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Indiana University

IU trustee says now is the time to explore public-private partnerships

February 26, 2012
Bloomington, Indiana -- Courtesy of HeraldTimesOnline.com
By Mike Leonard

Investors around the world are sitting on piles of money, looking down on a low-yield investment market.

American universities are experiencing declining state support but boast valuable assets that are attractive to investors and could provide a revenue boost for the schools. Assets such as parking garages, power plants and student dormitories.

Those dynamics are worth looking at, says Indiana University Trustee William H. Strong, who delivered a presentation on public-private partnerships at the trustees’ recent meeting in Indianapolis.

Strong is managing director and co-CEO for the Asia Pacific arm of Morgan Stanley, one of the world’s leading asset management and financial services firms.

“In a resource-constrained environment, universities and municipalities are going to have to look at the most efficient way to finance their needs. One of the possible tools is the leasing of assets known as concessions,” he said in a phone interview last week. “It may not make sense in particular situations, but it might in others.”

Strong steered clear of the terms “privatization” and “outsourcing” — terms often used interchangeably with public-private partnership — and emphasized that he’s talking about lease agreements that can be negotiated to detail price parameters, service expectations and whatever concerns a university or municipality might have.

“In this resource-constrained environment, educational institutions, states and cities are going to have to consider what is their core mission,” Strong said. “The mission of a university is to educate its students. It’s not necessarily to operate certain kinds of assets.”

The Ohio State University might be looking at a cash influx in the neighborhood of $375 million or more by leasing out its parking operations, Strong said.

Those sorts of numbers were enough to get the IU trustees to agree to direct Chief Financial Officer Neil Theobald to determine what assets IU has that might be candidates for public-private partnerships.

“Are there any assets that have the right attributes for this technique? If the answer is no, the process stops there,” Strong said. “If there are assets that come out of Neil and (Treasurer MaryFrances) McCourt’s work, then the next step is (asking), would it financially make sense? I see this as a series of steps where each step is a condition before we go to the next step.”

Among asset qualities Strong identified as good public-private partnerships were limited competition, a long useful life, stable earnings, strong profit margins and favorable regulation. Among potential candidates for universities, Strong said, are parking infrastructure, student housing, university-owned hospitals and energy plants.

Not always the answer

Sergio Fernandez, an authority on privatization and public management in IU’s School of Public and Environmental Affairs, cautioned that despite the allure of the up-front money investors offer, public-private partnerships are no panacea.

“There are seemingly as many examples of failed privatization initiatives as ones of success,” he wrote in an email exchange. “Indeed, the empirical evidence reveals that gains in efficiency from privatizing are on average much smaller than what many expect, and such gains all too often come at the expense of reduced quality and level of service, especially when privatizing ‘soft’ services that are hard to specify and measure and for which few bidders can be found.”

Fernandez said one leading scholar on the subject has said that the irony about privatization is that it takes excellent government to make it work. Contingencies such as the degree of goal alignment between principal and agent, the amount of competition and levels of task uncertainty and asset specificity must be taken into consideration when deciding whether or not to privatize when structuring and managing privatization initiatives.

“Moreover,” he pointed out, “privatization requires public managers with the capacity to carefully analyze feasibility, clearly specify requirements and expectations, rigorously screen bidders, develop effective incentive systems, closely monitor contractor performance, and resolve technical and legal disputes in a constructive manner.

“In short,” the SPEA professor contended, “privatization is a policy instrument that requires considerable knowledge, skill and effort to use effectively. Policymakers who fail to recognize this run the risk of wasting taxpayer money and undercutting the benefits of public services.”

Strong, who was appointed to the board of trustees by Gov. Mitch Daniels, declined to say where he would look to apply a cash windfall similar to the one Daniels saw by negotiating a 75-year, $3.8 billion lease on the Indiana Toll Road. One obvious candidate, however, would seem to be IU’s elephant-in-the-room, the estimated $900 million it’s looking at, system-wide, in deferred repair and renovation on $3 billion worth of building assets.

Here and elsewhere

IU has been down the privatization road as recently as 2007, looking at various operations including residence hall food operations, printing services and the central heating plant before deciding to outsource the IU Bookstore to Barnes & Noble and most motor pool services to Enterprise Rent-A-Car.

In addition to using the Ohio State parking initiative as an example, Strong, in his presentation, noted that the University of Kentucky is negotiating with Education Realty Trust Inc. to operate its student housing facilities and construct the capacity for 2,500 new beds in the next five to seven years. Other universities privatizing student housing include Montclair State University; the University of California, Irvine; Arizona State University; Portland State University and Boise State University.

Harvard sold its energy plant to Commonwealth Energy in 1998.

“Now is the time to look at this,” Strong said. “In a low interest rate environment, it’s very likely investors will value those revenue streams much more highly today. As a finance matter, it’s prudent as an alternative to borrowing money off the balance sheet and using your own credit.

“All I’m suggesting is, why don’t we go through this process and see if anything makes sense at the finish line?” he said. “If the answer is no, then there are lessons learned. If yes, we should dig deeply into those concessions that make sense.”