Leverage for State and Local Economic Development

Leverage for State and Local Economic Development

Leverage for State and Local Economic Development?

By Valerie Martinelli, MPA

Some may regard P3s as the solution for economic growth and development issues facing governments, while others are skeptical regarding their efficacy and desirability. I always exercise caution when applying a one size fits all approach to public policy requirements. However, facilitating private sector investment into an arena that may be experiencing a financial deficit or is in need of additional cash can be beneficial. A state and local government may have little to no P3 experience but it is not too late to learn how to leverage the private sector investment and build a strong partnership. P3s are expected to continue to grow in importance as methods for conducting several types of state and local economic development programs. They are generally politically favorable and viewed positively by the business community as a tactic for contributing human capital and guaranteeing their input into important economic development purposes.

Factors Required for Economic Growth

P3s have the capability to free up government resources by infusing the private sector investment in public policy necessities, however, they will not influence the economy without the proper blend of elements. The amount, value, and type of P3s, in combination with supportive policies, can influence economic growth on both the state and local levels.

The number of P3 contracts: Evidence proposes that the more P3 projects initiated, the rate of GDP growth increases. Large projects such as infrastructure tend to be large responsibilities, which instill capital into the market while producing long-term employment. Job growth drives more consumption, thereby generating more wealth and fueling a stronger economy. This type of private investment dually attracts other investors to the market, constructing a sustainable model for economic growth.

Value of the P3 Projects: Projects with an increased level of value introduce more financial resources and investment into the economy. As P3s establish additional financial resources and investment into the economy, government expenses will begin to decrease. Public resources that originally would have been applied for infrastructure necessities are directed into more socioeconomically productive sectors, such as healthcare and education. Only a 1 percent increase in P3 investment will increase GDP per capita by 0.3 percent. This evidence is suggestive that consistent investment in P3s can increase GDP levels substantially. Although the short term increase to economic growth is moderately small, it has a significant cumulative effect over time. This is holds true after macroeconomic factors, social factors, institutional factors, geographic factors, and education are all accounted for.

Type of P3 contract: The type of P3 contract is the component that has the greatest influence on economic growth. The nature of the P3 contract will ultimately determine the level of private sector involvement. The quality of the project and the transfer of knowledge and resources increases as private sector involvement increases. Investment in state of the art technology and procedures in combination with the application of private sector management principles facilitates an increased access to services and more cost effective administration. In turn, this attracts more private investment into the economy and thereby raises the standard of living.

Government Policies and Minimizing Risks Essential to Attracting P3s

Regulatory framework must be employed in order for monetary policy and financial stability to be secure enough to attract investors. Simple and straightforward procurement policies also increase transparency, reduce time and money spent and eliminate the risk of any sudden changes. It is critical for governments to minimize any economic and political risks in order to encourage private sector investors. Although comprehensive policies help in attracting P3s to the market, shrewd negotiating is also necessary in the development of agreements that improve the overall economy. Potential projects should be screened based upon a cost-benefit analysis and the capability to deliver a good return on the investment. Private partners should be vetted for their experience and financial support. Governments in return should offer guarantees that decrease investor risks. Any guarantees must be structured to ensure that risk is properly assigned. Lastly, competitive markets yield benefits for consumers and the government through price reductions, the creation of more services, and offering greater accessibility. Governments have the ability to influence resources for development.

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