Universities are under increasing pressure to secure the efficiency, reliability and sustainability of their utility infrastructure while managing long-term funding constraints. This is due to various factors including declining enrolments, lower state funding, rising operational costs and ageing infrastructure. Covid-19 has exacerbated many of these challenges.
At the same time, these institutions have committed to reducing emissions by transitioning to cleaner fuels and enhancing energy efficiency. The public private-partnership model has gained momentum in the US as an effective way for universities to address these challenges. By partnering with the private sector, they can secure the performance, resilience and reliability of their utilities.
A recent survey by the University of Connecticut Center for Clean Energy Engineering estimates that there are over 400 university campuses in the US with combined heat and power utility systems, with the mean installed year being 1975. This indicates both the ageing nature of the infrastructure and the potential opportunity for investors.
While there are different PPP delivery models, a common theme is the role of private financing under a long-term concession framework with performance-based contracts.
The two most popular models are the availability-based Design Build Finance Operate Maintain (DBFOM) model and the asset monetisation model. The DBFOM model is typically used for new-build assets, while the monetisation model is popular among universities seeking to monetise existing utility assets.
The monetisation model has been boosted by pioneering transactions such as those involving Ohio State University and the University of Iowa. These delivered upfront payments to each university of over $1 billion, illustrating the effectiveness of the model as a way of raising funds. Universities can effectively borrow off balance sheet and use those funds to achieve other objectives: expanding the curriculum, increasing research and development or funding the university endowment.
The “core” characteristics of the asset class make it highly attractive to investors. These assets are low-risk, essential infrastructure, with a stable cashflow profile and a single customer with a high credit rating: around 90 percent of public universities have a minimum rating of ‘A’ by Fitch and S&P.
Given the sector tailwinds and strong ESG profile, we are excited by the pipeline of opportunities in the sector and believe that PPP will become increasingly popular in the US as a way of alleviating the financial pressures on higher education institutions in relation to campus energy.