Manufacturing Competitiveness Enhancement Programme (MCEP) (MCEP)

The contribution of South Africa’s manufacturing sector to the total output of the economy has been in decline since the mid 1970’s. In 2011 share of the manufacturing sector made up 14.6% of South Africa’s Gross Domestic Product (GDP) compared to 21% in 1977 (Trademark South Africa 2012). Apart from that, the 2008/09 recession in resulted in a loss of approximately a million jobs in South Africa and around 200,000 in the manufacturing sector (Barings 2012).
Since the crisis the manufacturing sector has experienced difficulties to compete internationally, e.g. with Chinese goods. Increasing electricity and labour costs are considered to be crucial factors that put the South African manufacturing industry in a relatively weak position compared to international competitors.

MCEP was initially formed in the in the post-economic crisis environment to encourage manufacturers to invest in competitiveness by modernizing their equipment in order to contend with global markets.
With respect to the Green Technology and Resource Efficiency Investment programme, one of the crucial sub-components of MCEP, the focus is on the uptake of environment friendly technology upgrades and enhancement of industrial processes. DTI statements (2014, p. 12) suggest that the GTREI can be considered as a facilitating factor contributing to South Africa’s “green economy through the manufacturing sector.”

It is a national policy.

Relevant sectors

• Industrial: MCEP consists of several supplementary programmes. The following document focuses on the Green Technology and Resource Efficiency Improvement grant. As its title suggests, the MCEP primarily aims at enhancing the competiveness of South African businesses. Hence, information on the programme’s effect on energy savings were hardly available to this study. Please also note that one of the implementing bodies of the MCEP, the Department of Trade and Industry, suspended the programme. A new application window is planned to open in April 2016.

MCEP and GTREI, in particular, do not target specific concepts and options, rather they aim at encouraging manufacturers to upgrade their production facilities in a manner that improves energy efficiency, general efficiency, sustains employment and maximises value-addition. This can be achieved, for instance, through improving the building envelope, upgrading lighting or installing solar panels (DTI 2014).

As stated earlier, MCEP focuses on improving the competitiveness of South African manufacturers. Within one of the supplementary programme, the Green Technology and Resource Efficiency Improvement, competitiveness is to be enhanced through, for instance, energy efficiency measures in production facilities or buildings.
GTREI offers a grant of 30%, 40% or 50% of the costs incurred. Hence, through the GTREI, MCEP facilitates the uptake of different types of energy-saving building equipment.

Manufacturers need to show that they have introduced new improved processes that lead to energy savings, improved energy efficiency technology (e.g. solar panels, pumps, motors etc), or made building improvements capitalised in balance sheet.

Relevant target groups

• Investor Investors in energy efficiency technologies or process improvements in the manufacturing sector of South Africa are the key target group of MCEP and GTREI, in particular. Through GTREI manufacturers receive financial support for investments that do not only improve competitiveness but also reduce the environmental footprint.

Direct beneficiaries

• Investor

  Investor-users benefit directly since GTREI provides grants for energy efficiency investment reducing upfront costs for manufacturers. After the investment, investors may benefit from reduced energy bills.

• Energy consultant

  Manufacturers applying for the GTREI grant programme have to hand in a cleaner production and/or resource-efficiency audit or green technology assessment report for the project. Energy consultants able to conduct such an assessment report benefit directly from increased sales of their services.

Indirect beneficiaries

• Manufacturer

  Manufacturers of energy-efficient building technologies benefit indirectly from the measure through increased demand of their services.

• Bank

  Despite the grant support provided by MCEP and GTREI, some manufacturers may not be able to cover the remaining investment on their own balance sheet. This financing gap could be bridged by a loan from a bank, which, in turn, would receive interests. In such a case, banks would become indirect beneficiaries of MCEP and GTREI.

• Governmental actor

  The indirect benefit of the MCEP Green Technology and Resource Efficiency Improvement grant to the South African government is the efficient use of energy as a means to: • Safeguard the security of energy supply – by reducing energy demand, • Reduce carbon emissions, • Increased contribution of the manufacturing industry to the GDP, • Create and sustain employment. Note, however, that the effect on reduced energy demand is uncertain because MCEP aims at improving production capacities, which may even result in higher energy demand due to higher overall output (even though the demand per output may be lower than before the investment).

Relevant barriers

• Economic and financial barriers: Improved energy efficiency is often associated with high start-up capital costs which makes companies cautious of embarking on energy efficiency projects. The MCEP incentive is aimed at providing a financial incentive for companies to invest in energy efficiency technologies.
• Lack of interest and motivation in energy efficiency-improvement: In countries with low electricity tariffs such as South Africa, manufacturers may lack in saving energy, especially through capital intensive (upfront) investments. The interest in investing in such measures can increase through substantial support provided by MCEP and GTREI.
• Knowledge and information barriers: Little information is available on this aspect. Limited knowledge of manufacturers on saving energy through tailor-made actions restricts energy efficiency investments. If seeking to gain access to the GTREI, in particular, manufacturers must submit a report that assesses the usefulness of the investment. Theoretically, such a report provides the chance to identify comprehensive energy saving opportunities, which could then be realised with GTREI funding. However, if such reports indeed provide indications for energy savings in manufacturing entities is unknown. However, MCEP also offers a grant for feasibility studies. However, such studies are not exclusively designed to identify energy saving potentials comprehensively.

Relevant incentives

• Saved energy costs: The price of electricity and fuels has increased a great deal in recent years. Implementing energy efficiency projects, which is especially targeted by the GTREI grant programme, will result in companies purchasing less energy and therefore saving money.
• Improved reputation: Companies who have embarked on projects to save energy would improve their reputations among various stakeholders due to their contribution to increasing the country’s security of energy supply and reducing their carbon footprint. Their reputation with shareholders would improve due to energy cost savings and increased efficiency of production processes. Moreover, MCEP’s objectives, companies can also improve their public image by arguing that they maintained or increased employment.
• Contribution to protection of the environment: The improved energy efficiency, driven by MCEP, will lead to a reduced greenhouse gas emissions.
• Increased (re-sale) value of the property: Businesses who have made their buildings more energy efficient, for instance, through the GTREI grant programme, could benefit from increased resale value.

Given the overall objective of MCEP to strengthen South Africa’s industrial basis, it is difficult to include the instrument in a policy package promoting energy savings. However, an attempt to connect the dots between MCEP and South Africa’s efficiency measures is made – and the GRTREI, again, appears to be of particular interest.
The year 1998 and the introduction of the White Paper on the Energy Policy can be regarded as the Government’s commitment to save energy, among other things, through the buildings sector. While it is controversial whether this commitment was only on paper, energy saving targets were set with the National Energy Efficiency Strategy. The NEES established voluntary and sector-specific targets for reducing total final energy demand by 12% by 2015; for instance, through commercial and public buildings 15% of energy was to be saved between 2005 and 2015. It is noteworthy that one of the objectives of the NEES was to improve global competitiveness and fostering job creation (Modise 2013). Hence, MCEP and GTREI together perfectly align with the NEES since especially MCEP is rather an industrial policy instrument than an energy saving measure.
South Africa’s main utility ESKOM provided financial support through its Demand Side Management programme. For instance, for the installation of certain technologies or measures (e.g. building energy management programme, energy-efficient lighting), ESKOM paid to its customers a fixed amount for daily energy savings. The ESKOM programme was suspended and it is unknown whether it will be continued. Yet, it provided an additional financial incentive for manufacturers apart from MCEP and GTREI.
For energy efficiency related projects, companies will need to consider the viability of MCEP when compared to initiatives such as the 12L energy efficiency tax incentive. 12L will not allow projects with concurrent benefits (i.e funding from multiple government sources). As such, companies would need to choose between the two initiatives for energy efficiency projects.
Another important measure was established with financial support of the United Kingdom’s Department for International Development (DFID). The so-called Private Sector Energy Efficiency (PSEE) programme, implemented by the South African National Business Initiative (NBI), provides funding for different types of advisory services to businesses. For example, “[l]arge businesses are provided with specialised energy audits […] undertaken by specialist consultants and focusing on a specific system with significant energy savings potential, for example lighting; compressed air; heating, ventilation and air-conditioning; etc. These companies will also be assisted with measurement and verification to quantify savings achieved on such systems. This service is fully subsidised by the PSEE.” Through PSEE companies can identify their energy saving potentials, while GTREI enables them to finance respective efficiency investments (NBI 2015).

MCEP offers support for carrying out feasibility studies. However, these have to be focused on identifying energy saving potentials in order to have a real impact on energy efficiency.
Moreover, GTREI will offer additional grants for manufacturers if jobs are created. Hence, the programme combines employment efforts with saving energy.

GTREI does not target specific technologies. While this offers flexibility to manufacturers, it does not support the dynamic market transformation of certain technologies or even BAT. The Government could assess whether GTREI funding should become more technology-specific.
The amount of funding provided to manufacturers could be in relation to the energy savings achieved. However, in so doing, the original goal of MCEP would be altered (from strengthening competitive to saving energy).
For gaining access to the GTREI grant programme, manufacturers have to hand in an assessment report. While our analysis was inconclusive on whether such reports are comprehensive from an energy saving perspective, the quality of such reports is crucial. For instance, through the identification it is possible to avoid lost opportunities.
As stated earlier, MCEP was suspended. Such discontinuities disincentivising investors to apply for MCEP have to stop.

The DTI is currently working to streamline the MCEP application and claim process in order to:
• Pay claims as soon as possible
• Reduce and better manage the amount of supporting documentation.
• Ensure that only fully completed applications are submitted.
• Reduce the application size by only requesting mandatory information, based on the applicant's component selection.
Clear guidelines have been released by the DTI to explain the April 2014 updates to MCEP.

The policy package could also be improved. Several improvements to the policy package could increase the potential to harvest energy savings in the manufacturing sector.
First, voluntary energy saving targets could be made mandatory. However, such a process is rather unlikely given that the Government’s “overriding priorities” are the eradication of poverty and inequalities (Government of South Africa 2015).
Hence, secondly, energy and climate policies should become priorities alongside poverty eradication. This may also contribute to reducing discontinuities regarding certain policy programmes including MCEP as well as ESKOM’s Demand Side Management programme.
Through certification systems for building equipment, management systems or related measures, the Government could more easily safeguard that funding is used according to GTREI guidelines.
As stated above, companies need to consider the viability of MCEP when compared to initiatives such as the 12L energy efficiency tax incentive. This increases transaction cost and, particularly, for smaller companies with inadequate staffing to carry out such an assessment could be a barrier to realising energy savings.

The following pre-conditions are necessary to implement Manufacturing Competitiveness Enhancement Programme (MCEP) and the Green Technology and Resource Efficiency Improvement (GTREI) programme, in particular

Agencies or other actors responsible for implementation
Department of Trade and Industry

Funding
DTI funds the MCEP programme. It has a total budget of R5.8 billion (almost EUR 400 million) for a period of 6 years. Information on the budget of the GTREI programme is not available.
It is noteworthy that funding of MCEP, in general, is exhausted, the DTI decided to suspend the programme between late 2015 to April 2016 (DTI 2015).

Draft programme guidelines for the proposed MCEP incentive were released for public comment prior to its launch. Sector specific engagements had been held by the DTI, prior to the release of the draft report.
In April 2012, shortly after its launch, a number of stakeholder engagement workshops were held by the DTI in order to educate stakeholders and hear their concerns.
Manufacturers, interested in participating the programme have to submit a “cleaner production and/or resource- efficiency audit or green technology assessment report” together with their official GTREI application (DTI 2014, p. 13). Application documents have to be handed in at least 60 days prior to the intervention.
The total grant amount depends on the total assets of the enterprise, but varies between 50%, 40% and 30% of the investment costs. Applicants with higher assets receive a lower share of the investment as a grant from DTI. For creating new jobs, manufacturers can receive additional grant financing.

Actors responsible for design
Department of Trade and Industry

Actors responsible for implementation
Department of Trade and Industry

Monitoring
A monitoring system is in place. For MCEP, in general, the following points are relevant:

• All approved companies will be monitored to assess how the MCEP is contributing towards the strategic objectives of the incentive and its intended outcomes.
• The DTI will also conduct site inspections at each claim stage to verify the information in the claim form. In addition, companies may be subject to additional periodic performance monitoring visits.
• Companies are also required to submit annual performance reports up to a period of three years after the final claim has been paid.

Some specific data is relevant for the Green Technology and Resource Efficiency component and has to be submitted:

• Energy consumption and reduction comparing pre-intervention and post-intervention figures
• Type and cost of machinery and equipment used

• Dynamic market transformation and/or innovation: The financial support for the uptake of green technologies and innovation could foster market transformation. However, since MCEP and GTREI do not target specific technologies or product groups, the effect should be negligible. Moreover, it is unknown, how many manufacturers have indeed made used of the GTREI programme component. Only GTREI targets energy efficiency upgrades in buildings explicitly.
• Avoiding lost opportunities: This aspect has to be regarded from different perspectives. First, GTREI is one of the components of MCEP. Without GTREI, MCEP would not target energy efficiency explicitly. Hence, GTREI avoids lost opportunities. As MCEP also offers feasibility studies, there could be a great opportunity to comprehensively assess energy saving potentials and, thus, avoid lost opportunities. However, it is unknown in how far such studies take into account energy efficiency. GTREI applicants also have to submit cleaner production and/or resource-efficiency audit or green technology assessment report for the project. Further information on such reports and their relation to energy savings is missing.
• Minimising rebound effects: Rebounds may happen. First, through MCEP and GTREI a manufacturer may benefit from increased competitiveness – the overall goal of MCEP (and GTREI). Hence, due to the increased output, total energy demand could increase (even though the energy demand per unit of output was lowered). Apart from that, monetary savings resulting from energy savings could be used to invest in expanding other branches of the business, which must not necessarily be environment friendly.
• Minimising snap-back effects: Snap-back effects seem unlikely given the nature of MCEP. The Green Technology and Resource Efficiency equipment funded through the grant will remain in the manufacturing process once MCEP ends.
• Minimising free-rider effects: It is certainly possible that a number of companies who would have undertaken energy saving projects even without the benefit of MCEP will still make use of this policy in order to save costs. However, since experts state that South African manufacturers have failed to invest in energy efficiency improvements to enhance competitiveness, it is rather unlikely that respective investments would have been made without MCEP or GTREI.
• Creating Spill-over effects: The Green Technology and Resource Efficiency component of MCEP is designed to increase the uptake of energy efficient technologies. However, little information is available on this issue. Theoretically, GTREI should increase the demand of these technologies, which should in turn drive down their prices creating an interest of other actors to acquire the cheaper technology. It should be noted that MCEP and GTREI may increase the awareness of manufacturers in reducing energy demand. This may also result in spill-over effects in terms of purchasing further energy saving equipment or changing their behaviour.

Design for sustainability aspects
A major component of MCEP is to promote energy efficiency (and therefore electricity and fuel efficiency). Furthermore, the increased uptake of cleaner technologies and innovation will result in reduced greenhouse gas emissions, which will have environmental and health benefits for the country.

Co-benefits
Competitiveness and increase of employed work force in manufacturing companies is the key objective of MCEP. These labour market effects are to be considered as co-benefits.

The following barriers have been experienced during the implementation of the policy
Several barriers have been experienced during MCEP’s implementation, which is why the policy is a good example to learn from.
First of all, the original design of MCEP had overlaps with other financing support schemes. According to Deloitte (Deloitte 2012), companies will have to carefully consider which incentives to apply for in order to maximise benefits. For instance, projects under R200 million should apply for MCEP whilst projects over R200 million should apply for benefits in terms of section 12I of the Income Tax Act (requiring projects to upgrade via an innovative process, cleaner production technology or improved energy efficiency). For energy efficiency related projects, companies will need to consider the viability of MCEP when compared to initiatives such as the 12L energy efficiency tax incentive. 12L will not allow projects with concurrent benefits (i.e funding from multiple government sources). As such, companies would need to choose between the two initiatives for energy efficiency projects. In certain circumstances companies also qualify for the Section 12b Renewable energy tax incentive. All these parallel schemes created confusion among manufacturers. The fact that some manufacturing sectors are completely excluded from MCEP financing (e.g. textile industry) exacerbates the situation.
Some business actors were completely unaware of the incentive scheme. Others were cynical of the government’s intention (why would government give free money?).
Moreover, company representatives felt that it is not worth applying for MCEP due to “red tape”. And the fact that the procedure to provide manufacturers with the grant takes a relatively long time further discourages manufacturers to apply.
Last but not least, three years prior to the programmes official end year, MCEP’s budget was completely disbursed.

The following measures have been undertaken to overcome the barriers
The DTI is currently working to streamline the MCEP application and claim process in order to (i) pay claims as soon as possible, (ii) reduce and better manage the amount of supporting documentation, (iii) ensure that only fully completed applications are submitted, (iv) reduce the application size by only requesting mandatory information, based on the applicant's component selection. In that respect, clear guidelines have been released by the DTI to explain the April 2014 updates to MCEP (cf. DTI 2014).
Prior to the launch of MCEP, DTI engaged the manufacturing sector and published MCEP’s draft guidelines for public comments. Moreover, in April 2012, shortly after announcing the introduction of MCEP, a number of stakeholder engagement workshops were held by the DTI in order to educate stakeholders and hear their concerns. Apparently, despite such efforts to inform stakeholders about MCEP and GTREI, these were not enough to clear up misunderstandings regarding the programme.

These figures are not available for MCEP.

MCEP has been implemented by the DTI since June 4, 2012. On the 31st March 2014, 524 applications were approved with over R4-billion committed to support manufacturers and sustain over 100 000 jobs.

Average investment per project: R21.3 million; Average incentive per project R4.9 million.

The specific energy savings are not available.

MCEP has been implemented by the DTI since June 4, 2012. On the 31st March 2014, 524 applications were approved with over R4-billion committed to support manufacturers and sustain over 100 000 jobs.

Average investment per project: R21.3 million; Average incentive per project R4.9 million.

The specific energy savings are not available.