STRATEGIC INVESTMENT PRIORITIES PLANTax Reform for Attracting Better and High-quality

Opportunities (as approved on 3rd reading HB 8083)

RAFAELITA M. ALDABADEPARTMENT OF TRADE AND INDUSTRY-BOARD OF INVESTMENTS22 November 2018 PICC

Agenda

Inclusive Growth: Need for Economic Transformation

SIPP : Areas for Investment Promotion

-- Evaluation Framework

-- Emerging SIPP Sectors & Activities

Inclusive growth needs a national

strategy for productive transformation

Recent growth has laid foundation for inclusiveness, but

• Unemployment & underemployment have remained high

• Manufacturing share remained unchanged• Poverty & inequality persisted

Inclusiveness requires high & sustained growth, poverty reduction & social protection programs, pro-active growth policies & industrial strategy to create jobs

i3S: sustain manufacturing growth for job creation & poverty reduction

• manufacturing can create labor-intensive & new & high productivity jobs for low, medium, high-skilled workers

• Increase skills of the poor thru greater access to education

• Improve productivity in agriculture where half of the poor are

Part 1

inclusive innovation industrial (i3S) & Comprehensive National Industrial Strategy

• Integrate industries, close industry supply chain gaps, address fragmentation of production systems

4

MANUFACTURINGDriver for structural

change

SERVICESGlue that binds all sectors together

AGRIBUSINESSCatalyst to drive

regional transformation

INTERNAL FACTORS: GOVERNMENT POLICIES &PROGRAMS, INSTITUTIONS, INFRASTRUCTURE, MACRO STABILITY, RULE OF LAW,

PEACE & ORDER, POLITICAL CLIMATE

EXTERNAL FACTORS: GLOBALIZATION, REGIONAL/BILATERAL/MULTILATERAL TRADING ARRANGEMENTS, GLOBAL & REGIONAL PRODUCTION NETWORKS

Why do we need an industrial policyLessons Learned from Countries That Had Successful

Transformation • Most countries that successfully transformed from an agrarian to a modern

economy pursued an IP

• 7%+ average growth for 25+ years (Growth Commission 2008)o Fully exploited the world economyo Maintained macroeconomic stabilityo High saving & investment: 25%+ national saving rateo Allowed markets to allocate resourceso Had committed, credible, & capable governmentso Industrial policy: way to jump-start process subject to certain disciplines

• IP debate: how to design & govern industry policies; right balance between doing too little & intervening too much

What is the right level of government intervention

No intervention Market enhancingNon targeted SSP Targeted SSP

No intervention Market enhancingProviding business information systems, trouble shooting for investors

Non-targeted SSPGeneral export promotion, incentives for R&D

Targeted SSPSpecific activities or technologies, clusters, value chains, skills development, dedicated labs

1980s-1990s 2000-2010 1990s-early 2000s early 2014 -present

Trade LiberalizationTariff reduction programRemoval of non tariff barriersPrivatizationServices LiberalizationInvestment liberalization

Trade facilitation Customs reformsNational Single WindowCompetition Law (2015)

General export promotion: PEZA, Clark, Subic, & other IPAsGeneral industry promotion: BOI IPPAutomotive: MVDP Program

Manufacturing Resurgence Program: CARS Program (ongoing)Eco-PUV Modernization

The figure is adapted from Alterburg 2015.

Industrial Policy in Thailand & Malaysia

GDP/capita (current)

• Thailand 1997 Industrial Restructuring Program US$1.19 B: soft loans, technical assistance to 13 industries (textile, garments, furniture, auto, chemicals, electrical appliances, electronics)

• Malaysia 7th Plan ‘95-’00: new industrial policy to move to high-tech manufacturing, budget allocation RM2.5B (integrated steel mill, wafer fabrication, aerospace, petrochemical)

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Shar

e, in

%

Manufacturing Share 1981-2011

PH TH MAL INDO

MFG GROWTH PHILS THAI1982-85 -4.2 4.71986-90 5.1 15.11991-95 2.1 12.11996-00 3.2 3.022001-05 4.3 6.522006-10 3.9 4.74

EMP SHARE PHILS THAI

1981-85 9.7 7.51986-90 9.9 8.11991-95 10.3 11.11996-00 10.1 13.52001-05 9.5 14.82006-10 8.7 14.9 7

Country 2012 1980

PH $2,588 $685

TH $5,474 $683

i3S Policy Directions• Late industrial latecomer, cannot copy other countries’ IP strategies

o Upgrading in GVCs offer opportunities but entry not easyo High entry barriers in the global economy & GVCso Industry 4.0 & impact on our industries

• Innovation focus o craft correct pace for reform & provide temporary support while

allowing for technological learning

• Industry support programs: no one size fits all approach, need to understand each industry, strategic measures tailored to specific industry circumstanceso more specific programs to support emerging industries, integration

in global value chains, linkages promotiono create space for MSMEs, parts & components suppliers o a more modern BOI Omnibus Investment Codeo walk on two legs to support both domestic & global markets, lower

70% export requirement in ecozones8

Strategic Investments Priority Plan

(SIPP)

• BOI, in coordination with the OP, IPAs, and other government agencies & industries shall formulate the SIPP

• Validity period: 3 years subject to review and amendment• BOI: carry out an evaluation process to determine the

suitability & potential of industry or sector in promoting long-term growth & development and the national interest

• Include activities covered by the Philippine Development Plan & other government programs

• Identify agribusiness activities, less developed areas or recovering from armed conflict or major disaster• Identify services & activities that can spur regional or

global operations in the country• Include existing registered products before effectivity

of TRABAHO Act that shall relocate from Metro Manila to other areas of the country

Part 2

Strategic Investment

Priority Plan Evaluation Guidelines

SIPP activity shall take the following into account

• substantial amount of investments; • considerable generation of employment; • adopt inclusive business activities and value-

added production by MSMEs;

• use of modern or new technology; • adoption of adequate environmental protection

systems

• address missing gaps in the supply/value chain or move up the value chain or product ladder; or

• promotion of market competitiveness

Framework for Discovering New Industries

Step 3. recommend measures to overcome constraints, upgrade industry, make open markets work

protection of property rights, improvement of overall business & investment environment, R&D, industrial clusters, economic zones

time-bound, performance-based incentives, direct credits, access to raw materials & capital equipment, GVC participation

Step 2. identify obstacles preventing firms from upgrading or entering power, shipping, logistics costs, bureaucracy, red tape, policy uncertainty, weak enforcement of laws, etc

high cost & lack of raw materials, absence of upstream/downstream industries, lack of scale, risks

Step 1. identify existing growth potentials of industry domestic & exporttrade & other economic indicators, benchmarking, domestic & global value chain analysis, industry roadmaps

investment size, employment, spill-over effects/multiplier (forward & backward)

Bad Infrastructure

Low Levels of Private Investment and Entrepreneurship

Low Return to Economic Activity

High Cost of Finance

Low Social Returns

Low Appropriability

Poor Geography

Low Human Capital

Bad International Finance

Bad Local Finance

Low Domestic Savings

Poor Intermedia-

tion

Government Failures Market Failures

Micro Risks: Property rights,

Corruption, Taxes

Macro Risks: Financial,

Monetary, Fiscal Instability

Information Externalities:

“Self-Discovery”

Coordination Externalities

Hausman, Ricardo & Velasco Framework : are there market failures & will incentives solve the problem

• Growth diagnostics – strategy for figuring out policy priorities, develop growth strategies based on opportunities & constraints

1. Employment contribution? H, M, L2. Potential to move up the value chain, Latent comparative advantage? H, M, L

3. Spill over effects and forward & backward linkages? H, M, L4. Create competitive market? H, M, L

A SUPPLY GAP?* UPSTREAM * MIDSTREAM * DOWNSTREAM * GEOGRAPHIC

MOST BINDING CONSTRAINTS PREVENTING ENTRY AND/OR

MOVING UP VALUE CHAINHOW TO MAINTAIN COMPETITIVENESS

Y N

HIGH PRODUCTION COST• Power • Logistics• Raw Materials• Lack of scale

HIGH RISKS• Huge Capital requirements• New Technology

HUMAN CAPITAL• Skills Gap• Labor mismatch

OTHERS• Financing • Competition• Standards, quality, etc.

GOVERNMENT POLICIES• Tax• Labor• Foreign Equity Restriction

GOVERNMENT REGULATIONS• Licenses• Smuggling

POLICY RESPONSE

INCENTIVES + OTHER POLICIES(WITHOUT INCENTIVES)

FRAMEWORK FOR PRIORITIZATION OF ECONOMIC ACTIVITIES

HOW TO MAINTAIN

COMPETITIVENESS

MOST BINDING

CONTRAINTS PREVENTING

ENTRY AND /OR MOVING

UP VALUE CHAIN

HIGH PRODUCTION COST

• High costs of raw materials• Logistics problem: import/export lead times

HIGH RISKS

• High risk due to huge capital requirement to invest in new

technology

•Expensive, tedious and time-consuming accreditation for potential entrants to the

aerospace industry

Application of framework to the AEROSPACE PARTS Industry

POLICY RESPONSE

• Incentives for aerospace parts and components manufacturing to attract major OEMs and Tier 1 suppliers.

• Incentives for potential investors on process capabilities

Support trade facilitation for imported raw materials, support training

programs and certifications among suppliers, support technology

upgrade to conform to industry standards

1. Employment contribution?

2013: 2,200 jobs; 2022:14,932 jobs.

2. Potential to move up the value chain, Latent

comparative advantagemore aerospace mfg. activities, aside from

machining, design, aerospace electronics

3. Spill over effects and forward & backward

linkages?

Backward : tool and die, metalworking equipment, chemicals, plastic, rubber,

electronics, logistics, machining, special

processing, chemical and metallurgical testing,

fine machining

Forward : packaging, logistics

N

Y

SUPPLY CHAIN GAPS in the process capability:

• High-end machine tools & metrology equipment• Fine Machining • Heat treat, surface treatment process

• Gear manufacturing• Non-destructive inspection (NDI) and

plating/metallurgical• General functional testing for compliance to aerospace requirements

• Chemical test/ solution test compliance to aerospace requirements

* Trade facilitation / integration of supply chain:• Raw material supply/distribution (MIL/AMS Specs)

• Transport and import/export turn-around• Tooling & chemical supply distribution

1 Top Priorities for Both Domestic & Export Markets

Electrical & Electronics

Auto & Auto Parts

Aerospace Parts & MRO

Chemicals

Shipbuilding, ship repair

Furniture, Garments, Textile

Tool & Die, Iron & Steel

Agri-business Innovation, R&D

Transport, Logistics, Construction

Climate Change

Criteria: modern technology, innovation, infrastructure, regional imbalance, labor-intensity, environmental protection, spill-over effects, value/supply chain linkages

IT BPM, Creative

Social Services

Efficiency seeking or competing in highly contestable markets

Sectors in transition

Parts, Components, Inclusive Business

1. coffee, cacao, processed fruits, processed meat, tourism

2. processed fruits, processed meat, coffee, furniture, cacao, agribusiness

3. bamboo, furniture, aerospace, processed meat, shipbuilding, aerospace

4A. auto, electronics, petrochemical, IT-BPM, chemicals, aerospace

4B. seaweed, tablea, rubber, coco coir, tourism

5. metal casting, coco coir, health care, agribusiness

6. processed meat, processed shrimp, tourism

7. seaweed/carrageenan, dried mangoes, furniture, IT-BPM, shipbuilding, tourism

8. processed meat, copper, processed marine, processed fruits, natural health, agribusiness

9. Rubber & rubber prods, coconut & coconut prods, fish & fish prods, mango & mango prods, seaweed & seaweed prods 10. rubber, bamboo, cacao, coco

coir, coffee, agribusiness, tourism11. processed meat, seaweed/carrageenan, cacao/tablea, agribusiness, tourism

12. rubber, palm oil, processed fish/aquamarine, tourism, agribusiness

13. processed marine, palm oil, rubber, agribusiness

CAR: coffee, processed vegetables, aerospace, electronics, tourism

ARMM: coffee, rubber, cacao, palm oil, agribusiness

Regional Industry Priorities

Upgrading Trajectories for Selected IndustriesIndustry Specific Activities

Electronics & electrical R&D, IC design, expansion facilities for advanced products & technologies (IoT, robotics, drones, AR, cognitive cloud, 3D printing), auto electronics (GPS, infotainment, wireless communication modules, telematics, autonomous vehicle sensors, VR systems, onboard computers, microprocessors ), aerospace electronics, batteries, consumer electronics

Automotive Auto electronics, ADAS components, engineering services outsourcing, sensors, motors, automatic transmission, metal casting, forging products, machining products, electric motor powertrains like battery, charging facilities, EV assembly

Aerospace parts & MRO Flight control actuation systems, servo actuators, servo valves, galley inserts, structures & equipment, seat parts, lavatories, interior fit-out, panel assembly, electronics, airframes & sub-assemblies; MRO: base & line maintenance for commercial aviation

IT-BPM & creative Engineering services outsourcing, data analytics, legal process outsourcing, health information management (preventive health, remote), animation & game development (3D, AR/VR), IT services, global-in-house, services embedded in manufacturing (R&D, design), modern voice services (omnichannel delivery)

Chemicals Petrochemicals, oleo chemicals, basic chemicals, plastics

Priority Industries & ActivitiesIndustry Sector Specific ActivitiesAgribusiness Production & processing of high value crops like mangoes, bananas, nuts, coffee,

cacao, coconut, & other resource-based industries

Shipbuilding & Ship-repair RORO as well as small- and medium-sized vessels

Furniture, garments, textile Manufacturing & design

Iron & steel, Tool & die Integrated steel manufacturing; manufacturing, design

Construction, Infrastructure, Transport, Logistics, & other infrastructure linked with manufacturing & tourism

Mass housing, land, air, & water transport, airports & seaports, LNG storage & regasification facility, bulk water treatment, industrial waste treatment, warehousing, support facilities for transport, infrastructure linked with tourism & manufacturing, domestic ecozones

Innovation & R&D activities Commercialization of R&D investments, business incubators, accelerators, rapid prototyping & demonstration facilities, R&D labs, science parks

Supplier Parts Development, inclusive Business

Companies sourcing their raw materials, intermediate parts & components & services especially those produced by MSMEs; manufacturers of parts & components & services esp those that are linked with priority industries

Environment, climate change, energy efficiency activities

Investments in low carbon technologies & technologies to improve energy efficiency

Priority Industries & ActivitiesIndustry Sector DescriptionEfficiency seeking activities in highly contestable markets

operating in highly contestable markets in both export and domestic sectors including those that would use the domestic market as platform to become a future export hub

Sectors in transition (covered by special laws)

Industrial Tree Plantation (P.D. No. 705); Exploration, Mining, Quarrying and Processing of Minerals (R.A. No. 7942) (limited to capital equipment incentives); Publication or Printing of Books Textbooks (R.A. No. 8047);Refining, Storage, Marketing, and 5. Distribution of Petroleum Products (R.A. No. 8479); Rehabilitation, Self-Development and Self-Reliance of Persons with Disability (R.A. No. 7277); Renewable Energy (R.A. No. 9513); Tourism (R.A. No. 9593) - Tourist transport , Tourism-related facilities, Accommodation facilities, Tourism Training Centers and Institutes, Health and Wellness, Retirement VillageRestoration/ preservation and operation of historical shrines, landmarks and structures

Social services Healthcare services including drug rehabilitation, education, training facilities

BOI IPP Preferred Activities

1. All Qualified Manufacturing Activities including Agro-Processing2. Agriculture, Fishery, and Forestry3. Strategic Services• IC Design• Creative Industries/Knowledge-Based Services• Maintenance, Repair, and Overhaul (MRO) of

Aircraft• Charging/Refueling Stations for Alternative Energy

Vehicles• Industrial Waste Treatment• Telecommunications• State-of-the-art Engineering, Procurement, and

Construction4.Healthcare Services including Drug Rehabilitation Centers5. Mass Housing• Economic and Low Cost Housing• In-City Low Cost Housing for Lease

6. Infrastructure and Logistics including LGU-PPPs• Airports and seaports (includes RO-RO ports) for cargo

and passenger• Air, land and water transport

i. Air Transport ii. Land Mass Transportiii. Water Transportiv. Mass Rail

• (LNG Storage and Regasification Facility • Pipeline for Oil and Gas• Bulk Water Treatment and Supply • Training/Learning Facilities• Testing Laboratories• Domestic Industrial Zones• PPP Projects• Tollways

Preferred Activities (cont’d)

7. Innovation Drivers

• Research and Development• Centers of Excellence (COE)• Innovation Centers, Business Incubation Hubs,

Fabrication Laboratories (FabLabs)/ Co-working Spaces

• Commercialization of New and Emerging Technologieso Agricultural biotechnology toolso Disaster mitigation/prevention hardware or software.o Hardware or software for increasing agricultural

productivity

o Mechanized means for natural resources conservation

o Portable technologieso Hardware or software for the prevention of disease

outbreaks

o Remote monitoring devices or systemso Professional services for remote sensingo Hardware or software for the upgrading of local

industries

o Photonicso Nanotechnology.• Natural health products

8. Inclusive Business Models

9. Environment or Climate Change-Related Projects

10. Energy

BOI IPP Preferred Activities

Export Activities Special Laws

1. Production and Manufacture of Export Products

2. Services Exports*

3. Activities in Support of Exporters

*Contact centers and non-voice business processing activities that will be located in Metro Manila may no longer be qualified for incentives availment with the Board of Investments under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended, by year 2020.

1. Industrial Tree Plantation (P.D. No. 705)

2. Exploration, Mining, Quarrying and Processing of Minerals(R.A. No. 7942) (limited to capital equipment incentives)

3. Publication or Printing of Books Textbooks (R.A. No. 8047)

4. Refining, Storage, Marketing, and Distribution of Petroleum Products (R.A. No. 8479)

5. Rehabilitation, Self-Development and Self-Reliance of Persons with Disability (R.A. No. 7277)

6. Renewable Energy (R.A. No. 9513)

7. Tourism (R.A. No. 9593)• Tourist transport• Tourism-related facilitieso Accommodation facilitieso Tourism Training Centers and Instituteso Health and Wellness• Retirement Village• Restoration/ preservation and operation of historical shrines,

landmarks and structures.

What is an innovative product or service

• implementation of new or significantly improved products, services, or processes

• introduction of a new marketing or organizational method in business practices, workplace organization or external relations in response to problems, challenges, or opportunities arising in the social and economic environment (OECD 2007)

• result of new combinations of existing knowledge, capabilities, and resources

• includes low-tech and high-tech activities occurring across all industries, as well as in both the private and public sectors

• may not necessarily mean “new to the world,” but can also refer to something that is new to producers or users

• does not have to be disruptive – like a product using artificial intelligence or robotics – but may be an incremental improvement or upgrading of a process or product, like making more energy efficient motors or engines

SIPP Evaluation Process:

Summing Up

• Selection Criteria & Guidelineso Investment size o Employmento Spill-over effects/multiplier (forward & backward)o Value added contributiono Innovation: product upgrading, process upgrading -

technology o Regional impacto Competition impact

• Fiscal &/or non-fiscal supporto ITHo RCITo Additional deductionso Regulatory & policy reforms, ease of doing

business, promotion & marketing, capital & technology access for MSMEs

• Special programs for selected priority industries especially to make them Industry 4.0 ready