City’s economic development fund awards first grant amid safeguards
$100M municipal program modelled after similar ones in other jurisdictions
Calgary’s $100-million municipal fund to boost the economy has already awarded its first grant, and additional money is expected to be handed out soon. But if the fund created by city council is to be a success, it will have to avoid stumbling into the minefields that have plagued a similar program south of the border.
Established by city council this spring, the Opportunity Calgary Investment Fund is meant to help private-sector companies, non-profits and public institutions make “transformative investments” in the local economy. Applicants are asked to propose projects that will create jobs, help diversify the Calgary economy and expand the property tax assessment base.
The fund was modelled after programs in other jurisdictions, including the Texas Enterprise Fund, the largest of its kind in the United States. Created in 2003, the state-funded program has awarded more than $500 million in financial incentive grants to companies promising to create new jobs and capital investment, but it has been dogged by controversy.
A scathing 2014 audit found almost half of the money granted through the fund went to firms that never formally submitted applications or weren’t required to create jobs. At least one congressman called for a criminal inquiry into the program, and some critics equated it to little more than a political slush fund.
However, in Calgary safeguards have been established to ensure nothing like the Texas problems arise here, said Barry Munro, chairman of the Opportunity Calgary Investment Fund.
Every application must submit a detailed business case and be subject to thorough analysis and due diligence, including a third-party review, said Munro.
In the interest of transparency, each funded project will be publicly announced with information about expected returns on investment, including job creation, capital investment, square feet of new space leased and increase in economic activity. To minimize the risk of non-performance, most of the deals will be structured such that payments will be made only after the targets or milestones have been achieved, Munro said.
He added that both the commercial and financial viability of each company and project will be investigated in depth. While a risk-reward calculation will be made, the board is committed to maximizing the return to Calgarians, though it will never be able to ensure the 100-per-cent success of all projects.
“If we’ve done our job right, there will be few projects that don’t materialize as planned, but there will also be many successful companies that result in a significant impact on Calgary’s economy,” Munro said in an email.
South of the border in Texas, that state’s economic stimulus program has tried to tighten its rules and now requires a new standard contract for all recipients. The fund must also submit an annual report to the legislature making public all of its grants, the number of jobs promised and created, and the amount of clawbacks collected in the event companies do not fulfil their commitments.
Nathan Jensen, a professor in the department of government at the University of Texas at Austin, said questions remain about how much the Texas Enterprise Fund is actually accomplishing. A recent study by the Michigan-based Upjohn Institute concluded at least 75 per cent of firms that received incentives would have made the same decision regarding investment, location, or retention even without funding.
“These (incentives) are not what sway most company’s decisions,” Jensen said, cautioning that transparency will be key for Calgary. He pointed out that $100 million is “very large” for a city-funded program, and recommended the recipients’ applications (what they are promising), as well as the final contracts be made available online.
In Calgary, a concern was raised about the fund’s first grant of $1.5 million to MobSquad. The company is promising to bring 150 software engineering jobs here, but observers noted that MobSquad CEO Irfhan Rawji was on the volunteer committee that raised funds for Mayor Naheed Nenshi’s legal defence after Nenshi was sued by home builder Cal Wenzel in 2013.
However, Nenshi — an ex officio member of the $100-million fund’s board — does not get to vote on fund applications. The fund also has “very significant” conflict of interest regulations, he has noted.
“One of the challenges we have is that the venture and investment community in Calgary is relatively small, so it’s actually difficult to pick people that are completely clean,” Nenshi said earlier this month. “But, clearly, if you have any interest of any kind, you have to recuse yourself from that conversation.”
Officials in Calgary have cited Kitchener, Ont., as an example of a jurisdiction with a successful economic development incentive fund. While that city didn’t award money to private businesses (the province of Ontario prohibits that), it had a $110-million fund from 2004 to 2013, thanks to a special capital levy.
The program worked with notfor-profits and public sector institutions to fund projects such as bringing the Wilfrid Laurier School of Social Work and the University of Waterloo School of Pharmacy to downtown Kitchener. The city also gave $500,000 to Communitech, a public-private innovation hub, to set up a facility downtown.
Cory Bluhm, executive director of economic development for the City of Kitchener, said an impact assessment found 1,600 new jobs were created through the program and the projects funded by the program breathed new life into the downtown. Currently, Kitchener has more than $1 billion worth of private-sector developments proposed for the downtown, a building boom that is unprecedented for the city, and which Bluhm said would likely not have happened if the economic development fund hadn’t kick-started the growth.
One of the challenges we have is that the venture and investment community in Calgary is relatively small...