I have been participating in an informal discussion on the direction and use of incentive packages in economic development. The amount of media coverage afforded the topic over the last year has seemed to grow exponentially versus prior years. The central issues are around taxpayer return on investment and transparency.
Given the high interest in the subject, I thought it might be helpful to talk to a subject matter expert. I did a little research and found the Smart Incentives organization. Its founder, Ellen Harpel, Ph.D. has a wealth of practical knowledge on how communities use incentives in their company attraction, retention and expansion efforts. Dr. Harpel is a Senior Research Fellow with the Center for Regional Economic Competitiveness, an affiliate with the Center for Regional Analysis at George Mason University. Her combination of academic and practical experience in working with communities on evaluating the impact of their incentive packages affords Ellen a unique perspective that is very worthwhile to listen to.
It is with my thanks to Dr. Harpel, that I am pleased to share this interview with you. I hope you find it valuable.
Use and misuse of incentives have been a hot topic in the media. Some of the focus was created by a series of articles Lousie Story (NY Times) authored on the subject. In general, do you think the use of incentives has gotten out of control in economic development?
That’s not how I’d phrase it. Incentive use has certainly grown, but the real challenge is that we still don’t have good data on what works. Communities use incentives because they believe they make a difference in attracting businesses and jobs. They probably do. But we need better information on whether individual incentive deals and incentive programs meet overall community economic development expectations in terms of simple compliance and overall effectiveness. Only then can we figure out if they are over-used or not.
How important is public transparency when a community chooses to use incentives as a strategy to compete for capital attraction, expansion or retention?
I think transparency is critical, and not just because communities should explain how they use taxpayer funds. If economic development organizations can’t state how and why they are using incentives, they are in danger of losing support for their programs.
Do you think local economic development professionals are sufficiently trained to understand how to determine the return on taxpayer investment for a structured incentive offer? What are some of the factors they should be considering in that ROI calculation? How should a community value the opportunity cost of tying up funds in incentive offers?
The ROI calculation should take into account the nature of the direct project benefits — especially as they relate to the community’s economic development strategy; the fiscal impact – considering both additional costs as well as potential new revenues; and economic impact – the expected indirect and induced benefits from the project.
The difficulty is not so much in training as in having sufficient time and resources to conduct a good assessment. But there are more tools out there now that make this type of analysis doable on a project-by-project basis.
Your company www.smartincentives.org offers a range of services to help a community make smarter choices on when to use and how to structure incentive packages. Please describe some of the more popular services and the benefit each offers.
The most popular service is assessing the competitiveness of incentive offerings. We have done several of these types of analyses through my company Business Development Advisors.
We also offer due diligence research services on companies applying for incentives and draft deals via www.smartincentives.org to help EDOs identify possible red flags and avoid problem deals. We use multiple data sources, have experience doing these assessments quickly and efficiently, and can provide an independent review that can be shared with stakeholders.
We are also happy to introduce EDOs to ROI analytical tools beyond those we offer at Smart Incentives that we think are especially useful.
What are some of the common mistakes you see communities make when structuring and administering an incentive package?
Right now I’m focused on compliance issues, and a common mistake is not thinking through how to monitor whether a company has met its commitment in terms of jobs, investment or other factors that drove the decision to provide incentives in the first place.
Clearly, no community is going to simply walk away from using incentive packages to compete for business investment. But, hopefully all communities want to minimize the risk of making a deal that never delivers a positive ROI for taxpayers. If an economic development organization or elected official wanted to engage your company to help them think through their incentive offer, how would they do that?
What are your thoughts on the principles that should be used to determine when an economic development organization should consider offering an incentive to a company? Is there ever a time when a community should refuse to include an incentive package? Do you have examples of alternatives to incentives that have been successful? What is the most important lesson you have learned about the effective use of incentives?
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