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 , Kincaid Strategic Partners (Nov 07)
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What Companies Want
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.
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
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.
[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
Eyes Wide Open
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
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."