Friday, March 7, 2014

A Comedy Of Errors--But Who's Laughing?

     Great job, Bob Mercer, and most appreciated.   Mercer is the independent reporter/blogger based in Pierre whose twitter coverage of today's hearings in the state capitol on the Slaughterhouse EB-5 fiasco has been fast and clear.  I'm writing this during the hearing's midday break.  The session is being held by the South Dakota Legislature's Government Operations and Audit Committee, which wants to know how the U.S. Citizenship and Immigration Service's EB-5 investment program, designed to induce foreigners to invest a minimum of $500 thousand in American enterprises in exchange for obtaining American visas, wound up creating a bankrupt beef packing plant in Aberdeen, SD, that lost $159 million.  Given the time, effort and outright grants that the State of South Dakota and the City of Aberdeen put into the project, it's still unclear to me how much South Dakotans lost to this endeavor, but it looks like it could amount to millions.  Eventually we'll find out.
     And just how will we find out?  Maybe the surprise announcement at today's hearings that 3 more federal authorities/agencies (HUD, the Treasury Department and the Energy Department) have joined in the investigation with the U.S. Attorney and the FBI will scare some solid financial information out of the story.  As of now the numbers have yet to be toted up, and this morning's segment of the hearings hasn't yielded much information, other than a vague comment by Pat Costello, who heads up the Governor's Office of Economic Development--the agency under whose auspices all of this occurred--that the state has received tax receipts from the project that could offset much of the money put into it.  The financial dust has yet to settle before reaching that conclusion, because a lot of indirect costs have yet to be accounted for.  There are easily overlooked costs in broad-ranging financial disasters like this one.  For examples, how much did the state pay in unemployment benefits to the laid off workers of the plant, how much of the Governor's economic development budget was used up by promoting the endeavor, and, on the private sector front,  how much did it cost South Dakota contractors who were stiffed by the bankruptcy and so on.
     The hearing itself has disclosed some operational and oversight blunders that were surprising in their magnitude.  The private entity, SDRC, Inc., that contracted with the state to handle EB-5 investment programs failed to submit monthly financial records as required by its contract.  Who on earth was responsible for letting that pass?  You can twitter @pierremercer to get a complete and timely report of the proceedings to learn more about these mishandled details.  The word "wrongdoing" shows up at the hearing several times--whether or not that's code for "potentially criminal" is a decision that's above my pay grade.
     Pat Costello, and apparently Governor Daugaard, are still relentlessly optimistic about the packing plant's prospects, which turned out to be another surprise at the hearing.  Costello believes that in two years, Northern Beef Packers at Aberdeen will be a functioning and profitable operation.  Having been in the cattle business myself, I know one of the necessary traits of operating in that business is unabashed optimism, but in this case I think it's misplaced.  The plant was designed to kill 1500 head of cattle every day in order to make money, but they were never able to secure more than about 200 a day during its few months of operation.  The explanation at the time was that the operation was short of cash, but I think it had more to do with a shortage of cattle.  If anything, cattle numbers now are shorter than they were a couple of years ago when the plant went bust.  I can't see the situation improving.  Nor can I see the outcome of these investigations into what happened turning up anything better than incompetence and poor management, from the Governor's office on down. The "wrongdoing" part may have to be taken up a bit later. 


9 comments:

  1. A beef plant isn't much of an economic driver. It will attract a workforce of low skilled immigrants (mainly because they are they only ones that will do manual labor for $12/hour) and flood the public school system with children that will need E.S.L. teachers.

    I support the EB-5 program but that money should have been spent on a pediatric hospital in Rapid City. $159 million would be a great foundation for a world-class facility that would rival the Mayo clinic.

    ReplyDelete
    Replies
    1. Slaughterhouse EB-5 was all about Mike Rounds' fatally flawed vision about South Dakota Certified Beef. Rounds bet everything on that long shot and lost big. Very bad call. I think EB-5 is okay conceptually, but lends itself to charlatans pooling big sums of bucks from well-heeled foreigners that don't have a clue about what they're getting into. Your vision of a great pediatric center in the Black Hills is a nice one. Maybe this will plant a bug in somebody's ear. Thanks for commenting, Thad. Always appreciate your thoughtful observations, both here and elsewhere.

      Delete
  2. John, you allude to the point that a shortage of cash to buy more live cattle, (and I would assume to pay the help) was claimed as a reason for the bankruptcy. I asked this question of Cory on Madville, but as yet have not received an answer. There was something mentioned in an article this week, that 25 million in previously approved State loans was never distributed to NBP. Why if already approved, was it not distributed? I certainly remember when I started my business, that cash flow was the biggest obstacle to success that I faced, and really worried the first couple of years that I was not going to make it.

    ReplyDelete
  3. Hi Lanny. It's a mystery to me as why the money was never advanced or granted to NBP. Here's a piece from AgWeek a few weeks ago that says $31 million in loans and grants was committed by the state, but a substantial portion was never awarded: http://www.agweek.com/event/article/id/22560/publisher_ID/80/ Why that money never got transferred has never been explained. Meanwhile Meat & Poultry News (http://www.meatpoultry.com/articles/news_home/Trends/2013/08/Northern_Beef_Packers_seeking.aspx?ID={31B76C5F-0A5F-4E99-80AB-288A8DF79949}&cck=1) last August said the plant couldn't secure more than 200 head/day even after funds were advanced. I just think the cattle weren't available and that no matter how much cash the company had, they couldn't buy enough to make their 1500 head/day breakeven. I'm surmising of course, but I know how tight cattle supplies have gotten in recent years, so I'm not surprised that NBP had trouble getting inventory. Who made the decision to hold back on South Dakota money that had been committed has never been fully explained, at least as far as I know. My guess--emphasis on "guess"--is that the authorities in charge could see that the plant would be a loser from the get-go and just didn't want to throw good money after bad.

    ReplyDelete
  4. I think the problem was deeper than not enough cattle. I think there was a marketing problem. The freezers were filling and product was not moving like it needed to. I think producers were concerned that payment wasn't going to be made. The supply was drying up on that account. We have all heard stories of the meat packing industry. Squeeze out the new guy and buy him for pennies on the dollar.

    ReplyDelete
  5. Another thought, It had been said that now was possibly the worst time to start a packing plant. Cattle were at record highs to buy product and because of the high price there is consumer resistance. The big packers all have a branded product that consumers know and trust ( ranchers reserve, certified angus ). I don't know where this meat was going. but they didn't have a trusted brand name. It was always rumored the meat was going to Korea, but don't know if that happened.

    ReplyDelete
    Replies
    1. You're much closer to the livestock trade than I am, Dallis, so I defer to your observations. I did notice in the piece from Meat & Poultry News that NBP, "after securing additional financing" still could only increase production to 200 head/day, which I read as a supply problem. I'm confident of one thing, if it was supposed to be about finding SD Certified Beef cattle the whole thing was a complete fiasco from inception. We probably know many of the same ranchers out here in West River, and my general sense from talking to them was that all the paperwork requirements for assigning cattle to that program was more hassle than it was worth. A few years into it I think there was only one West River meat locker that was selling it, up in Belle if I remember correctly, for sky high prices, never mind trying to find it in a supermarket. If NBP was indeed turning out commodity beef, they had no brand as you note, and no direct markets. Korea could well have been an outlet, but at 200 head/day, there was no chance of keeping the plant afloat, regardless of market. Hard to believe they couldn't even unload that much product, which had to be frozen and stored onsite.

      Delete
  6. The entire business plan was/is suspect. Building a relatively small plant to produce a pure commodity product in a mature industry dominated by four giants controlling over 80% of the business is a fools errand. This plant was destined for failure before a shovel full of dirt was ever turned.

    Nick Nemec

    ReplyDelete
    Replies
    1. Ya know, Nick, I would love to see what, if any, business plan preceded this colossal blunder. At some point, I would think investors have to be presented with a prospectus, which as far as I know, has never been presented at any time during this debacle. If the SDRC guy-in-charge ever does testify, this is a question that is utterly germane to the whole investigation. Were these investors fully informed about the operation and its risks? American and (I'm assuming, because it's commonplace among all individual states) South Dakota investment firms have disclosure requirements that must be met before soliciting funds for a venture like this. Those disclosures are public documents. I'm actually getting curioser and curiouser.

      Delete