R&D and Alaska’s Natural Environment 11 Approach to Development of a Natural Environmental 11

The economy of Alaska is heavily dependent upon oil. While we are fortunate to have this rich resource, which has and will continue to greatly benefit our state, many other Alaskan resources and industrial opportunities are underutilized, underdeveloped, or undervalued in the current economy. This is due to a number of factors, including a paucity of risk capital available in the state, and few individuals with the business savvy needed to develop them. However, through better application of the leadership, knowledge, and services available from UA, ASTF, and other state agencies combined with the impetus provided by a State R&D plan, we can realistically build a diversified, technologically sophisticated economy.

SJR 44 requested a plan for using R&D to expand and diversify Alaska’s economy. This portion of the report addresses this charge by first discussing the nature of industrial R&D in Alaska, next commenting on two critical issues, mapping and telecommunications, and then providing snapshots of individual industrial sectors.

 

Nationally 74% of R&D is done by industry; in Alaska it’s only 7%. University research is 57% of research in Alaska but is only 14% nationally. In addition, one-third of research in Alaska is funded by federal agencies compared to 8% nationally.¹⁷ Research in Alaska is heavily slanted toward basic research, and the size and concentration of research in Alaska is low. In 1999, Alaska ranked 49^th of the 50 states, with only $152 million in federal R&D expenditures; Alaska also has just $245 in R&D spending per capita compared to the national average of $850 per capita. ¹⁸

The strong investment of federal agency research in Alaska has, as expected, led to an emphasis on monitoring and assessment of the natural and human environment over wealth creation. With a large amount of the land in Alaska publicly owned and with the federal role in the state being to monitor and regulate environmental impacts, the focus of research is unlikely to shift much in the near term. So how can Alaskans think more strategically about research and the formation of stronger industry clusters?

Economic logic indicates that we must add more value than cost to our natural and intellectual resources so that Alaska products are competitive in world markets. If Alaska’s economy as a whole, both public and private sector, adds more value than cost to what Alaska produces, the state will grow wealthier and become more capable of supporting the research and education infrastructure that continues to provide a value-adding economy. It has proven far easier for Alaskans to call for a value-adding economy than to organize profitable investments that achieve that goal.

 

Currently, over 40% of the state’s economic base is oil and oil revenues, 3% is mining, and less than 1% is based on timber and forest products. ¹⁹ Alaska’s economy is based on products where the raw form of the product (crude oil, gold) contains the majority of its value. Timber and fish products, which require processing, are minor contributors. Clearly, the fact that oil and mining are also much more expensive products than fish or lumber contributes to the relative unimportance of these latter products in our economy. However, the fact that little processing or refining is done within our state also plays an important role. Most of the margins and profits in the salmon and timber industries occur at the processor. To build these and other industries, we must pursue more manufacturing and processing capability. The development of the technologies that allow for manufacturing and processing in state is dependent upon R&D, but hold great promise for building Alaska’s business base.

 

Step III: Trying to Think Strategically – Adding Technology, Business Know How, and Ownership

It is clear that capturing value involves more than the knowledge and technologies that allow us to create new industries and make existing base industries more competitive. Alaska also needs business owners and managers with the ability to put projects and enterprises together. In addition, Alaska must think like a corporation when considering the size and agenda of its R&D budget, and must work to create wealth for its shareholders and jobs for its communities by strengthening existing businesses and starting new businesses that will show returns on the original investment. Finally, we must be sure that our R&D investments go towards businesses that are located in Alaska, or are Alaska owned or controlled. Combining technology, sound business practices, and a vested interest on the part of Alaskans should help us build a value-added economy.

 

Components – Capital, Business Know-how/Management, and a Skilled Work force

 

Capital and Ownership

Most of the major players in the state’s economy are out-of-state global corporations with branch plants in the state. Almost all of the capital (and therefore ownership) and leadership for the oil, mining, and seafood industries are brought to the state from outside. A state benefits from having industry owners present in the state and from having home-grown executives. As a case in point, the philanthropic leadership of the state (which has so significantly benefited Alaska’s educational and cultural institutions) has come largely from wealth made in Alaska’s service industries (banking, hotels, and retail), which are Alaska-owned and Alaskan-managed. This philanthropic leadership is not paralleled by the basic industries that are owned/managed by out-of-state parties, even though it is these industries that drive our economy.

The state is relatively weak in risk capital and the capability to lend to early stage (pre-collateral) businesses. Alaska is one of only a few states without venture (pure equity) funds or a Small Business Investment Corporation (SBIC) located in the state. ASTF is the only source of seed capital for technology-based early-stage firms. Alaska Growth Capital was launched with $6 M of capital from ASTF and the Arctic Slope Regional Corporation, and is the one private-sector institution able to do equity and high-risk lending. Although the Alaska Growth Capital base has now grown to over $10 million, it is limited to considering projects under one million. One possibility is that the state’s native corporations, due to their size and growth, will become more important providers of risk capital in the state. This is ideal, because they are Alaskan-based corporations with a long-term stake in the state’s future

Capital has to be priced to accommodate the risk of the investment so that margins are low for asset-based lending, higher for the middle-risk market of lending to less than fully collateralized lenders (such as many seafood and timber manufacturing projects), and high to compensate for the risk of early-stage mining or technology projects. In Alaska we have little capability to structure or finance early-stage deals, which puts Alaskans out of the opportunity to receive the higher returns from successful investments (while admittedly also exposing us to the losses that are more likely to occur in early-stage deals) and limits the growth of new industry. By increasing the risk capital available to Alaskans, we should see an increase in the number of enterprises that help increase the ownership and management capability of Alaska firms.

In the last few years the state and university have made a promising start at strengthening the identification of training and career paths for workers in the processor, health, and information technology fields. All of these efforts have formed their own industry-education consortiums and each needs to continue to be supported and scaled up.

In part because executives are more mobile than production workers and also because Alaska has few large corporate headquarters here, it is a much harder, but still critical challenge to identify the management and entrepreneurial skill sets necessary for the next generation of entrepreneurs and executives for Alaska’s enterprises. We must also have some assurance that those talents, if grown, will be captured in the future economy.

 

Corporate-university programs and exchanges around the country reflect existing, rather than future economies, so it is not surprising that industry and technical managers familiar with information technology, advanced manufacturing, and entrepreneurial programs in Silicon Valley, Pittsburgh, and Austin are ahead of the efforts in Alaska. It’s much harder to establish such programs when corporate headquarters and R&D functions are not located here. Nevertheless, more university support and structure could encourage senior-level project courses in engineering, business, and the sciences that are supported by industry. These courses would encourage the integration of disciplines and further university involvement with industry. ²⁰

Employers report that ideal technology workers and managers are often Alaskans that have grown up in the state or spent significant time here, have worked in competitive enterprises elsewhere, and then have come back to Alaska, bringing enhanced capabilities and connections to Alaskan firms. Having the University and all post-secondary Alaskan institutions keep a robust data base of all graduates and make it available to state employers seeking defined skills would be one way to expand the existing graduate placement capability of the university. This database could be maintained throughout a graduate’s career, so it that would continue to serve the state’s employers.

Mapping and telecommunications connectivity are two cross-cutting issues that affect both the capability to use the research base to build the economy, and the competitiveness of the research base itself.

Alaska remains the least mapped state, with few areas mapped to national mapping standards of 1:24000. Other states’ mapping projects have been funded by the state and by private industry, primarily agriculture and resource industries, with each footing approximately one-half of the bill. However, because Alaska is characterized by little private land ownership and a small customer base, only a few urban areas and parts of the north slope have been mapped to the high resolutions of 1-5 meters needed for land use planning, and many resource applications.

Even for those areas mapped, the lack of a common statewide geographic data base means that individual customized map products usually created for a single application are never available for a common archive. And the absence of an accurate digital elevation model results in data that cannot be accurately geocoded to the right elevation, or an inability to take information from two different sources and accurately geocode it. Data providers have been frank about the inefficiency and high cost of this way of doing business. Each of those customized products have different licensing restrictions on the use and transferability of data.

A number of pieces are needed for Alaska to move into the modern geographic information world: 

-- Policy direction to map the state to high resolution and to accurate elevations; and to enter the information into a data base that can be shared across user groups

-- Agreement on what areas of the state need 1-3 meter resolution and which can use 5-10 meter resolution.

-- A strategy for public support of an accurate digital elevation model, so that all geographic data can be accurately geo-coded and so the data can be aggregated for a statewide data base.

-- Better coordination of public mapping agencies so they can work more efficiently with private vendors to lower volume pricing, and so that wider use licensing is put in place. A coalition that includes the providers of satellite and airborne data, some state agencies, and university researchers have outlined a plan to accomplish this, but there is not yet a consensus on a systematic way to proceed. Until there is a consensus, final pricing and licensing arrangements cannot be worked out.

Policy regarding the establishment of a web-accessible geographic information base for both public and private sectors should be developed in 2003 and promulgated with the expectation that the state can be accurately mapped within three to four years.

 

Connectivity

Broadband fiber network is available in Juneau, Fairbanks, Mat-Su, and Anchorage, and along most of the Railbelt, but there is less robust connectivity and higher costs away from the road system. Three possible expansions to the fiber system include: lighting up the fiber along the pipeline, more connections to the two modern Seward-Washington fiber optic cables, and a currently speculative alternative to a planned dedicated Aleutians route connecting Shimya with Seward, via a land route through the Bethel-Lake Ilamina area across Cook Inlet.

Earth stations in most rural villages now provide fairly reliable 56 K to ¼ T1 service to users. However, at these speeds the applications requiring nearly full motion video images, such as telemedicine diagnosis, collegiate education, or TV quality images, are not yet possible.

 

Market and Industry Structure
With the universal service fund that supports phone service and the e-rate that subsidizes Internet service for schools, medical clinics, and libraries in off road communities and poorer areas (as measured by percentage of children in federally subsidized lunch program), Alaska enjoys the highest per capita support for telecommunications service. Unfortunately, the e-rate has created a digital divide within rural villages, separating those with subsidized Internet service from those that have to pay much higher rates for unsubsidized service.

With the longer-term future of the universal service fund in doubt, and with telecommunications service moving to the less regulated and lower cross-subsidy market of Internet-based services, the challenge for Alaska will be to grow an economy and a larger customer base that will continue to build a more robust telecommunications industry. An additional challenge is that while Alaska sees the same regulatory wars between local exchange carriers and long distance carriers as other states, the smaller customer base in both on-road settlements and off-road villages can make providers more reluctant to invest in upgrading the infrastructure.

In short, in the highly politicized environment of the telecommunications industry, individuals from different perspectives can agree that Alaska has a shrinking window of subsidized support that can be used to build the infrastructure and grow the market. An increased market it needed to close the cost and service gap between users in Alaska and users in other locations.

From a user’s perspective, a firm on the fiber network in Anchorage or Fairbanks wanting a dedicated T1 line (necessary for high-end applications) and a rural business or residence that wants non-e-rate subsidized Internet service at 56 K will both pay significantly more for their service than they would in the lower 48. From the perspective of providers, the long distance carriers and local exchange companies are weakly capitalized, in part because of a small customer base, and in part because Alaska (unlike other rural states like Montana and Wyoming) did not fully benefit from the telecommunications capital boom of the 1990’s, where many rural communities accessed broad band fiber just because they were located along the way between urban centers.

In sum, Alaska will have to be more strategic and purposeful in its regulatory and customer-development strategies to effectively enhance its level of service, which is necessary for competitive services.

 

IT Skills

Even with a solid telecommunications infrastructure and advanced Information Technology, the chief constraint to the promise of telecommunications can be the education and skills of the individuals that integrate the technology in order to provide better applications, services, and products.

A majority of the best computer science graduates leave the state upon graduation in search of better career opportunities at IBM and Silicon Valley, so Alaska employers report a continuing scramble for the higher end IT skills such as network administrators, voice over IP, software applications programmers, and higher end web services at Alaska firms. There is also a shortage of trained certified technicians in Alaska’s small communities and off road villages. These small settlements ideally would have trained technicians so that systems could be maintained locally, eliminating the need to fly technicians from urban centers to the villages.

A focus group of IT employers in addition to surveys administered by the High Tech Business Council confirm that in the last few years, significant progress has been made to provide more vendor-certified technicians (MCSE, Novell, Cisco) at the entry level of IT careers. The challenge will be to continually upgrade the skills of IT workers to keep the skills pipeline filled. Employers seek employees that combine vendor certifications, strong project management skills, good communication and other soft skills with some general business savvy and common sense. The courses needed for IT careers and those necessary for a general education are often taught in different colleges at a campus. The ability of a student to understand employer requirements and then to combine credits and courses into a single degree is often a daunting challenge. The ability to transfer credits between colleges into the integrated IT education will be important for the university if it hopes to produce graduates who can flourish in IT careers. As discussed above, the maintenance of a robust data base of all University graduates will allow us to track our success, and will also provide a mechanism for Alaskans to identify and recruit talent. Employers are also challenged to offer the salaries, career advancement training, and cutting edge work that will keep IT talent in the state.

In the last few years a number of consortiums (Alaska Processor Industry Consortium {supported by large employers}, the Alaska Hi-Tech Business Council, and the IT fellows program {supported by tech firms and ASTF}) have worked to bridge the school-to-work divide and to help define clear career pathways that will allow educators and employers to work more efficiently with each other. But the pace and scale of these efforts will need to be expanded to grow an economy that can support a more technology-based economy.

The collapse of the prices of telecommunications stocks and the market realization that too much capital has been chasing too few customers means that for the next few years, at least, telecommunications will not be the high growth area which attracts above-average levels of investments. Rather, it is resembling a more average industry sector that has to be market sustainable and must use IT skills and connectivity to enhance its productivity.

With its high federal and industry subsidies, Alaska will not be exempt from these larger market forces. So a more robust relationship between IT educators and employers will be necessary to increase and retain IT talent and firms in the state.  

 

Some Tentative Conclusions
As expected, the state’s research and technology base reflects Alaska’s existing economy. This is not currently an economy that is capable of growing significantly by adding more value to Alaska’s resources and by embedding more technology and intellectual capital in what we sell to the world.

The predominance of federally funded research, the paucity of private R&D in the state, and Alaska’s land ownership pattern will continue, as expected, to serve funder needs and will focus more on human and natural environmental health than on local wealth creation. The amount of research funding in the state will continue to be some function of the power of the state’s congressional delegation, the capability of the state’s researchers, and the national interest in the arctic environment and north pacific strategic location. So, while Alaskans will have some ability to influence each of these factors, our future is clearly not entirely in our hands.

Using part of our research base as a strategic asset is part of an economic strategy to exert more control over our economic destiny and to create more sustainable wealth. Such a strategy has the important additional benefit of allowing us to self-finance research topics, both economic and non-economic, where Alaskans need ongoing knowledge. Such investment assures a more pragmatic knowledge base—one that does not merely reflect federal priorities that are subject to political and policy changes.

A major challenge to the attempt to build research or finance infrastructure in the state is that in the global economy, the three critical inputs of capital, technology, and – in part- workers, are increasingly mobile and will be moved or attracted to the locations where they can earn the highest return or wages. If Alaska’s competitive advantage is limited to its natural resources, then we must be acutely aware of the fact that the price of those resources will reflect lower cost third world locations where wages are significantly lower and environmental responsibilities may be more cheaply met or disregarded.

As a higher cost, higher quality of life location, Alaska will choose or back in to some form of a strategy that seeks to combine resources, technology, capital, and business know-how to produce competitively priced intermediate or final products. We must consider how, in a global economy, with investment increasingly seeking lower wage locations, Alaska can compete and how Alaska can move beyond its branch plant economy. Since Alaskans do not want to compete with lower wages and salaries, they will have to compete by adding value and increasing the amount of intellectual capital in the state. They will have to attract, or more likely spawn and grow, more of the missing headquarters and R&D functions that other local economies have in their economic base.

To grow a more robust economy requires at least two steps:

1. We must determine how at least