Landlord:Tenant or Strategic Partner?
It should be no secret that I am not a big fan of incentive dollars as a way for locations to compete for capital investment. I have authored several posts on this subject. I would much rather see locations compete based on their ability to help a company be more competitive and deliver superior value to their shareholders. I think money spent on incentives would be better invested in building sustainable capability (new asset creation or infrastructure improvement) that would help a community become more attractive to further capital investment. Money is fungible, and partnerships based on the size of an incentive package are always at risk of dissolving when another community encourages relocation with an even higher cash proposition.
The fundamental question in my mind is do you want to perpetuate a Landlord:Tenant relationship, or do you want to create a strategic partnership between your community and the companies that do business in it?
Having said that, I recognize eliminating incentives as a tool in economic development is highly unlikely and that unilaterally deciding to refrain from using available incentive programs may be damaging to your community’s competitiveness. Since we don’t live in a perfect world where mutual disarmament of the incentive war is possible, the next best thing is to be smarter in the use of incentive packages to ensure a positive ROI for the community.
Good Jobs First
I want to share a website I found while researching the question – “Do incentive packages deliver a positive ROI?”. The organization behind the site is Good Jobs First. Good Jobs First is a DC based policy resource center promoting accountability in economic development.
The website has several tools to evaluate state level effectiveness in using incentive dollars. Accountable USA reports on subsidy practices in each of the 50 states and DC. Subsidy Tracker is a national compilation of company specific information on subsidy awards. Their website also has a number of publications and resources intended to help you better understand best practices in using incentive packages and important insight into what doesn’t work well.
I can’t speak to the robustness of the methodology used by Good Jobs First in their evaluation. As always, when evaluating information from any organization you will need to use your personal judgment. If you’ve read my “12 Things I Believe” document, you know I believe that “Truth has boundaries”. In this case, since the strategic considerations around offering an incentive package to a company are often just as, if not more, important than the financial considerations the boundaries of these data are worth considering as you evaluate the information. But, similarly I would encourage you not to “throw the baby out with the bath water”. I think there is a lot that can be learned from the analyses provided.
In their report entitled “Money For Something”, the Good Jobs First team highlights some pretty impressive statistics.
- States and cities spent roughly $70 billion annually in economic development. Roughly $11 billion (16%) is invested in subsidies.
- The degree of robust oversight to ensure taxpayers get an ROI on that investment varies across the nation. Some locations do better than others, and all location shave opportunity for improvement.
- Within a state, there is often quite a variation between programs.
- Adoption of stringent standards is no guarantee of success.
The methodology for scoring states is disclosed in the report. This is a great practice because it allows the reader to form an opinion on the reliability of the conclusions. I don’t think many state elected officials will be happy with their score though. Nevada scored best and it only achieved an 82 out of 100.
I don’t think the absolute score is as important as understanding what is holding your state back from achieving a higher score. Therein lies insight that could potentially drive program redesign. And that is why I think this website and the reports are worth your time to review.
The obvious reality is that incentives are not going away any time soon. So there are two things we can do as a profession to make a positive difference in their use.
- Learn to use incentives well and improve our ability to measure the ROI achieved. In the private sector, when a contract is struck between two companies it is expected that each company will track the expected ROI performance and if it is unacceptable there will likely be action taken by one or both companies to dissolve the contract. In my career, I can say that “I’ve been there, done that”.
- Consider alternatives to incentives that are not as fungible as cash. This will look like asset creation, infrastructure investment or public policy reform. If you can create a strategic advantage for locating in your community, it becomes an integral component of a company’s margin and grows in importance as the company becomes more successful. These types of advantages are difficult to duplicate and hard for companies to walk away from.
Loyalty is earned by creating a strategic partnership between a company and a community. As long as the relationship remains a landlord:tenant arrangement then there is always a risk the company will leave if it can find the same (or slightly better) service at a lower cost. If you have experienced the challenge of a company leaving your community, you know it is extremely disruptive and people’s lives are dramatically impacted.
Here’s a challenge for you. Take the last dozen RFP responses your community has prepared. Categorize the components of the offer as either strategic or financial. If something falls in both buckets, err on putting it in the financial bucket. Then take two steps back and ask yourself – “What could we do to increase the number of strategic elements offered in our RFP responses?”.
I appreciate there is a real difference between investing hard cash today versus investing a percentage of incremental future tax dollars. The size and health of your community’s discretionary budget will always be a rate limiter. But, I am willing to bet that by asking the question you will uncover a number of low cost ways to begin forging stronger strategic relationships with the companies in your community and the companies you want to attract to your community. It is tough work, but worthwhile work in my opinion.
What has your experience been? Do you have an example of a strategic partnership? What examples can you share where you’ve been able to (or seen) a community and company form a true partnership versus a landlord:tenant relationship? What are the practical hurdles that need to be overcome to reduce reliance on incentives as a way to attract capital investment, expansion or retention? In the spirit of making the most informed decisions, what are some of the practical watch-outs you’d suggest people keep in mind as they review the data and reports from the Good Jobs First Organization?
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