Alternative procurement strategies for North American Higher Education infrastructure are on the rise
5 Dec 2017
Along with the EU and the UK markets, US and Canadian university infrastructure procurement has more recently shifted to better take into consideration some of the best practices found in Public-Private Partnerships (PPP or P3) and other alternative forms of procurement. This paper aims to understand and situate this recent trend with the review of select recent and upcoming P3 transactions procured by higher education institutions across North America.
Historically, most common types of P3s have been for civil infrastructure: roads, tunnels, bridges and transit projects (also often referred to as horizontal projects). Some of these projects are closer to concessions with fully transferred revenue risk (e.g. tolls, ports, airports), while others are based on the availability of the asset. A typical P3 would essentially group: design, construction, financing, operation and maintenance in one central partnership agreement whereby the private partner would be paid a predetermined availability fee to operate and/or maintain the asset and ensure it is available for public use throughout its lifecycle.
In recent years both Canadian and US authorities have shown that other asset classes could be successfully procured as P3s or using Alternative Financing and Procurement (AFP), especially vertical infrastructure (i.e. public buildings and facilities). Often tagged as social infrastructure, this category includes courthouses, detention centres, hospitals, long-term care centres, accommodation, office buildings, stadiums, and other specialized facilities (water, wastewater, recycling and waste management facilities).
Traditionally outright private concessions have been used for numerous student housing projects in North America, typically leaving a significant amount of risk (and leadership) to private concessionaires tasked with building and operating secondary university assets such as student accommodations or parking facilities. In some cases, the private partner would fully fund the project using private capital (debt and equity) and the concession agreement could include the ability for the private partner to set prices, plan more or less aggressive maintenance schedules and differ any upgrades to ageing facilities. Occasionally when private sector and university interests are clearly opposed, contractual tensions may lead to litigation.
Diversity in types of assets being procured as P3 by North American Universities
More recently, however, higher education institutions in North America have broadened their procurement policies to allow for other types of contracting mechanisms (including P3) to be used for a wider range of strategic assets which are fairly common to the P3 marketplace, but until recently, less so to higher education institutions.
Diversity in types of P3 structures
While some P3s are closer to full concessions, with the creation of a special purpose vehicle tasked to raise private debt and equity (DBFM/DBFOM) and with pure revenue risk, several recent University projects look at alternative P3 structures:
Availability-based DBFM/DBFOM with private debt and equity, but with no revenue risk for the private partner. Rent/revenue can be collected on behalf of the university by the private partner or by a third party
Availability-based with some revenue sharing mechanisms between private and public partners (such as pain share, gain share provisions)
DBF with separate Facilities Management (FM) or maintenance contracts with no revenue risk for the FM operator. Again, here the FM operator can still be tasked to collect revenue on behalf of the University.
Availability-based DBOM contracts with monthly progress payments during construction and OM payments during operations (with no revenue risk for the private partner)
The flexibility and adaptability of P3 procurements to meet the project’s needs could explain in part its recent success with universities; allowing them to leverage existing in-house FM divisions instead of having the function transferred to a private partner, or better use funds if the university can access specific public grants or contributions instead of overly relying on private capital.
This characteristic can become a key asset for a successful procurement, especially when projects involve multiple levels of government, or even transit authorities or multiple municipalities.
Diversity in the location of the transactions
According to the Federal Highway Administration (FHWA), 35 U.S. States, District of Columbia, and one U.S. territory that have enacted statutes that enable the use of various P3 approaches for the development of transportation infrastructure. According the National Conference of State Legislatures (NCSL), 22 of these states have legislation that also covers social infrastructure. Examples abound of innovative solutions used by states and localities while capitalizing on the P3 model for a variety of infrastructure needs.
The following map provides an overview of recent or upcoming higher education P3 transactions in North America.
Recently, at the 2017 Higher Education P3 Summit (San Diego) several smaller higher education projects were showcased issuing some tax-exempt financing structures compatible with some P3 models, the 63-20 Bonds.
Revenue Ruling 63-20 allows a not-for-profit corporation backed by a local government to issue debt to finance a facility for tax exempt purposes. Conditions include:
A local governmental entity endorses the financing
The facility will be occupied by a governmental or tax exempt entity
The facility reverts to the ownership of the endorsing local governmental entity at the retirement of the debt
Similarly, at a recent Casgrain & Company Conference in Toronto, Panellists focussed on Student Accommodation and University Infrastructure in Canada confirmed a similar trend across provinces, with several Canadian universities looking at P3 procurement as an effective tool to better align public and private interests throughout the asset lifecycle and ensure only transferable risks are handed over to the private partner.
Operis’ first education P3 transaction dates as far back as 1999 with the Penweddig School P3 in the United Kingdom. Since then we have successfully delivered services on over 160 Education P3s internationally, of which 7 have been in North America including Ohio, Alberta, Saskatchewan, Ontario and Quebec.
Please feel free to reach out for more details on our Higher Education P3 experience.