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The
Company, the Project, and the Economic Developer: Great Things Happen
When All Three Get Together Introduction This article is about something quite fundamental in a project involving the development, expansion, or location of a company's operations, particularly one with significant capital investment or job creation: the invaluable support of an effective economic developer. Simply put, a company's strategic decision-making and project execution entail many risks and are typically done in a fluid situation where there are few clear or simple answers. These decisions are much less risky and much more reliable when the company makes every effort to (1) gather and analyze the essential information and (2) negotiate and secure the optimal operating environment for its business. An effective economic developer can assist in facilitating both information exchange and negotiation, especially regarding a project's economics. What do I mean by "effective economic developer?" There really is no one definition of an economic developer. Chances are, the reader of this article either is an economic developer or a company executive who has had or expects to have dealings with one. So, this article relies on the reader to already have his or her own working definition of an economic developer. Mine is that an economic developer is the official - individually or as part of a team comprised of federal, state, and/or local officials - who is responsible for an area's efforts to attract, retain, and enhance business activity, tax base, and jobs availability (and quality) for the area's residents. By "effective" I am referring to the presence of two abilities in an economic developer. The first is his or her ability to provide the company with an accurate understanding of the area's doing-business attributes and resources, political climate and support for the project, and possible negotiation outcomes on cost and related incentive aspects. The second is his or her ability to help enhance the company's chances of prospering in that operating environment during the short and long terms. So, within this context, here are three areas of battle-tested advice about how a company can involve the economic developer to everyone's benefit. This advice reflects some of the common threads gleaned from our consulting with big and small companies, negotiating numerous capital investment projects for them, and working with economic developers in numerous locales. 1. Communicate Early and Often . . . But Quietly The main types of information that an economic developer wants from a company are related to the contemplated capital investment, job creation or retention, business operations, and schedule. The main types of information that we want from an economic developer are related to the area's capital costs, recurring costs of doing business, utility and other infrastructure availability and reliability, workforce availability and skill, and stability of the business environment. Keep in mind, though, that exchanging information is really setting the stage for project negotiations. Just like
in most business or other dealings, communicating goes a long way in
helping parties to get what they want. Likewise, in the realm of major
facility projects, neither the company nor the community is well served
by trying to accomplish their objectives independently. These changes may be one of degree (for instance, instead of creating 100 jobs, the company now thinks it will create 125 jobs), of scope (for instance, instead of just a new corporate headquarters, the facility also will contain R&D operations), or transaction structure (for instance, instead of building a brand new facility, the company has decided to buy another company with a facility already in the area and then to modify that facility). In any of these examples and the many others I could list, the company should not be afraid to let the community know that the project is changing. There are always changes. An experienced economic developer is used to this. While the company may have to educate the economic developer in what these changes mean in terms of the overall project and its impact on the community, the economic developer can assist the company with obtaining the new or different information, access to the appropriate parties, or resources (including incentives) that these changes require. Sharing
Information For the reasons described later in this article, we first have the economic developer earn our trust that he or she will keep the client's name and business initiative confidential and will instruct all others on the economic development team to do the same. Once the team has earned our trust, thereafter we rely on the economic developer's and other team members' professionalism to keep our information confidential until we permit further disclosure. From a risk-reward standpoint, we typically can show with either our computer models or plain common sense that the time and money savings involved in getting to and through the negotiations faster far outweigh the risk of a premature disclosure. Only in a few instances have our confidences been violated. And even then, the deals went forward faster and more cost-effectively than otherwise would have been the case. Similarly, we try to share much of our findings and analyses, which are often highly detailed and proprietary, with the economic developers. We do this for two reasons. First, they often find it helpful if not enlightening. This is especially so when they are explaining to their elected leaders or others on their team, for instance, why we are asking for a certain deal point or why we feel the country, state, or community in question is not competitive compared to our alternatives in certain respects. Basically, we have found in negotiating with economic development teams that we get better, faster results, and that the teams are more responsive and cooperative, when we clearly explain our interests and substantiate all of our points. For example, we have found that the more the company can share the financial aspects, or "economics," of the project and its component transactions, the better. Stated differently, the more the economic developer understands what makes the company tick, and what will make the project a success in the company's view, the better. Interestingly, many economic developers either do not ask for this information or the companies that they are recruiting do not provide it for one reason or another. Yet, as all of us in the business world know, understanding the costs and expected returns of any business decision obviously is central to determining whether and when it will be a profitable one. However, government officials do not handle profit-motivated decisions everyday. As a result, we always make an effort to help the economic developer understand the project's economics as applied in his or her area and, just as importantly, where they will need to improve for the project to happen there. Second, our sharing with the economic development team encourages it in turn to share with us. This sharing augments the company's relationship with the economic development team and reputation in the community for a long time. After all, the "real work" lies ahead to get the new facility or other business initiative, whatever it is, fully staffed and functional. And that initiative will have a life cycle potentially lasting decades. Our project development engagements last at least many months and often several years to select the location, site, and/or transaction structures; to secure any needed financing; to buy the target company, land, or building (or to construct one); to place and train the workforce; to implement any agreements with the governments; and to make sure the operations are functioning as planned. So, we too will be dealing the economic development team and the other area parties involved for a long time to come. Accordingly, both the company and we have a strong interest in making sure we all are proceeding with accurate information, the lowest risk of possible surprises (just like changes, there are always at least one or two surprises), and the greatest possible local support for a timely start up and profitable operations going forward. Confidentiality First, having been involved in over a thousand deals, I can recall only a handful of clients that really wanted to announce anything. Frankly, there is rarely a strong business purpose in the company's announcing its new capital investment to the world, at least not until it is a done deal. If the company is publicly traded, then there are disclosure obligations in the SEC filings at the appropriate time. However, for the most part, other than some groundbreaking or ribbon cutting events for internal consumption and general corporate public relations, the companies just want to go about their business. They do not want to attract a lot of attention from others. Rather, the area officials are the ones who want the fanfare of big public announcements. Second, the company's main motivation for confidentiality is usually related to expediency, the company's competition, the company's existing employees and operations, or all three. The confidentiality has nothing to do with trying to deprive the area officials of the opportunity to trumpet their "win," i.e., their new or expanding corporate citizen. No business wants its deals negotiated publicly except to the extent the law requires public hearings, meetings, or other disclosure. Of course, it is much easier to negotiate with fewer chefs in the kitchen than with the entire public (including the company's competition) looking in if not actually involved. While this may go without saying, we naturally advise our clients to avoid letting their competition know what they are up to, until and unless they have to. We also do not want to "spook" our clients' employees who might fear that the new facility, operation, or venture may adversely affect their jobs. Employees should learn about the project internally from management at the appropriate time; they should not have to learn about it first in the newspaper. Fortunately, in the last several years, government officials generally, including economic developers in particular, have come to realize a company's valid needs regarding confidentiality until the company is ready for the world to know. More basically, the officials have learned, sometimes the hard way, that the company has the ability to put the project elsewhere if the target location gets loose-lipped. Beyond that risk of "losing the project," truth be told, many economic developers are compensated in part on their wins -- they have a financial motivation not to blow a deal because of a leak. 2. Be Good to Your Fans Remember, the economic developer typically wants the project to happen, just like the company does, and often will be - or at least should be -- advocating on the company's behalf. In the words of Steve Nye, a successful economic developer and the head of economic development for Cleveland County, North Carolina, "when dealing with local economic developers, companies and consultants must bear in mind that these individuals are, in many cases, the greatest local supporters of the project. It is incumbent that you help them to relay the importance of the project and its economic benefit to the elected leaders and citizens of the community. That means you need to be prepared to give them conservative numbers when dealing with employment and investment in land, building and equipment." We perform a substantial amount of business simulation, project planning, and financial projection as part of helping companies understand their development, expansion, and location choices. Those efforts rely on considerable database input and sophisticated computer models. The accuracy and presentation of the core information regarding capital investment and job creation or retention materially affects the company's analysis of its prospects in the various areas or transactions under consideration. Not surprisingly, it also materially affects the interest level of the economic development team in the company and its project. So, as Steve points out, "This information needs to be shared with the local elected officials that will be offering or the local economic development board supporting any inducement package. Timing is going to be critical so you may want to have an information session with either the local Economic Development Commission, City Council, or County Commissioners. It is most likely that this session could be conducted as a closed meeting. Please make certain that members of these groups understand the importance of this project and give them an indication of the level of confidentiality needed for the process. This discussion will allow all parties to be brought up to speed on the specific parameters of the project." As mentioned above, information changes are inevitable. Given that reality, it is always better to manage everyone's expectations by erring on the side of low capital investment and jobs figures, so changes are likely to be upward. In our experience, it is always better to under-commit and over-deliver than the other way around. Steve's experience is the same. According to him, "The conservative estimates will help you to obtain the proper incentives. No local economic developer desires to go back before an elected board and request different or additional inducements for a deal that was supposedly completed. It always is better to create a few more jobs and investment that legally promised, as there is some public sentiment that incentives are nothing more than corporate welfare and that there is no public benefit derived from them. This helps to silence the critics and maintains credibility for local EDCs and elected boards." The
Truth About Clawbacks I, for one, do not have a problem with clawbacks, if they are reasonably related to a company's performance. I, for one, also have never seen a reasonable clawback kill a deal. There is a lot of hype that often accompanies the interface between a company and government when incentives are involved. But when you cut through the hype, the projects simply are comprised of business deals, regardless of whether some of the parties are government entities. And clawbacks are simply adjustments to the underlying deal point, such as a particular incentive, based on actual future performance compared to presently projected future performance. Once the parties get to this level of deal making, they all obviously want the deal to happen, and no one wants to see the expected benefits or results fail to materialize. While we would not volunteer the clawbacks to an economic developer any more than we would volunteer them to a private party in negotiating a business contract, making adjustments to the original agreement based on future performance is a logical way to hedge risk in many types of business deals. Of course, if we are getting into a clawback discussion, we additionally will seek some upside for the company if its actual performance exceeds the projections on which the incentives were based. Either way, our experience is that neither party wants to be put in a position where the clawbacks (or add-ons) might be triggered or, if triggered, where one or the other party has to enforce the clawback provisions. Rather, in a clawback situation, we have found that usually the parties try to make accommodations to one another to save face and preserve the relationship. 3. Understand Your Dance Partner, Not Just the Dance Steps On a recent greenfield manufacturing facility project, we worked extensively with the Carolinas Partnership, a regional marketing entity for the Charlotte, North Carolina area. That entity promotes the Charlotte area on behalf of 15 counties in two states, no easy task politically or logistically. However, even in this era of regional cooperation as opposed to internal competition, we knew from experience that we would get a very different read on the area's doing-business attributes, depending on which state, North Carolina or South Carolina, or frankly which of the constituent counties we were talking to. In fact, as we disclosed to everyone involved, the Charlotte Region was one, but not the only, area under consideration. By the time a location decision was made and detailed negotiations were underway, we considered over 400 alternatives for that project. Therefore, we made the point to the Carolinas Partnership early on that we needed accurate information, quick introductions to the official and unofficial power structures in many of the constituent communities, and, frankly, unbiased insight into the area's political and economic dynamics. And that's what we got! Of all the regional economic development alliances with which we have done business, the Carolinas Partnership is way above most others in understanding what is important to business. One of our primary contacts there was Jack Roddey. Known widely throughout the Carolinas, Jack has spent over 40 years there in the economic development business, first with Duke Power and then with the Carolinas Partnership. Having probably seen just about every kind of economic developer, Jack feels, "Some are very professionally competent; some you have to go around to get accurate and timely information. This has always been true and still is today, but much less so. Economic developers today have a much higher level of professionalism than before. The more developed the county and the more it can pay economic developers, the better the performance you get - as is typical in other settings. In more rural places, the expertise is less, and the company has to figure out whom to go to for fast and accurate answers. It's a question of reliability." To get something done in many rural places, you have to figure out who are "the powers that be." This is a much more difficult process in a county where there is not an experienced, professional economic developer. However, Jack cautions, "Don't exclude the economic developers, even in the smaller, rural places - they need to be involved, but they may not be as experienced or knowledgeable as in other places. These are just generalizations - not universal truths. There are fine economic developers in rural places as well. The really good ones, regardless of the community's size or resources, can be relied on quite a bit to get the right information to the company. It's more of a feel you get." Conversely, the rural counties allow better access to the head elected officials and they are actively involved in economic development compared to in more developed counties. So, as Jack points out, "a company may get much closer to the political pulse more quickly in rural versus developed places." On the role of economic development entities at the different levels, it is important to realize that they do not all have the same purpose. For instance, as Jack points out, the role of regional partnerships is " mainly to introduce a company and/or its consultant to the area and to possible sites in the area, help show their representatives around, provide factual information, and make introductions, all while being neutral. It's up to the state or locality to sell company on the specific location or site - to help the company be successful wherever it goes in the region." We indeed have found that regional alliances or partnerships can help a company save a lot of time and effort if they are "plugged in" with the area's component jurisdictions - including their politics, rivalries, attributes, and detriments. For instance, if in the project described above we had gone to one state or the other first, then naturally the first state would have steered us toward communities and sites there and, whether overtly or subtly, would have tried to steer us away from communities and sites in the other state. With a fair regional economic development entity, this tug-of-war is avoided either entirely or at least until the company is really ready to get down to the negotiating table with one jurisdiction or another. Nevertheless, as Jack aptly suggests, "the company and its consultants always have to keep the politics in mind. Regional partnerships have their own politics to contend with when dealing with multiple states, not just to mention multiple counties within each state." Conclusion This article focused on the information exchange and negotiation context with economic development professionals to make a significant, risky business development, expansion, or location initiative a success. Honest, thorough, and confidential communication between the company, its consultants, and the economic development team can lead to some great results for everyone concerned. Steve Nye summarizes the opportunity this way. "A good job of communicating solves a lot of problems. If you provide your local economic developer with the information needed to present to local boards, then you have a better chance of receiving the support you need for the project." Therefore, we involve the economic developers of the target areas early, impress upon the need for confidentiality, test their discretion by sharing some information early, build the trust, and then negotiate from there with everyone communicating frequently but confidentially. In other words, we proceed on the basis that trust is earned but that the economic developers will operate professionally. The economic development field is increasingly competitive. Consequently, the profession's standards are improving all the time. We find that, with rare exception these days, if one treats economic developers as professionals, they will act as professionals, will do well for the areas that they represent, and will help the company achieve its objectives at the same time. But remember that not all economic developers are the same. A company needs to understand and respect the differences among economic developers at the national, state/province, regional, and local levels, among those in developed and rural areas, and among those in prosperous and depressed areas. They have varying levels of training, office support, compensation, and experience. They also have different agendas. [View the Printable Version of this page.] |
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