Good idea or not?
by Amy McCullough
Published: January 23,2011
Tags: beef plant, clawbacks, Edward L. Glaeser, Gov. Haley Barbour, GREEN ENERGY, Kathy Gelston, Khosla Ventures, KIOR, Marianne Hill, Mississippi Development Authority, Soladigm, solar, Stion, Tate Reeves
See related Feb. 4 Business Blog post, ‘Haley Barbour and Khosla Ventures’ and Feb. 11 post, ‘WSJ: Learned from Khosla-backed energy startups that tanked.’
State leaders agree that affordable and reliable energy is essential for Mississippi’s future economic growth. Gov. Haley Barbour has said his energy policy is “more of it” and has aggressively promoted hefty incentive packages to a number of green energy projects, which have received enthusiastic support from the state Legislature.
Successful global companies like Nissan and Toyota have also received generous state incentives to locate plants in the state. But these companies have excellent and lengthy track records, unlike start-up energy companies.
Making loans to start-ups is “a relatively new position for the state to be in,” said Kathy Gelston, chief operating officer for the Mississippi Development Authority (MDA).
Wisely written clawbacks, or contract reversionary clauses, can recoup Mississippians’ money if a plant moves or doesn’t produce. But it’s hard to claw back money from a corpse if a start-up goes belly up.
Mississippi clawbacks and competition with China
The people of the State of Massachusetts are unhappy and reviewing clawback provisions in a deal they made with Evergreen Solar — a plant that announced this month that it is moving its manufacturing facility and 800 jobs to China.
Massachusetts taxpayers gave more than $40 million in combined grants and tax incentives to Evergreen’s plant, which opened in 2008. But manufacturing costs in China are 50 percent cheaper.
The company says that clawbacks in its state agreement dictate that Evergreen Solar only owes Massachusetts $4 million, according to Solar Novus Today. The state disagrees.
Citing the Evergreen debacle, Harvard economics professor Edward L. Glaeser wrote in a New York Times editorial last week that “The (Evergreen) closing reminds us that even when ideas are ‘made in America,’ production is almost always cheaper in China…
“We should continue financing research on solar technology as long as that research continues to produce cost-cutting breakthroughs… but we shouldn’t pretend that cheaper solar energy will end up employing millions of our less-skilled citizens. For decades, local economic success has come from entrepreneurship and education, not large-scale manufacturing.”
MDA’s Gelston said the agency puts clawbacks in place to protect Mississippi taxpayers.
“In general, the way our programs work, if the state has invested money… then clawbacks basically state the company must maintain the jobs for a negotiated period of time. Normally that number is 10 years. And they must make an investment amount by a certain date,” Gelston said.
“A lot of them have really long construction cycle. In the event that that doesn’t occur then most of the time the clawbacks are written so that we would do a percentage. For example, if they had to invest $300 million and had only invested $150 million, they would have to pay back 50 percent” of the investment money.
“In the event the company doesn’t meet their investment commitment or job commitment, we have the ability to make them make full payment on that loan… The way we work these projects is we based the incentives we provide based on the investment the company is going to make and the jobs they’re going to create over the next several years,” she said.
State Treasurer Tate Reeves said the failure of Mississippi Beef Processors, commonly referred to as the “beef plant,” cost taxpayers more than $40 million and is an example of a project that was not vetted appropriately. Reeves noted the project occurred prior to his election.
“With the beef plant, that was $40 million that could have spent on public education, $40 million that could have spent on public safety, $40 million that could have spent on other vital services that the state government provides. It’s real money, and it makes a difference. There’s a big difference in the way in which the project that MDA is doing now and the beef plant. The main difference is the security on the loan. When the beef plant went belly up, the state of Mississippi didn’t even have the first lien on assets of the facility. It’s MDA’s responsibility — and I believe they’re doing a great job — it’s MDA’s responsibility to make sure the state is protected on these loans,” Reeves said.
Green energy startups and secured loans
Since July 2010, the Mississippi Legislature has approved a $185 million alone in loans for three green energy projects — Soladigm, KiOR and Stion – which collectively represent more than $1.1 billion in planned investments in the State of Mississippi.
>> Soladigm, founded in 2007, will build its first full-scale manufacturing facility for dynamic glass windows, in Olive Branch.
>> KiOR, founded in 2007, will convert biomass to crude oil with three facilities near Columbus, Newtown and Franklin counties.
>> Stion, founded in 2006, will manufacture high-efficiency, thin-film solar panels in Hattiesburg.
Such projects have received loans from a Mississippi Development Authority-administered fund called the Mississippi Industry Incentive Financing Revolving Fund, and Mississippians are on the hook for the money if any of these companies should go bankrupt. The Revolving Fund is funded with state bond proceeds.
MDA’s Gelston said all the start-up companies MDA has worked with are cash- and equity-rich.
When the state makes loans for equipment purchases, as it has for Soladigm, MDA makes sure the state has the first lien position on pieces of equipment, she said. And, “We normally don’t finance pieces that are not somewhat generic. For example, a generator is a generator; a crane is a crane,” Gelston said.
If a company went bankrupt, much of the equipment for cutting-edge renewable energy technology wouldn’t have much market value. Additionally, the start-ups “don’t want run risk of their technology being seized,” Gelston said.
Marianne Hill, who earned her Ph.D. in economics from Yale University, is a senior economist with the state Institutions of Higher Learning’s Policy, Research and Planning division.
She recently issued Mississippi Outlook 2011, a report which tracks state economic trends.
Regarding the clean energy projects, Hill said, “In general, green energy is a growing field. It’s important that Mississippi doesn’t lose an opportunity to take part in cutting edge technologies. Of course, you have to evaluate a project individually and make sure that the return to the taxpayer is worth the subsidy that they are being given by the state… I would like to see us focusing more on local start-ups.”
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