Category Archives: Economic development

Former Apostle of Sprawl Now Touts Walkable Urbanism

Stephen S. Fuller

Fairly or unfairly, I’ve always thought of Stephen S. Fuller, the George Mason University professor and expert on the Washington regional economy, as a guy who made his living providing the intellectual justification for the business-as-usual pattern of real estate development in Northern Virginia. The real estate lobby hired him to conduct innumerable studies and forecasts, which invariably were used to justify opening up new areas to low-density development and support construction of the transportation infrastructure to serve it. As it turned out, his mid-2000s forecasts of population and economic growth stretching into the infinite horizon turned out to be spectacularly wrong.

But agree with him or disagree with him, his views on economic trends in the region carry a lot of weight with important people. So I was startled (in a good way) to read of remarks he made to the Prince William County Chamber of Commerce. Reports Inside NoVa:

While Fuller feels that the county is generally well-positioned for the next decade or so, he warned that Prince William officials will need to find a way to build more high-quality, walkable communities if they want to attract talented young workers (and the companies that covet them).

“What companies want most these days is a good workforce,” Fuller said. “And that puts pressure on areas having good housing, parks, these amenities, more so than 10 or 20 years ago. Businesses don’t go somewhere and think the talent will follow. It tends to be the other way around.”

In particular, Fuller suggested that the county might look at attracting developers of higher density communities to come to Prince William, particularly in areas with access to public transit like Manassas or along the “I-95 corridor.” He’s also bullish on the potential of Innovation Park near Mason’s Prince William campus to attract development, calling it a “gold mine,” though he urged patience from county leaders to not abandon the area if growth looks sluggish.

“You have two or three major nodes that will generate good jobs, you need to build communities around them,” Fuller said.

I disagreed strongly with some of Fuller’s past prognostications. This time, he’s got it right. Prince William is the county that sprawl built. It will not age well. Older, car-centric subdivisions will lose relative value in the metropolitan area compared to walkable urbanism. Over time the middle class will move out and lower-income and working-class households will move in.

While it’s always tempting to keep the growth Ponzi scheme going by busting into the sparsely populated Haymarket area in the western part of Prince William, it makes far more sense in the long run to build walkable communities concentrated in a few nodes that (1) will attract Millennials and employers, and (2) will create development patterns offering a better balance between tax revenue and infrastructure spending.

I don’t know when Fuller became a convert to higher-density, mixed-use development — I haven’t tracked his activities closely in the past few years — but I’m glad to see that he’s made the switch. Given his reputation in Northern Virginia as an economic guru, he can be a force for positive change.

Amazon, Incentives, and Virginia’s Best Sales Pitch

The odds that Virginia can snag the Amazon HQ2 project strike me as exceedingly long. Not because our communities don’t measure up well against Amazon’s location criteria but because we don’t have the stomach in Virginia to assemble massive enough subsidies and tax giveaways to compete with metropolitan regions willing to stroke blank checks.

New Jersey’s Economic Development Authority and the City of Newark have offered an incentive package worth $7 billion over 10 years, according to William F. Shughart II and Thomas A. Garrett writing in The American Thinker.

Virginia’s reticence to hollow out its tax base is a good thing. As Shughart and Garret write:

If history serves as a guide, politicians will defend giveaways of taxpayer dollars to Amazon by claiming that the benefits flowing from new jobs and higher wages exceed the costs of financing a subsidy. The same arguments routinely are heard when it comes to building a new sports venue, hosting the Olympic Games or SuperBowl, and enticing other headline-grabbing businesses looking to move to greener pastures. Luring Amazon indeed will be a major publicity coup for local and state politicians who certainly will claim credit for a successful outcome in the runup to Election Day.

It turns, out, however, that the benefits of taxpayer-financed subsidies always are overstated. The economic costs of subsidy packages for private business enterprises are in reality much larger than their supporters admit, for several reasons. Among the errors in thinking the authors cite:

  • Politicians fail to account for the opportunity cost of business-location subsidies. The opportunity cost of any taxpayer-funded subsidy is the private-sector economic activity that would have been generated (but is lost) had the dollars financing it remained in private hands.
  • Politicians argue that new wage earners will spur economic growth through a multiplier effect as their larger incomes circulate around the regional economy. That is certainly true (although multiplier estimates are wildly overstated), but removing income from the private sector to finance subsidies means that the multiplier effect works in reverse. Politicians baldly assume that every dollar of subsidy is worth more to the economy than if the dollar remained in taxpayers’ pockets.

“Politicians,” write the authors, “believe that they know better than ordinary people how best to allocate resources to their highest valued uses. The historical evidence against that belief is overwhelming.”

If I were making the pitch to Amazon, I’d offer no incentives or tax breaks. This would be my argument: You’re making a long-term commitment when you locate your second headquarters in our state. You thrive if we thrive, and vice versa. You want a community capable of building the kind of infrastructure and amenities that your employees desire. The last thing you want is to parasitically feed off the community through subsidies and tax breaks, thereby rendering it unable to fulfill critical functions of government. If you locate in Virginia, you’re moving to a place where state/local government is fiscally sustainable over the long term. You won’t be regretting your decision a decade from now.

Explaining Virginia’s Economic Growth

Every time I’ve seen Governor Terry McAuliffe give a speech, he’s warmed up the audience by touting all the jobs Virginia has created on his watch. And the one time I saw gubernatorial candidate Ed Gillespie speak, he emphasized that the rate of job creation has been one of the slowest in the country.

Both men can cherry pick facts to back up their positions. Virginia has created a lot of jobs over the past four years of uninterrupted national economic expansion. But the rate of job creation in Virginia has been slower than the national average.

Whether the Virginia economy is doing well or poorly depends a lot on your vantage point. Here I have to agree with Peter Galuszka, a former contributor to this blog: Viewing the state as a unitary whole is not terribly useful.

“One way to explain what is happening is to unpack the Old Dominion region by region,” he writes in a Washington Post op-ed. “Many forget that it is a huge state whose southern border runs from the Atlantic Ocean to a point on the map farther west than Detroit. It is sort of like comparing rural Maine with the New York City suburbs.”

Much of the employment success is in a crescent area from Northern Virginia to Richmond and on to the peninsula. Much of it has been fueled by federal spending and an increasingly diverse economic and population base. In September, employment in Virginia grew by 34,000 in total.

September figures show that Northern Virginia grew by 10,700 jobs compared to the same month in 2016. Some of that may be federal spending. Not far behind in jobs growth is Richmond, which added 10,500 jobs, mostly through the private sector that brought in new businesses such as real estate firm CoStar.

Not so in somewhat forgotten areas such as Danville and Martinsville, which are struggling to make comebacks after the demise of tobacco and furniture manufacturing a couple of decades ago. Ditto Southwest Virginia, where coal production took a nosedive around 1990 and never recovered, leaving local government coffers in need of tax revenue and young people on the move elsewhere.

Here are some other basic truths to remember next time someone credits or blames a governor with success or failure of Virginia’s economy. Job creation in Virginia is driven by two things primarily: the performance of the national economy, and the state’s industry mix. Look at any chart comparing economic growth in Virginia and the U.S., and the two move in the same cyclical patterns. If Virginia over-performs or under-performs the national cycle, more than half the difference can be explained by the state’s industry mix. The biggest “industry” is the federal military-intelligence-homeland security sector. When that sector booms, Virginia booms. When it falters, Virginia falters.

That’s not to say Virginia’s business climate doesn’t matter. It does, a lot. But on the margin. The effects of an incremental move up or down in the business climate can take years to show up in stronger or weaker job creation numbers. And let’s remember this: Virginia’s business climate rankings reflect broad institutional strengths and weaknesses that take years, even decades, of positive or negative massaging. Any improvement in (or degradation to) in K-12 schools, higher education, workforce training, transportation infrastructure, taxes, labor laws, the legal climate, and the dozens of other factors that contribute  to the business climate is the work of governors, the General Assembly, the judiciary, local governments, and, yes, citizens.

Even in the realm of corporate recruitment, the governor’s role can be overstated. Governors don’t identify prospects or do the months, even years, of grunt work that goes into reeling in a big corporate investment. Economic development professionals do. For the most part, governors don’t get involved until deals reach the serious talking stage. But when a deal is closed, the governor’s office writes the press release and the governor takes the limelight. That’s the way it works today, and that’s the way it’s always worked.

Any governor who claims credit for hundreds of thousands of jobs created is pulling your leg. Any candidate who claims he can turbo-charge Virginia’s economy is pulling the wool over your head. We need to dispense with the idea that a super-hero governor can swoop in and pump up the economy. What we Virginians can do is slowly and patiently assemble the building blocks of a better business climate in the expectation of seeing incrementally more investment and job growth over time. After a decade or two, we can say we made a big difference. That’s not a message that drives voters to the polls who want results now, but it has the virtue of being true.

What Happened to Jerry Peng, and Other Questions about Tranlin Inc.

Jerry Peng, Darden School alumni and former CEO of Tranlin Inc., left the company for unexplained reasons earlier this year. Was he ousted? If so, why? And what are the implications for Tranlin’s announced $2 billion investment in Chesterfield County? Darden’s website still lists Peng as “a member of the Darden School Foundation Board of Trustees.”

Tranlin Inc., a Chinese paper manufacturing company that promised to invest $2 billion and hire 2000 employees in Chesterfield County, has failed to meet a deadline for repaying a $5 million incentive grant from the state. The company informed the Virginia Economic Development Partnership (VEDP) that the company could not fully repay the loan, instead writing a $150,000 check and vowed to repay the balance in monthly installments, reports the Richmond Times-Dispatch.

“We are deeply sorry and apologize for the delay in full repayment,” Tranlin’s acting CEO Donald Lan said in a letter to VEDP President Stephen Moret. The company agreed to give the state a first-position lien on 50 acres in Chesterfield it has purchased for $3.2 million, which Lan described as “a sign of good faith to meet the repayment obligation.”

Tranlin insists that it still intends to proceed with the Chesterfield project, which was originally scheduled to begin operation by late 2019. Earlier this year, the company informed Virginia officials that its timetable had encountered delays when the company changed leadership and decided to install a new technology that required a redesign of the Chesterfield project.

The Tranlin news follows revelations in 2016 that a different Chinese company, Lindenburg Industry, reneged on a $1.4 million grant from the state to build a factory in Appomattox County. Lindenburg, it transpired, was a hoax company. By contrast, Tranlin is real. State officials have visited its plant in China. Doing business  under the name of Vastly, the company describes itself this way: “We make tree-free paper products and plant-derived fertilizers from post-harvest straw, using an earth-restorative process.

Bacon’s bottom line: I have nothing factual to add to this story, only questions and suspicions. Many Chinese companies are highly leveraged, and the Chinese economy is notorious for tolerating — and hiding — high levels of bad debt. The company is huge, otherwise it couldn’t contemplate building a $2 billion factory in the U.S. A financially sound company of that magnitude should have no trouble repaying a $5 million loan. The fact that Tranlin can’t fulfill that obligation ought to send up warning flares about its financial condition.

Back in July, the Wall Street Journal published an article describing how President Xi Jinping, the most powerful Chinese leader since Mao Tse Tung, is clamping down on the overseas expansion of Chinese companies by restricting their access to credit from state-owned banks. Wrote the Journal:

Beijing for years encouraged Chinese companies to scour the globe for deals. Now it is reining in some of its highest-profile private entrepreneurs in what officials say is growing unease with their high leverage and growing influence. The measures serve as a stern warning for other big companies that loaded up on debt to buy overseas assets, officials and analysts say.

Mr. Xi acted after China’s cabinet set the government machinery in gear by directing financial regulators, the economic planning agency and other bureaucracies to take a hard look at foreign acquisitions, once seen as a means for China to showcase its economic might, these people said.

Another reason for suspicion is the unexplained departure in March of CEO Jerry Peng, who sealed the economic development deal with Governor Terry McAuliffe. The company gave no reason for the departure of Peng, a graduate of the University of Virginia’s Darden School of Business, and a company spokesman had no comment beyond the company’s short statement. Very little can be found in U.S. media (via Google searches) about the inner workings of the Chinese company, so Peng’s departure remains a mystery. However, I would argue that his removal and Tranlin’s delays should be viewed in the broader context of Xi’s consolidation of power, his campaign against excessive leverage, and his reining in of private industry.

Will Tranlin ever build that Chesterfield plant? Let’s just say that, if I were a betting man, which I’m not, I wouldn’t bet on it.

Marohn to Bring Strong Towns Insights to Virginia

I have written about Chuck Marohn, founder and chief evangelist of the Strong Towns movement, many times. Not long ago I urged elected officials and citizen activists wanting to revitalize Virginia’s small towns to read his blog. Marohn is, hands down, the leading thinker today about building more prosperous, livable, and sustainable communities” in America’s small towns.

At long last, Marohn is coming to Virginia. As the guest of the Partnership for Smarter Growth, the Coalition for Hanover’s Future, and the Virginia Conservation Network, he will be holding one of his “Curbside Chats” at Randolph-Macon College in Ashland tomorrow (Tuesday) evening.

How can our towns get stronger—not weaker—when our economy changes? How can we repopulate our empty streets and empty storefronts? What can we learn from the earliest days of city building about building better places tomorrow? And how can active citizens, local officials, and ordinary people like you and I make it happen today, no matter how badly we’re starting off?

This live Curbside Chat is an opportunity to hear Strong Towns’ answers to these questions, and to participate in a community-specific discussion about how the Strong Towns approach can improve your city.

This core Strong Towns presentation is a game-changer for communities looking to grow more resilient in an uncertain future.

Find out more here.

Chuck fuses Smart Growth and fiscal conservatism — akin to what I did much less successfully when I published the “Smart Growth for Conservatives” blog. He is acutely aware of the nation’s perilous fiscal condition. While others focus on the entitlement state, Chuck explores the contribution of runaway, low-ROI infrastructure spending — what he calls the “growth Ponzi scheme — to undermining local government finances. He has dissected the damage done by traffic engineers to our transportation system. Among other contributions, he coined the term “stroads” to describe street-road hybrids that provide neither the connectivity of streets nor the higher-speed mobility of roads. He believes in taking lots of small bets with public investment rather than betting the farm.

I hold Chuck in high esteem because he consistently questions the conventional wisdom, much as I try to do in Bacon’s Rebellion. Yet his thinking has not hardened into orthodoxy. He’s always incorporating new ways of looking at the world. I look forward to hearing what he has to say. I highly recommend the event to readers of Bacon’s Rebellion.

Chesterfield Debates Matoaca Mega-Site

Image credit: Chesterfield Observer

In August Governor Terry McAuliffe joined legislators and local government officials to announce plans to build an industrial “mega-site” in the Matoaca area of Chesterfield County. The county anticipates spending $9 million for preliminary engineering and right-of-way-acquisition and $70 million on road improvements, according to the Progress-Index, and that’s just the expenditures noted in the 2018 budget. The county likely will spend tens of millions more providing utility connections.

A mega-site, county officials says, will put Chesterfield in the running for a large-scale industrial manufacturer like an auto assembly plant or aerospace company capable of investing a $1 billion and creating 5,000 jobs. But there are no guarantees. Indeed, the track record of Chesterfield’s previous mega-site, the Meadowville Technology Park, is decidedly mixed.

Jim McConnell and Peter Galuszka raise good questions about mega-sites in a well-researched article in the Chesterfield Observer.

Twenty years ago the county rolled the dice on Meadowville in the hope of landing a semiconductor manufacturing facility. Instead, the U.S. semiconductor boom fizzled, and the 2008 recession intervened, and county officials lowered their aspirations for the park. Meadowville wound up attracting two data centers, a couple of warehouse operations (including an Amazon facility), and a bottling plant. County officials call the park a “success story,” noting that it has attracted $570 million in private investment, produced a 3,000% increase in real estate assessment and collected $24.45 million for land sold to date, with 726 acres yet to be developed.

But not everyone is impressed. “Meadowville was never intended to be a bunch of warehouses,” the Observer quotes Meadowville neighbor Freddy Boisseau as saying. “It was supposed to be computers, biotech, research and development. But the county couldn’t get what they wanted there, so they started searching for what they could get.”

What’s missing is a proper accounting that would allow Chesterfield citizens to draw an informed conclusion about whether the investment in Meadowville was worth the risk taken. What was the total investment in roads, utilities, land acquisition, engineering and improvements? How much has the county recouped in land sales, how much does the increased tax assessment generate in additional tax revenue, and do those revenues cover the debt service? Does the park represent a net gain or a net drain to county finances?

But that is only the beginning of questions that citizens should insist upon answering. Chesterfield has maintained its AAA bond rating, so it can’t be said that Meadowville did any obvious harm. But to what extent did investing in Meadowville crowd out other uses of the county’s debt capacity? What other capital projects went unfunded? And what other transportation improvements could the Virginia Department of Transportation have funded? Maybe Meadowville turned out to be a great investment, maybe it didn’t. The fact is, nobody has done the analysis, and county officials now are asking citizens to take it on faith that the new Matoaca mega-site is worthwhile.

When you roll dice in Las Vegas, you know the odds. It strikes me that Chesterfield, which is hardly unique in this regard, is gambling without knowing the odds. The logic behind mega-sites is more akin to that of someone playing the mega-lottery: You can’t win if you don’t buy a ticket. That’s fine for a $1 lottery ticket, but it’s not OK for a $100 million industrial site.

“They’re asking us to accept a major highway, rail and an industrial site in our neighborhood without anything more than the possibility of getting a company that will bring thousands of good jobs,” said Mike Uzel, leader of a citizen group, Bermuda Advocates for Responsible Development, that opposes the megasite. “This boils down to, do you believe them or not?”

As President Reagan famously said, trust but verify. Chesterfield citizens should get all the facts about Meadowville so they can make a retrospective judgment, and they should get all the facts about Matoaca.

Virginia Gears up for Amazon HQ2 Pitch

Fort Monroe — hands down, the coolest location proposed for Amazon HQ2. No one else, not even Google or Apple, has an headquarters on their own private, friggin’ island! Good luck getting 50,000 people in and out, though.

The Amazon gold rush is heating up. Northern Virginia, Richmond and Hampton Roads are pitching the online retailing giant on multiple site in their regions for Amazon HQ2, a $5 billion, 50,000-employee second headquarters complex. Michael Martz with the Richmond Times-Dispatch has the scoop, citing “multiple” unidentified sources.

Northern Virginia, writes Martz, has identified four potential sites, including the state-owned Center of Innovative Technology property near Washington Dulles International Airport, the Potomac Yard along the Potomac River in Alexandria, and Arlington County properties in Rosslyn and Crystal City.

Hampton Roads is pushing three potential sites: Town Center in Virginia Beach, Harbour View in Suffolk, and Fort Monroe in Hampton.

The Richmond region is pitching three sites as well: Tree Hill Farm, a 500-acre property south of downtown, the Diamond baseball stadium and neighboring properties, and a 160-acre property in Chesterfield County.

The odds are long. Virginia’s metros are competing with dozens of cities/regions around the country. Of the three Virginia metros, Northern Virginia comes closest to matching the criteria established by Amazon, including one of the largest (though financially troubled) mass transit systems in the country and access to three international airports. The Washington region also has a massive, technologically literate labor pool. As an added bonus, Amazon CEO Jeff Bezos already has a mansion in Washington, D.C., owns the Washington Post, and would enjoy access to U.S. government leaders.

However, one informed economic-development source that I talked to recently reminded me that Amazon has encouraged Richmond and Hampton Roads to submit proposals. A major advantage of either metro, the source said, was massively lower costs than Northern Virginia — and Amazon is highly sensitive to costs. However, any number of other cities and regions around the country could claim to offer lower costs. It doesn’t strike me as much of a differentiating factor.

Speaking with another well-informed economic-development source, I raised the objection that metros the size of Richmond or Hampton Roads would have a difficult time building the infrastructure and otherwise adapting to such a massive growth stimulus, especially if Amazon demands significant subsidies or tax exemptions. This source was confident, however, that the 15-year time frame for the project would allow plenty of time. I’m not so sure. I expect Amazon wants to see assets on the ground now, not promises that something will get done. Given Virginia’s track record with big infrastructure projects, I wouldn’t bank on any promise.

But my sources know a lot more than I do, and if they think Virginia has a genuine shot at bagging Amazon, well, I say go for it. Who knows, maybe they have something up their proverbial sleeve they’re not willing to talk about.

Making the Link Between Higher-Ed and Economic Development

Anup Ghosh, founder of Invincea Labs, the kind of company Virginia business leaders would like to see more of emerging from state colleges and universities.Photo credit: Washington Post.

If there’s one thing that big business, colleges, universities, Republicans and Democrats agree upon, it’s that Virginia’s public system of higher education is essential for workforce development, social mobility, economic competitiveness, and building the economy of the future. The unanimity of opinion was on full display today at the 2017 Virginia Summit on Higher Education and Economic Competitiveness in Richmond.

A series of speakers including the Democratic and Republican candidates for governor hammered away at a common theme. Virginia’s economy has slowed, people are leaving the state for the first time since records were first kept in the 1940s, and the Old Dominion has declined in a number of best-state-for-business rankings. To revitalize the economy, Virginia needs to invest in its colleges, community colleges and universities to equip workers with 21st century skills and create innovation ecosystems capable of spinning university research into new businesses and jobs.

If those messages sound familiar, it’s because they largely coincide with the goals announced last week by Growth4Virginia, an initiative of the Virginia Business Higher Education Council, which put on the summit. The council, comprised of college presidents and prominent businessmen, has been working with the Virginia Chamber of Commerce to build public awareness of higher-ed’s contribution to the economy.

Beyond articulating four broad strategies — making Virginia the top state for talent, making Virginia a home for entrepreneurs and innovators, providing affordable access for all Virginians, and preparing Virginians for great jobs and great lives — the conference did not stake out any public policy positions. The event seemed more geared to raising consciousness that something needs to be done.

However, it was not apparent that the consensus strategies, hemmed in as they are by scarce state resources, will accomplish much. Two dissenting themes emerged in the panel discussions. First, Virginia can crank out more graduates, but there is no guarantee that the grads will stay here if they can’t find jobs. Second, Virginia can pour money into university research, but R&D activity won’t generate enterprises and jobs unless other elements of the innovation ecosystem are in place.

Peter Blake, executive director of the State Council of Higher Education for Virginia (SCHEV), set the scene by describing Virginia’s progress toward reaching the goals of the Virginia Plan for Higher Education. The most audacious goal is to make Virginia the “best educated state” in the country by 2030, leaping past Massachusetts, Colorado, Connecticut, Minnesota and Washington. As a practical matter, that means granting 1.5 million undergraduate degrees and workforce credentials between 2015 and 2030. Two years into the initiative, Blake said, Virginia is on track to its goal, having granted 265,000.

Boosting Virginia from the sixth best educated state to No. 1 “will not be a light lift,” Blake said. “It will require sustained attention.”

Neither Blake nor anyone else at the conference gave an estimate of how much it would cost to achieve that goal. But for the most part, Virginia’s business leaders at the conclave accepted the necessity of investing in the higher-ed system.

The Virginia Chamber of Commerce is focused on improving Virginia’s best-state-for-business rankings, and the quality of the workforce is one of the important metrics, said Dennis Treacy, chamber chairman. Particularly essential are the so-called STEM-H (science, technology, engineering, math and health) degrees.

Stephen Moret, president of the Virginia Economic Development Partnership, agreed that the quality of Virginia’s workforce is vital for recruiting out-of-state business. “Human capital is the single greatest driver of prosperity in the economy,” he said. “Incentives still matter, but what matters the most is human capital. If we win on human capital, we win, period.” As for the goal of becoming the best educated state, he said, “I love that goal.”

But he warned that there is a “relatively small correlation between degree production and degree attainment.” In other words, it’s one thing to grant the degrees, it’s another to find jobs for people with those degrees. The reason so many Virginians, half of whom have college degrees, left the state over the past three years is that they can’t find jobs here. Federal budget sequestration has crimped job creation in Northern Virginia, the commonwealth’s economic engine. Moret suggested that it might be prudent to focus resources on graduating students from disciplines for which there is a demonstrated shortage.

Making a similar point, John L. “Dubby” Wynne, former CEO of Landmark Communications in Norfolk, noted that Virginia has a 4.3 million-person workforce and has an acute shortage of employees with information technology skills. Yet Virginia’s higher ed system produces only 4,000 four-year degrees, two-year degrees, and certification credentials in computer science per year.

The other big sticking point was the goal of investing more in Virginia universities’ research capabilities. It is a truism that in a technology-driven economy, research universities are engines of economic growth. Look no further than Stanford, Berkeley and Silicon Valley or Harvard, MIT and Boston. But given the size of its economy and the high regard of its public universities, Virginia punches below its weight.

Virginia’s six research universities generate about $1.4 billion in research annually, said Angel Cabrera, president of George Mason University. That’s less than the University of Michigan alone. Virginia is attracting less than its fair share of federal research dollars. If the commonwealth wants to be a player in research, he said, “you have to make investments to get it.”

Cabrera gave examples of the kind of economic benefits that accrue from R&D activity. Annup Ghosh, founder of Invincea, which describes itself as a next-generation anti-virus company, sold the company earlier this year for $120 million. Ceres Nanosciences, which developed a highly accurate diagnostic test for Lyme disease, has raised millions of dollars in growth capital. Both came out of GMU.

However, GMU is embedded in a dense innovation ecosystem. Ghosh, for instance, had worked at DARPA, the Defense Advanced Research Projects Agency, which funded his research at GMU. He tapped the Center for Innovative Technology for funding, and he found other early-stage funding in Northern Virginia. Thanks to the region’s ties to the defense and intelligence agencies, entrepreneurs also can draw upon world-class technical and executive talent in cyber-security.

Other regions in Virginia don’t have such well-developed innovation ecosystems. With an eye to building innovation assets in Hampton Roads, Wynne conducted a gap analysis comparing Hampton Roads capabilities with best practices. The regional fell woefully short. The NASA Langley research facility and the Thomas Jefferson Lab conduct about $1 billion in research between them, but a scientist seeking to commercialize a technology would find few resources to help him, he said. Wynne said he is working on building a business accelerator and developing a source of seed funding.

Bacon’s bottom line: While strong colleges and universities are essential components of technology-driven economic development, they are not sufficient in and of themselves. It is possible for the commonwealth to invest too much in higher-ed, getting ahead of the demand for graduates and the ability to commercialize R&D. Investment in higher-ed has to be carefully calibrated with demand for particular skills and the slow and painstaking development of innovation ecosystems around research universities. If state leaders are not careful, they could wind up subsidizing at great expense the workforce of other states and building research capabilities that generate little economic spin-off.

Why Henrico Likes the Facebook Project

Gary McLaren, executive director of the Henrico County Economic Development Authority.

This afternoon I caught up with Gary McLaren, executive director of the Henrico County Economic Development Authority, who addressed the main questions I raised in the previous post. The Facebook data-center project, he says, is a great deal for Henrico County citizens and taxpayers.

Facebook will locate its $750 million data center in the White Oak Technology Park, in which the county had invested $40 million in the 1990s to induce semiconductor manufacturer Infineon Technologies AG to locate there. The plant, later part of Infineon spin-off Qimondo, was an excellent corporate citizen while it resided in Henrico, but it closed under competitive pressure of subsidized offshore chip plants.

The Infineon legacy bequeathed three important assets to the White Oak Park, says McLaren. First, thinking that the county might attract other semiconductor plants, the county had oversized its water and sewer lines. Thus, White Oak had 10 million gallons a day of excess water capacity and 13 million gallons of sewer capacity — more than enough to handle the estimated 3.5 million gallons-per-day needed to cool Facebook’s servers.

Second, the park was well supplied with fiber optic trunk lines. “We’re up to eight or nine fiber companies that have run fiber into the park,” McLaren says. Making the location even more attractive, he adds, is the laying of three separate transatlantic cable lines terminating in Virginia Beach. While he doesn’t know it for a fact, he is almost certain that Virginia Beach will link to the North American fiber grid through the Richmond region, making Henrico an ideal location for serving both North America and trans-Atlantic markets.

Third, the park is served by dual feed power. Dominion delivers electricity to the park via two transmission lines. If one line shuts down for whatever reason, the other will keep the park supplied with electricity. While designed to meet the specs of the semiconductor plant, the redundancy fits the needs of the data center industry as well. Says McLaren: “We  have a unique and robust technology park ready to go.”

Henrico County has a good number of data centers. McLaren won’t say exactly how many — some corporate entities would prefer to keep a low profile — but reports have reported the number as twenty. Well known data centers include QTS Data Centers, Peak 10, and Capital One. As the data-center industry explodes, Henrico wants a bigger piece of the pie.

Northern Virginia localities Loudoun County and Prince William County are widely recognized for their large clusters of data centers. Thanks to their proximity to MAE-East internet exchange points in Northern Virginia, the two jurisdictions got off to a strong head start in attracting server farms. To get a bigger share of the business, Henrico had to do something dramatic to increase its competitive posture, McLaren says, so it the tax rate on computers and computer-related equipment.

“We decided we could have a strong value proposition if we made ourselves more competitive” by cutting the tax rate, says McLaren. The thinking was: “Would we rather have 100% of nothing or X percent of something?”

Cutting the tax rate from created a windfall for the dozen or more existing data centers in Henrico County, McLaren concedes. But after the Facebook announcement, the net effect is positive. “I can tell you, with this announcement we are more than made whole.”

When asked for specific numbers, McLaren says he cannot provide them. A breakout of the net gains resulting from the tax break would list data centers and detail proprietary information such as how much they’re investing in real estate versus how much in computers and other capital equipment. In effect, Henrico citizens have to trust that their local government knows what it is doing.

A second inducement offered Facebook — an $863,000 credit on a water-sewer connection fee that normally would cost around $2 million — won’t cost county citizens anything, McLaren says. When the county built the water-sewer infrastructure for White Oak years ago, it gave the Economic Development Authority some credits it could dole out to major prospects to reduce their connection costs. “From time to time, we can use [the credits] as an incentive for companies. … We’ve used them for other companies that have come into the White Oak Tech Park.” Issuing the credits creates no new liability for the county or its taxpayers.

McLaren hopes the visibility of the Facebook deal puts Henrico in the running for more data centers. He is told by industry consultants that the good sites for data centers in Northern Virginia have been taken. While NoVa has many advantages, it’s getting more difficult to supply electricity to the region. Public opposition to Dominion Energy Virginia proposed Haymarket transmission line suggests that the easy-to-serve locations might be tapped out.

Henrico has one less visible advantage in its competition for data centers, McLaren says. The county is highly responsive to economic development prospects and can move quickly. Speed to market is critical to technology companies. Facebook, he says, told him yesterday, “that our willingness to fast track their project … made a big difference in their impression of Henrico County.”

Crunching Numbers on the Facebook Deal

Visualization of Facebook’s Henrico data center. Says CEO Mark Zuckerberg on Facebook: “We’re building out 11th data center in Henrico, Virginia. Like all our new data centers, it will be powered by 100% clean and renewable energy and will create thousands of jobs over the next few years. Our community is growing quickly and we’ll need this infrastructure to serve people all around the world.”

Facebook’s $1 billion announcement is a big deal for Henrico County and for Virginia. The social media giant will invest $750 million to build a data center complex in Henrico’s White Oak Technology Park, and Dominion Virginia Energy Virginia will spend roughly $250 million to supply the facility with “100 percent renewable energy.” It is not yet known precisely where the solar facilities will be located, but they will be in Virginia.

This is one of the biggest economic development deals in the state this year — a massive one by RoVa (Rest of Virginia) standards. As with all mega-projects, the big question is this: Did we give away the store? At first blush, it appears that state tax payer and rate payers will do fine. The impact on Henrico County citizens is murkier.

Drawing upon a U.S. Chamber of Commerce data center study, the McAuliffe administration estimates that construction of the 970,000-square-foot data center will employ up to 1,688 local workers, provide up to $77.7 million in wages for those workers, and produce $234.5 million output along the local economy’s supply chain during construction. Once in operation, the data center will inject $32.5 million annually into the economy.

You can read the congratulatory comments from various politicians and poobahs in the press release from the Governor’s Office. Remarkably, state and local officials managed to close the deal without any direct subsidies or tax breaks from the commonwealth, which is almost unprecedented in a project of this magnitude. Moreover, Facebook and Dominion Virginia Energy have crafted a special tariff to cover the cost of solar power which appears to protect rate payers. However, Henrico County made two major concessions, the justification for which are impossible to evaluate based on information made public so far.

The Facebook plant will consume an estimated 130 megawatts of electric power at full build-out, the equivalent of about 32,500 homes, and will require close to 3.5 million gallons per day for its cooling systems.

Henrico, which competed with Loudoun County and Prince William County, for the deal, had invested $40 million in infrastructure improvements at the White Oak Technology Park. The park offers high-seed fiber-optic cable from multiple providers, it can accommodate a high-capacity electric customer, and it can deliver up to 10 million gallons a day of water.

To sweeten the pot, Henrico County enacted a major tax break and gave Facebook an $850,000 sewer-connection credit on a fee that otherwise would have cost the company more than $2 million.

In April, the Board of Supervisors approved a cut in the business property tax rate on computer and related equipment for data centers from $3.50 per $100 of assessed value to $0.40 — an 88.6% reduction. It’s not clear how much that tax break is worth. The county has released no detailed numbers. But if one assumes that half of Facebook’s capital investment consists of computers and related equipment, about $500 million, then tax revenues would drop from $17.5 million to $2 million per year, making the tax break worth about $15 million a year. And that doesn’t include the loss in revenue from the roughly 20 other data centers located in the county that would benefit from the tax cut.

Whether the reduced tax rate is reasonable or not also depends on how the county financed those $40 million in improvements. Will the revenue stream from Facebook taxes cover the cost of paying down bonds or other financing mechanisms used to pay for the improvements? That data was not available from press reports or press releases.

Another big question mark involves how the special electricity tariff will be structured. To meet Facebook’s commitment to consume clean, renewable energy, Dominion plans to build solar facilities with a total capacity of 300 megawatts.

The proposed RF (Renewable Facility) tariff, which must be approved by the State Corporation Commission, will be structured so that only Facebook will pay the cost of solar generation, said Robert M. Blue, president and CEO of Dominion’s power delivery group. At present, solar is more expensive than other power sources. The rate structure, said Blue, “is designed to be neutral to our other customers.”

In summary, a quickie analysis suggests that the Facebook project is probably a good deal for Virginians — neither state taxpayers nor Dominion rate payers will be subsidizing the project. It’s less clear whether the project is a good deal for Henrico residents. It may be, but it may not be. The data needed to draw a conclusion has not been made public.

Update: The $40 million investment in the White Oak Technology Park dates back years to when the country geared up to serve the Infineon semiconductor plant (now closed). That investment was paid off within six or seven years, and the financing of the infrastructure was not an issue in the Facebook deal. I’ll have more to say in the next post.