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Staying Power

Government agencies are turning more frequently to financial incentives as tools for retaining businesses and jobs. But do these breaks benefit the communities, too?

Cynthia Kincaid  (Nov 07)
(page 2 of 2)
What Companies Want
Some of the most popular incentives for companies, according to Kosmont, are "land write-downs," where companies can purchase land at a reduced price. "They also like operational assistance, mostly in the form of utility cost reductions, equipment installations, and tax credits for large purchases," he says. Less favorable incentives require companies to support a great deal of housekeeping and maintenance procedures, typically targeted to credits for wages, salaries, and training programs. "These tend to be high maintenance, high sustenance programs for employers, so they are less likely of interest," he says.

Even utilities are offering incentives to keep their commercial customers happy and in place. The Tennessee Valley Authority (TVA) has assisted Aisin Automotive Casting Tennessee, Inc. in breaking ground on a new $67 million parts plant in Clinton, Tennessee. Electricfil Automotive of France, with 1,100 employees worldwide, also plans to establish an American headquarters in Athens, Alabama, with the help of a TVA $5.3 million initial capital investment to assist with the purchase of new equipment.

California is also stepping up to the plate to make doing business easier and more cost efficient. In 2005, California's Public Utilities Commission passed a law allowing two of the state's utilities, Pacific Gas and Electric Co. and Southern California Edison, to give rate reductions to companies that threaten to move out of their service territories, all in an effort to stem the tide of companies leaving the state.

Inexpensive electricity and land were two very important factors for Google in their search to build a new server farm. Lenoir, North Carolina, was left stunned by 2,100 job losses after the closing of seven furniture factories over the past three years. But the area had plenty of land and cheap energy, so Google came calling. The Internet search company inked a deal this year to create 210 jobs within the community in exchange for tax breaks and infrastructure upgrades valued at $212 million over 30 years. Google plans on investing $600 million in the server farm.

"The costs [of electricity and infrastructure] are much higher, and the risks are greater, so benefit packages to companies are higher," says Kosmont. "The dollars involved have grown, and that trend is going to stay in place."

Eyes Wide Open
For many companies and municipalities, these incentive partnerships can be win-win, but only if both parties come to the table with open eyes, particularly the municipalities who usually bear the brunt of fiscal responsibility. "It's the municipality's job to negotiate for incentives, produce a thorough analysis, and make all of that information public," says Balber. "And that's where some of this simply falls by the wayside because so much of this is done behind closed doors."

Balber says once the deal is inked and the press conference held, the public is usually told about all the tax revenue that will be generated and the jobs created, without any discussion of concessions. All of these things, she says, need to be brought to light for everyone, including the public. "No neighborhood association should be responsible for hiring some expert to analyze whether or not the government is doing a good job for them."

Kosmont agrees and also blames the vagaries of the marketplace for some government loss of control where incentives are concerned. "If the economic marketplace takes a major turn, it's hard for state or local government to control how a company responds to market conditions," he says. "So sometimes the best investments going in, over the long term don't yield results, because things have changed for that company, based on the overall marketplace that they compete in.

"It can be a risky business," he adds. "When government gets into a deal with a private-sector company, and they make an investment in their operations or relocation package, they are subject to the whims of the marketplace in which the company operates over the long term."

Balber and Kosmont both believe that it is incumbent on both sides to make sure that the investment they are making has all the marks of a good long-term relationship. "You want to hedge your bets," says Kosmont. "And it's important to have an exit strategy."
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