Savers have a problem today. Interest rates are painfully low, and there are few places to invest that are relatively safe and yield a decent return. Who knows how many hundreds of billions of dollars are sitting on the sidelines?
Government agencies have a problem, too. Many are essentially broke, yet they have big and chronic spending needs – they need to build schools, bridges, prisons. (Los Angeles alone could spend a billion dollars just to patch its potholes.)
So why not put these two together? Let savers invest in those schools, bridges and prisons. With one move, two problems solved.
What I’m talking about, of course, is called public-private partnerships or PPP or sometimes P3. And you may be hearing a lot more about them, given the ongoing money problems of governments coupled with the greater willingness of investors to seek out opportunities in this sort-of post-recession era.
The advantage of public-private partnerships for a government agency is that it may be able to build something – one of those schools, bridges, prisons, etc. – much quicker by having the private sector do it. After all, the agency may not have to slog through the 27-step approval process and other red tape normally associated with a government project. All it has to do is contract with a PPP, which can handle the design and construction. As a result, the final product may be a little cheaper.
“There is a cost-saving element,” said Leonard Gilroy, a PPP expert who is director of government reform for the Reason Foundation, the free-market think tank in Los Angeles.
What’s more, the government would not have to seek voter approval of a bond issue to pay for the project. That lessens the political risk, and a PPP keeps debt off the government agency’s balance sheet.
PPPs aren’t magic of course. There are risks and downsides, as in most anything. And while they may save a government a little money, they probably won’t save a lot. The government still must pay lease rates to occupy, say, a new courthouse, which may be about the same amount of money as a bond payment. Still, they offer governments a way to build projects when there may have appeared to be no way.
The advantage of a PPP for the private sector is simple. Each one is a new opportunity for investors to put some of those hundreds of billions of dollars to work, earning good returns. Since governments aren’t likely to skip town, they represent pretty solid credit risks.
And PPPs may boost L.A.’s business community. As you can see in the article on page 1 of this issue, Samsung Group has opened in Long Beach the headquarters of a unit that specializes in PPPs. The company sees “tremendous opportunity here.”
Samsung may get a little competition. L.A.’s Aecom Technology Corp. is among the engineering and construction firms that have started an arm to raise money to invest in PPPs.
“There’s great demand for infrastructure, a poor supply of money on the public side and significant supply of private-sector money,” Mike Burke, president of Aecom, told our reporter, James Rufus Koren.
What this all points out – other than a business opportunity for Los Angeles – is the innovation that’s inherent in our economic system.
If you hand a problem to the private sector – one where there’s money to be earned and need to fulfill – more often than not, a solution will be found.
Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].
