Impact of Economic Stimulus on Corporate Location Decisions
The federal government has assumed an expanded role in economic development in an attempt to stimulate the economy, and its actions will affect business investment and site selection decisions.
Matt Adams, Raj Vohra, and Josh Timberlake, Global Expansion Optimization, Deloitte Consulting, LLP (Aug/Sep 09)
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Economic Stimulus Package
The American Recovery and Reinvestment Act (ARRA) of 2009, commonly known as the "Economic Stimulus Package," was enacted by the current administration in an attempt to revitalize the U.S. economy. The act allocates $787 billion among a wide variety of government-funded projects. As of August 18, only $77.1 billion of ARRA funds had actually been paid out, while another $100 billion had been made available but not yet disbursed (http://www.recovery.gov).
There are three categories of outlays, as described by the stimulus website, which may be particularly relevant to domestic investment: infrastructure and science ($111 billion plus another $25 billion in tax relief); state funding ($144 billion); and energy ($43 billion plus $22 billion on tax relief). Given the unfathomable amounts of money on the table, it should be no surprise that the complexity of overlap between disbursements to the states, outlay categories, and federal agency allotment responsibilities make it challenging to understand who gets what, and when. However, some programs emerge as particularly interesting for location projects.
Although states around the country are beginning roadwork projects, the Department of Transportation had spent only about $817 million on transportation infrastructure projects through the third week of August, though this figure is up significantly in recent months ($317 million in June), and the DOT has made available more than $24 billion. Transportation and other similar infrastructure investments will likely influence location projects, particularly as infrastructure needs at specific candidate sites are identified, and states gain more clarity on how infrastructure funds may be channeled toward specific business attraction/retention projects.
States have been allocated funds under a number of programs, such as the Recovery Zone Bond Program (RZBP), which provides for tax credit bonds and direct business incentives for investment in areas that have significant poverty, unemployment, or home foreclosure. These incentives are similar to economic revitalization and related investment benefits that stimulate infrastructure and corporate investment, targeted to those areas hardest hit by the recent economic crisis.
While the Stimulus Package has yet to generate substantial direct impact on project-specific funding for proposed domestic investments, recent project experience indicates several significant indirect impacts have been recognized, including:
• Increased activity in targeted sectors such as wind, solar, and energy efficiency
• Increased interest in U.S. investment from foreign companies (particularly of European origin)
• Re-engagement of several dormant projects of domestic origin in anticipation of an improving U.S. economy
The Troubled Asset Relief Program (TARP) is part of the Emergency Economic Stabilization Act of 2008, legislation enacted in October 2008 that also includes the aforementioned Energy Improvement and Extension Act of 2008. TARP approved up to $700 billion to rescue failing financial institutions and stimulate the flow of credit. TARP's primary vehicle for government intervention is through government purchase of preferred stock that pays quarterly dividends.
Banks and other financial institutions constitute the dominant share of recipients of funds ($314 billion - $70 billion of which went to AIG), though automakers ($85 billion), homeowners ($50 billion), and small businesses ($15 billion) are among the other beneficiaries (http://bailout.propublica.org).
One of the heavily debated aspects of the TARP legislation was whether to restrict fund recipients from offshoring certain aspects of their operations, a condition actually passed by the House of Representatives, but since stalled in the Senate. This discussion alone has impacted site selection, as recipients of government funds appear to have decreased interest in offshoring, at least in the short-term, to avoid potential negative public reaction. Unfortunately, most TARP recipients are contracting rather than expanding operations, so the diminished interest in offshoring has generally not translated to domestic growth.
As an example, the top management of one major U.S. bank that was the recipient of substantial TARP funds has effectively cut off the company's location strategy group from undertaking any offshore deployment activity. The bank specifically cited concern over the public backlash of offshoring in light of receiving TARP funds. It did conduct a brief investigation of on-shore options for back-office functions, but determined - for now - that domestic redeployment does not make sense as the projected 5-10 percent labor cost savings relative to current U.S. locations do not justify the one-time investment and business disruption costs.
Though the proposed legislative restriction appears unlikely to advance, TARP recipients appear to have little appetite for offshoring. Over time, low-cost U.S. locations may eventually see increased back-office activity from TARP recipients and other affected companies seeking to reduce structural costs while enhancing public perception.
The Federal Government May Be Just Getting Started
It will be many years before the dust settles and the full site selection impact of these massive government-spending programs is known. However, it is clear that under the Obama administration, the U.S. government is playing a larger role in economic development than at any time since Roosevelt's New Deal. And with recent talks of a possible "second stimulus," the government's role may only increase.