Production diversification in the PSI – what it is and why the 200% threshold in practice means a 3x multiple

One of the four forms of a "new investment" in the Polish Investment Zone – alongside the creation of a new plant, an increase in production capacity and a fundamental change in the production process – is diversification of the production of an existing plant. In practice, this is the variant that tends to be the most confusing, because besides the definition itself it contains an additional financial condition that many entrepreneurs interpret incorrectly. In this article we explain in plain language what diversification is, when it genuinely is diversification and when it only appears to be – and, most importantly, how the famous "200%" threshold is really calculated.

What is diversification of a plant's production

In accordance with Commission Regulation (EU) No 651/2014 (GBER), diversification is an investment consisting in introducing, at an existing plant, products or services that the plant has not previously produced or provided. Put simply: a company that has so far produced only one type of product launches, alongside it, production of something entirely new, not previously offered.

There is only one key condition: the new product must genuinely be new – it cannot have been produced at that plant before. By contrast, a situation in which an existing product is merely modified or improved is not diversification. Replacing an old product with a newer version of it is not diversification, but simply a modernisation of the offering.

Important: whether a product is "new" is not formally determined by the PKD/NACE code of the activity. NACE codes serve the European Commission for something else – to define "the same or a similar activity" in the case of investments initiating a new economic activity. If the new activity falls under a different four-digit NACE code than the existing one, this is usually a strong argument for a new product. But even where the code does not change, the product may still be recognised as new – what counts is the actual nature of the product, not the statistical classification.

Example: a company producing soups and broths (NACE code C.10.89 – manufacture of other food products n.e.c.) decides to launch production of artificial honey. Although both products fall under the same NACE code, artificial honey may be recognised as a new product, because in practice it is an entirely different product.

The financial condition: why 200% in reality means a 3x multiple

This is the part of the rules that most often misleads – which is why we devote a separate, detailed section of the article to it.

Article 14(7) of GBER states that, in the case of diversification of an existing plant:

"the eligible costs must exceed by at least 200% the book value of the assets that are being re-used, as registered in the fiscal year preceding the start of works."

Read superficially, this sentence suggests that it is enough for the new investment to be "twice as large" as the assets the plant will re-use. This is an incorrect interpretation – and a very common one.

What are "re-used assets"

In diversification, production is usually not built from scratch. Part of the assets that previously served to manufacture the existing product – e.g. land, a production hall, sometimes supporting infrastructure – will continue to be used, only now also (or exclusively) for the production of the new product. Such assets are precisely the "re-used assets". Their value is determined as the book (residual) value recorded in the books at the end of the financial year preceding the start of works on the new investment. If a given asset (e.g. a building) is re-used only in part, its value is taken into account proportionally ("pro rata").

Why it is a 3x multiple and not 2x

This is the crux of the matter: the rule does not say that the new costs must equal 200% of the value of the old assets. It says that the new costs must exceed the value of the re-used assets by an additional 200%. This means:

100% is the book value of the re-used assets alone (the reference point),
+ 200% is the required excess of new costs over that reference point,
in total: 300%, meaning the new eligible costs must be at least three times higher than the book value of the assets the plant re-uses.

In numbers it looks like this: if the book value of the re-used assets (e.g. land and a hall previously used to produce product A, and now also to produce the new product B) is PLN 1 million, the value of the new assets (new machinery, technological lines, new buildings, etc.) must be at least PLN 3 million – because PLN 3 million exceeds PLN 1 million by exactly 200%. An investment worth, say, PLN 2 million, even though "twice as large" as the old assets, will not meet this condition – because it exceeds the base value by only 100%, whereas 200% is required.

This distinction is of great practical importance when planning the project budget and when estimating whether an investment will qualify at all as diversification within the meaning of the regional aid rules.

Importantly – only new assets are an eligible cost

The eligible costs, on which state aid is calculated, include only new assets (or, in particular cases concerning SMEs and the acquisition of a plant, also used assets purchased from third parties). Assets already owned by the company and re-used in the project are not an eligible cost – they serve solely as a reference point for calculating the required 200%/300% threshold.

The support application must be accompanied by a statement and documents confirming that this additional criterion is met – including a valuation of the book value of the re-used assets at the end of the financial year preceding the start of works.

Diversification and the quantitative criterion – which threshold applies

The 200%/300% test described above is not the only financial condition that must be met. Independently of it, there is also the quantitative criterion – that is, the minimum value of investment outlays required to obtain a support decision, which depends on the unemployment rate in the county, the size of the enterprise, and in some locations (e.g. medium-sized cities losing their socio-economic functions and the municipalities bordering them) is lowered in advance, regardless of unemployment. The level of the quantitative criterion for a specific location can be checked in our municipality database or estimated in the PSI calculator.

What is key is that both conditions – the quantitative criterion and the 200%/300% diversification test – must be met jointly. This means that the higher threshold always applies.

Example: let us assume that in a given municipality the quantitative criterion for the planned investment is PLN 1 million. At the same time, the book value of the assets re-used in the diversification project is also PLN 1 million. Under the diversification test, the new eligible costs must be at least 3 times that value, i.e. a minimum of PLN 3 million. In this situation, meeting the quantitative criterion alone (PLN 1 million) is not sufficient – even though formally the local entry threshold to the PSI is lower, the higher threshold resulting from the diversification test remains binding. Only outlays of at least PLN 3 million satisfy both conditions at the same time.

In other words: the quantitative criterion sets only the starting minimum for a given location. In the case of diversification, the real, binding investment threshold may turn out to be much higher – and it is this that ultimately determines the value of outlays that must be planned in the project.

Diversification and an increase in production capacity – can they be combined?

A practical question that often arises: can one investment project be both an increase in production capacity and diversification? Yes, such a situation is possible – an investment may include elements falling under more than one type of new investment. However, in accordance with the instructions for the support application, only one type of investment is selected in the application, guided by the main objective of the project. This means it is worth clearly defining the main objective of the undertaking already at the planning stage – because it decides under which category the investment will be classified and, consequently, what additional conditions will have to be met (e.g. the aforementioned 200%/300% test for diversification).

Documentation worth preparing

For a project based on production diversification, it is advisable to prepare:

a description of the existing activity and the products manufactured at the plant,
a description of the new product and a justification that it was not previously produced at that plant,
a list of the assets that will be re-used, together with their book value at the end of the financial year preceding the start of works,
a calculation of the relationship between the value of the new assets and the value of the re-used assets (200%/300% test),
in the case of assets used only partly – a calculation of the "pro rata" value,
a statement confirming that the condition under Article 14(7) of GBER is met.

The most common mistakes when planning diversification

First, confusing a product modification with diversification. Modernising an existing product is not a new product within the meaning of the rules. Second, miscalculating the 200% threshold – treating it as a requirement of "twice as much" instead of "three times as much" as the value of the re-used assets. This is the most common and costly mistake, because a wrongly estimated project budget may turn out at the last minute to be insufficient to meet the condition. Third, omitting the valuation of re-used assets – without a reliable book value as at the relevant date, it is not possible to credibly demonstrate that the test is met. Fourth, failing to clearly indicate the main objective of the investment where the project combines diversification with an increase in production capacity.

Summary

Production diversification in the PSI means introducing at a plant a product or service that was not previously produced there – but a "new product" alone is not enough for the project to qualify for support. The key is the additional financial test: the value of the new assets must exceed the book value of the re-used assets by at least 200%, which in practice means that the new investment must be at least three times higher than the book value of the re-used assets. This distinction – a 200% excess, i.e. 300% of the base value in total – is the source of the most common mistakes in planning this type of project, which is why it is worth taking into account already at the preliminary investment budgeting stage, before the project reaches the stage of a formal application.