State economic development officials gathered recently to discuss ways to improve incentive outcomes and accountability. Here is a summary of the themes we covered at the Business Incentives Project Accountability & Transparency Workshop held in Minneapolis.

Defining and designing business incentives

Presenters defined incentives as programs designed to influence business investment behaviors and described growth and trends in incentive program use at the state level. Valuable state-by-state detail on active incentive programs is available at http://www.stateincentives.org.

Good program design is a necessary precursor to successful program implementation. Different incentive programs might be created in order to achieve a wide variety of economic development objectives. Therefore, program design must be connected to clear policy goals in order for incentive projects and programs to be held accountable.

Due diligence

Due diligence is another aspect of project accountability. Good up-front due diligence before offering incentives is important to:

  • Reduce risk
  • Determine whether an incentive has the potential to generate net benefits for the community
  • Refine strategies and recommendations for each project
  • Prepare documented and defensible agreements

Due diligence should include background research on applicants, a thorough business case analysis of the proposed project, and a cost-benefit analysis for the community.

“Art of the deal”

Good negotiators can look at the process from all points of view – not just their own – and know when to walk away from a bad deal. Economic development organizations built around marketing and outreach and then urged to “win” projects can struggle on both fronts.

Successful negotiation requires:

  • Thinking about the interests of all parties
  • Being flexible and creative in response to those interests
  • Taking a long-term view of economic goals
  • Pulling all public parties together to avoid airing internal conflicts in front of prospects
  • Following a clear process that avoids surprises

Economic development organizations should also be clear upfront about expected reporting standards and project information that will and will not be released.

“Businesses will not object when you act in a business-like, economically rational way. They will respect you more.”

Performance agreements & compliance monitoring

All incentive agreements should be covered by written, enforceable performance agreements. This is not unfriendly to business; this is how business is done. Good performance agreements limit risk, show the economic development organization is a responsible steward of public funds, and makes expectations clear up front.

Agreements should connect the incentive to the company’s performance on specific milestones or achievements, set a time limit for retention that exceeds the breakeven point for the return on investment (ROI), and include a process for performance reporting.

While the company itself will (or should) provide most of the information to enable the economic development organization to monitor compliance with the agreement, other state agencies (especially keepers of tax and workforce data) and site visits can provide supplementary data to validate company-provided information. 

Communicating results/transparency

With better up-front data and analysis through due diligence and with stronger performance agreements and compliance monitoring processes in place, economic development organizations will have the information they need to answer calls for greater transparency and accountability in incentive programs. 

The Business Incentives Project Accountability & Transparency Workshop was the second in a three-part series created as part of the Business Incentives Initiative, which is designed to “improve decision-makers’ ability to craft policies that deliver the strongest results at the lowest possible cost” by identifying better ways to assess and report on incentive programs. The first workshop on Business Incentives Data Collection and Management was held in Portland, OR, in June 2015. The third workshop will address Project Impact and Program Evaluation and is scheduled for September 2015 in Washington, DC.

The Business Incentives Initiative is a joint project of the Center for Regional Economic Competitiveness (CREC) and the Pew Charitable Trusts. Smart Incentives is pleased to be part of the CREC team working on this effort.

 

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