From Good Jobs First:
One of the key questions for economic development officials is figuring out how large, national companies decide where to locate job-creating facilities such as headquarters buildings, factories, warehouses and research & development centers. The answer should be simple: companies base their location decisions on business basics such as proximity to suppliers and customers, infrastructure conditions, labor market considerations and access to affordable energy. Clustering can also play a role, especially for companies working in emerging technologies.
Yet the process of site location has been made more complicated–and less rational–as the result of the involvement of a group of consultants that present themselves as indispensable middlemen between communities seeking investments and companies deciding where to locate new facilities. The use of consultants by itself, is not objectionable. Just as a family may use a realtor when looking for a new home, a company may need a consultant to identify the best location for an investment in light of corporate needs.
The problem is that the consultants have persuaded both local economic development officials and corporate executives that the use of subsidies is an inevitable part of the site location process. The consultants play to the fear of communities that they will be shunned by corporations unless they create an appealing “business climate,” which usually includes “incentives” such as the availability of substantial corporate tax breaks, low-cost financing and infrastructure assistance. At the same time, companies are made to think they are fools unless they extract the best subsidy deal out of a community, even if issues such as taxes are a minor part of the decision on where to invest.
All this is to the advantage of the consultants, who usually work both sides of the street–getting paid by communities to offer subsidy-laden deals that may cause local fiscal distress and by companies that may be distracted from business basics and seduced by unnecessary subsidy packages. The fact that the consultants are allowed to work both sides is a sad reflection of how disorganized the public sector is, how the corporate divide-and-conquer strategy has left public officials in a weak position. If public officials were more unified, they could command loyalty from consultants. Instead, communities are pressured by consultants to engage in bidding wars for particularly attractive projects, and they often end up giving away the store to a company that will probably make its decision on factors that have little or nothing to do with the subsidies.
Actually, the subsidy system has become so routine that consultants do not have to exert much pressure; public officials are eager to offer lucrative packages. What they tend to ignore is that some of the features most important to companies, such as the quality of schools and roads, may deteriorate if tax giveaways undermine the ability of local government to pay for these public goods.
The techniques of the consultants were openly discussed in an article by Dennis Donovan of the Wadley-Donovan Group, a nationally prominent site location firm. Writing in Expansion Management, he said a key tactic was to “negotiate incentives for the new project in two or three finalist locations, preferably in different states. Generally speaking, spend the most time negotiating in the preferred location. Use offers from the alternate areas for leverage.” He further recommended pitting two cities against each other in the same metro area: “In the preferred area, tie incentive negotiations to a couple of sites, ideally in separate communities.”
Cities competing for investments are put in a type of “prisoner’s dilemma.” The consultant doesn’t tell any of the finalist cities who they are competing against. Even if the deal is so high-profile that the news media identify the competing places, it is clearly understood that the cities (or states) will not compare notes or cooperate in any way. That leaves the consultant and the company in total control as they play the sites against each other to up the ante.
The consultants have a particular motivation to perpetuate this system: they get paid largely or in part in the form of a cut of the subsidies they negotiate for the company–as much as 30 percent of the subsidy package. So of course, the consultants are highly self-interested in maintaining the fiction that subsidies matter, so they can run up the subsidy tab and get bigger fees.
Commissions also raise the issue of the consultants’ objectivity. As veteran site location consultant Bruce Maus has put it: “When the deal is incentive-driven, we lose our objectivity. I wish I had a nickel for every time a broker said she won’t show the client the property unless he agrees to the commission. That means the client doesn’t get to see all the options. The same is true with consultants paid by incentives. They only show the sites with high incentives. They lose the objectivity in the deal and may steer the client to the wrong place or not the best place.”
What does this all really mean for subsidies and jobs? Candid site location consultants will admit: the only time subsidies can actually tilt the scales is when a company has two equally compelling choices. But that rarely happens. So subsidies are a really crude tool that can only affect a really tiny percentage of deals. All the other times, the subsidies are just wasted windfalls, paying companies to do what they would have done anyway. That means less money for things that really do help create jobs, like skills and infrastructure.
Origins of the Site Location Business
In the depths of the Great Depression, a young Chicago industrial real estate salesman named Leonard Yaseen grew impatient with his father-in-law and boss, Felix Fantus. The old man was doing a lot more for his corporate clients than helping them buy and sell real estate. He was giving companies that sought to relocate factories information not just about land and buildings, but about transportation and utilities, local wages and taxes. He had been doing this since 1919, when he performed his own site location search to move his chair manufacturing plant from Chicago to Indiana. Fantus was giving all this valuable information away for free, and Yaseen thought they should be charging.
Unable to convince Fantus that his insights could be commodified into a business, Yaseen left Chicago for New York in 1934, with his father-in-law’s blessing. For a year and a half, he immersed himself in data about rail service, labor skills and wages, utilities, raw materials and taxes. Then he sent a pitch letter to lots of Manhattan-based manufacturing companies, and one hired him.
Thus was born the Fantus Factory Locating Service, one of the most powerful yet obscure consulting firms in U.S. history. Yaseen’s fledgling business slowly took root through the rest of the Depression and World War II, and then boomed after the war. As early as 1953, Yaseen realized that the expertise Fantus was developing while working for companies could be parlayed into a new consulting niche: advising cities, states, regional organizations, utility companies and railroads on how to attract businesses. He formed a wholly-owned subsidiary called Fantus Area Research. When asked if this was not a conflict of interest, he defended his impartiality. “We are just making double use of our extensive library and files,” he said. Six years after forming this subsidiary, he even claimed that he had never placed a company in a city that had employed Fantus Area Research.
For the next four decades, Fantus dominated the site location consulting industry, playing a central role in the relocation of thousands of workplaces, most of them factories moving out of the Northeast and Midwest to the South. By its own count, it helped engineer more than 4,000 relocations by the time Yaseen retired in 1977, and 2,000 more in the next decade.
Fantus survives today as a Chicago-based consulting affiliate of the Big Four accounting firm Deloitte & Touche. Although the industry is now more fragmented and its work more computerized, site locators still use the basic system Fantus created. The identity of corporate clients is still held confidential until late in the process. The real reasons a company chose a place are not revealed. Cities and states are still whipsawed against each other to maximize subsidies and when that happens, cities and states are often not told the places they are competing against, so there is no way for City A to know that what the consultant says Cities B and C are offering is true. Many of the consultants work for both private and public-sector clients, claiming no conflict of interest. Indeed, many of the profession’s most influential players– including Robert Ady, Gene DePrez, Dennis Donovan and James Renzas–are Fantus alumni.
The Site Location Consulting Industry Today
The industry has fragmented since the early 1990s. Missteps by later owners of Fantus caused defections, and the explosion of data available on the internet has lowered the barriers to entering the business. Some site location consultants work within market niches defined by industry or corporate function. There is an elite group of firms that work mostly for Fortune 500 firms, while others work for second-tier and medium-sized firms.
It’s hard to sketch the industry, both because it is fragmented and because firms within it seem to wax and wane. There is no trade association of site locators, nor are they licensed or regulated by the states. Some have alliances with various publications, websites, utility companies and economic development associations. Besides Fantus, there are numerous other long-standing firms, such as: Wadley-Donovan-Gutshaw Consulting (part of the Wadley-Donovan Group, which also includes Wadley-Donovan GrowthTech); McCallum Sweeney Consulting; Location Consultants International; A.T. Kearney, Inc.; Carter & Burgess; Fluor Global Location Strategies (part of engineering giant Fluor Corporation); and Moran, Stahl & Boyer.
Two of the other Big Four accounting firms besides Deloitte & Touche have site location practices: KPMG Strategic Relocation and Expansion Services and Ernst & Young International Location Advisory Services. IBM purchased PriceWaterhouseCoopers’ Plant Location International business in 2002; it is now IBM Business Consulting Services-Plant Location International. Some industrial real estate firms also have site consulting divisions, such as C.B. Richard Ellis Corporate Advisory Services.
“From a Money Pit to a Cash Cow”
Occasionally, documents leak out that expose the subsidy-grubbing game plan. In March 2004, the national director of Ernst & Young’s Business Incentives Practice led a workshop together with a former Boeing government relations vice president at the annual meeting of the State Government Affairs Council, which calls itself “the premier national association for multi-state government affairs professionals of over 120 major U.S. corporations, trade associations and service providers.” The title of their PowerPoint presentation says it all: “Turning Your State Government Relations Department from a Money Pit into a Cash Cow.” The audience reportedly included officials from Wal-Mart, Proctor & Gamble, Bank of America and Microsoft.
The presentation was leaked to the John Locke Foundation (a Libertarian think tank with a long history of activism on subsidies in North Carolina), which broke the story in its Carolina Journal online magazine. Said one Tarheel State representative: “Cash Cow? You got that right. They look at [government] as just turning on the spigots… They play state legislators like violins. They’re treating us like a scam.”
Site location consultants are among the most powerful yet least regulated consulting industries in America. Most avoid publicity like the plague, yet they are in the middle of the majority of high-profile deals. Their methods have raised serious questions about conflict of interest, because many work for both side of the street. This dual role gives them inordinate power, and they are central figures in the creation and escalation of the subsidy-bidding wars for jobs. They have a monetary self-interest in this escalation, because it makes their work more valuable and because they sometimes work on commission, taking a cut of the subsidies they help companies negotiate. They are the rock stars in expensive suits at economic development conferences, before whom public officials line up to give their cards. They are the saw-teeth of the corporate-orchestrated “economic war among the states” that is slashing corporate tax rates and manipulating state and local governments everywhere.