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Public-Private Power Grab: The Risks in Privatizing State Economic Development Agencies

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Transferring state business recruitment functions from government agencies to private entities is not the panacea that its proponents suggest. In fact, the track record of those few states that have taken the step is filled with examples of misuse of taxpayer funds, political interference, questionable subsidy awards, and conflicts of interest. Rather than making economic development activities more effective, privatization often is little more than a power grab by governors and powerful business interests.

Public interest in economic development privatization has surged recently because it is being promoted by newly elected governors in states such as Wisconsin, Ohio, Iowa and Arizona. They are pressing for state commerce or development agencies to be replaced by public-private partnerships (PPPs) that supposedly bring private-sector expertise to state efforts to attract new business investment and thereby create new employment opportunities for residents.

A Good Jobs First review of prior experiments with economic development PPPs finds the following:

  • The idea is far from new but it is not a common or standard practice. Economic development PPPs date back more than 20 years, but only seven states currently allow private entities to control their business recruitment functions: Florida, Indiana, Michigan, Rhode Island, Utah, Virginia and Wyoming.
  • Several other states previously employed PPPs but abandoned them because of performance problems. One of those states was Wisconsin, where the concept is now being presented as something new. From 1984 to 2007, a private entity called Forward Wisconsin handled recruitment for the state, though not on an exclusive basis.
  • Most of the seven states that currently make use of economic development PPPs have experienced a variety of performance problems. These include the following:

Misuse of taxpayer funds (Rhode Island, Florida and Wyoming)
Excessive executive bonuses (Virginia, Florida, Michigan and Wyoming)
Questionable subsidy awards by the subset of PPPs that have a role in that process (Michigan and Rhode Island)
The Risks in Privatizing State Economic Development Agencies
Conflicts of interest in subsidy awards (Florida, Utah and Texas, which makes limited use of PPPs)
Questionable claims by the PPP about its effectiveness (Wyoming, Florida, Utah and Indiana)
Resistance to accountability (Florida and Michigan)

Based on these experiences, we conclude that the creation of economic development PPPs is not a wise course of action and recommend states focus instead on making their existing agencies more effective and accountable.

In states where a PPP already exists or a new one is being created, we recommend that the entity adopt strong accountability principles, including:

  • Maximum transparency in decision-making and finances, including adherence to state open records rules;
  • For PPPs that oversee subsidy awards, maximum transparency concerning recipients of those awards and their performance;
  • Strict conflict of interest rules regarding staff members and boards of directors;
  • Strict rules barring favoritism and “pay to play” in connection with companies doing business with the PPP;
  • Appointment of a public ombudsperson to monitor PPP activities and respond to outside complaints; and
  • Respect for the rights of employees to organize a union (or to transfer a representation agreement that was in place when the entity was a government agency).

As for the governance of PPPs, we recommend that the governor not chair the entity’s board and not have absolute power to name all of the directors. We recommend that leaders of the state legislature be represented on the board and play a role in selecting directors. Board members should represent not only the private sector but also labor, the non-profit sector and other constituencies.

Finally, we recommend that PPPs be funded entirely out of public revenues with full legislative oversight. If private contributions are deemed necessary, they should be in the form of mandatory fees imposed on companies applying for and/or receiving subsidy awards. Barring voluntary contributions will make it easier to avoid the problems of favoritism and pay to play.

Whether or not a state makes use of a PPP, it is worth keeping in mind that the activities that go by the name of economic development or business recruitment are not magic bullets for improving economic conditions or job opportunities in a state. Those conditions are determined by a host of factors, most of which cannot be altered by persuading individual companies to invest in a state. In the end, the business basics are what really matter: proximity to suppliers and strong linkages, proximity to customers, an adequate supply of skilled labor, adoption of technological innovation, and well-maintained and efficient infrastructure. Growing those assets requires strategic public investments to benefit existing employers, not privatized smokestack-chasing.