Matt Adams, Raj Vohra, and Josh Timberlake, Global Expansion Optimization, Deloitte Consulting, LLP (Aug/Sep 09)
The United States has been grappling with a recession that has stunted corporate investments, left politicians and businessmen scratching their heads, and created considerable debate over what role the federal government should play in stimulating a recovery. Despite political leanings, almost everyone can agree that domestic investments are badly needed to create jobs and revitalize our GDP. In the past year the federal government has taken significant actions to stimulate the economy, many of which will affect strategic planning, economic development, and future investments for private businesses and local government agencies.
There is a wide range of programs that have been - and continue to be - implemented to stimulate investments. Volumes could be written about each, so for purposes of this article, we will broadly focus on four that are expected to be particularly influential:
1. The Energy Improvement and Extension Act (EIEA)
2. Department of Energy Loan Programs
3. The Economic Stimulus Package
4. Troubled Asset Relief Program (TARP)
Energy Improvement and Extension Act (EIEA)
The Energy Improvement and Extension Act of 2008 is a component of the Emergency Economic Stabilization Act of 2008 (better known for one of its other major components, TARP). Although lesser known than TARP or the Stimulus Package, the EIEA may currently be doing the most to encourage domestic investment among all the recent programs. The EIEA has helped accelerate alternative energy investment in the United States through a series of new tax incentives, changes to existing incentives, and bond funding for renewable energy projects. Some of the specific programs associated with this act include:
• An eight-year extension, through 2016, of investment credits for solar energy, as well as breaks for wind, geothermal, and other alternative energy sources
• A 30 percent tax credit for businesses to offset the development costs of solar and other clean energy projects
• Authorization of $800 million of new clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, qualified hydropower, landfill gas, marine renewable, and trash combustion facilities
• Tax credits for retrofitting existing structures to increase energy efficiency
• $1.5 billion in new tax credits for the creation of advanced coal electricity projects
• Elimination of the $2,000 monetary cap for residential solar electric installations, creating a true 30 percent tax credit
• New tax credits of $2,500 to $7,500 for plug-in electric-drive vehicles
The EIEA generally does not provide incentives directly to manufacturers of renewable energy products; however the "demand-side" inducements it creates may be a more effective long-term solution. Germany, for example, adopted a feed-in-tariff (a subsidy which effectively pays homeowners to install solar panels on their rooftops) in 2000, and now has roughly five times the solar installations of the United States despite consuming only 15 percent as much electricity.
While the United States is playing catch-up to Europe (and parts of Asia) in the alternative energy arena, the projected increase in U.S. demand for clean energy products has already led to heightened activity among domestic and international manufacturers considering U.S. investment. Companies that can easily ship their products from overseas may continue to do so, as high labor costs and corporate income taxes remain a disincentive for producing in the United States. However, for large or fragile products - such as solar panels and wind turbines - logistics dictate the need to deploy production closer to the end customer and are increasingly steering manufacturing toward the growing U.S. market.
Department of Energy (DOE) Loan Guarantee Program
The U.S. Department of Energy (DOE) loan guarantee program is designed to encourage investment and commercialization of energy-efficient or renewable-energy technologies. DOE announced the first round of loan solicitations in August 2006, targeting a broad portfolio of environmentally friendly, energy-related technologies, including advanced fossil fuel technology, industrial energy efficiency, solar energy, electricity delivery, alternative fuel vehicles, and biomass projects. This initial solicitation offered up to $2 billion in loan guarantees, for which DOE received 143 pre-applications for loans totaling $27 billion.
DOE has since complemented the initial solicitation with two more, in June and September 2008. The second solicitation targeted renewable energy and nuclear applications and offered $30.5 billion in loan guarantees, while the third offered $8 billion and targeted innovative clean coal technologies.
The act responsible for the DOE Loan Guarantee program has been in effect since 2005, however progress was slow to materialize due primarily to the time necessary to craft the legislation and screen the first round of applicants. It received a boost in early 2009, when Energy Secretary Steven Chu announced a "sweeping reorganization" of the program. Activity has increased significantly in recent months, exemplified by additional solicitation rounds and progression for round-one participants. The first loan was approved by Secretary Chu in March 2009, and offered $535 million to Solyndra for use in construction of a commercial-scale manufacturing facility for its cylindrical solar photovoltaic panels. Solyndra is one of 16 organizations invited to submit full applications that are now in the final stages of the process.
Scores of active U.S. site selection projects involve a DOE funding component, and the recent acceleration of the program has moved many of these projects off the sidelines. DOE requirements for "shovel-ready" sites that meet a long list of environmental and other development criteria have many companies scrambling to quickly navigate the site selection process to secure (or maintain) their place in the queue. And companies have learned the hard way that switching sites can be a cumbersome endeavor, potentially delaying the DOE application review process by many months.
The DOE loan program offers a powerful, if targeted, stimulus to investment for young companies. It will be important for companies considering round two and three applications, as well as any future rounds that may be announced, to be prepared to launch a site selection project concurrent with preparation of the pre-application to avoid challenges later in the process.
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.