MANAGEMENT: Study Reports Superfund Effects On Small Business

David Davenport

Camp Dresser & McKee Inc.

Potentially Responsible Party (PRP) status has affected the ability of small firms (those with under 500 employees) to raise capital, invest in plant equipment and create jobs according to Superfund's Impact on Small Firms' Investment Decisions. The report, a study of 5,000 PRPs, was sponsored by the American Council for Capital Formation Center for Policy Research.

The report indicates that management is presently focused on short-term survival rather than long-term growth. Researchers found that 39.1 percent of all small firms reduced or delayed investing in plant equipment after being named a PRP. Forty-six percent of that response came from firms with fewer than 20 employees.

Twenty-six percent of the firms reported that their capital costs increased after being classified as PRPs. For the smaller firms, less investment and slower economic growth will result from the higher capital costs, according to the report.

The report also noted that employment decreased in more than 25 percent of the respondents after being named a PRP, with the majority of those (15 percent) cutting staff between one and five. More than 61 percent experienced no change in employment, and 13 percent of the respondents increased their employment. Hiring decisions are made on the basis of growth expectations and the ability to finance continued growth, said the report (see chart).

The amount of credit and terms of credit also were affected, according to the report. Nearly 20 percent responded that PRP status affected bank credit amounts and include 7 percent that were denied credit increases and 13 percent that experienced credit reductions. Under terms of credit, 40 percent of the respondents noted that creditors required a personal guarantee and more than 37 percent found that banks increased the amount of required collateral. Rather than raising interest rates, bankers imposed terms and conditions to reduce credit risk exposure.

PRP status had a significant impact on senior management time for 87 percent of the respondents, according to the survey. More than 50 percent dedicated 1 to 5 percent of management time, or nearly one business day a month, to Super-fund-related issues during the last five years. "There are some things that [managers] have to deal with directly such as working with the lawyers representing them," said Jeffrey Sohl, co-author of the survey and director of venture research at the University of New Hampshire, Durham, N.H. Super-fund functions, such as filling out forms and keeping up with information, become a major distraction to managers, according to Sohl. "Managers have to stay on top of this issue since it's a pretty substantial liability hanging over their heads," he said. In the long run, the consequences of the management time devoted to PRP issues will be felt increasingly, said the report.

Nearly 70 percent of the respondents felt that the current liability system for Superfund is a major problem. "They feel that they did nothing wrong and they have to pay for it. They follow all the regulations, and try to be as diligent a corporate citizen as possible. Then they get slapped with something that could drive them out of business." The report noted that nearly 75 cents of every Superfund dollar went to legal and consulting fees during the last five years. Only 16.4 percent cited clean-up standards as a problem and 14.8 percent cited the remediation process.

According to Sohl, Superfund effects are not making as significant an impact as they will in the future. "Underlying effects are really going to come out later on. It erodes away at small business' ability to be competitive and react quickly to changes," he said.

The report was conducted in cooperation with the National Federation of Independent Business by Professors William Wetzel and Jeffrey Sohl of the University of New Hampshire. For more information, contact Margo Thorning, ACCF, 1750 K Street NW, Suite 400, Washington, DC 20006-2300. (202) 293-5811.