The Need For Elected Officials To Learn About Capital Investment Deals Is Clear
The recent decision by Amazon to reverse a decision to locate a headquarters operation in New York has again put the strategy of offering corporate incentives for capital investment back in the headlines. In case you have somehow missed the news coverage, here is the cliff notes version:
- NY Governor Cuomo and NYC Mayor Bill de Blasio work with the NYC Economic Development Corporation to convince the Amazon site selection team to locate a second Amazon headquarters in NYC.
- The capital investment is projected to create 25,000 jobs over a 10-year period.
- The average salary for these jobs is reported to have ranged from $100,000 to $150,000.
- Amazon committed to immediately hire 1,500 blue-color construction workers and invest $5 million in local workforce development.
- Some estimates suggest the capital investment would also create roughly 80,000 additional jobs in the service sector to support the headquarters.
- While challenging to estimate, it is expected the headquarter operation would have helped support NYC as a technology hub and spin off hundreds of technology start-up companies.
- Rather than work within the system, Congresswoman Alexandria Ocasio-Cortez used social media to express her opposition to the deal creating serious doubt within the site selection team that the local political environment would be supportive on Amazon.
- Most egregious (in my personal opinion) is the Congresswoman claimed the $3 billion in tax deferments and subsidies would now be available to invest in initiatives to improve the community’s general quality of life. [Of course, there is no $3 billion to invest without the incremental tax revenue collection associated with Amazon actually creating the jobs.]
- Amazon leadership decides to take the NYC location off the finalist list.
- The projected 25-year cumulative opportunity cost to NYC from Amazon’s reversal decision is over $27 billion.
- The NY Governor and NYC Mayor publicly rebuke the freshman Congresswoman for her naïveté.
- Congresswoman Alexandria Ocasio-Cortez makes news by offering to reconsider her opposition to the Amazon capital investment deal.
- NY initiates a deal recovery effort.
This is a sad story illustrating the need to educate elected officials on the fundamentals of economic development and basic structure of capital investment deals. Despite a degree in economics, the freshman Congresswoman failed to understand the potential ramifications of her public opposition to a major capital investment deal. She took a victory lap in the name of her constituents for scuttling the deal. And now, after a significant amount of backlash, is in the embarrassing process of flip-flopping.
What Can Be Learned From This Debacle?
- Basic training of elected officials on economic development needs to happen early in their term (particularly if a large capital investment is under negotiation). The unanswered question is who has the responsibility to make this happen? Should it be the Governor’s Office, the Mayor’s Office, or the local EDO?
- Companies care about the local political environment when making capital investment decisions. This is not a new learning. But, this case study really highlights just how important it is. Companies want to feel like local government will be collaborative partners in future success. No company executive wants constant confrontation with local politicians to do what is believed by management to be right for shareholders. It is pretty simple … collaboration = good, confrontation = bad.
- The difference between locations on the short list for capital investments is typically more emotional than rational. The only way a location makes the short list for consideration is if it can deliver on the “must have” criteria to ensure business success. For all intensive purposes the location options on the final list are indistinguishable from a projected return-on-investment perspective. The ultimate decision is made based on emotion (often described as “best fit for the company culture”). Not feeling welcome, not having confidence a collaborative environment will exist going forward, being publicly humiliated are all examples of emotional factors that can negatively differentiate a location and result in a no-go decision.
- The Yogi Berra philosophy of “It ain’t over ‘till it’s over” is alive and well. It is important to realize no capital investment deal is complete until it actually is. While I don’t think it is easy to win a deal after a competing location has been selected, it is clearly easy to lose one.
It will be interesting to see how this live case study plays out. Will Amazon swallow it’s pride and decide to move forward with NYC as the location for the headquarter investment? [I find it hard to envision that scenario playing out.] Will NY and NYC restructure the terms of the deal so Amazon can’t refuse it? If yes, how much will this gaffe cost NY taxpayers? Will the freshman Congresswoman be held accountable at the polls for her uninformed, and highly effective opposition to the deal? Will the Governor’s Office implement a basic training program in economic development for newly elected NY politicians? Will the economic development team in whatever location Amazon decides to put their headquarters at least send a box of chocolates to Congresswoman Alexandria Ocasio-Cortez as a thank you?
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