areas that need application instead of the blanket application using remote sensors, automated hardware, and software, telematics, drones, autonomous vehicles, global positioning system (GPS) soil sampling and robotics. "Smart farming" refers to the implementation of data and information technologies to utilize labor more effectively and enhance crop quality and quantity. It enables agribusinesses to grow more with less using agri-tech tools and solutions in seeding, applying fertilizers and crop protection products, harvesting, as well as mobile devices, IoT, AI, robotics, unmanned aircraft systems, sensors and actuators, and drones. 9. "Digitalization" refers to the utilization of digital technologies to entirely transform a business process that would lead to value creation, not just merely converting analog data, documents, and elements to digital format. 10. "Industrial transformation" refers to the rapid and sustained rise of the contribution of the manufacturing sector to the economy. In FIRe, industrial transformation can be achieved through the application of the latest technologies that can exponentially increase the productivity, competitiveness, and resilience of manufacturing companies through improving products, processes and business models. SECTION III. Criteria . For a project to receive a score for the target outcome of "innovation and use of new technology," the project must satisfy ALL of the following criteria : 1. The product, service, process, or business model is innovative; 2. The project is technology oriented and utilizes FIRe technology; 3. The project is high value-adding; 4. The project promotes any of the following industries/activities: a. advanced manufacturing/smart manufacturing b. tech-powered services c. precision agriculture (precision farming and smart farming) d. digitalization e. industrial transformation; and 5. Certification from a panel of technology experts (government or the private sector/non-government entity). The certification may come from government agencies having expertise in the use and application of the new technology being applied for incentives, such as but not limited to the Department of Science and Technology (DOST), Department of Agriculture (DA), Department of Information and Communications Technology (DICT) or other relevant government entities. Experts from private groups and individuals who are knowledgeable and competent to evaluate the product and be able to provide an expert opinion on the degree of innovation, novelty, and whether FIRe technology is used. In determining whether a project satisfies the criteria, the explanation or justification should be based on factual information with verifiable evidence. The absence of such proper documentation may be considered insufficient justification to meet a certain criterion. For purposes of justifying the criteria set above, refer to "Annex A" for samples of acceptable justifications in order for the project to score under the "innovation and use of new technology" criterion in the ex-ante CBA. SECTION IV. Amendments to the Criteria . The FIRB-TC may amend or modify this issuance after considering factors such as new scientific findings, advancements in technology, economic conditions, and any other factors impacting innovation and technology. SECTION V. Effectivity . This memorandum shall take effect immediately. SDHTEC All IPA evaluators and other IPA personnel concerned are hereby directed to use this memorandum in implementing the revised ex-ante CBA scorecard applicable to tax incentives applications duly received by IPAs from 1 July 2022. (SGD.) JUVY C. DANOFRATA Assistant Secretary of Finance and Head of the FIRB Secretariat ANNEX A Checklist and Sample Acceptable Justification for the Project to Score under the "Innovation and Use of New Technology" Criterion in the Ex-Ante CBA Criteria Checklist Sample acceptable justification 14 The product, service, process, or business model is innovative. Is the product, service, process or business model new or has significant improvement? The activity implements new or greatly improved production or delivery methods, including a major change in technique, equipment, or software not yet tried in the Philippines. The company introduces a product that has not been commercially produced in the Philippines. The project is technology oriented and utilizes FIRe technology. Does the project have an intensive utilization of FIRe and state-of-the-art technologies in their products, processes or business models? Does the technology involve utilization of automation and information, communication and technology in production, such as the internet of things (IoT), artificial intelligence, robotics, big data analytics, and cloud technology? The company is using the latest available technology and it utilizes artificial intelligence in its processes. The project is high value-adding. Does the activity produce goods or services that have a value addition of at least 25% and upgrade the existing output to higher stages in the value chain? Does the activity produce goods or services that have a value addition of least 25% and are the products predicted to be in high demand from a range of significant international markets? The goods produced have a value addition of 30% and the goods produced represent one step higher in the value chain. The goods produced have a value addition of 25% and are currently demanded by various buyers in international markets. The project promotes any of the following industries/activities: 1. advanced manufacturing 2. tech-powered services 3. precision agriculture 4. digitalization and 5. industrial transformation. Is the manufacturing process characterized by a fully integrated, connected and smart production process? The company uses smart sensors, machine to machine communication, cobots, big data analytics, cloud computing, artificial intelligence or 3D printing. Does the activity use ICT-based and FIRe technologies to efficiently use resources in crop production, livestock, dairy, fishing, aquaculture and farming? The company uses high technology sensor and analysis tools to increase production, reduce labor time and ensure the effective management of fertilizers and irrigation processes. The company is using a (GPS), laser land levelers, GPS tractor guidance systems and variable rate input applications which allow farm operators to calibrate their operations and achieve new levels of efficiency. Does the activity utilize digital technologies to transform a business process that would lead to value creation? The activity uses digital technology to transform the reporting processes, collecting and analyzing data in real-time and using insights to mitigate risk and promote efficiency. Does the entity harness technology to change or streamline its legacy 15 processes? The company embraces technologies and innovation at all levels of its operations. Does the company contribute to the rise of the manufacturing sector of the economy by using the latest technologies? The company applies FIRe technologies that can exponentially increase the productivity, competitiveness, and resilience of manufacturing companies through improving products, processes, and business models. Footnotes 1. "Value-added" refers to the measure of output net of intermediate consumption which includes the value of materials and supplies used in production, fuels and electricity consumed, the cost of industrial services such as payments for contract and commission work, and repair and maintenance, the compensation of employees, the operating surplus and the consumption of fixed capital. 2. The 25% value addition threshold is patterned after Sec. D (l) (3) (b) of the 2020 Investment Priority Plan (IPP) Guidelines. The value addition of the product or service is computed by getting the ratio of the gross profit ( i.e. , net sales less cost of sales) over the net sales during the period that the project is receiving incentives. Cost of sales represents the direct expenses incurred such as direct materials, direct labor and other fixed costs related to the production of goods or services. 3. "State-of-the-art technology" is the up to date or latest technology available. 4. "Cyber physical system" is a networked system with embedded intelligent sensors, processors and actuators, designed to sense and interact with the physical world and support production in real time, guaranteeing performance in applications and allowing machine-to-machine or product-to machine communication about how to proceed. 5. "The Internet of Things (IoT)" refers to the increasing number of everyday devices and objects that are connected to the internet to gather and transmit data. 6. "Artificial Intelligence (AI)" can be defined as making computers intelligent and capable of mimicking and predicting human behavior and solving problems as well as or better than humans. 7. "Big data" refers to the exponential explosion in the amount of data being generated in the increasingly digital age. Big data analytics refers to the techniques and technologies that allow voluminous machine-readable data to be generated, stored, accessed, processed and analysed to uncover valuable information patterns, correlations, trends and preferences that can help organizations make informed decisions. 8. "Cloud technology" is storing and accessing programs and data through the internet. 9. Advanced digital production technologies combine hardware (advanced robots and 3D printers), software (big data analytics, cloud computing and artificial intelligence) and connectivity (the IoT). 10. "Nanotechnology" is the manipulation of materials on an atomic or molecular scale especially to build microscopic devices such as robots. 11. "Biotechnology" is the manipulation, through genetic engineering, of living organisms or their components to produce useful, usually commercial products such as pest resistant crops, new bacterial strains, or novel pharmaceuticals. 12. "Cobot" is a collaborative robot that physically interacts with humans. The cobots are designed to learn new tasks and built with passive compliance features and integrated sensors to adapt to external forces. 13. "3D printing" refers to the use of special printers to create three dimensional physical objects from 3D model data by adding layer upon layer through material extrusion, directed energy deposition, material jetting, binder jetting, sheet lamination, vat polymerization and powder bed fusion. 14. In the justification, the IPA or RBE should be able to properly document their assessment that the project or activity meets all of the criteria stated above based on factual information and verifiable evidence. This sample shall not be considered exhaustive. 15. "Legacy system" is an old or outdated system, technology or software application that continues to be used by an organization because it still performs the functions it was initially intended to do.