AIDEA: The Alaska Industrial Development and Export Authority

Transcription

1 AIDEA: The Alaska Industrial Development and Export Authority The State of Alaska s Development Finance Authority Kennis Brady Carrie Collins Wm. Daniel George Amiee Nishimoto Shana Valente Spring 2011 Dr. Greg Protasel University of Alaska Anchorage

2 Abstract: AIDEA has proven itself as one of the forces fueling Alaska s economic engine - Alaska State Governor Sean Parnell This essay examines the history and implementation of the Alaska Industrial Development and Export Authority (AIDEA). This essay focuses on the programs offered to Alaskans and their businesses, the current economic impact and expense, and the sustainability of the program. The organization was created by the Alaska State Legislature in 1967 to help provide funding for both small and large businesses in Alaska. AIDEA promotes economic well being for Alaska and long term employment opportunities and gives local companies financial incentives, such as: financial capital, lower interest and principal payments, and longer loan terms, to invest in Alaskan communities and projects. Projects are financed through several different programs -- each targeted to a different population or business sector, which this essay discusses each in full detail and depth. When compared it to different programs throughout the nation, AIDEA has proven itself repeatedly to be a reliable resource to Alaskans and Alaska s economy. With the threat of potential oil revenues running out, AIDEA has recently shifted focus to researching other revenue sources to diversify investments in an effort to keep Alaska s economy strong. 2

3 Table of Contents: I. Introduction II. Sponsored Programs A. Loan Participation Program B. Development Finance Program C. Business and Export Assistance Program D. Conduit Revenue Bond Program E. Rural Development Initiative Fund F. Small Business Economic Development Program III. Effect of AIDEA Policy on Alaska State economy IV. Effect of AIDEA Policy on Local economies V. Importance to the Development of Alaska VI. Alaska State Budget Considerations VII. Comparable National Organizations VIII. Comparable Organizations within Alaska IX. Current AIDEA Projects X. Future Implications and Sustainability of the Program XI. Conclusion References 3

4 I. Introduction The Alaska Industrial Development and Export Authority (AIDEA) is a semiindependent corporation that was created in 1967 by the Alaska State Legislature. The Legislature created this program to help provide funding for Alaskan organizations and businesses for the State, which in turn, would produce more jobs in Alaska. When the idea of AIDEA was first created, the goal was to use the program as a pass through conduit agency providing Alaskan businesses with lower interest rates offered by tax exempt financing by having AIDEA issue a bond which was then purchased by others (FAQ s). Over time, the tax laws within Alaska changed and it became more difficult to find and provide tax exempt funding to Alaskan businesses. In 1979 and 1980, Alaska began to experience a downward economic trend upon the completion of the Trans-Alaska Pipeline System (TAPS), which was completed in The Alaska State Legislature reacted to this by granting AIDEA additional financial authorities and capabilities which allowed them to greater assist the smaller businesses in the state. With this new authority, AIDEA was able to assist both small and large businesses to promote economic growth within Alaska. In addition to funding Alaskan businesses, AIDEA is also required to provide an annual dividend to the Alaska State Legislature, pursuant to Alaska statutes, AIDEA is required to annually determine the amount of a dividend to be made for appropriation by the legislature. The dividend made available by the board is to be not less than 25% and not more than 50% of AIDEA s audited net income as defined by statute, for the fiscal year two years before the fiscal year in which the dividend is to be made. The dividend may not exceed unrestricted net income. Since the dividend program began, AIDEA has made available over 4

5 $178.1 million in dividends to the state general fund (FAQ s). The mission of the Alaska Industrial Development and Export Authority is to promote, develop and advance economical growth and diversification in Alaska by providing various means of financing and investment (Investing, 05). AIDEA is able to pursue this vision by utilizing a number of different programs to provide funding. The programs that AIDEA offers are: Loan Participation, Conduit Revenue Bonds, Development Finance Programs, Business and Export Assistance Loan Guarantee, Rural Development Initiative Fund, and the Small Business Economic Development Loan Fund. II. AIDEA Sponsored Programs AIDEA sponsors six loan programs throughout the state of Alaska and is responsible for administering four of those programs. These programs consist of: the Loan Participation Program, Development Finance Program, Business and Export Assistance Program, and the Conduit Revenue Bond Program. Two additional programs are administered by the State of Alaska Department of Commerce, Community and Economic Development: the Rural Development Initiative Fund and the Small Business Economic Development Program. A. Loan Participation Program The Loan Participation Program is one of the most commonly recognized programs, and has achieved great success since its creation and implementation in the 1980 s. This program is offered to people who are completing a project in Alaska and are using the loan to acquire, develop or enhance business enterprise. These loans can be used for existing projects or new projects. Borrowers also have the option to use this loan to refinance an existing loan. AIDEA s Loan Participation Program is designed to provide permanent financing, both taxable and tax 5

6 exempt, to borrowers through a qualified originator for the purpose of developing, acquiring or enhancing Alaska business enterprises (Investing, 05). For the portion of the loan purchased by AIDEA, the borrower will benefit from longterm fixed or variable rate financing. In most cases, the interest rate on the AIDEA portion of the loan is slightly lower than the rate on the bank s portion and the term of the AIDEA portion of the loan can exceed the term of the bank portion, typically resulting in lower scheduled payments for the borrower. The remainder of the loan is handled through the AIDEA approved financial institution. The bank must also take responsibility for service of the loan and take payments. The loan participation program can cover up to 90% of a commercial loan originated by an eligible lending organization, but total participation must not exceed $20 million per project. The terms for this loan program are up to 15 years for personal property and up to 25 years for real property. The application cost to the borrower is $1,000 and it is not refundable. Through the loan participation program, AIDEA funded $37,802,598 in FY 2010, which led to the creation and retention of more than 195 jobs. In addition, $8,513,000 was committed in FY 2010 for future projects. For FY 2010, AIDEA s outstanding revolving fund loan portfolio consisted of 251 loans with an outstanding principal balance of approximately $377.7 million. From FY 2002 through FY 2009, the loan participation program created or retained 2,901 construction jobs and 4,721 permanent jobs. B. Development Finance Program AIDEA s Development Finance Program assists Alaska business through its ability to develop, own, and operate facilities within the state, with the purpose of advancing the prosperity of a region (Investing, 07). Eligible projects for this program include manufacturing facilities, roads, ports, airports, infrastructure for tourism destination facilities, and other public use 6

7 facilities. This program is restricted by the AIDEA statutes, which defines a project as a plant or facility used or intended for use in connection with making, processing, preparing, transporting, or producing in any manner, goods, products, or substances of any kind or nature or in connection with developing or utilizing a natural resource, or extracting, smelting, transporting, converting, assembling, or producing in any manner, minerals, raw material, chemicals, compounds, alloys, fibers, commodities and materials, products, or substances of any kind; a plant or facility demonstrating technological advances of new methods and procedures and prototype, commercial applications for the exploration, development, production, transportation, conversion, and use of energy resources; and infrastructure for a new tourism destination facility or the expansion of such a facility (Anderson). These projects must be economically advantageous to the state and public welfare, must contribute to economic growth, and be economically and financially able to produce revenue to repay the amount financed (Investing, 07). To qualify for this program, projects must be endorsed by the local government and must be economically and financially feasible and able to produce revenue adequate to repay the bonds or loans used to finance the project. In addition to meeting these guidelines, the project must be beneficial for the public welfare and the economic growth of Alaska. Projects funded through this program are owned by AIDEA and are repaid through user fees, lease payments, and other revenue sources. Development finance projects through this program have created and retained more than 735 jobs throughout Alaska. Some examples are the Healy Clean Coal Project, Snettisham Hydroelectric Project, Federal Express Aircraft Maintenance Facility and the Alaska Seafood Center. C. Business and Export Assistance Program AIDEA provides loan guarantees through the Business and Export Assistance Program. 7

8 This program assists small to medium-sized Alaskan businesses by making project financing of working capital, inventory, and other assets possible for borrowers who might not otherwise obtain commercial financing (Investing, 11). These loans can be used to refinance existing loans, in conjunction with capital loans or to allow qualified businesses to acquire financing when no other options are available. They can also be used to export transactions, personal property, working capital or real property. Through this program AIDEA can guarantee up to 80% of a loan, or up to a maximum of $1 million. The guarantee can be applied to the balance of the loan as well as any accrued interest. As with AIDEA s other programs, loans through the Business and Export Assistance Program must originate from an eligible financial institution. AIDEA may also provide unsecured loans up to $100,000 for qualified borrowers and projects. The interest rate on loans from this program cannot exceed 2.75% above the prime rate, and can be adjusted with the changes in the prime rate. Applicants have to pay a $200 non-refundable fee and must be an Alaska resident. Through this program, small and medium enterprises have access to the U.S. Export- Import Bank. The U.S. Export-Import Bank has developed a partnership with AIDEA that helps Alaska small and medium enterprises make greater use of the U.S. Export-Import Bank s financing programs (Investing, 11). These programs include working capital guarantees, export credit insurance, medium and long-term guarantees, and other direct loans to foreign buyers. This partnership provides assistance to manufacturing enterprises for the export of goods and services. D. Conduit Revenue Bond Program The last program administered directly by AIDEA is the Conduit Revenue Bond Program in which AIDEA works as an agent for issuing tax-exempt and taxable revenue bonds. Any 8

9 business enterprise or non-profit corporation may apply for the issuance of bonds through this program. If the project qualifies for tax-exempt financing, AIDEA s Board generally would adopt an eligibility resolution to ensure the maximum amount of expenditures are eligible for financing (Investing, 14). AIDEA is simply the conduit in this program and the organization s assets and credit are not at risk with the issuance of these bonds. The creditworthiness of the project, borrower strength, and any credit enhancements are essential to the underwriting and placement of conduit revenue bonds (Investing, 14). When the applicant applies for this bond, they realize that they are taking responsibility of the bonds, not AIDEA. When the applicant fills out an application and submits it to AIDEA, they must also pay a $500 application fee. Once AIDEA receives the application, they will review it and process it to determine if the applicant can participate in the bond program. The issuance fee of the bond is determined according to 26 U.S.C. section 147 and is broken down in percentage points. An example bond is the Recovery Zone Facility bond. These bonds are typically used to purchase and finance commercial equipment and construction. With these bonds, the borrower can save money and at the same time provide great benefit to Alaskan companies. The Conduit Revenue Bond Program issued $29.1 million in FY 2010, with more than $1.1 billion issued since the start of the program in 1978, and has resulted in a total of 310 projects funded. E. Rural Development Initiative Fund The Rural Development Initiative Fund is administered by the State of Alaska s Department of Commerce, Community, and Economic Development (DCCED), and is designed to provide long-term private sector employment by financing business start-up and expansion in 9

10 communities with a population of 5,000 or less and not connected by road or rail to Anchorage or Fairbanks, or 2,000 or less connected by road or rail (Investing, 16). These loans can be used to contribute to working capital, equipment, construction or other commercial purposes, but must result in the creation of new jobs or the retention of existing jobs within the community. These loans cannot exceed $150,000 to one person or up to $300,000 to two or more people, and have a maximum term of 25 years and a rate of 1% below prime but not less than 4% total. Once the loan is approved, the interest rate will be set and fixed for the remainder of the loan. The application fee is $100 and the applicant is responsible to pay for all closing costs. For FY 2010 there were two new loans issued which resulted in a total of $84,000 funded through this program for that year. These loans led to the creation and retention of seven jobs for FY Since the program s inception, 61 loans have been issued, for a total of $6,927,146, and 465 jobs were created and retained during that time period. F. Small Business Economic Development Program The other program administered by DCCED is the Small Business Economic Development Program. This program is designed to provide long-term private sector employment by financing business start-up and expansion for companies that are a small business as defined by the Small Business Administration (Investing, 17). Similar to several of the other programs, these loans must also result in the creation of new jobs or the retention of existing jobs. The applicant is also required to match the loan funds which can be done with other financing such as non-public financing or private financing. If a bank is willing to fund the project for a business the loan through AIDEA may not be granted. If applicants have been turned down from a bank, they should provide that information to AIDEA when submitting an 10

11 application. This program is also limited to specific areas in Alaska. "Eligible areas include the land granted to Native Alaskans that remain in the ownership of the Village Corporations, the twelve Alaskan Regional Corporations and the traditional Alaskan Native Villages. These terms are defined under the Alaskan Native Claims Settlement Act, as amended and 13 CFR 301 (DCCED, 2011). Funding for this type of loan is very limited. The loans are typically set for an interest rate that is less than 6%. The fixed assets loans are for a maximum of 20 years and the working capital loans are for a maximum of five years. These loans cannot exceed 90% of the collateral value and the interest rate is fixed. The maximum amount allowed for these loans is $300,000. There is also a $200 fee to apply and applicants are responsible for any closing costs. In FY 2010, nine new loans were issued for a total of $1,097,510 funded. This program also created and retained 31 jobs. Since the implementation of this program, 119 loans have been issued resulting in total funding of $14,202,102 and the creation and retention of 1,014 jobs. III. Effect of AIDEA Policy on Alaska State economy One of the ways that AIDEA stays current and increasingly effective in any economic climate is by continually assessing the business climate and adapting to meet the changing needs of Alaska s business community (Investing, 04). For example, new legislation in 2010 helps the program to meet current needs and economic trends by changing the mechanisms used to establish interest rates and better tying AIDEA s rates to the current cost of money. AIDEA programs directly support the state beyond stimulating the economy with investment and loan opportunities, each year the board additionally awards the state a dividend based on revenue from the past fiscal year. The dividend program is the way in which AIDEA contributes directly to the state budget. The AIDEA board is required to annually determine the 11

12 amount of a dividend to be made available for appropriation by the legislature (FAQ). Established in 1996, this program has since provided Alaska with more than $304 million dollars in revenue which is used to support much-needed programs, services and projects across the state. Promisingly, this program shows continued growth and support as in FY 2010, when AIDEA s board declared a $29.4 million dividend the highest ever reported (Investing 2). IV. Effect of AIDEA Policy on local economies While AIDEA s programs clearly effect and contribute to the State of Alaska in several ways, the board also takes into consideration local economic stimulus when selecting projects to finance. As stated above, several factors go into the board s consideration -- beyond the obvious financial health of the investors and the company, the local competition and any public or industry opinion, they also pay special attention to the jobs each project will create (both statewide and locally). In FY 2010, AIDEA s programs created more that 460 construction jobs, and perhaps more importantly, created or retained approximately 963 permanent jobs for Alaska s economy (Investing, 02). In fact, for several of the programs, including the Rural Development Initiative fund, in order to be eligible for consideration, a project MUST result in the creation of new jobs, under state law AS (Overview, 01). One of the largest challenges faced by industry in rural Alaska is a lack of infrastructure. Outside of financing private business, AIDEA s board also looks at projects which create and sustain infrastructure, making communities more viable and attractive to private industry. This includes roads, ports, airports, infrastructure for a tourist destination or other public use facilities. Through their role in economic development activities AIDEA provides a strong example of 12

13 public and private partnership success. Rural communities and urban ones alike benefit from this increased job growth, infrastructure and an increase in private industry. V. Importance to the Development of Alaska AIDEA serves a noteworthy role in the continued development of Alaska. The Legislature created AIDEA to provide financing for Alaskan businesses to expand the economy of the state and provide jobs for Alaska (FAQ). Acting as a middle man of sorts between the legislature and the people, AIDEA encourages growth in Alaska through their various programs in sustainability, rural areas, small businesses and private enterprises. As seen in their mission statement, the mission of AIDEA is to promote, develop and advance economic growth and diversification of Alaska by providing various means of financing and investment. AIDEA s programs and policies focus on sustainable economic growth both locally and statewide. The effect of AIDEA s programs is acknowledged by people at all levels of involvement -- private citizens, business owners and public officials. Governor Sean Parnell recently re-iterated the importance of AIDEA to Alaska policy in an interview, AIDEA has proven itself as one of the forces fueling Alaska s economic engine (Investing, 04). One of the ways in which AIDEA is sustainable, is that the board carefully approves business loans, but largely allows business owners (once financed) to develop, own and operate their own facilities. This partnership with business owners and communities helps to keep financed projects on track and profitable. It also allows AIDEA to release responsibility for a completed project and move on to others. The overarching purpose of AIDEA is not to make a profit, but to advance the prosperity of a region through industry. Each project is evaluated based on whether it s economically advantageous to the State and public welfare, how it will contribute 13

14 to economic growth, and whether it is economically and financially able to produce revenue to repay the amount financed (Investing 7). Looking at each project from all of these angles allows for the board to make sound decisions and to finance well-rounded projects -- therefore limiting liability. VI. Alaska State Budget Considerations With an outstanding revolving fund loan portfolio of 251 loans with an outstanding principal balance of approximately $377.7 million (Investing 5) no one can deny that AIDEA will continue to affect the Alaska State budget in a large way, and for many years to come. However, this is a unique lending program, in that it combines both public and private financing. For several programs, there are limitations (typically by percentage) of how much public financing can be provided. For example, under the Small Business Loan Program, at least half of the project costs must be privately funded (Anderson, C). Also, although AIDEA does provide permanent public financing to borrowers, AIDEA does not originate loans. Loans must originate at an eligible financial institution within Alaska (Anderson, C). Eligible finance institutions currently include: Wells Fargo, Alaska USA, Northrim Bank, and Key Bank of Alaska among others. This creates a unique structure in which a partnership between private and public industry is utilized for the benefit of all involved the state, the citizens, private banks and also private business. Despite a partnership with private industry, and close examination and consideration of each project, not all can be as sustainable as hoped. When a project goes into default, there are several procedures in place to continue to protect the State of Alaska. One way in which the state aims to recoup any costs with failed projects is to list these properties as OREO (other real estate 14

15 owned) which refers to any real estate AIDEA has in their portfolio due to a loan default. Also the banks which originated the loan share the responsibility and can help with the foreclosure of properties and any possible re-payment costs from the investors. VII. Comparable National Organizations Currently there are no organizations within the United States with the same unique framework as AIDEA. However, there are a number of organizations which incorporate some of the same, or very similar, programs and goals. Probably the most common organizational structure for promoting economic development is the Narrow or Single Purpose Organization. These organizations have very narrowly focused economic development goals which often revolve around a limited area; such as a town or city. An example of this organizational structure is the Silver City Main Street Project which was established in 1985 to bring economic vitality and growth to downtown Silver City, New Mexico while preserving and enhancing local culture and historic resources (Silver City Main Street Project, 01). With Silver City, the focus for economic development is tourism and the strategy is designed around the City s history and the re-creation of the imagery and character of the old historic city (Strategic Plan, 61). Another common organizational structure is the Special Purpose Organization which often emerges from unique circumstances/situations within a community or area (Strategic Plan, 60). These organizations are often limited in scope and jurisdiction. The Regional Development Corporation (RDC) in Northern New Mexico is an example of this organizational type. The RDC is a private, non-profit organization whose mission is to diversify the economy 15

16 within the north central New Mexico region by working with communities and small businesses to address the increasingly rapid pace of technological, social, and environmental change in Northern New Mexico and assisting communities and industry in managing their economic projects and initiatives (RDCNM 1). The main focus of the RDC is on technology transfer from the Los Alamos National Laboratory to the growth of small businesses within the area (Strategic Plan, 60). This organization coordinates and communicates with specific stakeholders whose interests fit their specific economic development goals. Big Stakeholder Organizations are another organizational structure found throughout the nation. These organizations are typically created by some level of government and are not preexisting organizations. These organizations typically focus on broad ideas of vision, goals, and strategies, rather than on specific program implementation. Thus, these organizations usually are designed to use existing state, local government and special purpose organizations as the implementing agents (Strategic Plan, 60). The Puget Sound Regional Council is an excellent example of a big stakeholder organization. This organization was created in 1956 by the boards of county commissioners within four regions of Puget Sound. The mission of this Council is to work together on economic recovery efforts and lay the foundation for future prosperity and a vibrant, livable region (PSRC 1). This organization is responsible for setting regional goals for economic development and then relies on local organizations to develop and implement the programs to reach those goals. Nearly every state has at least one organization with a similar overall goal of economic development. Often such efforts use a big stakeholder approach to pull a broad coalition of 16

17 stakeholders into a process of defining state-wide vision, goals, and strategies (Strategic Plan, 61). This organizational framework is commonly known as a Designated Lead Agency organizational framework. In this organizational system the state s economic development work is housed within a designated lead agency to at least implement the process and sometimes to actually be the program implementation agency (Strategic Plan, 61). This organizational structure is the basis for the Kentucky Cabinet for Economic Development. The Kentucky Cabinet for Economic Development is the main state agency in Kentucky responsible for creating new jobs and promoting investment in the state. Programs administered by the Cabinet are designed to support and promote economic development within the state, primarily by attracting new industries to the state, assisting in the development of existing industries, and assisting communities in preparing for economic development opportunities (The Kentucky Cabinet, 01). The organizational structure of the Kentucky Cabinet for Economic Development closely resembles that of AIDEA. Kentucky s program has a heavy emphasis on implementation and it is clear that the state legislature has provided a broad range of authorities from which the agency has developed a variety of targeted funding and assistance programs to achieve its economic development goals (Strategic Plan, 63). The business assistance programs within the Kentucky Cabinet include industrial revenue bonds, tax incentives, and loans of $100,000 and $500,000 designed to match federal funds. This organization is broken down into four sections consisting of: the Department of Commercialization and Innovation, the Department for New Business Development, the Department for Existing Business Development, and the Department of Financial Incentives. The programs found within these departments are not as detailed as those of AIDEA and are not 17

18 present throughout the state at the same levels found within Alaska. VIII. Comparable Organizations within Alaska The Alaska Regional Economic Assistance Program and the Division of Economic Development are two substantial organizations within Alaska designed to promote economic development throughout the state, similar to AIDEA. Established in 1988 by the Alaska Legislature, the Alaska Regional Economic Assistance Program (ARDOR) was designed with the belief that a locally driven initiative, in partnership with the state and other entities, could most effectively stimulate economic development and produce a healthier more sustainable local economy (ARDOR, 2). This program is designed to enable communities to combine their limited resources and work together on economic development issues and to develop partnerships between public, private, and other organizations. This program is not continually funded or serviced throughout the state, but is reauthorized when the legislature deems it necessary and provides the required funding for the organization. Alaska Governor Sean Parnell created the Division of Economic Development in October 2010 which is organized as a one-stop shop that can assist an existing or proposed business with financing, marketing, business assistance, and governmental coordination (Commerce 1). Some of the services provided by this organization are quite different from that of AIDEA. However, this organization administers 12 loan programs which include the Small Business Economic Development Loan and the Rural Development Initiative Fund which are directly funded by AIDEA. IX. Current AIDEA Projects Through its various financing assistance programs, AIDEA is helping to provide jobs for 18

19 Alaska and ultimately financing Alaska s future. Currently, as listed on AIDEA s website, they are working on eight specific owned and development finance projects which are as follows: DeLong Mountain Transportation System, Red Dog Road and Port, Federal Express Aircraft Maintenance Facility, Healy Clean Coal Plant, Ketchikan Shipyard, Lik Deposit Transportation Study, Skagway Ore Terminal, Snettisham Hydroelectric, and the Sitka Fish Waste Processing Plant project. The DeLong Mountain Transportation System (DMTS) project serves the mining district that includes the Red Dog Mine. The company Teck Alaska announced that it will proceed with the development of the Aqqaluk Deposit. This expansion had been called into question due to the fact that Teck could not remove enough pollution from its waste water to meet the level of water quality required by an old discharge permit. This problem was quickly solved when the Environmental Protection Agency (EPA) confirmed that newer less strict levels of water quality would still be protective of the environment. Unfortunately, Teck and the Alaska Department of Environmental Conservation (ADEC) continue to face numerous challenges from environmental groups. ADEC certified that Teck s waste water could be mixed with receiving waters without causing any type of degradation, but environmental groups argue that there are procedural and substantive errors with ADEC s original certification. This is where AIDEA intervenes and seeks to protect the Red Dog Mine from shutting down by supporting ADEC s certification. The scope of the DMTS project consists of a 52 mile 30 foot wide all weather industrial haul road, a shallow water dock, offshore conveyor concrete loading facility, fuel distribution and storage systems, and other port facilities. The DMTS road is designed to accommodate multiple users from the mining district including the Red Dog Mine along a port site located on the Chukchi Sea. The purpose of this particular project is to provide employment opportunities in 19

20 Northwest Alaska through development of a transportation system to serve the Red Dog Mine. AIDEA owns DMTS, and NANA Regional Corporation owns the Red Dog ore deposit, and the mining has been contracted to Teck. Teck Alaska has then contracted with AIDEA, bringing the project full circle for a priority non-exclusive right to use the DMTS system until the year 2040 to ship ore concentrates over the road, store concentrates in the storage buildings, and trans load concentrate onto ore ships. Teck pays a toll for the use of the facilities and is obligated to operate and maintain the system at a commercially reasonable rate of compensation. The DMTS project exhibits both extremely important social and economic effects. In 2009, the Red Dog Mine and DMTS provided 516 regular and approximately 100 seasonal jobs of which over 250 were staffed by NANA shareholders. In 2009, Teck s payment in lieu of taxes to the Northwest Arctic Borough (NWAB) was estimated at $9 million dollars along with Teck s royalty payments to NANA of approximately $38.8 million dollars. From the mine s beginning, NANA has been paid $466 million dollars in nominal royalty payments while the NWAB has also received $90 million dollars in revenue. AIDEA s DMTS investment base is now approximately $267 million dollars after the expansion to handle Red Dog s increased production from the original of $180 million dollars which was completed back in AIDEA s investment is being repaid with annual fees assessed to the DMTS users. In 1987, $103 million dollars in tax exempt bonds were sold by AIDEA to fund a portion of the original construction of the project. A state appropriation to AIDEA provided the remaining original investment base funding. On March 27, 1997, AIDEA sold $150 million dollars in bonds to finance the DMTS expansion, the insured bond sale was the largest bond sale in AIDEA s thirty year history and the first time the authority received an AAA rating on its general obligation bonds. 20

21 Not all of AIDEA s projects are as successful as others. For example, the Healy Clean Coal Project (HCCP) is a fifty megawatt coal fired power plant neighboring the Golden Valley Electric Association (GVEA) which is a twenty-five megawatt coal fired power plant in Healy, Alaska. HCCP grew out of a nationwide competition sponsored by the Department of Energy (DOE) to test new technologies that would help solve the international problem of acid rain. In 1991, GVEA entered into a thirty year power purchase of agreement with AIDEA. GVEA s obligation to the purchase power was subject to a demonstration that the plant could be operated on a sustained basis on commercial standards as define in the power purchase agreement. Construction and testing of HCCP was completed in December The following table presents a summary of capital costs by funding source (in thousands) associated with the construction and development of HCCP. Table 1: Funding Source Dollars (in thousands) State Appropriation $25,000 Federal Grant $117,327 Contractor Contributions: Golden Valley Electric Association (GVEA) $9,428 TRW, Inc. $532 Usibelli Coal Mine, Inc. $2,639 21

22 Components of AIDEA funding: AIDEA $135,664 Earnings on State Appropriation $4,030 Power Sales revenues $13,260 Net Capital Costs $281,360 Note: AIDEA includes funds from net proceeds of $85 million of bonds. Not all costs were capitalized by AIDEA. General construction of the power plant began in May 1995 and was completed on November 21, Coal firing start up and the demonstration testing phase required under the federal grant provision began in January 1998 and was comprised of several test series, including performance guarantee acceptance tests, environmental compliance tests, major system characterization test, integrated system commercial operating condition tests, and collection of commercial operating data. During demonstration testing from January 1998 through December 1999, GVEA purchased approximately 456,000 megawatts of electricity from HCCP for $13.4 million dollars. A ninety day test of the power plant and its new technology was completed in December 1999 and although AIDEA found that the new technology met the technical and environmental objectives that were established for the project, GVEA argued that the plant did in fact not meet its requirements in terms of operations and maintenance costs, reliability and safety. Prior to the completion of testing in 1998, GVEA started litigation raising various claims relating to the then pending determination of commercial operability. As a result, in March

23 AIDEA and GVEA entered into a Settlement Agreement, which provided for the temporary shutdown of HCCP, however due to unforeseen and various complications, HCCP has remained inoperative since. From 2000 to 2005, both parties have tried various ways to bring HCCP back into operation, but unfortunately for one reason or another, their efforts have been completely unsuccessful. In November 2005, AIDEA filed a suit against GVEA, alleging various breaches of the March 2000 Settlement Agreement related to the operations of HCCP. GVEA filed a response which asserted counter claims against AIDEA for damages. GVEA successfully moved to stay the litigation pending mediation over disputed issues, including over a land lease and other agreements necessary for AIDEA to restart and operate HCCP. In March 2008, both parties finished mediation negotiations on five different sets of agreements. GVEA did not execute the agreements and as a result the case moved back to active litigation. Finally in 2009, the parties again reached an agreement on the sale of HCCP to GVEA which is one of the only positive outcomes of this entire project; the sale of this property automatically settled the suit. AIDEA is always looking to invest in new and up-and-coming projects in the State of Alaska. On Friday April 01, 2011, the Board voted to invest in a jack-up drilling rig for the Cook Inlet. They voted unanimously to enter into a deal with an Australian independent Buccaneer Energy Limited and Ezion Holdings Limited to jointly acquire a rig. AIDEA will invest up to $30 million dollars to buy, outfit, and ship a jack-up drilling rig as long as their other party meets fifteen different conditions over the next few months. Some of the conditions for Buccaneer and Ezion to adhere to are: contribute at least $5 million dollars to the project, secure a term loan for the remaining $50 million needed to fund the $85 million dollar drilling expedition, and contract to buy a jack-up rig from the Transocean Limited, and finally to contract to upgrade the rig for use specifically in Alaska. The deal also makes Buccaneer and Ezion to commit to drill four 23

24 wells in Cook Inlet with the new drilling rig. Only under these conditions will AIDEA fund this project, which increases the competition between the two independent oil companies of Buccaneer and Escopeta Oil. Escopeta is a privately funded U.S. company, and both are looking to bring a jack-up rig to Alaska for use in the Cook Inlet. X. Future Implications and Sustainability of the Program After examining the tools AIDEA uses today, we turn our focus toward the sustainability and future of the entity. The noble goal stated in the mission statement: to promote, develop, and advance economic growth and diversification in Alaska is more than a challenge; it is a mandate with State backing, and it will carry out a specific legislative agenda. By promoting regional and statewide economically viable industry opportunities, AIDEA creates fertile ground for other industry and support businesses to grow and thrive, just as the stability that year-round employment from the oil industry historically provides (Goldsmith, 07). To adequately comprehend the vital importance of the mission that AIDEA has been tasked with, one must understand the overall economic breakdown of the Alaskan revenuegenerating economy: About 1/3 of jobs and income can be traced back to the production of our traditional natural resource industries, those depicted on the state seal, fishing, mining, timber, as well as tourism, air cargo, and retirees. 1/3 can be traced to the dollars flowing into Alaska from the federal government, and 1/3 of jobs and income depends on the petroleum industry (Goldsmith, 3-4). 24

25 This heavy reliance on the petroleum industry is actually more dramatic when viewed through the lens of percentage share of state unrestricted revenue funds, and in light of the economic multiplier effect. This multiplier is an indicator describing how many jobs are created by each new dollar coming into the economy. Now, thanks to petroleum, every new dollar that a tourist brings to Alaska or that comes in from the sale of zinc circulates longer in the economy before leaking out. Without petroleum many of those multiplier jobs would not exist (Goldsmith, 7-8). AIDEA has long been focused on servicing the needs of businesses and organizations that rely on these multiplied dollars. Oil presently accounts for 87% of Alaska s unrestricted state revenue (Rosen). This number is expected to rise to 91.6% for FY2011 (Spring). Then taking into consideration the fact that oil production in Alaska has almost certainly peaked: the pipeline is operating at only one-third of its capacity, and there has been a 39 percent decline in oil production in just the past 10 years (Production, 01), and it becomes clear that Alaska has a significant economic engine that is revving down (see table from AOGA below.) Recently departed state Department of Revenue commissioner Pat Galvin noted that "over the next decade we expect to see a continuation of the decline, but a slowing of the decline rate (Rosen). This will make AIDEA s progress difficult to measure, as economic growth would not have remained stable otherwise, but would have declined an indeterminable measure. Further complicating matters, world demand and the price of oil have fluctuated wildly in recent years. Governor Sean Parnell called upon the Legislature to sock away $2.5 billion of this fiscal year s windfall $3.4 billion surplus into savings accounts (Governor). After years of AIDEA s existence and efforts at developing resources other than oil, the state still relies overwhelmingly on the petroleum industry. Despite an impressive portfolio of loans and credit opportunities available to businesses which deal with alternative resources; they 25

26 make up no more of the market share today than they did over 20 years ago (Goldsmith, 05). The implication of this heavy reliance on a resource base that is eroding in production numbers will be increased demand for investment in industry that can produce and sustain jobs and economic activity in the absence of the petroleum industry. The challenge that this presents to AIDEA is two-fold. It must continue to promote, develop, and advance economic growth in existing industry, but it must also initiate a renewed wave of efforts toward economic diversification, something it already deals with. That diversification is evident through many of the year-round-employment oriented projects it has recently completed or will complete in the near future in non-energy related areas, such as the Ketchikan shipyard and the Harry and Sally Porter Heart Center at Fairbanks Memorial Hospital (Investing, 15). 26

27 Upon completion of the Trans Alaska Pipeline System (TAPS), the Alaskan economy took a downward turn. In response, the Legislature empowered AIDEA in 1979 and 1980 with powers to assist smaller businesses through the Loan Participation Program, and shortly thereafter with the Development Finance Program (FAQs). Just as the organization was empowered to meet the economic challenge of that time, it must be reassessed and empowered to meet the challenge of declining petroleum production, direct revenues, and related economic contraction. While AIDEA is currently perceived as a passive player in the economic development of the state, that perception will be intentionally challenged in coming years through the establishment of an outreach and deployment function to increase awareness of specific AIDEA financing capacities and to establish the Authority s role as coordinator or arranger of the whole range of state economic development financing tools (Strategic, 30). Through the addition of a business development function, this outreach objective will be aimed at significantly increasing the volume of loan project prospects and at translating those prospects efficiently into loans and development projects (Strategic, 35). While the Authority has not directly sought out or recruited projects in the past, it will attempt to do so in the future through outreach. This will mean a larger and more proactive organization on the whole. AIDEA will target specific industry sectors, regions, project types, and in some cases even specific companies in order to achieve the state s and AIDEA s goals with respect to economic development strategies. Those strategies include: being future-oriented, market-driven, and meeting rural and industry needs, while leveraging existing/known projects. (Strategic, 30-31). AIDEA aims to become a one stop shop for financing economic development initiatives, while coordinating efforts between state, borough, and municipality, and an Economic Development 27

28 Officer position will be created within the organization to spearhead this effort (Strategic, 34, 36). The following table is a list of targeted industry sectors which have been identified for potential project investment (Strategic, 33). AIDEA anticipates that these areas will form the core of its future economic development investment. While AIDEA has not demonstrated any aversion to continued investment in the oil industry (as evidenced by the recent purchase of the jack-up rig for Cook Inlet), other energy resource development projects have been high profile as of late. The Snettisham hydro dam and 28

29 the GVEA/Usibelli Healy Clean Coal Plant are two high priorities in the near future for the organization, which also supports resource extraction efforts such as Pebble Mine (Bauman, 06). AIDEA as an entity is virtually assured continued existence so long as its bond and credit ratings remain high (Overview, 08). Its core services have created or preserved hundreds of Alaskan jobs each year, while providing strong consistent dividends. Another item that assures long-term demand for AIDEA s existence is that it provides small businesses access to the Export-Import Bank, credit insurance, and loan guarantees to domestic and foreign sources. Together, these offerings ensure AIDEA will remain a vital financial hub. The organization does not have any clear competing entities, and provides businesses with access to long-term affordable capital (Investing, 03). Alaska s economy relies disproportionately on the extraction and development of natural resources and the sale of those resources, primarily outside of the state. As a major exporter of raw or unfinished resources, 29

30 AIDEA plays a very important role in ensuring that this flow of development and resulting export trade continues at optimum levels. The challenge will be to meet the changing needs of Alaska s business community (Investing, 04). Those changing needs will be strongly driven by, and linked to the decline in petroleum production in coming years. The two-fold challenge will be to sustain oil production and wealth as long as possible, and to develop other industries to fill the economic job and revenue void. XI. Conclusion Since its inception in AIDEA has grown and changed with the Alaska business environment. Through a yearly analysis of existing legislation and arising issues, economic indicators and forecasts within the state, and the overall loan portfolio, AIDEA remains current and productive in Alaska. The Legislature created this program to help provide funding for Alaskan organizations and businesses for the State, which in turn, would produce more jobs here in Alaska. AIDEA currently sponsors six loan programs throughout the state of Alaska and is responsible for administering four of those programs. With a program structure that combines public funding, with private financial backing, and also promoting business owners to be involved and a vital part of the process -- there is nothing quite like AIDEA. There are programs with similar mission statements -- such as the Alaska Regional Economic Assistance Program and the Division of Economic Development -- but AIDEA exists as a unique organization which fills a very important niche. The Board focuses on stimulating both the state economy and local economies -- with job creation and the building or updating of infrastructure. However, they also contribute directly to the state budget with yearly cash dividends. The AIDEA board manages to accomplish these tasks all while remaining a sustainable and productive program by paying close 30

31 attention to both the details of each investment as well as the big picture. Although they have several on-going projects -- AIDEA is always looking towards the future and considering investments in new and up-and-coming projects in the State of Alaska. AIDEA has taken clear steps to become a more proactive organization with regard to financing industry in Alaska. As it attempts to achieve a more efficient and effective organization, AIDEA will continue to grow as a major force in Alaskan economic development in both the near and long-term future. 31