Dean Barber

Lost But Not Forgotten: A State Strikes Back

In Economic Development, Site Selection on November 24, 2013 at 5:30 am

Any adult with walking around sense knows it true – that the best laid plans of mice and men often go awry.

I am paraphrasing, because the original prose comes from a Robert Burns’ poem  “To a Mouse,” which read: “The best laid schemes o’ mice an’ men / Gang aft agley.” Translation: We will mess up.

In virtually every state in this country, elected officials have stood at podiums to announce wonderful economic development projects that would never subsequently happen. In their defense, they believed what they said to be true and accurate, even if their news conferences were hastily convened.

But projects blow up for a variety of reasons. Sometimes both sides – the company considering the community for the future investment and sometimes the community itself – have not thought things clear out. And when there is a  lack of due diligence and study, plans do go awry.

That Which Never Came

Sometimes my gut, based on my experiences, immediately tells me these are shaky propositions at best. I recall the Sprinter project some years ago being announced in Georgia when then Daimler Chrysler remained ominously quiet. Then there was that vaunted Chinese MG car project in Oklahoma. I seem to remember a bio-based jet fuels project that was supposed to happen in Natchez, Miss.

This past summer, I saw the remnants of a failed and highly publicized project in Moberly, Mo. A Chinese-owned company had actually started construction on what was to be an artificial sweetener factory. State and local officials had provided bond financing and incentives worth $17.6 million. But the company defaulted on its bond payments, and an unfinished shell is all that remains.

I have lost track on the number of announced solar projects that started with a bang and only to end with non-start fizzle. Mississippi and Tennessee had their share of those.

In virtually all these projects, there was a degree of confidence that these projects would happen, which is why they were announced (or leaked to the press) in the first place. But in many cases, the professional economic developers knew the announcements to be premature.

Politicians Do What They Do

But anxious elected officials all too often want to pull that cake out of the oven before it is done. They love to take to a stage to announce projects, especially when significant job creation is involved. For many politicians, project announcements represent their own job security, a reason for the voters to keep them in office.

In short, they hope to take credit, because that is who they are. It’s part of their DNA. More often than not, when these announcements do take place, the economic developers who worked the project, stand off to the side and politely clap. It comes with the territory.

Egg Splattered Faces

Our mentioned examples are not intended to embarrass, merely point out. Again, there is plenty of scorched earth all over this land due to announced projects that went sour. Most of us have had egg on our face at one time or the other. I know I have.

A certain Canadian Tier Two automotive supplier prominently comes to mind. While their manufacturing operations did come to fruition, they did not last long, less than a year. That’s not because of any failings of the community, but rather because of gross mismanagement on the part of the company, which was eventually dissolved. Still, I feel partly to blame.

In the world of mice and men, stuff happens.

An Indictment in Alabama

But usually criminal charges do not result from such botched affairs. That is a rarity. However, it happened this past week in Alabama, where a grand jury indicted the CEO of the Canadian firm National Steel Car on securities fraud charges involving a project that never came to be.

Now I cannot recall of a single case of criminal charges being filed because a company did not do what it said it was going to do stemming from an industrial recruitment project. If my readers know of anything approaching this in similarity, please let me know. But first read on.

The 10-count indictment accuses National Steel Car CEO Gregory James Aziz and his brother, Warren, of lying about the cost to build a railcar manufacturing facility in Colbert County, knowing full well that the true cost would far exceed the $350 million loan that Retirement Systems of Alabama provided for construction.

A revised agreement was worked out in which RSA agreed to up the loan amount to $625 million to complete the plant in northwest Alabama. At some point in 2009, RSA must have figured that it was being played, because it ended its relationship with National Steel Car and began steps to take over the incomplete building.

The 2.2-million-square-foot facility in the Barton Riverfront Industrial Park, 12 miles west of Tuscumbia, was eventually built, but the announced 1,800 jobs never happened. Subsequently, the Alabama Securities Commission investigated and a grand jury indictment in Colbert County resulted earlier this month.

The indictment says that Aziz, who is now free on a $1 million bond, “repeatedly falsely represented to the governor of Alabama that the project was on time and on budget.”  I found a photograph online of then Gov. Bob Riley standing onstage with Aziz during the initial announcement back in 2007. Both men were smiling as if they were lottery winners.

In 2011, Navistar leased the facility from RSA, and FreightCar America has leased a quarter of the plant and began producing coal railcars in July with a workforce of about 70. FreightCar says it may hire up to 500 employees as production ramps up in the next few years, according to press reports.

The Nuclear Option

Now I have a lot of friends in Alabama, a place that I will always view as a second home. I spent more than 20 years there in my professional life, first as a journalist and later as an economic developer and then consultant. (A downward spiral if I have ever seen one.)

One of my friends, an economic developer who I greatly respect, suggested that this National Steel Car story was not a “simple matter of an economic development project gone sour. This is an indictment of securities fraud, and I think it’s probably a lot more complicated than a company not living up to its commitments.”

My friend is absolutely right that this is more than a project gone wrong. It’s now a criminal matter, because somebody in Alabama officialdom chose to make it so. Why this particular case is thought to go beyond the pale of civil litigation, I do not know. But it happens at a time when JP Morgan Chase this past week paid a record $13 billion settlement to settle federal and state civil claims by various entities related to the mortgage securities.

But for whatever reason or reasons, Alabama went for the nuclear option with National Steel Car by going the criminal route, which I find more than a little noteworthy. Apparently, they want more than just money from Aziz. No, they must want him to face jail time. Vengeance is mine, sayeth the RSA.

Keep in mind that RSA is one of the 20 largest pension funds in the world, managing assets worth more than $32 billion, including the Robert Trent Jones Golf Trail in Alabama. David Bronner, the CEO of RSA, is a very smart and shrewd investor, and he has a more than capable staff. He is also a bit of a warlord in Montgomery, and I get the impression that he has probably told more than one governor to go take a hike.

The fact that RSA got burned with National Steel Car surprises me, as I would have thought they would have found some tale-tell signs that this investment strategy was not a good deal worth entering. They must have eventually come to that conclusion back in 2009, but by then they were hip deep in it.

In business as in life, risk is always something to be weighed. And even RSA and JP Morgan Chase are capable messing up, although they hate to admit it as stakeholders can be an irksome bunch. But I go back to the mice and men analogy — sometimes things just don’t play out the way the way they were supposed to. And that holds true even for the big money boys, who play with others people’s money.

An Unintentional Message?

Most savvy business leaders know how plans can and do unravel, and are hesitant to point all the blame at others when they too may share a good part of it. Of course, when they do blame others, they usually do so in the form of civil lawsuits, seeking compensatory and punitive monetary damages.

Criminal cases assign blame in a most extreme fashion, as those charged can face prison time. While I do believe those adjudicated guilty should pay, and that bad apples should be rooted out, I cannot help but wonder if this nuclear option is a message that Alabama wants to send out to the corporate world. I’m just saying.

Of course, I’m still trying to figure out why no Wall Street investment bankers, practicing dubious methods that resulted in the loss of trillions of dollars and brought the economy to its knees, ever faced criminal charges. The ramifications of their fraudulent practices are still with us and yet nary a one of them has faced jail time.

Go figure.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, but only if expressed permission has been granted.

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  1. Dean: I’ve been in economic development for 30 years, and every time I have worked on a early stage, high job number project, I have the nagging feeling that no matter how much due diligence we do, the balance between the “get the deal” and “get the deal right” is a fine line. The Alabama case should concern us not just because of the criminal charges, but because as EDPros, we are accustomed to saying “Well if (fill in the blank name of big bank or big investor) is investing, it must be an OK project. Thanks.

  2. Dean,
    I know anyone who has been in the business for any amount of time has more than a couple interesting stories. The experienced, smart professionals try to mitigate the risks to the community and to their own credibility, but there is only so much that the ED pro has actual control over. Most are pretty adapt at weeding out the flaky prospects and projects up front. There are still enough stories to fill a book, and I’ve thought about writing one some time, if and when I have any semblance of spare time .
    One of my favorites was from my days in Pensacola. A gentleman came in the office and was looking for a site or building for a national distribution/3PL project. The firm name sounded vaguely familiar (it turned our to be a name similar but a slightly variation of a national firm). We met later that day at a local industrial park, met the administrative assistant at the park office, and looked at a couple options. After he left, I went back into the office and the perceptive lady (and I mention this because most men would not have this specific take on the prospect) said “he drives a Cadillac, has a fancy belt buckle, but he is wearing a shirt from K-Mart. He doesn’t have any money, so don’t waste your time”. An interesting way to screen prospects (and no offense to anyone who buys their shirts from K-Mart.).
    As the “project” wore on, the man came into my office one day with his building plans, or at least a copy of one he said he had done for a similar project in AZ. One skill every good economic developer should acquire is the ability to read upside down. While he was showing me the plans across the desk, I noted the engineering firm and where they were located. After my prospect left, I called the engineer who signed the plans. He asked if I had met the gentleman recently, and when I replied that he was just in the office, he informed me that he still owed him his fee for the plans and he’d like his contact information.
    The best part was a subsequent visit to my office from a private investigator. It seems that some family members had hired the investigator to look into the background of the “prospect” as he was getting pretty tight with their mother, who had a nice place on Perdido Key. They were a little suspect of his motives.I had already written this one off, and fortunately didn’t really spend much time on it other than a couple meetings, but the memory of this one has stuck with me over the years.
    That is the short version, but as you know, some of this stuff we just can’t make up.
    Frank

  3. Dean:

    The real culprit in the mortgage market collapse was Congress. This article, written 14 years ago by a NY Times reporter, marks the beginning of the rise and fall: http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

    Yes, bankers used the mechanism to make money off of the mortgages the government facilitated, but they had nothing to do with the easing of the credit standards. Would an originator say “No” to an applicant the government said was qualified, especially under CRA pressure? Yes, there was some originator fraud, just like there is now, but the primary problem was FNMA and GNMA, driven by a Congress who believed themselves smarter than the market.

    The most egregious example of questionable ethics I heard about Wall Street was the traders betting against the insured bonds they sold by short-selling insurance company stock, understanding their would be a high default rate in the underlying securities and resulting profit hits to the insurance companies. But, they were simply packaging and selling risk generated by Uncle Sam.

    Bottom line: Keep the U.S. Government out of setting risk standards for mortgage industry; but that is exactly what the new Consumer Financial Protection Board is doing.

    Gregg Motley
    Executive Vice President and
    Chief Lending Officer
    American Bank of Baxter Springs
    Work: 620-856-2301

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