Someone following CNBC’s coverage of California’s budget troubles just might end up believing that things are in a bad way in the Golden State.
A recent report on the business news service’s website leads with: “The World’s Eighth Largest Economy is On the Brink”.
Recently, California began to its pay bills with IOUs as a way to conserve cash while legislators wrangled over how to fix a $26 billion budget gap, now finally nearing agreement.
As former Los Angeles City Controller Laura Chick once told city council members, “dire circumstances sometimes lead to drastic measures. The current crisis offers us opportunities for needed and positive change”.
So infrastructure investors are right to ask, “What’s in it for us?”
The answer isn’t as clear as what the mainstream media portrays it to be. There isn’t likely to be a giant California yard sale of state-owned assets, like $12 billion selloff being planned by Poland’s treasury. But on the municipal level and within California’s newly minted public-private partnership (PPP) law, there are bound to be some interesting opportunities that everyone should keep an eye on.
Let’s start at the state level.
True, California is in dire financial shape and asset monetisations could be one attractive option to pursue in shoring up state finances. In May, Governor Schwarzenegger reiterated his support for selling seven state-owned properties, some of which, like the San Quentin Prison, could afford investors access to infrastructure-like cashflows.
But whatever asset sales eventually end up making their way into the budget compromise, California’s ballot proposition initiative is likely to complicate the process. The state has a long history of outsourcing decision-making to its citizens in the form of propositions. Californians have been asked to vote on over 1,000 ballot measures in the last 100 years, according to a proposition database run by University of California’s Hastings College of Law. So proposals to monetise state assets could face huge political risk.
Which assets? As Fred Klass, chief operating officer for the California Department of Finance points out, the state went back to the voters in May to ask their permission for a $5 billion bonding scheme for the state lottery in part because the lottery was born out of a ballot proposition in 1984. So a simple rule of thumb may be: if the voters were asked to create it, they will likely have to be asked for permission to monetise it.
Plus, as some local investors are quick to point out, even in a budget crisis, asset sales aren’t the state’s top priority.
“While the state loves to talk about PPP activities, they are interested in PPPs for upgrades and new projects, rather than selling brownfield assets. The assets which are more sellable assets are at the country and municipal level,” says Bob Hellman, chief executive officer of California-based American Infrastructure MLP Funds.
“Cities and counties own a lot of assets which could be candidates for divestitures or PPPs – a lot of assets”, Hellman adds.
Catalysing an asset sale on the municipal level may also be a lot easier. California is one of a handful of states that permits its municipalities to opt for broad home rule, meaning that they do not have to ask permission from the legislators in Sacramento for everything they do – including PPPs.
“I certainly think dealing with municipalities is a great unexplored opportunity that has to be looked at,” says Penny Cobey, of counsel at law firm McKenna, Long & Aldridge in Los Angeles.
Los Angeles tops Cobey’s list of cities where investors might see tangible opportunities. In December, former controller Chick published a study to assess opportunities for PPPs in Los Angeles – similar to New York’s Asset Maximisation Commission report – which outlined nine different assets as candidates for PPPs and monetisation schemes.
Among them were the city’s Ontario Airport, seven animal shelters, golf courses and 118 off-street parking lots.
The parking lots in particular were outlined as “ideal candidates” for a PPP opportunity and Mike Keeley, advisor to Mayor Antonio Villaraigosa, is said to be moving full-steam ahead toward issuing a request for proposals sometime soon.
“What’s driving the mayor's administration, pure and simple, is lack of money. So as long as California stays in a bad financial shape, the opportunities for PPP investors will only increase,” says Cobey.
One indication of those opportunities is the state's newest budget compromise, currently being hammered out. If approved, it would take about $4.7 billion from local governments by, among other measures, tapping into their property tax revenues and transportation funding. This would make them even more likely to pursue asset divestitures or PPPs.
The third pillar of opportunity for infrastructure investors is the state’s newly-enacted PPP law, which has created a Public Infrastructure Advisory Commission (PIAC) to shepherd projects along.
So far, there is reason to be optimistic. The first big PPP project under the law, a replacement of the southern access road to the Golden Gate bridge, known as Doyle Drive, is already in the planning stages.
And the state, under the leadership of Business, Transportation and Housing Secretary Dale Bonner, is so far doing a good job of listening to the market. Bonner has scheduled a feedback session on what role the PIAC can play in delivering PPPs for next Wednesday, 29 July.
All signs that, despite the talk of meltdown, breakdown, failure and crisis, there is a bright future for investors in the state.
In which case, like the gold miners of the 1850s, infrastructure investors may want to go prospecting in the Golden State.