The thinking behind former Mayor Mike Rawlings’ “Grow South” campaign was that City Hall needed to encourage investment in the city’s historically segregated and economically shortchanged areas. But what was standing in the way in the first place?
Multiple causes are commonly invoked, from active racism to passive unawareness of the potential. But another great disincentive to investment in Southern Dallas and other nonaffluent parts of the city is what two authors writing in the Harvard Business Review have called “policy risk.”
Usually associated with foreign “emerging markets” (the new, more correct term for what used to be called the Third World), policy risk is the chance that a host government will gin up bogus regulations to extort money or even totally tank the business of an investor, either because he has fallen out of favor or because he just looks like a soft target.
Consider that car wash on Martin Luther King Jr. Boulevard about which I have written way too much. The city changed the zoning and sued to shut it down, even though the owner, an East Texas man, had done everything the city asked him to do to combat crime in the area.
Think about the more recent case, a Texaco service station in far East Dallas on the border with Garland where the city is suing an investor from Houston who is in the same situation. Asked why the city wants to shut down the Texaco, a city prosecutor told Robert Wilonsky of The Dallas Morning News, “Because when you talk to citizens in the community, the first thing that comes up is, ‘What are you going to do about the Texaco?’”
Here’s the one I still can’t stop thinking about. In the period of 2005-2006, a cabal of southern Dallas elected officials led by state Sen. Royce West pressured an investor from California to give them an ownership stake in an enormous shipping and warehousing development planned for southern Dallas. When the investor refused and called it a shakedown, local officials used every regulatory power in the book, from water rights to transportation planning, to run him out of town.
The investor, Richard Allen, lost millions of dollars and went bankrupt. He told me later that his one regret was looking at the map of southern Dallas in the first place, seeing unbelievably low land costs and not asking himself, “Why is this land so cheap?”
The rote response has always been that racist white people make the land cheap in southern Dallas and other heavily minority parts of the city by redlining those areas, by withholding investment for racist reasons. I don’t think any reasonable person doubts there has been a whole lot of that.
But following the Allen travesty, there also must be another important side of the story, another important disincentive. Even if big investors have never heard about some car wash on MLK in South Dallas, even if the Texaco station in far East Dallas is way beneath their radar, I have to think some kind of word got around somewhere somehow on Allen’s huge, disastrous and utterly undeserved financial and personal shellacking. If you’re a big potential investor and somebody wants you to sign a check for a deal in southern Dallas, how do you defend yourself against what happened to Allen?
Witold J. Henisz, a professor at the Wharton School at the University of Pennsylvania in Philadelphia, and Bennet A. Zelner, a professor at the University of Maryland Robert H. Smith School of Business, argued in their piece published nine years ago that none of the traditional business tools work effectively as hedges against that kind of risk. Insurance won’t do it, because no insurer is dumb enough to insure you in a place where you’re sure to get skinned.
Setting up your own escrow fund is a dumb idea, too, if it means you have to raise twice the cost of the investment and risk losing half of it if the local pols decide to put you in the ditch. Life’s too short. The world is too big.
Forget contracts. Nobody broke a contract with Allen. I don’t think anybody has broken one with the owner of the car wash, and I doubt they have with the Texaco. They don’t need to break contracts. That would just expose them to recourse.
The city of Dallas, like any heads-up emerging market regime, has everything it needs to carry out a hit on an investor while staying within the law and contracts. Allen needed a bridge. They made sure he didn’t get the bridge. He needed authority for an international tax-free zone. They held up the zone. He had completed a five-year process to gain permissions and sign-offs from a host of local planning and regulatory agencies. They said they needed to do a fresh round, five more years of planning before he could start.
I remember asking Dallas County Commissioner John Wiley Price why Allen needed to undergo a fresh round of planning. Price asked me if I was against planning. He asked it in the arch tone he might have used to ask me if I was against virginity. He wore his regulatory powers like a choir robe while he ran the guy through with a pike.
This is important: The Dallas Morning News, the North Texas Council of Governments and the Dallas City Council all heartily endorsed the campaign to kick Allen out of town. It was a southern Dallas deal on the ground, but the fix was in at the top.
In the business review article, the authors say there is money to be made in dodgy emerging markets, and they suggest ways it can be done: “The network of relationships in a society greatly influences policy outcomes,” they write, “especially in countries with weak legal systems. To turn these networks to their advantage, international investors must identify and engage local politicians’ power bases.”
At the risk of oversimplifying, I would translate the article as saying, “Give Royce West a callback.”
An example of a company that knows how to navigate these tricky waters, the authors say, is Eni, an Italian state-owned oil company:
“Once again, Eni has shown the way, this time in Kazakhstan. Through its subsidiary Agip KCO, Eni has adopted a business model that responds to the former Soviet republic’s economic and social needs.
“The company funds the construction of various public works, including the national library, the prime minister’s residence, schools, computer labs, and multifamily housing units for the poor. As a result, many Kazakh officials now have a stake in Eni’s success.”
Again if I may translate, Allen would have known exactly what to do in southern Dallas had he been an Italian. He would have gone straight for that detail about the prime minister’s residence; his huge shipping and warehousing project would be a reality today; and Royce West would be living in an immense castle with gleaming gold and silver turrets, by now the region’s greatest tourist attraction.
In the past, I have reported — based on court testimony — that the Allen case had a lot to do with a major competitor. The competitor, whom I have flailed enough by name already, has deep political and social roots in the city and used those connections ruthlessly to run Allen out of town. But that’s what competitors do. They compete. It’s what they will always do, if they can. There is no fix for it. We shouldn’t want to fix that.
Nor do I like the racist explanation of that’s just how they do business in southern Dallas. No, as I explained above, the Allen case was driven by factors external to southern Dallas and was fully supported and fueled by lots of rich white folks.
The problem, the thing that can make Dallas an emerging market investment climate, is something shared across all of the city’s main racial, ethnic and geographic lines. The problem is home-fry. Outsiders get home-fried here, as if this were some all-cousin hick town in the boonies. Sometimes local folks even get home-fried.
Once the verdict is in, once the people in power have put a landowner or business owner in their sights, basic property rights and honest dealing go straight out the window. That willingness of Dallas City Hall to abuse its regulatory powers for political ends operates citywide, but it exacts a more bitter price in southern Dallas and other poor parts of the city. Those areas have a limited amount of capital to draw on from within. They ought to be looking for investment from East Texas, Houston, California and elsewhere, rather than treating investors as interlopers and carpetbaggers and enlisting City Hall to run them off.
Dale Davenport, who owns the car wash on MLK, is on the board of a bank in East Texas and owns multiple businesses and investments. He is a sophisticated investor. Dallas home-fried him big-time.
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A local zoning board refused even to hear evidence that he had done everything the city had asked him to do to fight crime at his car wash, which is in a high-crime area. A local judge refused to hear evidence that crime is worse all around the car wash — that the car wash, by the city’s own metrics, is an island of law in a sea of crime. The judge and the board shut him down. The judge slapped other onerous requirements on him that will pressure him to sell at a cheap price.
At the funeral of a City Council member who had been headed to federal prison for bribery before she died in a car wreck, a community leader used her oration to praise the deceased for having helped get the car wash killed. Neighborhood leaders already are gleefully advancing plans for what they intend to do with Davenport’s property after it is in their control.
When it was all signed, sealed and delivered, Davenport asked me: “Who would invest in southern Dallas? Knowing this, who would invest there?”
Good question. Perhaps it needs to be someone who has already been successful in Kazakhstan.