Category Archives: Economic development

Source: Mercatus Center

George Mason University’s Mercatus Center does not like the deals struck by Virginia and New York to split Amazon, Inc.’s $5 billion HQ2 project. In a new commentary, the market-oriented research center raises a valid consideration rarely mentioned by politicians touting favored government expenditures of any type: alternate opportunity cost. Money spent on “A” is money not spent on “B.” Continue reading →

An Amazon home-delivery drone. Private-sector applications of unmanned systems would fit nicely with Virginia’s economic development priorities.

In the lead-up to Amazon, Inc.’s announcement that it would split its massive HQ2 expansion between Northern Virginia and New York, there was considerable speculation that Northern Virginia had an edge among the 20 finalist regions due to its proximity to the federal government. The company was aggressively vying for federal government business, most visibly in cloud services, and Amazon, like other federal contractors, needed a Washington location in order be close to the world’s biggest customer of IT services.

But Amazon’s decision to locate in Arlington practically next door to the Pentagon is not a federal government play, says Stephen Moret, CEO of the Virginia Economic Development Partnership. Furthermore, Virginia is not shelling out an unprecedented $550 million in job-creation inducements by FY 2035 (plus up to $200 million more in later phases) to magnify Northern Virginia’s dependence upon federal government spending.

The Amazon expansion is driven mainly by private-sector initiatives, says Moret, and Virginia’s incentives package is “right in the bulls eye” of Virginia’s strategic goals of diversifying the economy away from the federal government and bolstering the region’s high-tech industry. “For us, this is principally a private-sector diversification opportunity,” he tells Bacon’s Rebellion. “In terms of the jobs we incentivize, no more than 10% can be associated with federal government contracts.”

That’s why the Amazon-Virginia Memorandum of Understanding requires “a certification as to whether more than 10% of the New Jobs at the Facility during the prior calendar year were primarily engaged in supporting Federal Government contracts, and, if so, the percentage of New Jobs so engaged.” If new jobs tied to federal work exceeds 10% in the new facility, they would not be eligible for state employment incentives.

The percentage of federal-related jobs was not a significant issue in negotiations between Amazon and Virginia, Moret says. VEDP included the language as a “safeguard” to advance Virginia’s diversification goal. “We just wanted to make sure that the opportunity we saw would be ensured by the incentive structure.”

Last June Amazon announced a decision to expand the presence of Amazon Web Services (AWS) in Virginia with a new East Coast campus in Herndon. The deal was expected to create 1,500 new jobs in the cloud computing field. The press release from the Governor’s Office described the business this way: “AWS offers over 90 fully featured services for compute, storage, networking, database, analytics, application services, deployment, management, developer, mobile, Internet of Things (IoT), Artificial Intelligence (AI), security, hybrid, and enterprise applications, from 42 Availability Zones (AZs) across 16 geographic regions in the U.S., Australia, Brazil, Canada, China, Germany, India, Ireland, Japan, Korea, Singapore, and the UK. ”

While AWS was pitching cloud services to Uncle Sam, the list of add-on software applications clearly was aimed at an audience beyond the federal government.

Known primarily as an e-commerce giant and, more recently, as a provider of cloud services, Amazon is expanding into many exciting fields, Moret says. In vying for HQ2, an even bigger investment, VEDP scrutinized the public job postings for Amazon’s Seattle headquarters and found the company was recruiting talent for fields from health care to big data analytics.

Amazon Business, launched in 2012, provides an Amazon.com shopping experience for business supplies. Amazon is expanding its array of consumer electronics products beyond the Kindle e-readers and Echo smart speaker into smartphones TV set-top devices and credit-card readers. The company is pushing into digital streaming of music and games, and with its Whole Foods acquisition is experimenting with the home delivery of groceries. Amazon wants to rationalize the logistics of the health care industry, peddle event tickets online, sell educational toys on a subscription basis, and penetrate the home Internet-of-Things market. (See a list of Amazon products and services here.)

Moret expects new private-sector initiatives will take root in Northern Virginia, enlarging the region’s innovation ecosystem, generating new Amazon business lines, and creating new opportunities for non-Amazon entrepreneurs. Ideally, the new ventures will play to Virginia’s strengths in areas such as unmanned systems, cloud computing, Artificial Intelligence and cyber-security.

Says Moret: “We saw these as big growth opportunities for Virginia.”

Incentives language in Amazon RFP

Critics of Virginia’s deal with Amazon, Inc., have focused on the $550 million in job-creation subsidies as a grotesque example of corporate welfare, crony capitalism, or whatever you want to call it. I totally sympathize. The richest company in the world doesn’t need public subsidies. Moreover, given all the assets Virginia offered — a prime walkable-urbanism site in Washington’s metropolitan core, access to mass transit, one of the nation’s largest pools of high-tech labor, and a promise to invest billions building Virginia’s talent pipeline — some might think that Virginia didn’t need to give away so much money.

However, Stephen Moret, president of the Virginia Economic Development partnership and Virginia’s lead negotiator, argues that the subsidies were necessary to win the biggest economic-development deal in recent U.S. history. Amazon’s RFP made it as transparent as a Victoria’s Secret negligee that the company expected incentives to help it offset the up-front cost of its investment. States the RFP:

Incentives offered by the state/province and local communities to offset initial capital outlay and ongoing operational costs will be significant factors in the decision-making process. …

Identify incentive programs available for the Project at the state/province and local levels. And outline the type of incentive (i.e. land, site preparation, tax credits/exemptions, relocation grants, workforce grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers.

Virginia’s goal in economic development projects like this is to reduce incentives to an absolute minimum — ideally zero, says Moret. But in this case, Virginia’s economic-development team knew it was competing with states who were willing to give away the store. New Jersey offered $5 billion to $7 billion in direct incentives.

It’s hard to gauge the competitiveness of other offers in Amazon’s site-location calculus, so state officials could do no more than make an educated guess as to how much Virginia needed to offer to snag the deal.

“You can never know the break point. The company always knows more than we do,” says Moret. “It’s hard to reverse-engineer their thinking.”

As a practical matter, Virginia had to put something on the table, Moret says. The state previously had agreed to provide $70 million to Micron Technology, Inc., to win a $3 billion, 1,100-employee expansion of its semiconductor facility in Manassas. “It would be hard to offer Amazon nothing after what we’ve done in the past.” On a dollars-per-job basis, Virginia’s incentives are less than what it provided other premier headquarters, such as Northrop Grumman, he adds. Given the state’s track record, to deny Amazon an incentive would have signaled that Virginia was not serious about the deal.

Another key point, says Moret, is that Virginia structured the deal to ensure that it is cash-flow positive for the state budget. Virginia makes the first incentive payment five years from now — long after Amazon begins hiring and generating tax revenue.

In past posts questioning the necessity of the subsidies, I have quoted Secretary of Finance Aubrey Layne as saying, “Incentives didn’t really drive the decision. At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

In an email, Layne provides context to that statement:

Even though [incentives] did not drive the deal, remember we wanted to have a real public/private partnership with Amazon. That requires “skin in the game” for both parties in order to show commitment to make the deal happen. We were very careful to make sure our direct incentives were payable only “after” Amazon incremental revenues are realized by the Commonwealth.  We can debate the level of incentives, but on a per job basis they are moderate when compared to previous incentives.

You are correct, only Amazon knows their ultimate importance in their decision.  I only know we are comfortable with how we structured our total incentive package. We believe it is good for Virginia and we have properly protected our taxpayers in relation to the upside benefits we expect for years to come.

Governor Ralph Northam touted the Amazon deal at a press conference last week.

Michael Martz has done an excellent job reporting on the political factors that shaped the incentive package that induced Amazon, Inc., to select Crystal City-Potomac Yard in Northern Virginia along with New York City to co-host its massive expansion. The article illuminates the critical role of the little-known Major Employment and Investment Project Approval Commission (MEI), in forging the incentives.

As its name suggests, the legislative commission provides oversight of incentives for economic-development projects, and its input was essential for a project that would require budget approval for an estimated $1.85 billion in state expenditures on direct incentives, transportation projects, and higher-ed funding.

While Stephen Moret, president of the Virginia Economic Development Partnership (VEDP) was the administration’s point man on the deal, it is apparent from Martz’ reporting that state Secretary of Finance Aubrey Layne was a key player in the negotiations. “VEDP’s role was to get the deal done,” Layne told the Times-Dispatch. “My role was to make sure we were partners and kept in communication with MEI and the money committees.

Crafting the Amazon deal required political calculations on how to sell the biggest incentive package in the history of Virginia to the General Assembly. One MEI member, House Finance Chairman Lee Ware, R-Powhatan, resigned from the commission in February in protest of the immense size of the incentives offered the e-commerce giant, the biggest company (by market value) on the planet. At least one other member, Del. Steven Landes, R-Augusta, remained undecided until negotiations coughed up $250 million in state funds toward creation of Virginia Tech’s proposed $1 billion Innovation Campus next to the Amazon campus.

Some of the key political considerations:

Cash flow positive. The $550 million in job-creation incentives for Amazon was structured so that state payments to Amazon will be delayed until after income- and sales-tax revenue from the new jobs roll into the state treasury. That way, the deal will be cash-flow positive for the state from year one.

Sustained Metro funding. Amazon was a significant factor in the General Assembly’s decision in the 2018 session to contribute $154 million a year as Virginia’s share for the recapitalization of the decrepit Washington Metro mass transit system. Access to mass transit was a key consideration for Amazon. Said Jason Miller, executive director of the Greater Washington Partnership: “It was a pretty clear signal that because of the importance of the system to both the economy and Amazon, the region can come together and tackle its most pressing issues.”

More STEM degrees. The General Assembly also committed $28 million this year to boost production of undergraduate degrees in computer science and other technical fields as well as $25 million to the CyberX cyber-security education initiative to strengthen Virginia’s technology talent pipeline. In Layne’s estimation the educational commitments may have been more important to Amazon than the direct incentives for job creation. “Incentives didn’t really drive the decision,” said Layne. “At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

NoVa transportation money only. The Commission made it clear that funds designated for transportation improvements around the Amazon site would not come from general transportation funds. Instead, the state will tap federal transportation dollars restricted to Northern Virginia and toll-concession revenues from the Interstate 95 express lanes. “It was not taking any money from anyone else in the commonwealth — that was key,” said Layne.

Affordable housing a local responsibility. The commission balked at a proposal to offer $100 million in state subsidies to maintain affordable housing in Northern Virginia. Both legislators and the administration agreed that housing was the proper role of local governments and private developers.

Splitsville. Amazon’s decision to split the HQ2 project — a total of $5 billion in investments and 50,000 jobs — between Northern Virginia and New York City actually made the deal more attractive for Virginia. Said House Appropriations Chairman Chris Jones, R-Suffolk: “We felt that it was a better fit for us because it was more digestible.”