If you have heard any news from Vermont lately it is likely a story about the allegations of fraud in an EB-5 regional center here. The SEC is investigating a pair of Vermont developers for running what some reports are characterizing as a ponzi scheme, improperly using money from investors intended for new projects to make up for cost overruns and or losses from earlier projects. In total, these developers have taken in about $350 million in EB-5 funds some $200 million of which was allegedly diverted from their intended purpose. There is even some speculation that one of the developers diverted $50 million for private use. Prior to this Vermont had been “held up as the squeaky clean kind of EB-5 project as opposed to many, many others all over the United States.”

What is the EB-5 program?

The EB-5 program was initiated as a “temporary” immigration program in 1990 as a way to boost foreign investment in the United States. This temporary program has been continually renewed ever since, as is often the case. In essence, it is a program that sells green cards, permanent resident alien status, to anyone, and their families, who are willing to invest in the United States.  The amount of investment required depends on where the location of the project being investment in, with $1 million being required for most areas but only $500,000 for areas considered as “underserved.” It is not surprising that about 90% of EB-5 projects are designated, rightly or wrongly, as taking place in these underserved areas.

There are some caveats of course. Initially, in order to qualify you for a green card the investment had to result in at least ten permanent direct jobs. As it turned out, this was a pretty difficult goal to reach so Congress altered the law to allow for regional centers where funds from many investors could be pooled and, rather than relying solely on direct jobs, they could count indirect jobs as well. If, as is the case here in Vermont, your project is building a resort you can count not just the people working the ski lifts and in the hotel, but the jobs at restaurants in a nearby town. These changes boosted participation in the program such that in 2014 the program reached its mandated limit of 10,000 visas for the first time.

(I am leaving aside for this article the questions about just who the people are who are investing in these EB-5 projects. There are concerns about criminals and terrorists using them to enter the country. I think these concerns are justified, but they are beyond the scope of this article.)

Why are some areas “underserved” in the first place?

One question that is rarely if ever asked when discussing the EB-5 programs is why are some areas of the country “underserved.” While there are likely many reasons, the major factor is government regulations which limit the desirability of investment in these areas. While I only have knowledge of Vermont, there is certainly not much difference between this area and others which qualify as underserved by the EB-5. In Vermont, Act 250, which controls the development process, energy mandates and a general dislike of development slows projects down such that many never get off the ground. Developers take one look at the hurdles they will need to clear and decide it is not worth the effort.

The development climate in Vermont is so bad that the American Legislative Exchange Council, in their 8th annual Rich States, Poor States report lists Vermont as 49th out of 50 (50 being the worst) for economic outlook “due to the state’s ratings on 15 different variables, including tax rates, labor policies and overall regulatory burden.” The 9th annual report has just been released and Vermont is once again ranked 49th out of 50. In fact, Vermont has never been ranked higher than 49th in any of the nine years of the survey.

A good example of the delays this process can entail is to look at Wal-Mart and their attempt to build a store in northeastern Vermont, the same area where the troubled EB-5 programs are located. Wal-Mart had been attempting to build a store there and has finally succeeded in gaining approval and breaking ground. After ten years. Lest this be seen as a fluke, the last Wal-Mart constructed in the state is in St. Albans, on the more developed side of the state, and the process for getting it approved and built took twenty years. Many companies simply do not have the resources to sustain such perseverance.

Given the economic climate in Vermont as a whole and the fact that the area the EB-5 projects are in is the most depressed area of Vermont, it is no wonder that private investment has not been forth coming. There simply is not a lot of potential to make a profit, and profit potential is what drives investment. As my mother pointed out regarding the projects at Burke Mountain, “People have been pouring money into the mountain for as long as I can remember and there is nothing much to show for it.”

With private investors unwilling to sink money into what are certainly losing propositions, another way had to be found. The government could either change the underlying causes by remove barriers and disincentives to business in order to encourage private investment or they had to find another way to incentivize investors. Enter the EB-5 program which, in the words of Senator Leahy, “once promised to transform the Northeast Kingdom and other underserved communities through millions of dollars of investment at no cost to the taxpayers.” This is a point that deserves emphasis. Rather than unwind the actual causes of the poor economic conditions in these areas, both state and federal governments chose to pursue a program that would, perhaps, cover up the disaster their policies had caused.

The problem is that by ignoring these underlying causes they are still present despite the influx of capital from people who simply want to move to this country. Permitting regulations, energy costs, property and income tax burden and more still contribute to the higher costs associated with development in this area and decrease the chance of any developments turning a profit. Indeed, a GAO audit of the EB-5 program requested by Senator Leahy last year “questioned its economic impact.” So while there may the isolated successes, as a whole there appears to be scant evidence that these programs provide much in the way of overall benefit for the millions of dollars invested.

A project I would have named as a success for the EB-5 program, Jay Peak Resort, is, it turns out, nothing of the sort. The management team that has taken over operations in the wake of the SEC charges is finding that the resort is anything but profitable. According to the receiver put in charge of the resort, “the ski resort operations are currently losing money and in danger of not having sufficient funds to continue operating beyond the very immediate future.”  Hardly the picture of a profitable enterprise, especially given the amount of money spent there.

It is precisely this lack of profitability that will require further investment, likely from additional EB-5 participants. Investment that will be needed to continue to cover up for the failure of the government policies that caused these depressed areas in the first place. And isn’t the covering up of the lack of returns from an initial investment by means of seeking new investors the very definition of a ponzi scheme?

If the government actually wanted to spur investment in currently “underserved” areas, they could take no better step than to unwind all the factors that hinder development in the first place. Get rid of costly energy mandates and streamline / reduce the burden of the permit process. Allow people to develop their land, or sell it to developers with the only restriction being that the development doesn’t actually damage the property of those around them. Open up immigration, especially for the successful businessmen and professionals who are the desired participants in the EB-5 program. Leave them free to immigrate and invest their money where such investment will achieve the greatest economic return, not where compelled by the government to disguise failed economic policies.

As it is in so many areas, freedom is the key to economic development and prosperity.