Paul Wallbank – Brilliant Communications

Tag: subsidies

A tale of three cities and three different government programs
Three different business; Chobani yoghurt, ESPN and Phizer are an interesting contrast on how government support can help business and get a real return for taxpayers.

When Kraft Foods decided to shut down its South Edmeston yoghurt plant losing the 55 remaining jobs was a blow to the hamlet of 2,000 in upstate New York.

Eight years later the plant is in new hands, employs 600 people and is the centre of the United States’ thriving Greek yoghurt industry.

In 2006, Hamdi Ulukaya bought the dilapidated factory from Kraft to produce yoghurt similar to what he was used to in his native Turkey and today Chobani is one of the fastest growing food brands in the United States.

Ulukaya tells the story of Chobani in the Harvard Business Review and how the company has grown without any external investment, instead relying on bank finance and government supported guarantees.

Key to Chobani’s founding were the US Small Business Administration loan guarantee program that enable the entrepreneur to buy the mothballed Kraft plant.

While Chobani is a success of the Federal government’s program, just over a hundred miles away the Connecticut state government is pouring money into the maw of ESPN to keep the company’s head office in the town of Bristol, the New York Times reports the company has received nearly quarter of a billion dollars in subsidies in just over a decade.

ESPN has received about $260 million in state tax breaks and credits over the past 12 years, according to a New York Times analysis of public records. That includes $84.7 million in development tax credits because of a film and digital media program, as well as savings of about $15 million a year since the network successfully lobbied the state for a tax code change in 2000.

Notable amongst ESPN’s benefits are the credits under the state’s film and digital media program. As we’ve discussed on this blog in the past, the movie industry plays a cynical game or playing off governments and its no surprise that cable networks would do the same thing.

Connecticut has a bad track record in industry incentives, the destruction of much of the town of New London is a poster child of what governments shouldn’t do when trying to build new industries or attract large corporation.

New London’s demolition of an entire suburban district for the never built head office of pharmaceutical Pfizer is testament to what can go wrong when government officials are dazzled by big promises from large corporations.

Unless support is appliedstrategically and sensibly, competing against other communities to attract big corporations, sporting events or major projects is a zero-sum game that ultimately sees the taxpayer a lose.

While Chobani created 600 jobs in South Edmeston at no net cost to the taxpayer it’s likely Kraft would have demanded tens of millions of dollars in NY State taxpayer support for retain fraction of the jobs that the new business created.

Invariably modest small business programs prove to be a better bet for taxpayers than dumb corporate welfare, unfortunately governments around the world prefer to throw money at big business as they are the ones that write the campaign cheques and employ retired politicians.

Sadly in an era where corporate welfare is the norm rather than the exception, we can expect to see more ESPN type deals and fewer Chobanis with the taxpayer being the poorer for it.

When a politician proudly announces the number of jobs being created through their subsidies to a large corporation, it’s worthwhile for local taxpayers to take the spending of their money with a large grain of salt as history is not on their side.

Image courtesy of jprole through sxc.hu

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Tasmania and the travelling circus
“We bring in almost everything,” says V8 Supercars director Mark Perry as he guided journalists around Launceston’s Symonds Plains racing track.

Everything Mark showed us – a fleet of trucks, communications equipment, hospitality tents and the racing teams themselves would be packed up on Sunday night, shipped to Melbourne and flown to New Zealand for the next race.

The V8 Supercar management are very proud of their work, and they should be given the massive task they have, but it exposes a weakness in the Tasmanian economy in that almost all the high value employment and equipment has to be flown in.

Quiet times in downtown Launceston

Arriving into Launceston on the Friday before the races, it’s interesting how little hype there is around the event. In Sydney, San Francisco or Cannes there would be banners and flags around the city welcoming visitors, in Launceston there’s almost nothing despite the race meeting being one of the state’s biggest events.

It was also surprising how there were no downtown events to complement the main attraction.

Almost every major sporting event from the Olympic Games and FIFA World Cup to the AFL Grand Final and Australian Open has some inner city satellite venues with big screens for the locals who can’t make it to the stadium.

Having those satellite events adds to the buzz and hype in the host city. Something that downtown Launceston needs at 7pm on a Friday night.

That lack of support by the community is notable, particularly in light of the $600,000 per year the cash strapped Tasmanian government pays in subsidies for the V8 Supercars.

I’m against government support for events like these, but if that money is going to spent it may as well be spent properly to maximise the economic benefits.

Subsidies like this would be even better if they were part of some grander economic plan, but like all the payments given to the film production, motor manufacturing and other industries, they are based more on populism than any strategy – the politicians may as well be giving free beer out in Launceston’s main street.

Why the community support is so tepid for the Supercars event is so tepid is something I’m going to be exploring in the next few days as I meet various business leaders in Launceston and Hobart to hear how the state is positioning itself in the 21st Century.

In the meantime, the V8 Supercars “travelling circus” has moved on, hopefully Tassie will have some more long term jobs to show for it.

Paul travelled to Tasmania and the V8 Supercars courtesy of Microsoft Australia

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April 8, 2013
Going insane with government subsidies
Albert Einstein is said to have defined insanity as doing the same thing over and over again while expecting different results.

When it comes to funding the film industry it’s hard not to think that governments, and those who want a strong local film making communities, have all gone insane.

As discussed previously, the global producer incentive industry is a scam perpetuated by the major movie studios on gormless governments desperate for the glitz and glamour of having a Hollywood star or two come to town.

In Australia, governments are scratching around to raise change to attract a high profile Hollywood production once again – unsurprisingly to subsidise another remake of a fifty year old hit.

This is dressed up in the guise of helping build or maintain the local skill base or infrastructure. The water tank that’s expected to be used should the Aussies win the bid was built by the Queensland government in 2007 to attract aquatic themed movies, as the minister at the time said;

“As a result of having the water tank facility, the Government’s Pacific Film and Television Commission and Warner Roadshow Studios are currently in negotiations with a number of major studios requiring water tank facilities for their next major films.

“These projects under negotiation have an estimated value of $US370 million.”

Little of that money made it down under and the Gold Coast water tank stands largely unused as the Queensland and Federal governments failed to interest subsidy hungry movie producers.

When governments win those subsidised productions the local industry has brief sugar rush as providers struggle to find caterers, crew and extras required to film Superman XVIII or the fourth remake of Herbie The Love Bug. After a few months, the big producer folds their tent and moves on to the next city that spent millions attracting the studios’ favours.

Those involved in the big Hollywood production sadly go back to their day jobs and dreams of building careers in a vibrant local industry which has no chance of developing under the boom and bust cycle of major production attraction.

And so the cycle goes. At least today’s Sydney accountants can tell their kids how they once stood next to Keanu Reeves as an extra on The Matrix.

While Hollywood is the best organised at milking gullible governments, it isn’t just the film industry that pulls this scam off on taxpayers. If anything, the automobile manufacturers are probably the biggest beneficiary of government largess and produce more unloved bombs than the movie industry.

What’s particularly notable when governments announce huge licks of money for multinational corporations is just how small support is for the local industry in comparison.

A good example of this are the New South Wales film industry subsidies. The state’s Emerging Filmmakers Fund dispensed a grand $90,000 to local producers in 2012. This compares to the $6.6 million dollars spent by the state on attracting foreign productions.

Even that $6.6 million number has to be treated with caution as major productions can be subsidised from the state’s Investment Attraction Scheme – a $77 million slush fund put aside for attracting ‘footloose’ multinational business operations.

Generally payments from the IAS are ‘Commercial in Confidence’, or ‘Crooks in Collusion’ as some more cynical might put it, so it’s almost impossible for taxpayers to know how much has been lavished on attracting foreign businesses.

What is clear though is the government subsidies for foreign operators, not just in the film industry, dwarf the support given to local businesses.

During my short period working for the NSW Department of Trade and Investment more than one businessman asked me “why is your minister giving a slab of money to my overseas competitors rather than encouraging local businesses?”

It’s difficult to find a diplomatic answer that doesn’t imply that political and public service leaders are blinding the glamour and prestige of being associated with rich multinational corporations.

The real support local industries need is steady work producing products that play to their advantages, the sugar rushes of major movie productions or subsidised manufacturing only distort the market and may even damage the smaller local production companies as the wrong skillsets and infrastructure is built.

Done strategically as part of a broader, long term plan targeted subsidies to global industry leaders can work, but unfortunately few of the movie industry incentives or investment attraction schemes have that sort of thinking underlying them.

As budgets tighten with the deleveraging global economy, it’s going to be interesting to see how long governments can continue this sort of corporate welfare.

Film clapper image courtesy of Chrisgr through SXC.hu

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February 16, 2013
How the film industry cons governments
“I would never make a movie where I didn’t get an incentive and I don’t ever intend to” states Michael Benaroya, producer of the movie Margin Call, in a New York Times story on movie studio subsidies.

While we focus on the cost of subsidies to motor manufacturing, one sector that beats all others for playing governments for suckers is the global film industry.

“Incentives” are a huge factor in determining where studios will film their latest blockbuster, Australia’s learning this the hard way as rent seekers looking for fat subsidies parade Hollywood stars in an effort to convince publicity hungry ministers that giving fat payments to the major production houses is good for jobs.

The problem with this is that these susbidies aren’t that great for employment – Accompanying the New York Times’ video is a story on how Michigan’s dream of building a film industry has foundered.

“Film is one of the few industries that’s really well subsidised and that’s a really attractive thing” Michael Benaroya says in the video.

Before Michael even made the movie, he sold the rights to the New York production subsidies to investors. Who says financial engineering is the purview of Wall Street?

The question for governments, taxpayers and those who want to build a sustainable movie industry in their city, state or country is do you want to attract “entrepreneurs” like Michael Benaroya who are shopping around the world for the best deal.

New York might be the flavour today, but tomorrow it might be Sydney, Toronto or Prague. If the incentives aren’t fat enough then the movie productions may not come back for decades.

In the meantime the crews, production assistants and catering companies who make up most of the employment on a major production move onto other jobs so the skills and industry infrastructure is lost.

The biggest challenge is for governments, it’s estimated that New York state gives away over $400 million in subsidies and it’s difficult to see how that sort of expenditure can be justified as politicians face cuts to basic spending in today’s austere times.

For the taxpayers, we need to be demanding fair value and real long term plans behind the subsidies doled out to the film, motor manufacturing and other industries.

During the good times it was easy for opportunist politicians to dole out money to rent seekers for a media opportunity or to boost votes in a key electorate, but today that spending has to be strategic with real value and outcomes.

As Michael Benroya shows, when an entire industry is based around government subsidies and incentives the leaders are those who know how to manage the bureaucracy and fill in the forms properly. Is that what we want our industries to become?

If the answer is ‘yes’, then the next question is ‘can we afford it?’

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December 6, 2012
Building new technological Jerusalems
A Telegraph profile of Joanna Shields, the incoming Chief Executive of London’s Tech City Investment Organisation, is an interesting view of how we see economic development and the route to building the industrial centres of the future. Much of that view is distorted by the ideologies of our times.

London’s Tech City is a brave project and somewhat reminiscent of future British Prime Minister Harold Wilson’s 1963 proclamation about the UK’s future lying in harnessing the “white heat of technology.” From Dictionary.com;

“We are redefining and we are restating our socialism in terms of the scientific revolution…. The Britain that is going to be forged in the white heat of this revolution will be no place for restrictive practices or outdated methods on either side of industry.”

Fifty years later a notable part of Wilson’s speech is the use of the word “socialism” – the very thought of a mainstream politician using the “s-word” today and being elected shortly afterwards is unthinkable.

Today the ideology is somewhat different – much of Tech City’s objectives are around aping the models of Ireland and Silicon Valley – which in itself is accepting the failed beliefs of our times.

Based around London’s “Silicon Roundabout” – a term reminding those of us of a certain age of a childhood TV series – the heart of the Tech City strategy lies the tax incentives used by the Irish to build the “Celtic Tiger” of the 1990s and government investment funds to create an entrepreneurial hub similar to Silicon Valley, something also done in Dublin with the Digital Hub.

It’s hard not to think that copying these models is a flawed strategy – Silicon Valley is the result of four generations of technology investment by the United States military which is beyond the resources of the British government, and probably beyond today’s cash strapped US government, while the Celtic Tiger today lies wounded in the rubble of Ireland’s over leveraged economy.

At the core of both Silicon Valley’s startup culture and Ireland’s corporate incentives are the ideologies of the 1980s which celebrates a hairy-chested Ayn Rand type individualism while at the same time perversely relying upon government spending. Ultimately failure is not an option as governments will step in to guarantee investment returns and management bonuses.

Just up the M1 and M6 from London’s Silicon Roundabout are the remains of what were the Silicon Valleys of the eighteenth and nineteenth centuries.

The manufacturing industries of the English Midlands or the woollen mills of Yorkshire revolutionised the global societies of their times. These were built by individuals and investors who knew they could be ruined by a poor investment and managers who retired to the parlour with a pistol if the enterprise they were trusted to run failed.

Today’s investment attraction ideologies – tax discounts to big corporations and grants to entrepreneurs – are in a touching way not dissimilar to Harold Wilson’s 1960s belief in socialism.

At the time of Wilson’s 1963 speech China and much of the communist world were showing that socialism, with its failed Five Year Plans and Great Leaps Forward of the 1950s, was not the answer for countries wanting to harness the “white heat of technology.”

Similarly today’s Corporatist model of massive government support of ‘too big to fail’ corporations is just as much a failed ideology, like the socialists of the mid 1960s had their world views had been framed in the depression of the 193os, today’s leaders are blinded by their beliefs that were shaped by the freewheeling 1980s.

Whether the next Silicon Valley will be in London, or somewhere like Nairobi or Tashkent, it probably won’t be born out of a centrally planned government initiative born out of the certainties of Margaret Thatcher or Ronald Reagan anymore than the 1960s technological revolution was born out of Karl Marx or Josef Engels.

Silicon Valley itself was the happy unintended consequence of the Cold War and the Space Race, which we reap the benefits of today.

Every ideology creates its own set of unintended consequences, those created by today’s beliefs will be just as surprising to us as punk rockers were to the aging Harold Wilson.

Maybe Tech City will help Britain will do better at this attempt to regain its position as global economic powerhouse, but you can’t help thinking that economic salvation might come from some West Indian or Sikh kid working out of a storage unit in Warrington than a bunch of white middle class guys celebrating a government grant over a glass of Bolly in Shoreditch.

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October 21, 2012