EDC role, leadership in doubt

BOARDING PASS: Gov. Chafee took office in 2011 saying he wanted his people in place on the R.I. Economic Development Corporation board. Since the 38 Studios collapse, he has questioned the agency’s continued independence. / PBN FILE PHOTO/RUPERT WHITELEY
BOARDING PASS: Gov. Chafee took office in 2011 saying he wanted his people in place on the R.I. Economic Development Corporation board. Since the 38 Studios collapse, he has questioned the agency’s continued independence. / PBN FILE PHOTO/RUPERT WHITELEY

When the R.I. Economic Development Corporation finally emerges from the turmoil surrounding its $75 million loan guarantee to Curt Schilling’s 38 Studios LLC, the quasi-state agency in charge of growing business activity in the state may be unrecognizable.
Already, the EDC’s executive director has resigned in the wake of 38 Studios’ collapse and by late last week six of the 13 members of the board of directors had either stepped down or not been reappointed. On May 31, Gov. Lincoln D. Chafee nominated three people to serve on the board: Marcia Blount, president of Warren’s Blount Boats Inc.; Dr. Pablo Rodriguez, former medical director of Planned Parenthood of Rhode Island; and Alison Vareika, co-owner of William Vareika Fine Arts in Newport. She is the mother of Chafee’s deputy communications director, Christian Vareika.
And the changes may go well beyond leadership.
In discussions about what went wrong at 38 Studios and with the state’s oversight role, Chafee has questioned the independence of the EDC and said he would like to see the agency “more closely aligned with the governor.”
Chafee’s comments came after his hand-picked vice chairwoman, Helena Foulkes, resigned, citing differences with the governor about the future direction of the agency.
Whether Chafee intends to create a new state agency under the governor’s office that would handle some or all of the EDC’s functions, as is the case in many states, including Massachusetts and Connecticut, he has not said.
But many Rhode Island leaders have noted that it was a former governor, Donald L. Carcieri, and not the EDC, who became intoxicated by Schilling and the idea of bringing his video game company to Rhode Island.
“We do see that central irony,” said Greater Providence Chamber of Commerce President Laurie White about Chafee looking to reduce the independence of a board that could have stopped the deal from going through if it had been a little more independent. “I don’t know if it is really a matter of independence or of overlapping terms and the governor wanting to be able to appoint all his own people immediately.” Regardless of what changes are made to the EDC’s structure, White is concerned that the 38 Studios episode will scare away the best-qualified business leaders from serving on state boards in the future.
“It is going to be very difficult to get other private-sector leaders involved in public-sector activities after this experience,” White said. “What the board brings to the table is knowledge from the field, knowledge from outside the walls of government.”
If the EDC board is either eliminated or brought closer under the control of the governor, it will represent another in a long line of reforms and reorganizations for the agency since it was created as the Port Authority and Economic Development Corporation in 1974.
The EDC took its current semi-private form under then-Gov. Lincoln Almond in the 1990s with the idea that it could move faster, form closer ties to the private sector and efficiently issue bonds or facilitate financing for businesses.
Gary Sasse, who served as director of administration under Carcieri and is now director of the Institute for Public Policy at Bryant University, said in at least two areas – providing business financing and attracting new business to the state – the EDC’s independence is an asset.
“You need a quasi [state agency] to have the flexibility to assemble financial packages that meet business’ needs,” Sasse said. “And the states that have been most successful attracting business have been states that worked closely with the business sector and in public-private partnerships.”
But Sasse said in other areas where the EDC now plays a role, such as community development, regulatory reform and setting policy goals, a good case can be made that an agency within the government itself is best positioned to make those calls. The Mass. Executive Office of Housing and Economic Development coordinates that state’s economic-development policy, but leaves much of the financing and assistance work to a multitude of different quasi-state agencies.
Sasse said creating a new office within the administration to handle economic policy could be the way to go if it helps the state develop a coherent development strategy, instead of the scattershot approach Rhode Island is known for and was evident in 38 Studios.
“Certainly we have to do something, because the model we are using is 20 years out of date,” Sasse said. “The reason we are in this situation is we have not had an economic-development strategy in this state. When Chafee came into office, it would have been good to establish what this strategy was. They can reorganize all they want, but you have to establish a strategy with clear, accountable goals.”
The last high-level examination of the EDC’s operations took place in 2009 when a panel led by Hasbro Inc. Chairman Alfred J. Verrecchia likened the agency to a “basket of frogs” moving without coordination or clear direction.
Not long after the critical report was released, Carcieri made Verrecchia his EDC board vice chairman and a reorganization led by former Executive Director Keith Stokes took place around the same time the 38 Studios deal was being put together.
When Chafee took office at the start of 2011, Verrecchia resigned when the new governor indicated he wanted his own people in place.
Reached by phone, Verrecchia said he wished he could take the 38 Studios deal back, but made it clear that the EDC board had simply been following a policy decision set by Carcieri and endorsed by the legislature.
“We first wanted to know why allocate $75 million to any one company, before we knew it was 38 Studios – then we learned the fund was really $50 million for everything else and $75 million for 38 Studios,” Verrecchia said. “It was all things we wanted, high-paying jobs in Rhode Island, and most members understood the risk. The video game business is a tough business, but it was a risk the governor, legislature and board were willing to take.” Verrecchia said he had been disappointed that third-party monitoring established in the deal had not involved a firm with direct video game knowledge. He said he was surprised to hear Stokes waived a requirement to have reports from third-party monitor IBM delivered in writing.
In the wake of 38 Studios’ implosion, Sen. James Sheehan, D-Narragansett, co-chair of the Joint Committee on Economic Development, has pushed for more oversight of the EDC.
Sheehan has filed a bill that would give a new office of management and budget audit power over both the EDC and any company it finances.
Sheehan said it will likely remain difficult for the General Assembly to keep close tabs on all the things going on in the state’s economic-development portfolio, making it more important to set parameters for future deals.
“I think more than bringing the EDC in-house, the question should be what is the purpose, how should we do economic development?” Sheehan said. “Should we be guaranteeing loans and do we have the expertise? My experience is that we don’t have that level of experience or expertise, unless we are working in a joint initiative with private investors.”
Saul Kaplan, founder of the Business Innovation Factory and a former EDC executive director, said he would have fought the 38 Studios deal’s size and risk if he had been in charge, but worries that the fallout will hamper the rest of the state’s bets on innovation.
“38 Studios should be a wakeup call that we need to transform our economy and play less defense and more offense on encouraging entrepreneurship,” Kaplan said. “But 38 Studios could also be a huge distraction and that would be a shame.” •

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