“The result of long-term relationships is better and better quality, and lower and lower costs.”
-W. Edwards Deming
The ability of governments to keep up with the pace of economic transformation and business model innovation is limited. The difficulty in building a system that taxes businesses fairly, maintains strong bond ratings based on a long-term forecast of public revenues, and can move quickly enough to take advantage of opportunity while holding investors accountable is tricky to say the least. The best communities find this balance more often than not, but aren’t perfect. Struggling communities fail to capitalize on opportunities or build a sustainable economic foundation. Businesses want certainty from their public partners, but live with uncertainty and volatility every day. Neither party can provide the certainty that both seek when approaching an agreement.
To succeed, both businesses and communities have to look beyond the transactional debates to a longer-term partnership. That is getting harder for both parties. A recent McKinsey Consulting study found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958, today it is less than 18 years. Communities can’t rely on businesses to be there for decades, and companies have to constantly evolve and compete, which means they have to consider their location alternatives often.
So, how do we move quickly, ensure accountability, and ensure business investors and the public financial markets of the future maintain integrity of our businesses and governments?
First, double down on performance-based business incentives and processes that acknowledge the risk that businesses are taking with each project. Most incentive programs are oriented this way already, contrary to how these agreements are reported and perceived in the news, and they work quite well. Tax benefits are received once the jobs, development, and capital is invested. Any outlays that the community provides upfront should be dedicated to the development of the public good, such as infrastructure and workforce programs that deliver a benefit beyond the individual business or project. Capital to fund underserved markets in the minority and small business communities is also a public investment because of the future capacity it builds. There is some guidance from the Government Finance Officer’s Association.
Second, develop more three-way partnership agreements that define what the company will deliver to the community (jobs, investment, corporate citizenship, etc.), what the community will do for the business (delivery of public services and utilities, predictable regulation, etc.) and finally, what they owe each other. This final piece is the hardest, but perhaps where most of the value is created. This identifies “the partnership” and defines how gains or losses accruing to the business or the community will be mutually beneficial.
Third, an acknowledgement that the realities of our modern, global economy are volatile, uncertain, complex, and ambiguous (VUCA), and that we will talk, spend time with each other, and seek to understand the challenges and opportunities we face, together. This is why it is important for your economic development teams to consistently reach out to businesses, why elected leaders should tour and spend time inside the businesses in their community, and why private sector leaders should spend time with their public partners and engage in public initiatives when possible. True partnership requires time, effort, and the ability to deal with difficult issues as they arise.
It is possible to move quickly, reduce risk for both parties, address local priorities and inequities while thinking long-term and with an eye towards global competitiveness. Your thoughts on this issue are welcomed!
-Kenny McDonald