Maryland’s PPP schools bundle takes a page from the UK playbook

For public officials, discussion about how to pay for the schools came down to a simple question: how long should students have to wait to receive better classrooms?

The answer, from county and school board members, was clear: sooner is better than later, especially considering that some children walk everyday through dilapidated hallways of buildings built more than 50 years ago.

Some of the schools also lack proper heating, which means students have to learn at their desks while wearing their winter coats. But delivering improvements efficiently and in a cost-sensitive manner was a tough task for a cash-strapped local government. To get the buildings up and running as fast as responsibly possible, officials negotiated a first for a US public school system: bundling the development into a single package and partnering with the private sector.

Shawn Matlock, director of capital programmes at Prince George’s County Public Schools, tells Infrastructure Investor it is hard for PGCPS and county officials to stomach the thought of making students wait any longer than necessary to fix the problems: “The question really is, how can we build these schools without spending all the money right now? How can we defer the payment structure?”

With a $160 million annual budget, and an estimated $8.5 billion needed for repairs to elementary and middle schools categorised as being in “critical need”, “not bleeding” and having “good bones”, it would take PGCPS 20 years on its own to pay for improvements needed today.

Its answer has been to turn to the private sector for help. Although using PPP to build schools is new for the US infrastructure market, it is more common in other countries.

After reading about such projects being financed through PPPs in Canada and the UK, Matlock says his team did their research and launched a procurement. PGCPS has now closed on a deal estimated to be worth $1.24 billion, according to a Prince George’s County council meeting document, to have private companies invest in repairing, replacing and managing six schools that will seat 8,000 students.

Public sector pick

Prince George’s County is not the only cash-strapped local government in the US, especially after nearly a year of economic strain due to fighting covid. However, its decision to hand over the upkeep of its schools bucks the traditional resistance among the country’s public sector towards collaborating closely with private interests on social infrastructure projects.

If the project in Prince George’s County proves successful, school boards around the country may warm to the idea of pursuing similar agreements, bringing investors with them and, ultimately, putting dollars to work for education.

Time was PGCPS’s primary motivation in opting for a public-school PPP. In partnering with two developers – Toronto-based Fengate Asset Management is providing 75 percent of the project’s equity and US company Gilbane Development is putting in 25 percent – PGCPS will receive, by 2023, one new middle school and four rebuilt facilities, as well as a merged school for kindergarten to eighth grade.

Mac Bell, Fengate’s managing director for infrastructure investments, says there are huge benefits from getting this project off the ground as quickly as possible.

“We’re honoured to be working with PGCPS and to be saving them a heck of a lot of time, which is pretty hard to value when you’ve got kids wearing coats in school because the heater isn’t working,” he says.

Risk-reward

The deal, structured as a 30-year availability payment agreement, will see PGCPS pay $29.8 million annually over a 30-year period.

The project also shares cost risks between parties. The public sector assumes costs if unforeseen issues arise on the school properties, or if there are government delays to development. The investors have agreed to cover any over-runs that occur from construction mistakes or during the maintenance period.

“It was important that all parties accepted the appropriate amount of risk for themselves and the project,” says Charles-Henry Lecointe, head of infrastructure debt in the US for UK-based Legal & General, which along with MetLife, Canada Life Assurance Company, Northwestern Mutual and Barings, is providing the financing. Debt taken on to fund construction of the new schools totals around $478.5 million, with MetLife and its institutional clients providing $203.5 million, according to a statement from the insurance company.

The PPP model used for the Prince George’s County schools is similar to the availability-based agreements to build and manage other types of infrastructure, from toll roads to airport redevelopments. However, there are two unique features that ultimately helped this deal to close.

First, the developers did not seek the tax-exempt financing that is typically awarded to public infrastructure projects. “Tax-exempt financing comes with greater upfront costs,” Bell says. He adds that these would have had an impact on the leverage ratio that was negotiated to lower PGCPS’s annual payments.

The second aspect of the deal that is uncommon for the US market is the bundling method used to combine six smaller school developments into one investment package.

In other markets, government procurers have bundled projects to save costs and boost development efficiencies, according to Joe Seliga, co-head of government practice and infrastructure investment at law firm Mayer Brown. “There is a real benefit to having multiple educational facilities incorporated into a single transaction in order to get a deal to a large enough size,” Seliga explains.

Matlock says that, as PGCPS was creating its procurement solicitation, officials knew that projects would need to be bundled to make the development “palatable” to investors. Although urgency and budget constraints drove PGCPS to the PPP model, it is not guaranteed to be a quick and easy funding solution. Local governments in the US have been slower to embrace PPPs than have authorities in other countries. This has been especially so for social infrastructure, and examples of failed projects or profiteering investors have fed this caution.

In one example, in 2018, the efficiency of the UK’s private finance initiative being applied to school projects was called into question when a report published by thinktank the Centre for Health and the Public Interest found that schools were projected to pay £4.8 billion ($6.6 billion; €5.5 billion) by 2020, generating an estimated £270 million in profit for private investors.

The accuracy of the $174 million in projected savings on the PGCPS project is one aspect of the PPP that opponents have called into question. According to the PGC council document, construction costs will amount to $485.8 million, a figure that reaches $930.8 million when milestone payments and financing costs are factored in. But, that is still less than the $1.1 billion the projects would cost under a traditional procurement model, a figure that includes deferred maintenance costs, according to PGC. Fengate declined to provide further financial details.

There are also questions around whether the model actually saves development time.

Last April, the infrastructure ministry in the Canadian province of Alberta abandoned a PPP and opted to fund the project itself. It cited a quicker permitting approval process for a development that remained under government management.

Another PPP in Maryland, the Purple Line transit project, offers a close-to-home example to PGCPS of what can happen when disputes over permitting approvals erupt and drag on for years.

Still, Matlock says the decision to finance the public schools as a bundled PPP was born out of necessity, and he is confident that a proper contract arrangement with experienced counterparties will be enough to see the project through.