Government Aid To Business Requires Exceptional Rigor
Less than two years ago, the commonwealth came under criticism for letting a Maynard-based maker of video games move to Rhode Island, where it said it expected to more than triple its employee base, thanks to a $75 million loan guarantee from the Ocean State.
The fact that the company is owned by Curt Schilling, the hero of the Boston Red Sox’ run to the 2004 World Series title, made it seem an even more visible missed opportunity.
Fast forward to May 2012, and the Patrick administration’s decision to not put up a fight is looking like a good call. The reported financial troubles of Schilling’s company, 38 Studios, have called into question the whopping financial commitment Rhode Island made to the fledgling firm, where the combination of a charismatic ballplayer and an 11-percent unemployment rate drove the state to give a package that looks foolish today.
But beyond the headlines, the Rhode Island deal with 38 Studios begs two important questions: How far should government – be it local, state or federal – go to attract or keep business? And, how much rigor must their vetting processes contain before they make significant financial commitments?
Let’s answer the second question: Governments should be required to apply as much rigor as – if not more than – a private investor would. They need to look at the risks inherent in any industry, a company’s past performance and future potential, as well as the credentials of the company’s leadership. And, of course, they need to determine the overall benefit of any incentive package for the public as stewards of those funds. Will the company really add jobs at the scale they project? Will it generate meaningful tax revenue? Will it help steer significant growth in a sector that shows great promise or produce spinoff development and growth?
The answer to the first question isn’t so easy.
Tax increment financing (TIF) agreements have proven effective in keeping key employers in a community as well as luring them from other locales. For instance, Oxford gave its largest employer, IPG Photonics, $431,000 in tax breaks in 2011, while the state issued a $1.7-million tax credit to IPG, a recognized leader in its market. In return, IPG pledged to hire 175 more employees and build a 101,500-square-foot addition to boost its manufacturing capacity. What made all that work was that IPG surpassed the number of jobs it promised to create under its original 20-year TIF agreement with Oxford in 1999. And the TJX Cos., which has a long history in MetroWest, won agreements earlier this year to keep its headquarters in Framingham and move 1,600 jobs to Marlborough. One could make a solid argument that successful firms like IPG and TJX would be doing just fine without any public aid and they may well have expanded in MetroWest without these incentives. It’s hard to tell, but in these two deals with established firms, the municipalities gave a relatively small amount and got a lot in return.
However, while TJX and IPG are success stories, there have also been some visible failures. Evergreen Solar, for example, secured millions from the state as part of the Patrick administration’s push for investments in clean energy. But last year, Evergreen filed for bankruptcy protection, a victim of weak demand and competition from cheaper suppliers in China.
When it comes to investments, you win some, you lose some, and – like 38 Studios, as in baseball trades – the best deals can be the ones you don’t make.
As private investors and business owners, we all accept those inherent risks. Yet it feels different, of course, when you’re working with the public’s money. Governments may take some of the same risks as investors, but they must also be exceptionally rigorous, transparent and deliberate with their processes. Unfortunately, the stench of a bad deal can scare off the potentially good ones. And that benefits no one. n
WBJ Web Partners
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