Attractive incentives and tax deductions have always the interest of companies considering to set up new operations wherever in the world as financial packages can reduce investment and annual operating cost. But Covid-19 causes hurdles, but also new opportunities.
Covid-19 will not only lead to 40-50% less new investment projects in 2020, but puts also current investment projects in jeopardy. From an incentive point of view Covid-19 can cause substantial compliance issues. Take for example an industrial products manufacturer now building a new plant in North America, Europe or Asia. The company was satisfied with the incentive package negotiated. But due to the current unfavorable economic circumstances the board decided to invest 15 million USD less and to install only 3 product lines instead of the initial 5. This means also that not 400 jobs will be created but 250. However, the financial package was agreed on higher amounts of investments and jobs created. So, the company fails in complying with the terms and conditions agreed before. What does that mean for the incentives? But also the new plant will also be opened later, so the company misses agreed upon deadlines. What does that mean for the incentives? And for new office operations, where 75 per cent of the workers keep on working at home the next years for 3 days in a week; how do you than count jobs created in the new center?
The way how governments and economic development agencies handle these situations varies tremendously, from very rigid to very flexible. But reductions, terminations and deferments are on the table. Our advice: assess your situation, ask advice from an expert and open up discussions with the pertinent authorities.
Covid-19 can bring also positive economic incentive news. Although governments everywhere struggle with their budgets, the appetite to revitalize the economy is huge as growing unemployment underlines the urgency. Here again, the answers from governments vary tremendously: short term financial help, low interest loans, higher incentives, but also for example substantial financial support to bring China based manufacturing jobs back to the home country (Japan, US).
As the incentive landscape is changing it makes sense to review your opportunities.. BCI Global distinguishes six categories of incentives:
Whether you are eligible for financial support, depends on a wide variety of relevant factors (see below). They determine for what kind of financial support – to what level – under what conditions your investment project is eligible.
Source: BCI Global, 2020
While economic support sounds great, there are also hurdles ‘on your way to the bank’. Red tape is an often-mentioned barrier, i.e. complex, long and unclear application procedures, with often detailed monitoring and reporting during the eligible period. Negotiating with pertinent authorities can be difficult if your project changes during the location decision process: different project parameters, different planning/timing, ownership requirements, to name a few.
Hurdles can emerge even after a Commitment Letter if the project changes (for example: more automation than anticipated, so fewer new jobs; another pandemic), or your project planning, or the key performance metrics, or a combination of the above. Though renegotiations may be the result. Last but not least uncertain, political and public support can be unpleasant, and media coverage can be negative. The Amazon headquarters case in New York is well-known, causing Amazon not considering the Big Apple anymore.
BCI Global works with a detailed 4 step process in which we combine our 35 years of experience in dealing with public and private authorities all over the world. We follow an ambitious-realistic path, analyse carefully whether the eligibility criteria match your project, understand what the counterparts are looking for (jobs, investments, selling land, etc.) and know that at the end of the day you have to cope with the specifics of each financial arrangement.