Economic development incentives have been around for decades. Country-level, state, and local investment promotion authorities have long used a myriad of inducements to help achieve their objectives of attracting new jobs, increasing income, and growing the tax base through corporate projects. Thousands of corporate investments for new or expanding headquarters, manufacturing plants, research and lab sites, distribution centers, and back office locations are announced each year, many of which are heralded in the receiving communities as a boost for the local economy. Yet, some investments can receive quite the opposite reaction.
How can CEOs and their teams obtain the incentives necessary to position projects for success and make them financially viable in their preferred community, while avoiding negative blowback on the company and its investment plans? Where is the fine line that separates a company receiving its “fair share” of incentives from negotiating too hard for too much?
To be an effective steward of the company’s ability to receive economic development inducements, the CEO’s team should consider several “guiding principles of incentives.”
1. Are possible for more than new deployments– Corporate expansions, retention projects, and equipment investments are examples of projects that can receive incentives. Every greenfield project should consider and potentially pursue incentives, but most companies do not realize that the same can be said for investments and job creation projects in existing locations. These should be applied for judiciously and remedy a challenge the company faces in its current location that may make future operations untenable, or other locations materially more attractive.
2. Go beyond tax credits– Tax credits often get the press, but tax abatements, infrastructure assistance, training support, low-interest loans, cash grants, and much more are often possible. With rigorous site selection and due diligence on candidate locations, companies are able to uncover site needs that can be addressed with incentives such as land preparation, utility extensions and improvements, expedited permitting, and other inducements.
3. Are not always of value– Companies may be offered incentives that are all but useless to them, such as tax credits that are unlikely to be claimed. Some incentives have onerous compliance requirements that make it difficult to monetize the inducement over time. Others are subject to fiscal realities; they may be tied to budgets that are depleted and may not be funded in the future.
4. Often are tied to performance– Economic Development leadership have elected officials and the general public to answer to. Incentives are granted after careful calculation of the net benefit of the outlay – all must deliver a return on investment, and mandates exist that a company receiving incentives will, over time, achieve its job creation and investment numbers. Many incentives may be subject to clawbacks, the notion that the company may need to surrender some portion of the package if the promised metrics are not achieved.
Be mindful of clawback requirements and how they are calculated in the negotiations process.
How can CEOs help ensure that teams pursuing incentives are optimizing the financial outcome for the company while considering the potential perception issues by local stakeholders? Here are a few tips from my 20+ years of helping companies with incentives.
First, go where you are wanted. That sounds obvious, but companies are likely to encounter more backlash to incentives deals in communities that have shown resistance to the investment during the site selection process. Second, know when enough is enough.
Pushing boundaries is not uncommon, but companies that push for incentives to levels that defy any rational benchmarks, that are perceived to “take” from the community, or that place elected officials in untenable situations, place the company’s and local partners’ reputations at risk. Even if the deal is welcomed by the community, we have seen some incentives deals negatively impact the borrowing capacity and debt rating of communities, jeopardizing needed improvements to schools and infrastructure.
Finally, be visible – articulate and celebrate how the project will bring positive change to the community. Many projects are truly transformational for communities, often delivering multi-generational positive impact. However, some communities sour on companies that appear for the signing but disappear once the ribbon cutting is over; remaining engaged in the community is a wise practice. Some ideas include co-investing in a program or equipment at the local tech college, quantifying the economic and social impacts of the project, giving something back to a local charity, and driving employee engagement through community-based volunteerism.
Done well, incentives can create undeniable win-win scenarios. They bring meaningful value to companies as they make investment and job deployment decisions, helping to reduce up-front cost, ongoing expenses, and development risks, all while delivering jobs, income, and other community benefits. CEOs and their teams must work to optimize outcomes for all parties to help ensure that the pursuit of incentives does not come at the cost of something more precious.