ublic financial support for business is a common practice in most parts of the world as governments try to encourage corporate behavior that is beneficial to the economy and society at large. While there is disagreement about the economic benefits of government incentives, there is no doubt that these have an influence on corporate investment activity.
This influence is particularly strong — and sometimes controversial — in the case of incentives designed or used to affect corporate location decisions. Particularly in the United States but also in many other areas of the world where competition among locations for corporate investment is strong, incentives have become an established part of the location selection process. Many companies value the financial benefits provided by governments and have incorporated these in their decision making for selecting new locations.
Despite the importance assigned to incentives, companies do not always take full advantage of the benefits that are available to them. There are two ways in which companies may be leaving money on the table:
1. Companies do not receive the benefits to which they are entitled.
Contrary to popular belief, governments do not simply give money away. Public incentives such as tax credits or grant programs come with strings attached in the form of reporting and performance requirements that companies must meet in order to secure benefits. Companies sometimes fail to fulfill the administrative procedures involved, which can be very burdensome and time consuming. Training grants, for example, usually require extensive reporting to document that all employees receiving training are eligible for funding. The same is true for incentives related to specific types of capital spending, which require companies to provide detailed records of items purchased as part of a capital expenditure program. In the recent economic downturn, some companies have not been able to meet the performance requirements included in their incentive agreements.
Organizational issues may also prevent companies from securing the benefits to which they are entitled. A typical scenario involves companies that have received an incentives package for a new investment or expansion. Once the incentives agreement has been concluded, the responsibility for administering and securing the benefits over the course of the investment is not directly assigned internally, causing the company to miss out on incentive payments that were part of the incentives agreement. This is often the case in companies where the team leading the site selection and incentives negotiations moves on to other projects and has no further contact to local staff at the new facility, who may be in the post position to administer the incentives secured for the investment.
2. Companies are not aware of the incentives opportunities available to them.
In some cases, companies are simply not aware that incentives exist to support a particular activity. In the European Union, for example, the range of activities for which incentives are available is seemingly endless, and includes everything from R&D and product development to employee training and investments in energy efficiency. To put this into numbers, the overall budget for European Union funding programs for the period from 2014 to 2020 amounts to €960 billion. Although a large part of this is allocated to agriculture and infrastructure spending, the budget also includes €91 billion for “improving European competitiveness” and €70 billion in research and innovation grants for researchers throughout Europe. This funding will be disbursed through innumerable programs administered by government agencies at the European, national, regional and local levels. In the US, a 2012 review of business incentives by the New York Times estimated that state and local governments provide $80.4 billion in incentives each year through 1,874 different programs.
Even for companies that actively seek and track government funding opportunities, it is easy to miss opportunities for new incentives or changes to programs that may affect existing agreements. However, not all incentives programs are equally attractive and companies must weigh the potential benefits against the effort and cost of applying. Some companies choose not to take advantage of incentives opportunities at all, because the application procedure would slow down or delay their plans.
When entering into an incentive agreement with a particular government, the company is establishing a public/private partnership with the community. In developing this partnership, it is critical to work closely with the government and community officials to identify all opportunities that may be available for the company. While most incentive programs may be discovered through research of economic development websites and promotional materials, there are often opportunities that communities may offer companies that are based on discretionary authority.
Often, companies don’t realize incentive opportunities extend beyond job creation and/or new capital investment. Many governments are offering incentives targeted at the retention of employees at a facility. Governments offer these incentive programs to provide assistance for companies to grow in their existing location and help make the business case more attractive for them to remain.
There are a few key reasons why companies are unable to take advantage of incentives already available to them or are not aware of the opportunities that exist.
As indicated above, the sheer number and diversity of incentive programs makes it difficult for any company to be aware of all opportunities. Even government agencies may not be familiar with every program offered by other agencies or levels of government.
Another challenge is that incentives are rarely a formal corporate function. Smaller companies in particular are often unable to take advantage of incentives opportunities because they lack the resources and time. While some large companies may have a person or small department responsible for securing and administering incentives (often based in the company’s tax or finance department), this type of specialized incentives role tends to be an exception.
Even where a dedicated incentives function exists, the diverse nature of incentives means that coordination among the various departments that are involved in incentives is essential. Depending on the particular incentive program, this could include human resources (for hiring and training incentives), real estate (for facility investments and expansions), R&D (for research related programs), manufacturing (for new capital expenditure programs), procurement (to document purchases) and several others. This need for coordination is compounded in companies with a large geographic footprint, where a centralized approach to managing incentives is often impossible. The various functions and individuals must be identified and in place prior to undertaking the compliance and administration phase of an incentive agreement.
There is no data to quantify how much money is actually being left on the table. However, project experience and anecdotal experience suggest that even the most sophisticated companies may not be making the most of the incentives opportunities available to them. The following are a few simple ways in which companies can reduce the risks of this happening:
Andreas Dressler is managing director of Berlin, Germany-based Terrain, a corporate location advisory firm and a division of Conway Data, Inc. He can be reached at firstname.lastname@example.org.
Jason Hickey is president of Hickey & Associates, a full-service site selection firm based in the United States. Jason can be reached at email@example.com.
What can companies do when they realize that they have in fact missed an opportunity? In cases where this relates to a project or investment that has already begun the answer is: very little. Although some tax credits can be claimed retroactively, most incentives programs must be applied for before the activity for which support is being sought actually commences. In both Europe and the US, for example, ordering equipment or securing property before applying for incentives is likely to make a facility investment or expansion ineligible for government support.
If a company realizes early enough that it will not meet an existing incentives program’s performance requirements, it is advisable to be open with government officials and work with them to address the situation. In our experience, most government agencies understand that a company’s situation may change and are interested in helping companies to manage the impact on their incentives agreements.
There is a sometimes-held notion that individual companies ask for handouts or push governments to provide them with incentives. In reality, most incentives programs have been created by governments to meet specific policy objectives and are equally available to all companies that meet the eligibility requirements. It is up to each company to determine whether and to what degree to take advantage of these opportunities.