Incentives for the Furniture Industry Furniture Bargaining Council February 2012

Incentives for the Furniture Industry

Furniture Bargaining Council

February 2012

FBC incentives workshop – 7 February 20122 © 2012 Deloitte Touche Tohmatsu Limited

Background

• the dti:

– New incentive scheme that seek to address the raised issues and complement what is currently available has been developed.

– The proposed scheme seek to address firm's needs on areas such as:

• working capital • value chain, cluster studies • product development • process improvement, and so forth

– Background on industry


About the Furniture Bargaining Council

• Members:

– Employer Associations:

• Furniture Bedding And Upholstery Manufacturers' Association

• Curtain Makers And Allied Products Association

– Trade Unions

• National Union Of Furniture And Allied Workers Of South Africa

• Chemical Energy Paper Printing Wood And Allied Workers Union


• Statutory functions, including:

– to develop proposals for submission to NEDLAC or any other appropriate forum on policy and legislations that may affect the sector and area;

About the Furniture Bargaining Council


• Section 12I of the Income Tax Act

• Black Business Supplier Development Programme (“BBSDP”)

• Critical Infrastructure Programme (“CIP”)

• Section 11D of the Income Tax Act (deduction for scientific or technological research and development)

• Support Programme for Industrial Innovation (“SPII”)

• Export Marketing and Investment Assistance (“EMIA”) Scheme

• Recommendations

– No specific provisions for furniture required

Existing Incentives


• Enterprise Development

– For investments in product development, local procurement, marketing support, equipment upgrading or enterprise franchising.

• Infrastructure Investment

– For local infrastructure investment projects such as light manufacturing enterprise zones, local market and business hub facilities, critical transport and communication links and upgrading of infrastructure services.

DBSA Jobs Fund: Focus areas


• Support For Work Seekers

– For support programmes with a particular focus on unemployed young people such as job search projects, training activities and support for career guidance and placement services.

• Institutional Capacity Building

– For projects aimed at strengthening institutions through which job creation is facilitated.

DBSA Jobs Fund: Focus areas


• Presentation by the DBSA to the industry

• Identify projects that could qualify

• No specific provisions for furniture required.

DBSA Jobs Fund: Recommendations


• Business Process Services Incentive (“BPS”)

– Only applicable to finance and accounting services, human resource function, contact centres, back office processes, IT and technical services and other specialist services.

– Furniture manufacturers will not qualify for the incentives.

– Recommendation

• New incentives such as furniture design centres that will not only benefit offshore investors.

Existing Incentives


• Enterprise Investment Programme: Manufacturing Investment Programme (“MIP”)

• Enterprise Investment Programme: Foreign Investment Grant (“FIG”)

• Furniture Industry Competitiveness Programme (“Clothing and Textiles Competitiveness Programme”)

Existing Incentives


• Ending in 2014.

• 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.

Manufacturing Investment Programme: Investment Grant


• Small Projects (investment projects of R5m and below)

– The project must achieve a minimum score of 50 for contribution to industrial policy targets.

– Furniture already a priority sector.

Manufacturing Investment Programme: Evaluation Criteria


• Medium-to-Large Projects (investment projects of above R5m)

– In addition to the evaluation criteria for small projects:

• The grant is necessary for the project to proceed

• The project must achieve a minimum score of 4 points to industrial policy targets:

– investment within the priority sectors;

» Expansion or upgrading project in the furniture sector

– creation and sustainability of direct employment; and – BB-BEE compliance and– location in areas advancing spatial economic activities

Manufacturing Investment Programme: Evaluation Criteria


• Applies to > and ≤ R5m project.

• 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 one (1).

– as opposed to 35% and 30%

• Any increase in investment in land and buildings, leasehold improvements and commercial vehicles is excluded for the purpose of calculating the increase in investment.

Manufacturing Investment Programme: Additional Conditions T&C Expansion Projects


• Extend MIP in general or for furniture industry beyond 2014

• Amend guidelines to include upgrading production capability in an existing furniture production facility.

Manufacturing Investment Programme: Recommendations to dti


• Compensates qualifying foreign investors for costs incurred in moving qualifying new machinery and equipment (vehicles excluded) from abroad to South Africa

• Available only to foreign entities establishing production facilities for the first time in the RSA

• Offered once only to any single entity.

Foreign Investment Grant


• Compensate qualifying furniture manufacturing projects qualifying for MIP.

• On new technology machinery and equipment (vehicles excluded) only

Foreign Investment Grant: Recommendations to dti


• The Production Incentive Programme (PI)

– benefit = benefit ceiling = 7.5% of Manufacturing Value-Addition (MVA)

– MVA = sales (goods manufactured locally by the company only) - material input costs (used in the manufacturing process)

– benefit used towards:

• upgrade grant facilityand/or

• a facility consisting of an interest subsidy for working capital.

Furniture Industry Competitiveness Programme


• An upgrade grant can be used for the following:

– Upgrading equipment; – Developing people; – Improving manufacturing processes; – Optimising materials used; – Developing new products; or– Access to markets, logistics etc.

Clothing and Textiles Competitiveness Programme


• Interest subsidy

– An interest subsidy equal to the ruling prime interest rate

– Pay only the difference between the interest rate determined through the IDC’s normal pricing model and the ruling prime lending rate.

– The IDC will apply normal due diligence procedures to ensure the economic merit of applications, and normal IDC fees will apply to such facilities.

– Funding requirements include the provision of sufficient security.

– The IDC‟s minimum funding amount of R1 million will apply.

• Lower limit



• The Furniture Industry Competitiveness Improvement Programme

– cost-sharing VAT exclusive grant :

• ≥ 75% of project cost for cluster projects • ≥ 65% of project cost for company-level competitiveness

improvement projects.

– excludes costs pertaining to machinery, equipment, commercial vehicles, land or buildings in an existing clothing and textile production facility.

– limited to a cumulative ceiling of R2.5 million over the five-year period of programme implementation.



• Typical project outcomes are:

– Increased (maintained) market share / penetration; – Increased labour or capital productivity; – Increased skills levels of employees; – Improved product /service quality, uniformity and reliability; – Improved product design, packaging design, etc.; – Improved response times to client orders and order

changes; and – The introduction or adoption of new technologies or

techniques that result in the diversification or extension of the company’s or cluster’s range of saleable products or services.



• Establishing SA Brands in export countries

• Review current tax provisions regarding headquarters

• Incentives to downstream manufacturers

• Double Deduction for Freight Charges

Other incentives to consider


• Business Plan requirements of IDC to get access to funding is complex – this is a barrier to smaller players in market

– business plans should still be required but level of detail should be reasonable– also take into account for business plans required for new incentives

• We understand that raw material and input suppliers currently have no incentives (other than general incentives)

– furniture industry is cost sensitive and require access to low cost raw material

• Biggest challenge to the industry is high logistics costs to get product to the market– logistics benefit either through grants or tax deduction (double deduction for example)

should be considered

• Working Capital is always required and should not be limited to only pre-shipment costs interest rate subsidy as per the textile programme is advisable

• Funding to clusters should be available for projects that would benefit wider industry is required – for example for productivity studies, logistic costs studies etc.

Comments on incentive as presented by dti

© 2012 Deloitte Touche Tohmatsu Limited

Documents

Incentives for the Furniture Industry Furniture Bargaining Council February 2012