The Production Incentive (PI) Offered by the DTI

The Production Incentive (PI) forms part of the overall Clothing and Textile Competitiveness Programme (CTCP) and flows from the implementation, by the Department of Trade and Industry (DTI), of customised sector programmes (CSP’s) for the clothing, textiles, footwear, leather and leather goods industries.

The Production Incentive (PI) consists of two components, namely an Upgrade Grant Facility and an Interest Subsidy for Working Capital Facility.

The Upgrade Grant Facility is meant to focus on competitiveness improvement and the Interest Subsidy for Working Capital Facility is meant to support working capital requirements resulting from past and future upgrading interventions.

The Production Incentive is available to the following:

Clothing manufacturers;
Textile manufacturers;
Cut, make and trim (CMT) operators;
Footwear manufacturers;
Leather goods manufacturers;
Leather processors (specifically for leather goods and footwear industries); and
Design houses (provided the design house partners with one or more CMT’s).

The Production Incentive specifically excludes goods manufactured for the automotive sector, which qualifies for any incentive programme offered for that sector.

The applicant can decide how it wants to utilise its allocated benefit. Applicants can either use the full benefit as an Upgrade Grant Facility or for an Interest Subsidy Facility, or a combination of both.

Upgrade Grant Facility

Can be used for the following:

Upgrading of existing plant and equipment;
Acquisition of new plant and equipment which will have the effect of improving the overall competitiveness of the applicant;
Developing people;
Improving manufacturing processes;
Optimising materials used;
Developing new products; or
Market development (excluding normal day to day marketing expenses such as advertising) as part of a clearly defined strategy.

An Upgrade Grant can also partly be used in conjunction with the Competitiveness Improvement Programme (CIP). Companies qualifying for an Upgrade Grant have the option of using it towards funding their own contribution of 25 % (Cluster level application) or 35 % (Company level application) required in terms of the CIP up to a maximum of 100 % for small and medium enterprises (SME’s), and 75 % for others.

An individual company that has received approval for CIP grant funding is required to contribute 35 % of Qualifying Expenditure from its own funding. The Upgrade Grant Facility can be used to fund the full requirement of 35 %.

If it is an SME cluster, the cluster should jointly contribute 25 % of the Qualifying Expenditure. The Upgrade Grant Facility can be used to fund the full requirement of 25 %.

An individual company that has received approval for CIP grant funding is required to contribute 35 % of Qualifying Expenditure. The Upgrade Grant Facility can be used to fund 26, 25 % of the required 35 %, thus the company needs only to contribute 8, 75 % of from its own funding sources.

If it is a cluster, the cluster should jointly contribute 25 % of the Qualifying Expenditure. The Upgrade Grant Facility can be used to fund 18, 75 % of the required 25 %, thus the cluster needs only to contribute 6, 25 % from its own funding sources.

Companies that have any existing loans from any financial institution to fund expenditure for purposes that would have qualified under the Upgrade Facility will be able to utilise their Upgrade Grant to settle or partially settle these loans.

Interest Subsidy for Working Capital Facility

Commercial banks have considerably reduced overdraft facilities to manufacturing companies since the onset of the economic crisis. This incentive aims to reduce the cost of funding to companies that have been able or are successful in raising working capital facilities with the Industrial Development Corporation (IDC), or any reputable financial institution (existing facilities only). The raising of such a working capital facility stands separate from the Production Incentive, and has to be applied for independently from any application under the Production Incentive.

An Interest Subsidy equal to the ruling prime interest rate will be made available to participating companies. The applicant for working capital will be required to only pay the difference between the interest rate determined through the IDC’s or any reputable financial institution’s normal pricing model and the ruling prime lending rate. The IDC will apply normal due diligence procedures to ensure economic merit of the applications and normal IDC fees will be applicable on such facilities. IDC funding requirements include the provision of sufficient security. The IDC’s minimum funding amount of R1 million will apply.

Design Houses

A product design and related services entity which outsources some or all of its manufacturing to CMT’s. Related services may include sample making, production development, pre-production planning, fabric sourcing, pattern making, quality control, labelling, packaging, distribution and delivery.

The design house must operate as an independent legal entity.
CMT’s must be bargaining council compliant.
The Manufacturing Value Addition (MVA) will be calculated based on the audited financial statements of the design house. The CMT’s may or may not participate in the PI and they will have to claim separately, and on their own account.
The integrated MVA is to be audited and signed off by the applicant’s auditors.
The design house will be required to spend at least 50 % of its benefit on selected CMT’s. A business plan will be required to motivate and measure the intervention. The intervention must improve the competitiveness of the CMT (s).
The design house must provide proof of outsourced CMT work by providing an audited reconciliation per CMT to their financial statements and evidence of bargaining council compliance for each CMT that it complies with.

Mandatory Conditions of the Production Incentive (PI)

The applicant must be a registered legal entity in South Africa in terms of the Companies Act or the Close Corporations Act. Section 21 companies or ‘not-for-profit-or-gain’ organisations are specifically excluded from applying.
The operations of the company applying must be classifiable as manufacturing (SIC Code 3) in terms of the ‘Standard Industrial Classification of all Economic Activities’.
The applicant must be a taxpayer in good standing and must, in this regard, provide a valid tax clearance certificate.
The applicant must, where applicable, be bargaining council compliant and must, in this regard, provide evidence of compliance.
The applicant must comply with all relevant environmental regulations, applicable to its operations and must, in this regard, provide evidence of compliance.
Should the company have any pending litigation against it, the outcome of which may have a material impact on the company’s financial position, this needs to be brought to the attention of the CTCP Desk at the time of application.
Should the company have any intentions or plans to retrench or downsize its manufacturing process, such intentions or plans must be brought to the attention of the CTCP Desk.

Disbursement of the Production Incentive (PI)

Once the Approval Panel has adjudicated an Upgrade Grant Facility, invoices on upgrading expenditure will be considered by the CTCP Desk for reimbursement of approved upgrade expenditure already incurred or for payment of approved upgrade expenditure to be effected.

Upgrade Grants made by the programme will be made exclusive of Value-Added Tax (VAT).

Payments shall be made directly into the bank account of the approved receiver, whether it be the applicant (on reimbursement of expenditure already effected) or a supplier of goods and services to be expended. The name of the account holder must be the same as that of the approved receiver.

On adjudication of an Interest Subsidy, the CTCP Desk will pay the amount of the Interest Subsidy directly into the applicant’s working capital account with the IDC based on the terms and conditions approved. In the case of the Interest Subsidy being reimbursed to applicants who have facilities with reputable financial institutions, the CTCP Desk will reimburse the applicant on a 6-monthly basis.

Exclusions and Limitations from the Production Incentive (PI)

Eligible products will be financially supported only if the upgrading investment costs could be linked directly to productivity and competitiveness improvement activities in a company. All expenditures incurred wholly and exclusively on a qualifying activity will be considered for support, as long as these expenditures are adequately motivated by the business plan.

Non-qualifying cost:

Normal operating costs;
Staff costs;
Upgrading of vehicles; and
Land and buildings.

General Exclusions and Limitations

Entities that are already receiving incentives approved on recommendation by the CTCP or the Enterprise Investment Programme (EIP) are required to declare such support as part of the application for the PI. A specific intervention / expenditure can benefit from more than one incentive as long as the combined grants do not exceed the total cost of the intervention / specific expenditure.
The CTCP Desk reserves the right to withhold, reject, or terminate approval for projects or disbursements under the incentive programme if a project is seen to be circumventing the rules of the programme. The entity may not change facts in its application when it does not meet the appropriate criteria. If the CTCP Desk 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 CTCP Desk will terminate that agreement and institute action to reclaim any monies that have already been paid to the entity. The monitoring of the projects is the responsibility of the CTCP Desk of the IDC.
Non-governmental organisations (NGO’s), trusts, co-operatives, partnerships, and foreign governments are explicitly excluded from participating in this programme directly or indirectly.
Grant approval and disbursements will cease if the entity ceases manufacturing or is liquidated.

Additional Conditions

The following are considered a circumvention of Production Incentive guidelines and will lead to the rejection of an application or claim:

Changing the business set-up, composition, structure or operations, processes or products to enable the project to qualify;
Restructuring the business internally, forming a new entity or project, or phasing in or segmentation of investment to avoid exceeding maximum or differentiating levels.
More than 1 business in reasonable proximity or in a defined municipal area, owned by connected person(s), manufacturing generically the same or similar products or similar services without, in the sole opinion of the CTCP Desk, any real commercial reason for the separation.
Splitting up of an integrated production process, including where the 1 process manufactures the raw material for another process, thereby excluding a non-qualifying process, or allowing 2 projects to qualify for the incentives.
Manipulation of inter-company assets, products, services and processes.
Any other action that, in the sole discretion of the CTCP Desk, can be regarded as a circumvention to allow the entity, which otherwise would not have qualified, to qualify.

Criminal, Misleading, Dishonest, and / or Irregular Activities

The CTCP Desk may, upon suspicion of any such activities, suspend payments that may be due or may become due to an applicant. The CTCP Desk shall not be liable for any damages or interest, pending the finalisation of any forensic investigation and any criminal proceedings brought as a result of the investigation.

Findings of a forensic investigation indicating such activities will be sufficient to allow the CTCP Desk to cease all payments and reclaim any payments already made, with mora interest.

The CTCP Desk subscribes to the principles set out in the Prevention and Combating of Corrupt Activities Act 12 of 2004 (PRECCA). Applicants are requested to contact the DTI fraud hotline on 0800 701 701 should they wish to report any such suspicion.

A duty rests with the applicant and / or any other person that may benefit from the PI to disclose all information that may influence the adjudication of the application and / or claim. Failure thereof will lead to termination / suspension / cancellation of the application / claim.