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Reason Foundation

University of Kentucky Smart to Explore Private Sector for New Campus Housing

Public-private partnerships are saving taxpayers money and helping universities provide better services.

Leonard Gilroy and Harris Kenny
December 15, 2011

Ongoing state budget deficits and challenges are putting pressure on state university systems and prompting them to explore ways to cut costs. Higher education officials are desperately seeking ways to keep services, maintain facilities and find less costly and more efficient ways to build and modernize the dorms, academic buildings and other capital intensive facilities needed. To do this, some are turning to public-private partnerships, arrangements in which public entities contract with private sector firms for the financing, design, construction, operation and/or maintenance of public assets.

Universities across the country are already using public-private partnerships to build and maintain a range of student housing, academic buildings and other campus redevelopment projects. Broadly speaking, these partnerships offer a powerful way to put the private sector to work in the business of serving the public interest, lowering long-term taxpayer costs and delivering better facilities to serve the public education mission.

The University of Kentucky (UK) may become the latest university to embrace public-private partnerships. Yesterday, the university announced that UK President Eli Capilouto told its board of trustees the school would begin negotiations with a Memphis-based company to potentially upgrade and expand over 9,000 residence hall beds over the next decade. After reviewing vendor responses to an October request for proposals issued by the university, an eight-member selection committee composed of faculty, staff and students selected Education Realty Trust Inc. as the preferred firm to potentially take over operations of UK’s existing 6,000 residential beds, ultimately replacing them with new, updated facilities that could accommodate an additional 3,000 beds over the next 10 years.

UK officials will spend the next several weeks negotiating with the firm to determine whether a public-private partnership for residence hall operation is the best path forward for the university and students, or whether UK should finance and operate the revitalization project and facilities itself.

This exploration is a smart move, and if UK ultimately chooses to move forward with a public-private partnership (PPP), they will join a number of their peers and can learn from their experiences. For example, some noteworthy recent developments on PPPs in higher education include:

To be sure, public-private partnerships are a paradigm shift for university systems that are used to relying on appropriated funds and traditional debt financing to deliver assets and services. But moving them towards more cutting-edge procurement models that offer greater flexibility, accountability and give the private sector a much more direct role in the financing and operation of university facilities can be a big win for students, schools and taxpayers.

Oftentimes, these PPPs see the private sector coordinating the financing of university housing facilities upfront and, upon construction, operating and maintaining them on behalf of schools through a long-term lease. A 2007 Reason Foundation study, Privatizing University Housing, explains the typical university housing PPP model further:

[U]niversities have turned to long-term land lease arrangements with private development companies for construction and management of on-campus residence halls. In this framework, a university leases land that it owns to a for-profit or non-profit corporation for a period of 20 to 40 years. The ground lease includes specific rules governing land use as well as construction, operation, and maintenance requirements for student housing on the property. The company typically owns the land for the determined period and collects student rent payments. Usually the ground lessee pays the university net revenues once operating expenses, debt service, and management fees are paid.

As the Reason report explains, this approach allows the private partners to recoup student housing fees to cover their debt service and operations, allowing universities to avoid these costs and stretch their tuition dollars and appropriated tax funds further. Further, the report explains that in 1996 the U.S. Congress authorized the U.S. Department of Defense to launch a large-scale, ongoing program—the Military Housing Privatization Initiative—that has successfully been using similar PPP models to modernize over 180,000 on-base military housing units across the country.

A June 2010 white paper by the Bay Area Council Economic Institute identified several other reasons why universities should explore PPPs for capital projects. For example, the paper notes that PPPs can deliver 15-30% life-cycle cost savings for operations and maintenance, creating more room to fund activities more central to a university’s academic mission. Further, PPPs can be used to deliver projects significantly faster than under typical public procurement methods, as they are designed from the beginning to streamline processes and minimize bureaucratic checkpoints and delays.

Given these benefits and the positive experiences from public higher education systems across the country, public universities in Kentucky and elsewhere are smart to evaluate their planned capital projects and their potential viability for public-private partnerships.

Public-private partnerships can save taxpayers money and provide better dorms and facilities for students, while also freeing schools to focus on their core mission: providing quality education.

Leonard Gilroy is the director of government reform at Reason Foundation. Harris Kenny is a policy analyst at Reason Foundation.

Leonard Gilroy is Senior Managing Director, Pension Integrity Project &
Director of Government Reform

Harris Kenny is Policy Analyst

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