Leaders of public higher education institutions face a challenge not dissimilar from that one faced by our mayors, governors, and even the US Treasury Secretary. How do we thrive in a constrained fiscal environment where an expensive modernization of public facilities is a prerequisite for growth?
If we do not find an answer to this question within public higher education, then how will we maintain the strength and competitiveness of a sector which is a bedrock of opportunity and a driver of America's prosperity.
The answer is public-private investment vehicles of which there are many types.
These vehicles can be used not only to build new state-of-the-art facilities from scratch, but also to transform decades old ones which may be in disrepair. They are not only suited to dormitories, but also to student and teaching complexes, hospital and science plants, and also energy systems. These vehicles can help realize visions for off-campus satellites. They can be designed for user fee arrangements, or else different repayment mechanisms.
Importantly, these public-private vehicles can only be used by public institutions for historical reasons. However, a private institution may take advantage of important public-private vehicles within limits.
Frequently, a public-private vehicle is a way of moving outside investors with a long term investment repayment horizon such as pensions, insurers and sovereigns into priority public projects. These are patient investors who expect relatively speaking modest returns over a long period.
These investors have actuarial needs which sync with the life of a significant public facility. For instance, a pension fund is looking for a steady modest return for its retirees. This facility will, in turn, produce dividends to its constituents over the long-haul. Here, public institutions are themselves then investors too. So matching up the aspirations of long term private investors with public higher education investors would be the name of the game.
Matching up these long term investors can be done through a range of ways including bespoke bonds, special purposed vehicles, and innovative enhancements.
At times a public-private vehicle may denote a situation in which, in the actual execution of projects, greater cooperation is achieved through consolidated contracting. Under this arrangement, payment is made to contractors only when performance benchmarks are met.
One of the most talked about public-private vehicles is P3. Although relatively new to the US, P3s have been used for decades around the globe. They have done astonishing things for cash strapped governments and citizens who seek prosperity in its fullest sense.
Twenty-five years ago, P3s helped countries in East Asia grow out of a serious bind. In the early 1990s, countries in the region had no manufacturing capability. As a result, they could not be successful within the global economy.
Because these countries were financially constrained, traditional lenders would not outlay the funds to build the public facilities needed to attract manufacturing firms - quality inexpensive roads, telecommunications, water, and energy. So countries opened themselves up to the pensions, insurers and other long-termism investors. What resulted was what is referred to as the East Asian Miracle—a little heady language, but extremely impressive nonetheless what was done across the Pacific. These investors had offered a bridge into the future. As a result, governments modernized facilities and thus attracted manufacturers in an impactful way.
Recently P3 has been used domestically to fix 432 structurally-deficient bridges in Pennsylvania, lay fiber optic cable across rural Kentucky, and build a tunnel in the Port of Miami which lessens pollution downtown and solidifies Miami as the gateway city in the region.
In July of last year, Moody's Investor Service moved US higher education from Negative to Stable. In doing so, it highlighted operational gains and discipline around expenditures. In university parlance, everyone is doing more with less. Moody's projects much the same: 'Ongoing expense discipline will contribute to steady operating performance.' Nonetheless, only staunch defenders of the status quo can view Stable as acceptable. One cannot invest in the future with a modest income stream at the best.
Importantly, when it comes to public-private vehicles, public higher education institutions are at a distinct advantage over their private counterparts. They have the ability to use them for one while their counterparts do not. It is the public nature of the vehicles which gives public higher education institutions the privilege of making long term investments with outside capital without many of the downside risks that a private one would carry. The US government has dozens of public-private bond vehicles and investment enhancements.
The ability to use public-private vehicles may soon become the envy of private institutions. However, we should not pretend that they will make life as easy for them as some of their most affluent private counterparts.
In 1819, the Trustees of Dartmouth College fought successfully to remain private. Dartmouth's endowment now stands at $4.7 billion. While the average public higher education institution derives 20% of its annual revenue from state and local government, endowments represent a sliver of their revenue pie.
However, so strongly do we feel, as a society, about our public higher education institutions that we confer upon them the privilege of using public-private vehicles. These vehicles are today an extraordinarily important route to realizing bold forward-looking visions firmly rooted in tradition.