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Monday, November 3, 2014

EB-5 is not the problem. What South Dakota did with it is.

The EB-5 program is not a great idea.  It came at a time when outsourcing jobs and wealth to other countries by major corporations seemed to need a balancing factor.   EB-5 invited foreign investors to put money into American business.  There are examples of where the investments did launch sound businesses.  However, the program was a very minor factor until the great recession.  Although U.S. corporations were rescued and benefitted from stimulus efforts through which they accumulated capital, they held on to the money rather than make investments in enterprises and jobs which would bolster the economy.  The reluctance of corporations to invest in America caused developers to do some serious recruiting of EB-5 investors.

The major defect of the EB-5 program is that it did not provide any regulatory means to vet would-be developers of business or to assess their competence and honesty.  Consequently, the program attracted the usual contingent of connivers and schemers with business plans that were suspect from their inception.  South Dakota’s handling of EB-5 projects is among the most flagrant for its fleecing of investors with shoddy business schemes. 

The bankruptcy of Northern Beef Packers triggered an examination of the EB -5 program in South Dakota and produced the revelations of a graft scheme between state government and business interests.  The beef plant scheme was shady and conniving in its origins.  Originally, the beef processing plant was to be a subsidiary operation to the turkey plant in Huron.  For a number of reasons which were never disclosed because of the secrecy with which business and government operates in South Dakota, the plan was canceled.  One of the reasons in circulation was because the governor, Mike Rounds, took issue with the people who were trying to promote the plant.  Then the promoters took their plan to Flandreau, where money invested by the Flandreau economic development and the South Dakota Farmers Union for planning was lost when the planning company sort of evaporated.   The schemers then contacted people in Aberdeen who revived the plan for a beef processor.

The plant was beset from the beginning by poor planning, the number of grafters who are always attracted to money schemes like flies on a dung heap, and a bevy of incompetents who had not the foggiest idea of how to build any legitimate business, let alone one as complex as a beef processor.

However, beef producers in the region saw a regional beef processor as a potential boon for their operations.  The challenge was to find a niche in a market that is dominated and controlled by the Big Four beef producers in the U.S., who control over 80 percent of the market.  There were smaller operations that found successful business, particularly those that were offering hormone and anti-biotic free beef and were also specializing in grass-fed beef, which was earning a premium price in high-scale restaurants.  Promoters of the beef plant, particularly Richard Benda, indicated that the plant was being set up to serve that specialty market, but there did not seem to be anybody developing the market.  NBP was signed up with a marketing organization to distribute its beef, but the agreement was canceled because of the bumbling and constant delays in the construction of the plant.  When the plant finally was operating, it produced boxed beef, the ordinary cuts of meat found at grocery cases.  Word was that this beef was shipped to Korea.  If that was the case, it meant that NBP did not have a U.S. market, no place in this country to sell its beef.  When it began layoffs leading up the bankruptcy, the company said it did not have funds with which to buy beef.  But generally, if a processor has a market to serve, it can find funds to buy the beef to process.  It appears that NBP lacked the most essential element for a viable business:  a market to sell its product.

The financing of NBP was a mess, covered up by business and governmental secrecy.  One must conclude that operation was doomed by incompetence, ignorance, and scamming schemes from its outset, and the people who understood the market did not have enough influence to establish the firm in a way that gave it a chance to succeed.

While EB-5 is not a well-conceived and administered program,  it has had its successes, but its failures are cases of incompetents posturing as business successes and fraud.  EB-5 is a negative title in South Dakota because of what the collusion between state officials and purported business interests did with.

As people go to the polls in the state, they need to remember that EB-5 in South Dakota is what the state made it.  They have a chance to change the way politics and business has worked.  By Tuesday night, we’ll know if the people of the state want to eliminate the secrecy and fraud, or if it will be business as usual. 

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Aberdeen, South Dakota, United States