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Alaska Forward: Towards a NextGeneration Economy

An OverviewPresented by

Brian Holst

Prepared for

Alaska Partnershipfor Economic DevelopmentPrepared by

Economic Competitiveness Group

December 1, 2009

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Alaska Partnership for Economic Development(APED)

A non-profit umbrella organization consisting of a variety of economicdevelopment entities, committed to the development of an AlaskaComprehensive Economic Development Strategy (ACEDS) andaccompanying realistic action plan to identify, prioritize, and implement thestate’s economic development program.

Ultimately, this plan – branded as the “Alaska Forward” initiative – willprovide guidance to the Alaska legislature, government policy-makers,regional economic development groups, and local community entities.

Come join the “Alaska Forward” initiative – a plan for the Next Generationeconomy in Alaska

Alaska Forward: Towards a Next GenerationEconomy

A project having two phases:

• Phase 1– Situational Analysis; an “economic reality check”now coming to its close

• Phase 2 —Strategy Development; to focus onrecommendations for potential new economic developmentdirections, new policies and new practices. This work willbegin shortly.

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The Consulting Team

IHS Global Insight — the global leader in economicand financial analysis, forecasting and marketingintelligence for 40 years. Now part of IHS andintegrated with units such as IHS CERA, IHS Jane’s,and IHS Lloyd’s Register-Fairplay.

Economic Competitiveness Group — exclusive focusfor 25 years on analyzing the drivers of regionaleconomic competitiveness and strategy development.

McDowell Group — McDowell Group is Alaska’s mostexperienced research-based consulting firm, with 35years of experience studying business, economic andsocial conditions throughout Alaska.

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Phase I – Situational Analysis Report

• Economic Profile and Forecast

• Alaska's Industry Cluster Portfolio

• Competitive Benchmarking

• Global Market Opportunities

• Analysis of existing economic development objectives and strategies

• Assess the strengths and weaknesses of the state’s economicdevelopment organizations

• Assessment of Entrepreneurship and Business Climate

• Final Report - A Path to the Future

Alaska Forward is the right initiative at the right time; APEDlooks forward to you helping us move from this study to thehard work that is to come.

After the Situational Analysis, what can we say?

The problem: accumulating levels of future risk and decliningeconomic resiliency, due to:

• Continuing declines in oil production (source of 85% of state revenue)

• Uncomfortable trends in other natural resource sectors (regulations,environmental concerns)

• Downturns in tourism

• Aging workforce

• Outmigration

• Weak culture of entrepreneurship

• Remoteness and related infrastructure challenges

• High energy and transportation costs

Making the challenge even greater, Alaska’s approaches toeconomic development--its institutional methods—need

attention 6

Call to Action

Oil prices may stay at or above current levels, significant newsources of oil and gas may be tapped, and federalgovernment national security spending may keep rising.

However, the probability that these events will not happen isuncomfortably high.

This risk represents the basis of our call to action for adifferent approach to economic development.

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The Key Problem:Alaska’s comparative stagnation

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Bill

ion

200

5 $

20

22

24

26

28

30

32

34

36

38

40

Bill

ion

200

0 $

Alaska (right scale)

Sources: Bureau of Economic Analysis (BEA) and IHS Global Insight

History Forecast

U.S. (left scale)

Alaska’seconomy hasbeenstagnatingwhen looked atin comparisonto the U.S.nationaleconomy.

Real Gross Domestic/State Product

The forecast is the status quo path Alaska is on at this time.

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Cyclical Output Performance

Gross StateProductcontracted in 5 ofthe last 10 yearswith the ups anddowns of naturalresource cycles.

No growth in2007, 2% declinein 2008 and a3.2% decline thisyear.

Sluggish sub-par“recovery”.

Real Gross Domestic/State Product

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Rea

l GS

P/G

DP

Gro

wth

History Forecast

Sources: BEA and IHS Global Insight

U.S.

Alaska

1010

Getting Poorer

Once a highper-capitaincomestate, Alaskais nowprojected tobecome alower thanaverage per-capitaincomestate.

Ten years ofdecline isprojectedunder thestatus quooutlook.

Real Per-capita GDP/GSP

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Rea

l Per

Cap

ita

GD

P/G

SP

Sources: BEA and IHS Global Insight

History Forecast

U.S.

Alaska

1111

Energy sector no longera source of growth

Alaska's oil andgas sector ismassive (15% ofthe nationalsupply), but indecline.

Without any newdevelopments,we expectcurrent fields tobe producingonly about one-third of theircurrent levels by2030.

Alaska Oil Liquids Capacity Outlook

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

MillionBarrelsper Day

Fields in Production

Fields Under Development

Fields Under Appraisal

Other Discoverieswith Potential

for Development

FutureDiscoveries

Source: IHS CERA

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Employment -- stability that tends to mask what ishappening in the underlying economy

Stability ofemploymenthas been animportantsource ofpeace ofmind forAlaskans.

A key driverof thisstabilityappears tobe a natural“laborhoarding”response.

Employment-Nonfarm

100

110

120

130

140

150

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Mill

ion

0.15

0.20

0.25

0.30

0.35

0.40

0.45

Mill

ion

US

Alaska (Total)

Alaska (Excl. Mining)

Alaska (right scale)

Sources: Bureau of Labor Statistics (BLS) and IHS Global Insight

History Forecast

U.S. (left scale)

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Oil Prices – leading expert’s price scenarios

Alaskansshould notignore thedownsiderisks of theprice of oil.

• Global supply exceedsdemand.

• OECD oil demand peakedin 2005.

• Cheap sources of supplystill coming on stream.

• Oil production costs arebeing driven down.

• OPEC members notdisciplined.

WTI Price Scenarios to 2020

$0

$20

$40

$60

$80

$100

$120

$140

$160

1995 2000 2005 2010 2015 2020

Nominal$US

Dollarsper

Barrel

Historical

Asian Phoenix

Break Point

Global Fissures

1986-2003 average: $21.20

Source: IHS CERA, Global Insight

Reducing Risk, Strengthening Economic Resiliency--Manyregions around the world are developing their economies aroundthe concept of industrial clusters

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15

Clusters represent 40% of total employment

15

Segmenting the 11 Clusters (at the state level, 7 regions havealso been analyzed)

16

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Seed Clusters: Fortunately Alaska has several“clusters-in-the-making”

• Cold climate technology

• Rocket launch technology• Cold climate housing

• Specialized super computing capabilities• Distance delivery -- education, medical, and management services

• Alternative energy and clean-energy (bio fuels, clean coal/coal gasification, etc)• Specialty solvents

• Light aircraft operations and maintenance/navigation• Marine and arctic biological sciences/potential for aquaculture

• Remote communications technologies/systems• Aerospace technology/operations

• Naturally grown/grazed food products

From a strategic standpoint, these areas should be nurtured, as manyof the jobs of the future will emerge from these seeds

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Peer State Benchmarking

To assess the strength and performance of the state’seconomic foundations, the Phase 1 report identifies sevenpeer states with which to compare Alaska.

• Louisiana

• Idaho

• Montana

• North Dakota

• South Dakota

• Washington

• Wyoming

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19

Relatively well-educated workforce

Alaska has a well educated workforce. But employers regularly comment thatmany entry-level workers cannot read, write or perform basic analytical functions

Source: U.S. Census Bureau, 2006-2008 American Community Survey

Percentage of Population (25 and older) with Bachelor’s Degree or Higher

27.4%26.5%

24.0%

20.4%

27.1%26.1%

24.8%

30.5%

23.3%

14%

18%

22%

26%

30%

34%

United States Alaska IdahoLouisiana

MontanaNorth Dakota

South DakotaWashington State

Wyoming

% o

f T

ota

l Po

pu

lati

on

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Abnormally high dropout rates

However, the state has abnormally high drop out rates.

Source: U.S. Department of Education, National Center for Education Statistics

Event Dropout Rate for grade 9-12, School year 2004-05

8.2%

3.0%

7.5%

3.4%

1.9%

4.4% 4.5%4.8%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Alaska IdahoLouisiana

MontanaNorth Dakota

South DakotaWashington State

Wyoming

Dro

po

ut

Rat

e (G

rad

e 9-

12),

200

4-05

21

Relatively good tax environment

Alaska does not levy individual income tax and state sales tax andoffers overall low business tax environment.

Source: Tax Foundation

State and Local Taxes As Percentage of Income, 2008

9.7%

6.4%

10.1%

8.4%8.60%

9.2%

7.9%

8.9%

7.0%

4%

6%

8%

10%

12%

United State Alaska IdahoLouisiana

MontanaNorth Dakota

South DakotaWashington State

Wyoming

Per

cen

tag

e o

f In

com

e (%

)

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Weak R&D effort

Private Industry contributed only 12% of the total R&D spending in thestate.

Source: National Science Foundation and Bureau of Economic Analysis

R&D Expenditure as Percentage of Gross State Product, 2005

2.60%

0.67%

2.24%

0.54%

1.06% 1.14%

0.51%

4.37%

0.45%

0%

1%

2%

3%

4%

5%

United States Alaska IdahoLouisiana

MontanaNorth Dakota

South DakotaWashington State

Wyoming

Per

cen

tag

e o

f G

ross

Sta

te P

rod

uct

(%

)

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Beyond the Statistics:Situation Analysis Includes Stakeholder Feedback

Outreach effort aimed at gathering opinions from Alaskans about economicdevelopment opportunities and challenges

• Interviews with 75 economic development professionals and industryrepresentatives from throughout Alaska

• Meetings with a variety of stakeholder groups

• On-line survey gathering public opinion about economic development inAlaska; more than 300 responses

Alaskan’s are worried about the state’s economy and,importantly, whether today’s approaches to economicdevelopment are the best way to improve the situation

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A majority of web-survey respondents said that the effectiveness ofcurrent and past economic development efforts were not effective.

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Less than 6 percent of web-survey respondents said they were veryconfident of the state’s ability to compete globally.

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Energy costs and transportation links are seen as the biggest barriersto development

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Surprising degree of consensus from stakeholders

• Lack of statewide leadership and coordination of economic developmentresources seen as obstacles, past and present

• Alaskans continue to view natural resources as the greatest opportunityfor economic development

• Greatest barriers include high cost of transportation, cost of energy, andfederal regulations

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Alaska’s Economic Development “System:” Many economicdevelopment organizations with diverse funding sources, geographicscopes, missions and approaches

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The effectiveness of Alaska’s EDOs appears subject toseveral overarching issues

1. Need for Leadership and Coordination

2. Need for Explicit Goals and Strategies

3. Need to Integrate Short-term and Long-term Initiatives

4. Challenges of Geographic Isolation

5. Challenges Supporting and Adding Value to Existing Industries

6. Developing an Institutional Framework to Elevate the Impact ofKnowledge-based Industries

These are serious challenges, but other regions have beensuccessful by taking non-traditional approaches toeconomic development

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What do you do in such a situation? Move forwardwith a collaborative strategy development process

Public-private processes (public funding, private-public leadership)

Seek a shared economic vision among stakeholders—”NaturalResources, PLUS”

Inclusive, direct engagement of cluster leaders

Focus simultaneously on economic sustainability and diversification

• Wealth generating clusters must remain competitive

• Achieve diversification by placing special attention on emerging clusters

Identify priorities and make strategic investments in “economicinfrastructure” that will be the foundations of the state’s next economy

• Appropriately skilled, and adaptable human resources

• Available technology, appropriate for the state’s industrial clusters

• Financial mechanisms, for existing and new enterprises

• Seek pro-competitive business climate

• Strategic investments in physical infrastructure 30

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Process success factors

• From this point forward, build momentum and maintain it

• Minimize gap between analysis, strategy development andimplementation of new policies and practices

• Fast track some high visibility/high probability initiatives

• Early wins with low-hanging fruit builds confidence in theprocess

Alaska is not alone in moving to a collaborative, cluster-basedapproach to economic development

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Join Us

While Alaska’s premier economic development organizationsare at the forefront of the Alaska Forward initiative……

APED cannot do this alone. Please find a way to participatewith us in this important initiative.

Please JOIN US!

www.alaskapartnership.com