Tag Archives: Amazon

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.”

The Virginia response to the Amazon’s 1/2 HQ2 (half of the originally proposed second headquarters) announcement is not uniformly delirious. Here are a couple of responses landing in my in-box — one from the center-left Commonwealth Institute (CI) and the other from the center-right Mercatus Center that urge caution in approving $1.7 billion in subsidies and inducements.

Writes CI on its Half-Sheet blog:

It’s critical that elected leadership, media, and the rest of us take a careful look at the realistic benefits and drawbacks of the deal, including related public subsidies and the tradeoffs that come with adding thousands – or tens of thousands – of jobs. And regular folks deserve to know what’s in the deal when their public land or public tax dollars are on offer to private corporations. …

With the megadeal promising to add thousands, and eventually tens of thousands, of high wage jobs, it is likely to further exacerbate the housing shortages in the region. … Early details do not appear to show any required direct support by Amazon in the provision of affordable housing, instead relying on local governments to make some investments, although the projected additional housing units fall far short of the projected shortfall for the region. …

The new development will bring new long-term costs – more need for fire protection, more children needing a high-quality education, and more need for public roads and transportation. Avoiding deals that cost more than they will raise over the long term is critically important to make sure ordinary residents aren’t paying the price for subsidies to megacorporations.

Meanwhile, Mercatus questions whether Amazon really needed the inducements to reach its decision to locate in the Washington metropolitan area. A NoVa location, I might elaborate, provides access to one of the nation’s largest high-tech labor pools and to the federal government, which is an increasingly important customer for its cloud services enterprise. Writes Mercatus:

We find it implausible that Amazon’s corporate leaders didn’t already have a good idea of where they would locate HQ2 even before launching the competition between cities.  The research on corporate location decisions finds that subsidies rarely affect the final decision, lending weight to our skepticism. It also suggests that any relocation subsidies would simply be extra icing on the cake that Amazon had already picked.

The general conclusion of academic research suggests that targeted economic development subsidies don’t lead to broad-based economic growth or improvements in community welfare when measured against comparison cities. Why? First, when government officials grant targeted tax cuts, they distort the market-determined prices that lead to the most efficient use of resources. Second, nearly every kind of tax causes additional price distortions and corresponding “deadweight loss”—a pure loss of economic value. This means that keeping taxes high for some businesses to give a subsidy to favored corporation causes further harm to economic efficiency—a better approach for economic growth would be a broad-based tax cut.

I have raised many of these points on this blog — good to hear that other people share the concerns. Amazon is a once-in-a-generation economic opportunity for Virginia. There are many reasons to welcome the deal. But CI and Mercatus both raise legitimate issues. When more than $1.7 billion in public subsidies are at stake, Virginia needs to give the deal a thorough airing. I would agree with CI’s admonition:

Community members, press, and elected officials should be provided time to absorb these details – and receive more details if some needed information is not available – before Virginia or its localities commit public dollars to a deal.

Meanwhile, up in New York… From CNBC:

Democrats from New York’s Queens borough slammed Amazon’s plan for offices in the area, setting up a potential political fight with one of the world’s most powerful companies. The criticism came even as Virginia lawmakers largely welcomed the e-commerce company’s decision to open up another facility outside Washington, D.C.

Amazon couldn’t see that coming?

The suspense is over. Amazon, Inc., has officially announced that it will invest $2.5 billion to establish a new headquarters in Northern Virginia. The facility will be located in the Pentagon City and Crystal City area of Arlington County and the Potomac Yard in the City of Alexandria. In addition to the 22,000 jobs created directly by Amazon, the project is expected to generate an additional 22,000 direct and indirect jobs in Virginia.

“This is a big win for Virginia—I’m proud Amazon recognizes the tremendous assets the Commonwealth has to offer and plans to deepen its roots here,” said Governor Ralph Northam in a press release today. “Virginia put together a proposal for Amazon that we believe represents a new model of economic development for the 21^st century, and I’m excited to say that our innovative approach was successful.”

Virginia offered a substantial incentive package to induce the commitment from the online-retailing and cloud-services giant, which received 238 proposals from across North America. Originally, the company said it would invest $5 billion in a single second headquarters, but in the end decided to split the project between Northern Virginia and Long Island.

Said Northam: “The majority of Virginia’s partnership proposal consists of investments in our education and transportation infrastructure that will bolster the features that make Virginia so attractive: a strong and talented workforce, a stable and competitive business climate, and a world-class higher education system.”

“Virginia’s biggest employment growth opportunity in the years ahead will be in tech—from artificial intelligence to cloud computing to cybersecurity, and everything in between,” said Stephen Moret, CEO of the Virginia Economic Development Partnership, which led the recruiting effort. “The tech-talent pipeline investments that Governor Northam and the General Assembly are launching will position communities across the Commonwealth for healthier, more diversified economic growth.”

As part of the Commonwealth’s long-term incentive agreement with Amazon for the creation of at least 25,000 jobs, Virginia will:

• Provide post-performance incentives to Amazon that will be paid annually based on job creation and wage levels, with minimum average wages of at least $150,000. Subject to General Assembly approval, the company will be eligible to receive up to $22,000 per job or up to $550 million in incentives. Additional incentives would be available if Amazon creates more than 25,000 jobs; and
• Invest up to $195 million of non-general fund money in transportation projects that will improve mobility in the region, including additional entrances to the Metro stations at Crystal City and Potomac Yard, improvements to Route 1, a connector bridge from Crystal City to Washington National Airport, and a transitway expansion supporting Pentagon City, Crystal City, and Potomac Yard. Additional funding would be available if Amazon creates more than 25,000 jobs.
• In addition, Arlington County and Alexandria will fund another $570 million for transportation projects, including including rail connections, transit facilities, multi-modal streets, and corridor connectivity serving the site.

To support the growth of the technology sector across the Commonwealth, Virginia will:

• Make performance-based investments in bachelor’s degree programs in computer science and related fields that will be distributed statewide based upon a negotiated agreement with each public university or community college that wishes to participate;
• Make performance-based investments of up to $375 million over 20 years for new master’s degree programs in computer science and related fields at George Mason’s Arlington campus and for Virginia Tech to establish a new Innovation Campus in Alexandria, both of which are subject to a one-to-one match from the universities with philanthropic funds; and
• Invest $50 million over 20 years in K-12 tech education and internship programming to connect higher ed students to tech jobs.

According to press reports, incentives will total about $2.5 billion.

Bacon’s bottom line: The announcement is exciting news for Virginia and should prove transformative to Northern Virginia’s economy. If inducements must be made, I would much rather see them in the form of infrastructure improvements, K-12 and higher-ed investments than in payments to Amazon.

As Reed Fawell has opined elsewhere on this blog, a corporate and public investment investment of this magnitude represents a once-in-a-lifetime opportunity to create a functional transportation system in Northern Virginia’s urban core. Will the transportation investments serve the region or just Amazon? The devil is in the details, but the potential benefits are enormous.

The one provision that triggers my gag reflex is the $550 million — up to $22,000 per job created — paid directly to Amazon. Where will those employees come from? How many will be recruited away from other Northern Virginia companies, accentuating shortages of critical skills in a tight labor market and reducing their competitiveness? While many will welcome the coming of Amazon, I would expect others to resent the hefty subsidy. I will be interested in hearing the justification for this particular element of the deal.

Note: I have updated the total figure for incentives to reflect reporting I did not have available when I initially filed this post.

JBG Smith stock price. Source: Yahoo Finance.

Northern Virginia is solidifying its position as the perceived front runner in the competition for Amazon’s massive HQ2 project, and Arlington’s Crystal City area looks like the front runner in Northern Virginia. The Washington Post reports that Amazon’s talks with the Seattle-based tech giant have been more detailed than discussions with other leading prospects.

“Crystal City, with easy transit access, proximity to Reagan National Airport, and ready-to-occupy office buildings, has been considered a strong contender,” writes the Post. Speculation has gotten so intense, according to stock analysts, that investors have added for or five points to the stock price of JBG Smith, owner of most Crystal City property.

I have to say, this is getting exciting. Amazon HQ2, which would entail investing $5 billion over the next 15 years and creating 50,000 jobs, would be a game changer for Northern Virginia. Not only would Amazon’s presence diversify NoVa’s economy away from the federal government, it would transform the region’s corporate culture from Beltway Bandit procurement to a more global, entrepreneurial approach. No region will supplant Silicon Valley as a technology hub, but the Washington region could become America’s undisputed No. 2.

If Amazon is looking at NoVa, thenwe should expect to hear something soon. The deal likely will be contingent upon tax breaks, higher-ed funding, and infrastructure commitments that require approval of the General Assembly. The legislature convenes Jan. 9. The Northam administration surely will have its legislative package lined up on Day One to provide ample time for public airing and debate.

Update: Amazon has decided to split HQ2 between two cities, the Wall Street Journal reports. Creating HQ2 and HQ3, with about 25,000 employees each, will ease the challenge of recruiting workforce, a source told the Journal. Moreover, the move will also ease potential issues with housing, transit and other areas where adding tens of thousands of workers could cause problems.

That’s all positive for Virginia, as far as I’m concerned. It doubles the odds of getting one of the two prizes, and the project will be easier to absorb from a growth-management perspective. I ave long feared that a 50,000-person facility would be indigestible, even for a metro region as big as Washington.

The big question now: Does Amazon get the same incentive package for a half-sized project as it would for the whole enchilada? Bezos better not get greedy. He’s already the world’s richest man. He could inspire quite a backlash if he demands too much.

Metro Washington: multiple government jurisdictions, one economic organism

As much as Maryland Governor Larry Hogan wants Amazon.com to locate its HQ2 in Montgomery County, he’d be delighted if the tech giant picked anywhere in the Washington metropolitan area. Accordingly. Maryland, D.C., and Virginia are working to pitch Greater Washington to Amazon as a unified region, he said Wednesday.

Hogan’s remarks, reports the Washington Business Journal, follow disclosures that officials from multiple Greater Washington jurisdictions have been discussing regional issues relating to the project, which could bring $5 billion in investment and more than 5,000 jobs to the region.

“Now, we all had our individual bids, and we’re still hoping,” said the Republican Maryland governor. “We think that Maryland had made a very, very attractive offer, one of the best in the country, and we’d love to have them here, but if that was the decision that Amazon made, to bring it to the Washington area and share, mix jurisdictions, we certainly would be supportive of that as well.”

If I were Amazon, one of my biggest concerns about locating in the Washington metropolitan is the division of government between two states and the district — an arrangement that has proven dysfunctional for regional organizations such as the Metropolitan Washington Area Transit Authority (which operates the Metro) and the Washington Metropolitan Airports Authority. I would be greatly heartened to see any sign that the states were willing to work collaboratively.

I think the Washington metro has a serious shot at bagging the Amazon HQ2. It only makes sense for the jurisdictions to collaborate because the impact would be so huge that, no matter which specific location Amazon selected, there would be big spillover effects everywhere.

I remain highly ambivalent about the desirability of winning the Amazon project, given that (a) in a labor market experiencing labor shortages, newly created jobs can be filled only by people coming from outside the region, which would mean (b) state and local governments would have to absorb big new costs for schools, services, and transportation, (c) Amazon would be extracting such huge subsidies and tax concessions that it won’t help pay for much of that growth, and (d) non-Amazon taxpayers would get hosed.

However, Amazon would help diversify a regional economy that is dangerously dependent upon federal expenditures, would turbocharge the regional tech economy, and would give Washington huge bragging rights for winning more tech companies and corporate headquarters. In the balance, I share Hogan’s view that HQ2 would be a good thing for the Washington region whichever jurisdiction it chooses.

Governor Terry McAuliffe has hired McKinsey & Co. to help Virginia localities build the best possible packages to recruit Amazon’s second headquarters, reports the Virginian-Pilot. The state plans to pay the consultant more than $1 million, while state regions will chip in hundreds of thousands of dollars more.

That information, which I haven’t seen reported anywhere else, comes from Virginia Beach Mayor Will Sessoms, who has committed Virginia Beach to the long-shot endeavor. The project, which could entail the investment of $5 billion and creation of 50,000 jobs, is attracting interest from metropolitan regions across North America. The deadline for submitting proposals is Oct. 19.

Sessoms said he expects economic developers in the Richmond and Northern Virginia regions also to avail themselves of the consulting services. Virginia regions will chip in $300,000 to $400,000 for the work product. Virginia Beach will pay $200,000 of the Hampton Roads region’s share. The City of Norfolk is participating as well.

Aside from available land, great parks and recreation, a strong arts scene, the ocean, solid schools, and a high quality of life, Sessoms said the city has something that most others don’t: access to transoceanic cables that will deliver faster Internet speeds. A new trans-Atlantic cable linking Virginia Beach to Spain will go live next year. Said Sessoms: “We have a cable that is going to allow people to communicate faster than anywhere else in the world.”