THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, May 13, 1996 TAG: 9605110229
SECTION: BUSINESS WEEKLY PAGE: 04 EDITION: FINAL
TYPE: Opinion
SOURCE: BY ROBERT T. SKUNDA
LENGTH: Medium: 100 lines
As the competition for economic development projects has steadily increased, especially during the past 15 years, states and localities have become ever more creative in developing incentive programs to influence corporations to choose one location over another.
Because so many of these incentives are available, companies often expect them to be offered even before serious negotiations start.
At the same time that incentives are multiplying - and the demand for customized incentive packages has increased - concerned taxpayers and elected officials alike have begun to ask if they are fair, effective and responsible.
The Volkswagen facility in Pennsylvania is often cited as an example of a financial bloodbath for a state when the company couldn't meet its commitments and eventually closed the facility.
Pennsylvania's decision to increase the size of the incentive package seemed rational since Volkswagen promised to create more than 5,000 direct new jobs and invest $70 million in the economically distressed Scranton area. Unfortunately, none of these promises was ever fully met.
It is cases like these that have prompted talk of a ``truce'' to stop the mounting competition. Proposals to encourage states and localities to cooperate instead of compete for major economic development projects also has been proposed.
In Virginia, we have pioneered a new approach to incentives that combines the most effective parts of a good program - creating jobs and investment - while ensuring that the state and its citizens get a good return on their investment. We have used what we call a performance-based grant program that involves the payment of grants to eligible companies once strict criteria established in law have been met.
As part of the commonwealth's economic development planning process, known as Opportunity Virginia, 10 key economic sectors were identified as critical to the future growth of Virginia's economy.
To further expand Virginia's base of technology-related businesses, and to promote the commonwealth's appeal as a technology center, a strategic decision was made to focus on attracting new semiconductor manufacturing, research and assembly facilities.
During 1995, we were successful in attracting more than $7 billion in future investment and the potential for the creation of 9,000 direct new jobs - and this from just two companies.
The Motorola and IBM/Toshiba investments in new semiconductor manufacturing facilities are the largest in the state's history and will build on Virginia's strong foundation of high technology assets. The performance-based grant program was the cornerstone of the state's incentive packages in securing these two projects.
The program is unique in several ways. Foremost, it is tied to the actual number of jobs created, the amount of investment made, and the manufacture and sale of a product.
If the company creates fewer jobs or invests less than promised during its negotiations to get a specified incentive package, then the size of its grant is reduced accordingly. Therefore, the state only awards incentives equal to the company's actual performance.
Another appealing feature is that no grant will be paid until five years after production has begun. This delayed payment feature has advantages for both the state and the company.
The state benefits by being able to collect taxes for five years before it incurs the expense associated with the incentive package while also allowing time for the company to ``ramp up'' to full production levels.
The delay also gives the state and the public time to certify that the promises made by the company are being fulfilled. In addition, the final requirement that the product must not only be manufactured in the state but sold there as well should preclude any ``Volkswagen-like'' occurrences in Virginia.
Moreover, unlike other incentives such as bond financing and tax credits that are managed administratively, the performance-based approach, as we have used it, allows the public and the legislature to be involved in its development since the grant is set forth in specific legislation.
This allows all sides to be heard and permits major public policy questions to be addressed each time a new performance-based incentive package is proposed. Finally, the public benefits from the creation of new jobs and the expansion of the tax base to increase educational opportunities and provide vital services.
This responsible approach to the use of incentives may mark a radical change in the way future incentives are developed and implemented. By creating a program that is fair to both the company and the public, each side benefits.
Virginia has taken great care to develop a set of policies guiding us in the responsible use of incentives, while at the same time recognizing the intensely competitive environment in which we operate.
We hope that this approach, coupled with the use of the strategic plan guiding us toward a prosperous and competitive future, will position Virginia as an economic leader in the 21st century. MEMO: Robert T. Skunda is secretary of commerce and trade for the Commonwealth
of Virginia. He wrote this for the Journal of Commerce.
by CNB