The big news in the battery industry this week was the much anticipated announcement of where Tesla Motors is going to build its gigafactory for lithium-ion batteries. Five states were at least nominally in the running. The winner is the State of Nevada.
For those who follow such things, the interesting question was not so much “where” as “how much”. It was rumored that Tesla would require the winning state to provide economic incentives equal to about 10% of the total $5 billion project cost.
As it turns out, the rumors were conservative. Forbes reports that the incentive package provided by the State of Nevada totals $1.25 billion, including $725 million in the form of a 20-year, 100 percent sales tax abatement, $332 million in the form of a 10-year, 100 percent property tax abatement, and $120 million in transferable tax credits. Nevada is therefore underwriting about 25% of the total project cost—an investment ratio that might make more than a few private equity investors blush.
The Nevada investment will inevitably rekindle the debate about whether government should be investing in businesses or picking winners in the private sector at all. I could not help but notice one comment on the Forbes Web site purportedly posted by a Forbes staffer suggesting that the better alternative to state economic packages such as the one offered by Nevada to Tesla is “competitively low tax rates for all.”
The sentiment expressed by the Forbes staffer (who, if he is a Forbes staffer, should know better) is at best naïve and at worst the kind of political gobbledygook that routinely paralyzes government decision making in the United States.
In the context of economic development programs, governments do invest in businesses and do routinely try to pick the winners in the private sector. This is not because government decisions are clairvoyant or fair. It is because governments have no choice but to make those decisions if they want to incent businesses to locate in their jurisdictions. Many businesses make siting decisions based on government incentives and actively shop for them, both in the United States and abroad. There is a market for government incentives in the very same sense that there is a market for cattle. You may think that the market for cattle is unethical or economically inefficient. But if you don’t play in the cattle market, you are not going to be eating a lot of steak.
Governments should not be criticized for making investments in private businesses in the form of economic development incentives. But governments can and should be judged by how wisely they make those investments. ROI’s for state governments (and the federal government) on economic incentive investments should be devised, calculated, compared and made a matter of public record. The elected officials who are ultimately responsible for those investment decisions can and should be held accountable for the ROI that their governments generate, no different than a private fund manager.
How successful Nevada will be on its investment in Tesla is at this point anyone’s guess. But our Forbes staffer can probably take some solace in the fact Nevada government officials are in this case not substituting their judgment for that of the market. With a P/E ratio of 1,682.59 for 2013 (versus an average P/E ratio of 18.15 for S&P 500 during the same time period), Tesla Motors is unquestionably a darling of the private sector.
Nevada has simply made what they call in the private equity world a “tag-along” investment. Time will tell whether Nevada government officials are just as smart or just as stupid as the professional money managers who have piled private investment into Tesla. I simply wish them all the very best of luck.
Photo Credit: Tesla Battery Factory/shutterstock