Incentives for the Furniture Industry Furniture Bargaining Council February 2012

FBC incentives workshop – 7 February © 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

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

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

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

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

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

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited Presentation by the DBSA to the industry Identify projects that could qualify No specific provisions for furniture required. DBSA Jobs Fund: Recommendations

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

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

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

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

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

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

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

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

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited Compensate qualifying furniture manufacturing projects qualifying for MIP. On new technology machinery and equipment (vehicles excluded) only Foreign Investment Grant: Recommendations to dti

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited 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 facility and/or a facility consisting of an interest subsidy for working capital. Furniture Industry Competitiveness Programme

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

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited 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 Clothing and Textiles Competitiveness Programme

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited 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. Clothing and Textiles Competitiveness Programme

FBC incentives workshop – 7 February © 2012 Deloitte Touche Tohmatsu Limited 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. Clothing and Textiles Competitiveness Programme

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

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