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

2

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)



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



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



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


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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



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




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



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



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



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



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



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


EVALUATION OF INCENTIVE PROGRAMS

1 2 3 4



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



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



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



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]

canadian incentives and how they compete...

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