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Bidding for Business: Boeing, Boeing, Gone

By Nicholas Gruen - posted Wednesday, 17 November 2004


You’re a government politician and a nice multinational company tells you they want to invest in your state. Not just invest. They want to locate a 170 job Head Office or a Regional Facility in your state. It will put your state “on the map” - maybe even the “radar screen”. (Apparently they use radar these days - very high tech I must say). Of course 170 new employees will need clothes, houses and so on and many will have spouses and kids. So the investor has got a company like mine - or a less reputable one - to model these additional impacts to determine the orgy of additional jobs that will be created.

Of course the company would like to invest. It really would. But, you know, well, there are other possibilities. And it will take a little help from you to host the investment. They want your best offer. What should you bid? In 2000 the South Australian Government paid nearly $4 million and built a special $20 million building to attract just such an investment from JP Morgan.

“Economic rationalists” often argue that making special bids for business makes no sense - arguing that subsidising one industry necessarily taxes others. Even if the funds to subsidise one business are raised from taxes on households rather than business that means less consumption or higher wages. Voila - a subsidy to one industry is a tax on others.

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But its not that simple. Governments competing for investment are like Qantas competing for passengers. It makes sense for Qantas to cut prices to tourists, because if they don’t the planes fly half empty. Better to fill them up, with some of the passengers paying the “marginal” or additional costs they impose like fuel and food, while other passengers pick up the fixed costs (the ones that can’t be avoided whenever a plane takes to the sky - like pilots’ and hosties’ wages and rent of the plane). So if it’s necessary to attract them, there’s a theoretical case for special tax breaks - so long as favoured investors meet the marginal costs they impose on government - for additional roads, schools and hospital beds etc.

So our Governments’ hankering to give poor multinationals a bit of a leg up (or hand out) isn’t necessarily wrongheaded - at least in theory. That’s why Queensland paid Boeing a reported $10 million to secure Boeing’s Australian headquarters in 1998. It’s why Victoria paid untold millions to get Holden to put its new engine plant next to its old engine plant in Port Melbourne. But the states are starting to realise that pinching business off one another is a zero sum game.

They’ve signed a compact not to poach business from each other. But Queensland has stayed out of the fold. It shouldn't be too cocky. South Australia used to congratulate itself on a similar strategy. But now JP Morgan is closing its Adelaide investment.

Despite the fine theory, governments negotiating special deals are usually well out of their depth. They don’t know if the company would invest without the incentives or how much will swing the deal. And they’re constantly tempted to bid too much. There are few political rewards for losing a deal, but being prepared to walk away is at the heart of successful negotiation.

Cheer up. Things could be worse. The US state of Alabama paid Mercedes more to set up an assembly plant than it cost Mercedes to build it - nice work if you can get it. Washington State was terrified that Boeing would relocate the assembly of passenger jets. It had already moved its global headquarters - thanks partly to incentives from Chicago. So Washington State agreed to $3.2 billion in incentives over 20 years to protect 800 assembly jobs (yes, the “b” is not a misprint - that’s $4 million per job). A consultancy duly showed how there would be thousands of additional jobs supplying the assembly facility. But since Washington State signed up to bankroll the assembly plant, there’ve been some nasty surprises.

The rear fuselage of a passenger plane is a big thing - yes? Not easy to transport from interstate - right? Wrong!

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Having signed up for the incentives, Boeing is outsourcing fuselage manufacture. They’ll be air freighted to Washington from across the country inside a specially built super-jumbo cargo jet. Seem strange? Not when you know the state hosting fuselage production will provide incentives too. Boeing, Boeing, Gone.

Business can be amazingly footloose to get government help. Right now, the wings of the largest passenger plane ever built - the Airbus A380 Super Jumbo - are being built in England and then shipped down the French Coast to Toulouse in specially built barges. They’re about three times the length of your house.

Things haven’t been as bad here as they can get in the States. Still, there are lots of things that Australia's states could do to improve things. Individual states could make it known that they will share information about their own bids with any other state prepared to reciprocate. Signatories to the agreement could join together in retaliating against those states that won’t sign, by poaching their businesses. And they could extend their agreement beyond bidding existing business away from each other to bidding against each other for new business.

The Federal Government could tie existing industry assistance programmes to states’ co-operation in any or all of these endeavours. But the fact the states themselves have not got any further than they have on their own is surely a sad illustration of a failure that will be looked back upon by future generations with sadness. It will be a long time before the stars align so well that all states are governed by the same political party. That party claims to be the party of idealism, the party of Chiffley’s “light on the hill”. A statewide agreement to work together for national (and regional) betterment to ensure that investment is located where it belongs - rather than where governments can bribe it to go - would be a good start towards what must be a promising agenda of interstate co-operation.

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A version of this article called “Bid to become smarter” was first published in The Courier-Mail,  November 9, 2004.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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