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Revised Draft Guidelines for the Enterprise Investment Programme

The Department of Trade and Industry (the dti), hereby releases for public comment the draft revised Guidelines for the Enterprise Investment Programme (EIP), with its sub-programme the Manufacturing Investment Programme (MIP) and Tourism Support Programme (TSP), as well as the Funding Gap Methodology.

The Guidelines seek to enable enterprises to present their business cases to the dti, and provide a framework for the dti to evaluate such cases. Some of the guidelines have been revised to enable the Programme to better meet the needs of industry.

See Annexures I and II for key elements of the Guidelines that have been revised, as well as a draft copy of the Guidelines, with the key proposed changes highlighted.

Annexure I

Summary of Key Changes to the EIP: Manufacturing Investment Programme (MIP)

1. Acquired of Assets (Ref. 3.4 and Annex. A (e))

• The definition of acquired assets has been revised to reflect any assets that have been brought into production.

• Criteria have been revised with more emphasis on job creation.
• Broadened definition of locating in areas advancing spatial economic activities to give recognition to projects locating adjacent to areas of high unemployment.

• Broadened definition of locating in areas advancing spatial economic activities, to give recognition to projects locating adjacent to areas of high unemployment.

• Owned land and buildings have been limited to the cost of machinery and equipment.

• Projects may not move the approved commencement date of production by more than 120 days of the approval for commencement of production.

• Expansion requirements for projects above R5m have been relaxed, where projects must show an increase (over and above total qualifying historic costs) of at least 35% in qualifying investment in machinery and equipment.

• The expansion requirement has been relaxed, where projects must show an increase (over and above total qualifying historic costs) of at least 10% in qualifying investment in machinery and equipment.

• The requirement for projects below R5m to have the third-year grant payment be dependent on the number of jobs created by the end of the third year has been removed. However, more emphasis has been placed on job creation, upon approval of the grant.

• Requirements have been relaxed to allow projects to attain a minimum of 70% of their projections for investment and turnover.

• Claims may be signed-off by an independent auditor or an ‘accredited person’. Claims should be submitted within six (6) months after the specified claim period.

Annexure II

Summary of Key Changes to the EIP: Tourism Support Programme (TSP)

1. Acquired of Assets (Ref. 3.8 and Annex. A (e))

• Definition of acquired assets has been revised to reflect any assets that have been brought into use by the project.

• Removed limit on land and buildings as a proportion of furniture, fittings and equipment. This change will be applied retrospectively for all projects that have already been approved.
• Fixed tents and caravans are to be treated as land and buildings.
• Land improvements, for activities that are not accommodation-focused, are to be treated as buildings.

• Projects may not move the approved commencement date of production by more than 120 days of the approved commencement date of production.

• Requirements have been relaxed to allow projects to attain a minimum of 70% of their projections for investment and turnover.

• Claims may be signed off by an independent auditor or an ‘accredited person’.
• Claims should be submitted within six (6) months after the specified claim period.

• Asset schedule of qualifying investment assets.

Annexure III

Funding Gap Analysis

1.1 Introduction

In order to justify the awarding of a grant for any project, a funding gap analysis methodology to assess additionality has been developed. The reason for conducting a funding gap analysis is to ensure that grants are approved for companies where they are likely to have an impact on decisions regarding the timing scale and quality of the project. The analysis will focus on:

• The level of post-investment debt in the balance sheet of the entity, the execution of an investment project, as well as the amount of debt incurred in order to fund the investment project; and
• The impact of the grant on the decision by a foreign investor to locate the project in South Africa.

Projects in the following categories will not be required to indicate the existence of a funding gap:

• All projects below R5 million;
• New entities not linked to an existing entity, where BEE shareholding is greater than 50%:
  • This provision does not apply to a new project of an existing entity; and
  • This excludes instances where: the majority shareholder of the entity has a similar business to that of a start-up entity, such that if the shareholder had established the start-up business under the auspices of its existing business, it would have been defined as an expansion per the Enterprise Investment Programme (EIP) rules; and
• New projects not linked to an existing entity, where more than 50% of the shares are owned by first-time foreign investors in South Africa.

1.2 Initial Assessment

The following projects will be considered to have a funding gap:

Expansion and new stand-alone projects undertaken by existing entities:

• The debt: total capitalisation of the entity is >= 40% in the first year, post undertaking of the expansion/investment;
• The debt: proportion in relation to the total funding requirement of the new stand-alone project or expansion is >= 40%. For this provision only, debt means a third party interest bearing debt raised directly for the project and does not include debt raised generally for the entity;
• The project is more than 50% owned by a foreign investor, and the awarding of a grant will positively influence the location of a project in South Africa.
• The dividend pay-out ratio averages less than 50% for the past three (3) years, and any of the following criteria is met:
  • The entities have generated a loss after tax for the most recent financial year-end;
  • The free cash flow/installment of the entity is <1.2 for the most recent financial year-end;
  • The specific industry in which the entity operates is performing poorly, relative to other sectors in the South African economy at the time of assessment of the application. the dti will fully reserve its discretion in making a decision on this basis.

New entities not linked to an existing entity:

• The Debt: total capitalisation of the entity is >= 20% in the first year for the forecasts. This excludes instances where the majority shareholder of the entity has a similar business to that of a start-up entity, such that if the shareholder had established the start-up business under the auspices of its existing business, it would have been defined as an expansion per the EIP rules.

Glossary of Terms

1. ‘Debt’ means third party interest bearing debt net of cash;
2. ‘Free cash flow’ means Earnings before interest, tax, depreciation and amortisation, less capital expenditure, less taxation, adjusted for movements in working capital;
3. ‘Shareholders equity’ means equity, shareholder loans and retained earnings or reserves; and
4. ‘Total capitalisation’ means debt and shareholders’ equity.

• Enterprise Investment Programme Guidelines: Manufacturing Investment Programme

• Enterprise Investment Programme Guidelines: Tourism Support Programme