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This report, “Urban Development Action Grants to Rural Communities” by Marie Howland and Ted Miller, examines the characteristics and impact of Urban Development Action Grants (UDAGs) in rural areas, using data from the U.S. Department of Housing and Urban Development (HUD), a telephone survey, and on-site case studies. Here are the key findings:
- Grant Distribution and Type: Rural UDAGs largely funded industrial projects (49%), followed by residential (11.8%). These grants were distributed across all regions and community sizes, but were concentrated in the most distressed rural communities. Northeastern states received a disproportionately high share of funds compared to their rural population and employment.
- Funding Mechanisms: The majority of rural UDAG funds (66%) were allocated as low-interest loans, with a shift from non-payback grants to loans over time. The average interest rate on these subsidized loans was 6.5% with a mean term of 15 years.
- Financial Composition: UDAG assistance covered only 14% of total project costs, with 48% of costs covered by some form of government grant or subsidized loan (including state and local loans/bonds, state grants, local grants, and other federal grants).
- Impact on Firms and Job Creation:
- Need for Subsidy: UDAG grants were more likely to go to firms in competitive industries with slow rural growth rates, suggesting they reached marginal enterprises in need of financial assistance.
- Failure Rate: The failure rate of UDAG recipients (17.7%) was higher than the average bankruptcy rate for all firms, indicating the program reached riskier ventures.
- “But For” Question: A majority of firms (59.6%) stated they would not have made the investment in their current location without UDAG funding. However, a significant minority (23.6%) would have, indicating some displacement of private funds. Branch plants were less likely to require UDAG funding than independent firms.
- Criticisms Addressed: The study found no evidence that rural UDAG loans disproportionately favored capital-intensive over labor-intensive operations, countering a common criticism of capital subsidy programs.
In essence, the report concludes that while the UDAG program successfully reached marginal and risky firms in need of capital, there was also evidence of public funds substituting for private investment in a minority of cases, leading to mixed results and ongoing debate about the effectiveness of such subsidy programs.
