Higher Ed P3 101 – Part 6: Common Misconceptions

This is the sixth article in a 7-Part Series. Read the previous articles:

Whether you’ve heard good or bad things about public-private partnerships (“P3s”), chances are you’ve heard something incorrect.

Here are some misconceptions we come across frequently—and the real story:

1.  Soon every project will be a P3. P3s are the right answers for some projects, but in other cases they’re best avoided. While we’ve seen more and more universities express interest in P3s over the years, P3s will never fully replace traditional models, nor should they. P3s are not always more cost-effective, not always faster, and not always better. They are simply one of many ways to bring a project to fruition, and the more options a university has, the better. We work with a lot of universities—hundreds of them. Some express an interest in P3s, and we go on to recommend a P3 development structure. Others express an interest and we steer—and strongly steer—them away from a P3. P3s are not a silver bullet.

2.  P3s are privatization—or are equivalent to privatization. If a university wants to fully privatize its assets, it can do that. It can fully relinquish ownership over an asset, and the private sector entity can fully own and operate the asset. But that’s not a P3. During the period of a P3 (generally 30–80 years depending on the deal structure), the private sector partner has leasing rights to the asset, and can manage it as laid out in the agreement. That’s not full ownership, and as a result the private sector partner does not have typical ownership rights like selling or mortgaging the asset.

3.  P3s in higher education can only be used for student housing. While P3s in higher education mostly originated in student housing, the model has successfully been applied to a variety of assets. For example, we’ve worked on and seen P3 projects for the following asset types: mixed-use featuring retail, campus rec, hotel and conference centers, campus edge projects, student unions, hospitals, health & wellness facilities, and workforce/faculty/staff housing, among others. Energy P3 deals are also now starting to gain traction in the sector.

4.  P3s are only for new construction. While much of the P3 work we’ve seen results in new development, there is a fair amount of modernization and maintenance work that takes place through P3s.

5.  If our university does a P3, we’ll have no control over the project. A university can retain as much or as little control as it wants over the development of the asset, depending on the type of P3 development structure selected. Once the asset is built and in operation, the university can retain control either by remaining the operator or, if the private sector partner is the operator, tracking the asset’s performance against metrics worked into the P3 agreement. If the private sector partner cannot meet the agreed-upon performance metrics, the university can react.

6.  In a P3, the private sector partner funds the project. The private sector doesn’t fund the project, but finances it—a minor difference in language, but a huge difference in reality. The private sector partner can source funds from a variety of areas, including traditional debt financing, private equity, and economic development incentives.

7.  The only reason universities pursue P3s is the financing help. Private financing can be a huge draw—that is a definite. Beyond private financing, though, there are many reasons universities look to P3s, including risk transfer, faster project delivery, minimization of costs throughout the asset’s lifecycle, etc. Remember that a P3 is so much more than just building or renovating an asset; usually it’s a multi-decade relationship.

8.  If my university does a P3, my job will be cut. Nothing is guaranteed, of course, but our experience has not shown this to be the case. Often a P3 is even a means for empowerment and professional advancement, as the university will need educated employees to oversee the developer’s design, construction, financing, operation, and/or maintenance of the facility.

If you’re interested in learning more about P3s, we recommend reading Higher Ed P3 101 – Part 7: The Value of an Advisor