Background on Public Private Partnerships (P3’s):
Many institutions of higher education are facing mounting pressure on their mission to deliver high-quality, affordable education to students and perform world-class research. Reductions in public funding support and concerns about overall affordability present substantial near-term and longer-term budget challenges for many institutions.
Public institutions are predominantly affected, having been constrained by suspensions or reductions in state funding. State appropriations across the US grew by just 0.5% annually between 2005 and 2015. State funding has still not recovered to 2008 levels, the last year in which state funding decisions would not have been affected by the Great Recession.
(Source: Integrated Postsecondary Education Data System (IPEDS) — state appropriations revenue divided by total fall enrollment, 2005–15)
Public-private partnership models are continuing to proliferate as cash-strapped colleges and universities seek to replace or update aging and outdated infrastructure amid tight finances.
(Source: Proliferating Partnerships)
What is the P3 Delivery Model?
A public-private partnership, or P3, is long-term agreement between a public entity and a private industry team that is tasked with designing, building, financing, operating and maintaining a public facility. The past decade has seen a steady increase in the use of P3 structures, both inside and outside higher education. In 2016, something of a watershed year for P3, multiple high-profile projects came online in response to a variety of public needs, including a $1-billion-plus water infrastructure project servicing San Antonio, and a $300-million-plus renovation of the Denver International Airport’s Great Hall.
“Public” is a non-profit institutional or governmental entity that engages a “private” for-profit entity to pay for a particular project.
The “private” partner provides funding (and often expertise) to deliver (and often operate) the project used by the “public” entity to meet its purposes.
In return for its capital, the “private” entity gets a revenue flow from the asset it has paid for.
The emergence of the P3 option is happening where it matters most: projects that would be otherwise unattainable under the traditional public-improvement delivery models. For instance, 10 years ago, only a handful of higher education P3 projects were up and running; today, we are approaching three dozen such projects.
The biggest challenge is, of course, the financing component, but P3 teams bring much more to the table than money — they give public entities access to expertise and innovation that can add significant value to projects at each phase of development.
Motivations for P3 transactions vary widely, but include:
- Supplementing traditional debt instruments. These include private capital, using off balance sheet or alternative mechanisms.
- Transfer of risk. Historically, universities have born all or most of the risk of facilities-related projects themselves. A P3 is a way to either transfer or at least share the risk.
- Speed and efficiency. A P3 allows for a faster development process, and time to completion is generally shorter and on schedule. The sole focus of the private entity is to complete the project on budget and on time. University infrastructure tends to have competing priorities across all-campus facility needs.
- Outsourcing provision of non-core assets. Outsourcing allows institutions to focus investment of internal resources and capabilities on those functions that are closer to the academic needs of its students.
- Experience. Private partners often have much more experience and skills in a particular development area (e.g., facility architecture and infrastructure, student housing needs) and are able to better accommodate the needs of students, faculty, administrators, etc.
- Planning and budgeting. Private partners offer experience and know-how in long-term maintenance planning and whole life cycle budgeting.
The four types of P3s:
- Operating contract/management agreement. Short- to medium-term contract with private firm for operating services
- Ground lease/facility lease. Long-term lease with private developer who commits to construct, operate and maintain the project
- Availability payment concession. Long-term concession with private developer to construct, operate, maintain and finance the project in exchange for annual payments subject to abatement for nonperformance
- Demand-risk concession. Long-term concession with private developer to construct, operate, maintain and finance the project in exchange for rights to collect revenues related to the project
Pro’s and Con’s of P3’s:
Since their emergence in student housing several years ago, P3s have become important strategies for higher education institutions because of the many benefits they offer, including:
- Lower developer costs
- Developer expertise
- Operational expertise
- Access to capital
- Preservation of debt capacity
- More favorable balance sheets and credit statements
- Risk mitigation
- Faster procurement and project delivery (It can typically take a university about 5 years to get a project built. With a P3, that process can be reduced to just 2 years. Additionally, P3s can save approximately 25% in costs compared to typical projects.)
Beyond the above, the indirect advantages of P3s in student housing are numerous, such as they:
- Provide better housing for students
- Expand campus capacity
- Create high-quality facilities
- Expand the tax base for both a city and county
- Provide an economic boost to surrounding areas, which likely lead to private growth and other improvements
It is important to note that, while there are many benefits of P3s for higher education institutions, these agreements also have disadvantages that need to be considered, including:
- High cost of capital
- Reduced control for the university
- Complexity of deals
- Multi-party roles and responsibilities
- Limitation on future university development
A LOOK AHEAD
Where Are We Heading?
- More political involvement and pressure to consider P3
- Pre-development Risks – Many projects failing to close
- Issues with Construction Pricing & Labor Shortages
- An increasing number of developers are getting in the on-campus business; however, developers are being more strategic on which projects/procurements to respond to
- Exploration of other sources of funds like tax credits, USDA, and opportunity zones
- Shared governance continues to grow
- Larger, more complex P3 projects including long term concessions, availability payment models, Key Performance Indicators (KPIs)
- Bundling of Procurements (food, housing (including faculty), academic buildings, hotel, energy, facility maintenance, etc.)
- State of the P3 Higher Education Industry by Brailsford & Dunlavey http://programmanagers.com/wp-content/uploads/2018/09/P3-State-of-the-Industry-Final_Small.pdf
- Should your University enter into a Public/Private Partnership – the Pro’s and Con’s https://edualliancegroup.blog/2017/06/26/should-your-university-enter-into-a-publicprivate-partnership-the-pros-and-cons
- No Free Lunch: The Pros and Cons of Public-Private Partnerships for Infrastructure Financing https://www.brookings.edu/blog/up-front/2017/02/09/no-free-lunch-the-pros-and-cons-of-public-private-partnerships-for-infrastructure-financing
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