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February 2, 1999

Cost-Benefit Analysis of Phenolchemie Project

by Edmund Tsang

Professor Richard Ault of Auburn University, who is recognized in Alabama for his expertise on economic and cost-benefit analyses, said he has many questions concerning the cost-benefit analysis prepared for the City of Mobile Industrial Development Board (IDB) in granting bond financing and tax exemption for the Phenolchemie project. Dr. Ault's comments arrived too late for the December 1998 issue of the Harbinger to be included in the article on the cost-benefit study of the Phenolchemie project (Vol. XVII, No. 8, 12/1-31, 1998).

Jim Apple, executive director for economic development for the Mobile Area Chamber of Commerce and author of the Phenolchemie cost-benefit study for the City of Mobile IDB directors, presented the results to a class of engineering students at University of South Alabama last November. Apple said his analysis is based solely on tax revenue gains generated by the Phenolchemie project and on losses through tax exemptions. Apple showed the one-page summary that he said he gave to the IDB directors.

Dr. Ault's Comments

Dr. Ault said the Phenolchemie analysis "ignored any increase or decrease in local expenditures that will result from the project." The Phenolchemie analysis does not address whether agencies of local government have to increase spending, such as building and maintaining roads, providing police protection, and educating additional K-12 students as a result of the project, Dr. Ault said.

Dr. Ault said he has reservations regarding the "underlying assumptions" of the benefits. "Would those [created] jobs produce the tax revenues indicated?" Dr. Ault asked.

"The numbers presented say that the local government will lose $697,000 a year due to ad valorem tax exemptions and $1,000,000 on a one-time basis for sales- and use-tax exemptions. The $595,000 in education taxes are local taxes [gain]. In sum, this suggests a one time loss of revenues of $1,000,000 and an annual net loss of $102,000," Dr. Ault said. Apparently, the author estimated local taxes from salaries of workers and the $5 million in annual maintenance expenditures and arrived at a number large enough to offset the above, Dr. Ault added. "Are these details laid out in the report?"

"The fact that the project will have a positive impact on local revenue does not mean that fiscal benefits exceed the fiscal costs," Dr. Ault said about the Phenolchemie project. "I do not oppose economic development. I oppose wasting taxpayer money."

Conflict of Interest

Dr. Ault said a footnote in the summary of the Phenolchemie analysis demonstrates clearly the conflict-of-interest pitfalls that "blind" those charged with promoting economic development of Alabama. Although the Phenolchemie project "will require increased supply of electricity and natural gas to the site, both of which the utilities are unable of supplying," according to the footnote, Dr. Ault said most such projects consume large amounts of energy that will be supplied by these utilities. The "potential conflict of interest" arises for the heads of utilities of electricity and natural gas when they serve as IDB board members and vote to fund such projects and to grant tax exemptions, because an increase in demand for energy will result in a growth in the income of the utilities. If the bonuses of heads of utilities are tied to company income, Dr. Ault explained, then the votes of these IDB directors to approve the types of project represented by Phenolchemie would lead to their direct financial gain. "I think there is a conflict of interest," Dr. Ault said.

"I suspect that many of their executives truly believe that any effort to promote economic development is in the interests of the state of Alabama. They are convinced that the best way for them to provide service to their hometowns is to attract business, and they are blind to the prospect that economic development may not be in the public interest," Ault said. In Mobile, the heads of Alabama Power Company and Mobile Gas Services Corp. are in leadership positions on the City of Mobile IDB. The previous two presidents of the City of Mobile IDB from 1994 to 1997 were heads of Mobile Gas and Alabama Power, respectively.

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