Is it Time to Blow Up the EDC?

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Wednesday, May 23, 2012

Dan McGowan, GoLocalProv News Editor

The highly scrutinized 38 Studios deal may have cost former Economic Development Corporation (EDC) executive director Keith Stokes his job, but several business experts, analysts and legislators say the agency now has the opportunity to the learn from its mistakes and reevaluate its approach for retaining and attracting businesses moving forward.

Stokes resigned last week amid concerns about the future of the video game company founded by former Red Sox pitcher Curt Schilling after the company defaulted on a $1.125 million payment due to the EDC. Stokes championed the efforts to secure the company a $75 million loan guarantee from the state nearly two years ago.

But those close to the EDC believe the state’s flawed approach to economic development is to blame for the agency’s risky decision. According to former EDC chief and founder of the Business Innovation Factory Saul Kaplan, Rhode Island has been “all over the place” with its ideas and has struggled to stick with one strategy for a prolonged period of time. Kaplan said turning around the state’s economy will not happen overnight.

“I know everyone wants a magic bullet, but I hate to break the news to everyone that it takes ten years of consistency to turn around an economy like ours,” Kaplan said. “We haven’t had that consistency and we haven’t been bold enough about what it’s going to take to move the economy forward.”

Innovation and Entrepreneurship

Kaplan said Rhode Island needs to focus on innovation and entrepreneurship, which he believes can come from both the startup economy and already successful businesses. He said the state should take advantage of its small-size by “connecting the dots” that already exist. He calls his vision the “innovation at scale” approach.

But a turnaround will take work. While some have called for the elimination of the EDC in recent days, Kaplan said the agency needs to serve as a catalyst for the state’s economic transformation.

“I’m pretty tired of this idea that we’re always the first in and last out of a recession,” Kaplan said. “The only way to change that is to create an economy that is more resilient to downturns.”

Bryant University economist Edinaldo Tebaldi agreed with Kaplan. He said the EDC needs to be revamped so that it gets out of the banking businesses and focuses more on promoting the state.

“[EDC] should focus on promoting the state's economic advantages, connecting entrepreneurs with potential investors, providing assistance to businesses including information about real estate, permitting, small business counseling, etc,” Tebaldi wrote in an e-mail to GoLocalProv. “EDC should also be the leading institution in Rhode Island conducting data analysis and economic assessment.”

Where’s the Accountability?

Still, others are more critical of the EDC, arguing that a situation like the one at 38 Studios only underscores the lack of transparency in an agency that has become too political. Rhode Island Tea Party President Susan Wynne said she would like to see the EDC board reshuffled and believes the public should have a say when it comes to large investments.

“[The current] corporate/government relationship fosters a destructive cronyism that the public detests and that contributes to these kinds of costly economic fiascos,” Wynne said.

Transparency is also a concern for State Senator James Sheehan, who is now calling for more oversight at the EDC. Sheehan has introduced legislation would allow a newly-created Office of Management and Budget to audit any quasi-public agency. He said his primary goal is to protect taxpayers, who could find themselves on the hook for over $100 million is Schilling’s company falters.

“I the state still wishes to provide loans, loan guarantees or grants to support the business community, loan and grants need to be better vetted, smaller in size, lower risk, and require substantive security or equity,” Sheehan said. “Moreover, the entire process from start to finish should be given greater scrutiny by the state. Otherwise, the EDC should focus its efforts on creating an overall better business environment with a less burdensome tax and regulatory environment.”

For Mike Stenhouse, CEO of the Rhode Island Center for Freedom and Prosperity, cronyism is the biggest problem at the EDC. This week, Stenhouse recommended that both the EDC and the General Assembly be defunded from putting taxpayer dollars at risk with private interests.

"If we hate special deals for specially-connected organizations this much, then we should demand that this type of taxpayer funded cronyism be immediately eliminated,” Stenhouse said. "Imagine how much less lobbying and influence-peddling would go on at the State House if there wasn't 50 million dollars of our money available to grab each year.”

Mazze: Never a Better Time to Remake EDC

But a running scared approach isn’t the answer either, according to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island. Mazze said Rhode Island has great opportunity to reevaluate its approach to creating jobs.

“This may be the time for the consolidation of economic development efforts in Rhode Island,” Mazze said. “The state should focus its efforts on a reorganized, more business friendly and better focused state Economic Development Corporation which recognizes and capitalizes on the state's sustainable competitive advantages rather than the ‘fads and dreams’ of the Corporation's senior management.”

Mazze said there has been a major disconnect between the government's approach in helping business and what businesses actually need. He said the state needs economic development programs that are transparent and an EDC that can evaluate and manage business opportunities that make sense.

“There has never been a better time to remake EDC or for government to get out of the way of business,” Mazze said.

Dan McGowan can be reached at dmcgowan@golocalprov.com.

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