development fund. Income from interest and loan repayments also go into the fund and may be used for additional loans. B. LOAN EXPERIENCE OF THE AUTHORITY At the outset of this paper, the highlights of loan operations of the Pennsylvania Industrial Development Authority since its inception just over 2 years ago were listed. Fuller details, as of October 31, 1958, follow: Total loan commitments (68 projects)- Estimated annual payroll in projects.. $7, 917, 450 $23, 742, 260 $37,054, 500 11, 761 It will have been clear, of course, that these figures do not represent the sum of Pennsylvania's industrial growth during the 2-year period. These figures are restricted to industrial development projects located in chronic labor-surplus areas in the financing of which community groups, banks and insurance companies, and the Commonwealth, through the authority, have joined hands. In fact, something like four times this amount of new factory employment has developed by virtue of Pennsylvania's new industrial development program outside PIDA financing, whether directly or indirectly. 1. Interest rates on authority loans In its early deliberations devoted to the setting of operating policies, the board apprehended its primary obligation to be so to conduct its affairs as to create the maximum of new employment opportunities. Though directed to charge interest on its loans, it did not interpret that direction to require it to make the maximum possible operating profits through such charges. Recognizing that, in accordance with the act, its loan operations must avoid even the semblance of a giveaway approach, it has, nonetheless, conceived its discretion as to interest rates to present an opportunity to offer to interested companies a special inducement to locate or expand plants in chronic laborsurplus areas. It had been, and continues to be, the practice of the participating local industrial development groups to charge an interest item into its transactions on its own portion of the project financing. This has been an obvious necessity when local subscription funds have been raised by evidences of indebtedness bearing interest. This practice has been followed, also, where local funds were raised wholly by gift, or through a combination of debt to the citizens and gift. In these latter instances, the local group has, however, enjoyed a latitude under which it could fix its rates lower than might otherwise be the case. In light of the foregoing, the authority has established a policy creating a minimum 2 percent interest rate on its loans, which it varies in accordance with the community group's interest rate when the latter is between 2 and 3 percent. Where the community is charging in excess of 3 percent, the authority arrives at its own rate after examining the local circumstances involved, always with a view to keeping its own interest rate consistent with the purpose of creating an inducement. The objective of the policy is to persuade the community group to make its interest rate as low as practicable. Low interest rates on half of the project cost (the community's 20 percent share and the authority's 30 percent) mean a significant saving in interest expense to the tenant-buyer, and a meaningful inducement. Interest rates on the first mortgage financing from banks and insurance companies remain, of course, at the going commercial rates. 2. Repayment of authority loans Having been left free also to set the term of its loans, the authority has, on the basis of community experience in Pennsylvania with this type of financing, set a maximum term of 25 years. In practice, however, the maximum term has seldom been used; most of the authority's loans are set up for repayment within a period of 20 years and less. Again, however, by way of enhancing the attractiveness to companies of its financing plan, the authority early determined that it would, where requested and where other factors seemed to warrant it, defer repayment of its loans until after retirement of the first mortgage in the given case. This practice has the obvious effect of reducing annual amortization charges being paid by companies occupying the plants financed under the plan; while no ultimate saving of principal is involved to the companies, they, nonetheless, have the benefit of reduced expenses in new facilities during the early years of operation, when needs for operating economies and working capital may be primary considerations. In instances where deferment of repayment of its second mortgage loans has been requested and granted until retirement of the first mortgage, the authority has stipulated in its loan agreements, again as a matter of established policy, that the interest rate on its second mortgage rises to that of the first mortgage upon retirement of the latter. Since at that point an authority's loan is in a first mortgage position, enjoying a 100 percent lien on a project in which it has invested only 30 percent of the cost, such mortgage paper would be attractive to outside investors, provided the interest rate thereon were commensurate with going commercial rates. For these reasons, the authority has anticipated that the board of directors would then sell its mortgage paper of this type and secure a quick return of its outstanding money into its revolving industrial fund. 3. Plant expansions, branch plants, relocations The nature of traditional community industrial financing in Pennsylvania, coupled with the characteristics of the authority's loan powers, has enabled it to serve both the out-of-State firm and the established Pennsylvania manufacturer. Of the 68 authority loan commitments through October 31, 1958, 19 have been for the expansion of plants already located and operating in Pennsylvania; 5 have been for new branch plants of Pennsylvania manufacturers. Of the remaining loan commitments, three are for new plants being built in part with funds borrowed by community groups using previously financed buildings as security; they are being built in advance of and in order to attract commitments from a manufacturing firm to locate. The 25 remaining loans are for projects which involve the relocation of plants from other States; and 16 are for branch plants of companies from other States. The places of origin of these relocations and branch plants will be of interest. They are as follows: 4. Characteristics of projects financed American manufacturing industry is essentially small business in the sense that out of the numerical total, the giant steel, chemical, automotive, and heavy industrial equipment firms, for example, are a small minority. The model manufacturing firm is a fabricator or component producer of one type or other. Thus, in the listing of firms occupying plants financed under the PIDA program, few are nationally known. Some are, however. The Eberhard Faber Pencil Co., relocated in Wilkes-Barre, Pa., from Brooklyn in a plant financed in part with PIDA funds, is a major national producer in its field. Chrysler occupies a plant for the production of ordnance tank parts at Scranton, similarly financed. Mergenthaler (Linotype) is to occupy another at Wellsboro; Tetley Tea, still another at Williamsport. The 68 projects have ranged in size from a building of 8,000 square feet to one of 260,000 square feet; in cost from $16,800 to $2,400,000. PIDA loans have ranged from $10,500 to $720,000. Plant employment in the projects has ranged from 25 workers to 600. Productwise, the plants include food, postal-canceling machinery, tubular copper products, steel scaffolding, scientific instruments, aluminum building materials, aircraft engine components, commercial chemicals, and garments, in addition to the products noted in the instance of the nationally known firms listed above. CONCLUSIONS The Pennsylvania industrial development program of industrial financing grew directly out of Pennsylvania industrial development experience at the local level. It works effectively in Pennsylvania mainly because it is essentially only an extension of an approach to financing tested and tried at the community level over a period of many years, prior to participation by the Commonwealth. The use of public funds for financing of private industrial activity, at least non-Federal governmental funds, has been and perhaps will for the foreseeable future be questioned on philosophic grounds. It has not been seriously questioned on those grounds in Pennsylvania, and the program has the full support of the business community of the State; banks and insurance companies have entered fully into it with their first mortgage funds. That this acceptance has been so readily forthcoming is doubtless attributable to the critical need for Pennsylvania to achieve economic redevelopment in its distressed areas. So long as those areas suffer economic decline, they constitute a serious drain on the financial resources of State and local government (through expenditures for unemployment compensation and public assistance, among other things) and a serious wastage of manpower. Pennsylvanians have considered that redevelopment purpose as a valid object for the expenditure of public funds in industrial financing. From the standpoint of small business, the availability of financing through State and local development corporations can be an important consideration in determining what projects can be undertaken and whether expansion is possible. Indeed, the increasing use of such corporations may be an important factor in the ability of small business to maintain an important position in the national economy. 47608-59 A NEW LOOK IN BUSINESS FINANCE 1 The sweetpotato, Mr. Webster says, is "a large, thick, sweet, and mealy tuberous root, which is cooked and eaten as a vegetable." To the people of Williamston, a small eastern North Carolina town, it's much more than that. It's a source of 110 jobs and weekly payrolls of $8,000 several months of the year and a means to a more profitable use of nearby farmland. Here's how it all came about. A few years ago Williamston-like so many other small towns-was scoring zero in its efforts to attract new industry. There were several small manufacturing plants, but jobs were scarce. Workers were leaving town, and tobacco acreages had just been cut drastically. Townspeople, farmers-everyone agreed that new industry was needed and needed badly. The trouble was that no one knew exactly what to do. Then the people decided to grab the bull by the horns and establish their own factory. The result was Martindale Foods, Inc.-a successful eastern Carolina owned sweetpotato canner whose market area already covers most of Southeastern United States. And there's more to come. Already Martindale plans to double in size through the sale of new stock, the acquisition of another plant in adjoining Halifax County, and the addition of more vegetables to the company line. Almost everyone in the area has felt the beneficial effects of its operations. A typical success story? To a large degree it is, but the establishment of the Martindale factory involved an interesting new anglea loan from the privately owned Business Development Corp. of North Carolina. Conventional lenders were not equipped to provide the needed risk capital, so the project threatened to bog down from lack of funds before it got rolling. The development corporation was contacted; it examined Martindale's prospects carefully, liked them, and extended the credit necessary to launch the operations. Within a year, their faith in Martindale had been vindicated; the loan had been fully repaid with proceeds from a larger longer term loan from a conventional lender. DEVELOPMENT CREDIT CORPORATIONS The Martindale story typifies the work of statewide development credit corporations-the providing of risk capital to industrial firms that are unable to meet the standards for conventional long-term credit. State development corporations are entirely privately owned and financed, but they have the quasi-public responsibility of fostering State economic development and are actively encouraged by the chartering States. Almost all aid is extended in the form of direct loans to firms, but some States also permit direct stock purchases, acquisition of plants for sale or lease to prospective customers, and loans to other development groups. 1 Article, Monthly Review, Federal Reserve Bank of Richmond, Va., March 1959. 106 |