Report urges caution on steel mill project


LITTLE ROCK — An independent analysis of a proposed $1.1 billion steel plant in northeastern Arkansas suggests the state economic office overestimated the benefits of $125 million in incentives the state is being asked to approve to close the deal.

Gov. Mike Beebe and principles of Big River Steel introduced the proposal earlier this year. The deal, which officials say would bring 2,000 construction jobs and 525 permanent jobs averaging $75,000 a year when the plant is operational, is contingent upon legislative approval of a $125 million bond issue under provisions of Amendment 82.

Legislative leaders hired independent consults IHS Global Insights and Regional Economic Models Inc. to analyze the financials of the proposal.

Legislators on Thursday received an executive summary of the analysis prepared by IHS in which the firm said the Arkansas Economic Development Commission “has, to some extent, overestimated the long-term, net economic benefits of the incentives being considered for the BRS project.”

The agency did not fully consider uncertainties surrounding key assumptions about the proposed Big River Steel Mill near Osceola, the summary said.

IHS said it agreed with AEDC’s finding that modest net economic benefits possibly could result from the investment, but it said they would occur only if the plant operated consistently at projected levels of employment and output.

“However, there is at least some chance that costs could exceed benefits if these operating criteria are unmet and other uncertainties emerge,” the IHS analysis said, recommending that AEDC look further into uncertainties that could reduce any benefits to the state in the deal.

Among the uncertainties cited in the summary:

—The likelihood that the plant will operate consistently at projected work force, output and profit margins to yield increases in tax revenue necessary to pay off the bonds.

—The size and timing of a Recycling Equipment tax credit which would prevent the state receiving any increase in corporate income tax revenues until late in the project.

—The share of inputs and supplies purchases from Arkansas vendors during operations.

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

IHS said effective tax rates and other such variables also are uncertain and could affect the level of tax revenues generated by the project.

Beebe spokesman Matt DeCample said the governor had no initial response to the report.

“No snap judgement, except that we’re going to be reviewing it and discussing it with AEDC and the Legislature, and we’ll go from there,” DeCample said.

AEDC Director Grant Tennille said the agency has some questions about IHS’ methodology and conclusions but considered the analysis fair and said it generally confirms AEDC’s assessment of the project.

“As I’ve said from the beginning, there’s risk involved in the steel business, as with any business. We’ve worked throughout the last year to understand and mitigate the risk,” Tennille said. “Many of our incentives are performance based, meaning they can’t receive them if they don’t perform.”

Among the safeguards, equity from company investors and commitments from other lenders totaling $300 million must be deposited into an escrow account before bonds are sold, and $250 million of company money must be spent before any bond proceeds can be spent on the project.

Tennille said his confidence in the project is buoyed by Big River Steel CEO John Correnti’s decades in the steel industry and his and his team’s proven ability to deliver on major projects.

A joint meeting of the Senate and House agricultural, forestry and economic development committees is scheduled for Monday. The consultants, representatives from Big River Steel and AEDC officials are expected to attend.

Senate Pro Tem Michael Lamoureux, R-Russellville, acknowledged some lawmakers are concerned about the viability of the project but said he remains optimistic it will be approved.

“It’s a big deal, it’s a lot of state resources,” Lamoureux said. “I think people hope it’s a viable project, but they’re not just going to run out there and endorse it before they have a chance to look at some reports and do some due diligence themselves.”

House Speaker Davy Carter, R-Cabot, said the report “generally backed up what AEDC had said.”

Release of the executive summary comes amid objections to the project from Nucor Steel, which operates two steel mills in the same area where the new plant would be built.

Nucor has raised questions about steel capacity and the proposed plant’s effect on Nucor’s state tax contributions, and also has floated the possibility of moving jobs out of Arkansas.

In the summary report released Thursday, IHS concluded that the steel industry likely could absorb the addition of Big River Steel from a capacity standpoint but that if other major facilities joined the U.S. steel market the industry would suffer and so would production, profits and tax revenues generated.

— Reporters Rob Moritz and John Lyon contributed to this report.