By Kevin Wayer
From the April 2017 Issue
From raising capital to intensifying competition, universities are vulnerable to the same pressures found in the business world. And the need to repair and modernize their facilities is more pertinent now than ever before. It’s not just a matter of building the newest facilities around; many institutions lack the financial resources required to make even the most basic repairs and infrastructure updates.
To stay focused on their core mission to provide unparalleled education, universities are recognizing that they can alleviate pressures and maximize operational efficiencies by turning to an unlikely channel for relief—the private sector. Early adopters of private sector strategies have discovered that they can preserve their resources by accessing expertise, funding, and co-funded research endeavors. These partnerships in turn, allow universities to invest in students, faculty, and research.
Public-private partnerships (P3s) have been used in the United States since the 1800s, backing roads and airports, hospitals, government facilities, and other assets. P3s come in all shapes and sizes, and can be complicated by nature. Simply put, a P3 is a contractual arrangement between a public and private sector partner in which resources, risks, responsibilities, and rewards are shared for the operations and maintenance of facilities, and development of infrastructure. For universities, this type of arrangement eases fiscal restraints, while the private partner can maximize their return and exposure.
Today, universities are utilizing P3s as a tool to accommodate enrollment growth, support a dynamic living and learning environment for students and staff, and maintain sustainable and environmentally appropriate facilities, all while curtailing their own financial risk and adding expertise. P3s will only increase in demand as construction simply must take place to repair aging buildings across many campuses. Despite pervasive budget crunches that brought education construction to a 15-year low in 2016, higher education institutions are now in a position where they must accelerate construction to make crucial improvements without hiking tuition costs, to strengthen their brands and student appeal.
The widespread appeal of P3s is often accompanied by uncertainty. How can university leaders ensure that they are making the right decision, and that a private partner can assist their unique needs?
Luckily, P3s can be utilized for various problems. The guarantees of any P3 are that it will entail capital investment by a private sector company and it always leaves a level of control in the hands of the university. The very structure of a P3 varies according to the needs of the project at hand, with the two most common approaches being concession agreements and lease arrangements through university-sponsored nonprofit entities.
Another persisting misconception is that a P3 is essentially privatization. However, in pure privatization, an institution retains no ownership or control of assets and has no agreement in place with a private entity. P3s allow the public partner to retain control and oversight of their assets while the private sector assumes much of the financial risk.
And while a plethora of P3s to date are centered on the need to renovate student housing, it’s important to note that P3 models are being applied successfully to other property types. In Philadelphia, PA, for example, Drexel University partnered with Brandywine Realty Trust to develop Schuylkill Yards, a six building development worth $3.5 billion that includes a skyscraper and retail space, in addition to educational facilities and medical institutions.
When seeing a multibillion dollar price tag, it’s understandable that university leaders question the benefits a P3 brings when private capital typically comes at a higher price than tax-exempt public debt. However, in most P3 projects, the relatively higher cost of private capital is offset by reduced costs elsewhere, especially if the partnership guarantees continued maintenance, repair, and replacement of assets. A critical success factor is the ability to assess project risks between partners so that financial risk transfers to the private partner, boosting the incentive to perform and protect their revenue.
Pressured by more competition and less public funding, it’s becoming clear that P3s can be a smart financial decision for universities. After conducting a thoughtful, systematic pre-planning analysis, universities will discover that the complex nature of P3s is supplanted by the simple fact that they bridge funding gaps and make new campus development possible, without full privatization.
Wayer is international director and co-president of JLL’s Public Institutions group. Wayer’s team of more than 100 professionals provides real estate services to higher education institutions across the United States.
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