The worldwide marketplace for economic development incentives facilitates over $300 billion in transactions every year. These incentives are simple in theory but extremely complex in practice. One reason governments offer them is to attract new private business investment in otherwise undesirable communities. While these incentives come in many forms — tax abatements, infrastructure grants, low-interest loans and even free land — their goal is simple: create new jobs and opportunities for government jurisdictions.
However, these are not just free giveaways to a company. In exchange for an incentive package, a business is expected to create value for that community. Whether the requirement is a specific number of new jobs created, investment into the local tax base, or even funding of new schools and parks, the goal is for an incentive to more than pay for itself and boost the local economy.
That said, governments do not just give out incentives and hope for the best either. They require reporting on commitments made or else they will rescind their offer going forward and many times require repayment of already earned benefits — something that can cost a business millions of dollars. Compliance with the terms of an incentive package are obligatory, but often difficult to manage across many jurisdictions.
In fact, Dell Inc. had to repay more than $26 million to Winston-Salem and Forsyth County, NC as a result of the company’s decision to close its facility in January 2010.
Reporting and auditing incentives via compliance is one of the biggest challenges for both a company and the government. It’s a process mired in old world methods, often performed mostly on spreadsheets and paper by both parties. Usually left up to an already overworked tax department, the last-minute nature of filing compliance papers combined with normal human error can create headaches and costly mistakes for most businesses. To make matters worse, government agencies typically operate on legacy software or simply push paper into filing cabinets. The combination of these two processes at loggerheads creates a ton of friction.
A Blockchain Solution
Blockchain technology, with its immutable audit trails and smart contracts, offers the basis of a transparent, automated, and paper-free system for trusted regulatory compliance. This creates solutions for both corporations and government agencies to seamlessly work together.
A blockchain is stored electronically and decentralized from a single server creating a significantly more secure environment. As smart contracts are executed, the data is automatically “hashed” to the blockchain and permanently stored. No more data entry, messy spreadsheets, or manual paperwork.
Secure Audit Trails
Because a blockchain is immutable, any input into the system is traceable from start to finish. By giving government auditors access to the blockchain, they can track all necessary compliance data to ensure regulatory requirements are being met in a timely fashion on a trustworthy system.
Two Product Ecosystem
Imagine a permissioned blockchain, specifically designed for economic development incentives compliance with two functional products layered on-chain: one for the company receiving the incentive, and another for the government providing it. These products — or dApps — would act as oracles on the blockchain and allow the parties to interact through a smart contract design.
The corporate application would allow businesses to create and execute smart contracts in accordance with compliance needs. This would ensure that all relevant information will be available in one interface, easily confirmed by auditors.
The government application would allow regulators to view, in real time, the progress that a business is making toward their commitments. This eliminates the time spent going back and forth asking companies for specific data and other necessary documentation that can take weeks.
Consensus Mechanism for Compliance
Incentives come in all forms, and there’s no one measure of compliance. If a company has to prove that it is creating 100 jobs every year, the simplest method is to provide pay stubs that show 100 new employees. Without blockchain technology, that means waiting for a payroll company to provide those paystubs to the tax department, staff personnel copying them, submitting a large stack of paper for a government auditor to sort through, and hoping nothing gets lost along the way.
Imagine a blockchain providing third-party access for necessary compliance. For example, a smart contract could be executed for compliance every year and where payroll data is hashed onto the blockchain. The government auditor would have immediate access to that data and the burden of providing the information in an accurate and timely manner would be eliminated from the corporate tax department’s annual workflow.
Creating jobs, attracting new business investment, and building infrastructure should not be hindered by creating mountains of paperwork and tracking down human errors. The value that blockchain technology provides will allow constructive growth, unencumbered by old world methodologies. Blockchain holds the key to providing the required transparency, provenance of data, trust of government, and one source of truth for all the stakeholders in this ecosystem. With a properly designed model, we can eliminate inefficiencies while lowering the cost of compliance, and improving overall security for both corporations and government.