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Business Incentives Reform Case Study: Federal Express [1] Federal Express had built its reputation on being quick and efficient. When it decided, in 1997, to build a new sorting hub, it would live up to the reputation. The air cargo giant had seen immense growth in its brief twenty-five year history. Founder Fred Smith had built his Memphis-based company into a $10 billion industry leader, credited by some with inventing the overnight package delivery system. FedEx's 120,000 employees shipped over two million pounds of air freight every 24 hours, using 500 planes and 36,000 ground vehicles. Not surprisingly, Federal Express was an attractive catch for many communities. First of all, FedEx was a "marquee name," as one official put it, and brought status and a cutting-edge feel to a community. More importantly, FedEx's jobs were relatively good ones. Many were less than full time, and many were in the middle of the night when FedEx did most of its sorting. But they paid relatively well, and, importantly, even part-time employees could qualify for benefits. The firm had a good reputation for treating its employees well. In addition, air cargo hubs have been credited with substantial multipliers, as firms sensitive to timely delivery gravitate toward areas with such facilities. For several years, FedEx had been planning a hub somewhere between its operations in Newark and Miami . The company's sales had been strong along the eastern seaboard, and forecasts of future growth indicated that a new site would be warranted. This fact was widely known, or at least suspected, among airport authorities and state commerce departments. FedEx's internal analysis had indicated that the most strategic location would be in either North or South Carolina , and its search would focus on those states. It is unclear how many sites were originally under consideration by Federal Express for what it would call its "Mid-Atlantic Hub". One local official recalls being told by FedEx that "twenty or thirty" sites had been considered, but Doug Buttrey, one of the senior FedEx officials on the search team, puzzles over the number as improbably high. (Indeed, if the search really was limited to the two states, it is doubtful such a number of even marginally adequate facilities existed.) What is clear is that substantial work had gone into the search at that point. An internal group known as Operations Research (OR) ran an extremely detailed analysis of the sites under consideration, and at least a few others. "Those people worked this over from one end to the other," says Buttrey. "If OR doesn't bless it, it doesn't happen." Before a formal request for proposals (RFP) would go out to individual sites, FedEx held private meetings with North Carolina 's Governor Jim Hunt, and his counterpart, David Beasley, in South Carolina . The meetings, according to Buttrey, were to provide the states with early information about the company's needs. The company also presented an economic impact report, prepared for FedEx by a consulting firm, demonstrating the projected importance of the project. In both states, officials began preparing a response to the FedEx opportunity. In the year or so preceding Motorola , North Carolina had decided to become more aggressive in the bidding wars. While a number of factors probably played a role, a string of high-visibility losses – of Motorola, Mercedes, and BMW, among others – to more generous neighbor states was most important. State and local developers would cite the losses of those firms again and again as demonstrating the need for more aggressive policies. As one former North Carolina economic development director put it, "North Carolina had become a little inattentive, and the loss of Motorola was kind of a kick in the head."[2] What had been relative fiscal prudence was especially noticeable compared to North Carolina 's neighbors. Southeastern states had grown increasingly generous to firms, and the Hunt administration was finding it more and more difficult to toe the line. As Mark Simmons, with the Central Carolina Economic Development Alliance in Columbia, South Carolina, noted, "I think the general reputation of North Carolina is they aren't out there buying companies or being a high bidder and they are not in the same incentive game other states are in. And if you're not in that game, you're at a competitive disadvantage." [3] The state had decided to get into the game. Officials were spooked by the very real specter of losing incentives as a tool altogether, when, in 1995, one county's incentives were temporarily ruled unconstitutional. In the same year, Hunt appointed an Incentives Task Force to study North Carolina 's options. Commerce Secretary Rick Carlisle, then a gubernatorial advisor who worked with the group, reports the Task Force's findings. " Our conclusion was that, like it or not, incentives had become a key part of economic development packages in all of our competitor states. The question then became how best to construct our incentives." [4] A colleague from the Commerce Department official echoed the refrain: You've got to have incentives to get your foot in the door. If South Carolina or Virginia really wants a company, they'll give free land and tax abatements, which can blow us out of the water. If we had no incentives at all, many companies may not have even looked at North Carolina. [5] Incentives and "competitiveness" were highlighted in Hunt's 1996 re-election platform, and his "Agenda for North Carolina 2000," the blueprint for his fourth and final term, had among its ten points, "Compete aggressively for jobs and economic growth." It is worth noting that the Hunt team did not choose "create" or "encourage" as their main verb, but rather "compete." The charge was clear. The principal result was the William S. Lee Quality Jobs and Expansion Act (commonly known as the Bill Lee Act), that would provide tiered incentives to firms, most strongly rewarding job creation in economically distressed counties. The Lee Act was introduced in the summer of 1996, during Hunt's successful campaign. The legislation would be passed 100-0 in the House and 42-0 in the Senate. The bill would be amended, in order to make more businesses eligible, in 1997 and again in 1998. In addition to the Lee Act, the governor was preparing to do more, as well. After North Carolina had submitted its bid for FedEx, Carlisle would argue that the Lee Act alone was insufficient for such projects, since it had been aimed at attracting plants valued at under $100 million. Prior to FedEx, according to Carlisle , the administration had begun moving toward a policy of more aggressive bidding for "larger" projects, those over $40 million. On several fronts, then, the Hunt administration was ready to play ball when FedEx came around. South Carolina had built a well-deserved reputation as one of the most aggressive bidders in the nation. Under the eight-year administration of Carroll Campbell, and continuing when David Beasley became governor in 1995, South Carolina was working non-stop to transform its economy. A relatively underdeveloped, agricultural state, South Carolina was determined to become a quickly growing, 21 st century manufacturing center. Its main tool was incentives. Available incentives included jobs tax credits, displaced worker jobs tax credits, job development credits, corporate headquarters credits, infrastructure credits, an absence of inventory taxes, and pre-employment recruitment and training programs, as well as the authorization to negotiate tax abatements or fees-in-lieu of property taxes at the local level. The categories of incentives were not radically different than other states, but the aggressiveness and generosity were. In 1994, the state enacted the Enterprise Zone Act, which would be used for multi-million dollar plants by Nucor, Michelin Tire, and Amoco Chemicals. By the end of 1995, 63 companies would take advantage of the act. Changes in 1996 would essentially make the entire state an enterprise zone, with tiered incentives available according to local economic conditions. South Carolina 's incentives were among the most generous in the nation. In addition to the incentives aimed at new investment in general, there was particular attention paid to air cargo companies such as FedEx. This was more than the "luck of the draw," as Buttrey would call it. The initial legislation had been put in place in the early years of Campbell 's tenure, with the intent of luring an airline hub to South Carolina. This, in the headiest days of the hub-and-spoke system, was seen as an important step in economic development, and Pan Am actually selected Columbia as a hub shortly before its bankruptcy. Though aimed principally at passenger airlines, the state saw the value in air cargo firms, as well. "As a result of that," recalls Bob Waddle, Executive Director of the Columbia Metro Airport, "when UPS came along [to Columbia ], we had intentionally written the legislation so that we didn't distinguish between passenger and freight purposes." The air hub legislation was amended several times in coming years to make it more flexible, and it would be an attractive feature to Federal Express. After meeting with the two states' governors, FedEx sent a formal RFP directly to the airport authorities in six areas: Greenville-Spartanburg and Columbia in South Carolina, and Charlotte, Greensboro (Piedmont Triad), Kinston (Global TransPark), and Raleigh-Durham in North Carolina . The RFP, according to FedEx spokesman Jess Bunn, said, "Are you interested in being considered as a location for a hub? If so, here's what we need." Actually, the request said much more than that. The RFP was extremely detailed, addressing the scope of the project, the schedule, the amount of projected investment, design, noise, cost, technical airport issues, and so on. In return, FedEx requested a substantial amount of detail from the competing airports. It also did so, in typical FedEx fashion, under a very quick deadline. RFPs were to be in to Memphis by February 1, giving the sites little more than two months to respond to a massive number of detailed questions. The RFP process was a new one for FedEx, which had learned much about negotiation. Dave Porter, with the Global TransPark Authority, had been working with the Wichita Chamber of Commerce when FedEx was negotiating a possible facility there. "Every time they put in a hub, they learn from their previous site selection." This time, they were much more aggressive about incentives. "I think they learned what a cash cow this is to the community. Incentives are a part of it, but that's just business." Unlike many companies that intentionally shield competitors' identities during site searches, FedEx took the opposite approach. The company made sure that the sites under consideration knew each others' identities. To accomplish this, and purportedly to ensure that everyone was getting the same information, the company made an unusual invitation. Each airport authority was invited to send five representatives to FedEx's newest facility, the hub at Fort Worth-Alliance Airport in Texas. Thus, they arrived, in early December, to check out FedEx and to mingle with the competition. Buttrey describes the "tent meeting" at Alliance as a way of making the process "as open as it could possibly be and still provide some level of confidentiality among each competitor site....We told them we would share [the same] basic information with every single entity and the best way to exhibit our commitment to doing that was our meeting with everyone at the same time." The Alliance operation was certainly impressive. Located in an 8,300 acre business park designed by businessman Ross Perot, Jr., the $250 million FedEx operation could handle 24,000 packages and 50,000 documents every hour. The Carolina guests watched the facility "hum" during its prime hours – midnight until two in the morning. Observers were wowed by the precision of the operation, and came back raving about the facility. Bunn, describing the Alliance operation as a "technological and personnel feat," says that, "anyone who's taken a tour will tell you it's a sight to behold." The company's guests were able to get a glimpse of the facility, and also able to get a better understanding of the company's needs. Among other things, the firm was especially sensitive to the costs of developing the site, the cost of land, the availability of labor, ground transportation, and airport infrastructure. FedEx wanted to locate with access to Interstate 85, which was a growth corridor for much of its present and projected business. One specific element that was raised was the importance of two parallel runways, which would increase the number of takeoffs and landings, and would allow the time-sensitive operation the ability to keep running if one runway were shut down for some reason. A mockup, shown by FedEx, had the facility located between the two runways, with an onramp to I-85 only barely in the distance. FedEx also took the opportunity to make another point abundantly clear: they were looking for whatever the states and airports were willing to put on the table. "FedEx's goal," states Hal Stone, South Carolina 's project manager for FedEx, "was to not pay taxes on anything." In case the message was not hitting home, FedEx made it very simple to understand. Several participants recall a presentation that starkly compared South Carolina 's generous air hub legislation with North Carolina 's much less generous incentives. ("Although they did it," said one South Carolina attendee, "in a way that said, 'But let us know if we left anything out.'") It was more than a hint. "They were not subtle," says Stone. "It was like a sledgehammer. They were hammering the North Carolina guys." Gary Jackson, with the Greenville - Spartanburg Airport, said, "It was almost as if they were saying, 'All right, North Carolina, if you want this, this is what you need to do.'" Buttrey, while not characterizing the Alliance presentation, does say that the difference between states had its effect. "I think [ North Carolina ] knew that if they were going to be competitive they had to at least match what South Carolina was doing." FedEx's message was not limited to state incentives. Many of their demands, reports Stone, revolved around local property taxes "and their desire to not have to pay any." This point was made, again, quite explicitly. Stone remembers reflecting, at the close of the meeting, on the plight of one of his friends, a local representative in attendance. "I'm thinking, I wouldn't want to be in your shoes to go back home and say there's a billion dollars in revenue [from the hub] and we don't have any [tax] revenue coming from it, especially for the schools." After the trip to Alliance, the thirty-one guests returned to their respective homes and began deciding what they could do to entice FedEx to pick their airport. Although Greenville-Spartanburg International Airport is situated in the small town of Greer, South Carolina, it is not the dominant presence that one might expect. Instead, the dominating landmark is the factory built by BMW several years earlier, lured by massive incentives. The airport, usually referred to by its FAA designation GSP, straddles the line between Greenville and Spartanburg counties. Three residents of each, appointed by the governor, make up the commission for the independent airport authority. That body was headed by Roger Milliken, described by the Wall Street Journal as a "secretive textile magnate." 6 Located in a dynamic and growing area, GSP was planning on future growth. The airport's one runway was being expanded; a second was on the books, but not for another fifty years. The airport's principal advantage was its location. Situated roughly midway between Charlotte and Atlanta and situated on two interstates, Greenville-Spartanburg was within a quick drive of much of the southeast's population. That asset was also something of a liability: the airspace over GSP was relatively crowded, given the proximity of Charlotte-Douglas and Hartsfield-Atlanta. GSP's approach was to go, immediately, to consultants. Gary Jackson, Executive Director of the airport, says that the phone call to the consultants was his first move, in order to make sure that the other areas did not contract with them first. Officials were eager and optimistic, knowing that their location made them attractive to FedEx. Like all sites except Charlotte (where the airport is city-owned) and the Global TransPark (which is a quasi-state agency), GSP's airport authority was independent. This allowed it some level of political insulation. The GSP airport authority worked, principally, in isolation with its consultants, although they remained in communication with state officials and the Spartanburg Chamber of Commerce. (The bulk of the airport's 3,300 acres are in Spartanburg County.) GSP put together a package of incentives based both on their own costs and what they knew of other sites' typical rates and fees. While the package aimed to meet the company's needs, Jackson says that they were prudent. "We're not going to give away the farm to get something here." One sticking point was the cost of the land-lease agreement. The cost of land was several times higher than that of other airports, nine times higher according to one source. Federal Express approached the airport authority about lowering the price, and it responded with a reduction. It was not enough. The company approached GSP several times more, but the airport authority refused to budge. Feeling confident that they might land another big one in Greer, Greenville-Spartanburg officials sat back and waited. Columbia had some experience when it came to air express hubs. Several years earlier, United Parcel Service (UPS) has conducted a search for a new regional hub. The winner was Columbia Metropolitan Airport . The company's southeastern hub was a $30 million, 200,000 square foot site. UPS valued the city's location, central to much of the population in the region. They also valued substantial incentives offered by the state, including ten-year tax abatements and special air hub legislation that was tailored, in part, just for it. The effect of the rival's presence is somewhat debated. On the one hand, point out some, the two companies could share costs on common facilities and expenses. On the other hand, FedEx was concerned about the two companies sharing the same schedule, as well as the influence of UPS' Teamster-organized workforce on its own non-unionized employees. When FedEx came, however, UPS' presence did help local officials know what to expect. A diverse team, headed by Waddle, gathered to draw up a response. While he says he enjoyed the process, Waddle notes that the timeframe was tight, requiring massive amounts of work even through the holidays. "Sixty days is not a lot of time.... It was a terrific amount of work." In addition, he says, there was a second problem: "trying to interpret what they really wanted." Participants in other sites made similar comments. Apparently, the volume of questions made it difficult for some to discern the "big picture;" of all the requests, which ones were the most critical to FedEx? One answer was financing. Mark Simmons, Managing Director of the five-county, nonprofit Central Carolina Economic Development Alliance, thinks this part was very clear. "We knew that tax exempt financing was big to them.... They dictated what they were looking for from the start.They wanted someone who would step in and make all the improvements and lease it back to them [tax-free]." Columbia put together just such a tax-free leaseback arrangement. The financing package was, however, available to all the airports, making this part of the package relevant only if it was missing, says Simmons. They also put together the site preparation details, and also offered to co-develop additional land with FedEx, thinking that might be attractive for future needs or supplier space. In addition, they decided to emphasize the fact that they were not on I-85, making the best of a suboptimal situation. Knowing from their UPS experience how important trucks could be, "we pointed out the advantages of Columbia 's location in terms of the operation of a ground fleet," says Waddle. This included the fact that they were near two north-south interstates and that, by not being on I-85, they did not have to worry about interstate backups or construction. But there were problems. One was the strong preference of FedEx for parallel runways. Columbia 's two runways met at an angle, like two sides in an equilateral triangle. Columbia 's runways, "if you squint real hard, might look parallel," laughs Simmons. "If you couldn't come up with parallel runways, you were making excuses for why they didn't need one." A second major problem was more difficult to laugh off. FedEx had made it clear that it wanted access to I-85, and Columbia just did not have it. "I figured, it's called the Mid-Atlantic hub," drawls Simmons, chuckling at his memory. "Where's the middle of the Mid-Atlantic? It ain't in Columbia, South Carolina !" Despite the tight timeframe, the team managed to get their proposal in to Memphis a few days early. The delivery system? "We made sure we didn't send that one UPS," says Waddle. Up the road in North Carolina , Charlotte had seen massive growth in the years preceding FedEx's announcement. The largest city in the Carolinas, the " Queen City " saw itself as the next Atlanta. While its political climate was still heavily progrowth, it was beginning to experience some pains from recent expansion. Of all the sites in competition, Charlotte was possibly the least in need of a "big gun" like FedEx. Charlotte-Douglas International Airport, located on Billy Graham Parkway off Interstate 85, was also the busiest and most developed of the six airports. The largest airport between New York and Atlanta , it had grown to the twentieth busiest airport in the nation in passenger boardings, and the fourteenth in takeoffs and landings. It was unique among major North Carolina airports in its legal structure; it was owned outright by the city. The airport was not only one of two with parallel runways (in addition to a crosswind runway), but was planning to build a third. In addition, the airport also sat near the confluence of two interstates and had access to an ample potential labor pool. The existence of another major hub, USAirways, meant the possibility of sharing expenses and facilities, as well. On the other hand, Charlotte-Douglas was primarily a passenger, not a cargo, airport. Although it had been expanding its cargo capacity in recent years, Carroll Gray, President of the Charlotte Chamber of Commerce, notes that FedEx would have required a change in the acceptance of late night flights for this reason. In addition, the growth of Charlotte meant that the local skies were crowded. Local officials had known about the project for "a good while." The airport put together its response in-house, under the direction of Aviation Director Jerry Orr. The size of the incentive package is unclear. Orr maintains that the offer was on a par with that of Greensboro or Greenville. On the other hand, one member of the Airport Advisory Committee drew a distinction between Charlotte 's bid and those of other cities: "Our philosophy is not to provide excessive incentives. We don't feel we have to. If you're in Greenville and trying to sell yourself, and you don't have the same resources we do, you're more inclined to do that. We're not." [7] Despite the many advantages, FedEx seemed to lose interest early on. Charlotte officials stopped receiving calls from the company during the waning months of the process, indicating that the hub was headed elsewhere. This time around, it did not appear that the Queen City was to add another jewel to its crown. Greensboro is the largest of the three cities – the others being Winston-Salem and High Point – that make up the so-called Piedmont Triad. Midway between Raleigh and Charlotte, the Triad boasted a strong and quickly growing economy. But the Piedmont Triad International Airport, or GSO, had not been growing at the pace it wanted. Despite the fact that its population was slightly larger than Raleigh 's to the east, the airport had a third the number of passengers every year, down to less than half the airport's one-time high. Several recent attempts by the airport to lure new airlines had failed. One of GSO's targets had apparently been FedEx. While it had been no secret in the industry that FedEx had been eyeing a Carolina hub, Greensboro alone seems to have been active in courting the firm beforehand. GSO had been active for some years in courting FedEx. When Federal Express issued its request for proposals, then, Greensboro jumped. The package that was eventually offered was "aggressive," as Johnson describes it, and was similar to that offered previously to other companies. In addition to the same kind of tax-exempt financing offered at other sites, Greensboro offered to grade the site, link the utilities, connect the taxiway and roadway, and perform other types of site preparation. One of the team's key decisions concerned a second runway. It was clear that parallel runways were important to FedEx, but the airport had to weigh the timing of such a huge expense. They decided that the promise of a new runway in 2007 to 2010 would be a reasonable compromise. Shortly after the bid submissions, however, the phone rang. In addition to a number of small clarifying questions, FedEx had a bigger one: could that date be pushed up any? At no time, recalls Johnson, did FedEx tell them that the runway was a "deal breaker." But the questions made it clear that the issue was of prime concern to Federal Express. The answer was to seek more money. Airport Authority Chairman Hudnall Christopher, by luck, happened to be an old friend of Senator Lauch Faircloth, who chaired the Senate's Transportation Committee. That committee, as further luck would have it, oversaw the dispensation of FAA funds, including those that went for runway construction. Faircloth pledged to do his best, should FedEx come to GSO, to secure the $132 million needed from the FAA. Those funds would have to leapfrog other communities' requests, including Charlotte 's desire for a third parallel runway. Faircloth, who would lose his bid for re-election several months later, promised to help out. After several years of jockeying for FedEx, Greensboro officials held their breath and waited. Eastern North Carolina has not enjoyed the fruits of an economy that is strong and growing in much of the rest of the state. Traditionally reliant on tobacco and other agricultural products, and lacking the road and power infrastructure that exists elsewhere, the region between the capital and the coast has stagnated. The Global TransPark was designed to help change that. The brainchild of a business school professor at the University of North Carolina , GTP was envisioned as a twenty-first century manufacturing and transportation hub. In the way that ocean ports spurred growth in the past, so the thinking went, an air cargo port could do so in the future. Planes could fly in, add or deliver cargo, and fly out, with transportation and support industry ringing the port. The Global TransPark would eventually locate, in 1992, at the airport in rural Kinston, where land was plentiful and noise-sensitive neighbors were scarce. The TransPark became a pet project of Governor Jim Martin, and remained in favor with his successor, Jim Hunt. Each governor chaired the TransPark board while in office. Since 1991, the state and federal governments had pumped more than $20 million into developing the hub, although only one firm had located there by 1998. In one sense, TransPark officials may have had a leg up on their competition. While it was true that FedEx and all the airport authorities knew each other through existing business, GTP officials had been consulting with the firm from the park's inception. Dave Porter, Vice President of Marketing for the Global TransPark Authority, explains, "The GTP design had in mind hopefully having a FedEx hub, or a major presence like that, so FedEx was consulted early on about the design. We were in periodic contact with senior officials at FedEx.... They were gladly available and interested in the project." When the RFP did come, the TransPark Authority quickly assembled a team of staff, Board members, and consultants, breaking the proposal into pieces. An outside firm was used for packaging, preparing site plans, and the like. Officials knew that they were facing an uphill battle. The facility only had one runway, and did not have the pool of college students that FedEx looks for to fill some of its temporary, late night shifts. (The Commerce Department had studied this point and contended adequate labor did exist, relying in part on farmers who would work at FedEx at night.) Most importantly, GTP was nearly fifty miles from Interstate 85. Although the long-range plan called for road improvements, there was no way that the desired interstate spur could be built in the near future. Like Columbia, at the other end of the crescent of contenders, there was nothing GTP officials could do about this disadvantage. FedEx officials had pointed out the problem early on. "We knew we were at a disadvantage even before the RFP came out," says Porter. Even if that RFP had come after another twenty years of infrastructure improvement, he concedes, that disadvantage would still have remained. "No matter how you cut it, slice it, dice it, we were still going to be a number of miles away from [I-85]." Given this obstacle, GTP worked to put together a generous package of incentives. Like other airports, GTP assembled the usual sampling of proposals concerning airport operations, construction, and costs. Readily available land and uncrowded skies were likely points in GTP's favor. In addition, the team was able to put another carrot on the table unmatched by the competition: the private Global TransPark Foundation kicked in $10 million dollars, and this amount was matched by Lenoir County. Although the $20 million was to be spread over five years, it was essentially a cash gift. "It was basically, 'You tell us what you need it for,'" says Porter. Officials also asked for help from Commerce. Rather than push the governor's pet project, though, the state bent over backwards not to play favorites. Commerce officials described GTP as a good "conceptual fit" for FedEx, but with "too many ifs" remaining in 1998. The state offered virtually the same incentives to any North Carolina location. Marc Basnight, the powerful Senate president pro tem from eastern North Carolina, vaguely proposed additional incentives for GTP. "I told [FedEx] I'd do whatever I could for them above and beyond what Commerce offered and the governor offered if it went to Kinston .... The governor has to be neutral, but I don't." [8] What, exactly, he could do for them was never publicly explored. Porter, for one, did not feel neglected by the lack of special attention. He believes that state officials probably did "fish," early on, to gauge FedEx's interest in the site, then pulled back when it became clear that other sites were in the lead. "The question is do you push something to the point where the company says, 'We'll go to South Carolina.' You run the risk, if you continue to push for a Kinston location, of scaring the client away." FedEx's quiet search had first become public when officials in Cary, North Carolina, announced it in January 1998, and the prospect was not well received. An affluent suburb located between Raleigh and Durham, Cary was also very near the Raleigh-Durham International Airport (RDU). The prospect of planes flying in and out in the middle of the night, in addition to the increase in truck traffic on congested Interstate 40, made some local residents anxious. Cary mayor Koka Booth, normally viewed as a progrowth booster, had decided that enough was enough. "From what I've heard," he said in January, "it would not be good for our community. It may be good for jobs, and it may be good for the economy. But I can name a hundred things you could bring in that might be good for jobs and the economy but they're not good for our community."9 Opposition to new jobs was rare in the Research Triangle. Despite the work of some controlled-growth and environmental groups, development had gotten a green light for years, especially in Wake and Durham counties, the areas that would be most affected by the hub. But the area was feeling the pressure of massive and rapid growth. The population, double what it had been only decades before, was projected to double again in the coming thirty years. Press accounts of noise problems at other FedEx sites fueled local concerns. The prospect of FedEx, bringing noise and traffic in addition to jobs, played on a growing sense of unease in some communities. While the extent of the opposition was never clear, critics of the hub succeeded in making themselves heard. Joyce Jordan, Cary 's representative to the RDU Airport Authority Noise Abatement Committee, suggested that the Triangle was not the right place for the hub. "This type of operation truly belongs to a place like Global TransPark. Let them have it." [10] More concerns emerged. The Chamber of Commerce president from nearby Apex expressed concern about the increase in road traffic. The town board of Morrisville, where the airport is located, voted unanimously to oppose the hub. A local environmental group added its voice, concerned about an adjacent state park. The opponents may have taken the early lead in the local debate, but local officials, meanwhile, fully well intended to win FedEx. Like most of the other sites, local officials had known for years that a Mid-Atlantic hub was in the works, and believed they were in a strong position. Together with Charlotte , they had the only other airport with parallel runways. The airport was located on I-40, which briefly merged with I-85 about twenty miles to the west. And the area, while experiencing a labor shortage overall, did have a rich supply of college students that might take the late-shift jobs. The independent airport authority took the lead on the project. John Brantley, the Airport Director, was in charge of the package, which he believed to be very similar to the other sites in the state. "One of the remarkable things was the evenness of the positions, at least regarding the three major North Carolina airports." Brantley and others on the local team put together the key tax-exempt financing, and added road, taxiway, and utility improvements. While Brantley plays down the importance of the local inducements, relative to the state's, one press account reported him putting the price tag of local incentives at $35 to $40 million. Once the package was submitted, local leaders began a PR campaign to help repair the damage caused by protesters. Research Triangle Regional Partnership, a thirteen-county marketing operation, hired a retired American Airlines executive to help win the hub. Charles Hayes, the group's president, says that they also debated commissioning an economic impact analysis similar to Greensboro 's, finally deciding that the speculative nature of such a report could easily be refuted by competing studies. Brantley publicly issued a letter to FedEx on the noise issue, although the "demands" were fairly innocuous. [11] Many local leaders did get on board. Several of them met with local news media to answer questions and garner support. The Durham City Council endorsed the project. (Although, ironically, one of the most vocal advocates was the mayor pro tem, who defended the project from a tax base perspective, apparently not realizing that the site would be tax-free.) The normally pro-growth Raleigh City Council and Wake County Commission declined to take a position. And, in a controversial move, the Cary Chamber of Commerce voted to endorse the project, prompting a Cary Councilman to threaten to cut off the Chamber's annual funding from the town. Meanwhile, hub opponents built up steam. About fifty people gathered at Cary Town Hall in March for an anti-FedEx rally. Jordan spoke again. "FedEx is a good corporation and I'm not against FedEx. I think we are just anti-hub." [12] While the airports and communities were busy readying their bids, the states were doing the same. In North Carolina, rumors flew that Hunt had decided that this was one project he was not going to lose to the competition. The Department of Commerce took the lead on putting together an aggressive proposal. The department was going through a transition at the time. Secretary Norris Tolson was preparing, in late 1997, to leave the department to take over the scandal-plagued Transportation Department. Despite the move, Tolson remained involved in the FedEx project, sharing responsibilities with Rick Carlisle, who had become Acting Secretary. After the meeting with the governors and the RFP to the sites, FedEx followed up directly with the state. Brantley, noting that most sites did not have the authority to put many incentives on the table, suggests that FedEx spent most of their energy on the Commerce Department, looking for "whatever they might obtain." Indeed, FedEx was not subtle about their desire for state incentives. Buttrey began with a November 20, 1997 letter to Carlisle requesting a meeting. After a quick introductory sentence, the letter continued, "We are eager to meet with you regarding incentives that will be available for a facility of this magnitude..." Tolson, on his way out, tapped two senior staff from the international division, Martyn Johnson and Julie Snee, to spearhead the process because they had experience with large-scale projects. The team quickly determined that a number of statutory incentives already existed to help lure the firm, and that they would amount to a sizable $80 million. On its own, these incentives would have approached the most generous in North Carolina 's history. (The state's previous high had been the $109 million offered to Mercedes-Benz.) But the Hunt administration decided that more needed to be done. Carlisle says the decision to aggressively pursue FedEx, to a degree unprecedented in the state, was due to the quality of the jobs and the expected spin-off benefits. Others point to Hunt's personal political agenda, which included deflecting attention from the Transportation Department's scandals. Certainly playing a role, as well, was the state's visible losses in recent years to competitor states, and the perception that North Carolina would have to "get in the game" on big projects or risk losing them in the future. The Commerce Department, as the lead agency, had two principal roles, says Snee. The first was "making [FedEx] feel welcome," and the second was crafting incentives. On the latter issue, Commerce focused on "leveling the playing field" with South Carolina. In this case, the state knew a great deal about the competition, helped quite a bit by FedEx. North Carolina was aided by FedEx's information, adds Johnson, in understanding the competition; "that's how we judged what would be necessary," he says. The package that Commerce finally put on the table initially came to $142 million, inclusive of the preexisting $80 million. This amount was eventually reduced to $115.4 million inclusive, after changing certain assumptions and dropping potentially explosive provisions like fuel tax changes. The package included reduced rates on income tax, sales tax, franchise tax, and property tax; a reinvestment credit; $2.4 million grants from the Competitiveness Fund and Utility Fund; and Worker Training and Jobs Tax Credits. The portions that would require separate legislation were special exemptions on sales and property taxes, and an exemption on a state bidding requirement for the airport authority that would build the hub. The state conducted a cost/benefit analysis that showed the benefits of FedEx at a 9:1 ratio to the costs, or 20:1 when incorporating indirect costs. In the end, argued Johnson, "We're actually not paying them anything." Governor Hunt also got involved personally. Although the pace and frequency of personal contact is unclear, there was some degree of face-to-face contact between Hunt and Fred Smith. The effect of this personal commitment is also unclear. Carlisle notes that the governor's involvement helps, at least, in two ways. First, the direct contact helps to reduce communication problems. Second, it "demonstrates that you're serious." Like the individual sites, North Carolina submitted its bid in time for the February 1 deadline. When reports began to leak that the governor had put a record package on the table, the news was greeted largely with resignation. "It's absolutely a sign of the times," said Basnight. "If you want to be ahead, you've got to do more than the competition and do it better if you want the jobs."[13] Buttrey saw North Carolina 's new attitude as simply saying, "If we're going to be players, we better get in the game." South Carolina, as usual, was very interested and very aggressive. The bold nature of the state's recruitment efforts would certainly not change for a project as large and attractive as Federal Express. One notable departure from the Palmetto State 's typical approach, however, was in the somewhat secondary role that the state played. While North Carolina, with a normally decentralized structure, had taken the lead at the state level, South Carolina moved in the opposite direction, with the Department of Commerce playing more of a supporting role to the local sites than it had typically done. Hartley Powell, the department's Chief of Staff, explains that this was simply because FedEx made contact with the airports and not with Commerce. (That FedEx did not make contact with Commerce is clearly not true. Not only did FedEx report direct contact with the state, but Waddle recalls explicitly that FedEx had issued formal RFPs to the state departments of commerce, in addition to the local requests.) Stone makes essentially the same argument, but adds that many technical sections of the RFP were better done by the airports than by the state. Some in the department, he notes, had to be convinced that the supporting role was the appropriate one this time around. South Carolina was in a different position than North, because it already had on the books many of the exemptions and inducements that FedEx was using as leverage. The state had a problem, in fact, crafting incentives because of FedEx's desire for total property tax exemptions. This was tricky because most of South Carolina 's programs were rebates of local taxes FedEx was trying to get out of. "There's just so much you can do when your incentive program deals with abatements" of taxes that don't exist, says Stone. "How do you do a fee-in-lieu of taxes if they don't want to pay any property taxes? If they get what they want locally [with abatements], then our participation is very little." South Carolina also suspected, however, that its neighbor was poised to be generous. The state knew what North Carolina 's statutory limits were, but believed Hunt might be ready to cross that line. Beasley announced, " North Carolina is pulling out all the stops, and so are we." [14] The state focused its efforts on fine-tuning the air hub legislation, figuring out what other existing incentives could be applied, and adding certain investment tax credits that were available only in Columbia . Officials also found ways to maximize existing programs. The jobs tax credit program, for instance, which made up "some pretty significant dollars," did not neatly fit FedEx's structure. Seventy-five percent of the jobs, according to Stone, were part-time, but the credit was aimed at full-time jobs only. Officials worked to develop a formula that could be used to let FedEx in to the program. Beasley, like Hunt, got personally involved in the process. Stone reports that he was just as aggressive as Hunt was. "He told FedEx, 'We'll do whatever we can to make it happen.' And we were in a position to do that, from our perspective." Another wild card was U.S. Senator Ernest Hollings. He and Fred Smith had a long personal history together. Some speculated that this friendship might be brought to bear to help the state. Though there is no evidence of any effect, Hollings' press secretary did tell the media, "Senator Hollings is completely committed to helping bring Federal Express to South Carolina and will use every means available to accomplish those goals." [15] Just what was put on the table is not known, since state officials will not release the precise numbers. The bid, though, was reputed to be larger than North Carolina 's, and the Spartanburg Herald-Journal reported them to be $150 million. Most players in both states believed them to have been somewhat similar to each other. With FedEx pointing out each site's advantages to the competition, this seems a reasonable conclusion. On Good Friday, 1998, Ted Johnson received a page from his boss, Piedmont Triad Airport Authority Chairman Hudnall Christopher. Come to my office, Christopher asked him. FedEx just told us to expect a call. Johnson braced himself for the bad news. "I guess it's just the history. We put together two or three of these things [in recent years], and it hadn't worked out for us." His pessimism was ill-placed. "They said, 'We want to make your weekend," remembers Christopher. "'You have been selected.'" Johnson was shocked. "I literally couldn't say anything." [16] Hunt, at FedEx's formal announcement shortly thereafter, was not at a loss for words about Greensboro 's selection. "This is the day for good news. We decided several years ago we were going to be competitive in North Carolina. And we won... We're a player now." [17] The announcement came a short two months after FedEx had received the proposals, and about four months after the trip to Alliance. North Carolina officials were ecstatic about the victory, in a battle Hunt was calling North Carolina 's "toughest ever." [18] Beasley's spokesman said, "The governor knew this was going to be a difficult project to get. There was some sense of a bidding war."[19]While FedEx insists that Greensboro was "number one, and everyone else was number two," Greenville-Spartanburg was considered by many to be the stiffest competition to Greensboro . When the announcement came that FedEx was not coming, officials there were surprised. "We thought we had it," says Jackson . Ironically, opposition to FedEx emerged in Greensboro only after the announcement had been made. The issue was noise, as it had been in Raleigh. Quiet during the hunt, residents quickly organized. The day after the announcement that Greensboro had "won," 150 angry residents gathered to protest. Most were from a residential neighborhood near the airport known as The Cardinal. Opponents also spoke out at the legislative hearings. (Much of the debate revolved around the third runway, which would not only add noise but would come much closer to The Cardinal. The planned runway, though, had been a source of controversy since 1973, when Guilford County commissioners voted to give developers a free hand in building houses in the Cardinal Country Club, just north of airport. Airport executives were concerned about the move, because the proposed third runway would reach within 1,500 feet of homes. John Russell, Cardinal Country Club president at the time, told the commissioners on November 16, 1973, "Why penalize us for the 'if'? We hope by the time the runway is built, if it is built, that environmentalists will have caused planes to be quieter." [20]) FedEx had made their announcement with two important "ifs" still on the table: the legislation for the new incentives and the FAA funding for a parallel runway in Greensboro. "I'm surprised that they would make a decision with so many cards remaining to be dealt," says RDU's Brantley. Although the runway issue could take years to wind its way through Congress, the state began working immediately on the incentives. The Commerce Department worked with others in the administration to draft the bill. Then it was time to sell it to the General Assembly. Commerce officials, Snee explains, are salespeople, but salespeople in two ways. The first stage is external, convincing the company that the offer is as generous as possible. After the announcement, however, comes the second, internal, stage of selling to the legislature. "It's a whole different thing," she says. "You say, 'no, it won't cost nearly that.'" One factor that helped clear passage was that the House and Senate leadership had been apprised of the negotiations from the beginning. In what appears to have been largely coincidence, FedEx's record would not stand long. Shortly after the announcement, the state announced an incentive package of $155.2 million to steel maker Nucor. Nucor was to place a $300 million plant in rural Hertford County. The plant would recycle crushed cars into plate steel. The Nucor and FedEx incentives were bundled together, along with other changes to the Bill Lee Act, in what would be known as the Economic Opportunity Act of 1998. Although it is unlikely the timing of the two projects was anything more than coincidence, it did provide proponents with a side benefit. Opponents had been counting on a coalition of Greensboro area legislators, responding to constituents' concerns about noise, and rural legislators, protesting the perception that urban areas got more attention on deals like FedEx. With the addition of Nucor, such a coalition was unlikely. Senator Mark McDaniel said of the bill, "It was strong by itself. I think with Nucor it's a stick of dynamite" for anyone who opposes it. Rep. Steve Wood, an opponent of the package, said, "I think it would be harder for the FedEx deal to go through on a stand-alone basis." [21] The package sailed through. As one reporter wrote of a key vote, "The Senate Finance Committee approved the plan almost unanimously, despite admissions by several lawmakers that the multimillion dollar tax breaks are distasteful." [22] One of a handful to vote against the act, Rep. Paul Luebke, of Durham , said of the FedEx incentives, "The problem is when states feel compelled to match the offer of any other state. It represents a race to the bottom. It is, in this case, the loss of $142 million [sic] that I believe could better be spent on school construction, health care, state parks, and the like. The solution will have to be a federal one. States have to stop hurting themselves because they feel compelled to do so." [23] The Economic Opportunity Act of 1998 was approved on July 22, and signed by the governor, with FedEx officials looking on, the next day. With one stroke of the pen, Hunt signed into law the two single biggest incentive packages in North Carolina history. The competition for FedEx is instructive in several ways, but one remarkable quality stands out: the bidders on both sides had very good information about what the competition was offering. Where did they get this information? Some of it was available through standard means, but it was also clearly manipulated by the company. FedEx, in fact, took the unusual step of not only informing the sites about their competition, but of deliberately bringing them together. The company, in other words, willingly surrendered some of its monopoly of information. Why would FedEx take such a step? Federal Express deliberately chose to share information with the competing sites, but it did so strategically. It never offered, or pretended to offer, full information about its needs and about the competition. Rather, it shared that information that it thought would help leverage additional incentives, specifically the probable bids of the competition, but only when they were higher. FedEx discovered that the strategic sharing of information could be more advantageous than the complete withholding of information. From the meeting at Alliance through the end of the process, FedEx made sure it knew what each party could offer, and made sure that the sites knew when they did not measure up. FedEx played the sites against one another deftly. This came out most dramatically in North Carolina, where generous incentive packages on the books only totaled $80 million. Federal Express made it blazingly clear that they wanted to see North Carolina match its neighbor's air hub legislation. In the end, this sharing of information helped make sure that the total incentive packages were remarkably similar. The local packages appear to have been nearly identical, primarily because the airport authorities had the same toolbox – tax-exempt financing and infrastructure improvements. The only notable difference at the local level was in Kinston , where an additional $20 million was put on the table. At the state level, both Carolinas seem to have been in the same ballpark. (In the $115 to $150 million range, it could be considered a spacious pitcher's ballpark.) FedEx worked hard to bring about this convergence of packages. Another unique feature of the FedEx case is the relatively rare lack of consultants. The site selection team was made up entirely of company executives. That difference was remarked upon by several, especially in North Carolina. Martyn Johnson argues that site selection consultants often act as filters, rather than facilitators, and make the process more difficult. Snee makes the same point forcefully: being able to work directly with the firm made an inestimable difference in their ability to give and get information efficiently and effectively. The difference between FedEx and most other major projects in which consultants are employed, she says, was "like night and day." In the end analysis, incentives canceled each other out, thanks to FedEx's help. The community opposition was likely only a factor at the margins, if at that. The biggest variables in the end were the biggest variables from the beginning – location, infrastructure, and cost. Among competitors, one of three reasons is typically given for Greensboro 's selection. The first is location. Many participants believed that Greensboro was ideally located in the middle of the " Piedmont Crescent " that roughly surrounds I-85. Several indicated that they believed FedEx's studies had told them years before that Greensboro 's location was ideal, and that the company wanted to go there in the first place. As Gary Jackson concluded, "In the end, location was the most important factor. It's a dollar-and-cents thing." A second commonly cited reason was the physical infrastructure at Piedmont Triad. The willingness to prioritize the second parallel runway helped put Greensboro on a par with Charlotte and Raleigh. The existence of a maintenance operation through another company was also important, as was the ready availability of large, empty buildings. Those components combined, says Simmons, meant that, "in Greensboro, it was a sweet deal." A third factor mentioned by some was the cost of the land in Greenville , knocking out what many believed was the number two site. South Carolina 's Stone believes that FedEx, "said that from a tax standpoint we beat North Carolina, but the difference came to the cost of land at airport. It was a local determination, as it should have been." While specific costs have not been revealed, the Spartanburg Herald-Journal reported three sources as saying Greenville 's refusal to lower land-lease prices helped lead to its loss. This characterization was confirmed by multiple sources as a part of this study, indicating that the price differential must have been large enough to play a significant role. What does FedEx say? (Apparently not much. Ted Johnson laments, "FedEx has never even said why they chose us.") According to Bunn, FedEx's decision ultimately came down to four factors: the interstates, the layout of the airfield, plans for a parallel runway, and the availability of maintenance facilities through other companies. It is worthy of note, again, that no one – no local official, no company representative, no state official – mentioned incentives as a primary reason for FedEx's decision. Ultimately, it appears that the incentives canceled each other out, leaving the firm much richer but not altering its ultimate decision. It is hard to miss the dilemma represented by Federal Express. The FedEx competition had many advantages that should have led to a much better policy result than is usually possible. Local and state officials had better-than-average information about the company and the competition. Packages were put together in response to a highly detailed application, in a process that most praise as being above-board and even-handed. The company was well-respected, and seems to have been fairly open and honest in its dealings with states and localities. Public officials had direct contact with company officials, avoiding the "filter" of consultants. Local decisions were, for the most part, made through airport authorities, thus reducing one layer of political pressure. One of the governors, with a long legacy and in his last term, presumably had little to prove politically. And officials at all six sites and two states were professional, hard-working, and intelligent. And yet, despite all these advantages, we are left with one uncomfortable but unavoidable conclusion. In the end, massive – unprecedented – public subsidies were offered to a private firm without affecting the investment or even the ultimate location decision.Perhaps because local officials had such good information about one another, their incentive packages lost meaning. With this aspect equalized, the firm went back to the basics, went back to location and costs. Federal Express, the company of the future that prides itself on its mechanization, computerization, and split-second timing, made a decision that could have been predicted by studying Alfred Weber's 1909 Theory of the Location of Industries. The incentives, at least at some level, were probably necessary for North Carolina to "win" FedEx. On a systemic level, however, it is abundantly clear that they represent a net drain on the public fisc [fiscal conditions] with no offsetting benefit of any kind. Noting this, the Wilmington (NC)Star-News published an April editorial entitled, "So now we're like ... Alabama ." North Carolina has joined the list of sucker states that give away huge sums to huge corporations to do what they probably would do anyway: move here. Federal Express is supposed to get what North Carolina was too wise to give to Mercedes-Benz in 1993 – about $272 million [sic], handed out through various tax breaks. Having paid tribute to the profitable shipper, North Carolina now expects it to open a sorting hub.... But it's a good bet FedEx would have come even without the money. Of course, the company is happy to take it. For years, North Carolina resisted the temptation to play such games, leaving them to the likes of South Carolina and Alabama .... But in the fourth term of Jim Hunt ... [he and his administration] seem to enjoy traveling the globe, giving captains of industry rides in helicopters and flashing fat wads of tax breaks. They are bragging that North Carolina is now 'a player.' So are rubes at roulette. [24] Some have speculated, mostly off the record, that some of the sites were never in the running, but had been used simply to drive up incentives. Was FedEx using some of the sites just to drive up incentives? FedEx, of course, insists that all of the six were in the running, although they do say that there were "three of the sites that we didn't know as much about as we needed to know," in Buttrey's words. But the firm says it did not want to "summarily dismiss" any of the sites without giving them a chance to make their case. "[The South Carolina ] sites were very strong contenders throughout the entire process. Anybody who knows what they're doing can look at the two sites in South Carolina and conclude that both of those sites could have turned out to be very optimum locations." On purely geographical grounds, however, two of the six sites stuck out as oddballs to most involved. The first was Columbia. Far off the targeted I-85 corridor, Columbia never made much sense from a logistical standpoint for FedEx, as even Simmons admitted. The team did its best to emphasize the importance of other interstates, and of the advantages of not being on crowded I-85 but, as Waddle says a bit sadly, "Obviously they didn't buy that." The other was the Global TransPark. Rumored by some to be on the list for purely political reasons, GTP was easily the least likely of the six sites, having none of the principal features that FedEx wanted, other than cash. There was little that could be done about this. As Orr puts it, "No one's going to the TransPark without massive incentives. Then again, no one's going to the TransPark with massive incentives, either." Although Columbia and GTP could have been in contention, it is much easier to make the case for the other four, any of which could have made a strong pitch. But, shortly after the announcement, Greenville-Spartanburg Airport Commission officials spoke up. Chairman Roger Milliken said publicly what many had said privately, that he believed FedEx had been eyeing Greensboro for five years. Commissioner Valerie Miller went further, saying that they and the other four sites were pawns. "We think basically they wanted Greensboro and used everyone else to get North Carolina to push incentives through." [25] Had FedEx already made up its mind? Some argue strongly (and privately) on either side. Many, as well, take a more moderate stance that Greensboro was probably the "favored site," with the hub being theirs to lose. Brantley summed up this line of thinking. "They had probably reached a tentative conclusion [before the RFP] as it was that the Greensboro location was the one most likely to meet their needs." Porter, drawing on his Wichita experience, agrees. "I would suspect that they probably did have a preferred location; however, they have to make business sense of it and have a fallback." To Waddle, the question is fairly irrelevant. "My sense is that Federal Express picked six airports that could reasonably meet their requirements, and they tested the waters. To find out whether or not a particular airport had an inside track is really beside the point because six airports had the chance to put together a proposal and there could only be one winner." While it seems unlikely that all six sites were seriously in contention, it does appear that several had a reasonably strong claim on the hub, including the Greenville-Spartanburg site. The charge, privately made by more than just Miller, that the other sites were merely pawns, is probably stating the case too strongly. In hindsight, Greensboro appears to be a very logical choice for FedEx, but several other sites, if chosen, could have seemed just as obvious in hindsight. Although the entire search process probably was more than a charade, FedEx clearly did make the most of it. Company officials never shied away from the fact that there was interstate rivalry. Although they did it kindly and professionally by most accounts, they also vigorously pushed each site to step up and match the presumed offer by the competition. Neither side, politically, felt that they could abstain from the game. With two record incentive deals in one month, what does the future hold for historically reticent North Carolina? It appears that incentives have come to stay. Tolson says, "What Federal Express tells our neighboring states is, 'Look out.'" [26] Carlisle is less strident, but agrees. (In May, Hunt took the "interim" from Carlisle 's title. The governor pointed to his success with FedEx in making the appointment to Commerce Secretary.) The state has formed a task group to deal with "mega projects," he says, which will continue to be dealt with on a case-by-case basis. Carlisle , more a policy wonk than a politician, is unapologetic in bowing to the political reality of the time. He confirms that FedEx and Nucor represent a shift in North Carolina policy. "It [our policy] will continue if the current environment continues as it is." One person who has no problem with that is Carroll Gray, President of the Charlotte Chamber. He says that he is "delighted" to see the state get more aggressive. "When everyone else is throwing money at the client, it's difficult. It seems like a few millions of dollars make a difference. I wish there no incentives but unfortunately, until that happens, we have to deal with it. We have to play the game by the same rules as everyone." End Notes
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