• External Contributor

PPP: What Worked, What Didn’t, and What Needs Tweaking

Small and medium-sized manufacturers weigh in on the COVID-19 relief program.

In late April, IndustryWeek conducted a survey targeted to participants in the federal government’s Paycheck Protection Program. The PPP was intended to provide paycheck protection for employees of small- and medium- sized companies, allowing employers to continue operations and keep their workforce employed in during the COVID 19 pandemic.

This survey is part of IW’s Supply Chain Initiative, an editorial effort speaking for and to small- and medium-sized manufacturers. The point of the survey was not to criticize PPP. Rather it was to provide participant feedback regarding how in the future, similar programs could be adjusted to better align with SME participation and financial needs.

It is important to note the federal government’s general definition of an SME.  Specifically:

  • A small company has 250 or less employees.

  • A medium-size company has between 251 and 500 employees.

The PPP, however, adjusted this definition so that it covered each business location within a company that met the above guidelines, whether they were independent operations or part of a larger corporate organization. For instance, Ruth’s Chris Steakhouse received a PPP subsidy because each of their individual locations has less than 500 employees, even though the corporation as a whole employs thousands. If you’ve ever eaten at one of their restaurants, you’ll know that they cater primarily to top income earners and, as a result, are highly profitable. I’m not sure why an intent of the PPP would be to subsidize large corporations, since other pandemic-related subsidy programs had already been made available to them.

The IW survey’s goal was to have feedback from a large enough sample to provide a statistical summary of responses. While the number of completed surveys did not hit that mark, the 60 completed surveys we received did represent a variety of manufacturing areas and geographical locations.

The feedback contained several common themes:

  • The program provided the right type of assistance at the right time. In other words, without the PPP, a significant number of jobs would have been lost, with the consequence that U.S. unemployment would have ballooned even more than it has.

  • The parameters of the subsidies and the program’s length needed to be adjusted—an adjustment that has been made since we conducted the survey. This doesn’t mean that the companies receiving grants necessarily wanted more funding. Rather, one of the program requirements was that 75% of the funding provided needed to go directly into employee paychecks, which was tough given the short duration of the program. Any part of the subsidy that wasn’t used in this period needed to be returned. Having a later deadline from the beginning would have continued employment and paychecks over a longer period without increasing government expenditures.

  • The initial $350 billion allotted to the program was inadequate to meet the need.  Many of the initial applicants did not receive a subsidy. Some feedback was along the lines that unless a company applied for funding on Day 1, it would have been left out. The additional $250 billion that was later allocated helped address this need.

  • One interesting point of feedback was that while many responders said applying for the program was simple and straightforward, just as many said it was too complicated and difficult.  Some responders pointed out that it helped to have a business relationship bank that had jumped into the program right away, since early active work on the part of a participating financial institution was needed to “get to the front of the line.”

I’ve talked to several other companies that received program funding but did not participate in the survey. They pretty much echoed the above results.

I’ve got some opinions on the PPP. First, it came about because federal and state governments finally recognized the importance of SMEs to this country’s economic well-being. This is a significant development. Previously, almost all government economic support subsidies has gone to larger corporate entities under the thinking that these funds would eventually trickle down to domestic suppliers, i.e. SMEs. While this happened to some extent, it is pretty clear that much of the funding did not flow down to domestic suppliers.

For instance, I talked to one automotive executive about his company’s use of an U.S. automobile bailout loan in 2008. He insisted that a large portion of the funding had trickled down to suppliers. This, by the way, was a manufacturer with almost 50% of its purchases from overseas sources. When pressed, he admitted that funding was used to pay suppliers without regard to their location. Although he wouldn’t actually admit is, it is pretty clear his employer used federal loan funds to pay foreign sources. I’d hope that in future federal (and state) subsidies and loans to large corporations, this type of thing is taken care of.

I hope this is not a one-shot occurrence, and that going forward, federal and (and state) subsidies will target SMEs in a way that corresponds to their importance to this country’s employment and Gross Domestic Product.

A second observation is that PPP was, in effect, a tactical knee-jerk reaction to an unanticipated problem. As with most such programs, PPP had more of a shotgun-blast impact rather than a focused sniper-type one. Such lack of focus usually results in wastage, and I suspect PPP had a fair amount of it.

In business we often talk about the need to act strategically. Although many companies have recently learned this the hard way vis-a-vis supply chains, this necessitates having pre-thought-out Plan B’s for negative impacts that could reasonably occur. Knowledge of a world-wide viral pandemic developing was not an issue of “if.” Rather it was an issue of “when.” It should have been planned for, and our country’s response should have been executed per that plan.

It is pretty obvious that our government had no pre-established Plan B for such an occurrence. Rather than being the fault of one administration or another, it is my opinion it was due to lack of planning by several administrations over the last couple of decades. This Plan B would not only have provided better targeted assistance to SMEs; it would have increased the impact of governmental funds.

Finally, since this is an article related to IW's Supply Chain Initiative, I would be remiss in not making the following point. SMEs and corporations are pretty much joined at the hip relative to economic well-being. This needs to be recognized in future federal and state governmental subsidy and loan programs.

How? By assuring programs overlap. For instance, as cited above, no monies made available to support corporate viability should be allowed to be spent outside of this country. Sure, program funds would make it easier for corporates to pay their foreign sources out of other funds, but it would also set precedence and be another pressure point for corporations to recognize the financial benefits or sourcing more locally. There are other intersections between OEM and SME support programs that could also be taken advantage of.

In my mind, it is okay for states and the federal government to offer subsidies to foreign companies to to incent them to locate—or relocate—to the U.S.  After all, foreign countries have often been successful in attracting U.S. firms with subsidies.  I do not believe that states should offer subsidy incentives to companies to relocate from another state to their own.

Why?  For few reasons:

  • First, it is a zero sum game for employment and GNP. In other words, such subsidizations rarely increase national employment. Another way of putting this is that it needs to be recognized that we are all in this together and states should act correspondingly.

  • Second, when governmental funds are used to attract companies to relocate from one state to another, it is akin to a tax increase to individuals and companies already located in a state. This has had the effect of the state taxing existing companies to bring in a competitor and providing them with a competitive advantage.

  • Third, state forecasts highly overstate the economic benefits associated with financial packages to attract companies from other states. The impact of this is that the R.O.I of taxpayer investment goes down, meaning that the time needed to recapture a state’s investment goes up. It is not unusual for large relocation projects to require 20 or 30 years for payback, and who can predict what will happen to the company over that time? Similarly, the cost of each new job brought to the state goes up. It is not unusual that within a couple years after the dog-and-pony-show politicians put on in announcing a new employer to the state, the actual quantity and wage rates of the jobs being brought in fall well below forecast levels. 

  • Finally, smokestack-chasing results in step-function employment devastation in the state that loses the employer. I think that as a nation we can do better than benefiting some citizens at the expense of others. Especially when the economic damage is too severe to the losing state.

Anyway, thanks to those who participated in this survey.  Hopefully, the above summary will encourage more participation in future surveys so that statistical prevision can be assigned to the results.