The Aker Shipyard and Tasty Baking Company in Philadelphia have absorbed more than a half-billion in taxpayer funded grants, low interest loans and tax breaks, collectively called “investments” by politicians.
Both stand on the edge of bankruptcy today.
This is part one of a two part series examining the history of the two Philadelphia companies, their reliance on taxpayer funds over the years and the ultimate failure of governmental “economic development” to keep them afloat.
Kvaerner-Aker Shipyard
In May of last year, Ben Bernanke, Chairman of the Federal Reserve, took a walking tour of the Aker Shipyard in Philadelphia and then moved next door to look at the new state-of-the-art bakery of Tasty Baking Company, which had only recently opened its doors. Glad handing, back slapping and talking with workers, Mr. Bernanke seemed to be enjoying himself.
“It’s been an inspiring morning for me,” Mr. Bernanke said while lunching later with Philadelphia business types. He claimed to have just seen a metropolitan area “being reborn with new businesses and new jobs.”
Obviously, his vision was less than 20/20 since Tasty Baking had greatly reduced its work force, down to about 600 from 1,000, and Aker Shipyard, once Kvaerner Shipyard, had never approached its projected job creation since city, state and federal officials decided to pump in $419 million in 1997.
Pennsylvania state government is no slouch when it comes to funneling money to purportedly private enterprises, a process known as “corporate welfare.” Although the state constitution prohibits giving tax dollars directly to private firms, the state frequently skirts the restriction by giving the money to local authorities, politically created economic and industrial community groups and government boards. These front groups then pass the money on to the companies.
Former Pennsylvania Gov. Tom Ridge, then-Philadelphia Mayor Ed Rendell and then-U.S. Vice President Al Gore joined together for a ground breaking ceremony at the defunct Philadelphia Navy Yard on Aug. 4, 1998 to welcome the Kvaerner operation.
“I have no doubt [Kvaerner] will be here for decades and decades and decades,” said Mr. Rendell, who as governor, now wants to pump $42 million more into the enterprise before he leaves office on Jan. 18.
“This project is about jobs – 8,100 jobs,” Mr. Ridge predicted in 1998. It turned out to be about 1,000 jobs – tops. Today about 600 workers are precariously holding on in hopes of getting a new ship to build.
The state gives away about $1 billion or more annually in hopes of creating private sector jobs. The money is generated in the form of a bond issues, which means taxpayers will have to pay back about 150 percent the amount borrowed.
These bond issues are frequently refinanced midway through their lives, ostensibly for better interest rates, but also to spin off additional cash for “investment” or meet current debts of governmental bodies.
Some of the high profile private sector beneficiaries of this political largesse over the past decade have been all the major league sports teams in Pennsylvania, Dick’s Sporting Goods, Comcast, Cabella’s and Wal-Mart.
These companies have collected handouts for locating here, building new facilities, moving existing facilities within the state and expanding warehousing facilities. Smaller firms wind up with lesser amounts to buy new equipment they allegedly cannot afford or other operations that will help them “retain” jobs, meaning they will go out of business otherwise.
Of course, the competitors to these firms pay the taxes that give their uncompetitive competitors a leg up.
In the case of the Philadelphia shipyard, most of the jobs created went to non-residents.
According to Gary Gaydosh, head of the Philadelphia Metal Trades Council that represents 11 unions at the yard, as much as 40 percent of the jobs went to foreigners hired by the Swedish shipbuilder. “They brought them in as consultants,” Mr. Gaydosh said. The practice continues today, Mr. Gaydosh said, even since Aker took over the yard from Kvaerner.
In 2000, then-state Auditor General Robert P. Casey Jr. (now-U.S. Senator Casey) unveiled a highly critical audit of the Kvaerner operation and the Ridge Administration’s “investment’ of tax dollars in the operation. Mr. Casey is a Democrat.
Mr. Casey’s audit concluded, less than two years into the operation, that taxpayers paid for wasteful and extravagant spending by Kvaerner management. Kvaerner managers had to repay some of the money they used for personal luxuries including new homes, landscaping, cars and toys for their children.
The economic free-wheeling of Kvaerner managers might be understood in light of the fact the Swedish multinational company was verging on bankruptcy at the time and had, in 1999, announced it was divesting itself of its shipbuilding operations. Mr. Casey’s audit also showed the firm had violated tenants of its agreement by ignoring contracting with minority and women-owned companies. It also questioned whether the Philadelphia Shipyard Development Corporation, the funnel for tax dollars to the private business, had “…exercised due diligence in assuring that the shipyard would ultimately benefit Pennsylvania businesses and workers.”
It took until 2005 before the shipbuilding facility was named Aker Philadelphia Shipyard. Aker had been a ship building division of Kvaerner before the pending bankruptcy and hostile takeover of the financially troubled parent allowed Aker to finally assume the Philadelphia project.
Meyer-Werft, a German shipbuilder, had offered to take over the vacant shipyard in 1995 in exchange for $167 million in public funds, but Mr. Ridge had turned them down, causing considerable political blowback on himself. One of the lures of the $419 million project in 1997 was that Mr. Ridge faced reelection in 1998.
He won.
In November 1998, Donald Bartlett and James Steele, prize winning investigative reporters, wrote a multi-part series on corporate welfare for Time magazine. Part of that expose read:
Time’s investigation has established that almost without exception, local and state politicians have doled out tens of billions of taxpayer dollars to businesses that are in fact eliminating rather than creating jobs. Some of the money has gone to prop up individual companies and avoid the consolidation within industries that an unfettered market would bring about. Some has been pumped into profitable companies, making them more profitable. Some has been awarded to companies that have threatened to move if they don’t get it. Some has been diverted to businesses that local politicians have somehow divined will be more successful than their competitors. And last, some has gone to entire industries that are shrinking.
The article changed nothing and in the intervening years, the cost of politicians, corporations and lobbyists attempting to pick “winners and losers” through the “investment” of taxpayer dollars has only quickened, while not being any more successful.
Over its 12 years of operation, the Kvaerner-Aker operation has built and sold 12 ships, tankers and cargo ships. Now, there are no buyers for a new ship on the horizon.
When Kvaerner ran into trouble in 1999, its CEO, Kjell Armstrong said, “There are simply no orders. It’s a little difficult to maintain a shipyard in a situation where we have no orders.”
Or, as Mr. Bartlett and Mr. Steele put it in their TIME magazine series:
“Cities go to extremes to keep jobs in the manufacturing sector, partially because they pay more than most service jobs. Here is how Edward G. Rendell, mayor of Philadelphia, explained why last year $307 million in local and state economic incentives in addition to $119 million in federal aid was being given to Kvaerner ASA, Europe’s largest shipbuilder: “Those are good, honest jobs that pay a living wage and significant benefits. Jobs you can build a family on.”
True enough. But Rendell cannot reverse the tide of economic forces. And no industry is a better example of the futility of subsidies than American shipbuilding. It has not been a vital U.S. business for decades. Yet surplus shipyards continue to be kept alive by subsidies from local and state governments, the Federal Government and sometimes all three. Without this aid, consolidation would have occurred long ago–as it has in virtually every other field, from defense to banking.”
