Tim Bradner: State has cash on hand, but not unlimited

Tim Bradner | Alaska Journal of Commerce

Last Wednesday's energy project panel at Commonwealth North's luncheon highlighted an uncomfortable fact: the state is pouring hundreds of millions of public dollars into projects that are usually the domain of private enterprise.

Can our state afford it? Scott Goldsmith, the dean of Alaska's economists, pointed out that the state is already running a billion-dollar deficit. (I was on the panel too, though my role was to set the historical context for others.)

It's interesting that for a conservative state with a Republican governor and Republican-led Legislature, Alaska's economic policies are, well, pretty socialistic.

We have an alphabet-soup of state agencies: the Alaska Industrial Development and Export Authority (AIDEA), Alaska Energy Authority (AEA), Alaska Housing Finance Corp. (AHFC) and the Alaska Gasline Development Corp. (AGDC), all investing in development projects to strengthen and diversify our economy.

Gov. Sean Parnell can be teased for letting some of this buildup of government-intervention happen on his watch, but the fact is that these programs have broad support, because most of the projects are successful, we have the (oil) money to do it, and without it our state would be economically weaker.

AIDEA in particular has an amazing slate of projects being planned, from road development (the Ambler District mining resource road), a small liquefied natural gas project on the North Slope and trucking of LNG to Fairbanks; investing in North Slope oil process plants in partnership with a small independent oil company; a mineral processing plant in Ketchikan in another partnership; a western Alaska coal port with Arctic Slope Regional Corp.; and the list goes on.

The authority has had its lemon projects (a big fish plant in south Anchorage, now a church) but also some big winners, like the Red Dog Mine road and port, a big-jet maintenance hangar at Anchorage's airport, an ore terminal in Skagway and a shipyard in Ketchikan. The jury is still out on AIDEA's investment in a jack-up drill rig for Cook Inlet exploration, but so far things look okay.

It would be nice if the private sector were able to step up to all of these projects, but the fact is the private investors are missing. Given the jobs created, this use of state money can be justified, and AIDEA usually recoups its investments and earns a financial return.

All that said, the next step up for state economic development investment in the economy, those big energy projects discussed at Commonwealth North, will be on a far bigger scale. Helping finance in-state gas pipelines or building a large hydro project on the Susitna River, will require billions. Our state development agencies have been pretty lucky in attracting the talent to manage these projects so far, but stepping up to the big ones is a whole new game.

Goldsmith made an interesting suggestion. If the private market isn't available to provide cold-eyed screening of projects (god forbid we let politicians do it), perhaps we could develop "surrogate" mechanisms that provides a similar vetting.

Eric Wohlforth, a former state revenue commissioner and long-time bond counsel, suggested that the bond market could provide this service if the state were to rely on it more. Bond buyers are investors, after all, who look at projects pretty carefully before plunking down their money.

A real-life example of how this works was with the initial proposal, in the 1980s, for a very large hydro project on the Susitna. Former Gov. Bill Sheffield is often blamed for "killing" the project but in fact Wall Street killed it. When Gov. Sheffield went to New York to investigate financing for Susitna, he was told the only way the project could be funded was if the state were to put up the Permanent Fund as collateral. "That made the decision easy for me," Sheffield told me years later.

Wall Street did us a service. Had we attempted to build Susitna then, at the scale it was planned, it would have been a disaster.

Let's take this a step further. We should finance all big projects with revenue bonds, which is debt repaid by project revenues with no backup from the state's treasury. We should keep any state cash appropriation to a minimum. This way the financial market vets the project, not our politicians.

The big energy projects being talked about now, including the in-state gas pipeline and Watana hydro, actually include proposals for revenue bond financing. But we must resist the temptation, if the numbers don't quite "work," to propose investing a lot of state cash. I think this problem will take care of itself, however, because cash will be increasingly short in the state treasury.

The principle of an independent and unbiased review, by the market, could be applied to smaller projects, though. It would avoid future fish plants.

Alaskans are in an enviable position today with cash on hand, resource opportunities, skilled and entrepreneurial people, and generally good political leadership (compared to those idiots in Congress). But our prospects and resources aren't unlimited either. So, let's be careful and not blow it.

Tim Bradner is an Anchorage-based business and economics writer.

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