Report questions steel-mill finding

Consultant says state overestimated long-term benefit of proposed plant

The Arkansas Economic Development Commission overestimated the long-term net economic benefits of the state’s incentives for the proposed Big River Steel project in northeast Arkansas, and the costs could exceed the benefits, a consulting company hired by the Legislature said in a report released Thursday.

IHS Global Insight, based in Englewood, Colo., said the Economic Development Commission estimated economic benefits ranging from $49.8 million to $54.2 million in two 20-year cost-benefit analyses. But those projections may be unrealistically optimistic, the report said.

State officials want the Legislature to authorize the issuance of $125 million in bonds to help build the $1.1 billion steel mill near Osceola. The bonds are permitted under Amendment 82 to the Arkansas Constitution, which seeks to facilitate major economic-development projects. The state plans to provide other economic incentives for the project, including tax credits, deductions and refunds.

Big River Steel, led by steel magnate John Correnti, has said the project will employ 525 people, each at an average salary and bonus pay of more than $75,000 a year. Without substantial state funding and tax breaks, the steel mill will probably be built in another state, boosters warn.

House Republican leader Bruce Westerman of Hot Springs said the prospects in the consulting firm’s report on the proposed project are “less than impressive.”

The report “will have an impact on the final decision,” he said.

Senate President ProTempore Michael Lamoureux, R-Russellville, said state lawmakers hope the proposed project is viable.

“But they are not just going to run out and endorse it before they have a chance to look through the reports and do some due diligence themselves,” he said. “I would still predict that we try to find some way to do the project.”

IHS Global Insight said the commission overestimated the long-term, net economic benefits of the state’s incentives largely because “it did not fully consider the uncertainties that surround some of the key assumptions.”

“These uncertainties could negatively impact the project’s net economic benefits or possibly result in costs exceeding benefits,” the consulting firm said in a three page executive summary of its report.

IHS Global Insight said it agrees with the commission that “modest net economic benefits are likely to be generated from the incentive package if the [Big River Steel] plant operates consistently at the projected levels of employment and output and achieves the operating margin.”

“However, there is at least some chance that the costs could exceed benefits if these operating criteria are unmet and other uncertainties … emerge,” the consulting firm said.

According to IHS Global Insight, the major sources of uncertainty affecting the cost-benefit analysis include:

Doubts about whether the plant will operate consistently at the projected levels of production and employment to yield the overall economic impacts and increases in tax revenue necessary to pay off the bonds.

The large size and timing of the recycling-equipment tax credit that will prevent the state from receiving any increase in corporate tax revenue until late in the project. The tax credit against the state’s corporate income tax has a potential value of up to $216 million.

The share of “inputs and supplies that would be purchased from Arkansas vendors during operations.”

The share of the Big River Steel project’s income that would be subject to corporate income tax since the majority of the plant’s production will be sold out of state.

Effective tax rates that will affect the level of tax revenue generated by the project.

The consulting firm said its own cost-benefit analysis yielded slightly lower net-economic benefits than those estimated by the Economic Development Commission and resulted in costs exceeding benefits in certain scenarios.

In addition, IHS Global Insight said it evaluated the areas of uncertainty to determine the downside risk and “in virtually all scenarios the net economic benefits were barely positive and in some cases costs exceeded benefits.”

The consulting firm said the steel industry can use the additional steel that the Big River Steel produces - as long as additional American steel mills don’t open elsewhere.

“However, if any other major facilities, other than the projects already announced, were to be added to the U.S. steel stock, the industry would quickly find itself in a highly competitive, zero-sum environment,” IHS Global Insight said. If this occurs, Big River Steel’s “production goals and operating margins are not achieved,” the consulting firm said.

“While decreasing margins will affect profits and corporate income taxes, the real threat to not having a positive benefit cost ratio is the level of production; if these decline, then the indirect and induced benefits decline, which drags down tax revenues,” the consulting firm wrote.

Grant Tennille, executive director for the Arkansas Economic Development Commission, said the commission’s cost-benefit analysis is consistent with the consulting firm’s analysis.

“As AEDC has stated from the outset of this project, there is risk involved in this, and every other business venture,” he said. “We have worked throughout the past year to understand and mitigate those risks. As IHS points out, our benefit analysis is dependent on Big River Steel performing as promised.”

Tennille noted that the consulting firm reported that the state has “appropriately inserted claw back and penalty language” in the agreement if Big River “does not meet defined performance criteria.” The state’s incentives for the project are performance-based, meaning that Big River Steel cannot receive the incentive if it doesn’t do what it promised, he said.

“We have some questions about IHS’ methodology and conclusions, but on balance we believe that IHS’ analysis is fair and confirms our assessment of the project,” Tennille said.

Commission spokesman Joe Holmes said the commission’s cost-benefit analysis of the project will become available to the public when its full report under Amendment 82 is delivered to the Legislature in the next few days.

“We’re still working on it. The analysis is required to be included with that report,” he said.

Correnti, chairman and chief executive officer of Big River Steel, said IHS is underestimating the amount of steel that Big River Steel can sell, and overstating the effect that increased competition would have on the new plant.

“If you produce less steel, your revenues are going to be far less and you’d pay less taxes,” Correnti said. “But if you’re the low-cost, quality producer with the newest equipment, which we’re going to have, you’ll have some of the lowest costs to produce coil steel in the United States. There will not be a steel mill in the United States with as modern equipment as we’ll have.”

Correnti compared the advantages that he believes Big River will have with Wal-Mart Stores Inc.

“Why has Wal-Mart run Sears [into bankruptcy],” Correnti said. “They are a retailer, which is different [from a steel mill], but it’s because they’ve been the low-priced seller of goods.”

Correnti acknowledged that he won’t be able to buy scrap metal for much less than other manufacturers do.

“But the key to the success of this project is taking that scrap metal and converting it to finished steel more economically than anyone else in the country,” Correnti said. “And the way you do that is lower energy costs, lower labor costs and better efficiency.”

It’s unclear what Big River Steel’s key Arkansas competitor thinks of the report.

Messages were left seeking comment from several executives at Nucor Corp.’s steel plant near Blytheville, but they were not returned Thursday afternoon.

Sen. Bruce Holland, R-Greenwood, who is chairman of the Senate Agriculture, Forestry and Economic Development Committee, said the Senate committee and its counterpart in the House will hold a meeting Monday afternoon to hear from the consultants and ask them questions.

The Legislature also has hired Regional Economic Models Inc. based in Amherst, Mass., to analyze the project.

Holland said he also hopes that lawmakers hear from Tennille and officials representing Big River Steel and Nucor Corp. during Monday’s meeting.

“I want them to mix it up [and] get everything out there. Whatever arguments anybody wants to make, I want to hear them all. That way you get the best result out of it,” said Holland.

Lamoureux said these “kind of things are best resolved through committee testimony.”

A lot of money is at stake, he noted.

“It’s a big deal and a lot of state resources,” he said.

Information for this article was contributed by David Smith and Sarah D. Wire of the Arkansas Democrat-Gazette.

Front Section, Pages 1 on 03/22/2013

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