SENATE BILL NO. 16 An Act relating to the financing authority of the Alaska Industrial Development and Export Authority and giving approval of the issuance of bonds for an Anchorage airport seafood facility; and providing for an effective date. Co-chair Pearce directed that SB 16 be brought on for discussion. SENATOR JOHNNY ELLIS and RILEY SNELL, Executive Director, AIDEA (Alaska Industrial Development Authority), Dept. of Commerce and Economic Development, came before committee. Senator Ellis voiced need to foster private sector economic development meeting three tests: 1. Create jobs for resident Alaskans 2. Leveridge significant private sector investment by drawing outside dollars into the state. 3. Add value to state resources prior to export. Alaska's export of raw resources also means that refining jobs are exported. The proposed Alaska Seafood Center meets the above tests. The project is not new. It was included in last year's AIDEA bond bill but was dropped during special session when it was determined that a stripped down bill had a better chance of passage. Necessary plans and financing were not in place at that time, and the decision was made to delay until this year. The Center would provide 450 year-round jobs and 750 indirect jobs outside of Anchorage. Approximately 200 jobs in the construction phase would be created in the near future, once authorization is provided. Between $100 and $115 million in new, outside, private investment would flow to Alaska for the Center. The Alaska Seafood Center will not compete with existing primary processors or contract any of its own fishing. The Center would make major, year-round product purchases from Alaska's primary processors for use in secondary, value-added processing. Following the secondary processing, the product will be shipped to domestic and international markets. The Center will make 45 million pounds of cold storage available to Alaska processors and other Alaskan businesses. That has been a great need in Alaska for some time. The Center will also provide reliable and economical transportation services to primary processors. The volume involved will be of great benefit. Money will flow through Alaska rather than directly to Seattle. Anchorage will provide the transportation link for product coming to and leaving from a central point. Senator Ellis said that the ultimate test of the project lies in the $15 million in revenue bonds. If the economics of the project are not favorable, it will not proceed. Financiers would match the bonds with $100 to $115 million. Further, the project is ready to proceed in that it is not tied up in mental health issues nor are there protests from interest groups. Local government is extremely supportive. Co-chair Pearce referenced accompanying zero fiscal notes from AIDEA and the Dept. of Transportation and Public Facilities as well as a supportive position paper from the Dept. of Commerce and Economic Development. A position paper from the Dept. of Transportation and Public Facilities states support but also raises concern regarding location of the facility near the airport because of a possible increase in the number of birds in the vicinity. Senator Ellis explained that the Center would not be located on airport property. The airport intends to reserve that for other uses. There are suitable locations for the Center in close proximity to the airport. The processing undertaken by the Center is not the type that would produce fish waste and attract birds that might interfere with aircraft. Riley Snell briefly spoke before committee, advising of AIDEA belief that significant advancements have been made in both the financing plan and marketing since last session. HOWARD M. BENEDICT, President ASC, next came before committee. He explained that he first came to Alaska in 1976 and moved to the state in 1981. Prior to applying to AIDEA, Mr. Benedict said that he and his family invested $ 6 million in the project. Feasibility and marketability have been determined. Additional marketing since the last session has produced significant results. A market for all of the Center's product appears to be available. The Center will be the first, value-added facility. The high technology operation will bring new infrastructure to Alaska. There is presently no substantial secondary processing occurring in the state. Speaking to human resources, Mr. Benedict advised that the center intends to provide profit sharing to all employees as well as child care. Last Week, lenders in New York indicated they could increase the amount of cash available and decrease the amount of the mortgage. Mr. Benedict reiterated that the project would bring $100 to $115 million in outside money into Alaska. No subsidy is being sought. The Center will repay AIDEA as it does commercial lenders. Senator Sharp referred to the position paper from the Dept. of Commerce and Economic Development and inquired regarding contracts with primary processors as well as contracts for sale of the product. Discussion followed between Senator Sharp and Mr. Snell regarding the type of analysis conducted by AIDEA prior to commencement of a project. Co-chair Pearce advised of concern by Senator Jacko relating to location of the facility in Anchorage rather than Dillingham or Dutch Harbor. Mr. Benedict said that location had been studied in great detail. The facility would experience a $2.5 million disadvantage per year per 100 million pounds of production for being located in Alaska. That disadvantage is caused by the fact that product will be brought to Anchorage at 2.1 cent a pound and taken to Seattle for approximately 8 cents. That is a 2.5 cent disadvantage. Practical methods of overcoming that have been developed. Construction elsewhere would lose the transportation advantage provided by the Anchorage Airport. Power is another factor. The facility must compete with Seattle's power costs. The proposed facility will be the "largest, single, private power user in the city"--a 4 megawatt power consumer. A location other than Anchorage would put the cost of electricity totally out of the economic picture. Seattle power currently costs 3.81 cents per kilowatt hour. The agreement with the City of Anchorage for an interrupted demand rate is 2.76 cents. That is 38% below the Seattle cost. End, SFC-93, #47, Side 2 Begin, SFC-93, #49, Side 1 In response to an inquiry from Co-chair Frank, Mr. Benedict said he had hired "one of the finest secondary processing people." He has resided in Anchorage for the past two years. He previously built a plant the same size as the one proposed for Anchorage and brought it in on time and under budget. Mr. Benedict said that the hire effectively eliminated financial institution concern that the project was starting something that had not been done in Alaska before. Mr. Benedict explained that secondary processing involves taking frozen blocks of seafood, cutting them into serving pieces, and breading, or battering, or topping with sauce. This work is now being done in Seattle or on the East Coast. Frozen fish does not have much odor. The concern regarding additional birds at the airport is not a great one since the plant will "only do 15 or 20% primary." Mr. Benedict advised that only top management positions-- four or five individuals--that must possess necessary background and knowledge of this type of processing would not be local hire. The intent is to hire Alaskans. In response to a further inquiry from Co-chair Frank, Mr. Benedict said the end product will not have a brand. It will be produced for other companies. He further advised of his intent that the quality of the product would be higher than currently available. Responding to a further question regarding financial arrangements aside from AIDEA, Mr. Benedict said "In the overall picture, our project is $165 million." Between $35 and $50 million will be cash, equity in the project-- provided by an investment banking firm in New York. In addition, there will be approximately $80 million in bank financing as a first mortgage. The foregoing is in addition to the $50 million request to AIDEA. Co-chair Frank sought assurance that AIDEA funds would be the last dollars rather than the first committed to the project. Both Mr. Benedict and Mr. Snell assured that all other commitments would have to be made prior to commitment from AIDEA. Mr. Snell said that he had been in contact with the New York investment banking firm and the bank that would raise the balance of the funds. Everything is now in the working stage. Nothing is yet firm. Mr. Benedict noted that part of the reason the project remains in the working stage is that it "lost a great deal of credibility" when legislation for the project did not pass last year. As soon as there is a commitment from the state, the other arrangements will be finalized. Mr. Benedict advised that his investment banking firm raised over $1.5 billion for internal projects over the last six weeks. The proposed $35 million request is small by comparison. Discussion followed between Co-chair Frank and Mr. Benedict regarding the means utilized to overcome cost differentials between Anchorage and Seattle. Mr. Benedict cited decreased electrical costs, an adequate labor supply, and manufacture of "extremely efficient" equipment. Many existing East Coast manufacturers have not upgraded their equipment. They thus do far too much hand labor. A total of nine different elements not only overcome the differential but overcome it substantially. Mr. Benedict voiced his assumption that once the proposed plant is operational and successful, others will follow. Someone must break ground first. In response to a question from Senator Kerttula, Mr. Benedict said that eighty percent of production will be committed to the "Lower Forty-eight." The remaining 20% will either be sold within the United States or overseas, which ever is best in terms of the strength of the dollar and other financial considerations. Mr. Benedict noted that Americans eat little seafood compared to the rest of the world. The average in the U.S. is 14.9 pounds per person. Europeans average 50 to 60 pounds, and the Japanese average 150 pounds. Responding to questions from Senator Kelly, Mr. Benedict noted that fish sticks will comprise the low end of the product line. Packaging will include family packs in addition to single dinners. The Center will also work directly with the food service industry to serve restaurants and cruise ships. Both have expressed need for a high quality product that is not now available. In reply to a further question from Co-chair Frank, Mr. Benedict indicated that interest rates are presently so low that AIDEA's interest component will not be of great assistance. The project needs a strong demonstration of state support. During further discussion, Mr. Benedict spoke to outside perception that Alaska has more money than it knows what to do with. Investment banking firms seek to utilize funding in areas evidencing demonstrated need and strong local support.