Scathing audit of high-tech projects slams ESD for lack of due diligence on Tesla at RiverBend

Buffalo

Empire State Development lacked the due diligence to ensure that the RiverBend project that houses Tesla was a safe investment that would meet its job and financial commitments, concluded a scathing audit by the state comptroller on oversight of high-tech projects.

The result could be that state taxpayers are left on the hook for a billion-dollar project whose risk was never fully investigated, despite the red flags in Tesla’s public reporting about how little experience it had with producing solar.

And that’s just one of many criticisms leveled against ESD in the report quietly released this week. News 4 Investigates first reported that the comptroller was auditing high-tech projects, including Tesla at RiverBend.

Despite the state’s significant $959 million investment to build and equip the facility, ESD’s assessment included only a “single-page company profile on SolarCity (the company that acquired Silevo, the original anchor tenant of RiverBend) and a memo on the financial situation of FSMC,” the report states.

The RiverBend project with Tesla is the centerpiece of Gov. Andrew Cuomo’s Buffalo Billion economic development initiative. The audit also is critical of how ESD managed the Buffalo Billion initiative, but it included a separate narrative on the RiverBend project by itself.

ESD’s cost-benefit analysis of the project was “mainly informational and limited to a comparison of the proposed amount of economic assistance and the project’s construction budget.”

In addition, “the analysis reflects only the impact of construction-related activities and indicates that, unlike projected funded through certain other economic development programs, infrastructure and economic growth investments projects may involve no permanent job commitments, as these types of projects generate long-term benefits not captured in the period of analysis.”

ESD’s cost-benefit analyses compare project evaluation results to established performance measures, such as infrastructure an economic growth investment projects.

The benchmark ESD sets for these types of projects is $30 in economic benefits for every $1 spent.

However, the Tesla at RiverBend project has not come close to that benchmark, showing only 54 cents in economic benefits for every $1 spent.

An ESD official wrote to OSC that the comptroller failed to note that this project is different from typical ESD projects. For example, ESD said the manner in which OSC calculated the economic analysis “presents a dramatically incomplete assessment of the full project benefits.”

ESD also mentions that the equipment purchased by the state at the Tesla facility is owned by the state. Therefore, the equipment could be re-leased or sold in the event the project failed, ESD said in a response to the OSC.

The OSC audit found that ESD’s assessment didn’t review inherit risks to the RiverBend project, even though Tesla stated in public records that it had hardly any experience in high-volume manufacturing of solar panels.

The comptroller audit states that this should have been a red flag for ESD that Tesla may not be able to meet its agreement to produce 1 gigawatt of solar energy each year and meet the job targets.

“ESD’s lack of due diligence raises concerns that, prior to awarding hundreds of millions of dollars, no real scrutiny of these projects is done, increasing the risk that projects will not fulfill publicized high-tech job and private investment goals,” the report states.

“Such a lack of basic due diligence increases the risk that public dollars will be spent with too little return on investment.”

The comptroller notes that when the RiverBend project expanded in the fall of 2014, the state said 5,000 jobs would be created statewide with more than 3,000 in Buffalo. But the original agreement has been amended more than 10 times, sometimes pushing the target dates back and making it less clear “what and where the remaining jobs would be.”

An example given is the October 2015 amendment that no longer required the 1,460 job Tesla was to have by April to be “high-tech,” which News 4 Investigates first reported in 2019.

Instead, the wording changed to require that those jobs only be in Western New York, and that 500, not 900 as originally proposed, of the 14,60 jobs would be at the Tesla plant.

Another problem the comptroller found is that it was never clear when the official “fully complete” designation was to be placed on the project, which would start the clock on the job commitment goals. The facility was supposed to be fully completed by the end of 2016. The contract between Tesla and Panasonic to begin making solar cells and modules was finished in the summer of 2017.

Tesla and Panasonic both operated inside the plant for more than two years before the state started the job goal time clock in April 2018. And ESD didn’t disclose this until April 2019 when News 4 Investigates began asking for Tesla’s job target reporting documents.

“Tesla was able [to] operate for about 2 ½ years before being held accountable for employment and investment targets,” the audit found.

During this time, Tesla has had numerous problems launching its Solar Roof, which is now on its third version. Former employees of the plant told News 4 Investigates that they would constantly miss production goals and there’d often be little work to do, so some workers stood around on their cell phones.

From October 2016 through 2018, Tesla kept saying it was ramping up solar production, but the opposite happened. The company reported as recently as the first quarter of 2019 that solar roof deployments “significantly declined.”

Even with the challenges, Tesla said it did meet its first employment and investment targets in April 2019 by having 500 employees and $130 million invested.

But Tesla’s job numbers and investment data have not been tested by ESD.

In fact, ESD told the comptroller that the agency has yet to audit any of Tesla’s reported data, despite telling News 4 Investigates that it would.

The comptroller recommended three changes:

  • Conduct comprehensive assessments of the risks, costs, and economic benefits of projects before funding decisions are made to determine if projects should receive significant State investment
  • Develop standard performance metrics and then evaluate projects to determine their actual economic benefits compared with the State’s investment.
  • Standardize the public reporting of projects to eliminate discrepancies and provide the public with accurate information on project costs, statuses, and economic benefits using a clear and consistent method.

In a Feb. 18 letter to the OSC, Elizazbeth R. Fine, legal and general counsel for ESD, she said the agency disagrees with the audit’s flawed findings “because they mischaracterize ESD’s role regarding these projects and ignores significant changes that have been implemented when ESD assumed enhanced oversight of the identified projects.”

For example, ESD said its role over these projects, including RiverBend, was limited before 2016 when nonprofit entities such as Fort Schuyler Management Corporation and SUNY Poly had control.

“It is also important to note that OSC approved every ESD request to draw State funds and provide them to the non-profits FRMC and FSMC,” Fine wrote.

“Finally, and most importantly, the audit makes no findings that any actual expenditures for these projects were inappropriate.”

OSC responded that ESD has been responsible for the oversight of Buffalo Billion projects since their initiation.

ESD’s full response to the audit is pasted below unedited:

“After an extensive, two-year State Comptroller review of SUNY Poly’s high-tech portfolio, this audit confirms what is already known:  all ESD expenditures were made appropriately, and not a single company within the portfolio has missed an annual investment or job creation commitment. 

The significant reforms implemented by ESD since 2016 – all but ignored by OSC – have yielded increased transparency, oversight and accountability, stronger executive leadership, improved finances, additional research funding and lower vacancy rates, leading directly to upstate commitments of more than $4 billion in new investment and over 2,500 new created and retained jobs.”

REBUTTALS

  1. The audit misrepresents ESD’s role in overseeing projects prior to September 2016 and, in fact, criticizes ESD for actions actually taken by Fuller Road Management Corporation (FRMC), Fort Schuyler Management Corporation (FSMC) and the Research Foundation for SUNY (RF). As such, these conclusions criticize ESD for a role it did not have.
  1. The audit goes so far as to criticize companies for not meeting FUTURE hiring goals. This is akin to taking a photograph in the middle of a race and chiding the runners for not yet having completed it. In reality, not a single company in this report has missed a job or spending milestone that is outlined in their project contracts.
  1. OSC failed to recognize that ESD had no formal legal control over any of these entities and grossly overstated ESD’s authority by asserting that ESD should have taken a greater role in overseeing projects.
  1. The audit argues that ESD should have performed more due diligence and project monitoring, but OSC failed to outline any standard by which these activities should have been carried out; nor has OSC suggested any specific responsibilities or duties that OSC feels ESD did not perform in this regard. Therefore, this statement has no basis.
  1. ESD’s actual role prior to September 2016 was limited to funding administrator. As such, ESD reviewed payment requests and provided funding based on invoices, not unlike OSC’s role in having approved every ESD request to draw state funds and provide them to the SUNY Poly-affiliated non-profits. 
  2. After September 2016, ESD’s primary role in existing projects (that had begun prior to 2016) was to honor the state’s commitments and to complete those projects as effectively and expeditiously as possible.
  3. The audit repeatedly takes issue with ESD not having further assessed the projects; however, ESD did not originate these projects, had no role in selecting the companies, was not a signatory to the agreements, and was not managing these projects.. 
  1. Even after ESD took on a larger role in 2016, the audit criticizes ESD for not exercising greater “due diligence” for projects that were then well underway—by which point they were already subject to existing legal agreements.
  1. While OSC identifies “15 high-tech projects with ESD-approved funding totaling $2.2 billion,” auditors only focused on four projects and buried a disclaimer at the end of the report stating that their audit is “based solely on the review of selected projects and cannot be projected to the entire population of high-tech projects as a whole.” Even then, the audit only focuses on the RiverBend project, an indication that, despite OSC’s initial claim that it would audit ESD’s “high-tech strategy,” OSC undertook its “high tech” audit solely in the hope of being able to criticize this specific project.
  1. OSC completely misunderstands the Tesla project, its history and ESD’s role, which was well underway before ESD began overseeing these projects in 2016. And OSC disregards the fact that Tesla has met and exceeded its employment targets for its first reporting period.
  1. OSC is critical of the fact that Panasonic employees at Riverbend are being counted towards Tesla’s job commitments. In actuality, Tesla has met, and even exceeded, its statewide employment targets for the first reporting period without utilizing the Panasonic jobs to do so. Of further note, in its recent Q4 2019 annual report, Tesla reported that it was in the process of “hiring hundreds of employees” at the RiverBend facility.[1]
  2. OSC appears to assert as a critique that Panasonic – a company with no agreement with the State – employed more personnel at the facility than Tesla, which reveals OSC’s blatant desire to find fault with this project and demonstrates its lack of understanding for the benefits of or tendency for large manufacturing projects to create significant multiples of additional new indirect jobs. The basis of the project is to bring jobs to the region, not to myopically quibble over whose payroll the employees are on. 
  3. The report claims that ESD did not perform economic analyses prior to allocating significant state investment. This could not be further from the truth.  ESD diligently monitors its high-tech programs to ensure that company-reported economic impacts are accurate and comport with all relevant statutes and regulations. ESD’s standard practice includes an assessment of each company that involves reviewing company information to perform a financial condition analysis that assesses a company’s overall strength, viability and finances. ESD also monitors projects through site visits, meetings, calls and grant payment reviews.
  4. By mischaracterizing ESD’s significant and ongoing reforms as being limited to changes in FRMC/FSMC board policies, the audit ignores nearly all positive achievements since ESD took over oversight of the projects in September 2016. Most importantly, the establishment of NY CREATES which in collaboration with ESD, has taken significant steps to “right the ship”. Specific steps include:
  1. Improved leadership team: ESD has brought on a new leadership team, led by former GlobalFoundries CEO Dr. Douglas A. Grose, which has created a new organization (NY CREATES) to more efficiently, effectively and transparently manage projects as a unified enterprise distinct from SUNY Poly’s academic leadership. Recent project announcements and improvements are reflective of this team and approach.
  2. Increased oversight: ESD increased its involvement in FRMC and FSMC board appointments, including adding ESD’s CEO as a non-voting, non-fiduciary representative, and requiring ESD’s consent/nomination for other board appointments.
  3. Improved legal agreements: ESD has ensured that every new company agreement that has been entered into since September 2016 for which existing agreements were not already in place (NYS-Applied Materials META Center, NYS-IBM AI Hardware Center, Cree, NexGen) includes significantly enhanced and more definitive project milestones, reporting requirements, clawbacks and financial penalties
  4. Improved finances: The combined outstanding principal owed by FRMC and FSMC has fallen by over 20%, and, based on prior and ongoing ESD actions, the entire portfolio is now expected to accrue surpluses beginning in Fiscal Year 2021.
  5. Reduced vacancy rates: More than 100,000 square feet of clean room space that was previously vacant has since been leased to tenants including Applied Materials, Danfoss, NexGen and IBM, offsetting the portfolio’s share of operating costs and adding several tens of millions of dollars in net new revenue each year.
  6. Increased research funding: New research partnerships between SUNY, Applied Materials, Cree, and IBM will provide over $100 million in new research funding.
  7. Increased economic impacts: Job and spending figures from existing projects continue to grow, and new commitments include over $4 billion in investment and approximately 2,500 new retained and created jobs.

[1] See: https://ir.tesla.com/static-files/b3cf7f5e-546a-4a65-9888-c928b914b529.

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