MEGA Questions Surround GlobalWatt

In November and December 2009, a corporation called GlobalWatt Inc. applied to the Michigan Economic Growth Authority for two different types of state incentives for a new solar module manufacturing plant in Saginaw. As a result of these and other incentives, which reportedly are worth between $39.8 million and $42 million, 500 new direct jobs were promised for the Great Lakes Bay region. Both deals were granted by MEGA.

However, an ongoing Mackinac Center investigation has produced evidence suggesting that on two MEGA applications, GlobalWatt may have misrepresented information critical to clinching the incentive deal. The possible misinformation relates to a competing incentive offer from Corpus Christi, Texas, and an alleged offer from the state of Texas. While these specific claims are the focus of this essay, these are not the only areas of concern related to this project.

Enough questions surround the special favors offered to this company that the Mackinac Center is calling for a state Attorney General investigation and a re-examination by the Michigan Economic Development Corp., which oversees the MEGA program. Given recent embarrassments (the Hangar42 and RASCO scandals), the MEDC should be particularly sensitive to deals involving possible misrepresentations of fact.

Possible Misrepresentations

First Michigan Request - Nov. 12, 2009

The first application was for a MEGA "high technology business tax credit." It was signed by GlobalWatt chairman and CEO Sanjeev Chitre on Nov. 12, 2009.

To apply for these credits, companies must describe the "competitive disadvantage" that makes locating in Michigan unattractive save for special favors granted by state government. GlobalWatt's submission explained they were "considering Texas" as a location for the new manufacturing facility, where "both the state and local government have offered substantial upfront cash incentives sufficient to fund a module lines [sic] in the first year, and, recruit and train employees." (Emphasis added.)

Local and state economic development officials in Texas, however, have informed the Mackinac Center that no upfront cash was offered to the company. GlobalWatt did request incentives from both, apparently including upfront cash from the state at least.

In addition, the local government referred to was Corpus Christi, whose Corpus Christi Regional Economic Development Corp. offered a $2.8 million incentive package in June 2009. However, this offer was contingent on GlobalWatt meeting a series of performance deadlines, including buying or leasing a building by the end of October. The company missed that deadline, perhaps because it had already decided on Michigan.

Therefore, GlobalWatt had in effect forfeited the Corpus Christi offer about six weeks before signing the Nov. 12, 2009, MEGA "high technology" credit application, which suggested that this offer was still on the table.

Second Michigan Request - Dec. 8, 2009

On Dec. 8, 2009, GlobalWatt signed a second application for a different type of incentive, a Brownfield Redevelopment Michigan Business Tax Credit. In this application, the company also made claims about Texas incentive offers that "included up front cash for assistance in purchasing and installing machinery and equipment and recruitment, training, and hiring of employees." Once again, according to the officials involved, no upfront cash had been offered by any Texas governmental entity.

Moreover, in a Nov. 17, 2009, letter to Chitre - almost three weeks before he signed the Michigan Brownfield credit application - Roberto De Hoyos, director of the Texas Business Development Fund, wrote, "[Y]our application has been reviewed and at this time the decision was made to decline request for use of Texas Enterprise Fund assets."

In an e-mail to the Mackinac Center, Lucy Nashed, a spokeswoman for the governor of Texas, was even more explicit in suggesting why the company was rejected out-of-hand:

Requests for Texas Enterprise Fund support undergo an extensive review process, which includes the company's ability to demonstrate a significant return on the state and taxpayers' investment, local support, job creation and wages, capital investment, financial strength of the applicant, and the applicant's business history, among other factors. GlobalWatt's application was reviewed, and the state declined their request for a Texas Enterprise Fund investment.

Summary of Possible Misrepresentations

In short, despite GlobalWatt's claims on its Michigan incentive applications:

• Neither the state nor the local Texas economic development agencies had offered upfront cash.
• Corpus Christi's offer of other incentives had already expired.
• The state of Texas had already (and unequivocally) rejected GlobalWatt's request for other incentives.

In fairness to GlobalWatt, if the firm had opened a Texas plant, it could have taken advantage of a state jobs training program that gives the local community college up to $1,000 per student for classes in skills useful to a job provider. While this could be characterized as an "incentive," this program is not restricted or "targeted" at particular firms, but is available to practically any job provider who opens a new plant in the state. Michigan and several other states have similar programs.

With that one caveat, these possible misrepresentations are not simply administrative details. Michigan's official tax credit agreement between MEGA and GlobalWatt contains the following language: "[I]f the MEGA determines that the Company misrepresented information in order to qualify for, or increase the amount of a MEGA Tax Credit, the MEGA may revoke the Company's designation as an authorized business. ..."

Also, Michigan law prohibits making a "false claim for credit or refund, either in whole or in part." Violations are a felony punishable by up to five years in prison and a $5,000 fine. Further, a provision of the MEGA statute states that a MEGA contract must contain "[a] statement by the eligible business that a violation of the written agreement may result in the revocation of the designation as an authorized business and the loss of reduction of future credits ..."

Details of GlobalWatt's Incentive Deal

GlobalWatt's Michigan incentive deal has three major components, two of which are referenced above. The first involves MEGA "high technology" tax credits. These are credits against the Michigan business tax that feature very low attainment thresholds. These credits are worth up to $5.9 million, according to GlobalWatt. If GlobalWatt is granted renaissance zone status (see below), the credits automatically become cash grants for any amount above the firm's site-specific MBT liability. (That liability is typically very low for start-up firms, so most of this $5.9 million could be in the form of state checks to the company.)

The second component is the "large brownfield" MBT credit worth $10 million. The MEGA Executive Committee unanimously approved this credit in December 2009.

Lastly, the city of Saginaw has granted a "renaissance zone" designation for the proposed plant. According to GlobalWatt's application, this exemption from practically all site-specific state and local taxes, including regular property taxes, could be worth $23.9 million over 15 years.

The value of these favors isn't limited to just the tax breaks and subsidies themselves: GlobalWatt has been using the MEGA deal as a government imprimatur of its legitimacy to entice local residents into making investments in the firm and to shield itself from well-informed criticism.

Concerns about GlobalWatt have been raised by a former consultant, who last August publicly questioned the company's ability to deliver on its promises. Chitre responded by pointing to his company's MEGA award. He told the Midland Daily News, "The state of Michigan has gone through every investigation they can on us before they allocated us the money."

As our investigation reveals, state scrutiny of this deal appears to be less than thorough. By granting these special favors, Michigan's economic development bureaucracy may unintentionally make taxpayers (or even investors) vulnerable to taking inappropriate risks.

The Mackinac Center made multiple attempts to contact Sanjeev Chitre at GlobalWatt. No phone call was returned. The Mackinac Center did speak with GlobalWatt incentive consultant Dawn Baetsen of Atlas Insight last week. She insisted that both Corpus Christi and the state of Texas did offer upfront cash incentives. We checked (again) with our sources in Corpus Christi (J.J. Johnston, executive vice president of the Corpus Christi Regional Economic Development Corp.) and with the Texas governor's office (Lucy Nashed); both continue to reject Baetsen's claims.

It should be noted that the concerns listed above are not the only ones surrounding this MEGA deal. On the MEGA application, GlobalWatt listed companies with which it claimed to have some type of business relationship. Representatives from more than one of these companies reported to us there was no such relationship.

Lessons and Recommendations for the Future

As in the recent RASCO and Hangar42 scandals, the possible impropriety here could very easily have been detected had MEDC staff exercised due diligence. A few phone calls to Texas or a Google search may have uncovered enough evidence to question GlobalWatt's claims. In an article posted in the Aug. 12, 2010, Saginaw News, reporter Kathryn Lynch-Morin describes the MEDC's insistence that it has exercised due diligence:

After discovering in March that (Richard) Short was a convicted embezzler, the state revoked his tax credit.

Since then, the Michigan Economic Development Corp. has beefed up its vetting process, which now includes extensive criminal background checks on all top company officials, business plan reviews and an analysis of growth potential. The vetting process was retroactively applied to GlobalWatt, Shore said. (Emphasis added)

The GlobalWatt details described here strongly suggest that MEDC's review processes may not only be inadequate, but compromised by a desire to push out as many press release-generating special business favors as possible.

The RASCO scandal is strong evidence for this conclusion: A refundable tax subsidy worth $9.1 million was granted to what may have been the fictional construct of a convicted embezzler on parole. Short, who had been convicted of financial fraud, stood proudly with the governor at a press conference where she touted new jobs for Michigan.

The Hangar42 film subsidy deal provides more evidence: Last February, Gov. Jennifer Granholm announced with great fanfare the opening of a major film studio thanks to an "assignable" tax credit worth as much as $10 million. A Mackinac Center investigation led to the arrest of the alleged buyer on a fraud charge, now pending in Kent County.

Even when the state is not being taken for a ride, recent empirical studies strongly suggest that MEGA does not generate higher net employment levels in Michigan.

These studies and other evidence highlight the futility of offering special favors to a privileged handful of investors, rather than creating an attractive climate for all job providers through fundamental reforms of Michigan's tax, spending, regulatory and labor law environments. At a minimum, the state should put its grossly obese corporate welfare bureaucracy on a strict diet that includes plenty of fresh transparency.