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What it'll take to persuade Corporate America to partner with government What it'll take to persuade Corporate America to partner with government
(7 months later)
One thing became clear in the state of the union address: in one of the great paradoxes of modern politics, President Obama needs Corporate America's money to be a good president.One thing became clear in the state of the union address: in one of the great paradoxes of modern politics, President Obama needs Corporate America's money to be a good president.
This is a huge reversal from everything that brought Obama to where he stands (very successfully, one might add): in complete defiance of Corporate America, Wall Street and its money and attitude. His presidential campaign gloried in $3 donations that helped Obama win against Mitt Romney, who was richly financed. Obama was not reluctant to call financiers "fat cats", or to pillory them for greed.This is a huge reversal from everything that brought Obama to where he stands (very successfully, one might add): in complete defiance of Corporate America, Wall Street and its money and attitude. His presidential campaign gloried in $3 donations that helped Obama win against Mitt Romney, who was richly financed. Obama was not reluctant to call financiers "fat cats", or to pillory them for greed.
Wall Street loved Obama at first because, in him, they saw themselves: multicultural, sophisticated, globally minded, well-mannered, well-spoken, well-traveled and above all, ambitious. When he turned on them, and showed what looked like an anti-Wall Street bent, many business leaders felt personally betrayed.Wall Street loved Obama at first because, in him, they saw themselves: multicultural, sophisticated, globally minded, well-mannered, well-spoken, well-traveled and above all, ambitious. When he turned on them, and showed what looked like an anti-Wall Street bent, many business leaders felt personally betrayed.
It's clearer now, however, that Obama and the business community are alike in at least one way. They are united again on this: ambition.It's clearer now, however, that Obama and the business community are alike in at least one way. They are united again on this: ambition.
We already know that the corporate world runs on ambition. Tuesday night, we learned that Obama, also, is an ambitious president. In his state of the union, he laid out a rich list of initiatives: creating jobs, encouraging manufacturing, spurring innovation, raising the minimum wage, encouraging sustainable energy, and rebuilding the national infrastructure.We already know that the corporate world runs on ambition. Tuesday night, we learned that Obama, also, is an ambitious president. In his state of the union, he laid out a rich list of initiatives: creating jobs, encouraging manufacturing, spurring innovation, raising the minimum wage, encouraging sustainable energy, and rebuilding the national infrastructure.
Obama needs Corporate America's help. On Tuesday night, he left all the rancor behind – all the leery suspicion of the past few years, all the obstinate smack-talk of the past few years – and asked for it.Obama needs Corporate America's help. On Tuesday night, he left all the rancor behind – all the leery suspicion of the past few years, all the obstinate smack-talk of the past few years – and asked for it.
Obama asked that "businesses will partner with the Departments of Defense and Energy to turn regions left behind by globalization into global centers of high-tech jobs"; Congress is supposed to authorize 15 of these hubs. Leaving aside the fact that Congress has not been co-operative, ask this: which businesses will want to give up their cheap, globally outsourced manufacturing without important tax breaks or subsidies?Obama asked that "businesses will partner with the Departments of Defense and Energy to turn regions left behind by globalization into global centers of high-tech jobs"; Congress is supposed to authorize 15 of these hubs. Leaving aside the fact that Congress has not been co-operative, ask this: which businesses will want to give up their cheap, globally outsourced manufacturing without important tax breaks or subsidies?
Chances are, very few. But will Obama compromise on corporate taxes after the bitter tax battle of last year? It is likely he will have to.Chances are, very few. But will Obama compromise on corporate taxes after the bitter tax battle of last year? It is likely he will have to.
The president also indicated that he wants to bring back cap-and-trade, the controversial plan to allow polluters to pay for expensive permits. Utility companies spent a fruitless $68m pushing that policy before. They are exhausted and it will be hard for Obama to convince them to take it on again.The president also indicated that he wants to bring back cap-and-trade, the controversial plan to allow polluters to pay for expensive permits. Utility companies spent a fruitless $68m pushing that policy before. They are exhausted and it will be hard for Obama to convince them to take it on again.
Most importantly, the president wants to tackle the toughest problem of all: the nation's failing infrastructure. He proposed a "Fix-It-First" program to fix the country's most pressing, worst infrastructure problems. To fund it, he wants to create a "partnership to rebuild America", which will attract "private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children".Most importantly, the president wants to tackle the toughest problem of all: the nation's failing infrastructure. He proposed a "Fix-It-First" program to fix the country's most pressing, worst infrastructure problems. To fund it, he wants to create a "partnership to rebuild America", which will attract "private capital to upgrade what our businesses need most: modern ports to move our goods; modern pipelines to withstand a storm; modern schools worthy of our children".
For every single one of those initiatives, he needs support from bankers and business leaders. Many of those business leaders, like those utilities, have already spent millions lobbying Congress for them, and they may sigh heavily at the prospect of spending millions more. This is especially true because doing business with the government is often a terrible experience for businesses.For every single one of those initiatives, he needs support from bankers and business leaders. Many of those business leaders, like those utilities, have already spent millions lobbying Congress for them, and they may sigh heavily at the prospect of spending millions more. This is especially true because doing business with the government is often a terrible experience for businesses.
What Obama was talking about were public-private partnerships – known as P3s (PPPs). These are investment partnerships that take some money from the government and some money from banks or companies. They help support infrastructure, and they could support manufacturing. They are certainly one of the few, last hopes for the government to create any jobs.What Obama was talking about were public-private partnerships – known as P3s (PPPs). These are investment partnerships that take some money from the government and some money from banks or companies. They help support infrastructure, and they could support manufacturing. They are certainly one of the few, last hopes for the government to create any jobs.
Unfortunately, asking the private sector for help may be just as hard as asking the cash-strapped government to fix the country alone. This will not be as easy as the president thinks – and not just because he is asking a lot of people who openly hated him just a few months ago and schemed mightily to get him thrown out of office.Unfortunately, asking the private sector for help may be just as hard as asking the cash-strapped government to fix the country alone. This will not be as easy as the president thinks – and not just because he is asking a lot of people who openly hated him just a few months ago and schemed mightily to get him thrown out of office.
It is because public-private partnerships are thorny creatures. They are, clearly, the most appealing way to get anything significant done. Yes, there is $68bn waiting to be deployed through private equity funds devoted to infrastructure. And government can't afford to build toll roads or renovate ports alone. Banks and construction companies want to make money. Wall Street already runs heartily on the invested pension money of government workers.It is because public-private partnerships are thorny creatures. They are, clearly, the most appealing way to get anything significant done. Yes, there is $68bn waiting to be deployed through private equity funds devoted to infrastructure. And government can't afford to build toll roads or renovate ports alone. Banks and construction companies want to make money. Wall Street already runs heartily on the invested pension money of government workers.
In theory, Obama's ideas are all excellent: infrastructure and manufacturing investment have traditionally helped lift the US economy. FDR's Works Progress Administration (WPA) and Tennessee Valley Authority, and Lyndon Johnson's Great Society helped create jobs, inspired a workforce, and pushed rural America into the future. There are still government programs built in that same spirit, like the project to get broadband coverage into rural areas. And American companies and banks are now glowing with financial security.In theory, Obama's ideas are all excellent: infrastructure and manufacturing investment have traditionally helped lift the US economy. FDR's Works Progress Administration (WPA) and Tennessee Valley Authority, and Lyndon Johnson's Great Society helped create jobs, inspired a workforce, and pushed rural America into the future. There are still government programs built in that same spirit, like the project to get broadband coverage into rural areas. And American companies and banks are now glowing with financial security.
In theory, all this takes is just an agreement to work together. A team of researchers from the College of William & Mary found that "over a 20-year period, generalized public investment generates an accumulated $3.21 of economic activity per dollar spent," which is a very good return. A lot of that investable money, however, goes overseas because American government has earned a reputation as one of the worst co-workers possible.In theory, all this takes is just an agreement to work together. A team of researchers from the College of William & Mary found that "over a 20-year period, generalized public investment generates an accumulated $3.21 of economic activity per dollar spent," which is a very good return. A lot of that investable money, however, goes overseas because American government has earned a reputation as one of the worst co-workers possible.
A Brookings Institution paper in 2011 summed up the problem:A Brookings Institution paper in 2011 summed up the problem:
"In practice, [public-private partnerships] have been dogged by contract design problems, waste, and unrealistic expectations.""In practice, [public-private partnerships] have been dogged by contract design problems, waste, and unrealistic expectations."
As the Deal magazine sagely observed recently:As the Deal magazine sagely observed recently:
"When it comes to public-private partnerships, or P3s, the US moves at its own pace. Add another 'P' to P3 for patience.""When it comes to public-private partnerships, or P3s, the US moves at its own pace. Add another 'P' to P3 for patience."
Cash-strapped states will also find it difficult to come up with the starter funds to kick off these projects. When unemployment is high, tax revenues have dropped, and pension funds are in trouble, few states or cities can scrounge together the tens of millions of dollars it takes to contribute to P3s. They also balk at the debt they have to take on to bring the projects to life.Cash-strapped states will also find it difficult to come up with the starter funds to kick off these projects. When unemployment is high, tax revenues have dropped, and pension funds are in trouble, few states or cities can scrounge together the tens of millions of dollars it takes to contribute to P3s. They also balk at the debt they have to take on to bring the projects to life.
That's why the rocky past of P3s is sure to haunt Obama's efforts. Even supporters of the partnerships acknowledge that there are many times they aren't done right. Anyone who has spent an afternoon at the DMV knows what it can be like to deal with government: delays, whims, bad answers that are often reversed and then reversed again.That's why the rocky past of P3s is sure to haunt Obama's efforts. Even supporters of the partnerships acknowledge that there are many times they aren't done right. Anyone who has spent an afternoon at the DMV knows what it can be like to deal with government: delays, whims, bad answers that are often reversed and then reversed again.
Governments – whether state, local, or federal – take a lot of time to function. Between the time an infrastructure idea comes up, there is a run of local votes, lengthy multi-part auctions, in-depth studies, political administrations that come and go, and the danger of fickle politicians who fall out of love with projects when budget time comes up.Governments – whether state, local, or federal – take a lot of time to function. Between the time an infrastructure idea comes up, there is a run of local votes, lengthy multi-part auctions, in-depth studies, political administrations that come and go, and the danger of fickle politicians who fall out of love with projects when budget time comes up.
That's why homegrown banks and investment firms have been leery of working with the government on infrastructure projects; foreign banks like Australia's Macquarie and Sweden's Skanska have stepped in on occasion, even though they can't possibly fund all the infrastructure, energy and manufacturing projects the president likes.That's why homegrown banks and investment firms have been leery of working with the government on infrastructure projects; foreign banks like Australia's Macquarie and Sweden's Skanska have stepped in on occasion, even though they can't possibly fund all the infrastructure, energy and manufacturing projects the president likes.
The country is littered with the ghosts of P3s that were committed to, and to which banks devoted money, only to be thwarted by local governments. Georgia, for instance, in late 2011, seemed to capriciously abandon plans for a toll road partnership when the project was "well past the point of no return", according to one trade publication. A plan to lease the Pennsylvania Turnpike to a private investor resulted in fiscal disaster for the state. Chicago signed a deal to turn over management of its parking meters to a private firm, and lost money on the deal.The country is littered with the ghosts of P3s that were committed to, and to which banks devoted money, only to be thwarted by local governments. Georgia, for instance, in late 2011, seemed to capriciously abandon plans for a toll road partnership when the project was "well past the point of no return", according to one trade publication. A plan to lease the Pennsylvania Turnpike to a private investor resulted in fiscal disaster for the state. Chicago signed a deal to turn over management of its parking meters to a private firm, and lost money on the deal.
Is there any good news? Yes. Obama's mission to attract more private money will be hard, but recent examples show that it's not completely hopeless.Is there any good news? Yes. Obama's mission to attract more private money will be hard, but recent examples show that it's not completely hopeless.
Some government leaders have been testing out public-private partnerships, like Governor Andrew Cuomo's NY Works program in New York state. Several cities and states have started working on "infrastructure banks", which would be funded with some government dollars but many more dollars from private investment firms.Some government leaders have been testing out public-private partnerships, like Governor Andrew Cuomo's NY Works program in New York state. Several cities and states have started working on "infrastructure banks", which would be funded with some government dollars but many more dollars from private investment firms.
They include the state of New Jersey, as well as one of its major cities, Newark; Connecticut, which passed an ambitious package two years ago; and the Chicago Infrastructure Trust led by Lois Scott under Mayor Rahm Emanuel.They include the state of New Jersey, as well as one of its major cities, Newark; Connecticut, which passed an ambitious package two years ago; and the Chicago Infrastructure Trust led by Lois Scott under Mayor Rahm Emanuel.
Still, it is likely that companies and investment firms need a stronger urging than anything the president has voiced so far. They're not going to be satisfied with faster permits; they want to see a return on their money.Still, it is likely that companies and investment firms need a stronger urging than anything the president has voiced so far. They're not going to be satisfied with faster permits; they want to see a return on their money.
In the meantime, those companies will require financial security: they're going to want simply more incentives and subsidies to work with the government. In any case, the president has taken a strong tack against more tax breaks for the rich. But it won't be surprising if he has to give way a little on corporate taxes to get what he wants in private investment.In the meantime, those companies will require financial security: they're going to want simply more incentives and subsidies to work with the government. In any case, the president has taken a strong tack against more tax breaks for the rich. But it won't be surprising if he has to give way a little on corporate taxes to get what he wants in private investment.
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