One man’s roadmap for Rhode Island’s prosperity

Editor’s Note: This piece is adapted from the keynote speech that FM Global Chairman and Chief Executive Officer Shivan S. Subramaniam gave to the attendees of Providence Business News’ Business Excellence Awards celebration Nov. 19, 2009.

Congratulations to this evening’s honorees, and hello to fellow members of the business community.
Tonight, I would like to offer some thoughts on how we might begin to transform our state into a model of economic success.
There has been much said about how Rhode Island is struggling economically through massive budget deficits and high unemployment.
In this vein, four facts bear repeating:
First, Rhode Island’s unemployment rate is currently one of the highest in the country and is expected to top 14 percent sometime in the 3rd quarter of 2010.
Second, Rhode Island’s share of total jobs in the United States has fallen 22 percent since 1980.
Third, remarkably, or sadly, Rhode Island is the only state in New England to actually lose population during the five-year period between 2003 and 2008. (Rhode Island lost 2 percent of our population.)
Fourth, Rhode Island’s combined income, property and sales taxes are among the highest in the country.
So, even if the current economic situation did not exist, Rhode Island would be in a similar position, just not as severe.
• How do we fix this wonderful place we call home?
• How do we create new jobs and opportunities for the people who live here?
• How do we maintain the quality and scope of services we receive?
• Most importantly, how do we keep our young people and wealthier retirees from fleeing the state?
• Or, to put it even more directly, how do we successfully compete in the global economy?
Compete in this case means more than just selling our products and services. It includes our success in keeping our brightest here in Rhode Island and sustaining the social and cultural environment that makes Rhode Island so unique.
Clearly, the challenge in front of us is daunting and very complicated. If it were easy, we would have accomplished success a long time ago.

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•

Most of us tend to view our economic problems in one of two ways:
• One group thinks that the services we provide, and the cost associated with those services, have outstripped our abilities to fund them and that drastic action is needed.
• The other group believes we have a revenue problem.
Both points of view are right, and our success will come from addressing both sides of the financial equation.
First, I would like to talk about the cost of services provided by the state and local municipalities. Secondly, I’ll discuss the revenue needed to pay for the services.
In order to address the cost of the services we provide, we must examine both the need for the services and the quality of the outcome of those services. At FM Global, as one of the world’s largest business-property insurers, we are in the knowledge and service business. Among other things, our company conducts scientific research that helps our customers understand and protect their business operations from property-related risks. We deliver that knowledge as a service across the world.
FM Global’s success comes from always comparing the cost of our services and the outcomes against our competition. Our company is always benchmarking itself against our competitors to improve our product and services, especially from the customer’s perspective.
Rhode Island must do the same with the services it provides at the state and local level.
Let’s look at a few examples:
State and municipal spending in Rhode Island is approximately $5 billion. Of that, approximately $1 billion is for Medicaid. Rhode Island spends more per capita on Medicaid than all the other New England states, as well as more than the U.S. average.
Massachusetts is delivering the same care and services at a significantly lower cost per Medicaid enrollee. If Rhode Island matched Massachusetts, our state could save $75 million. And, if we matched the U.S. average, Rhode Island could save $200 million. All of this can be accomplished without changing the number of enrollees in Medicaid.
Let’s look at another benchmarking example:
Of the approximately $5 billion that Rhode Island government spends annually, approximately $1.8 billion goes to support public elementary and secondary education.
On a per capita basis when it comes to education dollars spent, Rhode Island ranks third highest in New England and eighth highest in the country. However, the outcome of Rhode Island’s spending is not consistent with the amount the state is spending.
For example, a comparison of 8th grade math scores shows that Rhode Island ranks 38th in the country, while Massachusetts places first, Vermont third and New Hampshire sixth. Clearly, for that kind of cost, the outcome is unsatisfactory.
We can continue to look at the $5 billion Rhode Island spends on services, of which $1 billion, or 20 percent, goes to Medicaid, $1.8 billion, or 36 percent, is for elementary and secondary education. The balance of $2.3 billion is spent on police, fire, public works, other municipal services and the cost of state operations. That is, Rhode Island spends $2.3 billion for services that are not related to health care, entitlements or education.
These are all services that can be benchmarked across the country and against New England.
For example, Rhode Island has the 8th-highest per capita spending on public safety, while Massachusetts and Connecticut rank 17th and 21st, respectively. The key question we have to ask for a small state like ours is, as a customer of these services, do we really care who controls the delivery of the service? As long as we are satisfied with the quality and cost of the services, do we care if it is provided by the state or by a local municipality? Rhode Island can achieve economies of scale if it moves toward consolidating and sharing these services across the state. I suspect that if Rhode Island did that, it could save at least 5 percent, or $100 million, a year without compromising the quality of those services.

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Now let’s move on to the revenue side of the financial equation. Revenue growth will come from economic development and job growth, which likely will come about as a result of short- and long-term actions that can be taken. But, they all require investments today for some future benefit.
In the short term, Rhode Island must preserve its existing employers and employees.
To use a business analogy, it’s always better to preserve and grow an existing employer rather than looking to replace it with a new employer.
Small and medium-sized employers comprise a very large part of Rhode Island’s economy. They are the entrepreneurs and the engine behind our employee base.
But these companies do not have large administrative staffs to deal with many rules and regulations, nor any prospects in these difficult economic times to add people to deal with them. In the short term, therefore, we must make a concerted effort to aid those businesses by streamlining and coordinating regulatory processes.
Secondly, the current weak dollar provides an opportunity for Rhode Island’s manufacturing base to be more competitive outside of the United States.
Rhode Island products should be almost 10 to 20 percent cheaper today in Europe, Canada and Australia. Our state must coordinate intellectual capital to help small businesses identify export opportunities, access funding facilities like the export-import bank, and manage the regulatory processes. Rhode Island should not give up on the manufacturing sector of the economy.
Lastly, the airport plays a very important role in helping businesses sell their products and services outside the state. I can assure you that T.F. Green Airport is among the easiest airports in the world to use – and it has seen remarkable success in the last 15 years.
T.F. Green must be able to offer access to the places where businesspeople want to go … and not just to Florida.
It is imperative that Rhode Island stop debating about expanding the runways at T.F. Green and just does it, so that both the airport and our state’s economy can grow.
From a longer-term point of view, many say that the future of Rhode Island must be built on knowledge-based business.
But building a knowledge-based economy is a long-term project that is not going to help solve our state’s immediate unemployment issues.
For instance, Rhode Island does not have a knowledge-based work force. Many people seeking jobs today would not be qualified to fill higher-end, knowledge-based positions – even if such jobs were available today. At FM Global we have experienced just that and have had to recruit from out of state to fill many openings. I suspect there are other employers with similar experiences.
But if we all agree that the future of Rhode Island is knowledge-based, then why every year do the University of Rhode Island, Rhode Island College and the Community College of Rhode Island get a smaller piece of the state’s budget pie?
Rhode Island’s investment in higher education is significantly lower than New England on a per capita basis. In fact, Rhode Island ranks 47th in the country. Thank God we only have 50 states.
Rhode Island must invest in higher education and encourage public/private partnerships with state schools in order to create the skilled work force a knowledge-based economy demands. To do so will allow us to keep our young people from leaving for better opportunities.

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One of the most valuable and cherished assets of our state is our shoreline and its position on the East Coast.
There are many examples of other states that have developed their shorelines for economic growth, without jeopardizing the beauty of their coastlines.
Rhode Island has a long and successful heritage in the maritime industries, yet we have chosen to ignore it.
Rhode Island must develop a systematic plan to leverage our coastal assets. Oceanography, shipbuilding, ship repair, water-based transportation and fishing are all activities Rhode Island should be embracing.

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So overall, to stimulate business growth in Rhode Island we must remember there are four key variables:
• Tax structure.
• Education system.
• The cost of doing business.
• The skill set of the people who live in the state.
Rhode Island has so many reasons why people want to live here – from the rich cultural heritage and natural beauty of our Ocean State to the friendly people and access to world-class medical and educational institutions.
It is thus very important that we get the balance of those four variables just right.
We know things must be different here in Rhode Island.
To be successful – the business community must join with government, labor and special-interest groups to find that path to prosperity.
We must work together, and that will not be easy. It will require hard work and a commitment to change.
Business excellence, such as that which is being recognized tonight, comes from hard work, strategic thinking and the desire to embrace innovation. You know that because that’s why you are here and why many of you are being honored.
Many of you in this room tonight have proven you can effect positive change. Let’s now focus those abilities on our state.
Thank you and good night. •