The Promise and Perils of Privatizing State Economic Development Agencies

Community and Economic Development – Blog by UNC School of Government

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The Promise and Perils of Privatizing State Economic Development Agencies

By Jonathan Morgan

Published November 5, 2013

Many states have transferred various aspects of their economic development programs to private non-profit or quasi-public organizations.  Rhode Island and Florida were two of the first states to take this approach.  In 1995, the Rhode Island Economic Development Corporation was launched in order to consolidate all of Rhode Island’s economic development activities in one entity.  In 1996, Enterprise Florida, Inc. was created to become the lead entity for economic development in the Sunshine State.  Other states soon followed as evidenced in the establishment of the Michigan Economic Development Corporation in 1999 to market Michigan to prospective businesses, and to promote job creation, talent development, and tourism.

More recently, Indiana (2005), Wisconsin (2011), Ohio (2011), and Arizona (2011) decided to put a public-private partnership structure in place to advance their respective economic development efforts.  The Indiana Economic Development Corporation fully replaces the former Department of Commerce and is designed to “respond quickly to the needs of businesses” by functioning “like a business.”  The Wisconsin Economic Development Corporation is Wisconsin’s lead economic development agency and employs an approach that ” is customer-service focused and aligns with the needs of businesses.”  JobsOhio is a private nonprofit corporation “run by experienced business people who are focused on working with job creators that seek to grow and locate in Ohio.”   The Arizona Commerce Authority is “the state’s leading economic development organization with a streamlined mission to grow and strengthen Arizona’s economy” by recruiting, growing, and creating businesses.

North Carolina is the latest state to privatize a significant portion of its economic development activities with its plans to transfer business recruitment responsibilities from the existing Department of Commerce to a new public-private partnership organization.  While many of the specific details are still being worked out, it is clear that North Carolina’s new model for economic development will resemble the more private sector driven approaches of Indiana, Wisconsin, Ohio, and Arizona.  Why is North Carolina moving in this direction?  What difference will it make?

The decision to privatize state economic development functions is typically driven by an expressed desire to:

• Reinvent economic development and catalyze innovation
• Improve service delivery
• Create a more nimble and flexible organizational structure
• Insulate decisions from undue political influences
• Enhance responsiveness to business needs
• Engage private sector leadership and talent
• Increase private sector funding  for economic development
• Produce better results and outcomes than a state agency

The underlying assumption behind the privatization decision is that there are perceived and real shortcomings associated with doing economic development within a state government bureaucracy that can be overcome by shifting some functions and responsibilities to a public-private partnership structure.  When it can be demonstrated that a public private partnership structure is likely to achieve some of the aforementioned goals or produce better results than a state agency, the decision to privatize certain state economic development activities can be a smart one.  If structured well, a public private partnership can accelerate and strengthen a state’s economic development efforts by bringing together the “best of both worlds” from the public and private sectors  in ways that elevate the level of play and performance across the board.

However, two recent studies suggest that privatizing state economic development, in and of itself, is hardly a panacea.  The title of the first study, conducted by Good Jobs First, leaves no doubt about its ultimate assessment of the state-level public-private partnership model, “Creating Scandals Instead of Jobs: The Failures of Privatized State Economic Development Agencies.”  The findings from the second study, published by the Center for Public Integrity, are equally alarming.   Taken together, these studies raise some red flags about this type of organizational structure.   They document some of the pitfalls of privatizing state economic development based on the experiences of states that have gone down this road.  The problems found include:

• Misuse of public funds
• Excessive executive pay
• Conflicts of interest involving board members
• Questionable grant awards
• Overstated job creation numbers
• Problematic audits
• Lack of transparency and disclosure

It is debatable about the extent to which the privatized state economic development entities in Florida, Indiana, Wisconsin, Ohio, Arizona and elsewhere are the abject failures they are portrayed to be in these two studies.  However, the studies serve a useful purpose in pointing out the real transparency, accountability, and ethical concerns that can arise when a state administers a major part of its economic development program through a private nonprofit corporation.

The bottom line is that creating a public-private partnership structure for state economic development can potentially be a smart move, but the structure itself does not inherently guarantee better performance and results.  It matters an awful lot how these types of entities operate and conduct their business, and how they are structured, governed, and held accountable.