Annual Privatization Report 2013

Higher Education Public-Private Partnerships Update

Subsection of Annual Privatization Report 2013: State Government Privatization

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In the wake of the 2008 recession, many states have seen a combination of budget cuts in higher education, increased tuitions and growing deferred maintenance across their public university assets, each of which presents a threat to the future sustainability of the state’s higher education system. These fiscal pressures are prompting state university systems to explore innovative service and asset delivery models to help reduce costs, better maintain facilities and create new tools to finance and construct new and modernized academic buildings, dormitories and other campus facilities.

Some systems and schools have turned to the private sector to achieve these goals in various ways, ranging from the outsourcing of specific operational services to public-private partnerships (PPPs) that bring private sector capital and expertise to bear on the financing of university facilities. Noteworthy recent developments on privatization and PPPs in higher education in 2012 include:

  • Ohio: In September 2012, The Ohio State University (OSU) announced that it had reached financial close on a groundbreaking 50-year, $483 million lease of its parking assets (totaling over 35,000 spaces in garages, surface lots and metered spaces) to a private consortium composed of QIC Global Infrastructure—an Australian infrastructure investment fund—and parking operator LAZ Parking.1 The bulk of the $483 million upfront payment will be placed into the university’s endowment and invested to support the long-term academic mission of the university. The investment is expected to provide over $3 billion for academic initiatives in coming decades, to be used for scholarship support, academic hiring and similar educational uses. Under the deal, the concessionaire will operate, maintain, manage and collect revenue from the parking spaces for 50 years, and the deal caps rate increases on parking at 5.5 percent annually for the first 10 years of the lease.

    OSU's parking deal is the first transaction completed as part of a larger, comprehensive review of all of its non-core assets to see how they could be leveraged to generate additional revenue to support the university's academic mission. After parking, the OSU administration has announced that it will review the university’s airport, golf courses and other assets to determine if leasing or selling them could benefit the school's core mission.
  • Indiana: Following on the heels of Ohio State University’s $483 million parking asset lease, Indiana University’s board of trustees announced in October 2012 that it had hired Goldman Sachs to serve as a financial advisor to evaluate a potential 30- or 50-year lease of the school's parking assets on its Bloomington and Indianapolis campuses. University officials began to explore a parking lease in early 2012, seeking a potential deal that would defease $75 million in current university parking-related debt and generate an upfront payment totaling over $250 million. Indiana University President Michael McRobbie told the Associated Press in October 2012 that, "I think we have to take a look at this […] Every single source of revenue open to the university is open to threat. So we have to be creative."2 A final decision on whether or not to move forward with a parking system lease is anticipated by March 2013.
  • Texas: In June 2012, Texas A&M University announced the privatization of its campus dining, landscaping and building maintenance services in a contract officials expect to yield approximately $260 million in cash and savings for the university in the coming decade, through both cash payments by the vendor and avoided expenditures on staff, benefits and other operating costs.3 In a separate move, the university issued a request for qualifications in October 2012 to private firms interested in taking over management and fixed-base operator services at the university-owned Easterwood airport.
  • Kentucky: In October 2012, the University of Kentucky announced plans to enter into a PPP for the development of five new residence halls through 2014 as part of the university’s ongoing effort to add thousands of new dorm beds.4 Under the agreement, the university’s private partner—the real estate firm Education Realty Trust—will finance the construction of new dorms, with the private partner managing the new housing and recouping its investment via the collection of student housing fees over the life of the development agreements. Earlier in 2012, the university and Education Realty Trust broke ground on their first privately financed housing project, the new, 601-bed, $25 million New Central dorm.
  • New Jersey: New Jersey Governor Chris Christie signed legislation (Senate Bill 2501) in August 2012 to grant explicit authority to universities to enter into public-private partnerships (PPPs) with private developers to finance, construct, operate and manage new facilities under long-term lease agreements. The law allows universities to lease the operation of revenue-producing facilities (e.g., dormitories) to private entities in exchange for upfront financing to construct new academic buildings.

    The law follows on the heels of several recent higher education PPPs undertaken in the Garden State. In June 2012, the Rutgers University Board of Governors and Board of Trustees approved a $295 million PPP for a major campus development project that includes a 150,000-square-foot academic building, a residential honors college, a new dormitory and a new parking deck. Under the deal, the New Brunswick Development Corporation would develop and operate the facilities and be repaid over 30 years through a combination of student residential and dining fees and general university operating revenues.

    That same month, Montclair State University announced a new PPP to develop a $90 million combined heating, cooling and power system for the campus. Energenic-US, LLC will finance, design, build, operate and maintain the plant under a 30-year lease agreement. The new PPP follows the completion of the university’s first PPP—The Heights, a new $211 million, state-of-the-art residential complex—in 2011.
  • Nebraska: In September 2012, the University of Nebraska-Lincoln announced plans to privatize its aging University Health Center, partnering with a private entity to finance and build a replacement facility. After releasing a request for proposals that same month, the university received one bid from the local nonprofit healthcare provider Bryan Health, and in December a bid evaluation team recommended that the university move forward into negotiations with the bidder. Under the proposed privatization, Bryan Health will take over operations of the existing health center as it builds a new $14 million facility to open in 2014. The nonprofit has committed to retaining all existing staff for at least one year, and student health fees would be frozen through the spring of 2015. University officials expect to present a final contract to the Board of Regents for approval in January 2013.

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Endnotes

1 For more information and resources on The Ohio State University’s parking system lease, see http://www.osu.edu/parkingproposal/.

2 Associated Press, "IU leaders question wisdom of parking lease plan," Indianapolis Business Journal, October 12, 2012.

3 Jim Vertuno, "Texas A&M awards contract to privatize services," Associated Press, June 21, 2012.

1 "UK to build five new dorms through private management deal," The Courier-Journal, October 15, 2012.

Leonard Gilroy is Director of Government Reform





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