A legislative report on the Big River Steel mill project offers a second opinion on the state’s $1.1 billion superproject questioning an initial report from Arkansas’ economic development agency.

The executive summary for Big River Steel reviewed steel market conditions and a financial cost-benefit analysis.

Arkansas announced in January that a $1.1 billion steel mill, led by investor John Correnti, would locate in Osceola, Arkansas (Mississippi County) producing 525 jobs averaging $75,000 a year.

Legislators have been asked to approve a $125 million bond issue to finance incentives and loans for the project under the auspices of Amendment 82, the state’s superproject amendment.

As part of that process, lawmakers are charged with conducting an independent analysis of the project.

Today, the Bureau of Legislative Research released an executive summary of the analysis it has provided lawmakers. The summary highlights the review conducted by IHS Global Insight (IHS), which was one of two groups hired to analyze the deal.

STEEL MARKET CONDITIONS
The report said that the potential market size for Big River Steel’s (BRS) products is roughly 9 million short tons over the next 10 years.

“The steel industry can absorb the addition of Big River Steel, both Phase 1 and Phase II, from a capacity perspective. However, if any other major facilities, other than the projects already announced, were to be added to the US steel stock, the industry would quickly find itself in a highly competitive, zero-sum environment. If this occurs the BRS production goals and operating margins are not achieved,” the report said.

The report warns that decreasing margins could affect profits and corporate income taxes.

FINANCIAL COST-BENEFIT ANALYSIS
IHS reviewed two cost-benefit analyses conducted by the Arkansas Economic Development Commission (AEDC).

One analysis was a 20-year look at the deal with no early payoff of a $50 million incentive loan to Big River Steel. The second analysis was a 20-year view with an early payoff.

“The AEDC’s analysis estimated positive net economic benefits, on a net present value basis (NPV), for both combinations, ranging from $54.2 million for the former to $49.8 million for the latter,” the report said. “In our judgment, the types of benefits and costs considered in the AEDC cost-benefit analysis were appropriate, and to the best of our judgment, the methodologies were sound.”

However, IHS warns that AEDC’s projections may be rosy.

“IHS asserts that the AEDC has, to some extent, overestimated the long-term, net economic benefits of the incentives being considered for the BRS project, primarily because they did not fully consider the uncertainties that surround some of the key assumptions identified in the following paragraph,” it said.

Those uncertainties include:

  • The likelihood that the BRS plant will operate consistently at the projected levels of production and employment;
  • The large size and timing of the Recycling Equipment tax credit which will prevent the state from receiving any increase in corporate income tax revenues until late in the project;
  • The share of inputs and supplies that will be purchased from Arkansas vendors;
  • And, the share of BRS’s income that will be subject to the corporate income tax since the plant’s production will sell goods out of state.

“IHS’ cost-benefit analysis yielded slightly lower net economic benefits than those estimated by the AEDC, and in certain scenarios resulted in costs exceeding benefits,” the report said.

AEDC RESPONSE (UPDATE)
Grant Tennille, director of the AEDC, offered a rebuttal to some findings in the legislative report.

He said:

“We don’t see our cost benefit analysis as inconsistent with that provided by IHS. We’ve said from the outset of this project that there are risks involved in this, and every other, business venture. We have worked for more than a year to understand those risks and mitigate them. As IHS points out, our benefit analysis is dependent on Big River Steel performing as promised. IHS goes on to say that the State has :appropriately inserted claw back and penalty language” in the agreement that will be triggered if Big River “does not meet defined performance criteria.” It is also important to remember that the State’s incentives are performance-based, meaning that if Big River cannot receive the incentive if it doesn’t perform. We have some questions about IHS’s methodology and conclusions, but on balance, we believe that IHS’s analysis is fair and confirms our assessment of the project.”

You can access the full executive summary here.

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