A primer on public-private partnerships

The Facilities Forum’s Lauren Burakowski sat down with Jill Jamieson, Managing Director and Public-Private-Partnership practice lead at Jones Lang LaSalle (JLL), for an exclusive Q&A about public-private partnerships (P3s) and how higher education can leverage P3s to support institutional goals.

JLL is large international professional services company specializing in commercial real estate, finance, and P3 advisory. The higher education practice works with public and private institutions to leverage alternative finance and delivery models in support of broader institutional missions. Jill Jamieson has decades of experience working with P3s and has extensive experience advising higher education institutions on all types of infrastructure projects across multiple asset classes, including both new construction and renovation.

Lauren Burakowski: Thanks for taking the time to speak with us. Let’s start with a basic question: What is a P3?

Jill Jamieson: P3 refers to a broad array of contracting arrangements between public authorities and the private sector which aim to ensure the financing, construction, renovation, management, operation and/or maintenance of infrastructure, and/or the provision of a service. Many people realize that P3s are well suited to new facilities and infrastructure, but fewer think of them for addressing deferred maintenance and modernization needs. P3s vary in the financial and operational responsibilities assumed by the private entity, whether that’s constructing new facilities, operating new and/or existing facilities, or monetizing existing assets such as parking, central utilities, or real estate assets.

Burakowski: What is the current perception of P3s in higher education?

Jamieson: P3 have certainly gained traction in higher education over the past few years. You’ve got stories, such as University of California-Merced’s P3 for campus expansion, that have inspired many leaders to explore P3s to leverage increasingly scarce resources.

In some instances, however, leaders in higher education see P3s more as an end instead of the means that they truly are. P3s are not a catch-all solution; they are one of many possible tools facilities leaders can leverage to maximize the value of existing assets and fund projects that are difficult to support otherwise. So higher education leaders shouldn’t ask, “What can we do with P3s?” In many ways, that’s a solution in search of a problem.

My recommendation is that higher education leaders gain a clear understanding of their objectives and needs before identifying solutions. I’ve seen institutions have very negative experiences with P3s when goals are unclear, such as one institution that pursued a P3 to build student housing. They seemed to be more interested in the “deal” than in the long-term viability of the asset, so the contract fell apart due to inadequately specified details and internal politics. The focus should be on infrastructure and service delivery, not “deals.” To be successful, leaders need to first understand and articulate their goals before determining whether P3 arrangements are the best means to deliver on their objectives.

Burakowski: Why would an institution pursue a P3?

Jamieson: There are four primary drivers of P3.

First, institutions can benefit from P3s through accelerated completion of infrastructure projects and accessing additional financial resources. Higher education leaders are facing greater demand to modernize and expand core infrastructure and services offerings, cater to a broader audience, and manage new technologies and buildings, forcing them to identify ways to deliver infrastructure in the timeliest and most cost effective manner possible. Leveraging private finance and delivery, on average, results in 10—15% infrastructure cost savings in comparison with traditional publicly funded design-bid-build structures.

Second, P3s allow institutions to pursue creative monetization of assets. Higher education leaders are seeking ways to extract value from their current assets, especially as tuition revenue, state support, and free debt capacity decline. The key principle behind monetization involves leveraging assets to generate revenue that supports the mission of the institution. Good examples of this creative financing include long-term concessions or leaseback arrangements for existing assets (e.g., utilities, student housing, excess real estate), commercialization opportunities, and the sale of underutilized assets.

Third, P3s also can be leveraged to increase operational efficiency. While most higher education facilities leaders feel pressure to decrease operating expenses, not all institutions have the resources to complete this in-house. Institutions can establish incentivized performance contracts with a private operator to find savings and decrease operations and maintenance expenses, a portion of which are paid to the operator. Even in relatively well-run organizations, aligning incentives with operational performance generates significant improvements with savings typically between 15 to 25%.

Finally, P3s allow universities to transfer risk to a private partner. This is a very important driver for higher education institutions because the ability to transfer a wide variety of risks, including adapting to rapidly changing technology and student expectations, helps the institution hedge against many associated costs and negative consequences.

Burakowski: How can higher education successfully adopt P3s?

Jamieson: The determination of success depends on one’s perspective, but generally speaking, well-balanced transactions create value for the university while improving service outputs. If leaders are concerned about the condition of a facility at the end of the contract term, they can write safeguards into P3 contracts to ensure they are not left with decrepit or decaying assets. Institutions can establish hand-back conditions, or standards for asset condition to which the private companies are held. These standards can help guarantee the condition of assets 30 years out in a way that most facilities departments cannot.