Smart Incentives and the Center for Governmental Research (CGR) recently conducted an economic development incentives workshop at the Council of Development Finance Agencies National Development Finance Summit in Scottsdale, AZ. Here is a brief summary and our main takeaways related to analytics for evaluating incentive deals and monitoring the return on incentive investments.

Workshop Summary

Framework for incentives analysis: After reviewing the Smart Incentives 4x4 framework we addressed the importance of applying analytical tools to evaluate deals and monitor the return on investment in order to reduce risk and achieve better outcomes. We also acknowledged that communities use incentives to pursue diverse goals, of which economic growth may be just one. Further, communities may have a variety of economic goals intended to benefit different groups, types of businesses or locations. Clarifying the goal of each incentive is critical to effective use and analysis.

Can a deal generate net benefits? We organized our review of analytical tools to evaluate deals around a) project attributes, b) fiscal impact and c) economic impact. Kent Gardner of CGR presented a case study for measuring economic and fiscal impact and then demonstrated informAnalytics, a tool designed to make those calculations easier to conduct and the findings easier to communicate to stakeholders.

Did this deal generate net benefits? The last portion of the workshop addressed some of the most challenging issues associated with monitoring return on investment – that is, what actually happened with the incentivized project and what benefits did it create (or not) for the community. We had a great conversation with participants about good practices in developing performance agreements, monitoring compliance and assessing outcomes. We concluded with a discussion about evaluating incentive programs for effectiveness in meeting community goals, with an emphasis on creating clear and measurable goals upfront.

Takeaways

• Better analytics are necessary for smart incentive use, but decisions must still be embedded in a strong policy framework. In other words, communities still need to establish an economic development strategy and define clear goals for their incentive programs in order to determine when and how to use incentives.
• Judgment matters. Analytical ROI tools applied without critical thinking will still lead to poor incentive decisions.
• The role that “but-for” should play in offering incentives remains a hot topic. Participants from the development finance world tended to feel more strongly that “but-for” and financing gap analysis should drive public sector incentive decisions, while economic developers focused on business attraction were somewhat more likely to note problems that a strict “but-for” rule can create.
• We need to develop better ways to communicate economic development work to the public, our boards and elected officials. As we improve our up-front analysis and post-deal review, we also have to improve how we explain our methods and findings to a non-specialized audience.

If you are interested, you can download our presentation here.