Unintended Consequences of Public-Private P3 Relationships

Recently it was reported that colleges and universities are leasing their campus facilities. Dartmouth University was mentioned as one that is looking for off-campus help building a new heating system and running it. In so doing, Dartmouth joins a growing list of academic institutions looking to partner with an organization that specializes in one piece of campus operations much as it does with dining, laundry and the bookstore.

The problem is the current arrangements have a small financial footprint whereas leasing facilities, like a heating plant, has major financial implications. Moreover, the question arises whether leasing facilities like heating are an appropriate action for a college to undertake or might it be a diversion of funds from the academic mission of the university. These relationships smack of commercialism and bring into question the academic mission of a college or university.

According to Ritu Kalra, head of the western region and higher education in Goldman Sachs’ public sector and infrastructure finance division, lots of universities are asking: “Why are we in the business of owning and running our own power plants? That’s not our bread and butter.”

The underlying reason colleges and universities are looking at leasing options is reductions in state funding for higher education. These public/private university arrangements with private companies or other joint ventures has been designated as “P3” to describe these relationships. More colleges and universities are looking at them in a time of tight resources to deal with the reality that state support is dwindling and is unlikely to change anytime soon. Other rationalizations include reducing carbon footprints and making overdue improvements in campus infrastructure.

Dartmouth hopes working with a partner will lower the project’s cost in the long run and make it easier to maintain. According to Josh Keniston, the college’s vice president for institutional projects, the partners can help to maintain the facilities in a cost-effective manner.

It’s probable that these P3 partnerships will proliferate during the next few years as colleges work to replace outdated utility infrastructure. State funding is unlikely to provide what is needed to maintain maximum efficiency. Most higher education partnerships are like Dartmouth’s, which focuses on a single utility and serving one need that might be acceptable to internal stakeholders.

Another approach involves institutions effectively leasing out an existing system(s) to private companies that operate them in exchange for a large upfront payments. Colleges then make regular payments to the partner, which invests in the project. It’s these payments that are troublesome from an ethical point of view. Is this an appropriate way for colleges to use their resources? For public universities, should state governments approve such arrangements? After all, they are responsible for funding institutional needs.

A good example is Ohio State’s 50-year contract with an energy company and investment firm to run its utility system. The university received $1.1 billion at the outset. In exchange it pays its partner annually, including a $45 million fee that grows with inflation, as well as other annual fees for operations and capital investments in the project.

Universities rationalize that these arrangements are consistent with their sustainability goals. Maybe so but it still doesn’t seem quite right to me that institutions of higher learning are getting into the leasing game. I wonder what will happen if problems arise such as an unintended shut down of the system. What happens if accidents occur? In other words, I believe there are unintended consequences that that could harm the institutions and lead to greater financial burdens than anticipated at the outset.

Posted by Steven Mintz, aka Ethics Sage, on January 9, 2020. Dr. Mintz is an award-winning blogger. His Ethics Sage blog was recognized as one the top 100 in philosophy (#23) by Feedspot (https://blog.feedspot.com/philosophy_blogs/). Steve's Higher Ed Ethics Watch blog was recognized as one of the top blogs in the higher education field (https://blog.feedspot.com/higher_education_blogs/). He recently published a book Beyond Happiness and Meaning: Transforming Your Life Through Ethical Behavior that is available on Amazon. You can sign up for his newsletter and learn more about his activities on his website: https://www.stevenmintzethics.com/. Follow him on Facebook at: https://www.facebook.com/StevenMintzEthics.