Activity of EDC in decline

Rhode Island’s economic-development arm has yet to find a cure for its 38 Studios LLC hangover.
In the 10 months since Curt Schilling’s video game company ran out of money, the R.I. Economic Development Corporation has seen its activity-level drop across nearly all key programs compared with the previous 10 months.
Nowhere has the slowdown been more apparent than the state’s public-financing programs for Rhode Island businesses.
Since May 2012, the EDC has approved $1.4 million in loans, loan guarantees or grants to nonstate entities, according to a review of agency meeting minutes. The majority of that was a $1 million loan guarantee for Enow Inc., a startup, now in Warwick, that makes solar-energy systems for trucks.
But in the 10 months prior to last May, the EDC approved $12.5 million in loans, loan guarantees or grants – $20.5 million if you count $8 million in federal pass-through financing for the Greater Providence YMCA.
Either way, the quasi-state agency is experiencing an 80-90 percent decline in the amount of resources it puts to work to create jobs.
Combined with the slowdown at the EDC-affiliated Small Business Loan Fund, plus the suspension of Providence Economic Development Partnership financing last year, it means a significant amount of capital that could be flowing into businesses and the economy is tied up.
There are likely several reasons behind the slowdown at the EDC, starting with the direct upheaval that consumed the agency between May and July of last year, resulting in the effective ouster of five board members (with three more trying to leave) and the executive director.
Then there is the public-perception problem that the Small Business Loan Fund blamed for slowing its financing pipeline. In some cases businesses that would have applied for loans, or contacts who would normally refer eligible candidates, thought the agency had shut down, EDC director of financial-programs Sean Esten has said.
In other cases, businesses were wary of doing business with the state after it sued those involved in the 38 Studios deal, including advisers and financial services firms that helped facilitate the transaction. Another issue is the overhaul of one of the agency’s financial programs, the Renewable Energy Fund. Its director left to start a consultancy last year, and the fund has been completely reworked over the winter.
Funded by charges on electric bills and through payments by utilities, the Renewable Energy Fund used to focus much of its resources on municipal projects but is moving toward commercial and residential efforts. Aside from the $1 million guarantee for Enow, the other two EDC financial deals approved in the past 10 months were Renewable Energy Fund grants totaling $384,000 for the city of Providence and Solar Canopy.
Gov. Lincoln D. Chafee, ex-officio chairman of the EDC board of directors, has made no secret of his distaste of special deals for businesses, before and especially after the $75 million loan guarantee to 38 Studios.
After the video game company collapsed, Chafee had the EDC’s underwriting standards tightened, although the details of the changes have not been discussed publicly.
Asked this month whether he was at all concerned about the precipitous drop in activity at the EDC – even compared with a period of time under his administration – Chafee said it was quite the opposite.
“I am proud of that,” Chafee said about the EDC’s retrenchment, “and I put it in context of $100 million [in 38 Studios debt], the worst decision, colossally the worst decision, in the history of Rhode Island. I have taken a more conservative approach. I campaigned on it.”
Chafee said he still believes narrower state participation in job growth can be helpful in certain circumstances.
“We are going to be very conservative with Rhode Island taxpayer dollars,” Chafee said. “We will make good investments for the future. There is a time [for it] – Fidelity, you might point to.”
Pulling back the reins on public investments has undoubtedly reduced the risk to taxpayers, but it raises questions for those working and volunteering at the EDC about their mission.
“We have noticed [the slowdown], and I brought that up and asked, ‘Is there a general economic slowdown or is it that we don’t have the products people are looking for?’ ” said Vibco Vibrators President Karl Wadensten, who sits on the EDC board of directors. “The response I get is that we are in a period of transition, leadership has moved around, and we are trying to figure out who is going to be the value-stream manager for that; who is going to know the ins and outs of the programs, who qualifies, how much money is available and what does the quintessential customer look like for this,” he said.
In addition to the executive director, board members and Renewable Energy Fund director, the EDC also has seen the departure of its top communications officer, legal counsel and long-time finance director.
Aside from the leadership issues at the EDC, Wadensten said the agency’s business-financing programs likely also “need tweaking” to make them useful to companies in the current economy.
Banneker Industries President Cheryl Watkins Snead, who has led the Access to Capital subcommittee focused on improving the financing programs, announced last month she would like to leave the board as soon as a replacement can be found.
The Small Business Loan Fund had accumulated a $3.5 million balance of available capital because of the slowdown in applications since 38 Studios.
Capital also has built up in the generally administered EDC financing programs, but the agency was unable to provide specific figures to Providence Business News.
The slimming of Rhode Island’s public-investment portfolio comes as states across the country and New England pump more money into business attraction, growth financing and incentive programs.
University of Rhode Island economist Leonard Lardaro said in the context of the wider economy, the amount Rhode Island has spent to boost business growth, even in the pre-38 Studios era, barely moves the needle.
“It is a part of our economy, but a fairly small part,” Lardaro said about state investment. “They are helpful, but I doubt they have a huge general impact.”
As for whether reducing the potency of the EDC is complicating efforts to find new paid and volunteer leadership at the agency, Chafee said the longer legacy of 38 Studios, including high leadership turnover and expense account scandals, played a bigger part.
“It has been a bad history,” Chafee said. •

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