Incentive to Maintain

Despite losing over 10,000 manufacturing jobs since 2006, South Carolina is offering one of its largest employers incentives that do not require job growth. Last week the A.P. reported on Michelin North America, a tire manufacturer, was offered tax incentives for investing $500 million into South Carolina, however the incentives do not require the company to add to or even to maintain its employees within the state.

Gov. Mark Sanford said the deal would even let Michelin cut as many as 3,000 jobs and still be eligible for the new credits lawmakers approved over his veto. "I think it creates a very bad precedent going forward," Stanford said. "You would for the first time lose the nexus between job creation and incentives in our state.

The A.P. reported that some states are finding out that industries once promising to create hundreds of jobs in exchange for tax incentives are now asking for those financial incentives just to maintain employment levels.

Sources: Associated Press (via Mlive.com), The State

Expensive, but still cheaper than Manhattan!

Antares Investment Partners purchased 305,000 square feet of office space in Stamford, CT, for $86.8 million, or approximately $284 per square foot. The property portfolio, which was bought from Seaboard Properties, will benefit from corporations seeking lower-than-Manhattan rents. (Stamford is around 40 miles from Manhattan and is known for its wealth, convenience, and proximity to New York.) Antares, which is based in Greenwich, CT, is also embarking on a $3 billion, 82-acre waterfront redevelopment project in Stamford.

Sources: CNN Money, Commercial Property News, Antares Investment Partners

Courting Peabody

It seems as if everybody wants Peabody Energy's $3 billion coal gasification plant--and Peabody wants incentives, among other basic logistical considerations. The St. Louis-based company is considering locations in Indiana, Illinois, and Kentucky to build a joint coal-to-natural-gas plant with ConocoPhillips. Apparently, executives at the company promised to recommend Kentucky sites if lawmakers approve tax breaks over $300 million. The governor of Kentucky wants to hold a special legislative session on Monday to approve the incentive package.

Peabody as said that they are looking for a location in the Midwest with large reserves and an existing infrastructure, that would be designed to produce between 50 billion to 70 billion cubic-feet of pipeline quality natural gas from 3.5 million tons of Midwest coal. Peabody is the world's largest private-sector coal company, fueling 10% of all U.S. electricity generation and more than 2% worldwide.


Sources: Forbes, CNN, Peabody

The Inexpensive-Laptop Industrial Complex

The theory is simple: If every child has access to knowledge and modern forms of education, even if the child lives in the most rural and primitive environment, world poverty will be drastically reduced. The more tech-savvy students are, the more likely they will be tech-savvy adults, perhaps attracting high-paying technical jobs to areas that need them.

The non-profit organization One Laptop Per Child (OLPC), founded by Nicholas Negroponte and backed by organizations like Google, eBay, and Intel, is putting its supply chain into gear and begins manufacturing the XO B4 laptop computer. The computer will initially be sold for $176 each (in packages of 250,000) to participating countries, with the goal of eventually reducing the price to $100.

Dozens of suppliers were launched into production this week, creating the 800 parts that are being assembled in Taiwan by Quanta, the world's largest laptop manufacturer. Intel has recently joined AMD as one of the chip suppliers, after developing its own Classmate PC to compete with OLPC's AMD-powered laptop. (Negroponte had actually accused Intel of using dirty tactics to undercut sales).

The laptop is called one of the most durable and innovative computers ever: designed to withstand dusk, heat, and rain; operate in places without electricity; and features a sunlight-readable screen. Participating countries include Argentina, Cambodia, the Dominican Republic, Nigeria, and Tunisia.


Sources: BBC, One Laptop Per Child, Quanta, PC Authority, EFlux Media,

A Financial Incentive Backfires, Big Time

CITIES, COUNTIES, AND STATES in the U.S. are known for offering generous financial incentives to companies to encourage them to relocate or expand (or sometimes, just to stay put) in their area. The argument as to whether the forsaken revenue (usually through various taxes) is less than the increase in revenue from the added jobs and investment created by the company is an argument that will go on much longer than this blog post. But everyone agrees that incentives do not work 100% of the time; a company may promise new jobs with the best of intentions, but market conditions may force it to scale back its plans unexpectedly. Or in the worst case, a company may have had no real intention of creating those jobs in the first place. (That's why many argue in favor of "clawback" incentives, which only deliver the reduced/rebated taxes, etc. to a company after it meets its job creation and investment obligations.)
The New York Times today published an article casting doubt on the intentions of some very big companies taking advantage of one very big incentive (one without clawbacks, it seems). In this case, the body offering the incentive was none other than the federal government of the United States:

"If [multinationals] bring the [money they earned overseas] back to the United States to distribute to their shareholders, they still have to pay American taxes on it.

"But those rules were temporarily suspended when President Bush signed legislation in 2004 to let companies return overseas profits at a rate of 5.25 percent, far below the official tax rate of 35 percent, if they moved the money back by 2006."

I remember when this was happening--the upshot was that this year or so of tax vacation would bring a swell of cash back into the U.S., creating jobs though investment. The very biggest users of the tax break were large pharmaceutical companies, who, although they quite obviously charge Americans the highest amount for their products, are allowed under complex accounting rules to account for their profits by declaring profit margins to be incredibly high in the countries with the lowest taxes, while claiming profit margins in the U.S. were small. (The article cites claimed profit margins of only 15% in the U.S. but as high as 100% in places like Ireland or The Netherlands, which use low taxes to attract pharmaceutical companies among other industries. I'm not sure I even want to know what the real margin made on sick people in America is.)
You should read the article for yourself, but in case you want to know how this story ends right away:

"During that period, multinational companies of all stripes moved a total of about $300 billion into the United States, avoiding about $90 billion in taxes. Among them, the pharmaceutical industry was the largest single beneficiary. Leading the pack was Pfizer, the worldÕs largest drug company, which repatriated $36 billion.

"The quid pro quo was supposed to be that the drug industry would invest some of its tax windfall in American operations and jobs. Instead, struggling with a dearth of new blockbuster drugs, they have had mass layoffs. Again, Pfizer has been the leader, reducing its work force by about 8,000 in 2006 and saying early this year that it would lay off an additional 10,000 employees."

You win some, you lose some.

The $350 Million Mile

National Steel Car, a rail car firm based in Ontario, announced today that they (along with the National Alabama Corporation) will be investing $350 million into building a Northern Alabama manufacturing plant. The company plans to employ 1,800 workers and manufacture up to 10,000 freight cars a year. The 2 million-square-foot (1 mile long!!!) facility, located in the Shoals area of Alabama, is scheduled to open in 2009.

Alabama, which has been notoriously successful in luring automotive manufactures and suppliers to the state, had pursued the rail company. In June, the state passed an amendment increasing its borrowing power from $350 million to $750 million to finance incentives packages for companies like National Steel Car. Economic developers in Alabama purchased extra land, and plan to build around 5 miles of rail track to link to the Norfolk Southern Line, as well as highway, sewage, and power upgrades.

National Steel Car, which is the leading North American rail-car supplier, had been searching for a Southern U.S. location for two years. After visiting 150 sites in 12 states, company executives began negotiating with Alabama officials in September 2006. The plant is expected to make an enormous impact in Colbert and Lauderdale counties, which has a combined population of 145,000 residents.

Sources: The Times Daily, Press Release

Weekend Reading: Low-Tech Economies

SOMETHING ABOUT NEWSPAPERS from Australia is just too hard to resist...when I read about research from the University of Tasmania as in this article, you probably know which cartoon character comes to mind. But if you can put aside the urge to chuckle you'll find a great article arguing that there is substantial value in low-tech economies. Specifically, the value of technology is unlocked when it can be linked to something more basic, like the way the Industrial Revolution could never have been pulled off in Britain if it weren't for the strength of agriculture and coal mining in that country. Australia right now is riding high on extraction of vast natural resources; columnist Ross Gittins of The Sydney Morning Herald sums up the skepticism embraced by conventional wisdom by saying:

"At another level, however, I suspect popular worries about the durability of the resources boom are based on something deeper: a sneaking feeling that there's something insubstantial and unsustainable about a country trying to stay wealthy simply by pulling stuff out of the ground and selling it."

Indeed. Read the full article here to understand the argument that would assuage this concern.

An Artifical Island Powers Up

Siemens and Samsung will be investing around $650 million into a 785 megawatt power plant in Singapore, scheduled for completion in 2010.

Singapore's Island Power Company, which is owned by Massachusetts-based Intergen, has awarded a contract to to Germany-based Siemens Power Generation to build a power plant on Jurong Island, a man-made island in Singapore. South Korea-based Samsung will supply the main auxiliary systems and perform civil and assembly work.

Jurong Island, which was created in by developers, oil companies, and marketers in the 90's, is home to over 88 petroleum and chemical companies.

Sources: JTC Corporation, Industrial Info Resources, Forbes,

Green is the new Gold

The UK's version of a Wal-Mart grocery, Tesco, is often accused of forcing suppliers to cut costs and running small shops out of business. To improve its image, conform to government regulations, and hopefully boost its bottom line, the retail giant will be greening its operations and emissions and lessening its environmental impact. Tesco has pledged to triple recycling, cut in store energy use by 50% from the 2000 level by next year, and half greenhouse gas emissions by 2020. At the same time, Tesco has been opening an average of one store per week.

By investing in 500 million Euros (about $680 million U.S.) worth of environmentally friendly facility refits and research, 100 million Euros ($135 million) into developing low carbon technology, and 5 million Euros ($6.8 million) to fund Tesco's new Institute for Sustainable Consumption (with Oxford University), Tesco will be setting an example for all global retail giants. Tesco's plan may not be perfect, but it is a start.

From Ethical Corporation Magazine:

How Tesco has cut its energy usage

- More energy-efficient ovens, refrigeration and air-conditioning Ð the big users of energy in stores.
- More efficient lighting, and timers and motion detectors that switch off the lights when they are not needed.
- Redesigned fridges to keep more of the cold air in Ð cutting energy use by 10%.
- Equipment that retrieves cold air from chiller cabinets to use as an energy-efficient alternative to air-conditioning on the sales floor.
- Heat recovered from machinery to use as heating when needed.

Sir Terry Leahy, CEO of Tesco, wrote in the London Telegraph in April:

We want to lead what we have called a revolution in green consumption, and you can only do that from the front. Our commitment to combat climate change is an investment in the future of our business as well as of the planet.

Sources: Ethical Corporation, Oxford, The Telegraph

Industrial Distribution Evolution

As the first half of 2007 comes to a close, Industrial Info Resources (IIR), a marketing information service, has been tracking over 800 industrial manufacturing projects beginning construction, worth an estimated $28 billion. According to Bloomberg News, manufacturing and spending grew in June at the fastest pace in 14 months.

The IIR ranked areas throughout the U.S.
- The Mid-Atlantic Region has the most spending in the second half of 2007 at $5.1 billion. This is mainly due to the proposed $4 billion Dulles Metrorail corridor project, which plans to add 23 miles of rail line in Virginia.
- The Great Lakes region will see $4.8 billion in industrial investments, particularly in the automobile industry, including two engine plants each costing upwards of $700 million.
- The Southeast has $4.1 billion in spending; The Midwest has $2.9 billion; and the Rocky Mountains region has $2.6 billion in investments.

IIF's conclusion?

Rail and automotive spending combine for the majority of the spending this year, as they have for the last several years. Despite its problems, the automotive sector continues to crank out project work, however, now it is focused on various areas of the continent. . . When it is all said and done, the Industrial Manufacturing Industry will have had an extremely good year in terms of overall capital and maintenance spending. This second half activity should give the industry the momentum it needs to continue the spending push into 2008.

Monday Updates: Controversy, Good News, and Un-Outsourcing

Here's a few links I've picked for you...they represent what I think are the most interesting or important news items in economic development over the past week. Let's start with controversy:

• The mayor of Richmond, VA isn't happy with the Greater Richmond Partnership, despite what appear to be its solid results. (The Greater Richmond Partnership is a economic development organization funded by the Virginia counties of Chesterfield, Hanover, and Henrico, plus the city of Richmond.) Richmond Mayor Mayor L. Douglas Wilder wants to pull out of the partnership, saying there aren't enough results, especially corporate relocations, to show for it. In fact, one of his deputies is quoted in the article as saying that there are no jobs at all to show for the efforts of the GRP. So I'm wondering, was the $300 million Philip Morris R&D center in downtown Richmond a couple years back the exception to the rule? One would think that 14 years of operation by GRP--producing $5.5 billion in investment through work with about 350 companies (according to GRP stats) would have produced benefits that justify the annual city contribution to GRP of $390,000. That comes to an average of $393 million of investment per year; divide that four ways for four partners, and you're still talking $98 million of investment per year for the city--a pretty good return (24,400%) on about $400k. Even if the returns are not evenly divided, the profit margin seems awfully good. Experience suggests these things are often a dispute between partners regarding how often a corporate project goes to one county versus another (or in this case perhaps, the counties versus the city). They say a rising tide lifts all boats, but I guess one can get jealous when it feels like the neighbors are upgrading to a yacht while you're still rowing a dinghy. (I'm not taking sides on this, by the way--just pointing out that the numbers presented in the article look favorable to GRP.) (Article courtesy inRich.com, Web site for the Richmond Times-Dispatch.)
  
• More controversy, this time in the San Diego area, as reported in commentary in the North County Times, a paper serving San Diego and Riverside counties in California. The question being debated is whether or not to allow use of a certain piece of land for a new stadium for the NFL's Chargers team. Interestingly, the concern isn't over taxpayers footing part of the cost--the team has committed to doing the project with only private money. The concern has to do with best use of the land. The author says:
  • "More than 20 years of academic research has failed to find a significant relationship between an investment in a sports stadium and significant job or income growth. In a 2000 article in the Journal of Economic Perspectives, researchers from Smith College and Vanderbilt University found that 'independent work on the economic impact of stadiums and arenas has uniformly found that there is no correlation between sports facility construction and economic development.'
    
    "In fact, stadiums can actually divert spending away from local businesses and increase expenditures on public safety and other city services. Other research has shown that stadiums inject very little new money into a city's economy; rather, they reshuffle the jobs and money already there."
• I can believe that it's typically very difficult to connect corporate relocations and expansions to the establishment or updating of a sports facility. I'm also certain that some cities have been bilked and have never seen an adequate return of any kind on their investment in a stadium. Yet I also believe that you could make the same case for the opera, the municipal park system, and a modern art museum (well, maybe not so much the bilking part). If you want to have the quality of life that attracts potential employees to an area (and keeps them there), these sorts of investments must eventually be made, even if it's impossible to show exactly how the city will profit. San Diego should feel lucky they're getting an offer to get a new facility without having to contribute any money. If the piece of land the Chargers want is literally the last place in town for other needed development like affordable housing, then putting a stadium there is probably a bad idea; if not, then the city should carefully consider its options. If it disallows a stadium based on the commentator's argument, it should act immediately to develop the land for a better use. It would be a shame to preserve the land for another use only to have it later become a mall under the watch of some future government with different ideals. (P.S. -- for further BF coverage of this topic, you might find our Feb. 2005 cover story on Sports Cities interesting reading.)
• No Controversy: Not too many people will argue with $5 million coming to them. The U.S. Dept. of Labor announced that 13 more regions across the country have been awarded $5 million each from the WIRED program. (That's Workforce Innovation in Regional Economic Development for those who don't know.) The title of the grant program makes it sound like it's money for going high-tech, but that's not really a requirement. It's good news, though, for the regions with ideas for new workforce development methods that won; the regions were in the states of New Jersey, Virginia, Kentucky, Mississippi, Wisconsin, Minnesota, Missouri, Kansas, New Mexico, Arizona, Idaho, Oregon, and Washington. Full release on the DOL Web site is here.
• Finally: Found this news item (courtesy ElectricNews.Net) to be kind of contrary to what we're used to hearing--finally, an Indian company is outsourcing to the West. In this case, the West is represented by Northern Ireland. Best of all, the 200 positions being created are for helpdesk workers--the very sort of thing the U.S. has (or had) been losing to India. (The helpdesk team to be created will serve customers in the European and U.S. markets. It would have been true irony if the center also served Indian customers.) Now there's no chance that workers in Northern Ireland are cheaper by the hour, in terms of gross wages, than Indian employees doing the same work. But the Northern Ireland workforce has been earning a reputation for being still a good value compared to other Western locations, and most importantly, it seems to be a place where nothing is sacrificed in terms of cultural communications and efficiency between the employee and customers in the U.S. and/or Europe. To wit: "The announced jobs bring the total number of people employed by Indian IT companies in Northern Ireland to 2,500."