How to Revitalize Hawaii’s Economy

Dozens of ideas to get the Islands back on track

August, 2010

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

Ernest 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

Hawaii Business gathered seven local leaders – from businesses, nonprofits and government – to talk about how Hawaii can revitalize its economy. This is an abridged version of that discussion. (Click here to read the full transcript.)

Petranik: The topic is revitalizing Hawaii’s economy. Carol, I’m starting with you because you’re the only politician at the table. What should government do?

Fukunaga: What government should be doing that it’s not doing enough of right now is accelerating capital improvements on things that we need, like school repairs, infrastructure development and all the rest. Also, we should be measuring how long it takes to get things done and put in specific incentives: If departments are able to perform better than the standard we set, then next year their CIP (capital improvement projects) standing should go up. If they do poorly, their CIP standing should go down.

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. If we took care of our schools, that would get a lot of our guys working again. It’s the classic countercyclical spending in a recession: When the private sector’s not putting money into the economy, government 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 ground in August on construction of a new four-year university in Kapolei.

Belsby: The fiscal crisis forced us to rethink our view that government was responsible for everything. We’re getting back to the basic purpose of government: providing infrastructure for the private sector to succeed. 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.

To build that infrastructure, we should use some tools used in other parts of the country, such as Mello-Roos bonds in California. They’re basically private-sector bonds that have the full faith and backing of the state as a credit enhancement.

Nishizaki: In construction, the Honolulu airport should have been renovated much sooner. It’s the first and last impression that visitors have of Oahu, and that project should have taken first priority. Honolulu Airport is nice, but it’s certainly not up to par with other airports around the world.

Sullivan: In the short term, 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, the dialogue in tech is more sophisticated than it’s ever been. Act 221 created the environment for angel investing in tech companies, so we’ve got sophisticated angel investors, but to bring a product to market requires more capital. The state government can have a leadership role in encouraging more capital to bring these tech companies and their innovative technology to the marketplace.

There’s a lot to learn from what other states have done successfully around the country. Several years ago, Congress supported venture funds by putting some of its retirement money into them. Those venture funds then attracted additional capital. If you look at those funds today, 80 percent of businesses that were created are within about a 30-minute drive of where those funds physically reside. National Venture Capital Association numbers show that, for every $25,000 invested from these funds, you create one tech-sector job. Average salary for a tech-sector job is $70,000 to $75,000. Every dollar that was invested created $9 dollars circulating in the economy. It’s well within the flexibility of what the state can do to stimulate that.

Petranik: What’s the role of universities?

Dancil: They’re usually the No. 1 source of innovation. If you look at tech centers around the country, they all center on universities and their engineering, computer science, medical schools. They find a niche. I know (UH) President Greenwood has made that one of her top three things to do, and she did appoint an innovation council. She wants to figure out a better way to commercialize technology coming out of the university, and that’s a great first step.

Okimoto: In agriculture, part of the problem is developing infrastructure. We’re losing a lot of our ag industries like the pig industry, chicken, all of the livestock, because we can’t keep up with the infrastructure –building of slaughterhouses, processing facilities and the new ways to ensure food safety. Part of the problem is getting government permits. I had to put up a facility just to wash the produce for food safety. When I started four years ago, our estimated cost was nearly half a million dollars. By the time I finished, it was $2 million. That was after two years going through the permitting – county and state – and that was actually an expedited process. Most small guys are not able to do that. I talked with some people about bringing back chickens. Just for the processing facility you’re looking at $30 million and you need an FDA inspector in there at all times. That’s what makes the system not work for small farmers. Corporate farmers are the only ones that can afford this infrastructure. And that’s what we lack here in Hawaii. Agriculture is going to need that help going forward.

Belsby: There are bright spots on the horizon, because, for the last several years, we were trying to copy Mainland models on technology, intellectual property, economic development in general. Now, we’ve found where our competitive advantage is and it appears that renewable and green energy are valued propositions for Hawaii. It’s interesting that companies like General Electric, Shell Oil, First Wind – large multinational companies – are here doing business, whether it’s wind, solar or otherwise. Admittedly, they are relying upon federal laws or federal credits, but they’re not relying upon state support.

Petranik: Are there regulation fixes that government can do to help businesses?

Okimoto: One thing is having a one-stop (permit) center where you have county and state in the same building so you’re not going back and forth. That would help construction guys and everyone. It could be done more efficiently and without duplication.

Nishizaki: A study done last year about the loss of Waikiki Beach (due to sand erosion) said that would lead to a $2 billion decline in revenue for Hawaii. About four years ago, our company decided we were going to spend our own money to bring the public beach back to Gray’s Beach in front of the Sheraton Waikiki. That was four years ago. Our consultants told us our timeline would be 18 months to get it done. The timeline is still 18 months. We actually have to go through 25 different agencies – state, county and federal. At the federal level, we were told this was navigable water. This is at our shoreline! We have spent over $600,000 in private funds already.

Fukunaga: It’s difficult to get all the levels of government to cooperate, but I’ll point to one success: Hawaii is the only state that has a consolidated permitting process for a film production. We said this industry is important for our long-term economic prosperity, so we devised a permitting system that crosses federal, state and local governments. I don’t see why we couldn’t cooperate and work together between state, county, and federal in other areas as well.

Dancil: Take an example from technology: importation of species. When I started my last biotech company, I just wanted to bring in this one virus strain – very normal, off the shelf – I had to get this letter from this person, get this letter from this other person, go talk to another person, and talk to one other person. Like the film industry, we want a consolidated approach.

Sullivan: Obviously the driver in this kind of discussion is the mongoose and rat scenario: Bringing in the mongoose to fix the rat problem without realizing where it’s heading. In talking about permitting on Waikiki Beach – we don’t want what’s happened to Kuta Beach in Indonesia. That’s development out of control. So this stuff has to be regulated adequately. So, you want to balance the local interests of diversifying the economy and creating jobs and sustainability, yet preserving what makes Hawaii special. That’s been an ongoing struggle here, except today we’ve swung too far on this issue and we need a more balanced approach. With biospecies and life-sciences technology – a lot of things that we have to deal with now didn’t even exist back in the days when the mongoose was brought in to get rid of the rat, yet we’re still thinking in the same terms. There are ways to upgrade our thinking that could be reflected in the way permit jockeys do their job and get reflected in policy.

Okimoto: Part of that problem is a mistrust of government by the environmental community because they fear these things will get out. So the bio-security plan that we’ve been pushing for the last five years is for a facility by the airport where we check everything coming in – and even things going out can be checked there rather than on the Mainland – and putting both federal and state people there. That would probably help the biotech industry and ag, too. Every time a new virus is found in the Islands, people ask me what should we do, and I keep telling people that we’re not going to be able to control it, period. We’re going to have varroa mites on every island, viruses on every island, myconia on every island, coqui frogs, because there are not enough controls, which is why this facility is really important. We spend so much time controlling invasives when they come here, but if we had put all that money into a biosecurity facility, we probably would have saved hundreds of millions that was spent trying to control invasives, especially in agriculture.

Sullivan: The last time we did a real comprehensive plan here was during the Ariyoshi administration, and the world’s changed. It’s time to develop a plan for the future to integrate the world as it is today. A big vision. Why education matters is totally different today. The Internet didn’t exist when they did that plan. Not everybody is going to be happy about everything, but there’s the opportunity for a more thoughtful focus that reflects on ag, education, tourism and other things. For instance, manufacturing is changing. We’re talking about a thing now called miniature manufacturing that could be done very effectively in Hawaii. And there’s synergy among ag, the life sciences, the medical school. There’s this convergence of thinking and the infrastructure that is needed to make them succeed can be shared by everybody.

Okimoto: I think collaboration between all sectors helps. Right now, ag is partnering with Kyo-ya in presenting more local food at the (Starwood) hotels. Tech, of course, helps ag. We need leaders who are collaborative and bring industries together.

Belsby: I think there is value in creating a big vision, but I would not let that stop us from identifying five real projects that we can accomplish in the next 24 to 36 months. Projects that don’t require $200 million, but projects that might be $10 or $15 or $20 million, so collaboration has something to show for its efforts.

For example, we talk about agriculture sustainability and feeding ourselves in the event of some major disruption in shipping. If it’s a weather disaster, theoretically the crops just got destroyed. So, can we build a major cold-storage facility on the North Shore or on the Big Island or elsewhere? It could be built by something we’ve formed together – a farmers’ co-op, with support from other quarters. Green-energy technology could power it. I would rather have us think as a team about four or five projects that we could work on that are not going to stop us from dreaming the big vision.

Nishizaki: Industries helping each other is great, but right now, the tourist industry is the quick fix for Hawaii. We’ve got to get visitors back. Over the last two years, visitor spending has declined around 23 percent. Think of the multiplier effect in the community. The visitor industry employs around 160,000 people. That’s a large percentage of the workforce.

The visitor industry needs support. With all due respect to the senator, it’s “Visitors don’t vote, so let’s increase the tax.” On July 1, the TAT (transient accommodations tax, or hotel tax) went up another percentage point (to 9.25 percent). It’s not the right message to tourists.

The last thing is ag. We need homes here and housing, but visitors don’t come here to look at subdivisions or homes. We need the green space because that’s what they come to Hawaii for. Locals also like to look at green space. We need to balance that.

Okimoto: That’s a good point. Even ag and development can work hand in hand. I’ve been getting a lot of heat about supporting Hoopili (a proposed development in Ewa) and I truly support it because it’s in community growth plans. If that’s where the people want to grow communities, then I’m for it. That’s why rail is really important to the overall plan because development will be centralized around rail, and everything will go up and not out. That will preserve more land for agriculture.

Chock: Through our People’s Pulse Survey (conducted by Hawaii Business Roundtable and Pacific Resource Partnership), we asked local people, “How do you define sustainability?” Most defined sustainability as being able to raise a family in Hawaii, seeing their kids grow up here and have a job here. But Hawaii ranks 49th in the country in home ownership and 50th in intergenerational families living under the same roof. That won’t motivate local kids about coming back to Hawaii after they go away to get a good education. What message are we sending the business community when the state and the county made planning decisions 20 or 30 years ago to redirect urbanization and residential growth to Kapolei, and now there is an undercurrent that wants to revisit that decision?

A lot of dialogue has been on the jobs aspect of rail, but the long-term dialogue is about building an urban center from Kapolei to downtown Honolulu. We can address open space and redevelopment in an environmentally friendly way and still create more density in the urban core. The American dream doesn’t have to mean a home with a big yard, but it might be a 900-square-foot condo where you can live and work in Kakaako and be part of the life sciences or other budding industries.

Belsby: From an urban-growth perspective, we are in a state of transition, and transition is always painful. In the San Francisco Bay area 30 years ago, everyone was driving into San Francisco to work, not unlike everyone driving into Honolulu to work today. In the Bay area today, it’s a reverse commute: More people are going from San Francisco to San Jose in the morning because that is where the jobs are. I’m not suggesting 30 years from now everyone will be driving to Kapolei in the morning, but it will be more balanced. So, we have to approach some problems from a long-term perspective.

Some people are saying, “I want more agriculture.” But I think many are saying agriculture but mean open space. I don’t think we’ve really resolved, “Do we really need more agriculture or do we need open space?” Some studies suggest that we could largely be self-sustainable on vegetables and some fruits with 40,000 to 50,000 acres of good productive agricultural land. We have that much land. (Okimoto signals agreement.) What we don’t have is the labor to provide price-friendly food at the market. That’s because workers in agriculture, where labor rates are admittedly lower than in many other industries, cannot afford a home here. So the first thing we need to do is provide housing, because, under supply and demand, if we can supply enough housing, prices will moderate.

Sullivan: We are building a billion-dollar telescope on the Big Island and where are the crucial skilled technicians? Guys that can run a machine shop. Guys that can actually build things. They don’t need to have a degree from a four-year school to be a huge contributor. We need those kinds of people plus engineers and scientists. We’ve got an opportunity to grow all kinds of peripheral industries, but what are we doing about it? Not a whole lot. The community colleges, the (UH) College of Engineering, and the rest of the university, they should be part of creating jobs.

Dancil: We are taking steps. Just last week at Oceanit, we had the community colleges come together, the engineering schools, to talk about preparing our workforce for the jobs of tomorrow, creating internships and connecting kids to the private sector. I just held a SciTech Day at which scientists and engineers told kids that you’re just not studying a subject for its own sake, but here is a company in Hawaii that utilizes these skills.

Chock: One of the requirements to get into our union (Carpenters Union) is a math test and it’s written at the eighth-grade level: arithmetic, reading a ruler, a tape measure. Fifty percent of the kids who are DOE graduates cannot pass our math entrance exam. There’s a huge accountability problem in public education. I don’t think it’s a money problem. We spend more than higher-performing states, yet we’re not getting the results.

Fukunaga: We should be deploying government resources more strategically. For example, we need a state CIO (chief information officer). By the time Gov. Cayetano realized the importance of a statewide CIO to consolidate areas and utilize technology, it was the last two years of his administration. (Gov. Lingle) has a CIO who is also the state comptroller, but that is not an effective approach. I think the city administration and Mayor Hannemann have done a really good job of identifying areas that IT can help streamline government.

A new law we passed said there should be a state CIO, a cabinet level position, and there should be an advisory group of senior agency people who help identify best practices. It takes effect Jan. 1, 2011, and we think that can save us a huge amount of money.

Nishizaki: Businesses need to go out there to the young people and build their aspirations. Over the last four years, we’ve hired four local chefs, Rodney Uyehara, Jon Matsubara, Ryan Loo and Colin Hazama. I encourage them to talk to the kids. People look at big baseball players, big football players, but these local chefs can create that same type of enthusiasm. Because not every kid’s going to go to college, but KCC (Kapiolani Community College) lets these kids get a degree to be chefs, to be very creative and in high demand.

Another concern is that the University of Hawaii keeps talking about getting rid of the Travel Industry Management School, or consolidating it. I have a hard time understanding why, when the state’s No. 1 industry is tourism, we are going to dilute a program that is developing future managers. We’ve got to support good local people who want to be its managers.

Belsby: In my prior career, I did a lot of consulting work with the Chicago school district, San Francisco and Los Angeles school districts, and I found that the larger they got, the less efficient they became. They thought there would be cost savings, but the bureaucracy that was created offset any savings, and we’ve realized that issue in Hawaii. So it is very instructive that it takes a village to raise a child, not the state. And I think the more that we can migrate to that village model the better off we’ll be. If people in our community feel they own their local school, they are going to take a more active role.

Fukunaga: I’ve long advocated giving schools more independence. People talk about not having enough schools and a backlog of repairs and maintenance, but if parents were able to choose different schools for their children, maybe near their jobs, it would slow down the rate at which we have to build new schools. It would be much more efficient to let parents take their children to underutilized schools and that would encourage schools to compete and get better, because dollars follow the child.

Petranik: Kyle, what’s the role of unions in revitalizing the economy?

Chock: One thing we’re doing more now is leveraging our assets to partner with the business community. For instance, our pension-fund assets are funding projects at a time when local banks aren’t. If businesses win, we win, versus some unions who are still stuck in dealing with the employer as the enemy. We crossed over that a long time ago and tried to find that balance where you could still protect workers’ rights, still have an honest day’s wage for an honest day’s work, and still have employers and businesses come together.

If you try to resolve all of those issues outside of a collective-bargaining environment, you’re going to be more successful when you end up in the economic situation we’re in now, where union and management can solve problems with a phone call vs. a strike or this excessive posturing through the media between the administration and public-worker unions. When the downturn came, our union membership ratified a freeze on raises that had been negotiated and that employers by law were required to pay. You can do that when you put all that equity and trust in the middle of the table between labor and management, but the public-sector unions and the state and the counties have struggled to do that.

Petranik: Is there a way to further leverage the military presence in Hawaii?

Sullivan: The Department of Defense probably continues to be the biggest investor in technology in the world. Everything is evolving, including what the military needs, which creates big opportunities for local industry. The acquisition concept created post-World War II is changing: how to get things out faster because the bad guys can get it off the Internet and don’t have to go through a long procurement process. It’s a huge advantage for Hawaii – we have the biggest military in the world right down the street – for local industry to develop technology that can then be brought to nonmilitary applications.

To give an example of how state government has supported that, years ago, I remember looking at Small Business Innovative Research grants, SBIR. The state of Hawaii was 48 out of 50. But after the state started matching grants, the state’s rank moved from 48 or 49, to 23 to 24, a direct correlation. It occurred over five or six years. This little extra money allowed local companies to show up and compete for the next round of funding. Physically show up in D.C., tell them what they’re doing. That support was leveraged into a lot more, and there have been a lot of things the state’s done to support that and it continues to grow.

The fact that we’re not Rochester means that, when we think of optics, we don’t have to think about Kodak film. The lack of domain expertise leads to more disruptive innovation, which is a natural act for people in Hawaii, but it’s harder for other parts of the country. It occurs at the University of Hawaii and it occurs in a lot of these companies. The military needs disruption to beat the bad guys. They’re not going to do it by competing with the same things.

Petranik: Thank you for coming today. We had a very stimulating discussion.


How to Improve Hawaii’s Economy

A majority of Hawaii business leaders say that improving public education or promoting tourism would be the best way to revitalize the Islands’ economy. The BOSS survey of 403 top executives of small, medium and large businesses statewide, conducted in April, suggested six possible ways to improve the economy. Here’s how the executives rated those choices.

 

The No. 1 Solution

The executives were asked to pick the best single way to revitalize the economy. The executives of small firms were more likely to suggest reducing the size of government and lowering taxes, while the leaders of large companies were more likely to suggest bringing in new industries.

 

Tax Breaks and Incentives

The vast majority of business leaders surveyed, from companies of all sizes, said the government should use tax breaks and incentives to help diversify Hawaii’s economy.

 

 

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