John Swen, former director, RI Economic Development Corporation.
While the recent controversy surrounding the Rhode Island Economic Development Corp.’s use of state credit cards has prompted some to question the use of quasi-public agencies, their role in states’ economic development efforts seems firmly entrenched, national experts say. In fact, governments are experimenting with public-private partnerships more than ever, said John C. Anderson, president and chief executive officer of Enterprise Florida, a quasi-public agency that is charged with developing the state’s economy.
”There is, throughout this country, and in fact worldwide, a remarkable amount of experimentation taking place regarding the organization of economic development,” Anderson said. The reason for this, he said, is the, “growing recognition in many states and many regions that the traditional organizational model is simply not as effective as it needs to be, not as responsive to the real world.”
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By ‘traditional organizational model,’ Anderson was referring to agencies that are purely state-run. By contrast, quasi-state groups blend public-sector purpose with private sector speed and efficiency, and thus enable states to respond quickly to the needs of their business climates, Anderson and others say.
But that model has its critics. In light of John S. Swen’s resignation from his post as director of the EDC, following the revelation that he had used his state credit card for personal use, state Senate Majority Leader Paul S. Kelly, D-North Smithfield, has formed a seven-member Senate panel to investigate the state’s quasi-public agencies. Meanwhile, Gov. Lincoln Almond has formed a committee to conduct a national search for a new EDC director.
But when these agencies get themselves in trouble it is because states have not built the proper accountability measures into the agency, not because the public-private model is ineffective, said Belden Hull Daniels, president of Economic Innovation International, a Boston management consulting firm that helps states create quasi-public agencies. The company has worked in 13 foreign nations and in every New England state except Rhode Island.
”There has to be total transparency,” Daniels said. “If there isn’t it doesn’t matter, there will be some form of corruption – that’s the human condition.”
Daniels said he recommends that states take a number of measures to ensure that the agency, and its management team, is held accountable. For one, the organization must have clear performance goals. Next, the salaries of the top executives should be tied to the performance of the organization.
”The management has to be rewarded for success and penalized for failure,” Daniels said, adding that managers should receive bonuses if they reach their goals. Further, the agency must be audited. “If you can’t post audit and measure (performance), then you shouldn’t set it up in the first place,” he said.
Quasi-public organizations in Massachusetts and Connecticut provide examples of the kind of oversight Daniels recommends. Victor Budnick, president of Connecticut Innovations Inc., a quasi-public group that makes risk capital available to high tech start-ups, said an independent auditor conducts full accrual audits of his agency’s books. The state also conducts it own audit. Further, at least every two years the state sweeps through the organization and conducts a full review. Using independent auditors, the state checks to see if the agency is complying with state statutes. The state then issues a report with recommendations for how the operations can be improved, Budnick said.
Similarly, Michael P. Hogan, executive director of MassDevelopment, a Bay State quasi-public agency that works in a number of economic development arenas, said his agency is required to submit full reports of its activities to the state Legislature and to the Secretary of State. Independent and state auditors also review the books, he said.
Kelly, whose commission was set to begin work last week, has asked the state auditor to formally review the agency’s finances. Currently, an independent firm, Cayer Prescott Clune & Chatellier, reviews the corporation’s books annually, said spokesman John Martin. Copies of the audit are then forwarded to the state controller and to the state auditor. But the agency is not audited annually by the state, he said.
Martin added that the director’s pay is not tied to performance clauses. The board of directors does not formally review the director’s job performance, he said.
Keith W. Stokes, a member of the EDC’s board of directors and a member of the commission that is searching for a successor to Swen, said the committee will search for someone with outstanding leadership qualities, knowledge of state and local government, and business acumen. Asked if the director’s compensation will be tied to performance, he said, “That’s premature at this point; we can’t even begin to negotiate salary and benefits until we have a candidate.”
If the state does go that route, it must be careful in how it structures its incentives, warns Anderson, the Enterprise Florida president. He noted that since his managers’ pay is tied to their ability to meet certain goals, they have focused on short-term results at the expense of long-term gain – like a company that stops spending money on research and development. Enterprise is now looking to restructure its incentive programs to reward those who work to develop the state’s long-term economic interests, he said.
When they are run properly, quasi-state agencies are the ideal model for long-term economic development, those in the industry say. For example, the Bay State created the Massachusetts Technology Development Corp. to fill the “capital gap” that was forming between large and small companies. By leveraging public money, the corporation is able to provide early-stage capital to technology companies, said President John F. Hodgman.
The setup is designed to blend the best of the public and private worlds. For example, while the corporation self-supporting, it is also free from state or federal taxes. And that kind of freedom is important, Hodgman said, because it allows the corporation to afford to stay in the early-stage market.
The practices of quasi-state agencies also differ from purely state departments or purely private companies in more subtle ways. For example, Hogan, MassDevelopment’s director, noted that his employees are not part of the state pension, which has a 10-year vesting period. Instead, the organization offers a 401(k) plan. This allows it to compete for private sector workers who are looking to gain public-sector experience and then return to the private sector, he said.
”Our structure is not like a traditional civil service,” Hogan said. “Eighty percent of our staff come from (a) private sector background.”
Another difference is that foundations often prefer to make grants to quasi-public agencies, experts say. The reason, they say, is that public-private partnerships are freer from political influence than public departments.
”With a state agency, (the Legislature) can come in and dictate pretty much what will happen,” said Janice Tatarka, chief of staff of the Massachusetts Department of Labor and Workforce Development, which oversees the state’s various quasi-public agencies. “There’s less ability to do that with a quasi-public.”
Because of that flexibility, states will continue to use these partnerships to foster economic development, said Daniels, of Economic Innovation International.
”I think it’s a movement that has a lot of momentum, and is going to continue to be a very significant part of the economic landscape in the 21st Century,” he said.
