RATING THE ENTERPRISE ZONE : These public-private partnerships have had mixed success. Some wonder if they are worth the effort.

In a rough, graffiti-stained neighborhood south of downtown Los Angeles are two businessmen, Richard Breen and Lance Kluger, who are polar opposites when it comes to the merits of enterprise zones.

Count Breen a supporter of these programs designed to boost investment and create jobs in poor areas. Breen used the plan to qualify for a low-interest government loan to expand his shipping business that might have otherwise moved to the suburbs.

“It worked,” he said. “It was win-win” for himself and the city.

Forget it, says Kluger. His experience with the enterprise zone became a costly fiasco for his family’s clothing business after a city-sponsored development loan fell through. “We’re sorry we ever met anyone from the city of Los Angeles,” Kluger said.

So it goes these days for enterprise zones in Los Angeles and elsewhere nationwide. The zones so far have been a mixed bag, with some successes but many failures, sparking doubts about whether these well-intentioned social experiments are worth the effort.

Enterprise zones have taken over where urban renewal programs and the War on Poverty have left off. They are public-private partnerships to provide businesses in depressed areas with certain financial incentives, mainly tax breaks, if they hire the hard-core unemployed or expand their operations within the zone.

At issue is whether the private sector can be any more effective than government in cleaning up and reviving areas plagued by deep-seated social and economic problems. So far, true success has been rare.

Enterprise zone advocates says these programs reduce welfare costs by hiring the unemployed, infuse declining neighborhoods with new investment and act as catalysts in forcing local officials to focus on development and employment issues.

Yet, the evidence to date indicates that enterprise zones do not have the firepower to make meaningful change in areas that need it most. They have yet to get federal backing despite a decade of effort.

State-run zones have done little to improve inner-city neighborhoods like Watts, where unemployment, poor education, discrimination, apathy and crime are overwhelming problems. Hiring programs in these neighborhoods have met with little success, government officials concede.

“If you ask me for an honest opinion if enterprise zones work in the inner city, I’d say no,” said Juanita Tate, a community activist in South-Central Los Angeles.

Enterprise zones have also been criticized as unfair, inept and difficult to analyze. Government officials are often at a loss to quantify the effectiveness of their programs and how many jobs they have provided to those who most need them.

Yet, the zones have worked in some industrial neighborhoods that still have a business base and in rural communities that have high unemployment rates without debilitating crime problems. Officials in Porterville and Madera in California’s Central Valley say the enterprise zones have spurred their redevelopment efforts.

The U.S. government has never passed a meaningful enterprise program because the zones, tagged “revenue losers,” have been a low priority in a time of domestic spending restraints. Without federal backing, most of the state programs have never really taken off.

“State taxes do not affect business decisions like federal taxes do,” said Alan Eric Jones, head of the Evansville, Ind., zone. “With federal incentives some of these programs would take off like Roman candles.”

Enterprise zones were again eliminated from the most recent federal budget accord after being approved by the Republican and Democratic leadership in Congress. The program was eventually cut out because it was expected to cost the government more than $1 billion over four years.

First embraced by former President Ronald Reagan, the zones are a favorite of Jack Kemp, secretary of Housing and Urban Development. The Bush Administration is expected to try again next year to pass a federal program.

Most experts believe that even the best zones are doomed to limited success unless the federal government implements its own program. Currently 37 states have enacted their own programs since the early 1980s. California passed two separate, but similar, programs in 1984 that operate side by side.

Though most state programs are said to be ineffectual, about a dozen appear to have made genuine, if modest, progress. The state of California, for example, boasts that enterprise zones produced more than 6,700 new jobs last year on total investments of $300 million.

California has 19 zones statewide, including five in Los Angeles, with plans to add more. Others are located as far north as Eureka and as far south as Calexico. Seven are located in Central Valley cities, including Fresno and Bakersfield.

Though the zones attract little public attention, their merits have been fiercely debated in academia and government. Their cause was dealt a blow in 1988 when the General Accounting Office, the watchdog arm of Congress, panned the enterprise zone program in Maryland.

Yet, the enterprise zone concept received a major boost last year when a study by Marilyn Rubin, an associate professor at City University of New York, concluded that the enterprise zone program in New Jersey yielded the state a minimum of almost $2 in new taxes for every $1 spent.

Even if the zones are successful, they are often viewed as unfair because they favor certain neighborhoods and cities over others. Cities usually compete fiercely to get the enterprise zone designation.

“It’s always controversial,” said S. Charles (Gary) Garofalo, who heads New Jersey’s enterprise zone program. “You always have some cities saying: ‘Why do they have this and we don’t?’ ”

The early evidence shows that the success of state-sponsored enterprise zones hinges on far more than financial incentives, such as tax breaks. Experts said the programs are only going to work well if local governments are adept and aggressive in marketing the zones to the business community and cutting through red tape at City Hall to facilitate development.

“If you just declare the zone and say: ‘Here are the tax breaks,’ businesses will just yawn,” said Michael Jenkins, head of the San Diego enterprise zone program.

One of the most successful urban zones in California is located in southeast San Diego, a rundown but still viable neighborhood that is on the rebound, according to state and local officials. A new industrial park along Interstate 15 is the crown jewel of the area’s redevelopment effort.

One businessman in the San Diego zone, Diego Aguilera, stands to reap a major windfall in tax relief because he recently purchased a new $200,000-press for his commercial printing business, located in a drug-plagued neighborhood not far from the Coronado Bridge.

The state sales tax that he paid on the press, about $14,000, can now be used as a credit against this year’s income tax. Aguilera says he’ll use the savings to buy added equipment.

“Whoever set up the enterprise zone had a great idea,” said the 56-year-old former newspaper pressman.

The enterprise zones have helped to breathe new life into depressed parts of California’s Central Valley, where unemployment is high and incomes are low. Second-tier cities there are scrambling to grow and diversify their tax base to reduce their dependence on agriculture, the traditional economic staple.

Madera claims to have lured 13 major new businesses into its enterprise zone in the past year, setting off a construction boom in the sleepy town of 25,000 people 25 miles north of Fresno. Among the new buildings in town is a $12-million distribution center built by Gottschalks, a department store chain.

Porterville, a town of about 30,000 people nestled against the western edge of the Sierra Nevada mountains, about a three-hour drive north of Los Angeles, received a huge economic shot in the arm last year when Wal-Mart, another department store chain, chose to build a distribution center in the city’s enterprise zone.

The size of 22 football fields, the $30-million Wal-Mart facility is expected to employ at least 600 people and be the third-largest employer in town when it opens next year. “This is the biggest thing that has ever happened to Porterville,” said City Manager C.G. Huffaker.

What remains difficult to pinpoint--and it’s a problem in all zones--is the exact role that the enterprise zone plays in luring new business to a depressed area.

Though Wal-Mart stands to save millions of dollars in state taxes, company officials have indicated that the enterprise zone was a not primary factor in their decision. The most important considerations were the quality of Porterville’s work force and its easy access to major highways, they say.

Possibly the nation’s most successful enterprise zone is in Evansville, an Ohio River town of 130,000 people where about 4,000 new jobs have been created since its zone began in 1984.

With able management and strong support at City Hall, the zone is credited with sparking a turnaround in Evansville’s aging industrial sector that had been hard hit by plant closures in the early 1980s.

There are two enterprise zones in the back yard of downtown Los Angeles, and the results there have been mixed at best. One zone is in the Central City area, located just south of the Santa Monica Freeway, and the other is farther south in Watts.

In Watts, enterprise zones have done little to attract new business or ameliorate deep-seated social and economic problems.

“Watts is a tough sell,” said Paul Hiller, head of the state zone program for the California Department of Commerce. “Outsiders know there are better places to set up shop.”

Indeed, Watts is worse off today than it was before its devastating riots 25 years ago, claims Jasper Williams, a city official who recently took over as head of the Watts zone. “The disenchantment is more obvious and people have less hope today,” he said.

On the other hand, about 415 new jobs were created last year in the Central City enterprise zone, whose location makes it a natural business distribution point.

“We’re definitely a key element in what’s happening,” said Williams, who ran the Central City zone until recently. “But quite honestly, because of the location, a lot of this (business activity) would have happened anyway.”

Business leaders and government officials also concede that few of the new hires are the hard-core unemployed who need jobs the most. Hiring these applicants allows companies to qualify for tax credits, but successes are few.

Drug problems disqualify some applicants and most of those hired do not last long in the tough entry-level jobs that require heavy manual labor, businessmen and government officials say.

“If all you have been doing is sitting around and watching Oprah Winfrey, that (heavy) lifting gets old fast,” Williams said.

A major setback in the Los Angeles zone program occurred last year in what became a nightmare for Lance and Ben Kluger, a son-and-father team whose clothing business bearing their name has been a fixture in the Central City for decades.

The Klugers were to be pioneers in a city-sponsored industrial bond program that was highly touted by Mayor Tom Bradley at a press conference as a way to help business expand within the Los Angeles zones.

The Klugers were perfect: successful and stable. And they planned to use the low-interest bond fund to finance a new manufacturing facility on 29th St. The $7-million complex was to provide 200 new jobs and cut short the Klugers’ plans to move their operations from the Central City to Orange County.

Shortly after Bradley’s press conference, disaster struck. A European bank, Algemene Bank Nederland (ABN), unexpectedly withdrew its commitment to provide a letter of credit that was a key ingredient in implementing the $6.25-million bond issue.

Without the letter of credit, the sale fell apart, leaving the Klugers without permanent financing. Most painfully, they lost a good-faith deposit of $62,500 that was part of the agreement.

The Klugers eventually got half their deposit back, but have sued the city of Los Angeles and ABN to get the remaining amount. As a postscript, they went ahead with their expansion using private lenders.

Ted Berkowitz, head of the city’s private-placement bond program, termed the Klugers’ case “unfortunate,” adding “this is not the message we want to be sending out to the business community.” ABN, which Berkowitz blamed for the snafu, declined to comment.

The major success story in the Central City zone is widely acknowledged to be Richard Breen, who was persuaded to expand his shipping operations on Hooper Street. With a $1.35-million low-interest loan from the city, Breen turned an adjacent junk yard into a loading dock rather than move his entire business, known as Daylight Transport, to the City of Commerce.

The move saved the city close to 100 jobs and meant an additional investment of more than $5 million into a struggling but still viable commercial district that has about 2,500 businesses and a population of more than 45,000.

Breen has few illusions about doing business in the inner city. Crime is a continual problem around his guarded, fenced-in compound, which he likens to a “fortress in Indian territory.”

Occasionally, murder victims appear outside the compound on nearby railroad tracks and gang violence is always a fear. On one occasion, Breen said, a Daylight Transport sentry was menaced and surrounded by gang members after he foiled their robbery attempt of a woman near his guard station.

Police arrived and made arrests, but some gang members vowed revenge, Breen said. “Their last words were: ‘We’ll be back,’ ” he recalled.

Respected by local community figures, Breen is a former social worker in New York City and a one-time “hippie” who turned trucking entrepreneur after trekking to California in the mid-1970s. A wealthy man now, he says the only solutions to cleaning up the neighborhood are new jobs and viable businesses that will retake the area “block by block.”

“Social programs don’t work, but private enterprise will,” he said. “I know. I’ve seen it from both sides.”

ENTERPRISE ZONES AT A GLANCE * What: Enterprise zones are state-designated economic areas that offer tax breaks and other incentives to businesses if they expand their operations within the zone or relocate there.

* Why: To create new jobs by encouraging private investment in poor areas.

* Where: Located in 37 states nationwide, including California. There are 19 enterprise zones statwide, including five in Los Angeles.