The Manufacturing Investment Programme Offered by the DTI

The Department of Trade and Industry (DTI) has implemented the Manufacturing Investment Programme (MIP), designed to stimulate investment growth, in line with the South African government’s National Industrial Policy Framework. The primary objective of the Manufacturing Investment Programme is to stimulate investment within manufacturing.

The Manufacturing Investment Programme aims to enhance the sustainability of manufacturing investment projects by small enterprises and to support large-to-medium sized investment projects in manufacturing that would otherwise not be established without the grant.

The Manufacturing Investment Programme provides investment to both local- and foreign-owned entities, by offering an investment grant of up to 30 % of the value of qualifying investment costs in machinery, equipment, commercial vehicles, land and buildings, required for establishing a new production facility; expanding an existing production facility; or upgrading production capability in an existing clothing and textile production facility.

The applicable investment grant is as follows:

Investment projects of R5 million and below may qualify for an investment grant equal to 30 % of their total qualifying investment cost, payable over a 3-year period.
Investment projects of above R5 million may qualify for an investment grant of between 15 and 30 % of their qualifying investment costs, calculated on a regressive scale, and payable over a period of 2 years. This investment grant cannot exceed R30 million.
Foreign investment projects may qualify for an additional grant for the cost of transporting their qualifying machinery and equipment to South Africa. The additional grant is the lower of 15 % of the value of qualifying imported machinery and equipment or the actual transport costs of relocating qualifying new machinery and equipment from abroad to a maximum of R10 million.

The Manufacturing Investment Programme incentive is offered in conjunction with other instruments already available through the provisions of the Income Tax Act 58 of 1962, which the government is implementing to stimulate investment, including the accelerated depreciation on investment assets; graduated tax rates applicable to small enterprises; and tax incentives applicable to research and development capital expenditure.

Mandatory Conditions:

The applicant must be a registered legal entity in South Africa in terms of the Companies Act, Close Corporations Act, and the Co-operatives Act. “Not for profit or gain” organisations are specifically excluded from applying.
Where a project was trading as a sole proprietor, partnership, or trust, and converts to a qualifying registered legal entity in order to apply for an expansion project, such a project must submit the full financial statements of the previous legal entity as proof of its base year. Such financials should have been accepted by the South African Revenue Services (SARS).
The applicant must be a taxpayer in good standing and must provide a valid tax clearance certificate before the grant is disbursed. The project for which an application is being lodged must constitute a new production facility; expansion of an existing production facility; or upgrading of production capability in an existing clothing and textile production facility. The cost of the qualifying investment in machinery, equipment, land and buildings, and commercial vehicles will be capped at R200 million.
The project must be classifiable as manufacturing (SIC code 3) in terms of the “Standard Industrial Classification of all Economic Activities”. The project and its activities must comply with all applicable South African legislation that could materially affect the project, and pay minimum wages as gazetted.
Projects should apply and receive approval from the DTI before investment assets are taken into commercial production. Any project taken into production before approval by the DTI will be considered as non-qualifying.
- Projects will not be considered earlier than 12 months, or less than 3 months, before the planned commencement date of production.
- After the 3 months has elapsed and a project has not yet received a decision on its application from the DTI, such a project may take its qualifying asset investment assets into production, and such investment assets will not be disqualified on the basis of having been in production before approval, however the project should notify the DTI in writing of their intention to take qualifying assets into production before approval.
- In instances where the lead time for delivering specific machinery and equipment or other qualifying assets exceed a 12 month period, the application can be considered earlier than 12 months before the commencement of the date of production. The project applicant will need to submit confirmation from the supplier of the asset, confirming lead times and expected delivery dates for the assets.

Evaluation Criteria of the Manufacturing Investment Programme

Small Projects (Investment Projects of R5 million and below)

The applicant must demonstrate commitment to the planned investment project. The DTI will consider:
- The financing structure for the project;
- That the finance sourced together with the grant is adequate in relation to the requirements of the project; and
- That there is evidence of commitment to fund the project from the financiers that form part of the funding structure of the project. (Conditional approval for the MIP grant may be given to qualifying projects that wish to use the grant to leverage other sources of funding).
The project must be financially viable, subject to the provisions being realistic and reasonable.
The applicant must substantiate a need for financial grant assistance and the application must indicate how the grant will be used to improve the financial viability of the planned project.
The applicant must provide business plan information indicating customers, competitors, competitive advantage, technology, marketing, and management.
The project must achieve a minimum score of 50 for contribution to industrial policy targets:
- Contribution to B-BBEE as measured in terms of the Code of Good Practice for B-BBEE.
- Jobs created per million Rand qualifying investment made.

Medium-to-Large Projects (Investment Projects of above R5 million)

The applicant must demonstrate how the grant is necessary for the project to proceed. Projects are expected to explore other sources of funding before seeking grant funding. The principle is to use the incentive to:
- Fill funding gaps where there is not sufficient equity capitalisation for the project;
- Fill funding gaps where cash flows cannot support more third party debt; and
- Influence location of the project in favour of South Africa in cases where the investor is considering other countries for locating the project.
The project must achieve a minimum score of 4 points to industrial policy targets. These points relate to the following economic benefit criteria – investment within the priority sectors, creation and sustainability of direct employment, and B-BBEE compliance and location in areas advancing spatial economic activities.
- An investment project that is classifiable under the lead sectors prioritised in terms of the National Industrial Policy Framework (NIPF) and its Action Plan. 4 points are allocated to applying entities where the applicant project involves downstream manufacturing activities classifiable under the following sectors: Capital / transport equipment and Metals fabrication; Chemicals, plastic fabrication and Pharmaceuticals; Furniture; and Automotive and components.
- Jobs created per million Rand qualifying investment made.
- Compliance with B-BBEE.
Machinery and equipment, at cost, will exclude any office furniture and equipment.
The investment in qualifying land and buildings must constitute newly-acquired land and buildings at cost, whether as part of a new project or expansion, and must be owned by the applying entity. Land costs must be directly associated with the purchase, renovation, or construction of a new production facility for the investment project under consideration, and must be located on land that has been zoned for mixed use, industrial, agricultural, or commercial activity. Calculation of the investment grant, with respect to land and buildings, will be based on the amount of the factory and administrative space utilised. The qualifying costs in land and buildings are limited to cost of the qualifying machinery and equipment.
The lease for land and buildings may not exceed 20 % of the cost of qualifying machinery and equipment. The cost of leased land and buildings is capitalised for 5 years. It is calculated at the rental cost for year 1 multiplied by 5.
Where the application leases land and buildings from a connected party, the actual net rental paid as per income statement will be capitalised, and must be verified by the auditor or accredited person or professional evaluator that it is of fair market value. VAT and rates and taxes are excluded from this calculation. This may not exceed 20 % of the cost of qualifying machinery and equipment.
Commercial vehicles (owned or capitalised financial lease). Only eligible if such vehicles are for use on the production site, and / or have been customised to perform a particular business function.
Second-hand machinery and equipment, and commercial vehicles, can be regarded as qualifying investment costs provided they meet the qualifying conditions –
- The purchase of these assets must be at arms length. The assets may be acquired locally or internationally from existing project(s), a liquidation sale, public auction, through an offer directly to the liquidator, or a bona fide machine dealer. The applicant must provide the liquidation order or auctioneer report reflecting the source of the relevant machinery and equipment.
- All imported second-hand assets must be accompanied by an engineer’s report certifying the level of technology to be equivalent or better than the level currently in use in South Africa. The intention is to ensure that assets brought into the local industry are of an acceptable level of technology and fair value.
- Applying projects that are black / women-owned, and all projects with investment of R5 million and below, may invest up to 100 % in second-hand assets, without making an equivalent investment in new assets.
- Investments in vehicles may not exceed 20 % of the qualifying investment in machinery and equipment.
- The purchase of second-hand machinery and equipment by projects with investments of above R5 million are subject to the following additional rules –
  - The project must invest in new machinery and equipment at a cost equal to 100 % of the qualifying second-hand machinery and equipment as approved in the entity’s Manufacturing Investment Programme application, before the end of the first full financial year; and
  - In calculating the equivalent investment in new machinery and equipment, any investment in new commercial vehicles will be excluded.

Non-qualifying Assets / Investment Costs:

Assets acquired by way of an operational lease agreement;
Passenger vehicles; collection, delivery, distribution and vehicles not complying with commercial use;
Damaged assets or assets not utilised for the qualifying production process;
Revaluated assets;
VAT and finance charges on assets;
Rates and taxes;
Farms, smallholdings, and residential land;
Assets acquired between connected parties (transactions pertaining to the acquisition of investment assets at non-arm’s length). In instances where the connected party is a machine dealer, these assets will qualify on condition that the auditor or independent professional Consulting Engineer confirms that the cost is a fair and true reflection of the market value. Land and buildings acquired from a connected party will qualify.

General Exclusions and Limitations:

Entities that are already receiving Small Medium Enterprise Development (SMEDP) incentives approved on recommendation by the Manufacturing Development Board (MDB) and those with any approved Manufacturing Investment Programme projects, do not qualify for additional Manufacturing Investment Programme incentives until submission to the DTI of the final claim under the relevant agreement.
Entities already receiving incentives approved on recommendation by the MDB, may not attempt to convert existing incentive approvals to the MIP incentive.
An entity may only apply for 1 project manufacturing generically the same products / similar products, be it a new project, expansion or upgrading, per district or metropolitan municipality area. Entities planning a number of investments within a period of 3 years, across different metropolitan areas or district municipalities, should record their intentions in writing to the DTI and discuss their investment proposals with the DTI, prior to submitting their applications, in order to determine the eligibility of these projects.
The project applicant must notify the DTI in writing within 30 calendar days of the commencement date of production, as indicated in the approval letter. The DTI must also be notified in writing of any changes in the commencement date of production. The new commencement date must be no more than 120 calendar days of the original approved commencement date.
The DTI reserves the right to withhold, reject, or terminate approval for projects seen to be circumventing the rules of the incentive programme. The entity may not change the facts in its application in order to have the entity’s project meet the prerequisites for qualification, when it does not meet the appropriate criteria. If the DTI finds that the entity tried to circumvent or circumvented these guidelines, the entity will automatically be disqualified, and if an agreement has already been signed, the DTI will terminate that MIP agreement and institute action to reclaim any monies that have already been paid to the entity.
Projects that benefit from the Productive Assets Allowance (PAA) of the Motor Industry Development Programme (MIDP) or its replacement programme will not qualify for the MIP grant.
Non-governmental organisations (NGO’s), trusts, partnerships, sole proprietors, and foreign governments are explicitly excluded from participating in this programme directly or indirectly.
Applicants who have a majority shareholding (51 %) held by public-owned enterprises or state institutions are not eligible for grants. Shareholding by Development Finance Institutions will be considered on a case-by-case basis.
Applications in respect of a project which constitutes a subsection (division, branch, or profit centre) of a registered legal entity must be submitted by the legal entity. Financial information must be provided for both the legal entity as a whole and the project.
Capital work-in-progress is excluded until taken into production.
Financial lease-assets must be capitalised in the balance sheet in order to be considered for purposes of the incentive.
Grant approval will cease if the entity goes into liquidation.

Additional Conditions Applicable to Expansion Projects under the Manufacturing Investment Programme

The Manufacturing Incentive Programme support is intended for projects involving substantial expansions to existing production capacity. To be approved as a qualifying expansion project, an application must meet the following conditions:

Projects above R5 million must show an increase (over and above total qualifying historic costs) of at least 35 % in qualifying investment in machinery and equipment.
Projects below R5 million whose existing assets (combined cost of land and buildings, machinery, equipment, and vehicles) are R5 million or below, must show an increase (over and above total qualifying historic costs) of at least 30 % in qualifying investment in machinery and equipment. The increase in investment must be made in year 1 and must be maintained for the duration of the incentive agreement. Any increase in investment in land and buildings, leasehold improvements, and commercial vehicles is excluded for the purpose of calculating the increase in investment.
The base year machinery and equipment of the existing entity or project cannot have a zero-Rand cost (the existing entity or project must be actively involved in the manufacturing of a product with productive assets).
The expansion must demonstrate an increase in projected revenue of 15 % in the 1st year of production, and a 25 % increase in the 2nd year of production, above the revenue as reflected in the base year financial statements.
The period of the first full financial year shall not be any later than 24 months from the base year-end. If the 24 months has been exceeded, the application will not be considered.
An expansion may not be resulted in a reduction in the existing number of personnel employed in the base year, in any of the incentive years over the period of the incentive agreement (the total number of personnel employed in each year of the incentive period may not be less than the total number of personnel employed during the base year). Any reduction in total number of personnel, as compared to those in the base year, will disqualify the entity, and if an agreement has been issued, said agreement will be terminated. Any claims not yet evaluated or paid will immediately lapse and no obligation will accrue to the DTI on such claims.
Audited financial statements should be submitted for the base year, when applying for an expansion project. In instances where the audited financials are not yet finalised, management accounts may be submitted. Audited financials will be confirmed when the first claim is submitted.

Conditions

Conditions applicable to expansions and industrial upgrading projects in the textile and clothing sector for projects both above and below R5 million. The incentive support for upgrading available under the Manufacturing Incentive Programme is intended to encourage substantive enterprise-level upgrading, in order to improve competitiveness in the clothing and textile sector.

The project must show an increase in qualifying investment of at least 10 % above the historic qualifying investment in machinery and equipment, and this must be made in year 1. Any increase in investment in land and buildings, leasehold improvements and commercial vehicles is excluded for the purpose of calculating the increase in investment.
The incentive grant will be utilised for qualifying investment costs, which are defined as capital expenditure for the replacement of old and inefficient machinery and equipment, or the addition of new machinery and equipment to the existing production line.
The aim of the upgrading project is to assist the entity to improve or sustain competitiveness. This should include at least 1 of the following:
- Improvement in value-add, measured as the difference between gross turnover and cost of sales;
- Improvement in productivity, measured as value-added / capital assets (not applicable to the clothing and textile sector);
- Reduction in production costs per unit of output; or
- Redirection of the product mix to the niche market.
The applying entity is required to indicate the impact of the upgrading project on employment, before and after the project.