Is Privatizing Economic Development in NC a Smart Move?

“Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so”

Douglas Adams

Sara Dunnigan recently asked for my point-of-view on North Carolina’s decision to reorganize the state Department of Commerce. Sara is an economist and transformation strategist at Chmura Economics & Analytics, and one of the most interesting people I know in the economic development world. I definitely do not want to disappoint her. So, here are my thoughts.

As background, Governor McCrory has created a private nonprofit corporation with the objective of taking over many of the state government economic development duties. It is important to note that this organizational approach to state level economic development is not new. Several other states already rely on private nonprofit organizations for their economic development efforts. For example, Governor Snyder looks to the Michigan Economic Development Corporation (MEDC) to manage many of the economic development activities on behalf of Michigan. Governor Scott looks to Enterprise Florida to do the same for his state. And, in my state of Ohio, Governor Kasich formed the JobsOhio organization to support his Administration’s Development Services Agency.

Is Privatizing State Level Economic Development a Good Idea?

My honest answer is – It all depends. Ok, Sara is probably disappointed by that waffling position. But, certainly, privatization is not a silver bullet. In fact, all examples to date have had their fair share of challenges ranging from sustainable funding to independence of decision-making. All have struggled with defining work processes that provide a simpler interface with companies interested in capital investment and better meet their needs with respect to site location decisions.

Transparency is a Lightening Rod Issue

The area getting the most media attention over the last few years has been the degree of (or perceived lack of) public transparency. This shouldn’t be surprising considering these organizations exert a strong influence over the choices made with public funds, and the public wants to be certain those decisions result in a positive return on their taxpayer dollars. The challenge however is that the decision to provide incentives for company attraction, retention or expansion is not a risk free, and there is an opportunity cost associated with using tax revenue in this manner. This is not new news, but the rising amount of incentive dollars required to be competitive has caused the spotlight to be shined more brightly on how these decisions are made and who is making them.

The tone of the media scrutiny tends to be critical and driven by an underlying (but unstated) belief that the parties involved cannot be trusted. It is a guilty before proven innocent mentality. You simply have to read some of the media coverage and you can quickly pick up the vibe.

CAPCON (Michigan Capital Confidential; May 2013) – “The development corporation is a quasi-governmental and private entity that is supposed to spur economic activity and promote the state of Michigan. Although the amount of funds the MEDC spends annually has been significantly reduced under Gov. Rick Snyder, it continues to have access to millions of taxpayer dollars. The MEDC has a history of investing tax dollars in companies that do not live up their job promises and in industries that survive largely because of government funding.” … “Over the years, the MEDC has acquired a reputation for being less than transparent.”

Jacksonville Business Journal (April 2012) – “Integrity Florida on Wednesday released a report charging that tax breaks and incentive grants went to corporations that paid to be on the public-private partnership’s board of directors – and that not enough jobs were being created.” … “According to the watchdog group’s report, Enterprise Florida awarded contracts worth nearly $6 million last year to companies that were “confidential.” Publix Super Markets, Embraer Aircraft and Lockheed Martin Corporation – all Enterprise Florida board members – received tax breaks or incentives. Ernst & Young, the firm charged with calculating Enterprise Florida’s return on investments, also got a grant.”

Plain Dealer (August 2013) – “JobsOhio has a conflict of interest policy. But that’s cold comfort given something the Daily News also noted: The JobsOhio law exempts JobsOhio “from state audits, public records law and some ethics laws.” … “To reassure voters, the General Assembly must end those exemptions – and forbid JobsOhio directors from having financial ties of any kind with companies JobsOhio reviews for aid, even if a given director recuses himself.”

Effectiveness is Problematic to Verify

Perhaps the best example is a study completed by the Mackinac Center say (or at least I would expect the leadership at MEDC to argue) the methodological approach should be independently validated before the study conclusions are accepted as factual.

Having run an EDO and been questioned by the media to demonstrate the effectiveness of that organization, I know how difficult it is to do. Economic development is very complex and there are so many things that can impact job creation that is totally unrelated to an EDO’s actual performance. In fact, the lack of correlation between an EDO’s efforts and year-over-year job growth is one of the reasons I argue that it is a very poor performance measure. The fact is economic development professionals (or elected officials) do not create jobs – employers do. And, the decision is based almost exclusively on current and projected market conditions rather than on local economic conditions.

The Mission Needs to be Clear and Aligned to

According to Forbes, a great mission statement answers four questions:

What do we do?
How do we do it?
Whom do we do it for?
What value are we bringing?

Here are the published Mission statements for the MEDC, Enterprise Florida and JobsOhio. I’ll let you judge if the statements meet the criteria set forth by Forbes and if they are sufficiently transparent to inform you how to measure results.

MEDC Mission – “The Michigan Economic Development Corporation is a public-private partnership serving as the state’s marketing arm and lead agency for business, talent and jobs, tourism, film and digital incentives, arts and cultural grants, and overall economic growth. MEDC offers a number of business assistance services and capital programs for business attraction and acceleration, economic gardening, entrepreneurship, strategic partnerships, talent enhancement and urban and community development. MEDC, founded in 1999, also developed and manages the state’s popular Pure Michigan brand.”

Enterprise Florida – “To facilitate job growth for Florida’s businesses and citizens leading to a vibrant statewide economy.”

JobsOhio – Taken from the Article of Incorporation: “…to promote economic development, job creation, job retention, job training and the recruitment of businesses to the State of Ohio…”

A transparent Mission should make it much easier to create alignment of the key stakeholders around the State. The reader should be able to clearly articulate 1) what the Organization does, and doesn’t do; 2) how the organization’s work adds unique value to making the economic development process either more efficient or effective, and 3) what the organization can be held accountable for delivering as a work product. Getting it right up front will go a long way to helping ensure success. Getting it wrong will most certainly doom the Organization to fail.

My hope is that North Carolina designs their new organization around the work to be done. If it does, that will ensure the right work gets done and the right structure gets put in place.

Adequate Resourcing is Mission Critical

Creating a private economic development organization for the State is an important strategic choice. As such, it needs to be supported with a reliable (an ideally politically agnostic) revenue source as well as top talent. If the new Organization needs to invest too much time in fund raising, it will not have sufficient time to deliver the desired results. Privatizing economic development should not be viewed as a simple cost shift from the public to the private sector.

In addition, if North Carolina is to succeed, it will need to take a lesson from Jim Collins book “Good to Great”. It is critical the new Organization starts by getting the right people on the bus, and getting them in the right seats. It means finding and paying some of the best, smartest, and hardest working people need to get the job done. If the new Organization has the wrong people on the bus, regardless of how well it is organized, success will be out-of-reach. In my experience, the compensation required to compete for those right people is often magnitudinally higher than historically has been paid for the role when in the public sector. The optics of this perceived discrepancy can become a major sticking point.

Measure The Right Thing

These privatization exercises are typically done in response to dissatisfaction with year-over-year job growth numbers. The general belief is that by approaching the site selection process more as a business and less as a bureaucracy, a State will begin winning more capital investment deals. But, the reality is that if the State is fundamentally non-competitive then it really doesn’t matter if the economic development is done in the private versus the public sector. It simply devolves into an exercise of “putting lipstick on the pig”.

Economic development organizations do not create jobs. Employers do. And the decision to create or destroy a job is driven more by market conditions than by anything an economic development professional can directly impact.

The focus should be on measuring outcomes the Organization can be held directly accountable for.

One example is the quality of the State’s strategic plan design and deployment process. This would require ensuring there are people on staff that understand and know how to facilitate strategic planning and ensure the deadlines/budgets of resultant action plans are being met.

Is Privatization of State Level Economic Development a Wise Choice For North Carolina?

If the State does it right, it could very well be. It the State does it wrong, the potential certainly exists for the choice to turn into an unmitigated disaster. It all depends on whether Governor McCrory does a good job of leading the exercise or not.

Discussion

What do you think about NC’s move? What are the pros and cons of privatizing state level economic development? I want to thank Sara Dunnigan for asking the question. If you are attending the IEDC Conference in Philadelphia, I’d appreciate it if you would join me in making a point to find Sara and buy her a cup of coffee for stimulating this blog post. How cool would it be if Sarah didn’t have to buy a cup of coffee the entire Conference?