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December 1, 1998

A Simple Cost-Benefit Study or Something More

by Edmund Tsang

Judging from Jim Apple's simple but narrow approach in performing the cost-benefit analysis for the City of Mobile Industrial Development Board (IDB) to finance the Phenolchemie project, it is hard to imagine that, when The Harbinger made a request for a copy of such a study in March, 1994, IDB counsel Mack Binion said the study was "confidential."

A 1992 change in state legislation governing IDB's, Alabama Act 599, requires a cost-benefit analysis to determine the impact of granting property-tax exemptions before the boards issue bonds to finance business relocation to or expansion in Alabama. Before January 1993, projects financed by IDB bonds were exempted from paying property taxes to the county, city, state, and the school system. Act 599 requires companies receiving IDB financing to pay ad valorem taxes to the schools, but they are still exempted from county, city and state property taxes, as well as a one-time sales tax exemption associated with the construction or expansion of facilities.

In a presentation to a class of University of South Alabama (USA) students, Mr. Apple, executive director for economic development at the Mobile Area Chamber of Commerce, said he adopt a straightforward and objective approach by using only the tax revenues generated by the direct jobs created and ignoring any multiplier effects, and the tax exempted when he performs cost-benefit analysis for the City of Mobile IDB. Using an overhead projection, Mr. Apple showed a one-page summary dated November 20, 1996, Cost/Benefit Analysis for the Phenolchemie project, that he says is typical of such reports he prepares for the IDB directors.

The analysis states 50 new, direct jobs with an estimated annual average salary of $38,000 will be created by the Phenolchemie project, generating an estimated total annual payroll of $1.9 million. Estimated annual total taxes for education is $595,000; and estimated total local ad valorem exemptions is $697,000, with an estimated one-time local sales and use-tax exemption of $1 million.

The one-page summary also includes four footnotes, of which one states "[O]ngoing maintenance for the facility would cost $5 million/year of which 1/3 would be labor costs and a 1/3 locally purchased maintenance materials." Another footnote states "[T]he project will require increased supply of electricity and natural gas to the site both of which the utilities are unable of supplying. Barge and/or ship transportation of our materials and products will require the Alabama State Docks to develop public facilities for either or both at the Theodore Industrial Canal." The one-page summary concludes with the footnote: "Cost/Benefit calculations show a positive impact on local revenue collections over the projected project life."

Mr. Apple also explained, using a hypothetical example, the calculations he performed for each line in the one-page summary to demonstrate how he arrives at the conclusion of the hypothetical cost-benefit analysis.

[Updated figures provided by Phenolchemie officials show 150 new, direct jobs with an average annual salary of $48,000 will be created.]

The First Cost-Benefit Study

The first City of Mobile IDB-financed project that falls under Alabama Act 599 was a $60 million bond issues approved in March 14, 1994 for Huls America, which is owned by the German conglomerate Veba AG that is also the parent company for Phenolchemie. According to the minutes of the November 30, 1993 meeting of the City of Mobile IDB, "a cost-benefit analysis is required on the economic impact" of Huls America's bond request because of Act 599. The minutes also stated that "a subcommittee consisting of Board President, Vice President and Treasurer was formed to create criteria upon which to base the analysis of the project as well as future projects."

When in March, 1994 The Harbinger asked for a copy of the Huls America cost-benefit analysis after the City of Mobile IDB had approved the bond issue, its council Mack Binion said he could not give out the study because it is "confidential." The Harbinger contacted five of the City of Mobile IDB directors then about the cost-benefit analysis, all of whom said they had not seen it. (The Harbinger, 6/21/1994)

At the time The Harbinger asked State Senator Steve Windom, who is an author of Act 599 that requires the cost-benefit analysis, concerning public access to the study. Sen. Windom stated: "Anything that is part of the board's decision, once it is passed, would be public information." He added that "proprietary information" might be withheld, but for everything else, "the public is certainly entitled to this information." (The Harbinger, May 24, 1994)

Cost-Benefit Study

Casi Calloway, executive director of Mobile Bay Watch who also spoke to the same group students at USA, said she has no idea what data are included in the cost-benefit analysis performed by Mr. Apple of the Chamber of Commerce for the City of Mobile IDB. Mobile Bay Watch has been a vocal opponent of the Phenolchemie project since news about the project was reported in the media.

At a minimum, Ms. Calloway told the USA students, the cost-benefit analysis should include the negative impacts another chemical manufacturing facility may have on the local tourism and seafood industries, as well as the potential health risks and health costs of locating one more chemical company in a county that already has more than 50 companies that emit air pollutants.

Ms. Callaway also said the Board of Directors of Mobile Bay Watch include prominent oncologists and pulmonary specialists who are concerned about the cumulative health impacts of air pollutants that will be introduced by the new Phenolchemie project as well as other air pollutants released by industries already here. This concern prompted the president of the Medical Society of Mobile County, Regina Benjamin, M.D., to write a letter in December, 1997 to the president of the Mobile Area Chamber of Commerce stating "[W]e feel that it is not in the best interest of the citizens of Mobile County that the Chamber of Commerce continue to pursue the growth and development of heavy industry and specifically chemical and petrochemical companies. The further degradation of the environmental health and ecosystem of the county would not be served by the continued promotion of such industries. We would, therefore, urge the Chamber of Commerce to focus its economic development on non- polluting business and industries."

For a related article, see UPDATE: Cost-Benefit Analysis of Phenolchemie Project, in the February 2, 1999 issue of The Harbinger.

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