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Incentives 2.0 (Making Incentives Work Better)

4 Mar, 2013

By: Chris Steele

Last December, the New York Times ran a multi-part story on the role of incentives in corporate location selection. Each of the three parts focused on a different nuance. The first focused on risks governments face when offering great sums to companies without a reasonable assessment of the possible return on investment. The second shined a harsh light on the deals provided by a southwestern state and the negative impacts these may have had on other public spending. The third installment brought focus to the use of incentives in luring entertainment and the film-making industry and the limited return to another community.

While the series did a great deal to highlight the hazards of improperly designed incentive policies, it did little to bring facts to a debate that has carried a lot of emotion. Focus was placed on failure rather than on suggestions for improvement. Left unstated was the ways in which incentives can play a legitimate and effective role in business attraction and support.

The Zero-Sum Game
Each of the Times articles and much public debate assume that incentives simply transfer wealth from existing residents to a new corporate entity. This perspective implies that incentives are always to the detriment of the community offering them. It’s an interesting argument as it begs the question of why communities continue to try to incentivize investment.     

Well-designed incentives are not a zero-sum game. When the community’s goals are clear, the desired outcomes are realistic, and the responsibility of all parties expressly laid forth, benefits can be achieved for both the public and private sector. These also must be evaluated in the context of the community’s other business fundamentals so the program complements the full competitive package.

The ideal goal of an incentive program is to sway a location decision while also building a strong ongoing relationship between company and the community. Such a relationship can only develop where benefits are put in place that will not only accrue to the company, but also to the community at large. 

Training grants often fit this description. They allay company costs, provide a trained workforce and also improve the general skills base for the community. Even if the company in question fails or pulls back from the community, the community and its residents are left better off than before.

Other goals can also be better than a zero-sum game, but can be more risky for the community. For example, many communities use incentives to try to drive investment in deprived areas. While an admirable goal, incentives alone will not be successful in drawing investment into an area where business fundamentals are absent. Such incentives can, however, be successful when used in conjunction with efforts to invest in infrastructure, skills and other key areas.

Trust, but Verify
Critically, accountability and transparency also need to be in place for incentives to be effective public tools. Companies need to be able to show the return on investment the community has made. Specific thresholds should be established for job growth, capital investment or whatever the desired outcome of the community happens to be.

Accordingly, the public must also have visibility on those goals through clear reporting. There must also be implications when goals are not met, such as clawbacks or dependent payments. Such measures need not be punitive as there may be a case for further investment. Nonetheless, a failure to meet a threshold must be accompanied with some change in the relationship.

Incentive and credit programs can absolutely play a useful and powerful role in business attraction and economic development. However, such programs must incorporate the key principles of clear objectives, mutual benefit, transparency and accountability.

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