AMZN Amazon.com Inc

By Cezary Podkul 

Georgia rolls out a red carpet for them at the Masters Golf Tournament. Kentucky gets them tickets to the Kentucky Derby. Arkansas takes them on a private duck hunt with the governor. Utah recently arranged a private ski trip with an Olympic medalist.

Such is the life of site selectors -- consultants who jet around the country helping corporations decide where to build new headquarters, factories or expansion projects, often pitting communities against each other in multistate bidding wars to maximize tax breaks, grants, land deals and other incentives.

As communities across America race to win such marquee projects, these middlemen have quietly become some of the most powerful consultants in corporate America.

There are about 500 site selectors active in the U.S. and a 2017 survey found that 54% of companies plan to outsource part of their next corporate location search, according to consulting firm Development Counsellors International.

Amazon.com Inc. retained a site selection advisor, Alex Leath of law firm Bradley, to work with its in-house team to sift through 238 proposals during its recent search for a second headquarters. Site selectors from Ernst & Young LLP helped Foxconn Technology Group secure the richest incentive package in Wisconsin state history for its now-delayed liquid-crystal-display manufacturing plant. Foxconn selected Wisconsin's package, which totaled more than $4 billion in state and local support, after a multi-state bidding war in which states jockeyed to sweeten their offers.

In some ways, the site selectors act like lobbyists, interacting with government officials as they help their clients obtain favorable deals that sometimes require legislative and regulatory changes. Unlike lobbyists, site selection consultants often work on commission, which is frequently tied to the size of the incentive package they negotiate for their clients. That fee structure has drawn criticism from some of the very economic development officials who are competing against each other for the projects.

Lee Crume, who heads an economic development group in Northern Kentucky, thinks site selectors provide a valuable service to companies, but they shouldn't be paid based on the size of the incentives they negotiate.

Site selectors' ability to shape billions in public spending decisions has also sparked criticism that the industry operates with little oversight or disclosure requirements that apply to corporate lobbyists.

"Winning legislative actions for discretionary incentives...I think that's lobbying," said Greg LeRoy, executive director of Good Jobs First, a nonpartisan policy group that is critical of incentives. "They know that and legally don't want to be treated like lobbyists."

Moreover, in the vast majority of cases, firms that receive public incentives for opening factories, expanding headquarters or creating jobs would have taken those actions even without a sweetener, according to a pair of 2018 studies by the W.E. Upjohn Institute for Employment Research.

Despite that, Upjohn research shows that the state and local costs of incentives have at least tripled since 1990, reaching $45 billion annually as of 2015. Average incentive awards have also tripled in size as a percentage of business taxes owed by the companies receiving the perks.

What the incentives can alter, in some cases, is the location of the project. That's fueling competition that has helped turn site selection into a booming cottage industry.

"Kentucky Derby. Mississippi governor's quail hunt. Georgia quail hunt...I've been to all of them," said Mike Mullis, a Tennessee-based site selector. He works alongside his fiancée, Denise Mott, at a site selection firm he founded in the 1970s, J.M. Mullis Inc. The firm completes an average of about 50 projects a year, according to its website.

Mr. Mullis has developed a reputation for being a tough negotiator on incentives. When he represented Jeff Bezos's rocket company, Blue Origin, on a site-selection search in 2016, a Washington state official told the Puget Sound Business Journal that Mr. Mullis "constantly hammered" the state to see what incentives they could offer. Mr. Mullis told the paper that the characterization was "pretty consistent with how we operated."

Blue Origin didn't respond to a request for comment.

Mr. Mullis was also an early member of an exclusive club of consultants known as the Site Selectors Guild. New guild members have to be approved by a committee, and every member is required to attend a conference where government officials and other attendees pay $2,000 a ticket for a chance to hobnob with them.

Guild members also get treated to extravagant parties and perks by local communities that host the events. Like the hunting trips and other events, they're often public-private partnerships.

Last year's festivities, held in Cincinnati, featured a private reception at Paul Brown Stadium, where the Cincinnati Bengals play. Site selectors were greeted on the field like NFL stars: plumes of fire shot in the air and a squad of cheerleaders waved pompoms as site selectors ran onto the field dressed in personalized Bengals jerseys that awaited them when they arrived in the team's locker room. One site selector, Jay Garner, got a chance to conduct the string section of the Cincinnati Pops at a private event with the orchestra. Mr. Garner, who describes himself as the conference's "de facto entertainment guy," conducted Mozart's "Eine kleine Nachtmusik."

Since its founding in 2010, the Guild has grown to include 50 consultants and now attracts 355 paid attendees at the marquee event, which usually sells out within an hour, according to the guild's executive director, Rick Weddle. Mr. Weddle says the industry's mantra is that "incentives can never make a bad location good. They can make a good location better." He said site selectors help companies weigh a variety of factors, such as the availability of qualified workers, access to infrastructure, proximity to customers and suppliers, the cost of utilities and other production inputs.

When the U.S. arm of Czech firearm maker Česká Zbrojovka began looking for its first U.S. factory site last year, the company had already committed to the expansion. Even if the subsidiary, called CZ-USA, received no incentives, it still would have proceeded with the project, said CZ-USA's chairman, Bogdan Heczko.

Still, he decided it would make sense to "see how much we can get."

Mr. Heczko's company was originally deciding between two states -- Kansas and Missouri -- which have a long history of competing on incentives. Then CZ-USA hired Mr. Mullis to help with the search. Mr. Mullis advised CZ-USA to broaden the search to more states, according to Mr. Heczko. Mr. Mullis said he helped the firm scout locations in a dozen states, including Arkansas.

In early December, Mr. Mullis and a handful of other site selectors spent the day hunting at a private retreat with Arkansas Gov. Asa Hutchinson. Mr. Mullis said events like these are good "relationship-building" opportunities.

At the end of the day, as Mr. Mullis relaxed on a couch in a spacious hunting lodge in Northeast Arkansas, Mr. Hutchinson approached him to ask for his advice on how to attract the gun manufacturer to his state.

"What do we need to do to close this deal? We want this project," Mr. Hutchinson said, according to Mr. Mullis.

Mr. Hutchinson confirmed in an interview that Mr. Mullis gave him advice on how to "fine-tune" Arkansas' pitch to his client. He also said Mr. Mullis "is a very good shot."

Mr. Hutchinson -- who has okayed 435 incentive deals since becoming governor in 2015 -- ultimately allocated $4 million from a fund he controls, the "Quick Action Closing Fund," to pay for improvements at the site in Little Rock selected by CZ-USA. That was in addition to more than $20 million of loans, rebates, tax breaks and other incentives Mr. Mullis helped negotiate. The company pledged to invest $90 million and create 565 jobs, according to a press release.

Site selectors sometimes explicitly ask for legislative changes to accommodate their clients. And when the deal is big enough, officials move quickly to act on those demands.

In the spring of 2017, Ernst & Young sent Wisconsin and other states a request for proposals for an investment opportunity it identified only as "Project Flying Eagle." The document included an explicit request that governments "provide offsets to all taxes levied at the state and local level" and "propose potential administrative and/or legislative changes" if they are "unable to close the cost differential" with the company's existing manufacturing facilities in Asia.

At least three states -- Wisconsin, Ohio and Michigan -- made it to the final round of bidding for what turned out to be the Foxconn plant, according to interviews and documents disclosed under public records requests.

After back-to-back pitches from the states' governors, Ernst & Young worked with state officials to help the company maximize incentives, according to a person involved in the confidential negotiations.

"All they did was ask for more money," the person said.

Michigan raised its offer twice, according to documents the state provided under a public records request. The state's package of discretionary incentives rose from about $1.7 billion in May 2017 to $4.4 billion to about $4.5 billion by late June. Including other available exemptions already on the books, Michigan package totalled around $7 billion, although many of the promised tax breaks would have paid out later than Wisconsin's package.

Correspondence between Wisconsin and Ernst & Young shows that state also sweetened its offer during the process. A spokesman for the state's economic development arm said the boost was justified because the scope of the project had increased.

The administration of Wisconsin's then-Gov. Scott Walker relied on an economic-impact study provided by E&Y to craft a package of tax credits, infrastructure improvements and other incentives for Foxconn, emails show. The state's share was about $3 billion and wouldn't result in a positive return to taxpayers until 2042, according to a state review of the incentives published by Wisconsin's Legislative Fiscal Bureau. But if everything would pan out as expected, Wisconsin would gain 13,000 jobs and be home to a $10 billion liquid crystal display manufacturing plant, the first in the U.S.

Ernst & Young's study was cited by Wisconsin officials as they sold Foxconn's incentive package to the state legislature. Gov. Walker called a special legislative session to pass the bill, which became law in seven weeks.

Ernst & Young executives said in a 2018 article on maximizing incentives that such studies can be useful as a "public relations tool" to "build support" for a project.

Timothy Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research, reviewed Ernst & Young's economic impact study of Foxconn's investment in Wisconsin. Mr. Bartik said the study wrongly assumed that the added jobs wouldn't result in any additional costs to governments, such as increased costs to schools or added spending on roads. Additional costs like these can overshadow the value of any incremental tax revenues generated by the employment.

"I think a true fiscal analysis would show that this project will NEVER break even fiscally, until the Sun turns into a red giant," Mr. Bartik said in an email.

Since Wisconsin inked the deal, Foxconn has scaled back its ambitions in Wisconsin. The company said in a January letter to the Wisconsin Economic Development Corp. that it has "adjusted our recruitment and hiring timeline" and had created fewer than 200 of 13,000 jobs it had promised.

Foxconn also said it would forgo the $9.5 million of job creation credits the company was eligible for in 2018 under its contract with Wisconsin. The company declined to comment.

Wisconsin Economic Development Corp. Chief Executive Mark Hogan said in an interview that Foxconn's incentives are performance-based and meant to provide the company flexibility to adapt to changing circumstances. "We came up with what we felt was the best deal for the state of Wisconsin and the taxpayers," he said.

In a meeting with the Journal, Ernst & Young's site selection leader, Paul Naumoff, declined to comment on his company's work for Foxconn, citing client confidentiality. A spokeswoman who attended the meeting advised him not to answer when a reporter asked if site selection work bears similarities to lobbying.

Incentives aren't always the key factor in companies' relocation decisions.

When Amazon searched for a home for its second headquarters, the availability of a skilled workforce was the top concern. "This was really about talent," Holly Sullivan, Amazon's head of world-wide economic development, said at the Site Selectors Guild's annual conference in March.

The event was held at the Grand America, a luxury hotel in Salt Lake City featuring a landscaped garden and harp concerts in the lobby. Perks included a cowboy attire-themed dinner with Utah Gov. Gary Herbert at the Grand Hall of the Union Pacific Depot and a site selectors-only ski trip with a two-time Olympic medalist, Shannon Bahrke. There was also a dance party featuring a Motown band. Mr. Garner, the site selector who conducted Mozart in Cincinnati, sat in to play drums to Duke Ellington's "Don't Get Around Much Anymore."

It was hard to find any part of the event that didn't have a state logo on it. Louisiana paid for the Wi-Fi; South Carolina paid for breakfast. Each cost $10,000. A chance to spend an hour at a private cocktail party with the guild's members also cost a good amount. "I paid $20,000 to go to this thing," said one state official as he waited to go in to the "silver sponsors" reception.

Like the competitive bidding process used by site selectors, the selection of the conference location itself was conducted via a request for proposals. A winning bid can cost upward of $100,000, according to two economic development officials who hosted past conferences.

Val Hale, executive director of the Utah Governor's Office of Economic Development, said it is money well spent. "This is the Super Bowl of economic development events," he said.

The conference was the brainchild of Robert Ady, an industry veteran who founded the Guild in 2010 after realizing that economic development officials would pay for the privilege of spending time in the presence of site selectors. (Mr. Ady died in 2012, the first year the annual conference was held.) The Guild runs as a for-profit corporation owned by members and the annual event is its main moneymaker.

True to its founder, incentives remain an agenda item at the conference. According to Mr. Ady's daughter, Janet Ady, he used to say that "you'll never know if you paid too much in incentives. You'll only know if you didn't pay enough."

Write to Cezary Podkul at cezary.podkul@wsj.com

(END) Dow Jones Newswires

May 18, 2019 00:14 ET (04:14 GMT)

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