Investment incentives earn CZK 230 billion according to unprecedented Deloitte study

This is according to an unprecedented study carried out by the consulting firm Deloitte, which is the first to describe the benefits and costs of all investment incentives since the system began operating until the present.

• State receives return of CZK 8.65 for every crown provided as an investment incentive
• State expenditures on incentives from 1998 to 2008: CZK 30.068 billion; income: CZK 260.041 billion
• Incentives account for 308,000 new jobs, employing 9% of all workers in the Czech Republic
• Incentives have been granted to 486 projects with a total investment amount of CZK 357 billion
• About a quarter of all incentives was awarded to Czech companies

“For every crown provided as an investment incentive, more than 8.5 crowns have been returned to the state budget,” says Alexandra Rudyšarová, acting CEO of CzechInvest. “Altogether, the state has provided to Czech and foreign investors aid in the amount of CZK 30.068 billion, whereas it has collected 260.041 billion in corporate income and payroll taxes from these same companies and their suppliers.

“A very important conclusion of the study is that roughly three-quarters of new jobs and income flowing into the state budget arise among suppliers from which investors supported by incentives purchase goods and services. This demonstrates the multiplier effect of incentives; as they gradually spill over into the economy, they benefit a range of other companies that did not directly receive incentives,” explains Luděk Niedermayer, director of the consulting firm Deloitte.

Investment incentives have been awarded to a total of 486 projects since 2008, giving rise to production enterprises worth a total of CZK 357 billion in the Czech Republic.

308,000 jobs

Thanks to investment incentives, 308,000 new jobs had been created in the Czech Republic by 2008. Most of these jobs, precisely 73%, were created by suppliers, whereas the remaining 27%, i.e. 83,000 positions, were created directly by supported investors. “Overall, the study indicates that, over the long term, for each new job created by an investor, two opportunities arise among their suppliers,” says Alexandra Rudyšarová.

Furthermore, supported investors and their suppliers are creating jobs at a time of layoffs in other industrial sectors. Whereas in the periods 1998-2000 and 2003-2004 several tens of thousands of jobs were eliminated in manufacturing, supported investors hired new employees. “In the coming years, we can expect a growing number of newly created jobs among investors as well as their suppliers. Between 2006 and 2008, investment incentives were promised to a record 265 companies which will now progress from constructing factories to vigorous production,” the study reveals.

In recent years, the average wages of supported companies’ employees have steadily risen. “Within individual sectors, however, the average wages of workers employed by supported companies have not significantly differed from the wages of those employed by firms that have not received incentives. This means that supported investors are not trying to attract workers away from other companies by offering higher wages,” adds Luděk Niedermayer.

“The key sectors in which incentive recipients operate have shown rapid turnover growth, which indisputably involves strengthening of these sectors’ overall performance, and not a strategy based only on taking over existing contracts from already operating firms,” says Luděk Niedermayer, citing the study’s conclusions.

One third of Czech Export

“In fact, only 6.431 billion crowns of the total 30 billion in incentives provided from the state budget since 1998 were transferred to investors’ accounts, specifically as aid for creating new jobs or retraining employees. The remaining amount comprises income-tax breaks totalling 21 billion crowns and 2.5 billion in discounts on prices of land in industrial zones. Both of these items are unrealised income, which is to say that they are not state expenditures and thus do not represent a direct burden on the state budget,” explains Alexandra Rudyšarová.

According to the study, the state’s income from supported investments is increasing year by year. In 1998, the state earned CZK 1.793 billion, whereas five years later this amount was 20 billion and in 2008 had reached nearly 56 billion. Deloitte predicts that if the trend stands the way it is now the state will earn an additional CZK 70 billion from incentives this year alone.

“In light of the fact that a significant number of projects supported by investment incentives are currently in the investment phase or just beginning the operating phase, it can be expected that fiscal income will continue to grown in the coming years as these projects reach full operation, thus directly generating additional income for the state budget,” Deloitte asserts.

In 2008, investors supported by incentives exported from the Czech Republic goods worth CZK 835 billion, which is 29% of all exports from the country. In the same period, these companies bought components and raw materials abroad worth CZK 545 billion. Thus, their exports improved the Czech Republic’s balance of payments by CZK 290 billion.

Incentives in other countries

“Investment incentives are offered by an overwhelming majority of countries, from the Czech Republic and Germany to even the United States. In particular, they are offered by all of our biggest competitors with which we compete for individual investment projects. Therefore, it can be said that our system of investment incentives is a key instrument that puts the Czech Republic on an equal footing with other countries that are competing for investments,” says Alexandra Rudyšarová.

“The results of the study indicate that, in comparison with other countries in the region, the Czech Republic is among the most open – there is no preference for foreign investors or pre-selection of sectors in the targeted part of the economy, and the threshold for receiving incentives is low in comparison with other countries. This stated fact leads to the conclusion that the parameters of the Czech incentives systems fulfil the condition of having the greatest possible openness, and thus to a large extent prevent the situation in which incentives would play a major distortionary role with respect to the business climate,” the study asserts.

Investments that stay here

Companies operating in the manufacturing industry in the Czech Republic usually reinvest their profits. According to information from the Czech Statistical Office, the total amount of CZK 747 billion was retuned to the Czech Republic in 2007.  

“The ascertained data concerning companies’ profits indicate that firms often increase their involvement in the Czech Republic following the initial investment. Their operations here are thus not based only on investments supported by incentives and transferring profits to the parent company as quickly as possible. Rather, incentives are often used as a means of facilitating initial investments, which are then further expanded,” says Luděk Niedermayer, commenting on the study.

“Three-quarters of investors that receive incentives also require their suppliers to comply with standards of quality, such as ISO, and roughly one-third of investors have stated that they cooperate with universities or the Academy of Sciences. Both of these factors help to improve the quality of the business environment in the Czech Republic,” says Alexandra Rudyšarová.

More about the Study

The assessment of the economic impact and benefits of investment incentives, including the methodology of the economic model, was prepared by the consulting company Deloitte in cooperation with experts from CERGE-EI, the University of Economics and the Czech Statistical Office. The study analysed all investments that received a decision to grant investment incentives since 1998, excluding projects in the case of which such decision expired or was withdrawn. The model examined both the impacts of individual investors’ activities as well as those of their suppliers.

Corporate income tax and income tax paid by natural persons, including all payroll taxes, were included in the state’s income from projects supported by investment incentives. Fiscal income does not include the effects of VAT, consumption taxes, customs or other potential state income generated by these projects, such as the effects of employees’ consumption, reduction of unemployment, etc.

The state’s fiscal expenditures include all aid provided in the form of investment incentives, i.e. income-tax breaks, transfer of technically equipped sites at favourable prices or transfer of land pursuant to a special legal regulation, tangible aid for the creation of new-jobs, tangible aid for training or retraining of employees and capital investment aid.

For more information please contact the CzechInvest Press Centre

Lucie Kocourková, spokesperson, phone: +420 296 342 538, lucie.kocourkova@czechinvest.org   

Contact to Deloitte

Tomáš Pergler, PR Manager, tel: +420 246 042 489, tpergler@deloitteCE.com