Canadian Incentives and How They Compete...
Transcript of Canadian Incentives and How They Compete...
STRICTLY CONFIDENTIAL November 1, 2016
© The CAI Global Group, Inc. 2016 1
CANADIAN INCENTIVES AND HOW T H EY COMPETE G LOBALLY
Isabel CyrSenior Consultant
NOVEMBER 1, 2016
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AGENDA
2016-11--01
• The Importance of Incentive Programs
• The Location Decision: Where Incentives Fit In
• The Global Incentive Landscape
• Canada’s Investment Project Competitors
• Incentives: Canada vs the United States
• An Evaluation of Incentive Programs
• Conclusion
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THE IMPORTANCE OF INCENTIVE PROGRAMS
THE DIFFERENT T YPES OF INCENTIVES
The term “financial incentives” refers to: Grants (outright grants and reimbursable grants) Tax Credits (Refundable and non refundable) Recruitment and Training Incentives R&D Incentives Utility Incentives (rate reductions or grants) Infrastructure Grants No-interest or Low-interest loans (forgivable and non-forgivable)
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ARE INCENTIVES NECESSARY?
Against For
Source: Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses. By Andrew Charlton. OECD. January 2003. and CAI’s Analysis
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EXAMPLE: THAILAND’S INCENTIVE REFORM
Diversify the Economy
Address Labour
Insufficiency
Source: Thailand Board of Investment
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ANOTHER ADVANTAGE
Incentive programs indirectly lead to more dialogue within the local industrial cluster
Investment Poaching
Healthy Competition
Beggar‐thy‐Neighbour
Winners’ Curse
MATRIX OF INCENTIVE USE OUTCOME
INTERNATIONAL WELFARE
DO
MES
TIC
WEL
FAR
E
MATRIX OF WELFARE OUTCOMES FROM THE USE OF INCENTIVES
Gain
Waste
GainWaste
Source: Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses. By Andrew Charlton. OECD. January 2003.
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THE LOCATION DECISION: WHERE INCENTIVES FIT IN
THE INVESTMENT PROJECT MATRIX
Implementation
Strategy
Site Selection
Financing
Source: The CAI Global Group Inc., 2016
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THE SITE SELECTION PROCESS
P R E L I M I N A R YR E S E A R C H
C O M M U N I T YA P P R O A C H
D U E D I L I G E N C ER E V I E W
L O C A T I O NC H O I C E
B E N C HM A R KL O C AT I O N S
& S I T ES
Can bias the list of jurisdictions
Request for and incentive proposal (as a separate RFP
or in the RFI)
Cost model and decisional matrix
Close the gap and influence final decision
T H E RO L E O F I N C E N T I V E S I N S I T E S E L E C T I O N
Source: The CAI Global Group Inc., 2016
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INCENTIVES ROLE IN F INANCING
Reduce initial costs
• Capex or investment grants• Grants to offset start-up costs• Infrastructure grants• Recruitment incentives• Training incentives
Reduce operational costs
• Job tax credits• Utility rate reductions• Property tax abatements• Sales tax exemptions• Inventory tax exemptions
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EXAMPLES OF PROJECTS
India Project Example Make in India incentive programs offered a grant of 25% of the project’s
projected capital expenditure because the company operated in the electronics sector
Other incentives for this project included programs that offset start-up costs, salary expenses, quality certifications, utility expenses, and taxes
In this case, the total incentive package covered 50% of the project’s initial investment
Mexico Project Example Two Mexican sites located 30 minutes apart offered different incentive
packages and different overall support ($22 million versus $1.3 million) Major difference was one site as located in a state with an existing
aerospace cluster (and competitor) Other site was in a state looking to diversify its economy and house its first
Tier 1 aerospace manufacturer
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THE GLOBAL INCENTIVE LANDSCAPE
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THE GLOBAL INCENTIVE LANDSCAPE
Globally, many of the same factors affect incentive packages Important not to generalize by country and look at every region
separately Understanding the investor and investment project will help you
understand which jurisdiction you are competing against
FACTORS AFFECTING INCENTIVE AWARDS
Capital investments
Creation of new jobs
Associatedwages
Underdevelopedlocations
Source: The CAI Global Group Inc., 2016
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EXAMPLES OF OTHER FACTORS
Start-up costs Both Mexico and India offer incentives to offset non-capex start-up costs
Electric usage incentives by utility companies TVA offers economic development grants for the areas it services in most of Tennessee and
Northern Georgia Duke Energy offers a “Carolinas Fund” Economic Development grant for sites it services in North
Carolina and South Carolina Other states, like Connecticut, New Jersey and New York offer solar panel incentives to reduce
electric grid usage
Use of port In the U.S., most seaport regions offer incentives based on the volume use of the port
Foreign investments Many countries and regions will prioritize foreign-owned investments In Brazil and Mexico, certain schemes can be put in place to exempt foreign manufacturers from
paying special taxes like the VAT in Mexico and the social contribution in Brazil
CANADA’S INVESTMENT PROJECT COMPETITORS
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CANADA’S COMPETIT ION
Regions within Canada sometimes compete with other regions for mobile investments
Investment projects are in the form of FDI or domestic investments 30% of FDI in Canada is manufacturing 49.4% of FDI in Canada is from the U.S.
Competition is strongest between sub-national governments that are close neighbours with similar economic conditions Based on CAI’s experience, Canadian regions compete most often against regions in the United
State Not all low cost countries are well positioned to attract manufacturing investments and usually
they complement existing operations in Canada
Source: Statistics Canada: CANSIM 376-0052, and table 376-0051
Source: Incentive Bidding for Mobile Investment: Economic Consequences and Potential Responses. By Andrew Charlton. OECD. January 2003.
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CANADIAN COMPETIT ION: CAI ANALYSIS
INVESTMENT PROJECTS CONSIDERING CANADA
62%
19%
6%
13%
At least one(1) US State
At least one(1) US Stateand one(1) Region Outsideof NA
At least one(1) Regionoutside of NA
Within Canada Only
Source: Data from The CAI Global Group’s Site Selection Clients
81%Of the investment projects that considered a Canadian province also considered at least one U.S. state
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CAI PROJECT EXAMPLES
P r o j e c t A
•Food processing greenfield project looking to penetrate the western part of North America
•Considered specific regions in Alberta, Manitoba, Washington, Oregon, Idaho, Wisconsin and North Dakota
•Ruled out regions in BC and California
P r o j e c t B
•Expansion project to increase capacity in geomembrane manufacturing
•Canadian and Malaysia plants considered for the expansion in addition to the option to open new plant in Brazil
•Ruled out the option to expand Chile plant
P r o j e c t C
•Paper product manufacturer looking to increase capacity in one of the existing plants
•Quebec, North Carolina, Pennsylvania and Wisconsin considered for the investment
•Ruled out possibility to expand Oregon, Tennessee and Ontario plants
STRATEGIES USED BY SOME GOVERNMENT S
One NC Grant Program Grow NJ Tax Credit Program
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I N C E N T I V E S : C A N A D A V S T H E U N I T E D S TAT E S
CANADA VERSUS THE UNITED STATES
Incentive Budget Program Toolbox Use of Training Incentives Bundling Practices Governance Socio, Legal and Political Differences
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INCENTIVE BUDGET
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The U.S. spends $80.4 billion a year on
incentives
Canada spends $24.4 billion a year on
incentive programs
Source: The New York TimesSource: Fraser Institute
INCENTIVE SPENDING: CANADA VS THE U.S .
ProvinceAnnual Average
(over the last 3 decades)Per Capita
Quebec $3.98 billion $555.20
Alberta $1.7 billion $600.07
Ontario $1.6 billion $155.36
British Columbia $1.12 billion $306.84
Saskatchewan $631 million $625.30
Manitoba $362 million $321.15
Nova Scotia $160 million $174.79
Newfoundland and Labrador
$110 million $199.36
New Brunswick $83 million $112.14
Prince Edward Island $52 million $391.11
State (sampling)Annual Spending
(based on 2012 survey)Per Capita
Texas $19.1 billion $732.08
Michigan $6.65 billion $672.40
New York $4.06 billion $207.46
California $4.17 billion $109.56
Florida $3.98 billion $205.58
Ohio $3.24 billion $280.52
Georgia $1.4 billion $141.13
North Carolina $660 million $67.69
Idaho $338 million $211.25
South Dakota $27.8 million $33.49
Source: The New York TimesSource: Fraser Institute
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EXAMPLE OF INCENTIVE COMPARISON
US SitesState A
Site 1: $2,050,000
Site 2: $2,050,000
Site 3: $1,750,000
State B
Site 4: $21,841,360
Site 5: $31,877,338
State C
Site 6: $112,745,000
Site 7: $117,313,000
Site 8: $100,059,000
State D
Site 9: $269,877,941
Site 10: $214,820,574
Site 11: $123,771,946
Site 12: $112,807,395
State E
Site 13: $191,445,624
Site 14: $150,408,024
Site 15: $161,445,624
Site 16: $150,408,024
Site 17: $150,408,024
Canadian SitesProvince A
Site 18: $74,100,000
Site 19: $74,100,000
Site 20: $74,100,000
Site 21: $74,100,000
Province B
Site 22: $57,300,000‐$87,300,000
Site 23: $55,380,000‐$85,380,000
Site 24: $55,300,000‐$85,300,000
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PROGRAM TOOLBOX COMPARISON
Number of Programs in the U.S.
0 200 400 600
Other
Tax exemption
Loan/Loan participation
Grant
Tax Credit
Number of programs in Canada
Grants
Tax Refunds and Credits
Wage Subsidies
0 50 100 150 200 250
3381,934
Source: The CAI Global Group Internal Analysis, 2016.Source: The Council for Community and Economic Research
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PROGRAM TOOLBOX
In general, more of the Canadian programs are in the form of direct contributions or grants whereas more of the U.S. programs are offered in the form of tax credits Currently, 46 states offer some form of tax credit granted through statute and implemented
through various programs
Most of the Canadian programs are accessible only to SMEs and start-ups whereas many U.S. incentive programs are only accessible to large corporations
Source: Emily Chasan, Companies Cash in on Tax‐Credit Arms Race, Wall St. J. June 16, 2014
Source: Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives. By Greg Leroy. Good Jobs First. October 20, 2015
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EXAMPLE PROGRAM TOOLBOX
A p p l i c a b l e P r o g r a m s f o r U S S i t e s
•4 incentive programsState A:
•5 incentive programsState B:
•8 incentives programsState C:
•6 incentive programsState D:
•11 to 13 incentive programsState E:
A p p l i c a b l e P r o g r a m s f o r C a n a d i a n S i t e s
•2 incentive programsProvince A:
•4 incentive programsProvince B:
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USE OF TRAINING INCENTIVES
Both the Canada and the US offer training incentives but do so in different ways
Both have a federal apprenticeship program however it is more widely used in Canada than the U.S. One exception is in South Carolina, where the state launched an initiative in 2007 to take
advantage of the federal program and help company close the skills gap The unusual success in that state can be linked to its large European-owned automotive cluster
Most workforce incentive programs in the U.S. are offered locally and administered by the college system whereas in Canada, the bulk of the aid comes from the federal Job Grant program
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•Funding provided by the Government of Canada through the Canada Job Grant
•Businesses receive to $10,000 per employee to help cover the cost of training
•Programs delivered by the different provinces and territories (all but Quebec)
•Two programs in Quebec that refund training costs•The MFOR program refunds 35% of training costs
and CPMT’s large project program refunds 25% of costs
•Includes external expert fees, salaries for trainee and trainer, and material used for training
EXAMPLES OF CDN TRAINING PROGRAMS
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•GeorgiaQuickStart Program•Oldest workforce
development program in the US, training 1.2 million people through 6,765 projects
•Offers free services and training material but does not refund training costs
•JobsOhio Workforce Training Grant•Must pay a salary
above the wage floor set and be within one of the target industries
•Reimbursement-based grant
•Eligible costs include safety training, on-the-job training, training material, and travel costs
•Alabama Industrial Development Training (AIDT) Program•For new or retained
employees•Reimbursement grant
for recruitment and training
•Eligible costs include reasonable advertising, soft skill training, on-the-job training, and travel expenses
•Washington State Jobs Skills Program•Refund of up to 50% of
costs•Must be matched by
the company, exemption is given to small businesses
•Eligible costs include salaries, trainee travel expenses are not eligible but count as a match
EXAMPLES OF U.S . TRAINING PROGRAMS
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BUNDLING PRACTICES
I N C E N T I V E
P A C K A G E
Local Government
State Government
Federal Government Privately
Funded Economic
Development Agency
Electric Service Provider
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EXAMPLE OF INCENTIVE BUNDLING
STATE AGENCYNUMBER OF
PROGRAM
Virginia Department of Taxation 21
Virginia Small Business Financing Authority 10
Virginia Economic Development Partnership 8
Center for Innovative Technology 4
Virginia Coalfield Economic Development Authority 2
Virginia Department of Transportation 2
Virginia Film Office 2
Virginia Tobacco Indemnification and Community Revitalization Commission 2
Virginia Port Authority 1
Virginia Department of Agriculture and Consumer Services 1
Virginia Department of Environmental Quality 1
Virginia Department of Housing and Community Development 1
Virginia Department of Rail and Public Transportation 1
Virginia Localities 1
Total 57
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GOVERNANCE
Canadian incentives are more frequently centrally funded and administered; very few local municipalities or counties offer incentives In the last three decades, the Canadian federal government spent $13.7 billion on subsidies to
business
In some US states, the local municipalities offer more financial aid and have access to more tools Examples: City of Orlando after eFlorida lost its Quick Action Closing Grant funding, North Carolina
counties since the Article 3J tax credits expired
Many regional economic development agencies are partly funded by the private sector and are often set-up as PPPs Example: Law firms in many southern states will donate to economic development agencies for
business development
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CANADIAN GOVERNANCE OF INCENTIVES
18% Of all Canadian incentive programs cover more than one or all provinces and territories
For example, Agri-innovation is pan Canadian, the Canada Job Grant
program covers all provinces except for Quebec, Work Smart covers all
the Atlantic provinces, Western Innovation (WINN) Initiative covers the
western provinces and the Northern territories have several small
business programs available for the NWT, Yukon and Nunavut
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Source: The CAI Global Group, Internal Analysis, 2016.
EXAMPLES OF U.S . REGIONAL PARTNERSHIPS
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GOVERNANCE: TARGETED INDUSTRIES
Sectors Targeted by Regions Nationwide Targeting of Food ProcessorsGrowing the Canadian Food Processing Sector: An Industry/Government Action PlanVS
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SOCIO, LEGAL AND POLIT ICAL DIFFERENCES
CANADAMore autonomy given to the investor
Consultants and companies are almost always required to register to the lobbyist act
Historic awards details are more difficult to look-up
Incentives fall within provincial borders and their geographic span is more clearly defined
UNITED STATESCan appear more proactive and business-friendly
Statutes behind incentives are often complex
Transparency in awards is standardized on the federal level
Regional EDOs, Tabaco funds, NMTC, and electric company territories not limited to state borders provide unclear incentive borders
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RECENT TRENDS IN THE U.S .
Increased transparency New requirement for governments to adhere to the GASB standards to disclose the costs of tax
abatements starting in 2016 and to be published in 2017
More long-term local incentives 2015 Made in Alabama Act allows local governments to provide extended 20 year period of tax
abatements
Retention of existing companies Both New York and New Jersey prioritize existing businesses
Shift away from tax credits that cannot be used The recent Grow New Jersey Act requires that tax credits be sold at no less than 75% of its value New tax credit programs are more and more refundable or usable against an employers payroll
withholdings
RECENT TRENDS IN THE U.S .
“Deal Closing” grants are still popular but heavily scrutinized Many state’s have closing grants and some are increasing funding, others have seen their
funding reduced
Focus on workforce though training and other incentives In Texas, only training in transferable skills are incentivized In New Jersey, facilities locating near major public transport hubs receive bonus incentives Many programs across the U.S. require that the company cover at least 50% of health care costs
Due diligence on cost benefit and competitiveness Many programs require an economic benefits analysis and have statutes with “but for” clauses
Lowering of corporate income taxes South Dakota offers almost no incentives but lowered the corporate tax rate to zero instead North Carolina and New York implemented tax reforms that lowered manufacturing state
corporate taxes to 4% and 0% respectively
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A N E V A L U A T I O N O F I N C E N T I V E P R O G R A M S
F O U R C R I T E R I A T H A T M A K E S U P A N E F F E C T I V E I N C E N T I V E P R O G R A M
Clarity and Information Accessibility Responsiveness
Financial Support/Program Funding Application Complexity
Source: The CAI Global Group Inc., 2016
EVALUATION OF INCENTIVE PROGRAMS
1 2 3 4
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CLARIT Y AND INFORMATION ACCESSIBIL IT Y
• Entirely available online• Clear definition of the programs’ scope and admissibility criteria
• Defining who can apply and for what
Ontario Local Food Fund
•The criteria and purpose of the program are clear with examples of a typical investment
Georgia’s EDGE Grant
•The program information is not included in their promotional incentive brochure for businesses
RESPONSIVENESS
• Treating the application in a rapid manner• Empower local representatives to support the investor (applicant)• Avoid “Yes” and “No” applications• Levels of evaluations and approvals
New York State’s Excelsior Program and ESD Grant
•The application form is provided with the incentive proposal and administered by regional offices
Wisconsin Job Creation Tax Credit
•Total delay for a project from the presentation varies between 4 and 6 months depending on the type of projects government wishes to attract
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FINANCIAL SUPPORT/PROGRAM FUNDING
• Type, condition and cap of financial support suitable to businesses’ needs
• Appropriate level of funding to run the program
Job Creation Tax Credit / Jobs Ohio Training Grant
•Funding is provided through a liquor tax and the criteria allows small and large projects to access the program
Georgia’s QuickStart•Funding is not available for smaller
investment projects and no alternatives are offered
APPLICATION COMPLEXIT Y
• Requirements and time needed to comply with the information demanded• Complexity in the application does not render your program ineffective if
matched with responsiveness
Washington State Governor’s Strategic Reserve Fund
•Discretionary grant provided ad-hoc, with no formal application, easy payment process and little restrictions
Grow New Jersey Tax Credits•Statutes do not clearly delineate the process
and eligibility criteria•The process is complex, rigid and not easily
accessible to firms with limited resources
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C O N C L U S I O N
KEY TAKEAWAYS
It is important to understand the investment project from the investor’s perspective in order to understand the competition
Canadian regions often compete against U.S. regions Sub-national governments in the U.S. can be fierce competitors to
Canadian regions Regions are best equipped to attract FDI and would benefit from having
discretionary financial incentive tools at their disposal There are trade-offs between the four criteria that make-up a good
incentive
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INCENTIVE BEST PRACTICES
Tied to performance criteria rather than unconditional, with mechanisms for monitoring and enforcement
Back-loaded rather than front-loaded: award incentive payments after targets are met rather than before to avoid the need to use claw backs
Rule-based rather than negotiated or ad hoc Accessible to both small and large investment projects Favours investment projects that increase workforce welfare Administered locally to empower your regional economic developers Tailored to suit targeted industries which would benefit your region
INCENTIVE BEST PRACTICES
A f f o r d a b l e
Ta r g e t e d
S i m p l e
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THANK YOU
Isabel Cyr, Senior Consultant I 514-982-0095, ext. 225 I [email protected]