Higher education to yield more P3s

US colleges and universities will increasingly rely on public-private partnerships for their expansion and redevelopment needs, Fitch finds.

The combination of rising needs for asset redevelopment and shrinking state funding will lead a growing number of colleges and universities to use P3s to address their needs, according to Fitch.

In a report released this week, the agency finds that higher education institutions, particularly in the US, are increasingly looking at public-private partnerships to pursue goals such as expanding housing for a growing student population or redeveloping facilities to stay competitive.

“Recent P3s by some colleges have been able to procure funds more quickly and efficiently than traditional sources while offloading risk to the private sector and preserving colleges' balance sheets,” Fitch senior director Seth Lehman said in a statement on Tuesday.

According to the report, the benefits of the P3 model include protecting the college or university from operation and management costs, lifecycle renewal costs and construction risk. “In addition, the P3 procurement process, using multiple bidders, can lead to innovative approaches,” Fitch states.

Higher education institutions have traditionally raised debt to fund capital improvements. The debt has generally been secured by general revenues or by revenues generated from a particular service – parking, dining and/or housing.

“This model is expected to remain a primary choice for capital investments, and similarly, has tended to work well over time,” Fitch states. “However, as needs grow in order to remain competitive for students, additional borrowing at the university level has put greater strain on the university's balance sheet, thereby limiting the university's debt capacity.”

In terms of ratings, higher education P3 projects are likely to fall within the BBB category, Fitch said, adding however that higher ratings are possible for P3s with robust coverage and low levels of cost risk.

For student housing projects specifically, factors such as campus location, student residency requirements, historical number of beds and occupancy rates of university-owned housing and off-campus alternatives are critical to understanding demand.