Government Funded Recycling Business Wasted Millions
Saturday, October 29, 2011
The South Providence recycling company that defaulted on a $410,000 city loan received millions in city, state and federal funds, including grants, loans and even municipal bond money over the course of a decade before going into receivership early this year, GoLocalProv has learned.
In addition to receiving at least $710,000 in city and state loan money, CleanScape, which later became Ecotope Environmental Services, received $1 million in startup funds from the federal government, according to a report at the time. The company, a for-profit initiative that was run by the South Providence Development Corporation and the Urban League (two non-profits) and was chaired by former State Representative Joseph Newsome, also received Recovery Act money just a year before going out of business.
The company didn’t just blow through funds either. Shortly before going into receivership, the state terminated a lucrative $200,000-plus per year contract after it stopped picking up recyclables at various public offices across the state. CleanScape also made errors in a major contract with the Navy, which ultimately led to the company losing the contract, forcing it to lay off workers as a result.
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Which raises the question: What role should the government play when it comes to investing in startups? On one hand, there are plenty of businesses that would never get off the ground without help of some kind. In Providence, that’s the point of the Providence Economic Development Corporation (PEDP). Those applying for a loan must prove they were turned away by at least two banks before receiving any funds, making the PEDP a last-resort lender.
But with little oversight and a lack of follow through after an investment is made or a grant is awarded, taxpayers are often the ones left on the hook when a good idea ends up collapsing financially. That was the case with CleanScape, which received a lot of local press when it launched in addition to millions in investments.
Still, Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island, said the state needs to provide assistance to small businesses. In a state that receives low marks when it comes to business friendliness, that assistance is at least one way of attracting new companies.
“From an economic perspective, Rhode Island must promote and support new ventures and existing businesses and provide assistance to help these businesses grow,” Mazze said. “These will be the businesses that create the jobs that are needed to lower the state's 10%+ unemployment rate. Some state assistance comes in making it easier for these businesses to operate by creating a more friendly business environment. Another type of assistance is financing. New ventures and small businesses find it almost impossible to get start-up or expansion funds from banks. Therefore, the state needs to provide carefully managed financing programs to these businesses that include tax credits, loans and grants.”
More Oversight
But that doesn’t mean the companies should be allowed to operate without any oversight, according to Providence City Councilman David Salvatore. Following GoLocalProv’s reports about how 25 percent of PEDP loans were at least 90 days past due (including CleanScape’s) and how in some cases, the group simply converts loans into grants, Salvatore called for the public to have more input in the process.
“Whether the PEDP is making grants or loans, Providence taxpayers have an interest in knowing what the agency is doing and making sure the businesses receiving financial assistance are going to generate jobs and contribute to the quality of life in our city,” said Salvatore. “The best way to make that happen is to be sure that all the decisions related to the PEDP funds are being made in the light of day, with the opportunity for public input along the way.”
Salvatore said he understands the need for the PEDP as a way of helping small businesses, but he also wants to make sure taxpayer money is used effectively and responsibly.
City or State Should Investigate
That wasn’t the case with CleanScape, according to city activist Anthony Sionni. A former employee of the company, Sionni claims the writing was on the wall regarding the finances of the company, even as it continued to announce new grant money that was supposed to create jobs.
With the Navy, CleanScape was awarded a multi-million dollar contract, but another competing company filed a protest, arguing that the contract was supposed to go to small businesses and because CleanScape was overseen by the Urban League, it shouldn’t have qualified. The Contracting Officer of the Navy sent the company paper work that it was supposed to respond to within three days, but CleanScape never followed through. Ultimately, the contract was awarded to the other company and jobs were lost.
Sionni said he would like to see the city or the state investigate the situation further, rather than just letting the business disappear when the receivership process ends.
“I think there should be an investigation into this,” Sionni said. I call upon the elected officials from the city and state to do a complete investigation as to where all this money went. We are talking about millions that this company got. What did they do with all this money? The company was so broke [that] they even told the Teamsters over and over there was no money. Yet they never cut the presidents pay or operation manager’s pay.”
Always a Risk
But Mazze maintains that while government investments can be risky, they’re important for recruiting new business to the state. He said sometimes that is going to mean that a business will fail.
“There is always a risk in financing businesses whether it be by the state or any financial institution,” he said. “Businesses fail for many reasons including lack of management experience, over-estimating the size of the market for their products and services and poor cash management.”
Mazze said the key for the government is making the correct investment.
“Even with the risks, it is still important for the state to do the diligence necessary to minimize risks which includes reviewing market feasibility studies, industry materials, company financial data, intellectual property owned by company and competitive information,” he said.
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