Should your University enter into a Public/Private Partnership – the Pro’s and Con’s

By Dr. James T. McGill – Retired Senior Vice President for Finance and Administration Johns Hopkins University and member of the Edu Alliance Advisory Council

“P3” (Public/Private Partnership) has become a commonly used acronym in U.S. higher education, as well as in other spheres, notably state and local government. Definition:

  • “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.

A typical example of a higher education P3 project is a private partner paying for and operating a new, revenue-generating facility on the public partner’s property, such as a student residence hall.

The P3 term also can encompass outright purchase by a “private” entity of a physical asset of a “public” entity and subsequent operation of that asset with the cost and revenues emanating therefrom accruing to the “private” partner. The public seller reaps a one-time payment up front. Two recent higher education examples are selling the ownership, and turning over the subsequent operation, of i) campus parking and ii) heating, ventilation, and air conditioning facilities.

This blog focuses on the positives and negatives of the use of P3 arrangements in providing a new facility through a P3, exemplified by a residence hall transaction.

There are a plethora of economically challenged colleges and universities with relatively small operational staff, thereby having only limited financial and personnel resources to manage the delivery of a new building. An institution’s capacity to pay for new student residence hall, say, may be constrained in several dimensions: i) insufficient accumulated cash, ii) reluctance to use endowment resources, and/or iii) limited borrowing capability. Such an institution may consider turning to a private partner with investment capital. Typically, the private partner will have expertise and experience in delivering the facility, knowing efficient construction approaches, how to deal with local zoning and environmental regulations, and managing local permitting processes. Perhaps, too, a partner might be experienced in dealing with the interested publics – neighbors and political interests. Such firms may also be familiar with governmental subsidies available to support such projects; an example is a project located in an economic empowerment zone. Too, not atypically, such a partner is able to deliver a project more quickly than if managed by the institution.

All sounds positive – some else’s money, expertise in building, knowledge of local regulatory restrictions, and fast delivery of a right-priced facility. Are there any drawbacks? Several countervailing factors to consider:

First, the “cost of capital” must be considered. The private partner is paying for the project with its own money (or, often, with that of financial partners it brings to the transaction); thus, it expects a return of perhaps 8-12% annually, maybe more. That return is generated from the “profits” of the operation of the facility it financed. If the institution is capable of borrowing from i) its own endowment (at a long-term annual cost from foregone investment returns of, say, 6% to 8%) or ii) a bank or the public bond markets (at rates today of perhaps 4% to 5% annual interest costs), there is an incremental carrying cost, ceteris paribus, to the public partner in a P3 arrangement.

Also related to “cost of capital” with the use of the private partner’s money, the bond markets and rating agencies may count part of the project cost as if the public partner had actually borrowed the money, resulting in a decline in the institution’s net worth (“balance sheet degradation” in accounting talk). If a rating agency believes that the institution would be obligated to step in to “rescue” the project if the private partner fails to meet its obligations, its cost will be counted, at least in part, as a credit obligation of the public entity. Any such project located on the campus property is usually so considered, in part at least, as an obligation of the institution. But access to a private partner’s capital nonetheless may be very attractive.

Second, the private partner will manage the facility. While relieving the institution from those day-to-day responsibilities, the public partner must negotiate conditions that ensure proper treatment of occupants in, say, the new residence hall, as if they were in a campus-owned facility. Often, too, the institutional partner is expected to help ensure the profitability of a residence hall by guaranteeing a flow of students to keep its beds filled, maintaining that the cash flow to the private partner. Thus, the institution gives up certain operating autonomies that can be core to its mission. These arrangements have been negotiated satisfactorily at many higher education institutions.

Third, there is the matter of the quality vs. cost of a building to be delivered under a P3 arrangement. The institution needs to specify such requirements and the private partner needs to agree to adhere to an institutional review process to ensure standards will be met. Imposing quality requirements may have pricing implications: the more expensive the project to build, the less value it may have to the private partner. Related is agreement on the responsibility of the private partner to maintain physically the facility throughout the life of the deal. Examples include roof repairs, replacement of heating and related infrastructure, painting and repair of the interior, facade maintenance, etc. Also, it is important to have documented understandings about the “end of the deal” condition of the facility — tear–down condition or fully operational, for instance.

Fourth, P3 arrangements are long-term, perhaps running to 75 years or more. And so, such arrangements will restrict uses of the land on which a project sits well beyond anyone’s capability today to project future institutional needs.

In short, there are positives and negatives to P3 arrangements. A higher education institution considering such must thoughtfully balance them all to arrive at a best decision.

Dr. James T. McGill (Jim) is a life-long higher education finance and administration executive.  He served as the chief business and finance officer at three universities spanning thirty years:  Oregon’s academic health science university, Missouri’s four-campus land grant institution and the Johns Hopkins University. All involved considerable focus on the academic health sciences. He had responsibility for the full range of financial operations; facilities; land development; human resources, and various other administrative functions.

Since retiring from his last full-time position, he has had an active consulting business, serving as a temporary executive at three different institutions and advising on strategic and financial planning at others.  He has supported several non-profit charitable enterprises through board membership and has also recruited and mentored higher education executives.

International Education Agents and Student Satisfaction

The use of commissioned agents to recruit international students by United States higher education was banned until 2013 and is still intensely debated on whether this practice should be allowed. Yet in many other nations it is widely accepted. What do we know from the student perspective and their satisfaction level.

By Dean E. Hoke – Co-Founder Edu Alliance Ltd. and Managing Partner North America

The use of agents for student recruitment has been an area of interest to my firm Edu Alliance for the past few years. In our consulting work we were engaged by a United Arab Emirates client to review the use of agents for their institution, the fees charged and the success of the student once they entered the university.  We have been asked by a number of US universities about the agent system, whether Edu Alliance does such recruiting, which we do not, or if we recommend agents we believe are effective and trustworthy.

I recently read an interesting article in World Education News & Reviews on agent research by Megha Roy, Senior Research Associate, World Education Services (WES). 5,880 international students representing five regions and over 50 countries were surveyed and the goal of the research was to better understand their experiences with education agents. All survey recipients came from a pool of former WES applicants for foreign credential evaluation.

According to WES the research sought to uncover:

  • The prevalence of agent-use among WES applicants
  • The types of agents used (e.g., independent educational agents, who are paid by the students/families, versus institution-sponsored agents, who receive commissions from the U.S. institutions)[1]
  • How applicants interact with agents – how they pay them, what services they use when, their satisfaction levels, challenges, and more
  • Regional variations in agent use and type

 

The Key Finding of the student study stated:

1,336 student responded, 23 % used agents during the application process. Of those who use agents:

  • Eighty-three percent were satisfied with the services offered, and indicated that agents met their expectations. More than 75 percent agreed that agents provided useful information and valuable suggestions; more than 70 percent indicated that the expenses were reasonable.
  • Two thirds used independent education agents rather than institution sponsored agents.
  • Two-thirds of students who use institution-sponsored agents paid them. One in five paid them more than USD $1,000.
  • Top concerns among those who worked with independent agents focused on quality control; while top concerns among students who worked with sponsored-agents revolved around conflicts of interest. Specifically, students complained about misrepresentation of information about universities, untimely feedback, document fraud, unclear fee structures, false promises about guaranteed admission, and unrealistic expectations about on-campus jobs or scholarship opportunities.

41% of students in East Asia use Agents:Agent Use Trends by Region

In the United States, the use of commissioned agents in student recruitment was considered unethical by the National Association for College Admission Counseling and banned until 2013. After years of debate when they revised their position to permit institutions to commission recruitment agents abroad. Bridge Education Group in their 2016 reported nearly half of U.S. institutions directly or indirectly now use international agents. Additionally an additional 40% are considering using international agents.

However the Middle States Commission on Higher Education in 2017 proposed a policy prohibiting the institutions it accredits from providing financial compensation to international education agents. Whether this will becomes policy remains to be seen but it shows the use of commissioned agents is still under debate.

The view of Edu Alliance is that agents provide a needed service to students and to higher education institutions worldwide. However the school must be careful in whom they select and make sure to provide the same level of oversight you do with your staff admissions personnel.

If your institution is using or considering the use of agents I would recommend reading the full WES report to gain additional perspective. Its called: Decoding International Students’ Experiences with Education Agents: Insights for U.S. Institutions