Piracy: The Illegal Incentive

In the civilized, regulated realm of economic development, there are heaps of financial incentives, job training programs, small business loans and corporate tax rebates available to assist communities grow their local economies. States develop enterprise zones, governors offer opportunity funds and fledgling firms form industry clusters.

But what does 'economic development' look like in impoverished boomtowns, a world away from boardrooms and power suits? To some communities in eastern Africa, massive benefits are reaped from the booties gained by the sea-faring, hijacking pirates that cruise and curse the Gulf of Aden, a wedge of water between Somalia and Yemen that spills into the Arabian Sea.

In 2008 alone, the "pirate economy" has raked in more than $30 million in ransom monies, according to the Associated Press. But the pirates aren't the only ones profiting. Northern Somalian towns like Haradhere, Eyl, and Bossaro actively monitor the pirate activity and actually cater to them! According to the Associated Press, when an oil tanker was captured in November, "businessmen started gathering cigarettes, food and cold glass bottles of orange soda, setting up small kiosks for the pirates who come to shore to resupply almost daily." Pirates often snap up these goods for free, stock them like squirrels, and then handsomely repay the local businesses with ransom money. Stunningly, this actually creates jobs and stimulates economic activity in these resource-strapped, nearly invisible villages.

"Regardless of how the money is coming in, legally or illegally, I can say it has started a life in our town," says Shamso Moalim, a 36-year-old mother of five in Haradhere.

As the international community struggles to quell piracy in Aden's perilous waters, struggles in Somalian shantytowns are easing up a bit. Unfortunately, by all the wrong means.

Recession What?

These days it's hard to stay up on the news without being subjected to talk of recession this and recession that. Now, there's no arguing that the U.S. economy has fallen on trying times, but it's nice to temper the bad with the good for some perspective. So in the spirit of optimism, I thought it would be a refreshing change of pace to veer away from talk of our "doomed" economy and highlight two recent major investment projects that promise to bring thousands of jobs to those in need.

Well-known for its troubled economy, Michigan has been working hard over the past few years to breathe life into a fresh new economy, one that is much less dependent on its automotive roots and more focused on high-tech and life sciences companies. Progressive incentive programs such as the 21st Century Jobs Fund have been helping with the transition.

In April, Michigan residents had much reason to rejoice when the state scored one of the largest non-automotive deals in MichiganŐs history--at a time when the stateŐs unemployment rate is the highest in the nation at 7.2%. Thanks to a $330 million investment by life sciences company MPI Research Inc., Michigan stands to gain 3,300 new direct jobs and an additional 3,300 indirect jobs over the next 15 years. The company, which provides comprehensive pre-clinical research and development services, plans to more than double its current one-million-square-foot facility in Mattawan, MI, as well as launch new operations in Kalamazoo, MI at two closed Pfizer facilities in downtown Kalamazoo that Pfizer is donating to the city. Assistance provided by the Michigan Economic Development Corporation (MEDC) helped convince the company to choose Michigan over competing sites in the U.S. and China.

Based on the MEDCŐs recommendation, the Michigan Economic Growth Authority board approved a state tax credit valued at $86 million over 15 years for MPI. The MEDC is also recommending the downtown Kalamazoo site receive designation as a tax-free Renaissance Zone and that a $2 million grant previously awarded to Western Michigan University be used instead for redevelopment activities at the Kalamazoo site. Through the transportation economic development fund, the Michigan Department of Transportation will chip in and provide funding for improvements at or near the I-94 interchange that are necessary to accommodate the traffic generated by MPIŐs expansion. In addition, local match requirements will be provided by the village of Mattawan. The city of Kalamazoo is also lending a helping hand by way of $150,000 toward environmental due diligence and infrastructure analysis.

The MPI Research expansion is one of five economic development projects the governor announced in April. In all, they are expected to create and retain a total of 9,013 Michigan jobs.

Meanwhile, down south, the Tar Heel State will soon see 900 new, high-paying jobs as a result of GE-Hitachi Nuclear Energy's recent investment promise. The company, which could receive more than $25 million in state incentives for new job creation, plans to invest $704 million to add manufacturing, training, simulation, and testing facilities at its 1,300-acre campus in New Hanover County, NC, near Wilmington. Part of the expansion could also include a commercial uranium enrichment facility. A joint venture of General Electric and Hitachi, GE-Hitachi Nuclear Energy already employs more than 2,000 people in the county.

While wages for all the new jobs will vary, the overall average wage will be about $85,000 a year not including benefits--more than double the New Hanover County average of $33,226.

Unfortunately, these new jobs won't fix skyrocketing gas and food costs, but it is success stories such as these that will hopefully pave the way to brighter economic times for the United States. These stories also reinforce the need for states, and the nation as a whole, to focus economic development energies (and monies) on transitioning to a primarily knowledge-based economy to help our great nation become great again.

Will Minnesota's JOBZ be AXED . . . for good?

It was about this time last year that I blogged about Minnesota's economic development golden child--JOBZ--which was on the legislative chopping block last year--largely criticized for the wage requirement attached to tax incentives offered. The JOBZ program, which was implemented in 2004 and offers tax breaks to businesses in designated zones, survived another year. However, after a not-so-great run in 2007, the program is (again) facing possible extinction. Governor Tim Pawlenty now has his fingers crossed that his beloved program will be resuscitated with some hearty revisions in the 2008 legislative session.

While the program's wage requirements are still an issue for some, it seems that mismanagement is another big concern: Just prior to the opening of the 2008 Minnesota legislative session in February, the Office of the Legislative Auditor reported that the "administration of JOBZ needs significant improvement."

The office maintained that:
* "The JOBZ program has not provided much help to certain economically distressed areas in Greater Minnesota."
* "DEEDŐs process for reviewing JOBZ compliance is slow, inefficient, and may fail to identify some businesses that are not meeting their obligations."
* "The program's effectiveness is reduced by the lack of a statewide perspective in the approval of JOBZ deals and the absence of any budgetary constraints."
* "The estimates published by the Department of Employment and Economic Development overstate the impact of the JOBZ program."
* "There are significant problems with the business subsidy agreements signed by local governments."

The office did, however, make note of the fact that the program "has been a useful economic development tool in some cases."

About 120 companies eagerly signed up the first year of JOBZ. However, since then, the number of new projects has fallen an average 26% a year, and that decline accelerated last year, according to an article on the Minnesota Public Radio (MPR) Web site where Minnesota Department of Employment and Economic Development Commissioner Dan McElroy said, "I wouldn't describe the whole [program's] outlook as bleak. But JOBZ needs clarification by the legislature and we're working hard to get that."

In the MPR article, Mankato business consultant Ed Tschida, who works mainly with city and county governments on economic development projects, often involving JOBZ, offered a bleak prognosis for the program. "Certainly all evidence is that it will continue to decline," said Tschida. "I don't see anything turning that around."

Tschida noted a number of reasons for this decline, including that businesses are finding the benefits of the program aren't as beneficial as expected, concern over court challenges of JOBZ ending the program, and that JOBZ requires companies to pay construction wages that are higher than the going rate in the area.

One legislative effort to "claify" the program involves an extension to the number of years companies receive tax breaks. As it stands now, benefits are on a sliding scale. According to JOBZ's 2015 end date, a company signing up this year gets eight years of tax breaks. A business entering the program in 2004 received 12 years of benefits.

Although some legislators are fighting to save the program, others have their sights set on putting an end to it. In fact, the Senate tax bill contains a provision to end JOBZ.

I guess we'll just have to wait a few months to see if Gov. Pawlenty's much-criticized pride and joy gets a makeover, or if JOBZ is finally AXED.

Now, Only the Brownfields Remain

Saw this article in The New York Times today; it's about how New Jersey's brownfield redevelopment incentives didn't do much during the 1990s, but now that there's hardly any greenfield space left in the state, developers are giving them a shot.

I think it's kind of unfortunate that the easiest way for a developer to earn back their 75% of cleanup cost is by putting retail on the site. I live in New Jersey, and let me tell you, we have enough retail. Can't they change the way the money is generated to give a boost to industrial or high-tech office work development? Companies that build a factory or research center on a brownfield site should be able to get their three-quarters cleanup reimbursement faster, not slower, than a speculative developer building yet another strip mall.

Oh, and I should say (in defense of the Garden State) that when I wrote that there's no greenfield space left to develop on, that's not because we have no green space at all--it's just that so much of the prime stuff has been protected by law (hurray). As the most densely populated state in the country ("New Jersey's density is currently 1,165 people per square mile--denser than both India (at 914) and Japan (835). No other state even comes close." - NY Times), we could be at the forefront of what development along the Bos-Wash corridor is going to look like soon.

Michigan is Hiring

The Michigan Economic Development Corporation approved state-funded incentives of over $53 million to help seven companies expand or build new projects. Together, the projects are expected to create 3,512 jobs

The projects include a $10 million engineering center in Pittsfield Township, MI,, for which Grupo Aernnova, a Spanish aerospace company, will receive $18.5 million over fifteen years through tax credits. The move could bring 600 new jobs to Washtenaw County. Aernnova considered 15 states before choosing MichiganŃa key factor being the availability of engineers in the Ann Arbor region.

Credit Acceptance Corporation will add a $3.8 million expansion to its headquarters in Southfield, creating 506 jobs. Also in Southfield, MARS Advertising Prize Logic LLC will spend $1.7 million for a headquarters and create 150 jobs. Sysco Food Services will add a 90,000-square-foot, $18 million expansion in Canton, MI, hiring 130 workers. Azure Dynamics Corp. will relocate its Canadian headquarters to Oak Park, MI, spending $2.5 million and creating 125 jobs. Grandvic Investment, a plastics company, will create a $2.7 million expansion in Standish, MI, adding 75 jobs. The Thunder Bay Development LLC will purchase a $15 million manufacturing plant and create 150 new jobs in Alpena, MI.

Sources: Globe St., The Detroit News, The Detroit Free Press

Powerful Ohio Win(d)s

Grants totaling $5 million were awarded for the development of utility-scale wind energy projects. The grants are the result of the first round of the Ohio Wind Production and Manufacturing Incentive Program administered by the Ohio Department of Development and the Ohio Energy Office. The Buckeye Wind Project (in Champaign and Logan counties) and the JW Great Lake's Wood County Wind Farm are expected to be operational by June 30, 2009.

The projects will receive incentive payment of $0.01 cent per kilowatt-hour for electricity generated, and an additional $0.02 cents per kilowatt-hour for projects that utilize Ohio-manufactured turbines.

Sources: Renewable Energy Access, The Ohio Wind Working Group

Selling South Africa

Two incentive programs are being re-introduced by the South African National Treasury to lure foreign direct investment. After two years hiatus, the Strategic Investment Programme (SIP), which gives tax deductions to capital investments over 50 million Rand (roughly $7 million), and the Small and Medium Enterprise Development Programme (SMEDP), which targets manufacturing, tourism, and agricultural industries, are returning to lure industry to the country. The country's Industrial Development Zones (such as Coega IDZ), which allows investors free import duties, is also used as an incentive.

The South African Department of Trade and Industry has chosen 4 leading industrial sectors that will anchor the S.A. economy: capital/transport equipment and metals; automotives and components; chemicals, plastics fabrication, and pharmaceuticals, and forestry, pulp and paper, and furniture.

Sources: City Press (South Africa), All Africa, The South African Department of Trade and Industry

Hire Local, Cash In

According to the Michigan Department of Labor & economic growth, the state's labor force has continued to shrink--falling by 64,000 (1.3%) from January to July. Since July 2006, the state has lost 27,000 payroll jobs in manufacturing, 17,000 in construction, 14,000 in government, and 13,000 in trade, transport, and utilities.

A new economic development bill proposed by Democrats hopes to address this issue-- giving extra incentives for hiring Michigan workers. Hire Michigan First would create a sliding scale in which a company employing 100% Michigan workers is more likely to get a tax break than one employing 80% local workers. The bill would also make sure that companies hiring illegal immigrants would not receive contracts or incentives.

State Rep. Robert Dean summed up the proposal at a news conference on Monday: "Tax incentives and other benefits that come with economic development projects should be awarded only to companies that put Michigan workers first."

Sources: Grand Rapids Press, Lansing State Journal, Forbes via AP

Chasing the Film Industry

As with other industries, the film industry has its share of states, regions, and cities courting it.

And ... according to a recent op-ed piece in the Los Angeles Times this has some economic officials in Southern California quite concerned. They believe California needs to start following the examples set by states such as New Mexico and Connecticut (both of which offer attractive incentives to the film industry and both of which have seen a dramatic increase in economic activity in this industry over the past few years) if the state wants to keep its financial foothold in the industry, and these officials want to see action taken.
With the backing of by Gov. Arnold Schwarzenegger, the Assembly included more than $145 million in tax breaks over three years in its proposed budget for this fiscal year. It also passed a bill to aid filmmakers with cash grants.
According this op-ed piece:

"One problem with such proposals is that they can't distinguish between productions at risk of leaving California and those sure to be shot here. A state such as New Mexico that's starting virtually from scratch doesn't have to worry about that; almost every dollar it sacrifices in tax revenue is going to a film that would have been shot elsewhere. But in California, the tax breaks would subsidize thousands of productions that have both feet firmly planted in the state."

The article went on to say:

"Granted, California needs the high-paying jobs that the film industry provides. A disturbing number have left the state as producers have sought cheaper locations around the globe. But backers of targeted tax breaks and grants need to make a better case that filmmakers are uniquely deserving of the taxpayers' help, and that a large percentage of the subsidies won't flow to those who don't need the help. They should also explain why financial handouts are the best way to welcome filmmakers to the entertainment capital of the world."

And, New Mexico and Connecticut aren't the only states leveraging these incentives and touting cost savings to lure the film industry, North Carolina, Arizona, and Louisiana are among several states that are waving their assets in front of businesses in this industry. (Incidentally, a former state official filed a whistle-blower lawsuit this past spring alleging that his former boss at the Department of Economic Development took bribes from a New Orleans film production firm in exchange for giving more tax credits to the company.) It will be interesting to see how and where the film industry evolves over the next few years, and if Southern California can keep it's hold on the industry that it is famous for.

Here is a list of what each state has to offer businesses in the film industry as of January 2007.

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

Minnesota JOBZ on the Chopping Block

So, it seems that Minnesota's shining star in the way of economic development programs--JOBZ--is under the gun in the Legislature according to an article in the Star Tribune last week.

The JOBZ program was created with the intent of stimulating economic development in areas of Minnesota that are struggling with job creation by giving companies state tax breaks. Interestingly enough, the senator behind the campaign to end JOBZ, DFLer (Democratic-Farmer-Labor party) Tom Bakk of Cook, MN, was behind the creation of the program in 2003.

According to a few companies who were interviewed in the article in the Star Tribune, one of the main problems with the program is that it requires a certain wage be paid to workers constructing any building using state money. (This requirement is intended to prevent a contractor from using cheap outside labor to undercut the local job market.)

An editorial piece in the Star Tribune ran the next day in defense of the JOBZ program.

So, is JOBZ really worth its weight? For now, that's up to the Legislature to decide.

For the most recent annual JOBZ program report, view the PDF here.