To some, it’s the stuff dreams are made of. An entrepreneur proposes to locate a high-tech industry on the Big Island, hire 4,200 high-paid ($90,000-a-year and up) employees, and invest tens of millions of dollars in infrastructure and equipment.
Others might well view it as a nightmare scenario. The housing situation in the area is already bleak; schools in the area will need to be beefed up to accommodate the new workers’ children; traffic jams and congestion will only grow with the addition of at least 4,000 more cars in the area.
Oh, and the new industry will require a boost of some 50 megawatts – roughly a 25 percent increase – in the island’s electrical grid. No one is saying where that will come from. And that’s not counting the electricity that the new housing and school rooms will be using. The energy consumption, traffic, and employment projections for this one project alone exceed the maximum “worst-case” build-out scenario anticipated for the entire Hawai`i Ocean Science and Technology (HOST) Park, under an environmental impact statement made in 1985.
While no document relating to the proposal was ever made public before the Natural Energy Laboratory of Hawai`i Authority board voted on the matter last month, these are a few of the benefits and drawbacks that emerged during board discussions of the proposal by a company called Megasoft. The company, which Venumadhav Pasupuleti registered in Hawai`i last December as a sole proprietorship, outlined plans to build a computing facility that would handle data management and data processing needs for corporate clients around the world. Initially it would occupy just 10 acres of land, but a five-year plan outlined by Pasupuleti calls for eventual construction of a 500,000-square-foot building and occupancy of 50 acres of state land under NELHA’s jurisdiction. The facility would draw up to $72 million in investments to Hawai`i, Pasupuleti told the NELHA board.
Although some board members had expressed skepticism over the project, last month, the ayes carried the day at a hastily arranged meeting held April 5, barely two weeks after the board’s previous meeting, March 20. At the close of the March meeting, chairman Richard Henderson had announced that the next board meeting would not be held until May 29.
But on March 28, Ron Baird, administrator of NELHA, sent out an email alert to board members, seeking a quorum for the April 5 meeting. Just two items were on Baird’s proposed agenda: approval of a lease of 10 acres to Megasoft, and an “update” from an investigative committee formed months earlier to look into a proposal to site an ocean-thermal energy conversion (OTEC) plant on NELHA grounds.
Baird was able to obtain a quorum of board members for the meeting. According to several board members, the lease for the computing facility was approved, with just two members voting against it – Robert Arrigoni, representing Hawai`i County, and Pat Cooper, representing the office of the president of the University of Hawai`i. Among those voting in favor was Baird himself. Although he is the board’s chief staff person and not a board member, Baird had received authorization from Ted Liu, director of the Department of Business, Economic Development and Tourism, to vote in favor of the proposal on Liu’s behalf.
In calling the meeting, however, Baird neglected to comply with the requirements for full public notice. According to the deputy attorneyt general advising the board, “the meeting will be reheld.” No date had been set by late April. (A fuller discussion of the breach of notification requirements appears elsewhere in this issue.)
High-Tech Migration
At the board’s February meeting, Pasupuleti unveiled his grand plans for Hawai`i. His company, he said, provides “a full range of ultra-high performance information technology services, code and non-code system applications for commercial and non-commercial clients.” By using high-speed computing and identification services, “we help clients reduce their costs in space, equipment, and people. We help them migrate to a new level of technology.”
Actually, Pasupuleti was speaking not of what his company does, but what he intends it to do. When questioned by a board member as to the status of his company, he said it would be a start-up operation.
Pasupuleti raced through a PowerPoint presentation that was heavy on lingo, but left board members curious about why he would have selected Hawai`i for his business, Pasupuleti claimed, for example, that he chose the NELHA site because “our business has high energy requirements. We plan to use NELHA’s non-conventional technical solutions for energy production and conservation. We save money. The state of Hawai`i will be the largest benefactor [sic].” (I’m sure Pasupuleti meant beneficiary, but benefactor is what he said.)
“NELHA,” he continued, “creates a symbiotic relationship for setting up business on state-owned property which has the necessary infrastructure.”
Yet NELHA’s infrastructure would need substantial overhauling to accommodate the demands of Pasupuleti’s company. The sole access road has no signal at the intersection with the heavily used main coastal road, Queen Ka`ahumanu Highway, making it difficult at times for people traveling to and from NELHA to merge into the high-speed traffic. The pipes and pumps that would be needed for the deep-seawater air conditioning system Pasupuleti anticipates using would have to be installed. Most of all, the company’s anticipated use of electricity would far exceed any new generating capacity that the Big Island utility, HELCO, has planned to install to meet the normal growth that was expected to occur over the next four years before the arrival of Megasoft.
Maurice Kaya, representing DBEDT on NELHA’s board, asked Pasupuleti whether he had approached HELCO about his company’s expected energy needs.
“Not at this point,” Pasupuleti replied. “It’s premature. Phase 1, phase 2 can be accommodated” with existing capacity, he said. “Also, geothermal is available, another resource.”
Kaya was among those puzzled by Pasupuleti’s decision to site his operation in Hawai`i. “For this type of operation, you could probably locate anywhere… You can go to a location with low energy costs and access to a human resource base that won’t be as much as a challenge as it will be here. Why do you want to go here?”
Pasupuleti responded that Hawai`i’s location, equidistant to his anticipated clients in both North America and Asia, was one factor. “The next thing is, also incentives from the state level, those are also attractive,” he added. While there might be drawbacks to Hawai`i, he conceded, “we can’t have everything. The Big Island [is a ]place to grow.”
Baird recommended that the board grant a lease to the company for the first phase of its development, Pasupuleti and Baird proposed a 10-acre site just makai (seaward) of the Gateway Energy Center, near the Queen Ka`ahumanu Highway. As the company grew, the lease could be revised to include adjoining vacant land, up to the 50 acres that Pasupuleti anticipated would be required at full build-out, after about five years.
Board members were a little more cautious. They voted to run the proposal by two of the board’s standing committees, the Research Advisory Committee and the Commercial Advisory Committee.
Vulnerability
By the March meeting of the board, the Research Advisory Committee, headed by Donald Thomas, a professor with the University of Hawai`i’s School of Ocean and Earth Science and Technology, had conducted its review of Pasupuleti’s proposal. Thomas summarized the views of the committee members in a detailed memo to NELHA board chairman Richard Henderson.
“The technical review of the proposal raised a number of important issues with respect to the planning and execution of this proposal,” Thomas wrote, identifying six separate problematic issues with the proposal.
First, “the proposal cites the company’s reliance on importing digital data, processing it with ultrahigh speed computers, and exporting the processed data product; yet there is little specific information given – or apparent research done – on the bandwidth available at NELHA, or on the Big Island, to handle the projected data load.” Thomas’ committee also expressed concern that Pasupuleti might have trouble recruiting a professional workforce. “It is not clear that the company will be able to attract welll-established professionals to such a (relatively) remote location having a high cost of living, limited physical infrastructure (roads, schools, communications, power sources), and limited intellectual infrastructure.”
Third, “although representations were made that seawater cooling was the primary reason Megasoft chose to locate at NELHA,” the company had no information on how much water would be required, whether NELHA had the capacity to deliver it, or how paying for the water would affect their bottom line.
Fourth, the company had not considered the “inherent vulnerability” of any location on the Big Island, subject as it is to earthquakes, volcanic activity, tsunamis, hurricanes, wild fires, flash flooding, and high winds. “Any of these events have the potential to deprive NELHA of communication links or electrical power, or both,” Thomas wrote.
The RAC expressed skepticism that the company could be up and running within a few months, as its business plan indicated it could be.
Finally, Thomas wrote, although Pasupuleti predicted “gross revenues in excess of $5 million at the end of the first year of operation and an increase in revenues of 500%, 150%, 120%, and 110% in years two through five,” the company “currently consists of two to three individuals with neither committed financing of the magnitude required, a clear plan for establishing/acquiring the needed infrastructure to bring their facility into operation, nor a base of clients committed to purchase their services when they become available.”
The RAC suggested that the full NELHA board might impose a series of milestones to be met by Megasoft before granting an extended-term lease. The milestones might include letters of commitment for financing or from prospective clients, documentation of available bandwidth, assurance of sufficient electrical power, and so forth.
When the Commercial Activities Committee met, many of the same concerns were raised. Baird told the committee that he and Henderson had been assured by Warren Lee, the president of HELCO, that the utility would be able to supply power – “no difficulty; it’s what HELCO was planning on.” He had also “been in discussions with the potential contractor to construct their building. That contractor reported to me rather favorably, too…”
“I think that, at the stage that the proposed operation is, it’s probably as far along as any proposal approved for tenancy here,” Baird said. “The CAC needs to take into account the continued demand on the part of the Legislature and administration for us to become self-sufficient without overburdening the aquaculture operations. To bring in a tenant who would begin by leasing 10 acres … would be very financially beneficial for us… The company has conveyed in meetings with myself and Richard [Henderson] some indications of who they expect to go in to in the future, in terms of operating cash flow. The list was impressive. At least three of the names I’ve heard, somebody could build a business on just one of them.”
Off-Balance-Sheet Accounting
At the full board meeting in March, Pasupuleti was pressed on how he would finance his venture. “We have some commitment from the mainland for working capital that we need,” he said, adding that for the first year, he would need “around $7.4 million, and that doesn’t include construction costs.”
“The construction company will get its own financing,” he added. “We are using off-balance sheet methodology to keep our cost structure lower so we can operate efficiently instead of carrying a load on our shoulders. Off-balance-sheet financing is not a new tool. It has been used over and over, especially in real estate, infrastructure.”
(Enron may be the most famous example of a corporation that used off-balance-sheet accounting. By foisting liabilities off to other wholly owned subsidiaries, Enron was able to hide the full extent of its indebtedness, with disastrous consequences for shareholders.)
“So, the payback to the construction company will be in the form of a promissory note?” asked Russell Tsuji, the board member representing the Department of Land and Natural Resources.
Pasupuleti did not respond with a simple yes or no. Instead, he said, it would be “a good example of an outsourcing model, where the whole funding will be arranged in phases to offset expenses.” He added, “It could be more in details of discussingwith them, to clarify details.”
Tsuji: “So you haven’t finalized a contract?”
Pasupuleti: “We don’t worry about their financing arrangements.”
Tsuji also raised the issue of power. Pasupuleti said he had been told by Warren Lee, president of HELCO, that the electric utility could accommodate Megasoft’s needs. By 2009 (the third year of Megasoft’s operations), HELCO anticipates installing a 16 megawatt steam unit on its Keahole plant, but this addition was planned to meet the growth in electrical demand before the arrival of Megasoft. Pasupuleti did not say how the additional 34 megawatts of his company’s demands would be met.
Baird proposed that if a substantial amount of the power would be needed for air conditioning, use of a deep-seawater air conditioning system could reduce the power demand by as much as 50 percent. Pasupuleti had said that the company might need up to 27,000 gallons per minute of deep seawater to cool his buildings, which, at full build-out, he anticipates will cover 500,000 square feet (some 12 acres under roof).
At this point, however, NELHA can pump no more than 14,000 gpm; upgrading infrastructure to meet Megasoft’s air conditioning demands could cost millions.
Misgivings
Speaking in favor of Megasoft’s proposal was Mark McGuffie, head of the Hawai`i Island Economic Development Board, a private non-profit agency, and also chairman of the Hawai`i County Workforce Investment Board, a position appointed by the mayor. “We have had many discussions with Venu … about the magnitude of the project and the excitement of the project,” he said. “We have never had the thrust of such a large innovation industry. The opportunity to make a shirt on this islasnd in the economy for the long term is very exciting. I would be disappointed if we lose the project.”
Arrigoni asked that the board defer making any decision on the proposal until after Mayor Harry Kim met with Pasupuleti, on April 3. “I want to take my nod from what the administration’s final decision is, whether they want to go forward,” he said. “But I also have to say that I have both misgivings about this project at the same time that I think the possibilities could be quite huge for the island…. Indeed, if they are able to pull off what they say they are going to do, there would be a fabulous effect of diversifying the work force and improving wages. My question is whether their aggressive time frame could be met.”
Thomas made a motion to have the board direct Baird to develop a set of benchmarks reflecting the concerns of the Research and Commercial advisory committees that would be incorporated into any lease document. That would then be circulated to board members for review and comment.
Thomas’ motion passed.
Megasoft Milestones
(The following account is based on interviews with people attending the April 5 meeting. Environment Hawai`i was not given notice of the meeting, nor were we allowed to review tapes of it by press time. We believe that the sources we rely on are trustworth ahd nave made every effort to verify their accounts. – Editor’s note.)
By April 5, Baird had rustled up seven board members (out of 10). With Liu’x proxy, Baird himself made up the eight board member. According to Liu, the special meeting was proposed by board chairman Richard Henderson. Liu told Environment Hawai`i that Pasupuleti was in the islands, his proposal looked good, and there didn’t seem to be any need for further delay.
Baird again sought approval of a lease between NELHA and Pasupuleti. The company would pay NELHA $3,000 a month per acre ($30,000 per month for the 10 acres to be leased in the first increment). The rental rates would be reopened at periodic intervals over the 30-year course of the lease.
Baird gave the board a list of nine milestones he and Pasupuleti had worked out and which were to be appended to the lease. Most of them are in the form of deadlines for performance. Few of them speak to the points raised by Thomas in his Research Advisory Committee’s report.
Curt Beck, representing HELCO, attended the meeting. He told board members that it would not be an undue stress on the utility to meet Megasoft’s demands, at least for the first phase of the proposal.
Leslie Isemoto of Isemoto Contracting, a Big Island firm with which Pasupuleti has apparently been in negotiations, was also on hand. He was asked whether milestone 6, requiring Megasoft to file applications for building permits within three months of signing the lease, was realistic. While it was aggressive, he acknowledged, it was still do-able. (Calls to Isemoto were not returned.)
Pasupuleti was questioned about his ability to meet the milestones. He assured board members he would.
Deputy attorney general Bryan Yee repeatedly told Pasupuleti that if he failed to meet the milestones, he stood to lose the lease and whatever payments he had made for improvements and rent. Pasupuleti insisted he was able to live up to the benchmarks.
Henderson, the board chair, wanted to give Pasupuleti more time. The condition that Megasoft was to begin construction of a building within nine months of signing a lease was changed to one year. The condition that Megasoft would begin business operations within a year of the lease signing was changed to 18 months.
With those changes in place, the board (with Baird joining them) voted 6-2 in favor of awarding the lease to Pasupuleti.
— Patricia Tummons
For further reading, see the EH-Xtra item, posted April 26, 2007: NELHA Board Gives Conditional Thumbs-Up to Pasupuleti.
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