Fundamental change in the production process under PSI – when does an investment meet the conditions of a new investment?
One of the less obvious, yet very important forms of a new investment in the Polish Investment Zone is a fundamental change in the production process. In practice, this is the variant that most often raises doubts: where does ordinary modernisation end and where does an investment begin that may be considered eligible for support? This question is particularly important for entrepreneurs developing existing plants, implementing automation, robotisation, digitalisation, new production lines, or changing the way production is organised.
What a fundamental change is and what follows from the European Commission's guidelines
Under the PSI system, support is granted for the implementation of a new investment. One form of a new investment is precisely a fundamental change in the production process of an existing plant. However, this does not mean every change, modernisation or improvement. Both the practical application of the rules and the European Commission's explanations clearly indicate that this refers to a comprehensive, significant and non-routine change.
As the European Commission explains: an initial investment in the form of a fundamental change affecting the entire production process in an existing plant means the implementation of a fundamental, rather than routine, process innovation. This is a very important distinction. A fundamental change does not mean ordinary upgrading of the machinery. It means implementing a technological or organisational solution that significantly changes the existing way of manufacturing.
The European Commission's explanations and the Ministry's positions on GBER lead to several important conclusions: First, simply replacing individual assets is not a fundamental change in the production process. If an entrepreneur replaces old equipment with new equipment, even more efficient, more precise or more energy-efficient, as a rule this is a replacement investment, or an investment consisting of substitution, rather than a new investment eligible for regional investment aid.
Second, in order to speak of a fundamental change, a change in the entire production process is necessary, or at least an intervention in its key elements that leads to a fundamentally different method of production. Third, an improvement in technical parameters is not enough. The mere fact that new machines operate faster, more accurately or more cheaply does not in itself determine that the PSI conditions are met.
A classic example illustrates this distinction: replacing manual machine tools with automated, numerically controlled machine tools may constitute a fundamental change in the production process, whereas replacing old manual machine tools with new manual machine tools, even much more modern ones, does not constitute a fundamental change. This distinction is of great practical importance, because it shows that the authority assesses not only what was purchased, but above all whether the way of manufacturing has changed.
Process change versus asset replacement – how to tell the difference
In practice, an investment that leads to the following may be regarded as a fundamental change in the production process:
- implementation of a new production technology,
- automation or robotisation of significant stages of manufacturing,
- a change in the way input or semi-finished products are prepared,
- reconfiguration of material flows and process organisation,
- digital control of stages that were previously performed manually,
- introduction of a new technological layout that changes the logic of production.
It is therefore not about the mere purchase of machines, but about changing the architecture of the production process. Put simply: if the investment causes the plant to produce differently than before, there is an argument for a fundamental change. If the plant produces essentially the same thing in essentially the same way, only more efficiently, the risk of the investment being considered a replacement investment is high.
As a rule, the following will not be considered a fundamental change: renovations and repairs, replacement of worn-out assets, replacement of old machines with new ones of a similar function, isolated improvements with no impact on the entire process, or modernisations that improve efficiency but do not change the manufacturing model. Therefore, if the investment boils down to an entrepreneur replacing equipment with more modern equipment but continuing to produce in the same technological and organisational model, it will most often not be a qualifying new investment in this category.
How to assess whether a change is fundamental – practical criteria
1. Does the method of production itself change? The most important question is: after the investment, will the company produce in a significantly different way than before the investment? If the answer is yes, we are closer to a fundamental change. If only the operating parameters of the equipment change, but not the logic of the process, the risk is much greater.
2. Is the change comprehensive? A fundamental change concerns the process as a whole, not an individual fixed asset. The assessment covers the impact of the investment on: the technological layout, production organisation, material flow, quality control, the way raw material or semi-finished products are prepared, and the way production is controlled and carried out.
3. Is the investment routine or innovative? The European Commission clearly distinguishes fundamental changes from routine ones. If the project is an ordinary, predictable modernisation of assets or a typical refresh of infrastructure, it is difficult to speak of a qualifying fundamental change.
4. Does the change concern the activity being modernised? When assessing a project, it also matters whether the new expenditure is genuinely related to the process that is changing. This is particularly important when calculating eligible costs and in additional statutory tests.
Additional condition for large enterprises and required documents
In the case of a fundamental change in the production process, it is particularly important that an additional statutory condition applies to large enterprises. Under the regulations, the costs eligible for aid in the case of a large enterprise must exceed the depreciation costs of assets related to the activity being modernised, incurred in the three financial years preceding the year in which the aid application was submitted.
The depreciation cost is intended to prevent a situation in which an ordinary modernisation of existing assets, on too small a scale, would be considered a new investment. For large enterprises, it is therefore an additional barrier to entry, intended to confirm that the investment is genuinely significant and not merely a replacement or cosmetic one. In practice, an appropriate statement and documents confirming that this condition is met should be prepared for the application.
An entrepreneur planning to base an application for a support decision on a fundamental change in the production process should ensure appropriate documentation:
- a description of the production process before the investment,
- a description of the process after the investment,
- an indication of which elements of the process are changing,
- a technological diagram showing the impact of the investment on production as a whole,
- a justification that this is not an ordinary replacement of assets,
- a list of new fixed assets and their functions,
- an analysis of the impact of the investment on the method of manufacturing,
- in the case of large enterprises: a calculation of the depreciation test together with source documents.
The more clearly the entrepreneur shows the difference between the „before” and „after” states, the stronger the argument will be.
The most common mistakes and practical examples
In practice, entrepreneurs most often make several recurring mistakes. First, reducing the project to the purchase of machines. Merely stating that new equipment is being purchased is usually not enough. The key is to demonstrate the impact of this equipment on the entire production process. Second, describing the investment solely through the lens of savings. If the project description focuses solely on the fact that after the investment things will be faster, cheaper or more energy-efficient, it is easy to create the impression that it is a replacement modernisation rather than a fundamental change. Third, no comparison of the state before and after the investment. Without such a comparison, it is difficult to show that the change is genuinely structural and process-related. Fourth, overlooking the additional condition for large enterprises. In the case of large companies, the lack of a depreciation test analysis may mean that a basic statutory condition was overlooked already at the project preparation stage.
Examples that may support a fundamental change: a transition from manual handling of key stages to an automated, digitally controlled process; implementation of a new, integrated raw material preparation technology that changes the further course of production; rebuilding a line in a way that changes the sequence of operations, the flow of materials and the method of control; robotisation combined with reorganisation of the process and a change in technological standards.
Examples that will usually not be sufficient: replacing worn-out machines with new ones of the same function; purchasing higher-capacity equipment without changing the production model; isolated improvements enhancing accuracy or energy consumption; renovations, replacements and routine modernisations.
Summary – how to qualify an investment
Under PSI, a fundamental change in the production process is not a „bigger modernisation”. It is a qualified, non-routine and significant change in the way of manufacturing in an existing plant. If the investment: introduces a new technological or organisational solution, changes the logic and course of the production process, is not limited to simple replacement of assets, and, in the case of a large enterprise, also meets the depreciation test, there are strong arguments for treating it as a new investment within the meaning of PSI.
If, however, the project consists only of replacing equipment with more efficient, faster or more energy-efficient equipment, without a fundamental change in the entire process, the risk of it being considered a replacement investment is very high.
In the shortest terms: a fundamental change in the production process under PSI is the implementation of a technological or organisational change that leads to a significantly different method of production in an existing plant; ordinary replacement of machines or routine modernisation is not such a change. In practice, three elements are key: a genuine change in the way of manufacturing, distinguishing the investment from ordinary asset replacement, and – for large enterprises – meeting the requirement that eligible costs must exceed the depreciation costs of the relevant assets from the last three years.