Recommendations Regarding Site Location Incentives for Large Manufacturing Projects

Mar 9, 2015

The wisdom of providing aggressive public sector financial tax incentives to attract economic development projects remain a hotly contested topic. Recent significant announcements, including those by Tesla, Boeing, and Daimler, and the aggressive incentive packages used by the public sector to lure these projects, continue to fuel vigorous debate between those in favor and those not in favor of using site location incentives to attract large projects.

Background:
Whether one agrees with the use of site location incentives or not, the fact of the matter is that they are increasingly being used to lure significant capital investments and related jobs in both industrial site selection projects and headquarters site selection projects.  Over time, the value of various inducements used to attract economic development projects is trending upward (as indicated in Figure 1). As an example, recent press reports indicate that the State of Nevada offered Tesla a $1.3 billion incentive package to locate its planned $5 billion lithium-ion battery factory projected to create approximately 6,500 direct jobs near Reno. Also, following the 2008-2009 recession, the ratio of the value of incentives to jobs created has increased significantly as the public sector aggressively pursues new job creation to reduce unemployment and jump start local economies.

Figure 1. The Increasing Value of Incentive Value Offered Per Job for Large Deals in the Last 20 Years
CaptureSource: Good Jobs First Subsidy Tracker, SDG Calculations, “Large Deals” means deals which attracted over $75 million in reported incentives

Recommendations for the Private Sector Related to Negotiating Site Location Incentives:
The private sector typically has two primary motivations in site selection and incentive negotiation, 1) obtaining the lowest short and long-term cost structure at sites with optimum functionality, and 2) maintaining and enhancing goodwill in the cities where they locate.

Key mistakes often made by corporations undertaking site selection projects include not setting up a competitive situation for incentive negotiations and not understanding the true, usable value of incentives that are being offered. The following are recommendations for corporations undertaking the site selection process:

  • Understand the likely positive public economic impact of a project and negotiate incentives accordingly.
  • Verify the usable value of tax incentives and other incentives; some tax credits have little or no value based on individual tax situations.
  • Conduct Net Present Value or other financial analysis to compare the short and long-term expenses and operating costs of sites being analyzed and the risk-adjusted value of incentives being offered.
  • Don’t let incentives steer a project to a site that has operational challenges. Operational losses from the wrong location last forever.
  • Develop binding agreements to ensure incentives are delivered at the value and timing they are promised.

Conclusions:
Incentives play an increasingly important role in site selection decisions and their increasing value has caused many to question whether incentives are good public policy while others believe that incentives are a critical tool for competing for jobs and investment in the global site location market place.

Site location incentives create value for the private sector when they drive investment to sites that have the highest operational and cost efficiencies and “bad” when they encourage site selections at locations that jeopardize operation and cost competitiveness. Thus, both the public and private sector must utilize great care when offering or accepting incentives to ensure mutual long-term benefit.

For more, read our article in Business Facilities Magazine.

[Strategic Development Group, Inc. provides site selection and negotiation services with a focus on large foreign and domestic projects.  The firm has sited projects valued over $2 billion within the last three years.  We would be pleased to discuss your company’s site location needs and hope to have the opportunity to add value to your company’s site location process.]

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