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Episode 14 – Incentives that Matter

Site Selectors Guild
Episode 14 - Incentives that Matter

Rick Weddle: Welcome to “Site Selection Matters,” where we take a close look at the art and science of site selection decision-making. I’m your host today, Rick Weddle, President of the Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site selection and economic development. We speak to members of the Site Selectors Guild, our economic development partners, and corporate decision-makers, to provide you with deep insight into the best and next practices in our profession.

In this episode, we have as our guest Larry Gigerich, Executive Managing Director of Ginovus. Ginovus is an independent economic development leader in site selection, location modeling, incentive procurement, and incentive compliance management. In addition to leading Ginovus, Larry brings more than 25 years of public and private sector development experience to the table as we discuss today’s topic, incentives that matter and make a difference or really move the needle in site selection matters. Join me as we welcome Larry Gigerich to “Site Selection Matters.”

Larry, today we hear a lot about financial incentives as a part of the site selection process. Some people say they’re really important, while others say they don’t really matter much, or maybe aren’t even necessary. Could you take a minute or two and share your top-level thoughts on this topic with our listeners?

Larry Gigerich: Sure. I think it’s important to recognize with financial incentives that when it comes down to the final site selection process, they do move the needle. The people in the C suite of companies that we work with are looking at, usually at the end of the process, two or three places that look very similar on paper. And those incentives can make a real difference at that point in the process. Certainly, no company should make a decision on incentives alone. And no amount of incentives is gonna make up for a poor business climate, a lack of talent in a marketplace to meet their needs. But certainly, incentives do have a role in the site selection process.

Rick: You know, a lot of people talk, Larry, about how important incentives are. Fewer times do you find them talking about when the incentives are important. When exactly in this process do incentives become, in your opinion, critical in the overall process?

Larry: Yeah, if you think about the site selection process and what we all do as guild members working with companies, we’re starting with usually a pretty wide berth of communities that we’re considering, regions or communities themselves. And we really aren’t going to focus on the incentives in that early and middle stage, again, because we’re looking at critical issues like talent, infrastructure, real estate, tax climate, things that will impact operating costs in particular for a company. It’s really when we narrow it down to a handful of places. It could be two, three, maybe as many as five locations, where, at the end, because these communities that have made the final cut look and stack up very favorably to one another, you know, very even, so to speak, that’s when the incentives can make a difference, either to address project costs or then ongoing operating costs for a company.

Rick: You know, Larry, I think that what you’ve just said highlights kind of one of the great confusion points about financial incentives. And from the perspective of someone like myself, who worked many years on the economic development side of this business, our leaders always say, “Well, how important are they,” you know? And, you know, it sounds like what you’re saying is that upfront, until you get to the final two or three locations, they are clearly important, but not the most important aspect. But then when you get down to two finalists or three finalists that are kind of neck and neck, they become very important at that. They become the tiebreaker oftentimes. Does that make sense?

Larry: Oh, absolutely. And, you know, that’s when the incentives can move the needle. Again, if you think about it, as we do all of this quantitative and qualitative analysis, that ultimately, we are presenting to our clients and they may be sharing it with their board or their close advisors for that business, you know, being able to say, okay, these places stack up, as you said, Rick, they’re neck and neck with one another, but because of how this incentive package can be structured, and often it’s really truly a public-private partnership. It’s the public, government side working with the company that’s doing the project, and they’re co-investing together to lead to an outcome that is something that helps everybody, helps the company, helps the community where the project is located, and the state. So, no question it makes a difference at that point.

Rick: So, you know, Larry, incentives is one word that sounds simple enough, [inaudible 00:04:57] describes something that has a lot of granularity in that, that it’s not just one number or one thing in terms of that, you know. So, there’s a lot of different things that go to make that up. What do you think business leaders or the C suite executives you deal with that make these decisions, what types of incentives or what exactly do they value most when it comes to looking at that big word of economic [inaudible 00:05:25]?

Larry: Yeah, and I think it’s similar for most companies. Certainly, every project has their own, you know, set of nuances to it. But I think generally speaking, you know, the C suite executives are looking at incentives to address things that are important to their company. So, again, looking at most projects having the same kind of critical decision-making criteria, certainly incentives around talent development, and ways to upskill a workforce, and even pre-training before employment takes place with that company, those are important. I think, certainly, incentives that are post-performance are also really important to companies, meaning that they can benefit from an incentive, you know, once they have invested capital, once they have hired people in their organizations. So really, I think the biggest thing, if you really boil it down is C suite executives like flexibility in how you structure incentives, because an early-stage fast-growing tech company might look a lot different than a mature manufacturing company in terms of tax liability, where they’re investing their dollars. So that flexibility, I would say would be number one. And the second piece would be really focused on things that are important to that company and what they’re trying to accomplish with their project.

Rick: It’s interesting. Let me throw you a bit of a curve now, if I can. That’s what…we talk about incentives that matter. Have you ever seen an example of a community or a region or a state that offer financial incentives that are costly to the community that really don’t matter, or that really aren’t significant? I mean, the company would take them, but maybe they don’t really matter that much in either the capital cost offsets or the operating costs offsets.

Larry: Yeah, I think certainly, there’s examples where there are incentive programs that really don’t make a difference or move the needle, and they’re offered. And, you know, in some cases, you will see training-related incentives that are offered, but they come with a lot of strings, so to speak, attached to them. So, you have, you know, a number of states across the country with their workforce development programs, have them set up, they’re not bad programs, but they require a company to utilize the local community college to deliver those training services. Well, what happens, with manufacturing projects, in some cases, certainly in technology company projects, there is so much that is proprietary in terms of what they’re doing and how they train their folks, that they really can’t open that up to a public entity like a community college to deliver those services, because that becomes information that can be shared amongst a lot of people. So, there’s a competitive issue that’s there.

And I think the other one that you sometimes see offered, where, you know, maybe it’s not as highly valued maybe as a governmental entity might think it is, really comes down to infrastructure assistance. Now, certainly, if you’re looking at a large automobile assembly plant, a large chemical plant, yeah, infrastructure becomes more important in helping get a site ready that may be more of a raw site. But really, in today’s world, most corporate executives that are gonna make a decision on a location for a project are anticipating and expecting sites to be fully served, at least to the property line, fully served with infrastructure. So, I don’t think they value, in a lot of cases, infrastructure assistance maybe as much as the governmental entities think they are valuable to that specific company.

Rick: That’s very interesting. So, incentives, if you will, taken as a large single item, are a pretty blunt instrument that really requires, to be effective, fine-tuning, to make a difference on the things, as I like the words you use, move the needle, or help make the decision. How do you work with or how can governmental entities and companies, you know, work together to create the kind of win-win public-private partnership agreements around this topic?

Larry: Yeah, I think there’s a couple ways or a couple of examples that really, really stand out. And I think, you know, first you have to start with, I think there is a common misperception amongst the media and certainly just, you know, people who live in an area who read about projects and economic development incentives, not recognizing that most incentives are post-performance, meaning a company, you know, they may see the headline, you know, company receiving $5 million to support their project, but not realizing that those dollars don’t come to them until after they’ve invested capital, after they’ve hired people, after they’ve hit certain milestones for their project.

So, it’s a long way of saying I think you can structure very effective public-private partnerships by looking at not only how you do things post-performance, how you establish milestones along the way as you release dollars. So an example of that certainly would be, in Texas, with the Texas Enterprise Fund, dollars get released, if you receive that incentive for your project, in tranches based on you hitting certain milestones. That, it helps protect the taxpayers that the governmental entity is serving, and the companies recognize, just like they would when they would buy products from a supplier, you know, if they order 100 and only get 70 of those, they’re only gonna pay for 70.

So, I think it’s looking at how to structure something creatively, a lot of it being post-performance, and then the other part of it being, you know, how you have flexibility in how you, you know, create a public-private partnership that really addresses key things in the community. You see a lot of places now that are trying to work around issues related to talent development, social impact, things where a company and the governmental entities can partner together. And yes, the company is going to benefit from the assistance, but also, it’s something that helps that entire community. You know, one of my favorite expressions, former Indiana Governor Mitch Daniels talked about governmental entities have to grow their economy to have revenue to invest in things that are important to their citizens. And I think that’s a great example of how you can structure something as an effective public-private partnership.

Rick: It really is. And it’s something…It’s such a, you used the word misconception, or misperception. You know, I think too often, citizens, when they read about these in the paper, they think almost, they get a visualization of a big number that’s almost like a wheelbarrow full of money that exists, that’s being kind of loaded into the company. And in reality, when you talk about post-performance, you’re talking about paying for incentives out of revenue growth that wouldn’t exist or materialize if the company didn’t come and make their investments in capital and equipment and workers, and things of that sort. So, it’s really sharing future revenue streams appropriately, as opposed to backing up a truck and loading up money from the existing government streams. I think that’s… But that’s hard to explain in that. How do you really message that to help citizens understand that a little better?

Larry: No, you hit the nail right on the head. I mean, clearly, it is hard, especially in a world where, you know, we have the media who talks about things in 30-second soundbites, and newspaper articles often now are only 400 words in length, so you really can’t even really get into any detail. And you’re exactly right. You know, but for these projects happening, that revenue wouldn’t exist to create the public-private partnership between the governmental entity and the company. And a lot of people think that for economic development projects, the governmental entity is taking existing dollars away from other things, you know, police, fire, schools, when they’re only working with that pool of money that is going to be created from that specific project.

So, I think trying to educate the public as much as possible when these projects get announced, because often that’s when the most attention is placed on the projects by the media in particular, where you can communicate effectively, here is how we’ve structured the deal. Here’s how it works. Again, because you have the attention of the media when you do a press conference, when you issue your press release. And I think that helps begin that education process, because even when you go through an approval hearing process for an incentive, typically, the general public isn’t there. And very often, you don’t have a lot of media people there. So, your best platform is to do it when that project is announced, and really try to explain what that looks like.

Rick: You know, Larry, you really explained that very, I think simply and straightforward and direct. And when it works correctly, it works well for all parties involved. I’m sure there are examples, as you said, where people think sometimes it’s about taking money away from existing revenues. I’m sure there’s some bad examples of where communities and companies got… It’s structured wrong, where they maybe were priced too high or there were too many incentives or there weren’t post-performance elements, or there weren’t performance standards. And those bad examples, like, we’re all fallible, I mean, humans are fallible and make mistakes, those bad examples are the ones that tend to get repeated over and over, and often, we don’t talk about the good examples in that, but I’m sure there’s examples where a community can pay too much for a project.

Larry: Oh, no question. And, you know, there are examples of that across the country. And you’re right. I mean, you know, even having 5% to 10% of deals, you know, go poorly, that’s what often people will pay attention to or point to. And, you know, there’s, you know, the recent example, is with the Foxconn project in Wisconsin, you know, huge project potential when it was announced, great opportunity for southeast Wisconsin with that project. But in that particular case, the local governmental entities, the state, were asked to push a lot of money forward early on, to acquire land, to do clearing and demolition, buy homes, put in infrastructure, you know. And now, we’ll see how it plays out. It may turn out to be okay in the future. But certainly, Foxconn is way behind their hiring schedule and their building development schedule, in terms of square footage of what they committed to build, in a situation where there was a lot of money put on the table at the very beginning. And again, some cases, for those huge projects, you have to structure deals that way. But you have to be extra careful when you’re not providing post-performance incentives, because there’s a lot more risk in trying to do that in a manner where you’re tiering those investments alongside when a company is committing things on that specific project, when they’re going to implement it, can be very important.

Rick: You know, Larry, a few years ago, I worked in Florida, and we did a very large analysis of incentive programs on projects the state had incentivized over a period of years. And what we found is that, you know, yes, there were some companies that missed their projections and didn’t create the jobs that they had forecast they would, and so they didn’t get the full amount of incentives. But what we found is that for every company that missed their forecast on the low end, there were two or three companies that exceeded their growth forecast. And the deal turned out to be even a better deal for the community than was originally imagined. Unfortunately, that didn’t get much press as we look at that, because the focus is always on the ones that don’t work.

Larry: No, absolutely. And we’ve seen that, especially in this really unprecedented economic growth period we’ve been in here recently. We’ve seen a lot of our companies over-perform, and it’s ended up being a better investment for local and state government and that original public-private partnership than anticipated, and, you know, at the end of the day, our client’s been successful. You know, they’re happy because they’ve overperformed. Now, they haven’t been, you know, generally speaking, rewarded with kind of that upside, but that’s okay. Everybody went into it with their eyes open, saying, “Here’s what we think we’re gonna do.” And if they achieve more than they expect, that’s great for not only their business, but that local community, the state as well, that they’re located in.

Rick: You know, Larry, when we talk about incentives, we’re talking about public perspective, the public money, the public treasury. That usually comes with a set of expectations around transparency and accountability. How do the companies that you work with view transparency and accountability issues, especially because they’ve got to be competitive and have a lot of proprietary information?

Larry: No, yes, I think, Rick, it’s important to realize in the world we live in today, I mean, it’s not just in site selection, and not just around economic development incentives, but really everything that happens today with governmental entities, transparency and accountability is required. I mean, on the transparency side, with so much more information available out there, you know, some of which is accurate, some of which is not, that becomes very important. And then generally speaking, the accountability piece is important because, again, if you’re a governmental entity, your job is to grow your economy and be a good steward of those financial resources, those tax dollars you have available to you. And a company certainly realizes, again, I referenced earlier, an example of when a company enters into a relationship with a supplier and they order a certain number of things, they expect to receive those, and if they don’t, you know, they’re not gonna pay the full amount. They’re gonna pay what, based on what they actually received.

So, I think in particular, most of our clients not only understand and respect the fact that you have to have accountability and transparency in a process like this, but, you know, you should also be responsible for your performance and what you do on a specific project. So, I think on the transparency piece, I think that’s the most important piece to manage. And to your point, whether it’s, you know, confidential or proprietary information, how you protect that in a way, but still allow for that transparency in the process. So, I think, fortunately, most economic development organizations and governmental entities recognize that. And during the period of negotiations, again, on that transparency side, recognize that things have to be kept confidential throughout that process.

And then, you know, once a deal is announced, the incentives have been approved and agreements have been signed, providing information around, you know, the company’s name, what they’ve committed to, and then on an ongoing basis, how they are performing annually towards those goals or commitments they’ve made, I think most people expect that and understand it. Where it’s more difficult is if you’re in a situation during that negotiation process, when you’re down to those final two or three places, and you’re trying to get the final incentive deals in place so that a company can make a decision, you can’t be in a position where you’re releasing information about the company and some specific things about what they’re planning to do, again, for confidentiality and competitive reasons. But again, I think the good news is, most governmental entities, certainly most economic development organizations understand that, and the way state laws have been structured during that negotiation process, you can keep that information confidential until a decision is made, and all the agreements are executed.

Rick: You know, Larry, thank you very much. You’ve been actually quite transparent in your conversation today as you help us pull back the curtain and look at this very complex but important subject of economic development in cities, and specifically, incentives that do in fact make a difference. I’m sure we could just go on and on with this discussion all day, but that’s really all the time we have today. So, let me say thanks, Larry, for talking with us today on this episode of “Site Selection Matters.”

Larry: Thanks, Rick. I enjoyed our conversation. Look forward to talking to you soon.

Rick: Thanks for listening to this episode of “Site Selection Matters.” And a special thanks today to Larry Gigerich for helping us get inside and better understand the complex world of economic development incentives. What an informative discussion, that leaves us with a lot to think about. Again, I’m Rick Weddle, President of the Site Selectors Guild. We hope you’ll subscribe to the “Site Selection Matters” podcast on Apple podcasts, on Stitcher, on Spotify, or wherever you listen to your podcasts. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.