Episode 54: Winning Amazon HQ2: A Conversation With Virginia’s Stephen MoretJanuary 29, 2019
Yes, Amazon HQ2 was the big, economic development story of 2018. It was one of those rare moments when the topic of economic development actually snuck into national headlines. And on November 13th, 2018 the company finally announced its decision to locate 25,000 people in Northern Virginia and another 25,000 in New York City.
“The Project” co-host Andy Levine traveled to Richmond, Virginia to meet with a chief negotiator of this landmark project. He sat down with Stephen Moret, President and CEO of the Virginia Economic Development Partnership for a behind the scenes look at this deal.
Andy Levine (DCI): Yes, Amazon HQ2 was the big story of 2018. It was one of those rare moments when the topic of economic development actually snuck into the national headlines. And on November 13th, 2018, the company finally announced its decision to locate 25,000 people in Northern Virginia, and another 25,000 in New York City.
Patience Fairbrother (DCI): So, last week, Andy traveled to Richmond, Virginia to meet with one of the chief economic development negotiators of this landmark project. He sat down with Stephen Moret, President, and CEO of the Virginia Economic Development Partnership for a behind-the-scenes look at this deal. So, welcome to episode 54 of “The Project: Inside Corporate Location Decisions.” I’m Patience Fairbrother of Development Counsellors International.
Andy: I’m Andy Levine, also with DCI and Patience’s co-host of “The Project.”
Patience: Andy, can you give our audience a little bit of background on your interview with Stephen Moret?
Andy: Well, first of all, it was absolutely the coldest day of the year. As I recall, it was about four degrees, as I boarded a flight at LaGuardia Airport to go to Richmond. I was actually wearing long underwear underneath my blue seat.
Patience: Andy, don’t you think that’s a little too much information for our audience?
Andy: Yeah, probably too much information. Okay. All right. So, let’s talk about Stephen Moret. He’s a really interesting guy. He started in economic development as the President and CEO of the Baton Rouge Area Chamber back in 2004. From there, he became the secretary of Louisiana Economic Development, under Governor Bobby Jindal. And he then became President and CEO of the Louisiana State University Foundation, which happens to be his alma mater.
Patience: So, he spent quite a bit of time in Louisiana. But in January 2017, he headed north and took the position as President and CEO of the Virginia Economic Development Partnership.
Andy: He has an MBA from Harvard. He has a doctorate from the University of Pennsylvania. So, he’s kind of a wonky policy type of guy, but he’s also a fierce competitor and you’ll soon see that. Here’s our 25-minute interview with Stephen Moret about Virginia’s successful pursuit of Amazon HQ2. So, we’re talking about Amazon. Go back to September 2017, and this opportunity emerges. How did you approach it at the earliest stage you know, when you found out about this for the first time?
Stephen Moret (Virginia Economic Development Partnership): Yeah, I remember the day well, I think it was September 7th of 2017.
Andy: Approximately, okay.
Stephen: Yeah. Approximately. I got the RFP in the morning, but I wasn’t able to look at it until the afternoon. I was immediately excited about the opportunity, not just because of the scale as certainly our peers were across the country, but also because just initial gut thinking was that the RFP criteria would line up well with the Commonwealth of Virginia. We were really excited about it. We were wrapping up our multi-year strategic planning process. We were dealing with a lot of audit issues I inherited. So, we had a lot going on before this came in, and the big challenge that we faced initially was, how do we produce a world-class response to what certainly justified a world-class effort, and do that not just for one region but from multiple regions that we’re interested in participating?
So, a lot of our work, the first few days, was really getting organized around how do we get the additional support that we need to do this in a first-class way from multiple regions, but without sacrificing all the other things that we’re working on?
Andy: Three regions participated?
Stephen: We did, yeah. We had more than that they proposed. But what we ultimately did with the governor’s support, Governor McAuliffe committed a million dollars if we could get a million dollars in matching funds. And we went out to the regions and basically told folks, “If you’re interested in participating, we have kind of this world-class track option. You don’t have to do it. We’ll certainly provide the support we normally provide. But if you’re interested in doing this and really doing it in a really comprehensive first-rate way, we’re, you know, seeking I think it was roughly $300,000 to $400,000 per region.”
So, we ultimately had the Greater Richmond partnership raise $300,000, the Hampton Roads Economic Development Alliance, HREDA raised $300,000, and the four major localities in northern Virginia collectively contributed $400,000. So, we had a million in matching funds across three regions. The four localities in Northern Virginia were Arlington, Alexandria, Fairfax, and Loudoun. They had never before worked together to recruit an economic development project. We also secured $150,000 from Virginia Tech. And with those funds, we engaged McKinsey & Company which had been working with us on our economic growth strategy. In any big project, there are a number of lucky breaks. One of our lucky breaks was that we had been working with them, and they were literally just wrapping up another big project that involved working with, in part, all of our universities and technology companies and so forth. So, we actually had them roll right into this project and add a couple of teams.
We had three McKinsey teams, one for each region, and then sort of one statewide group. We also engaged a marketing firm to help us with that piece of the work. And then, of course, we had, you know, ultimately hundreds of staff and state, regional, and local partners work with us on it as well.
Andy: So you got like everyone else, you had six weeks, it must’ve been a very…
Stephen: Six weeks to the day.
Andy: …intense period of activity I would imagine.
Stephen: It was extremely intense, but you know, we had the big advantage that we resourced it properly from the beginning. And so, we had a small army of people working on this full-time. In addition to some of our staff, you know, we probably had, I don’t know, 20 or 25 contractors who were probably nearly full-time for most of that six weeks.
And that made a big difference, I think, and ultimately the comprehensiveness, and the quality, and the polish of, you know, what we were able to put together because for each region we had a completely customized proposal. Most of the content was certainly, if not new, at least highly refined and polished versus what had been before. You know, those ranged from 250 or so to 400 pages each. We had a custom website for every region, password-protected. We had custom videos, drone videos, all kinds of elaborate maps and graphical representations. And ultimately, I think we were able to package it in a fairly compelling way for all three regions. We were very proud of what we were able to submit to them on October 19th of 2017.
Andy: Now, I know from reading some of the articles that have covered this, that this was not an inexpensive situation, it was reported that it cost about $2 million to engage McKinsey, engage your marketing firm, that sort of thing. But overall, I think in hindsight you have to say pretty good investment.
Stephen: Yeah, you know, we felt really good about it. And when you think about a 50,000 job, obviously they ultimately split it up. And by the way, still feel great about the investment we made even with, you know, half. You know, initially with 50,000 jobs, at the time, 100,000 average wage, we were looking at, you know, around give or take $500 million per year of new State General Fund tax revenue, year after year, after year. So, we were looking at, you know, in any reasonable estimates several billion dollars of opportunity. We thought if we put forth our best effort that, you know, that we would have roughly, we thought, a one in three chance of winning. And with those odds, we thought it was a great investment to make. The other reason we felt great about it was that, you know, we compete for a lot of headquarters projects in those three regions, and we really felt like we needed to upgrade our materials, our case, our pitch anyway, and that the creation of this content would be really helpful for future projects. And, in fact, we’ve already used it on additional successful corporate headquarters recruitment efforts.
Andy: So, I wanna switch to stage two, so you find out you’re a finalist down to 20. How did this news hit you? How did you learn that?
Stephen: I was in a panel in Richmond on workforce issues. I think I got a call from Amazon, but I certainly got an email while we were sitting there. And, you know, we were mildly excited, but we had kind of been hoping that we would get at least two regions in the next round. When we had done our initial competitive analysis at the very beginning in September of 2017, what it showed was that Northern Virginia was exceptionally strong on every dimension except cost. And on cost, it was quite high along with New York City. In fact, we actually, in our very first competitive analysis, had New York City and Northern Virginia in the top few, in the top-tier along with Boston, Atlanta, a couple other places.
So, on the other hand, you had Greater Richmond and Hampton Roads, they have many, many advantages. They’re smaller markets, but we thought if the company were to weigh costs significantly, that Northern Virginia potentially could get knocked out, you know, based on that. And our best shot would be one of our two remaining regions. So, we were a little disappointed we didn’t get at least two regions in the next round.
Andy: So, just broadly, how do you think your approach was different than the other 19 different contenders in round two?
Stephen: I think probably the single most significant difference between Virginia’s approach, and as far as we know every other place is that we really made higher education the centerpiece of our proposal. There were certainly, you know, many places that were offering, you know, several billion dollars in some cases, over $10 billion in incentives. Virginia was just not gonna do that.
I mean, even if we had recommended it, I don’t think we could’ve gotten it through. We decided that our primary strategy would be to make a historic investment in higher education to more than double our tech talent pipeline, computer science, bachelor’s and master’s degrees in computer science, computer engineering, software engineering, so forth. We had learned both directly from the RFP and from the company, and for that matter from many, many other tech companies we’d worked with that their biggest challenge is talent, and in particular technical talent, like folks that do software development, engineering, machine learning, artificial intelligence, and so forth. And so, we decided to make that the biggest piece of our proposal. Roughly $1.1 billion to add 25,000 to 35,000 additional graduates over 20 years in those key fields. I think that was a key distinguishing factor for Virginia.
Certainly, other places included some investments in workforce development or higher education. But I’m not aware of anyone that did anything near that scale, even within an order of magnitude, maybe two orders of magnitude. Now, in terms of the second round specifically, of course, we don’t really know what other places did, but we definitely put a lot of effort into providing very, very granular, you know, responses. They were looking for some very detailed information. I think our second round response was about 900 pages, but the broad strategy was really set in the very first few weeks.
Andy: The decision to focus in on higher education, and, you know, doubling the number of bachelors and masters. Did that come out of the early McKinsey work before the Amazon bid came apparent?
Stephen: It did to a large extent. Yeah. It’s funny you say that because when we were working on… So, McKinsey have been helping us with our economic growth strategy, which ultimately, you know, informed the whole statewide strategic plan for economic development. And that plan envisioned the tech sector broadly defined as the biggest traded sector employment growth opportunity of all in Virginia.
In fact, as big as every other trade sector put together. That’s how big it was. And that the biggest constraint or enabler of that growth would be the talent pipeline. And so, we actually already had a draft proposal for a large expansion of our tech talent pipeline. We already had a draft proposal to create a tech campus in probably Northern Virginia. So, these were ideas that had already been kind of really fleshed out to a large extent, and when the Amazon proposal came in, it was right in the bullseye, not only of kind of our aspirations strategically, but also helped to reinforce the things that we already thought that we needed to do to be successful. So, it’s very synergistic in that sense.
Andy: You mentioned earlier that costs were higher, and I know probably real estate costs were higher, salary costs were higher for Northern Virginia than many of the other 19 options. How did you overcome those negatives, or how did you address those negatives?
Stephen: Well, I guess, I’d say a couple things about that. First of all, to give you a sense of the significance of the cost difference, we looked at just a simple comparison of Northern Virginia and Atlanta, and the difference in payroll we estimated to be at least a billion dollars a year, every single year, right? There’s no incentive that would make up for that. So, you essentially had to believe that our talent supply was bigger, and/or higher quality than what would be available elsewhere. And I think probably both of those things are true. One of the sources of inspiration for our whole strategy was an economist at UC Berkeley named Enrico Moretti wrote a book about 10 years ago called “The New Geography of Jobs.” One of the things that book talks about is that paradoxically, these really high-cost cities often have the most productive technology workers or something special that happens when you put a lot of smart people in close proximity. They learn from each other, they tend to develop, you know, specializations in areas that are hard to develop in smaller metro areas.
But to some extent, it was a leap of faith. I mean, we could, you know, we could sort of talk about it intellectually. But it wasn’t until we saw the down-select list that we felt like Amazon clearly was open, at least open to considering some of these higher nominal cost markets like New York, Boston, and Northern Virginia.
Andy: Next two questions are a little bit more personal. What was the most nerve-wracking moment of this project for you? And maybe they were many.
Stephen: They were so many. I mean, I think one of them was, we were talking about doing something very different than had ever been done in Virginia before, and getting all of our state leaders on board really, again, for the first proposal, because we didn’t change it that much after. That was rather nerve-wracking, and ultimately we got, you know, unanimous support from both the governor and his administration, I guess, two governors now, and the legislative leadership. There were times where we were waiting for, you know, weeks. I mean, people…as a 14-month process, you know, in some cases there were months that would go by that essentially nothing else happened…
Andy: Just crickets…
Stephen: Crickets, you know, you don’t know if, are they talking to other people? Like, are we even still in this, you know. And then I think toward the end, you know, the big question was they had floated the possibility of splitting it into two, were they actually, you know, going to do that. And would we be selected as one of those?
Andy: What was the most unusual request that you received from Amazon during this period? Anything stick out in your head that was sort of odd?
Stephen: I mean, the first thing that comes to mind is they wanted our support for a helicopter pad. Not that we would pay for it, but just that we would, you know, do our part to help get that permanent. That was kinda unique. No, I think… I thought it was a really comprehensive, well-done site section effort from their side, that they were really organized. It was a really sophisticated effort, and I think given the constraints they were operating under, I thought the communication was really good.
Andy: I wanna ask you a series of questions in your ranking on a scale of 1 to 10 in terms of how important this was to the project. So, the first one, I think I know the answer. On a scale of 1 to 10, how important was talent to this project?
Stephen: I think like 15, something like that.
Andy: Sort of high.
Stephen: Pretty high.
Andy: Okay. Same question. On a scale of 1 to 10, how important were incentives to this project?
Stephen: I’d say, like, maybe a seven or an eight. I definitely think they mattered, but I think clearly there were other places that offered more. And one of the points that we made both to Amazon and to our own state leaders, was Virginia… You know, this is actually a really important point to make for your leaders. I mean, we nominally won this in 2018, right? But Virginia really won this over the last few decades. I mean, we had so many things to be able to sell. You know, one of America’s best public education systems, one of America’s best higher education systems, of regional transportation funding solution, the metro solution, stable tax and regulatory climate, AAA boundary. There were so many things that past state leaders have done to make this a great place to do business that that created a really strong foundation upon which we could make our pitch.
Andy: Last one and this is sort of a little bit squishier, but on a scale of 1 to 10, how important was just business climate to the decision, would you say, overall?
Stephen: I think it was certainly at least an eight.
Stephen: Yeah. I mean, you don’t think of New York City as necessarily leading in that, but they certainly do offer, you know, one of the world’s best places for talent, as does the DC Metro area. But I do think it made a significant difference and a difference in our favor.
Andy: Stephen, you mentioned this split, 25,000 in New York, 25,000 in Virginia. When you first heard that a split was being floated, was that a negative to the project? Did it impact you at all?
Stephen: I mean, it was definitely a very interesting development. I will say something very positive happened at the same time, which is, Amazon had been talking about an average in a wage of 100,000. They increased that to 150,000. So, while it was split in half, the payroll was 75% of the original, you know, expectations. So, half the jobs, but 50% higher wages. Yeah, we thought it was interesting. I mean, I think in general, we felt like that gave us a better chance. Although I will say our guess would have been, probably to some extent, was that it would be, if we won, it would be us, plus a more moderate cost location where you might sort of bifurcate things to put sort of the rocket science stuff, high-cost stuff here, lower costs stuff, you know, somewhere like Dallas or Chicago or Atlanta. But as it turned out, they went with two relatively high-cost markets. And, again, I think it was because of the tech talent piece.
Andy: Now, this will become sort of laurel in Virginia economic development history. But I understand you finalized this deal from a Wendy’s parking lot. Can you just describe that scene to our audience here?
Stephen: Well, I would say about three weeks from the announcement, give or take, the company said, you know, “Why don’t you guys take a draft at an MOU?” And they weren’t telling us we had one. It was really just they said they’re going to do this in a few different places. This was just kind of like another step in getting everything buttoned up. So, we’d been going back and forth, and there wasn’t really a negotiation as much as just getting clarification of all the key points. The Thursday before the Tuesday announcement, we sent over the final draft. We were pretty sure that that was, you know, good to go, assuming they picked us. Monday morning, the day before the announcement, they said, you know, “Can you sign today?”
And we said we could. So, actually we use DocuSign, so you can sort of electronically sign. So, we signed it around noonish. And, we had a call, a phone call, and so, we were on our way back from Hot Springs, Virginia, to Northern Virginia, and anticipating the possibility that we might have been selected because they’d asked us to have a phone call. So we…
Andy: This is going through a little more rural area of the state.
Stephen: Yes, going through a more rural area of the state. And it was approaching 2:00 when Amazon had wanted to do a phone call. We had guessed that this was gonna be a call to say we’d won or we’d won half, something like that. So, we stopped at a Wendy’s for lunch. My colleagues went in, and I got on the phone call and we were told a few minutes in that, you know, we had been selected as one of the two locations.
Andy: Wow. Celebration at Wendy’s.
Stephen: Yeah. Not my favorite fast food place, but [crosstalk 00:19:55].
Andy: Milkshakes for everyone, right? And the other sort of personal side of this, I understand, I think it was reported by the “Washington Post” that you brought both your wife and your children to the press conference announcement and that you cried during the ceremony.
Stephen: Yeah, yeah.
Andy: What was going through your head at that moment?
Stephen: They were there, I think all, but my son had science fair so he could not go. Brought my oldest son, but I had my next two sons and my daughters, the three of our four children.
Andy: How old are they?
Stephen: I had the 12-year-old son, 10-year-old son, and 5-year-old girl came with my wife. Yeah, I mean, I didn’t cry a ton, but I cried a little bit for a couple reasons. I think one, it was an incredible labor of love for 14 months with just the most amazing team effort with so many people involved that made such a difference, and it was a really special moment to be a part of that. The other reason was that the Secretary of Commerce and Trade, Brian Ball, when he was introducing the governor, thanked my wife for her contributions because she really had made it possible for me to personally, at least, for the amount of time that I put in and many, many other people put in a huge amount of time as well. But he thanked her, and that was really special to me personally because she was essentially, even though not nominally on the team, was a very big part of the win.
Andy: What do you think this means for Virginians, this overall win? What does it mean for the state?
Stephen: Well, it’s a big deal. You know, when you look at the job creation, and including the direct and indirect job creation, this project by itself, looking at sort of the latest forecast from Moody’s before the announcement, should be enough to close 25% to 50% of our entire growth gap to get back into the top 5 to 10 states for employment growth. It’ll be a big driver of diversification. A lot of people think that Amazon is coming to Northern Virginia to do federal government work. That’s not what this is about at all. In fact, our incentive agreement says that no more than 10% of the incentivized jobs can be associated with federal government activity. So, this is really a private sector centric opportunity.
So, we’re talking about diversification, we’re talking about growth, we’re talking about other opportunities with other tech companies. I think the two biggest things are these. One is, I think for the first time, in a broad sense, corporate America sees that region as one of the major tech hubs in the country. And that was not the case, broadly speaking, at the beginning of the process. That’s why we were initially considered a dark horse. I think the second big thing is that these historic investments that we’re making in higher education statewide are really gonna position our whole tech sector for success.
Andy: Just going to the incentives piece for a moment. Your incentives were considerably lower than many of the other communities, what they offered, and also much, much lower than what New York City offered. What do you think that tells the Economic Development Community?
Stephen: Well, I think in this particular case, and, again, every project is different, I do think incentives very often make a difference, particularly when a company is down to a few relatively comparable locations. I think they made a difference in this instance as well. I think in this particular case, the talent piece was so important to them that, you know, they were able to overlook Virginia perhaps not offering as much as some of the other places offered. I’d also hasten to say, while New York City offered more, New York State offered more, the project was certainly worth a lot more than they offered. So, they got a good deal as well. It’s not really a question of saying, you know, we got a good deal, and they didn’t. I think both places are getting a good deal for a great project.
Andy: And from what I understand, the way your incentives are structured, it really is, the investment has to happen first, and then the reward comes to the company later.
Stephen: Yeah. Their post-performance, yeah. So, you can always do that, but for a variety of reasons, it was a win-win opportunity for both the company and the Commonwealth. The company creates the jobs and retains them, and essentially, is they slightly oversimplify, every new job that’s created gets incentivized four years later. So, it means that the project is highly profitable for the taxpayers of Virginia from day one. Ultimately, we expect at least $3.2 billion of new general fund revenue over the 20-year term.
Andy: Now I know you’re a nerdy guy, but I’m gonna ask you to try to simplify something here for me. I’m just gonna ask you to finish this sentence. Can you finish this sentence? Virginia won the Amazon HQ2 competition because…
Stephen: Virginia won the Amazon HQ2 competition because we have roughly the best talent in America, and we’re investing to make it even better.
Andy: Okay, good answer. Final question. What did you learn from this process, and how will this impact how you approach deals like these in the future?
Stephen: I think we learned that a collaborative regional approach for Northern Virginia is very compelling, and that’s something I think you’re gonna see us and our locality partners do more and more. I think we saw the incredible potential for higher education to be a contributor to, you know, a great economic development outcome in a major way. We’re definitely gonna do more of that. I think we also saw the value of taking on, you know, bigger opportunities in a sophisticated way and being prepared to make the investment to do that. You know, we talked earlier about the investment that we made. We were fully prepared to lose.
I mean, we were prepared to invest that money, and, you know, not get the win because we thought it was a big enough opportunity to go for it. We also thought, and we still believe that we’re already benefiting in other ways from those investments that we made. And just going through that process and this is really where I think all the Amazon, all the company, all the communities that pitch on Amazon can benefit, probably are benefiting is, it really forced communities, regions, and states to put their best foot forward, to think about how to tell their story, to think about what they aspire to become in the future, and to lay out a vision to get there. And I think in that way we’re benefiting, but so are the other, you know, 236 communities that pitched for this project.
Andy: Stephen, thank you for your time today, and congratulations on the greatest win in economic development history.
Stephen: Thank you as well. Great to be with you, Andy.
Patience: So, Andy, what was it like sitting down with Stephen Moret?
Andy: This was an awesome interview. He’s a really smart guy, and their approach to winning Amazon was actually remarkably simple. There are kind of three things that stuck out to me. Number one, he resourced this properly at the beginning of the bid. So, that involved hiring McKinsey for strategy and data, involved hiring a marketing firm to help package that data into a compelling viewbook, a website and video. This was all done in about six weeks at a cost of $2 million.
Patience: Okay. So, $2 million is really quite an investment to put into this bid.
Andy: Substantial, substantial investment. But he saw a huge opportunity here. So, I don’t know that the other 19 communities put in that kind of investment. But, you know, Virginia was really serious about this. That was number one. Number two was the strategy, you know, he said, “Let’s show Amazon what we have here in terms of talent, but let’s show them what we’re doing to build the talent pipeline.” So, in this case, they profiled a billion-dollar investment that they were making in Virginia universities to double the number of bachelor’s and master’s computer science-related graduates. You know, they tangibly said, “We are gonna make a huge investment in the talent pipeline, whether you come here, or whether you don’t come here. This is, you know, things we’re doing that are good for the state.”
Patience: And I think we’ve heard from most forward-thinking companies that that’s what they really care about. It’s the talent pipeline of the future, not just who’s here now.
Andy: Exactly, exactly. So, finally, just to, you know, touch on the incentives piece of this, you know, they were thoughtful and smart about the way they deployed their incentives. Frankly, it was less than what other communities offered. But because they had sort of wrestled with the talent issue and sort of solved that, or, you know, put forward a solid solution, they were able to invest less on the incentive side of things. That’s sort of my assessment of it. So, those were, I don’t know, the three things that really stood out to me, Patience.
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