A new state audit is re-aggravating a seasickness that has been plaguing Pennsylvanians since the launch of the deal to bring a Norwegian shipbuilding company to the former Philadelphia Naval Shipyard. The audit, conducted by Pennsylvania Auditor General Robert Casey Jr., and accompanying media attention have been helpful in bringing the spending on BMWs, houses and other personal perks for private sector executives to light. But what is being overlooked is the more significant question of the effectiveness of such “economic development” projects as a whole.
That the nearly half-billion dollar taxpayer investment in the shipyard deal has resulted in little, if any, economic gain to date should come as no surprise. In fact, many Pennsylvanians saw a storm on the horizon before the deal was even inked, and others suggested the state should have jumped ship in late 1998 when the project was three months behind schedule and facing $80 million construction cost overruns.
But these cries of “abandon ship” fell on deaf ears, and the state decided to stay the course. In fact, it compounded the problem by giving Kvaerner $62 million more on top of the original $429 million in public funds. Even with the added cash, Pennsylvanians could be forced to plug more holes caused by weak language in the agreement and vague promises of government officials. The Casey audit found that though the original promise was for 750 jobs, only 200 have materialized, which the Auditor General’s math calculates to have cost over $1 million each.
The key fact is not simply that tax dollars have been diverted to questionable use, but, as a general proposition, turning taxpayers into venture capitalists is not a good idea. Pennsylvania still ranks seventh among the states in per capita economic development expenditures while ranking 46th in job growth. Based on data from all the states, economic research conducted by The Commonwealth Foundation and other organizations concludes that tax cuts are a far more effective means of spurring economic growth than sweetheart deals like Kvaerner.
Even a cursory review of the alleged economic benefits of such a project – as distinct from the political and public relations benefits – would have shown that the deal was about as seaworthy as a tin bathtub. And while Casey rightly questions whether “due diligence” was used in the background research of this project, he cast a vote as a member of the Delaware River Port Authority (DRPA) in favor of the deal. What was clearly known at the time of the initial vote is that shipbuilding has been a dying industry in the United States for decades and only 29 percent of the funding was to come from private sources, meaning that the rest of the costs (71 percent) were to be borne by taxpayers. Also, Kvaerner’s shipbuilding division has not been one of its top priorities; in fact, the company announced soon after the deal was signed that it is getting out of the business entirely. So, as valuable as the audit is today, these facts should have caused the DRPA board – including Casey – to vote against the deal when it was first proposed.
Three years later, the deal still hasn’t produced a ship. Moreover, Kvaerner is required to build only three ships in Philadelphia, and the first will not be launched until 2002 at the earliest. Plus, subsequent changes to the original agreement have made it even easier for Kvaerner to abandon its responsibilities without repaying the taxpayer grants. Apparently the government not only guessed wrong about the way to foster a thriving business environment, but it picked the wrong business to do it with.
If government officials are going to engage in venture capitalism at all, they first should do their homework and carefully negotiate and monitor deals that have little risk for taxpayers and at least some prospects of return. The recent audit shows that the Kvaerner deal fails in these respects, but it is only pointing out the shortcomings and missteps of a single – though admittedly large – project. The question remains whether tax dollars should be spent on these types of endeavors at all. Perhaps some day Pennsylvania government officials will find their sea legs, anchor economic development on sound policy and stop pulling taxpayers under with deals like the one struck with Kvaerner.
# # #
Robert Antanitis is a former research associate at the Commonwealth Foundation, an independent, non-profit, research and educational institute based in Harrisburg, Pa.