Dean Barber

All Good Things in Moderation

In Corporate Site Selection and Economic Development on June 1, 2014 at 6:07 am

During the more than three years that I have been writing this blog, I have not expounded on the subject of financial incentives being given to companies that will invest capital and jobs in a given place.

If you were to look at my LinkedIn profile or the website for Barber Business Advisors, you would see reference to “incentives negotiation.” That should give you a  clue as to my belief that there is indeed a role for incentives in the corporate site selection process.

Still, I cannot help but notice that this is a very emotional subject for some people. Even economic developers disagree on this, which is somewhat surprising to me. And because of its divisive nature, it is quite unlikely that what I write on this topic will change anybody’s mind.

Still, the blog must go on and so brace yourself, dear readers, for my take on this somewhat controversial topic.

My first point may be the hardest one for some people to accept – that whether you like it or not, incentives are a reality and sometimes, not all the time, play an important role in the site selection process.

Let’s Boil It Down

There is winnowing process inherent to corporate site selection. Locations must be eliminated for a variety of reasons to let the cream rise to the top.  While no place is perfect, our job as a site selection consultantancy is to boil it down, based on the company’s needs, to two or three places, all of which would make for a good location for future operations.

At that point (and not on the front end) discussions on incentives, I believe, are most appropriate.

But well before we get to that stage, we have reached an understanding with our corporate client that incentives should not drive the process of site selection – it should be primary business reasons that have been thoroughly analyzed and vetted — but rather be a contributory factor as to where that ultimate best location may be.

And at that point, the community that offers the most incentives doesn’t necessary have to be the ultimate choice. But if the company is going to invest millions of dollars of capital and jobs in your community, we’d hope to see a little love in return.

Having said that, I believe a local government/economic development organization has every right, indeed has a fiduciary responsibility to its citizenry, to do a cost benefit analysis to determine what is and what is not financially doable in terms of incentives.

I have no problem with reasonable clawback arrangements and believe that they can be written into a contract to protect a community. They key word here is reasonable.

Look, a bad deal is in nobody’s interest. Not for the community or the company where it would have to reside. But by offering virtually no incentives, which is usually rare in projects of any size, a community sends us a not-so-subtle message that there would be no love lost if we continue to look elsewhere.

You Can Get Creative

So what are incentives? Well, they can be a lot of things. They can be grants, low-interest loans, sales and/or property tax abatements over an extended period of time, workforce training, expedited one-stop shop permitting and even free land. Those are some that come to mind, but I have seen communities get very creative in their local offerings.

I’ve seen communities offer free office space to companies while their new building is under construction. I knew of a town that offered a company an apartment during the initial build out year at no cost as well as membership to the local country club. You might think that as goofy, but I’ve seen it work.

Legalities, of course, apply. Private or public/private ED organizations tend to have more leeway than ED departments of city or county local government.

I don’t particularly think of site preparation as an incentive so much as getting to an equal playing field with your competition. In most instances, we want a site to be ready so that we can hit the ground running, which is all the more reason for us to look at certified sites where all the due diligence has been done.

Two Competing Camps

Generally speaking, you have two competing camps in their outlooks on incentives. There are those who believe that incentives amount to no more than corporate welfare and that any and all such offerings should be illegal or at least highly restricted.

Then there are those who believe, as I do, that incentives can be a legitimate tool in the toolbox if used with a degree of prudence and moderation. “Moderation in all things,” is an extrapolation of Aristotle’s Doctrine of the Mean. And there are passages in the Bible that imply the same thing.

So why not “grease the skids” to help make something happen – jobs and capital investment — if you can show that there will be a greater payoff in the end to that of the incentives offered? (Which is the point of a cost-benefit analysis.)

The truth is that for most viable projects that have any sort of extended operating life, the incentives offered are but a pittance of what the total operating costs will be over the long term. And again, it’s not even necessarily the amount of incentives offered so much as they were offered in the first place.

I got this message from an economic developer in southern California recently. Not surprisingly, she was none too happy with Toyota’s announced decision to move its North American corporate headquarters from Torrance, Calif., to Plano, Texas, which is where I just so happen to reside.

She erroneously thought I was crowing about the coming move, when in fact, I was (and still am) most concerned about California’s exasperating business climate in terms of regulation and taxes. (The state was yet again ranked 50th in terms of business climate by 500 polled CEOs by Chief Executive magazine.)

More telling is what she wrote:

“But for those of us engaged in economic development, we know that companies taking advantage of hand-outs, subsidies and tax deferments to this level are not supporting the infrastructure or environment in which they conduct business. Those of you who think that’s appropriate, continue to cheer. But there will be a price to pay – the ony question is how big will the tab be and who will pay it.”

Detect a hint of bitterness there? I think it’s rather clear that she is a member of the corporate welfare camp on incentives.

It Was Not The Incentives

But if you believe that the combined $55 million in state and local incentives that Texas is providing to Toyota — the 14th largest company in the world with $222 billion in sales last year — then you truly don’t get it.

Anyone with a basic understanding of business would soon realize it is not the promised incentives that is prompting Toyota’ move to Plano. Rather, to quote former President George Bush who now living in nearby Dallas, it is “strategery.”

And the company said as much. After citing  quality of life issues, which are certainly real, Jim Lentz, Toyota’s North American CEO, honed in on the big picture business reasons.

“Another reason we chose Plano is simple geography. Locating there will bring us closer to our manufacturing footprint, in a time zone that allows us to communicate more easily with our North American operations, with direct flights to all of our operations — including Japan.”

To Automotive News, Lenz expounded further.

“I wanted to get sales, manufacturing and corporate operations in one location to be more efficient, and to put more resources against engineering and design. If I can have supply and demand sitting next to each other, with information in real time, and collaborating with each other, that makes us a stronger player.”

In addition to a $6.75 million construction grant for a headquarters that will result in at least 3,650 full-time jobs, Plano is giving Toyota a 50 percent property tax abatement for 2018-2027 and a 50 percent tax rebate for the 10 years after that. Based on the $350 million value of the property, the tax abatement would “cost” (It’s hard to cost something you didn’t have coming in) Plano $8.5 million over the decade.

But even with the abatement, the Toyota project is expected to generate more than $70 million in property tax revenue and an equal amount in sales tax revenue over the 10-year period for Plano.

Simple math shows that Plano comes out ahead. And what I see as a modest incentives package offered, virtually chump change to the world’s largest carmaker, is proof to Toyota that it was wanted. And let me tell you, companies like to be wanted.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

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