ARTICLE

Government Instrumentalities are Critical Players in Spurring Economic Development

March 16, 2016 – Justin Moorhead

Our government instrumentalities should consider moving beyond supporting economic development and assume a more proactive role in being engines of economic development. Including this as an element of mission is in their self- interest. The dividend return from economic growth is their enhanced financial sustainability.

Instrumentalities are public purpose entities closely tied to the central government, but not government agencies. Charted by legislation, with boards of directors appointed by the Governor, these instrumentalities operate as semi private organizations. Because of their quasi government status, they exist to benefit the community. Our utilities, port and airport concerns, housing and community development entities, economic development and public financing entities, institution of higher learning and waste management organization are all instrumentalities. Each possesses organizational depth, professional ability, financial resources and operating flexibility to vision, plan, finance and execute ambitious development strategies and projects.

Most generate their own revenues from fees, service charges or through the sale or rental of developed assets (e.g., housing, port facilities). Because they are required to manage operations in a fully compensatory manner, their decision-making is akin to that of private corporations. However, because of the monopoly they enjoy in delivering services, as well as the public sector interest they exist to serve, they can evaluate economic return over a longer term than can a private sector entity.

Combined, these entities control assets in excess of $750 million and many have ready access to financing for program and project development. All are actively involved with outside commercial interests as well as other institutions like themselves who actively confront similar challenges and devise strategies that contribute to the growth of their respective communities.
Incorporating an economic development agenda alongside their public purpose responsibility is not incompatible with their legislated mandate. It does, however, require a re-envisioning of the organization’s role in the community, some redirecting of invested resources and a more constructive engagement with the community in the defining and shaping of what the community’s future will look like.

Arguably, not embracing this concurrent responsibility constrains the growth and capability of these organizations, diminishes the sophistication of the product that can be offered, limits the ability of their professionals and in the long run jeopardizes their own financial well being. With the passage of time the long-term impact of not aggressively incorporating an economic development agenda renders both the institution and the economy it serves more vulnerable to the vicissitudes of external competition and does nothing to help that economy effectively compete in an increasingly globalized world.

Driving economic development in small communities is unquestionably challenging. But it is within small communities where economic development activity is most in demand and essential.

The challenge of small communities is the size of their local market, the limited ability to broaden that market regionally, nationally or globally, and the limited supply of talent and invested savings. For business start-up and growth, institutional funding is not readily available, and the attractions for offshore investment capital few. Small communities cannot offer many of the other enabling factors that larger communities provide. The creative challenge and interplay among peers, which stimulate pushing the boundaries of success, is difficult to create, as is the ability to leverage off of the success of others with synergistic ventures. Larger communities are often structured around tradable commodities that can be leveraged in business ventures. These communities also have a deeper pool of human capital as well as the physical infrastructure critical for entrepreneurial growth. The combined effect on the entrepreneur in a smaller community is to limit the horizon of what is doable. Big dreams with out sized risk are more difficult to consider or implement. Confronted with these obstacles, talent decamps. Not that these obstacles at some level do not exist in the new location, but the market is larger, which increases the margins for success as well as the associated rewards.
Central government delivers a community’s basic social services; education, health, public safety, and sound infrastructure. These maintain the platform on which economies operate and expand. Delivering these services may be in large part formulaic but a community’s strength rests on the quality of government services available to that community. Basic services are, however, exactly that. Looking for opportunities to expand the economy is not a function of those agencies addressing this level of need. Excess resources, when available, are most appropriately used to enhance service and product delivery.

The role and opportunity available to government instrumentalities differs from that of the central government. These too have critical community missions such as delivering utility, gateway, housing and community development, economic expansion or thought and knowledge leadership services. It is, however, in these areas where the providing of required services has the most tangible and appropriate overlap with economic development.

What then can we learn from the activity of others? Small highly productive countries are increasingly diverting some financial resources to sovereign wealth funds, which make investments designed to be economically transformative to their communities. We cannot do similarly at least in the near term. A pressing task of our local government is to stabilize annual financial operations. Regardless, our community has, however, made significant investments in our instrumentalities that can be similarly leveraged. That investment exists in the monopoly the community has granted these entities to provide services and generate income and savings. If our instrumentalities engage with us in visioning and proactively shaping our economic future we can reap dividends from their investments.

There is no other than can assume this role. The private sector cannot and will not make investments that can promote economic growth in the short term, but within that same time period may be marginally profitable or unprofitable. In the longer term these investments will generate meaningful investment returns. Public sector entities have longer-term investment return horizons. All will be around to enjoy the financial return from their investment whether that occurs in seven or forty years. It is this perspective that will drive economic expansionary investments in infrastructure, facilities, technology and human capital development, and new ventures.

Making transformative investments does not replace the essential service mission of these entities. However, the opportunity exists to think beyond the demands of the current deliverable to what is long-term developmentally desirable. And, it is our instrumentalities that have access to the resources to drive economic growth by leveraging their current activity, either in partnership with others or independently, and pursue well thought out projects that can be accretive to themselves and to the community. Utilities can spin off synergistic commercial opportunities for providing complementary or new services and address recycle and reuse issues. Gateway entities can look behind the gateway and consider facility investments that refresh community product offerings. Learning and thought leadership entities can support policy institutes that promote social introspection and advance best practices as well as skill development curriculum relevant to community growth. Economic development entities can provide coordination, financing and visionary support to entrepreneurs. They can help structure partnerships, which leverage comparative resources to fully exploit emerging opportunities.

Undoubtedly each institution must have an ongoing discussion of how their legislated mandate is best executed. The internal struggle will be to determine the correct balance between the efficient management, replacement and growth of assets that allows the private sector to leverage these in ways that contribute to community growth and a more proactive and direct investing in facilities and products, which expands the economy. However, when these institutions relegate their role to one of only producing the best product or service and shy away from direct investment that expands the economy, they do an injustice to their own self- interest. Absent economic expansion, the ability of these institutions to continue to deliver product and services will over time be increasingly compromised.

The economic concept of capital in motion best describes this reality. Financial return, to be sustaining, has to be continuously reinvested to generate additional financial return. This only occurs with growth. An open community expects and demands continuous product and service innovation and improvement. Very few communities are insulated from competition, local or outside. Even where local monopolies exist (i.e., power generation, transportation facilities) the consumer retains the ultimate option of relocating to where services or products are more competitively responsive and therefore more desirable. Because of this reality, the delivery of products and services must continuously evolve. The smart phones success is its continuous morphing into a more responsive product to keep it relevant to its market. Research and development drives this transformation. Setting aside dollars for research and development is an investment in future market growth and long term sustainability.

A stagnant or slowly growing consumer base lacks the resources to absorb the cost of growth and enhanced product delivery. That consumer has brought the product or service to the level of its current distribution. Taking it to another level requires new revenues from an expanding consumer base. Expanding and growing the consumer base therefore generates the incremental revenue that funds offering a better product to the consumer.

Both the instrumentality as well as the community benefit when growth brings others into the market and produces revenues, which allows product evolution. Expansion then is an important part of mission. And, expansion occurs only through economic growth. Pushing the boundary of what constitutes mission and becoming proactively involved in spurring economic growth is a self-interested proposition. The institutions benefit from this re-conceptualization of mission as does the community.

Our instrumentalities are then our investment in our future. At considerable expense these institutions were created and fostered. Many are the recipients of government assets or hold assets in trust for the benefit of the community. Deploying these assets to spur economic development requires thought and analysis but the question should not be whether but how. It is these institutions that can employ the dreamers as well as the technicians and it is within these institutions where sufficient savings can be generated to allow substantial investment in the growth of our community.