DO THE DUKAKIS PARTNERSHIPS PAY? Except for job-training programs, the governor's vaunted public-private joint ventures seem rarely to accomplish anything the marketplace cannot do better.
By Louis S. Richman REPORTER ASSOCIATE Sarah Smith

(FORTUNE Magazine) – EVEN BEFORE the election, Michael Dukakis made a lasting change in the way politicians think about relations between business and government. He has challenged his party's old faith in big-government nannyism by proposing frugal-sounding ''partnerships'' with the private sector as a new approach to solving society's problems without further pumping up government deficits. Whomever voters pick as President, a dozen states are investigating the concept or experimenting with it, and Democrats in Congress are sure to find it appealing. What will it mean for business? As practiced in Massachusetts, partnership delivers not less government but more. Says Harvard economist Lawrence Lindsey: ''Dukakis believes that markets are inefficient and that government must do what they cannot or will not do for themselves. Too often, however, it's a case of markets failing to do what the governor wants done.'' Mostly the partnerships amount to industrial policy in small doses, distorting investment patterns and imposing unnecessary costs on both the public and private sectors. To grasp the scope of partnership in the Bay State, one has to sort through a tangle of a baker's dozen of quasi-public and private agencies and scores of programs (see table). Eight agencies are financing bodies with mixed track records, each sustained by a different combination of private and public capital and management. Four of these attempt to leverage government spending with private capital to spur business expansion. The remainder help steer investments to areas or projects favored by the state. Two other agencies, largely successful, help schools and businesses train workers for skills that are in short supply and aid laid-off workers in finding new jobs quickly. Another pair oversee a congeries of partnerships | that support the microelectronics industry and five state-sponsored Centers of Excellence. The centers act as hothouses for such sunrise industries as biotechnology, photovoltaics, and polymers, often by providing grants that bring businesses and universities together. It's hard to tell whether they have advanced the dawn any more rapidly than the market would have. The final agency promotes exports and solicits foreign investment. What has this Chinese menu of agencies done to fan the Massachusetts economy? Not much, according to public policy experts Ronald Ferguson of Harvard's Kennedy School of Government and Helen Ladd of Duke University. Ferguson and Ladd, who studied the impact of state policy on the Massachusetts economy over the past decade, credit instead the research centers at MIT and Harvard, strong markets for the state's high-tech and service companies, and the stimulus that came from the Reagan defense buildup. Even Dukakis's planners seem willing to concede the point. Says state economic development director Alden Raine: ''If we hadn't had a boom in the Boston region, there would have been nothing to steer to depressed communities like Lowell and Taunton.'' Midway through his first term the Duke and his squires spotted what they thought was a market failure, a so-called capital gap. Many businesses, state officials believed, were unable to find ''reasonably priced'' financing to fund their startups or expansion. The governor convened a task force made up of public officials, labor leaders, bankers, and industry executives to study the issue and recommend solutions. Most of the private sector participants concluded that there was a gap and that the state could probably help. But some thought the proposal missed the basic point. Says former member Edson de Castro, CEO of Data General Corp.: ''The real problem with capital development in Massachusetts was that the business climate was so bad nobody wanted to invest.'' In 1978 the state set up the Massachusetts Industrial Finance Agency as a quasi-public body to issue tax-exempt industrial revenue bonds and lend the proceeds at below-market rates to companies that would locate in state- designated development districts. Since its founding, MIFA has raised $4.4 billion to fund some 2,100 plants, stores, and office buildings. The investments, it claims, stimulated the creation of some 76,500 jobs for the state. But as MIFA acknowledges, there is no way to know whether those jobs would have been created without its backing. . When Congress revoked the interest exemption on industrial bonds in 1986, MIFA shifted to a new tactic that its director, Brian Carty, calls ''the next frontier of investment technology.'' To give smaller companies access to AAA- rated credit, MIFA lined up a group of European banks, including the Netherlands' Rabobank and Britain's Barclays, to issue and sell commercial paper to institutional investors. The banks, eager to develop business in the U.S., lend the proceeds at an interest rate just a few basis points higher than their cost to smaller MIFA-approved companies. Carty hopes to raise $500 million this year. But the future success of MIFA's novel approach depends on whether the still small number of MIFA's partner banks will continue to float their paper, and whether a secondary market develops for the institutional investors who buy it. ANOTHER state-sponsored financing agency, called Massachusetts Technology Development Corp., invests seed capital in infant high-tech ventures. Launched in 1978 and financed with $8.2 million in state and federal funds, it is run by a board made up of state officials and business executives. MTDC has backed 48 companies, and has added $4.1 million to its capital base by cashing out of its successful early investments. With a flood of new venture ideas pouring out of Massachusetts-based research laboratories, MTDC has plenty of good projects to back. But do they need Massachusetts's money? Since MTDC's birth, the U.S. venture capital industry has mushroomed from just $2.7 billion to $30 billion, and the biggest problem now is finding worthwhile places to put all the loose cash (see Money & Markets). MTDC argues that its principal clients, companies needing less than $1 million, have a hard time getting investors' attention. But that begs the question, says Howard P. Foley, president of the Massachusetts High-Technology Council Inc., a lobbying group that represents the state's leading high-tech employers. Says he: ''For the government to get involved in underwriting new ventures comes down to a decision of how willing the state is to put taxpayers' money at risk.'' The Dukakis partnership principle offers one alternative: Persuade businesses to risk their money. That's what the governor did to the Massachusetts insurance industry. From 1978 to 1982 the insurers, led by John Hancock, invested $100 million to capitalize a partnership called Massachusetts Capital Resource Co. Since its start, MCRC has filled yet ; another ''capital gap'' by providing long-term subordinated debt at market rates to 140 companies. Just over half are slow-growing manufacturers; the balance are young high-tech companies. MCRC President William Torpey thinks that the funds have stimulated hiring, but admits he cannot tell whether the jobs might have been created without MCRC. Whatever its merits, MCRC is not an easy model for other states or the federal government to emulate. Virtually all its capital is supplied by the state's four top insurers. Their executives give the company a sharper investment focus than a more diverse group of smaller investors could. And few other states have comparable concentrations of capital quite so susceptible to persuasion. Dukakis extracted the insurance industry's cooperation by using the largely antibusiness state legislature, which his party dominates, as a club. The life insurers, among the state's largest employers, have long been a favorite source of tax revenues for the legislature. In exchange for their participation in the partnership, the governor agreed to reduce slightly the taxes on their investment portfolios -- although the industry still has an estimated state tax load six times the national average. Says Torpey: ''The net effect has been to make a terrible situation merely a bad one.'' FAILING BUSINESSES, of course, are too risky for any private lender to back, even with political arm-twisting. To close this ''capital gap,'' the Dukakis administration created a state fund called the Economic Stabilization Trust and backed it with $3 million. Billed as a loan source of last resort to distressed businesses with sound turnaround plans, EST money has helped 27 struggling companies get back on their feet. In 1987, for example, it lent Lou and Dianne Marani $50,000 to pull one of their two failing women's apparel factories in depressed New Bedford out of bankruptcy. With an additional $250,000 of EST money, the Maranis merged the factories and shortened delivery times to such customers as Liz Claiborne, making Marani Industries more competitive with foreign manufacturers. Helped by the weaker dollar, they turned a $24,000 profit in the first half of 1988 and employ 215 people. In other instances, however, EST has made loans most notable for their political expediency. Take the case of Morse Tool, a doddering industrial drill-bit manufacturer. Also based in New Bedford, 124-year-old Morse was one of the city's largest private employers in the early 1980s, supporting a payroll of around 400. But wages were high, productivity was slumping, and the market was shrinking. Morse's owner, Gulf & Western, decided to throw in the towel in 1984, and found a Michigan entrepreneur willing to buy the factory. But he ran into trouble in 1986, and the state hastily arranged a $1.5 million EST loan to keep him afloat. All to no avail: Within a year the new owner filed for bankruptcy and shut Morse down. Two new potential buyers were found: a Scottish firm called International Twist Drill looking to break into the U.S. market, and St. Louis-based Harbour Group, a conglomerate that owns Greenfield Industries, a toolmaker with a plant in western Massachusetts. Harbour wanted to keep the Morse plant shut and merge its marketing and distribution with the Greenfield plant. The sale would have paid back EST, along with Morse's other senior creditors. Harbour also offered to keep 40 salespeople in New Bedford, add 70 workers to its payroll in Greenfield, and donate the antique Morse machinery to the New Bedford Whaling Museum, which was eager to get it. To keep people working in New Bedford, however, state officials vigorously backed the Scottish bid. EST swapped its $1.5 million loan for company shares and a pledge to reopen the plant. Though the Scots have rehired over 200 workers, it's anyone's guess how long they will keep the factory going. Their workers in Scotland are paid about half the $13.50 an hour that Morse machinists receive. The Whaling Museum will probably get its artifacts long before the state recovers its money. THE MASSACHUSETTS partnerships that work best concentrate on retraining workers. The most successful, Bay State Skills Corp., doles out some $2 million of its $5.4 million annual appropriation to help companies work with the state's colleges and vocational schools. The 25 programs it helped fund last year offered courses from statistical process control for skilled factory workers to international management for executives who want to boost their companies' exports. The training programs lead to better jobs for those already employed or develop workers in fields where skills are in short supply. State grants range from as little as $15,000 up to $150,000, and where training needs are greatest, companies have matched every dollar of state money with as much as $5.50 of their own. Once a program is started, Bay State Skills lets the companies and the schools keep the program running without ^ further state investment. A Dukakis partnership success? Not quite. Bay State Skills was set up by his predecessor in 1981. Do give Dukakis credit for the Reemployment Assistance Program. A four-year- old effort administered by a quasi-public agency called the Industrial Services Program, it has helped 26,636 workers facing layoffs or plant closings to freshen their skills and get back to work quickly -- at wages averaging 92% those of their previous jobs. When General Electric announced it would shrink its turbine and jet engine production in Lynn and lay off 2,000 employees, for example, GE and the state organized a worker-assistance center, financed with $1.5 million from the company and $1.2 million in state and federal funds. General Electric and ISP expect that almost all the workers will be reemployed within a year of their layoffs. THE MAJOR VIRTUE of Dukakis's public-private partnerships has been that they haven't cost Massachusetts taxpayers much money -- yet. Come a recession, ''market failures'' are sure to multiply, and solving them will inevitably mean digging deeper into the pockets of both the public and the private partners. None of the state-financed programs have sunset laws, and few have any rigorous means of demonstrating the benefits they claim. Says James Howell, chief economist of the Bank of Boston: ''What begins for economic reasons may end up being preserved and expanded for political ones. There's a lot of policy entrepreneurialism going on here.'' Harvard economist Lawrence Summers, a key Dukakis adviser, insists that these programs do not amount to government-directed industrial policy. ''Partnership percolates up from the grass-roots level and involves a government role only where it is needed,'' he says. ''It does not put the state in the position of picking winners and losers.'' Summers's distinction seems to get blurred in practice. To direct economic growth to poorer areas of the state, the Dukakis administration designated five regions as ''Targets for Opportunity.'' The state uses its resources as a magnet to draw private investment to the targeted areas, while putting obstacles in the path of developers in the prosperous Boston suburbs by requiring them, for example, to pay for public road improvements. Says state development director Raine: ''The time I don't spend boosting growth in one area I spend retarding it in another.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: MIKE'S MINI MITI ; MASSACHUSETTS PARTNERSHIP PROGRAMS