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November 21, 2019
There is a nationwide demand for new facilities across the higher education spectrum, and the Pacific Northwest is no exception.
The academic arms race to attract the best and brightest talent, including students, faculty and staff all of whom are seeking well respected institutions with state-of-the-art facilities in which to learn, research, teach, study and live has colleges and universities searching for effective strategies to help them bring world-class structures to life faster and gain a competitive edge.
Enter public-private partnerships.
Public-private partnerships (P3s) can be thought of as another arrow in the quiver of procurement. P3s allow the public sector to deliver much-needed facilities more efficiently than traditional methods and can include integrated development, financing, design-build, and operations and maintenance all offered under the responsibility of one partner.
Under P3 delivery, the private partner considers the project’s whole life cost, including financing, long-term maintenance and refurbishment costs not just the upfront cost of delivering the facility. By integrating design-build, financing and maintenance all under one umbrella, the actual cost stream over time is lower than if the public entity undertook those efforts on their own.
As one example, it would be a greater first-cost investment to install terrazzo flooring than it would to install carpet. But when you consider that carpet needs to be replaced every five years, the terrazzo becomes more cost effective in terms of the 40-year investment.
P3s are often used for large-scale public projects, such as transit, infrastructure and hospitals, and can also be particularly advantageous for universities. Here’s why:
• Cost control: Under P3 delivery, the price for the building is guaranteed upfront, including forecasted life-cycle costs. Each agreement is different and may involve different partners, but at a minimum the developer will deliver a turnkey facility with a long-range plan for maintenance.
• Maintenance risk transfer: Under a popular P3 model, the private partner accepts the burden of long-term maintenance of the building. Everything from capital improvements to window washing and filter changes can be covered under a P3 operations and maintenance contract.
Oftentimes, higher education institutions have binders filled with a list of deferred maintenance projects waiting for capital allocation. Those binders tend to collect dust as projects wait for funding. In contrast, in a P3 project, the university is contractually committed to pay the private partner to maintain the facility. This solution ensures that the building will be maintained and handed back to the university in a high-performing manner.
• Variable financing options: The private developer may offer to privately finance the project in order to mitigate other financial obligations on the books for the university or free them up to make other investments. Nonprofits are often involved in P3 financing and can serve a variety of roles, including being a financing conduit for bonds or as a partner to the university’s real estate foundation.
• Guaranteed schedule: Under P3 delivery, the developer guarantees the delivery date of the facility or they are obligated to make the investments needed to keep it on track. Universities are driven by their academic calendars and need to ensure their facilities are delivered with date certainty.
• Risk allocation: On a P3 project, risks are allocated to the partner public or private that is best able to price and manage those risks. The opportunity to negotiate risks efficiently drives better value for the university over the long term.
Every state has its own set of regulations for P3, which poses a challenge from a developer’s perspective. In Washington state, the current guidelines cover only transit infrastructure projects through the state Department of Transportation. Higher education institutions often develop their own P3 guidelines in their procurement process.
Having successfully delivered a number of P3 projects for university clients across the country, Edgemoor has identified several best practices that university leaders should consider ensure success:
• Ensure total buy-in and approval from your board and senior administration prior to starting the P3 procurement process.
• Hire third-party advisors who have experience in public-private partnerships. These firms can assist in the procurement, contract negotiation, and project oversight and help a University navigate the P3 process smoothly.
• Dedicate the proper internal personnel to manage the P3 process.
• Identify funding sources to ensure you are able to make payments on the asset once it is delivered.
• Create a two-stage procurement process to identify the best partner. This benefits the university because short-listing at the RFQ stage ensures that technically qualified teams will be responding to the full RFP criteria.
• Conduct proprietary, one-on-one meetings during the RFP process with each individual proposer to further communicate critical project elements. That provides an opportunity to hear from the proposer how they would address what is most important to your university.
•Select a partner based on best value, not lowest bid. The university is committing to a 30- to 40-year relationship and should base its selection criteria on a variety of factors, including design, price, schedule, minority- and women-owned business participation, maintenance approach and financing.
Increasingly, higher education institutions are looking to partner with private developers to realize greater certainty in the delivery and long-term performance and value of their assets on campus.
Public-private partnership solutions fosters collaborative and much-needed relationships between academic and private institutions, creating a winning solution for all.
Geoff Stricker is senior vice president and senior managing director at Edgemoor Infrastructure & Real Estate. Brett Earnest is vice president at Clark Construction Group, Seattle.