2/7/14, "Another one bites the dust," Kelley Williams, Bigger Pie Forum
"Startup failures"
"Kior, a state funded green energy project, recently announced the shutdown of its Columbus Mississippi plant. It was supposed to produce gasoline and diesel from pine trees. This is the sixth state funded technology start up that has failed.
Others include Twin Creeks (solar
equipment), Stion (solar panels), View/Soladigm (smart windows), Silicor
Materials/Calisolar (silicon), and Virdia/HCL Cleantech (biofuels).
These startups received hundreds of millions in loans and other
inducements from the state paid for by taxes on existing businesses,
their employees, and others - who probably could have spent their money
better. Hard to see how they could have done worse.
These failures are costly and
embarrassing. But they are dwarfed by the unfolding disaster at
Mississippi Power's Kemper County Lignite Plant startup. This update on
Kior is a warning of Kemper's looming nightmare and a wakeup call for
southeast Mississippi and Mississippi Power's customers.
Kior shutdown
Kior put a hopeful face on the shutdown announcement. You know: not to worry because the shutdown is just temporary while we raise money to fix what doesn't work. Kind of like the smiley face it put on the $31.3 million loss first quarter 2013 that I wrote about last May. The CEO said then: not to worry because we are making progress and expect things to get better.
However, things got worse, not better.
Losses increased and totaled $261 million at the end of Q3 2013 - more
than the cost of the plant. That's a lot of money for most people. But
it's chump change for Kior's creator, billionaire Silicon Valley venture
capitalist Vinod Khosla. He has bankrolled Kior with help from other
billionaires including Microsoft founder Bill Gates. And he may continue
to do so indefinitely.
So while bankruptcy is probably
inevitable, the timing is uncertain. Who knows when he will pull the
life support plug? He may be hoping for a federal bailout payoff from
Kior's lobbying expenses which have steadily increased along with its
losses. Or he may have a state bond bill in mind like Kemper's to force
customers to finance Kior's cost.
But insiders are bailing. Former
Secretary of State Condoleezza Rice resigned from the board in December.
The Chief Financial Officer suddenly quit without the usual "no
disagreements with management" statement. An investor filed a class
action lawsuit last August alleging misleading reporting. In the last
few weeks one of the largest shareholders liquidated his position at
prices in the $1.50 range vs the initial public offering price of $15
and high of $23.85. The stock closed recently at $1.11 per share.
Death spiral
What took so long for people to wake up? Was it the residue of the initial hype or blind trust in really smart, really rich people and experts and popular politicians? Or the silence of public agencies and organizations that initially endorsed the project but stood quietly by while it went down the drain and took state funds with it?
The company has been another dead man
walking for months. The $254 million plant was completed in May 2012
over budget and behind schedule. Startup efforts and commercial
operations were late due to plant changes and unexpected problems. There
were scale up issues. The technology was new and not proved as
represented initially. So the original design was faulty. Sound familiar
- like Kemper's faulty design based on incomplete engineering?
This required more research and more
design changes. Research costs to date are $86.2 million with $22
million more planned in 2014 for a process that was supposedly already
commercial (like Kemper's). This is 43% of plant construction cost. If
Kemper's experience is similar to this much smaller and simpler plant,
it is looking at another $2+ billion research costs, major plant
modifications and years of effort to achieve even partial operations.
The Kior plant has not operated
consistently or at more than 70% of theoretical capacity even
intermittently after almost two years of trying. Q3 2013 net loss was
$43.1 million up from $38.5 million in Q2 despite higher production. The
more it makes, the more it loses.
Losses included about $4 million of
stock based compensation expense per quarter. Wonder if some insider
departures were related to tax liabilities on stock awards greater than
the decreasing market value of the stock?
Blinded by hype
The Kior plant was originally announced with great hype. However, the governor's office and the Mississippi Development Authority have been silent about the shutdown and the fate of the 1000 jobs and five plants initially promised when the legislature approved a $75 million interest free loan for the first plant. Odds are not good the state will get its (our) money back. Odds are not good that the 100 current employees mentioned in the shutdown announcement will keep their jobs.
Odds are not good that the plant's
unworkable experimental technology vetted by the MDA and blessed by the
blue ribbon Mississippi Energy Institute will ever work or will be a
"key step toward energy self reliance for our country-- as the former
governor announced. Odds are not good that the $2 million the
legislature gave to Alcorn State and Mississippi State to develop
methods to gather other products such as corn stalks to be turned into
crude oil will have any lasting results.
But despite the odds, some people are
still hopeful. The executive director of Natchez Inc. said there is
nothing from his standpoint to view the measure (shutdown) as a negative
regarding a planned second plant in Natchez. Seems we are almost
insanely desperate for jobs. We should be sanely desperate for a sane
and workable economic development policy.
Unworkable policy
Kior and Kemper are good examples of an unworkable policy. They both have a lot in common in addition to the hype. As I said before, both were negotiated in secret, vetted by agencies subordinate to their sponsoring politicians, supported by business leaders with construction contracts and other business in mind, and funded by the legislature after intense lobbying - but with little or no independent review or informed debate.
Neither appears to have been subject to
open and careful review and monitoring during construction and startup.
Their sponsors and the legislature seem unaware of their problems. Both
are based on experimental technology and wishful thinking and concepts
that violate a fundamental law of nature (Conservation of Energy).
Both involve state inducements and
federal grants and preferences that apparently induced the loss of good
judgment and common sense. Federal preferences force refiners to buy
biofuels. This guarantees a market and price for Kior's product. But not
its profitability. The Public Service Commission sets a guaranteed
price for electricity. Mississippi Power’s monopoly guarantees the
market. But not cheap electricity for customers.
Law of inverse hype
The initial fanfare around Kior suggests a Law of Inverse Hype: The greater the hype, the more dubious the claims - especially if they defy common sense and fundamental natural laws. Example: the hype about Kior's magic catalyst that would do in one day what Mother Nature took a million years to do. According to The Daily Journal, one legislator who voted for the Kior financial package exclaimed: "This is an unbelievable process!" Turns out he was right.
The hype for the Kemper lignite plant
has been off the Richter scale. Two governors, the US Secretary of
Energy, Newt Gingrich, other assorted politicians, luminaries,
academics, and so on have all now being justified as a believable supply alternative
to natural gas in case there is a Chicken Little event.
The flip side
The flip side of Kior and Kemper may be the recent low key announcement by the governor and company about the General Atomics expansion at Shannon, Mississippi. The company will invest $11 million and create 80 jobs there. It is not a new technology startup. It will relocate existing product lines already providing equipment and services to the defense, nuclear, oil and energy storage industries. They will locate in a vacant building in the Tupelo/Lee Industrial Park South that joins the company's existing campus according to the Lee County Courier.
There is some MDA assistance involved.
But no massive state aid for "next generation plants and technology" or
an "unbelievable process." My guess is the Law of Inverse Hype applies
here too: the less the hype, the better the odds of success.
Assuming General Atomics knows what it
is doing and saying, 80 jobs for $11 million will work out to be
$137,500 per job at virtually no cost to the state. Got that? No cost to
the state (that's you and me) to create 80 jobs. That's because the
investment is private money - General Atomic's shareholders money.
A better policy
Wouldn't it be something if we had a state economic development policy that encouraged private investment by keeping more money in the private sector? Might be more productive than state aid and tax breaks for targeted "unbelievable processes" paid for by taxpayers - who are left with less to invest in a believable process or business of their own.
If you think individuals and businesses
are more careful and efficient investing their own money than the state
is "investing" yours, think about how to get individuals and businesses
more money to invest. Lower taxes are an obvious way, of course. Another
less obvious way is honest objective regulation that puts the public
interest first.
Biggest job killer ever
The biggest investment and job destroying project in the history of Mississippi will be Mississippi Power's Kemper Lignite Plant if regulators put the company's interest ahead of its customers.
If the Public Service Commission deems
the $3+ billion cost of the plant prudent forcing customers to pay for
it as the company proposes, the extra cost of electricity to households
and businesses will be over $400 million per year over the 40 year life
of the plant. That's over $16 billion that will leave the state. That's
over $16 billion that will not be invested or spent in Mississippi.
If the private sector can create a job
for $137,500, and if Kemper sucks over $16 billion out of the state,
then Kemper will prevent or destroy over 116,363 jobs in Mississippi
over its life. That is a net loss of over 116,163 jobs assuming Kemper
creates the 200 permanent jobs it has projected.
We can do better
Supporting a project that will cost over 116,163 jobs is not good state economic development policy.
We can do better."
"Kelley Williams is the former CEO of First Mississippi/Chemfirst and a Jackson resident. He can be reached at kelley@greenover.com."
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- What is cronyism?
- How cronyism works
- Why cronyism is possible
- Welfare for the rich
- Impacts of cronyism
- Cronyism in Mississippi
- How to combat cronyism
Cronyism takes many forms, but the common thread is the use of government connections to promote one's own interest in a legal
way. This can be done through bailouts, subsidies, regulations, foreign
quotas and tariffs, mandates, and even tax breaks. Each of these has
the potential of giving an advantage to one firm or individual over
another with the government's permission. Often these preferences are
rationalized by the fear of market failure—the fear that bad things will happen, or good things won't occur if the government doesn't step in to help.
Cronyism works in two directions: 1)
Organizations lobby the government for favors; 2) Politicians favor
groups that can support them politically.
Economics professor Randall G. Holcombe explains
that, "Firms increase their profits through government favors, and in
exchange they support the politicians who provide the favors." For
example, a company may lobby Congress for special tax breaks on a
certain industry. Legislators may give the breaks only to those special industries in hopes of getting financial backing in return. Unions may also lobby government agencies to pressure companies to take action like relocating production for the sake of union jobs.
Cronyism is possible because of government power
and the natural human desire for gain. Government holds power in order
to promote liberty and rule of law, but that power also allows
government to hand out tax breaks, subsidies, or make laws favoring one
group over another.
Conversely, the potential for government favors
attracts private interests to lobby for privileges or foster profitable friendships in powerful places, rather than fairly compete in the marketplace. This set-up promotes a process of give and take between government officials and industries:
government gives out favors; industry supports the officials who hand
out the favors; and vice versa. Even the regulatory field (which is
supposed to protect the public from unfair business practices) ends up
as breeding ground for cronyism. Industries can "capture" the interest of the regulators who may raise rates or make rules that favor one group and block out others.
Welfare is often thought of as giving to
the poor. But with cronyism, welfare extends to many classes, all the
way up to rich corporations getting subsidies and bailouts. There are
numerous examples: Banks and car manufacturers are bailed out; subsidies
go to oil companies and big conglomerates; health insurance companies get big indirect subsidies through tax breaks for employers.
Programs touted to help the less advantaged also end up providing revenue opportunities for the wealthy. JPMorgan has a niche industry
supplying debit cards for the government food stamp program. Instead of
helping to save the iconic small family farm, most agricultural subsidies go to the big farmer. Mortgage interest deductions may sound good for struggling homeowners, but are often more beneficial to wealthy individuals who buy expensive property--and low-income homeowners often cannot even take the deduction. In the realm of education, Federal student aid subsidies inflate college tuition and replace institutional-funded aid,
meaning more money for colleges and potentially higher costs for needy
students. Even in primary and secondary schools, corporations profit
from contracts allowing them to exclusively supply all educational products to certain public school districts in the name of school reform. Contracts for school construction or transportation can be subject to fraud by the rigging of bids.
Cronyism hurts the public at large. Instead
of investing in better and cheaper products and services, businesses
spend time and money "rent seeking" after government favors. Increased prices also hit consumers when cronyism in the form of tariffs and foreign import quotas limits access to less expensive products.
Instead
of focusing on keeping the public safe and free, government officials
cater to personal supporters. Any government subsidies, loans, or tax
credits given to these special interests in turn go on the tab of
taxpayers. In effect, government uses the public's money to favor one
business or industry over another. Not only is this unfair to the
taxpayer, it is also unfair to businesses that don't have money to spend
on political connections.
More so, it is very difficult to reduce cronyism once it has a foothold. The very nature of
cronyism means those opposed to losing their privileges will be able to
use their crony network to stop the system from being reformed. And,
businesses seeing other organizations getting favors are encouraged to
lobby to get in on the benefits themselves, or at least to protect themselves from any unfair disadvantages.
Nationally and locally, the "green"
energy sector has been a hotbed for cronyism and government subsidies.
Mississippi Governor Haley Barbour hailed the state's granting of loans
to several green energy projects, such as solar plants for Twin Creeks
Technologies and Stion and the biofuels facility for KiOR.
In particular, the Kemper County clean coal plant owes thanks to its $270 million Department of Energy grant to BGR Group,
the lobbying firm Barbour helped found. More importantly, Barbour
lobbied for Southern Company, the power company that owns Kemper, before
running for governor. He then promoted the Kemper project while in
office, a move that suggests connections and a conflict of interest
typical of cronyism. BGR Group later pulled the reference to the Kemper success from its website.
A culture of cronyism also appears to exist among administrators of the Mississippi Department of Education (MDE). Questions have been raised about confidential data sharing practices for profit and the involvement of a former MDE employee in inflating public school ratings.
Other examples of Mississippi cronyism include Magnolia Ventures and the "Beef Plant." Magnolia Ventures,
which started in 1994, received $20 million in state bonding money and
went bankrupt after three years. One of its major lobbyists embezzled
significant amounts from the company as later chairman and CEO.
Beef Processors LLC,
which received a $55-million dollar taxpayer-backed loan, ended up
going bankrupt in 2004, its owner convicted of embezzlement. The plant's
construction oversight had made illegal contributions to then governor
Ronnie Musgrove, who supported the project.
In 2012, the Handy Hardware factory,
recipients of a $3.6 million state grant, decided to leave Mississippi.
The company never produced the 175 jobs it had agreed to create in
three years.
In the realm of government and politics, cronyism can be combatted by limiting the power of government to play favorites in giving bailouts, subsidies, and tax subsidies. Peter Schweizer, president of the Government Accountability Institute, advocates
"complete transparency" in the arena of election financing, in addition
to barring large contributors from getting government grants.
On the corporate side, businesses and
industries can fight cronyism by not seeking government handouts or
favoritism, but instead keeping to fair play and healthy competition, while saving lobbying for the purpose of limiting government's harmful use of power and fighting off cronyism.
The mainstream media needs to join independent journalists in watching out for cronyism. By keeping the public informed, they have the opportunity to fire up both sides of the political spectrum for the chance to shame and boycott cronies.
- This interactive chart shows that government bailouts "are only the tip of the iceberg" in American cronyism. Moving the cursor over various sections of the iceberg will provide explanations of other cronyism culprits, like monopolies, protectionism, and even tax credits.
- This chart lists the affiliations of individuals appointed to the President's Export Council in 2010. Beside each affiliation is a record of the money donated by that group in support of the president. Commenting on the plumbers union topping the list, The Heritage Foundation notes, "Now we'll wait to see exactly what the plumbers are going to export!"
- This chart lists the top 50 interest groups giving to incumbent members of Congress in 2012. It displays the amount given, the Democrat and Republican percentage of the money, and the top recipient of the money. A dropdown list allows viewers to review the data for each Congressional election cycle going back to 2000.
- In 2011, the health sector was the largest interest group lobbying the Congressional Committee on Deficit Reduction, as shown in this chart by OpenSecrets.org: "About 30 percent of these organizations -- 118 groups in total -- were from the health sector… an area that is facing steep cuts from the supercommittee."
- Occupy Wall Street and the Tea Party movement share a similar concern for cronyism as seen in the overlap of this Diagram.
- This infographic displays the estimated amount of government money spent on various forms of energy from 2002 to 2008. Costs include both tax credits and direct spending.
- The total impact of energy-related tax preferences on Fiscal Year 2011 income taxes was approximately $20.5 billion, according to Table 1 on Page 3 of this Congressional Budget Office (CBO) brief.
- Nearly half of Mississippi state revenue in 2010 came from the federal government. Mississippi's proportion of federal grant money can be compared with that of other states on this map. Transfers of government money often create incentives for cronyism.
- Chart 2 shows the proportion of government subsidies that went to large farms over small farms in 2002. Large farms (the top 10 percent of recipients) received 65 percent of the subsidies, while small farms in the bottom 80 percent received only 19 percent of the subsidies. Heritage Fellow Brian M. Riedl states, "Farm subsidies have evolved from a safety net for poor farmers to America's largest corporate welfare program."
- This interactive map shows the amount of federal agricultural subsidies given to each state from 2003 to 2005. It also shows the amount of subsidy money given to the country's top ten farm businesses that receive those subsidies. Four of those ten are located in Mississippi.
- Mississippi offers a number of financial incentives to encourage business growth in Mississippi. The 2012 Mississippi Incentives Report provides an overview of these awards, which are overseen by the Mississippi Development Authority. The map on page 2 of the report shows the distribution of stimulus grants, disaster grants, and economic development grants and loans throughout the state in 2012.
- A January 2013 Wall Street Journal article unveils the cronyism embedded in a federal tax reform bill. Tax credits include special interests, from a StarKist factory in Samoa to energy efficiency credits for consumers that will indirectly subsidize Whirlpool.
- Some companies pay much lower tax rates than others. This in-depth report by Citizens for Tax Justice and the Institute on Taxation and Economic Policy explains who pays what, and why, and notes that some corporations pay hardly any tax.
- In this article, Bill Frezza of the Competitive Enterprise Institute contrasts crony capitalism with market capitalism. He blames the crony capitalists, those who prosper on government favors, for raising discontent against the wealthiest "1%."
- AgainstCronyCapitalism.org gives a rundown of instances where crony capitalism can crop up—instances where government intervention in a private market has distorted the market. These include banking, the car industry, farming, and lawmaking.
- Economics professor Randall G. Holcombe goes into depth on the causes of crony capitalism, summing up the problem as one of big government. He says that "even in providing 'public goods,' government can steer funds to benefit cronies, so crony capitalism is fostered by any government spending, even when the rationale for that spending has a public-interest foundation. More government spending for any reason increases the incentives for cronyism."
- In this blog post, policy analyst Nicolas Loris discusses the rise of renewable energy subsidies. Taxpayers are getting "desensitized," and businesses of course want to jump in on the bandwagon if money's going to be given away. Green energy needs help because it's too costly, but taxpayers end up suffering due to "pricier electricity."
- Blogger Charles Hugh Smith walks through an illustration of how regulations can kill small business—in this case, farmers. In his example, a super farm lobbies the government and gets subsidies. Next, regulations come that are too difficult for small farms to deal with. They don't have enough resources to fight if they get in trouble with the government, while corporate farms are too big for the government to risk bothering. Regulations continue to multiply and force out the little man. Smith thinks the only solution is to ban all private campaign funding and lobbying.
- In Three Easy Ways to End Cronyism, Peter Schweizer chides the anti-crony lip service of politicians who don't actually combat the problem. He thinks a good place to start eliminating cronyism is with election financing:
"1. No government loans or grants to firms or entities connected to campaign bundlers and large financial supporters.
2. Complete transparency when it comes to campaign financiers and bundlers.
3. No campaign fundraising from large government contractors."
- F.H. Buckley discusses the importance of rule of law to the nation's prosperity in the July/August 2012 edition of The American Spectator. He predicts the continued expansion of corruption and cronyism with the growth of government, increased bailouts, and poor mainstream media coverage on the issue. He compares lobbying in America to the practice of bribery in poor countries.
- This video of the grand opening of GreenTech's MyCar plant in Horn Lake, Mississippi, shows former President Bill Clinton, Mississippi Gov. Haley Barbour and well known Democratic fundraiser Terry McAuliffe, acting chummy. Terry McAuliffe, then chairman of GreenTech, worked with Barbour to open the plant in Mississippi. GreenTech got a $5 million loan from the state. McAuliffe, while running for governor in Virginia, claimed his state didn't offer a competitive incentive package. He didn't mention that Virginia also had concerns about the company's business model.
- The Mississippi Baseload Act of 2008 allows electric utilities (under Public Service Commission oversight) to charge customers for power plant construction costs even if the new plant is never completed.
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2/15/11, "Plant closure bursts Georgia’s biomass bubble," Atlanta Journal Constitution, Dan Chapman
"The premise, and the promise, were brilliant in their simplicity: Turn tree waste into fuel, help break the Middle Eastern choke hold on America’s economy and"....
"The premise, and the promise, were brilliant in their simplicity: Turn tree waste into fuel, help break the Middle Eastern choke hold on America’s economy and"....
- (continuing, AJC): "bring hundreds of jobs to rural Georgia.
Plenty, starting with the closing last month of the Range Fuels cellulosic ethanol factory that promised to help make Georgia a national leader in alternative energy production. Then there’s the money — more than
- $162 million in local, state and federal grants, loans and other subsidies committed to the venture.
- Range Fuels,
But critics — ranging from budget hawks to renewable energy experts to dispirited locals — say the shutdown is a case of
- good money thrown at unproven science and lofty promises.
- We need jobs. We need them bad.”
- Many of the companies, though, are no longer in business.
- vowed in 2007 to
- “declare a war on oil” and said “cellulosic ethanol is the weapon we need.”
“Range Fuels represents a new future for our country,” proclaimed then-Gov. Sonny Perdue,
- flanked by dignitaries and beauty queens.
U.S. Energy Secretary Samuel Bodman, who steered a $76 million federal grant to Range, said that “by relying on American ingenuity
- and on American farmers for fuel, we will enhance our nation’s energy
- and economic security.”
- Georgia officials pledged $6.2 million.
Treutlen County, one of the state’s poorest, offered 20 years worth of tax abatements and 97 acres in its industrial park. Private investors reportedly put up $158 million. In all, the project raised more than $320 million.
- It hasn’t been enough.
- Treutlen’s
- 13.3 percent unemployment rate.
- Range shut down in early January. Only a few employees in Soperton remain.
- the company seeks additional financing.
==============================
"U.S. exports of gasoline, diesel and other oil-based fuels are soaring, putting the nation on track to be a net exporter of petroleum products in 2011
for the first time in 62 years.
- upending the historical norm.
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