How to Revitalize Hawaii’s Economy – Extended Version
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Participants in this discussion:
Kirk Belsby, VP of the endowment for Kamehameha Schools
Kyle Chock, executive director of Pacific Resource Partnership
Keiki-Pua Dancil, president and CEO of the Hawaii Science and Technology Council
State Sen. Carol Fukunaga, Democrat, representing McCully to Punchbowl
Ernie Nishizaki, executive VP of Kyo-ya, owners of Hawaii Starwood Hotels
Dean Okimoto, owner of Nalo Farms and former president, Hawaii Farm Bureau Federation
Patrick Sullivan, founder and chairman, Oceanit
Moderator: Steve Petranik, editor, Hawaii Business
This is the full transcript. Click here for an abbreviated transcript.
Petranik: The topic is revitalizing Hawaii’s economy. We’re going to start with the big picture and then go down into various sectors and get more specific. Carol, I’m going to start with you because you’re the only politician at the table. What should government be doing that it’s not doing now, or what should it stop doing that is holding us back?
Fukunaga: What government should be doing that it’s not doing enough of right now is organizing our capital improvements so we are really excelling in the amount of spending we’re doing for things that we need to pay for, like school repairs, infrastructure development, and all the rest. What would be more helpful than our normal approach is that we should be accelerating and measuring how long it takes to get things done. We should put in specific incentives: If departments are able to perform better than whatever standard we set, then the next year then their CIP (Capital Improvement Projects) standing should go up. If they do poorly, then their CIP standing should go down.
Over the last several years, we have put a huge amount of funding into areas like school repairs and renovations, and a lot of it is in lump sum funding. This last two-year biennium budget, we put in over $200 million in lump sum CIP for school repairs, etc. It could be re-roofing, painting, and one of the myriad of things that you would want to get done, but at the same time, DOE, DOT, most of all the big agencies that handle construction are undergoing Furlough Fridays. So, you know, duh! We should accelerate getting these kinds of projects out quickly and keeping the economy moving. There’s probably a number of ways we could get it funded a whole lot faster.
Chock: There’s almost a billion dollars in deferred maintenance and repairs between the University of Hawaii’s 10-campus system and the entire state Department of Education. For our industry (construction) and the amount of unemployment we have right now, if we just looked at taking care of our schools, that would get a lot of our guys working and off the bench again. It’s the classic countercyclical spending in a recession: when the private sector’s not putting money into the economy, government really needs to take the lead.
One good example, the legislature this past session funded the University of Hawaii’s West Oahu campus – $48 million – and they’re going to be able to break in August on construction of a new four-year university in Kapolei. So that’s a positive sign for our industry.
Belsby: The good news that’s come out of this fiscal crisis is that it’s forced us to rethink our expectations of government. There was this view that government was in charge of everything and it’s responsible for everything. I think we’re now getting back to the very basic purpose of government, which is to provide the infrastructure for the private sector to succeed. And so instead of being responsible for bringing Silicon Valley to Honolulu, the idea is back to providing an educated labor force, highways, other forms of transportation, utility infrastructure in Hawaii. I think that the best thing that government can do is provide the infrastructure.
Secondly, there’s this presumption that government is supposed to pay for everything and then we in the business sector get mad when the government puts in bureaucracy in order to measure it or monitor it. I think in all fairness that the better play is for government to do what it does best and provide the infrastructure, but I think where they can help is along Carol’s suggestion as it relates to bonds. Right now it’s very difficult for development to take place in Hawaii in areas where there is no infrastructure. I think that’s what plagued DHHL for years. Whereas, if we use some of the tools I think that are used in other parts of the country, such as Mello-Roos bonds in California, they’re basically private sector bonds but have the full faith and backing of the state behind them as a credit enhancement to facilitate the use of those bonds to provide infrastructure, and once the infrastructure is in place, then everything can follow from that.
Petranik: Where is the next area to grow and expand to with this new infrastructure?
Fukunaga: West Oahu is a prime example. For years, we’ve really not had an opportunity to look at new types of industry development partly because urban Honolulu is so crowded. A lot of our tech businesses are hunting for adequate space in which to expand. I think the UH West Oahu campus is going to give us a tremendous opportunity to combine job growth and new industry development, particularly in some of the areas that UH West Oahu Chancellor Gene Awakuni has focused on, one of which is the Academy for Creative Media. A lot of us are very familiar with what Chris Lee has been touting and championing over the last several years. We now have ACM up and running. We have a very successful digital media set of programs at the school level, on Olelo, all kinds of manner of different platforms, and you have such a demand and a desire at the school level to really go into areas like animation, video game development, and that’s a big area that we finally will be able to combine potential industry development right in the middle of a higher education campus. Now, how great is that? We haven’t had that for a long time.
Nishizaki: In terms of construction, one would have hoped the Honolulu airport was renovated much sooner. We’re talking about the first and last impression that our visitors have of Oahu, and I think that project should have taken first priority.
Petranik: Is what’s on the drawing board adequate?
Nishizaki: It’s a start. If you look at our airport and compare it to other airports throughout the world, Honolulu Airport is nice, but it’s certainly not up to par with any of the other airports.
Petranik: What about the Neighbor Islands?
Nishizaki: The Neighbor Islands are adequate and it could do better but the vast majority of our visitors still go through Honolulu International Airport. It’s an airport that needs a whole lot of repair done. Luckily, it is Hawaii and it is open and you can see the outdoors, so that offsets some of the shortcomings, but if this facility were in Los Angeles nobody would go there if they didn’t have to. The airport is a place where we need to focus more on.
Petranik: Patrick, you’re part of the technology sector. Government has cut back on its incentives to that sector.
Sullivan: They have and, to a large extent, without a complete thought of how to build on what has been started. But just to reiterate, in the short-term, I think that construction is a terrific investment. In the long-term, education has been put under the rug. That’s a huge mistake. But in the medium-term, there has been a dialogue in tech that is probably higher and more sophisticated than it’s ever been, even though it may not be what everybody wants it to be, but in the last 25 years, for example, there has been enormous growth, sophistication, within the state and business community to understand tech. Stock in Act 221 – it was going to run its course, but the complete thought on tech when it comes to capital formation is to be continuing with capital formation after angel investing. Act 221 created the environment for angel investing, so now we’ve got some sophisticated angel investors and some understanding, but to really bring a product to market requires more capital. The understanding of that isn’t there and that is an important step that I think needs to occur. I think the state government can have a leadership role in that, in encouraging more capital to come to work to bring these tech companies that have been created some really innovative technology to the marketplace.
Petranik: By encouraging to you mean marketing or tax incentives or …?
Sullivan: There was a really interesting article about a year ago that looked at about 18 states. We’re not the first to try it. There are many, many ways to do it. There’s ways for states to lead a discussion and encourage business, and it’s left to one’s imagination on exactly how to do it, but we didn’t start the idea here and there’s a lot to learn from what others have done around the country, and there are ways to do it that can lead to right kind of outcome. One example, an interesting case study was several years ago, Congress supported the formation of new venture funds by taking some of its retirement money and actually putting it into venture funds. Those Venture Funds then created additional capital to go to work with that money. If you look at those funds today, 80 percent of businesses that are created are within about a 30-minute drive of where those funds actually physically reside. National Venture Capital Association numbers show that for every $25,000 invested from these funds, you created one tech sector job. Average salary for a tech sector job is on the order of $70,000 to $75,000. For every dollar that was invested, it created $9 dollars circulating in the economy. So, there are some economic benefits that would come from that, too, and it’s well within the flexibility of what the state can do to stimulate that. A matter of fact, there’s a series of papers written by a group called Grove Street Advisors (http://www.grovestreetadvisors.com/news/gsa_comm.asp) from the East Coast that really articulated why this was a good idea, how it stimulated the economy and why those funds worked harder to succeed. It argues that some of the early venture funds in their first one or two rounds of hunting actually outperformed significantly the older, more tired funds. And that’s one of the reasons they tried it, to see if they could actually stimulate new funds so you get new blood, new ideas, and break through some of the traditions that were not as open to real innovation. So, that’s within the ability of the state. There are policy issues and there are ways to incentivize investment that would lead to further growth of these type of companies. And it goes hand in hand with education.
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