I. Background
II. Incentives
III. The Incentives Negotiation Process
IV. Conclusion

Baseball. Hot dogs. Apple pie. Incentives. . . . Incentives? They are about as commonplace in the U.S. as baseball and the rest, and have been so for at least as long. Many articles already have been written about the typical incentives in the U.S. While there are some common types and approaches, the possibilities are endless. Incentives vary greatly from state to state, and from locality to locality.

This article focuses instead on the elements of a comprehensive project negotiation process which can produce the optimal incentive package for the company and all the other stakeholders. Typical operating facility projects include headquarters, significant corporate offices, manufacturing or assembly plants, distribution centers and other warehousing or storage facilities, call centers or other customer service centers, and processing centers. Whatever the specific incentives and other deal points may be, all strong incentive packages (i.e., those which are "win-win" or mutually beneficial for all sides) result from a well-designed and well-executed project negotiation process.

This article starts with a background on the subject of incentives, then briefly lists of incentives which may be found in a U.S. incentive package, and then outlines a suggested project negotiation process, which includes incentives negotiation as an integral part.

I. BACKGROUND
Incentives exist in the U.S. mainly because of the convergence of four facts: (1) the U.S. has a federally-regulated interstate, free market economy; (2) the U.S. embodies a huge diversity of tax and other regulatory structures among the 50 states and their thousands of localities; (3) there is the constant desire of, and competition among, different federal, state, and local governments to attract and retain different businesses to create jobs and tax base; and (4) the business sector constantly is seeking new or expanded markets, plus better and cheaper ways to operate in those markets.

For many years, both U.S.-based and non-U.S.-based firms increasingly have been investing capital in U.S. operating facilities. Virtually daily, a company decides to develop, buy, or expand -- or downsize, consolidate, or close --an operating facility in the U.S. Often, one of the factors in that decision is the "incentive package" or similar set of incentives and other benefits from the government parties and sometimes the utility companies. The purpose of the incentive package is two-fold: to reduce the company's start-up and/or operating costs, including taxes; and to attract, retain, or expand the project capital investment and jobs for the community.

The incentive package should result from a project negotiation process involving the company, the various government parties, and other stakeholders (property owners, citizens groups, utility companies, and finance sources). If designed and executed well, the process will provide both the optimal start-up and operating environment for the company's facility, and also a good long-term corporate citizen for the community to enhance its jobs availability, tax base, and flow of commerce. The optimal environment is the one which allows the best possible achievement of the company's objectives regarding costs of doing business, qualified workforce availability, infrastructure adequacy, access to suppliers and customers, and quality of life.

However, despite the economic benefits of a particular deal, the optimal business environment often is less than the ideal one. The company, governments and other local stakeholders usually must compromise on conflicting timetables, plans, and priorities.

Furthermore, every so often, including now, various state governors or economic development officials get together to see if they can "call a truce" to their regional competition for attracting jobs. Even the federal government periodically considers whether it should allow or deter this competition. Meanwhile, companies continue to compete with each other for the best locations, operations, and markets. Governments continue to compete with each other to attract and retain those companies. And in the U.S., business incentives are used in the competition every day.

II. INCENTIVES
The most important consideration for the company is whether the project makes business sense in the long-term, if not in the short-term as well. If the answer is no, then the company should not pursue the project in the first place. If the answer is yes, then incentives can help to equalize, "break the tie," or "level the playing field" among the various regulatory, cost, workforce, and/or infrastructure factors in the competing states or localities under consideration. As the old U.S. cliché goes, incentives cannot make a bad business deal good, but they can make a good deal better.

So, the only good incentives are useful incentives. And, their usefulness is determined when they are put into the context of the project's start-up and business operations. For instance, a state income tax credit is a worthless incentive if the company does not have a state income tax liability and will not have one for years to come due to net operating loss carryforwards in that state. Accordingly, the company's objective should be to identify or create if necessary, negotiate, and implement incentives in these following general categories only if the company can use them:

Keep in mind also that, throughout the U.S., the definition of incentives will vary greatly: (1) from just standard tax or other regulatory attributes (for example, a statutory sales tax exemption for equipment used in manufacturing), to truly discretionary or negotiated benefits or "breaks" for a particular company; (2) from being absolute (not contingent on the company's performance), to being performance-based; and (3) from being subject to appropriation of funds from the legislature, to being binding on the government.

III. The Incentives Negotiation Process
Successful project negotiation will require an interactive process to accomplish at least two parties' goals. It will involve much more than a few simple steps or tricks; it is not an event. To maximize their value, the company needs to address incentives as an integral, not isolated, part of that process.

The project negotiation process has three basic stages:

These stages are not always discrete and separate. They do not have clear lines between them and in fact are often revisited. The following outline provides some points on these three stages. The outline then concludes with some dos and don'ts when negotiating incentives. The phrase "other side" used below is a collective reference to any of the government parties, utility companies, property owners, and other stakeholders.

However, there is a seemingly infinite array of incentive packages. Whatever its specific components are, the project's particular incentive package will be the best possible one if the company (1) fully identifies its incentive opportunities, (2) creatively integrates them into the overall project requirements, and (3) properly designs, controls, and executes the project negotiation process.

[View the Printable Version of this page.]