Date: 12-07-2017 – COURIER-JOURNAL
Kentucky legislators have high hopes – and some unease – about investment in aluminum company
ASHLAND, Ky. – City Commissioner Amanda Clark is used to watching people leave her beloved hometown – a riverside community of 21,000 that borders Ohio and West Virginia – because of layoffs and few job opportunities.
“People my age, all we have ever seen is decline here. Our parents lost their jobs at Ashland Oil or AK (Steel) … and we watched our friends move away so their parents could get a job somewhere else,” said Clark, who is in her early 40s. “And now, as parents, we’re watching our children leave and never come back because there’s not anything here.”
But the recent arrival of a new manufacturing company, Braidy Industries Inc., may help break that pattern with a bold plan to build a $1.3 billion aluminum rolling mill and create more than 500 high-paying jobs.
For Ashland, Clark said, Braidy Industries represents hope.
“Essentially, the attitude is that we’re all just very hopeful for the first time in a very long time,” she said. “There will be jobs here, there will be opportunities here, and we’re not dead.”
That hope for a better future for this slice of Eastern Kentucky is shared by Gov. Matt Bevin, a first-term Republican who promised voters a big boost in economic development.
“That is going to be transformative,” Bevin said of Braidy Industries in a recent radio interview. “That’s going to be one of the best investments the state has ever made.”
He has said the state’s return on its $15 million investment in the company could someday return a direct profit of $250 million.
When Bevin says “invest,” he means it literally. Through an unusual deal he personally put together, the state paid $15 million to acquire at least 20 percent of the company. That’s in addition to as much as $12.5 million in tax incentives more commonly used to attract new industry to the state.
The Kentucky Legislature unanimously voted to give Bevin the $15 million for economic development purposes on the final night of its 2017 lawmaking session, although legislators say they didn’t know it would be used to buy a piece of a private company.
State Rep. Kelly Flood, D-Lexington, said she would’ve changed her vote had she known how the funds would be used.
“Unanimous votes like that are when legislators believe they’re doing something within the scope of what they’ve done in the past, and we took the governor at his word,” Flood said. “My gut tells me now, in retrospect, that they knew a lot more about what they were doing and we just weren’t told.”
The buyer’s remorse is bipartisan.
“Kentucky should not be investing in companies – period – as a shareholder,” said state Rep. Jason Nemes, R-Louisville.
Though he agrees the state investment appears to have landed a community-changing project he called an “unqualified good,” Nemes plans to introduce legislation early next year requiring routine, comprehensive reviews of all commonwealth economic development incentives. The Braidy arrangement wasn’t the catalyst for his proposal, he said, but should also be evaluated.
“Any time we spend taxpayer money, we need to make sure that it is being effectively used,” he said. “I’m certain that there are incentives that we could do better with, and maybe some we should get rid of.”
The art of the deal
Self-described “serial entrepreneur” Craig T. Bouchard launched Braidy Industries in August 2016, mere days after resigning as CEO of Real Industry Inc., an aluminum recycling company that last month sought Chapter 11 protection in U.S. Bankruptcy Court, listing $401 million in debt obligations.
Bouchard, who splits his time between Illinois and Florida, needed a home for his mill, which will turn scrap aluminum into auto and aircraft parts. He said Kentucky wasn’t under consideration until lawmakers in January approved a right-to-work law that bars employers from automatically deducting union dues from paychecks.
The company ultimately evaluated 24 sites, including several in Kentucky, and was impressed by both Eastern Kentucky’s skilled workforce-in-waiting and the governor’s persistence, Bouchard said.
“The governor picked up the phone and called me on Saturdays while I was trying to watch my daughter play tennis … saying, ‘No, Craig, I’m not going to let you go until you come to Kentucky,'” Bouchard said at a government conference in Louisville in August.
But sealing the deal required “skin in the game” – matching a $15 million incentive Bouchard said he was offered by a competing state he won’t name.
Senate Appropriations and Revenue Committee Chair Chris McDaniel, R-Taylor Mill, said he learned Bevin wanted the incentive in the final three days or so of the session. The proposal became public on the final day, March 30.
Lawmakers were told only that Kentucky beat another state’s offer to win an unspecified, $1.3 billion project that would create about 1,000 temporary construction jobs and 500 permanent ones somewhere in Eastern Kentucky.
While not a common move, it wasn’t the first time the Legislature has had to vote quickly on a governor’s last-minute proposal, said Senate Majority Leader Damon Thayer, R-Georgetown.
Added state Sen. Tom Buford, R-Nicholasville: “You’ve got to be careful voting for these things. We had to put a lot of trust in the governor.”
Weeks later, lawmakers heard Bevin triumphantly announce Braidy Industries’ decision to build its aluminum mill near Ashland.
Flood and others emphasize that they’re comfortable with taking a calculated risk if it means bringing jobs to economically depressed areas of the state.
” … We have nearly 700 laid-off human beings who see this project as a lifeline,” Flood said, referencing a 2015 layoff at AK Steel’s Ashland plant. “There’s going to be so many people applying for these jobs.”
The state’s direct investment in Braidy Industries is relatively small, and the deal has built-in safeguards. The company must maintain a presence in Kentucky at least until June 1, 2022. That means keeping at least 51 percent of its tangible assets located in Kentucky, having at least 51 percent of its employees employed within the commonwealth or maintaining a headquarters here.
Commonwealth Seed Capital, a state-owned limited liability company through which Kentucky made the $15 million investment, also can opt to pull its money by selling its shares back to Braidy Industries if the company fails to start building the mill by June 30, 2018, or if Braidy fails to invest at least $1 billion in the mill by June 30, 2020.
“I don’t think there’s anything sinister or secret about the way it played out,” state Sen. Robin Webb, D-Grayson, said of the Braidy deal. “I think we’ve got to be willing to be creative and innovative and maybe even take some risk every now and then to be competitive in attracting major industry.”
Government owned, little-known
But lingering concerns about the way the blind investment was pushed through the Legislature have been compounded by the refusal of both the Bevin administration and Braidy Industries to reveal who owns much of the company.
“You know, when they don’t give the names, you automatically assume they’ve got something to hide,” Buford said. “I don’t think it’s the state’s business to be buying stocks and shares in a private industry.”
Added Flood: “The potential for corruption in government is a real factor whenever there is significant money passing between private entities.”
Bevin says even he doesn’t know who Braidy Industries’ other investors are, and dismisses the notion that private companies should be more transparent when they accept a public investment.
“It’s nonsensical to be asking a private company to tell us who their shareholders are,” Bevin told Courier Journal. “It doesn’t matter who they are. What we want to know: What are the finances? Who are the people that are going to be making the decisions as to whether or not we’re going to get a good return on our money?”
Bevin’s definition of “we” is limited. His economic development cabinet says records showing Braidy Industries’ finances are legally exempt from public disclosure. What little the agency has made available for public inspection shows that as of June the commonwealth and Bouchard each owned at least 20 percent of the business. Names of other investors are not publicly available.
While private companies are not required to name most investors, Braidy Industries is different, Attorney General Andy Beshear said recently in ruling that the Cabinet for Economic Development illegally denied a Courier Journal request for shareholder records. He called the issue “unquestionably a matter of public interest” because Kentucky taxpayers own a piece of the company. The cabinet is appealing his decision in court, where the issue is pending.
If the state were forced to reveal the investors in Braidy Industries or another private company, cabinet spokesman Jack Mazurak said it could hinder efforts to attract more business to Kentucky.
“With most projects, companies insist and require confidentiality,” he said.
Bouchard maintains that confidentiality is company policy for Braidy Industries, though in October he volunteered that Braidy board member Charles Price, president and CEO of Louisville-based Charah LLC, is the only Kentuckian with a personal stake in the company. Price did not respond to requests for comment for this article.
Unlike information about Braidy Industries’ investors and finances, it’s easier to get details about the company’s current executive lineup, which includes Nate Haney, a former deputy secretary for the governor’s executive cabinet who is now Braidy’s senior vice president of government relations.
Haney’s LinkedIn account says he left the Bevin administration around December 2016. Bouchard said Price introduced him to Haney sometime later, and by June, Haney was working for Braidy Industries.
The $15 million legislative appropriation was funneled through Commonwealth Seed Capital, the state-owned limited liability company. Like the economic development cabinet, CSC also withheld details about Braidy Industries’ investors and finances in response to a Courier Journal public records request.
“I haven’t talked to any legislators who knew that Commonwealth Seed (Capital) existed before this deal,” Nemes said. “I want to be as creative as possible in getting these kinds of deals to come to Kentucky … but it certainly raises questions.”
State officials say CSC is an independent company, though it is owned by the Kentucky Economic Development Partnership Board, which oversees the Economic Development Cabinet. The board is chaired by the governor, and all board members are gubernatorial appointees or cabinet secretaries.
The Partnership appoints CSC’s seven-member board, which chooses companies that get taxpayer-funded investments. CSC board members include two Partnership board representatives: Jean Hale, of Community Trust Bancorp, and Luther Deaton Jr., of Central Bank & Trust Co.
Another state board, the Kentucky Economic Development Finance Authority, has the power to allocate funds to the Partnership Board, which determines how much is passed through to CSC.
Once the money gets to CSC, it stays there. Any investment returns are reinvested in other ventures.
Old program with new money
Since its inception during the administration of Democratic Gov. Paul Patton in 2001, CSC – a tiny, two-employee operation – has backed companies in innovative fields such as pharmaceuticals and advanced manufacturing. It also puts money into investment funds that independently decide how to use it.
Under another Democrat, Gov. Steve Beshear, CSC began investing more often in private, early-stage companies. Its 2016 annual report says over 75 percent of those direct investments were made in the prior six years. That shift didn’t get much notice.
“This is not something that’s been at the forefront of legislator oversight,” said longtime state Sen. Ray Jones, D-Pikeville.
But with no public discussion, the Bevin administration put CSC on steroids: The $15 million stake in Braidy Industries is roughly 90 times larger than its average equity investment of about $166,000 per company since its inception.
Whether it is even legal for Kentucky to sink public money into a private business is unclear.
The Kentucky Constitution says the commonwealth cannot “become an owner or stockholder in, nor make any donation to, any company, association or corporation…”
That provision was ratified in 1891, but similar limits already were included in an earlier Constitution, said Robert Ireland, a retired University of Kentucky professor and expert on the state constitution. The language was added after the state lost money on turnpike investments.
But in 1987, the Kentucky Supreme Court ruled the commonwealth could give Toyota 1,600 acres for its Georgetown plant, in part because the economic benefit to the entire state made it a “valid public purpose.”
Would the same hold for Braidy Industries?
“You have these rather vague statements, and they have to be interpreted,” Ireland said. “The only way we’ll ever know is if somebody goes to court and challenges this, and eventually the Kentucky Supreme Court makes a ruling.”
The Economic Development Cabinet acknowledges the state cannot legally take equity positions in companies but says CSC was created as a way to avoid the ban.
For his part, Bevin has expressed interest in making more equity investments, on a case-by-case basis.
“We want to keep young, smart entrepreneurial people here, but we should get something in exchange for it,” he recently told Courier Journal. “It is entirely specific on the opportunity and whether it adds value.”
Regardless of legal points, some conservatives question whether direct investment is good policy.
Jim Waters, president and CEO of the free-market think tank Bluegrass Institute for Public Policy Solutions, said the government shouldn’t play favorites with businesses.
“Kentucky is becoming attractive enough that we don’t have to give away the store,” Waters said. “The state should allow the marketplace to work, and taxpayers do not need to become shareholders in these companies.”
John Boatright, a retired professor of business ethics at Loyola University Chicago, said it’s typically Republicans who complain about government picking winners and losers, and suggested that’s what the Bevin administration is now doing.
“Tax incentives are just sort of cleaner,” he said. “It doesn’t raise all these questions that equity investments raise.”
State officials might be more willing to continue sinking public money into a bad investment because they own a piece of it.
“If this Braidy company starts failing,” Boatright asked, “will the state come forward to bail them out?”
Danger of ‘political distortion’
States have been able to grow their economies by investing directly in private companies, but there are plenty of examples of uninformed and politically motivated government investments, said Harvard Business School Professor Josh Lerner.
“The issue is not so much what they’re doing but how they’re doing it,” he said.
Entrepreneurs are great at making pitches, but divining which investments are worthwhile is tough, Lerner said. Political interference must be limited, he said, and one approach is to put taxpayer money in investment funds, as CSC has done in the past, rather than investing directly in an individual company.
“There’s less danger of political distortion in terms of the decision-making process if it’s not the government officials choosing the companies,” Lerner explained.
Lisa Bajorinas, executive director of the entrepreneurial arm of Greater Louisville Inc., the metro chamber of commerce, said CSC typically wants to see a lead investor from the private sector before it buys into a business, as does the Kentucky Enterprise Fund, another state-sponsored entity that invests in early-stage companies.
When asked if Braidy had a lead investor when CSC bought in, CSC board member Bill Strench said only that there were several other backers. He said the deal was structured so there would be other investors, which filled their concern about having a lead investor “to some degree.”
Apart from initiatives such as CSC, states also invest in businesses through public pension plans.
The Kentucky Retirement Systems, for example, has nearly $1.7 billion allocated to private equity, said Christopher Elvin, the head of private equity products for Preqin, a leading source of data on the subject. However, KRS primarily hires outside firms to invest pension funds, though it does pick some investments itself.
Whenever states give taxpayer dollars directly to companies, loans are more common than buying shares, said senior economist Tim Bartik of the W.E. Upjohn Institute for Employment Research.
“It’s a tough judgment call, and the reason I’ve always been somewhat hesitant about it is it’s not easy to do,” Bartik said of equity investment. “It’s riskier, and the question is: Are you smart enough to manage the risk?”
Even though Kentucky’s investment in Braidy Industries has sparked questions and concerns, lawmakers say they hope it will bring jobs to Eastern Kentucky.
“This is too important to play politics with,” said state Sen. Morgan McGarvey, D-Louisville. “I still really, really hope it works, and I think everybody should want this to work.”
Braidy Industries plans to break ground on its aluminum mill next April. Although it already has at least eight shareholders, the company still needs to raise more capital to fund the $1.3 billion venture.
Clark, the Ashland city commissioner, said her community hopes to capitalize on the momentum Braidy Industries has brought to town.
“If someone is willing to invest $1.3 billion in your region, that’s a pretty good selling point,” she said.
Buford, the Republican senator from Nicholasville, also expressed hope for Braidy’s success but added that legislators should consider how they justify these types of gubernatorial requests.
“I do worry about getting into the private sector,” he said. “I guess this will be a litmus test of what we’re going to do in the future.”
By Morgan Watkins