The last word on incentives

Or maybe not….

We all love to debate the merits, morality, legality, efficacy, etc. of the government using taxpayer funds directly to attract industry. From their perspective, they are looking at an ROI (return on investment). For example, if we give a company $5,000/employee they hire to train new workers and we get $25000 back in taxes paid over 8 years, that is a good ‘ROI’. There are also rationale arguments against giving incentives.

My position is well known – if you read this rag very often. I think that governments should use incentives when it makes sense – to lose a good project because Quebec or Alabama coughs up more upfront goodies – on some quasi-moral grounds – doesn’t make sense to me.

But after a little chat this week with someone closely involved with this stuff, I have to issue a major qualification to my position. Major.

I don’t think you can ‘lead’ with incentives. In other words, if the main reason why companies are coming to your community is the ‘incentive’, then I think the naysayers are right. The company will use the incentive and then, likely, leave. If the underlying economics don’t make sense and you are levelling the playing field with government cash, that’s a losing proposition. However, I do agree that this has been done on some occasions.

I think incentives are something put on the table after you are shortlisted. Most of the big investment projects I have studied got to a ‘short list’ of jurisdictions (in other words, a list of areas where the economics and other factors made sense) before even having a serious discussion about tax breaks or free land or training grants or infrastructure funding.

The underlying business case (energy costs, labour costs, availability of labour, R&D capacity, business/industrial park infrastructure, transportation infrastructure, workers’ compensation rates, legal/regulatory environment, access to supply chain, access to markets, etc.) must be favourable before even considering ‘incentives’. And, I might add, governments should work on the former rather than the latter.

You can’t bait good companies with incentives. You can attract bad ones. Anyone who has been in economic development for any length of time has seen ‘shoppers’. Companies shopping around a project looking for large government incentives upfront (most likely because the private sector won’t touch it). But those are doomed to fail (9 times out of 10) and governments should avoid them.

Economic development departments, supported by good government policy, should be competing directly in sectors where there is a strong business case to locate in New Brunswick. If there are no sectors where there is a strong business case to locate in New Brunswick, then Houston (or should I say Fredericton), we have a problem.

Incentives come later.