Alaska-Sakhalin project gains momentum

Posted: Thursday, April 27, 2000

A Russian Far East version of Alaska's industrial development authority is gaining ground and could begin its financing operations in mid-2001.

The Sakhalin Development Authority, modeled after the Alaska Industrial Development Authority, would provide financing for infrastructure development. The Sakhalin Island organization also would fund business loans to Sakhalin residents and provide assistance for foreign businesses working there, including Alaska firms.

The Sakhalin Development Authority now needs to implement its business plan, plus gain final approval and some funds from the regional Duma (legislature), said Jim McMillan, AIDEA's deputy director of credit.

A nine-member advisory council for the Sakhalin Development Agency had its initial meeting April 5 and 6 in Anchorage. Sakhalin Gov. Igor Farkhutdinov appointed council members in February. The council includes representatives from Russian business and government, including the Duma chairman, McMillan said. The advisory council will disband once SDA selects a board of directors. Although plans for the agency are advancing, SDA could be stalled by political snags similar to any governor disagreeing with the legislative body, McMillan said.

However, Michael Allen, director of the American Business Center in Yuzhno-Sakhalinsk, believes SDA will secure approval because it is backed by Farkhut-dinov.

Advisory council members also will prepare a draft appropriation for the Duma to include in this year's budget, McMillan said. If approved, the Duma would fund the development authority with $10 million -- $3 million for the first three years then $1 million for the fourth year. The business plan calls for raising $30 million in equity capital.

Once the advisory council's plans are completed, SDA could begin operating in 18 months, McMillan said.

The idea for a Sakhalin development financing organization originated during Gov. Tony Knowles' 1997 trade mission to Sakhalin, McMillan said.

Knowles and Sakhalin's governor liked the idea.

"They agreed that AIDEA could provide the technical expertise to make a model, and Alaska companies would have access to this financing," said McMillan, who has worked on the project from the start.

Department of Community and Economic Development Commis-sioner Debbie Sedwick applauded the effort.

"I am glad that Alaska has been able to play a role in helping achieve this goal," she said.

Alaska and Sakhalin share similarities for such work together. Both areas are rich in natural resources and geographically remote from national government centers, McMillan said.

AIDEA was created in 1967 by the Legislature at a time when the state faced difficulty attracting capital for development, he said.

"Over the past 30 years, AIDEA has changed and grown and adjusted to the needs of Alaska development," he said. "But it started out very small, just like SDA will."

AIDEA started with only one program, tax-exempt industrial revenue bonds, but the Sakhalin agency will incorporate some of AIDEA's current loan programs, McMillan said.

The Alaska organization expanded in the 1980s, fueled by a one-time boost from the Legis-lature of $15 million in cash and an existing loan portfolio of $165 million, he said.

"This allowed us to expand into infrastructure projects where AIDEA owns and operates the property."

Today AIDEA operates in the black and has repaid dividends to the state in the past four years totaling $91.5 million, he said.

Advisers from AIDEA propose that the Sakhalin Development Agency adopt some key principles. For example, AIDEA aims to partner with private projects rather than compete with them, McMillan said. Also, AIDEA does not give loans directly to projects but works with banks, he said.

Even though the Alaska organization is a state agency, AIDEA has a board of directors and stays free from political influence, McMillan said. As the Sakhalin agency continues to take shape, AIDEA intends to uphold its guidance.

Sakhalin Development Agency executives are set to participate in courses covering basic English, computers, financing and business, he said. SDA staff also will work as interns at AIDEA and study economics, finance and project management at Alaska Pacific University or the University of Alaska Anchorage, he said. Once SDA begins operations, AIDEA will send a staffer to Sakhalin to advise the organization, he said.

SDA's Vladimir Kuznetsov said the concept of working with banks on financing is appealing. Russian statistics show low repayment of loans from foreign banks, he noted.

"This concept of direct financing is being rethought," he said. "The authorities seem to lean to the AIDEA model where the government shares the risk instead of shouldering the entire risk."

In November, Alaska and Russian creators of the proposed Sakhalin Development Agency presented their plan in Washington, D.C., and Moscow. SDA gained support from Russian federal government officials, who read a copy of the business plan, Kuznetsov said.

They were impressed with some of the ideas and were considering creation of a national agency that would syndicate loans, he said.

Nancy Pounds is the assistant editor for the Anchorage-based Journal of Commerce.

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