The changing face of investment incentives

A few years ago a Brazilian pharmaceutical company approached Palm Beach County in Florida with a proposition: it would set up a plant within its jurisdiction to manufacture its product, creating some 100 jobs in the process. In return it wanted financial incentives and free land.

Kelly Smallridge, CEO of the business development board of Palm Beach County, gave the proposal a look and came back with the questions it had asked of all companies seeking incentives in the jurisdiction: could the board see three years of financial records? Was the revenue stream a sustainable one? Was there any litigation against the company at the time? The Brazilian firm was taken aback, suggesting that Palm Beach’s process was rigorous compared with other locations to which it had spoken. Eventually, it opted to go elsewhere.

Beyond the headlines

Ms Smallridge was neither surprised nor particularly upset at this development. In comparison with some other locales, Palm Beach has opted to dole out its incentives very sparingly – only about one-third of its projects actually receive them in any given year, and when they do, they are performance based. “No money is ever extended on the front end,” she says.

The Brazilian company’s surprise at Palm Beach County’s attitude is understandable. The headlines, it seems, are full of blockbuster-sized deals that global firms land when investing in new markets, especially in the US.

In 2017, Foxconn received $3bn from Wisconsin in what was the largest greenfield investment by a foreign company in US history. Barely out of the starting gate, the competition for Amazon’s second headquarters in North America is already so intense that the state of Maryland is offering $5bn in incentives and the state of New Jersey is offering $7bn. Alabama won the $1.6bn Toyota-Mazda factory with a $700m incentives package, topping offers made from Texas and Louisiana.

Reality bites

The reality of what is happening on the ground, however, is not reflected in these headline deals. In fact, since 2014 there has been a decrease in the number of incentives awarded on a global basis, according to Nerys Coleman, deputy director of products at FDI consultancy Wavteq. In 2017, $17.1bn was awarded in incentives globally. In 2016, the figure was $14.08bn.

Another telling stat is that out of the 15 highest incentive offers over the past seven years, only one was made within the past two years, which was the Foxconn transaction. Eighty percent of the highest incentive offers took place between 2011 and 2015, and 75% of global incentive deals of more than $100m occurred between 2010 and 2014, according to IncentivesMonitor.com, a tracking service from Wavteq.

In other words, since 2015 the deals such as Foxconn’s in Wisconsin have been the exception and not the rule. “There is clearly a trend in decreased incentive spending,” says Ms Coleman.

Incentives narrowed

At the same time, the data also shows that transparency around incentives has become more important to local economic development officials, according to Mary Hebert, the US senior vice-president of Wavteq. “There is a lot of pressure on governments to make sure they are delivering a return on investment – at the very least they have to show what the economic impact of the incentive and the investment by the company will be,” she says.

Hence the growth of performance-based incentives in many US states. “If you are an Amazon or otherwise planning a huge project, then the dynamics are a little different,” says Steve Brunson, principal for the financing and economic incentives practice at McGuire Sponsel, a specialty tax and advisory firm. “But for a company looking to build a manufacturing facility for $30m and hire 150 people, the programmes are going to performance based.”

Yet another trend is also emerging: narrowly defined incentives, such as around job training or incentives tied to local universities.

Similar trends are under way in the UK and Canada, although to a lesser extent than the US. But then the US, anecdotally at least, would seem to provide more outsized incentives in the first place. In 2017 in the UK, 296 projects received incentives for a total of £179.13m ($251.3m), according to Wavteq. The London Taxi Company received the largest incentive package, valued at £16.1m. In Canada in 2017, 238 projects received incentives for a total of $640.6m with the largest being Ford Motor Company, which received a grant valued at $154.54m. The US, for its part, awarded 2925 projects in 2017 with a total value of $10.78bn in incentives, with Foxconn receiving the largest prize.  

A shift in thinking

There has been a shift in thinking about incentives on the corporate side as well. Forward-looking economic development officials have long understood the importance of an area being a good fit for a company culturally, economically and in terms of transportation and industry, but in recent years more companies have been coming to similar conclusions, according to Douglas van den Berghe, president and CEO of Investment Consulting Associates. For such companies “incentives are just the icing on the cake”, he says. “I’m not saying they are not important, but if the fundamentals of a business environment are not there, such as the talent or the infrastructure, the investment is just not going to happen.”

Also companies have learned to be wary of incentives following the 2016 EU ruling that Apple should pay back Ireland €13bn in taxes. “Companies are looking at transparency and predictability in policymaking around incentives now,” says Mr van den Berghe. “There have been a number of cases worldwide in which companies have had to pay back some or all of the incentives they received because there was a new government or new policy put in place.”

Then there are those companies that do not want to be viewed as taking every last dollar in a deal, according to Mr Brunson, preferring instead to be viewed as a good steward of the local economy. “There are wide differences in cultural approaches to incentives. You can definitely see the difference in approach between a European, a Japanese and a Chinese firm as they negotiate for incentives,” he adds.

Companies are also more nervous of the negative publicity they could receive if a lucrative incentive package makes its way into the media, which frequently happens due to the fact that much of the information is public. “Even US companies expanding within the US will ask if they are pushing the envelope too hard,” says Mr Brunson.