Does playing the incentive game work?

By M.J. Ellington
Montgomery Bureau
Published: Sunday, September 20, 2009 at 3:30 a.m.

Critics called Alabama's $253 million incentives package to attract Mercedes in 1993 the granddaddy of economic development boondoggles.

Fifteen years later, economic marketing strategist Andy Levine with DCI, an industrial marketing firm in New York, said landing Mercedes may be the smartest investment any state ever made.

Alabama is now the heart of the new automotive hub in the Southeast.

Alabama Development Office Director Neal Wade said Mercedes "was a game changer" that altered the direction of business and employment in the state forever.

The game change was necessary because the state's economic mainstays - farming and textile manufacturing - could no longer provide the stable jobs Alabama workers needed, Wade said.

"We don't ever want to get to the point again where we depend on one or two types of jobs," Wade said. "We must look for game changers, the megaprojects that will bring in new types of jobs."

Two questions remain, however: Does the search for game changers mean states must offer economic incentives, and is the result worth the investment?

"Absolutely," Wade said. "Right now, it's even more critical to go after projects."

The competition is not just among other Southern states; it became worldwide long ago.

The auto plants - Mercedes in Vance, Toyota in Huntsville, Honda in Lincoln and Hyundai in Montgomery - were the "low-hanging fruit" that brought thousands of other jobs with them, Wade said. Now the state looks to recruit corporate headquarters, robotics and high technology and entertainment companies with new incentives.

As for skeptics who still wonder if high-ticket economic incentives pay off in the long run, Wade said payroll figures alone help explain his support of incentives. The automotive giants that rolled into Alabama beginning with Mercedes paid $5.2 billion to workers in 2007.

Business experts who track the state's growth and economic negotiating strategy agree with Wade.

"We may or may not like this, but it is a reality," said Kerry Gatlin, dean of the college of business at the University of North Alabama. "We live in a competitive world and we must compete. Government plays an important role in establishing ground rules for competition and now in helping direct investments."

Smart incentives evolving

Early in the incentives game, states often offered incentives without requiring companies to live up to promises about jobs projections. Companies then left after getting the tax subsidies.

Sam Addy, director of the Center for Business and Economic Research at the University of Alabama, said states may be smarter about negotiating incentives than in the past. A research economist, Addy said Alabama ties incentives packages to company performance and promises for hiring.

That approach has been particularly evident in the Shoals, where local and state governments were part of an incentive package to lure National Alabama, a railcar manufacturing company.

The company, however, does not receive all incentives until it reaches certain thresholds in construction and hiring.

With the global market struggling for more than a year, railcar manufacturing has been virtually non-existent. Instead of the 1,500 to 1,800 jobs promised at the plant in western Colbert County, there are about 120 workers.

So, most of the promised monetary incentives remain tucked away until the market rebounds for National Alabama.

Worker training and infrastructure improvement such as roads make up two-thirds of state incentives packages, Addy said. The actual cash incentive usually depends on how well a company meets projections for employment and output.

Even if a company recruited with incentives did not make good on its promises, the "roads built would still be there; the employees would be trained," Addy said.

Alabama has been a leader in selling companies on the benefits of allowing the state to help train their employees. It has become a valuable tool in the recruiting process.

The two-year college system and state universities have major roles, Wade said.

"We have to have the kind of education that enables us to be flexible," he said.

Northwest-Shoals Community College in Muscle Shoals, for instance, is a big player in the National Alabama operation, which needs welders. The college brought in needed equipment and is training residents to do the work National Alabama will need.

Diversity stressed

Wade said Alabama must continue to diversify with companies such as Hudson-Alpha Institute for Biotechnology in Huntsville, the growing bio-medical presence in Birmingham and ThyssenKrupp Steel in Mobile County. He named National Alabama as another example.

Wade said he looks at the ripple effect when assessing the value of a project to the state. That includes jobs in real estate, restaurants, retail and service providers.

Wade said a standard multiplier that economic developers use is that for every automotive job brought in through incentives, six or seven other jobs also developed. He said that effect is likely to take place in Colbert and Lauderdale counties near the railcar plant, where underemployment has been a factor.

Cities such as Huntsville, now known for aerospace, defense and biotechnology, are able to recruit based on their own reputation, he said. Cities nearby also benefit, he added. Morgan and Limestone counties in particular see that benefit.

As the state refined skills for negotiating economic incentives, Wade said he always used cost-benefit analysis put in place when Bob Riley became governor in 2002. The analysis looks at the cost of the project, the number of jobs and the projected wages of the work force.

"We basically look at the cash cost to the state to give the governor some idea of how much to offer in incentives," Wade said. "He likes to see a return for the investment in four to five years. You want to protect the taxpayer dollar."