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Business Officer Magazine

A Primer on Public-Private Ventures

A study of three housing facilities at the Georgia Institute of Technology, Atlanta, identified several pressures on the public-private venture model that must be carefully balanced, as well as other key factors that affect the way institutions effectively manage such partnerships.

By Jennifer H. Stephens

Public higher education in the United States has become more privatized as a result of a number of factors, including (1) students and parents taking on a greater portion of college costs, as costs increase and state and federal funding declines; (2) decision making becoming increasingly oriented toward activities linked to specific revenue streams; (3) inadequate funding leading to workforce restructuring and outsourcing of nonacademic services; and (4) higher education being influenced more by the market and less in the pursuit of the public good.

One way the academy has adapted to this new environment is through the use of the public-private venture funding model. PPVs (sometimes referred to as public-private partnerships, or P3s) are increasing rapidly in Georgia's higher education system, and yet little is known about the implications of their use. This issue is significant because billions of dollars are invested in colleges and universities in Georgia alone. Higher education leaders must be able to use privatized financial tools and understand the best conditions for such ventures.

As the focus of my dissertation, "Significant Themes Threading Through Discussions on Public-Private Ventures," I conducted a qualitative case study of the Georgia Institute of Technology (Georgia Tech), Atlanta, and specifically three of its housing facilities—two that are PPVs and one that is not. This study identified a number of findings about the breadth and extent of PPV use at this institution. By understanding some of these implications, institutions may more effectively deal with control, oversight, and responsibilities associated with public-private ventures.

A Way to Close the Funding Gap

The public-private model has been in use by state and federal governments for some time. Basically, it is an arrangement in which a government and a private entity, for-profit, or nonprofit, jointly perform or undertake a traditionally public activity. It is defined more narrowly as a complex relationship—often involving at least one government unit and a consortium of private firms—created to build large, capital-intensive long-lived public infrastructure, such as a highway, airport, public building, or water system, or to undertake a major civic redevelopment project. Private capital and management of the design, construction, and long-term operation of the infrastructure is characteristic of such projects, along with eventual public ownership.

Higher education can apply such privatization efforts to adapt to their constrained economic environment. A good example is the Public-Private Venture Program of the University System of Georgia (USG). As of June 30, 2012, the USG reports $3.6 billion in outstanding bonds, representing 175 privatized projects in the USG, all of which were built after the program began in 2000. Each of these PPVs represent a facility that was constructed on a public campus.

In the past, the construction of USG facilities and buildings was usually funded by general obligation bonds issued by the state of Georgia; however, during the early 2000s, the Georgia General Assembly decided to only fund college or university construction projects for classrooms, libraries, or research laboratories. This left a funding void for student housing facilities, food courts, parking lots, recreational facilities, student unions, and stadiums. The USG created the PPV program to fill this void.

Evaluating PPV Progress

The single case study design helped me examine the PPV model in use at Georgia Tech, an urban public research university. It also allowed me to study different financial models enacted at different times but at the same university. Because university conditions and culture remain relatively similar over time, findings better illuminate the implications of using the different models.

In determining ways that Georgia Tech has used the PPV model, I selected housing as a facility type, since it was the most prevalent type used on Georgia's public campuses. I specifically chose examples of housing facilities using both traditional and PPV funding models. Tenth and Home Housing (built in 2004) and North Avenue Apartments (built in 2007) were built using the PPV model; and Woodruff Housing (built in 1984) was built using a traditional, state-funded or nonPPV model.

The data collection phase included formal, semi-structured interviews with 10 senior administrators, informal interviews and communication, as well as a review of existing documents-in all, 40 documents encompassing 785 pages that were then coded and analyzed.

Seven Significant Themes

The data analysis surfaced seven themes or elements that relate to public-private partnership dynamics.

1. Determination of control, responsibility, oversight, and autonomy. The dominant theme that emerged from the interview and document analyses revolved around issues related to control, responsibility, oversight, and autonomy. Whenever the public sector becomes more privatized, discussions arise as to who is in control, who has oversight, who is the manager, what is outsourced, who is the monitor, and what happens when there is poor quality or poor performance. These questions persisted throughout all PPV discussions at Georgia Tech.

The PPV model that was introduced in Georgia in the late 1990s led to struggles, as each involved agency attempted to attain the right levels of responsibility, control, oversight, and autonomy in light of the introduction of a new private funding entity into the equation. When a private foundation is involved in a project and has financial control, what is the appropriate level of responsibility and oversight for the institution and the USG? There are benefits to the state and the institution in terms of not having to take on debt to fund the facility. However, there are also costs associated with maintaining a level of responsibility and oversight for a facility over which institutional leaders have limited control.

From 2010 to 2012, the USG increased its oversight of the PPV program as a result of self-imposed pressures and external pressures from bond rating agencies. It took on more responsibility for the projects and increased the accountability of the institutions by requiring them to conduct a more rigorous justification, review, and due diligence process for new PPVs. The USG acknowledged that while a PPV does meet a need by utilizing a market model approach, the system is not excused from oversight and responsibility.

2. The need to balance risk and debt. In the study, the numerous documents associated with debt monitoring and tracking indicated the importance of questions about reasonable levels of debt and what entities would assume the debt. There was discussion of debt limits for certain agencies and concern about debt ratios at various institutions. For higher education institutions, the concern over increasing costs for students was in part based on the risk that rising costs might force the institution to assume more debt in the future. As Georgia Tech aspires to grow its facilities, and as costs shift from group to group when new financial models are introduced, discussion around debt and risk becomes central.

3. Debate over how closely to follow the market model. Some see a great advantage in allowing the private sector to address issues of customer demand. The private sector is seen as more efficient at doing this, and such a shift allows institutions to focus more intently on their academic mission.

My findings showed that Georgia Tech is attentive to customer demand. When determining whether to add a housing facility, great effort went into identifying the level of demand and the importance of the facility in increasing competitiveness. The Tenth and Home facility was created to provide international customers with adequate housing, understanding that a key component in achieving the institution's academic goals was to increase the number of international and graduate students in the areas of science, technology, engineering, and math.

Some interviewees embraced the market model wholeheartedly and saw the need to expand its use in public higher education to improve efficiency. Others expressed concern that the market model was capturing higher education's attention at the expense of its public mission and without delivering any real savings—only shifting costs.

There was general acceptance that the market model was being applied to the academy and would continue to be used for the foreseeable future. State funding cannot fully support the future of public higher education, so a new financial model is needed to provide alternative solutions and new revenue streams.

4. Effects of decreased state support. The study found an underlying assumption that states would continue to disinvest in higher education—that this is the understood "new normal." There was a high level of awareness of the funding gap created by this decrease and the fact that students and their families were paying more of this gap than any other group. The most evident example was the state's decision in the late 1990s to no longer fund any facilities outside the academic core. This decrease in support led the USG to create the PPV program to fill the funding gap.

With this new public-private mechanism, student fees could be channeled through a private entity to finance new facilities like housing. There was a general understanding that even though the state's support has decreased, costs have not decreased, and so alternative revenues must be pursued for the organization's survival. A comment from a Georgia Tech administrator summed it up: "The PPV is just a different method of funding. It's a different way of accomplishing something. The costs are being shifted. Tuition has to increase, if state funds decline. You have to continue to support facilities and meet the needs of students. PPV or no PPV, it's just a matter of how you get it done."

5. Strategic planning and alignment of financial models. This issue appeared to be a near mantra for officials at Georgia Tech, who emphasized connecting the strategic planning process to PPVs or any other type of financial model being used. Subthemes connected to this idea related to the institution's mission, capacity, justification for new facilities, and retention goals.

At Georgia Tech, the comprehensive strategic planning process occurred first, followed by subsequent funding discussions and facilities construction. The issues of mission (what do we do for our students?), capacity (how many students can we serve and house?), and retention (how many students can we keep?) were at the heart of the strategic plans underlying the rationale for both the traditional funding model and the PPV model.

The three housing facilities researched in this study were strongly connected to the comprehensive, ongoing planning process that permeated the Georgia Tech culture. Even PPVs that were outside the scope of this study, like the Technology Enterprise Park, the Biotechnology Campus, and Technology Square, were all rooted in a decade of strategic planning. Many of the documents reviewed were presentations of plans that took several years to complete and involved numerous institutional offices. All the facilities on campus and all the funding models used for each facility were connected to the master plan.

6.  The future of public-private ventures. While the PPV model has been a successful alternative to the state-funded model, it has been used to such an extent in Georgia that efforts are now underway to strengthen it, provide appropriate restrictions on its use, and safeguard it as an alternative for the future. With a large amount of debt in place, the USG is focused on fortifying the current program. The PPV program is meeting a need and should continue, but at a more measured and controlled pace.

That said, in November 2014, the USG entered into a partnership in which a third party, Corvias Campus Living, will provide on-campus housing for nine USG institutions over the next 65 years. The USG will retain oversight for the partnership, and the institutions will be responsible for residence life programming for students. The initiative's goal is to maintain the affordability of housing, while reducing student housing debt. The $517 million agreement will develop 3,683 new beds and manage 6,195 existing beds. (For more on this long-term partnership, see "Debt Dynamics" in April 2015 Business Officer.)

7. The triangle of pressure: oversight, control, and responsibility. Most significant of the study findings was the identification of three distinct pressures present in the PPV model-control, responsibility, and oversight-or a "triangle of pressure." This concept emphasizes the three elements that must be carefully balanced when engaging in partnerships that involve both public and private entities in public higher education. [See figure, The Triangle of Pressure.]

The Triangle of Pressure

The "triangle of pressure" concept helps us visualize the sometimes conflicting factors that organizational leaders experience as they navigate through the growing privatization of public higher education—tensions seen throughout the entire process of considering, setting up, implementing, and monitoring a PPV. One USG administrator described the motive behind this effort to develop a new funding mechanism, which is rooted in a desire to increase efficiency, minimize risk, and meet customer demands:

"We think there may be value in a new model, particularly for housing. We think it's possible that private sector [companies] might do a better job at this than we can. They might build it smarter, they might maintain it better, they might be more efficient in how theymaintain it. We think there may be a way to return some value to students in that way and not have the debt on our books."

As higher education applies the market model and seeks alternative revenue streams, private entities play a larger role in a once primarily state-funded industry. The tensions over organizational oversight, responsibility, and control are consistently at the center of the discussion.

As private entities play an increasing role in what has traditionally been a public activity, the pressure points are changing, which will then change the responses and choices of public higher education institutions in the future. It is important to consider the implications of these pressure points and clearly define in public-private relationships who has what level of responsibility, control, and oversight in each situation. Consideration must be given to how the market model approach is changing the way that public higher education operates, and research is needed on what financial models may be best to balance the responsibility, oversight, and control needed in today's economic environment.

Gains and Losses

The PPV model provides a way to meet customer demands and build facilities in a responsible manner that minimizes risk to the institution and the state. Additional revenue streams are gained and, accordingly, reputation is boosted. These facilities and amenities most likely would not have been built, if this partnership model had not been used. One USG administrator describes the "gains" this way:

"You get to provide things that you wouldn't otherwise be able to provide. There's probably a sense out there that ... at least some students are going to be sold on attending your institution, because you have the kitchenette, and the climbing wall, and the performing arts center. Right—these are the amenities that they expect ... spreading the cost out among that large of a population, you aren't marginally charging that much additional to provide those sorts of things to a whole population of students. It hasn't hurt the state's credit rating so ... that certainly is a positive thing."

While gains do occur from using the PPV model, there may also be some loss. At the top of the "loss" list is control. As public higher education increasingly involves private entities and relinquishes a large amount of financial control, there is clearly a new tension around how much oversight and responsibility it has for those services that were traditionally provided by the state but are now provided by private organizations.

Along with control, flexibility is also lost. A formal and contractual partnership is a financial agreement that must be funded by students for decades to come. This could impede the ability of institutions to change course in the future or adjust their strategic plans.

It begs the question: "If control and flexibility are lost, will public higher education be able to adequately pursue its mission in the future, given the added distraction of constantly needing to identify new and alternative revenue streams?"\

Another challenge that has resulted from the implementation of PPVs involves the tremendous proliferation of their use, which has grown to such high levels and at such a rapid rate that oversight and monitoring by the USG has had to intensify during the past three years. While the PPV program seems to be a good alternative, institutions must apply appropriate restrictions to ensure that the model can continue to grow in the future, with reason and measure.

One overall benefit that has resulted from the implementation of PPVs has been the evolution of a discussion focused on identifying new, more privatized models to be used in the future in addition to the state-funded model and the PPV model. Georgia is actively developing a new, more privatized funding mechanism to help meet the future needs of public higher education.

The trend of privatization in the academy is here for the foreseeable future, and leaders should carefully consider the implications for their institutions, their state systems, and their students and plan accordingly.

JENNIFER H. STEPHENS is associate vice president for public affairs at Georgia Gwinnett College, Atlanta.

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