Would Public Funding for NCInnovation Violate NC’s Umstead Act? | Eastern North Carolina Now

    Publisher's Note: This post appears here courtesy of the John Locke Foundation. The author of this post is Jon Guze.

  • There are several reasons to oppose the proposed $1.4 billion appropriation to NCInnovation
  • One of them may be the questionable legality of such an arrangement
  • NC's Umstead Act prohibits state government from competing in the provision of services typically provided by private enterprises

    The North Carolina General Assembly is currently debating a budget proposal that includes $1.4 billion in funding for an organization called NCInnovation (NCI). This would be a colossal public investment given that NCI has - since its inception in 2018 - done very little apart from raising money, publicizing itself and its mission, and lobbying on its own behalf.

    According to the NCI website:

    NCInnovation seeks state investment to establish a public-private partnership that will:

  • Develop and optimize regional innovation networks to connect industry, academia, and entrepreneurs across the state
  • Accelerate and leverage applied research from North Carolina universities to target market-based opportunities
  • Provide grant funding to support the commercial growth and scale of emerging technologies to create jobs and improve the lives of all North Carolinians

    The first two parts of that mission statement are rather vague. What is an "innovation network," and how can such a network be developed and optimized? What does "accelerate and leverage applied research" even mean?

    The third part, however, is all too clear. NCInnovation proposes to take money from taxpayers and distribute it to whichever private companies it selects.


    Last Friday, Locke senior vice president of research Brian Balfour posted a piece that asked a very good question: "What sort of innovative companies could we expect NCInnovation to invest in?" He went on to note that NCInnovation has given us clues to the answer by citing heavily subsidized Vietnamese carmaker VinFast as an example of the kind of investment it hopes to make. As Balfour observed, that choice does not inspire confidence:

    VinFast reportedly lost nearly $600 million in the first quarter 2023. This comes on the heels of the company's losses of $2.1 billion last year and $1.3 billion in 2021.

    The financial losses are the latest in a string of bad news for VinFast. A recall of all of the 999 VF8 2023 vehicles sold in the U.S. was issued last month due to safety concerns. Moreover, VinFast's latest model has been nearly universally panned as "abysmal," "very, very bad," and "simply unacceptable" by major auto publications.

    In an opinion piece that also appeared last Friday, Locke president Donald Bryson asked four more questions about the funding proposal:

  • Why are the state Department of Commerce and the executive branch excluded from this board of directors?
  • Why are there no Environmental, Social, and Corporate Governance (ESG) investment guardrails in the legislation?
  • How will NCInnovation guarantee research collaboration with North Carolina's public universities?
  • Why will NCInnovation not be subject to North Carolina's open meetings or public records laws?

    These are all good questions, and we must hope the General Assembly insists on satisfactory answers before giving such a huge sum of money to NCI. There's another question that could be asked, however:

    Does endowing NCInnovation with public funds and authorizing it to transfer those funds to private, for-profit companies violate the Umstead Act?

    That's not an easy question to answer, but the General Assembly would do well to at least think about it before granting such a huge outlay of taxpayer money.

    Blurring the lines between public and private

    Originally enacted during the depression, when the distinction between public agencies and private enterprises was relatively clear, the Umstead Act states that:

    it shall be unlawful for any unit, department or agency of the State government ... to engage directly or indirectly in the sale of goods, wares or merchandise in competition with citizens of the State ... or to maintain service establishments for the rendering of services to the public ordinarily and customarily rendered by private enterprises.

    Private venture capital firms find, nurture, and fund innovative new businesses all the time. Since NCI proposes to do precisely that, it follows that NCI will be rendering services to the public that are ordinarily and customarily rendered by private enterprises.

    Nevertheless, since NCI will continue to be - technically - a private corporation, the answer to the question posed above might appear to be "No." It is more complicated than that, however, and the complications highlight a growing problem in North Carolina and across the country: the blurring of the public/private distinction.


    NCI says it wants to establish a "public-private partnership." Unlike more conventional public-private partnerships in which it is the private party that provides most of the funding, in this case the funding would be provided almost entirely by the public. The $23 million that NCI has raised since it was founded in 2018 is a pittance compared with the $1.4 billion in public funding it is requesting.

    The request raises the question: Is a publicly funded organization operating under the auspices of and with authority delegated by the General Assembly truly private? Or is it, instead, a public agency within the meaning of the Umstead Act?

    If the General Assembly is so rash as to approve NCI's funding request, the courts will probably have to wrestle with that question. Before that happens, however, the General Assembly needs to think very carefully about whether it really wants to go down a path that blurs the lines between public and private in this way. If the General Assembly deliberately chooses that path, it should first do what it did with respect to the kinds of public-private partnerships that have become common for construction contracts, i.e., enact legislation to minimize the agency and accountability problems that such partnerships inevitably entail.

    A better approach, however, would be for the General Assembly to avoid those problems altogether by refusing to sanction this kind of public-private partnership altogether.

    In discussing the foolish decision by state and local governments to offer more than a billion dollars in subsidies to the failing carmaker VinFast, Balfour concluded by saying:

    Government not only should not be in the business of picking winners and losers in the marketplace with taxpayer dollars, it has a very poor track record of doing so.


    Of course businesses fail all the time. The problem is that government-funded programs like NCInnovation force taxpayers to become investors in businesses against their will.

    Delegating that power to a private party like NCInnovation would make that bad problem even worse.
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