State and Local Communities Want Your Investment. They Also Want You to Live Up to Your Agreement

Amazon is asking Virginia for the first tranche of state incentive funds that it promised it would pay out for its H2Q headquarters. This comes as economic uncertainty is intensifying the debate over the worthiness of investment incentives. 

Amazon filed a grant application on March 31 seeking $152.7 million — the first installment due to the tech giant related to its decision to build a second headquarters complex in Arlington County, according to the Associated Press.  Under the deal, Amazon is meant to create 25,000 jobs by 2038 – with the application stating that Amazon’s confidence is “high” that it will meet the requirement despite pausing the centerpiece of its new campus, the Pen Place Development project, the AP reported.

If approved, the money will not be paid until at least July 2026 as per the deal.

The filing comes as states and communities are stepping up oversight and enforcement of existing agreements as they look to reclaim budget expenditures wherever they can given the threat of a looming recession and growing calls for transparency, according to incentives and site-selection experts.

 “Going forward, states and communities face increasing exposure to a risk of non-performance on incentive agreements and will need to carefully consider the scale of incentives offered and the risk of non-performance,” Mark Williams, president of site-selection firm Strategic Development Group, tells GlobeSt.com. 

At the same time, with the looming downturn, governments are under increased pressure to secure investments.

“Competition is high for larger projects, where existing structured incentive offerings may be combined with custom offerings to give the city/state the best chance of securing the project,” Rob Creamer, executive vice president at economic development consultancy ResearchFDI, tells GlobeSt.com. “In mega-project situations, while further conditions on incentive awards and additional monitoring and evaluation of their impact are surely the aim, authorities may find it difficult to implement such positive changes in these circumstances.”   

Indeed, many states are still going big on incentives, despite the criticism by some that such incentives don’t pay off.  Alabama Gov. Kay Ivey signed a package of economic development incentives into law April 20, reauthorizing and expanding tax breaks for attracting new industries.

Competition for investment is also typical on a global scale, with incentives used as a differentiator. This can be seen by an announcement the same day that Vokswagen will receive more than $9.7 billion in subsidies and $500 million grant for building its North American battery plant in the country.

Investment project sizes have continued to increase significantly along with the value of incentive commitments causing increasing exposure to offering entities, Williams warns. For certain sectors showing increasing project announcements and investment sizes such as in EVs, semiconductors and green energy, activity is being further bolstered by the US government’s grant offerings through programs such as the Inflation Reduction Act and the Chips Act.  

Experts expect that governments will increase their focus on offering performance-based incentives that ensure payouts won’t occur until after performance metrics are met, and put in place measures that take into account the impact of investments they are supporting, such as proof of capex or hiring in R&D capacities.   

However, it is not so easy to enforce such measures after the fact. “Claw-backs are difficult to implement from a general business perspective and states and communities generally don’t want exposure to the controversy resulting from enforcing incentive agreements,” says Williams.

Creamer’s colleague Scott Bryan, executive vice president, strategy and consulting, expects locations to take a more precise or methodical approach to their investment attraction targeting, and place more scrutiny on evaluating the companies before awarding incentives. They may also be more thoughtful in how they design incentives to ensure the type of investment they want in terms of jobs or value-add. “This could mean making incentives more niche, taking innovative approaches, or having more stringent criteria,” Bryan says.