What is the purpose of offering incentives?

Published: 28th April 2021

By Paul Cranch

Governments across the globe have long used different variations of incentives to attract business. In a post-2008 recession-hit Europe, the Irish Government offered significant tax breaks to multinational firms.

While the incentives were not without controversy, Ireland punched above its weight and kept investment flowing in tough times—including one of the most notable business investments—the 150 million Google Data Centre that was established in 2015 in Dublin. Local governments do not have the kind of maneuverability state and federal governments have around taxes, but they do have more localised incentive options that can play an important role in corporate decision making.

There are many types of incentives available for corporate investors, and they can be categorised as fiscal, non-fiscal, discretionary, financial, and non-financial incentives. The most common incentives are rate concessions with a specific time horizon. (The regulation local government needs to
abide by when offering concessions can be found in the Local Government Regulation 2012—Part 10 Concessions.)

The types of concessions local government can offer are:
• a rebate of all or part of the rates or charges;
• an agreement to defer payment of the rates or charges;
• an agreement to accept a transfer of unencumbered land in full or part payment of the rates or charges.

The most common typeof incentives are rateconcessions with a specific time horizon.

More recently, governments have startedto distinguish between locational incentives (i.e., to steer or attract investment info favoured sectors or regions) and behavioral incentives (i.e., to influence the character, nature and quality of such investments). Locational incentives are purely aimed at
poaching investors into the host region, while behavioural incentives are used to entice investors to engage in certain sectors or business activities that result in higher benefits or increased levels of economic development for a region—for instance, productivity gains, economic diversification and skills development, and more recently to attract sustainable investment or investment projects that contribute to state or countries goals.

Will incentives seal the deal? Well, broadly, incentives do not drive investment and location decisions. No company is going to set up shop and invest tens of millions of dollars in a facility in a location just because it sprung for a million-dollar rate concession. Incentives are often the ‘tip of the iceberg’ or ‘dessert’, and this is where they should be positioned. However, there comes a time at the end of the process when the list of candidates becomes quite short, and the differences between them become smaller. With all things more or less equal, incentives then become the opportunity for cities or regions to differentiate themselves.