Sunday, December 27, 2015

Inside Story on an Economic Development Project and Incentive Negotiation

Numerous articles have been written about economic development projects, the process and incentive negotiations. Among the latest is the Elon Musk and Tesla $5 billion capital investment and 6,500 jobs announcement to be located in Nevada. Fortune magazine and Peter Elkind did an outstanding job describing the timeline and interviewing key players.  I realize that this is somewhat dated, but it still worth a few words. 

This article is fascinating for several reasons. The first one is the sophistication of the Tesla team. The second one is several states at various times told the Tesla team we cannot honor your request. The third is the level of detail in the article. Fourth is the intense competition from seven states. Finally, the article gives a very good understanding of what this type of economic development is.

And what is economic development in this article? It is a zero sum game, you either win or lose. You do not get a trophy for second place. Economic development in part is about improving citizens lives and providing opportunities to do so. One of the best ways? A good job with a cutting edge company and/or in a leading industry. Economic development in this area is about competition or how do I ensure my community continues to make the cut. After all, it is about elimination, not about inclusion. Economic development is about analysis. The Tesla team kept asking or increasing the incentive demands. As some point, each state or area said no, our best deal is on the table. Economic development is about justification. The Tesla team would not have considered any area that did not make business sense. Incentives are icing and cannot make a bad deal good. Finally, economic development is not always about the biggest incentive package winning. At least not this this case.

It is worth noting that Elon Musk, COB and CEO of Tesla, in 2007 negotiated a lucrative deal with New Mexico staff to build an auto assembly factory. Tesla then promptly abandoned New Mexico when California offered a richer incentive package. The Tesla team later said the New Mexico site would not work. Frankly, I find that hard to believe. Generally, by the time a sophisticated company team gets to serious incentive negotiating, the business case for the project in a specific location has been satisfied. In fact, I think the project was likely unworkable, not the New Mexico site. As you read the Fortune article, you will see the facility was built in California, experienced numerous production challenges and almost went into bankruptcy.

As you read the article, note the high level of sophistication of the Tesla team. They started out with an Excel spreadsheet covering 90 issues like labor availability, environmental issues, infrastructure needs, etc.

Additional Links:

Fortune Magazine article

Tesla Project Description

Nevada Project, Incentive and Proposed Legislation Summary.

Economic Impact Analysis

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