Universities Would Benefit from Private Sector’s Expertise

U of M business school building
Michigan’s public universities could save money and time on construction projects, such as the business school building at the University of Michigan pictured above, by adopting a Public-Private Partnership model.

The University of Michigan recently began construction of a new residence hall. The North Quad Residential and Academic Complex will house approximately 500 students, in addition to academic facilities for the School of Information and the College of Literature, Science and the Arts on the University’s Central Campus. Initial project approval set the cost at $137 million, but subsequent plans increased the cost to $175 million. Funded in part by a debt service, the university expects residence hall revenues to fund operations.

While the university’s plan constitutes a commendable effort to keep up with increasing enrollment and student housing demands, the project remains an anachronism. Michigan’s public universities have failed to consider the expertise and innovative financing mechanisms that other institutions of higher learning nationwide have used to privatize residence hall projects. In an economy of ever-increasing specialization, the U of M’s housing services would benefit from privatization. While universities certainly have expertise in academic pursuits, they should in turn recognize the expertise of others in the specialized field of residence hall facilities.

University residence hall privatization usually takes the form of a public-private partnership, or PPP. Pioneered in the U.K., these partnerships infuse traditional government infrastructure projects with needed private investment and expertise. PPPs typically involve an agreement in which a private company leases real estate from a government entity in return for constructing or operating an infrastructure project on the land. Toll roads and bridges in Europe often take this form. Generally in these cases, a university will enter into a ground lease with a nonprofit corporation established for the purpose of the partnership. The university may then issue tax-exempt bonds through the private corporation, secured by project revenues. A private developer will assemble the nonprofit corporation and handle project design, construction and financing in return for a development fee. Finally, a developer affiliate will often manage the residence hall itself.

A public-private partnership allows a university to obtain the benefit of a private developer’s expertise. Specialization leads to time efficiencies, improved services and decreased costs. Contracting with a private developer also provides risk allocation. Debt remains on the nonprofit corporation’s balance sheet, instead of the university’s. This allows the university to maintain its own credit rating for other projects. Additionally, the government procurement regulations do not apply to private developers. Expediting the procurement process can advance the project by as much as two years.

State universities across the nation have already used public-private partnerships to complete new housing projects. Towson University in Maryland has chosen Capstone Development Corp. for three campus projects, including two residence halls totaling 635 beds. Academic Privatization LLC provided interim funding to the University of Louisville and completed construction of a privatized residence hall in a little over one year. Bluestone Land LLC contracted with Virginia’s Longwood University in an arrangement to build a 400-bed facility that many expect will also lead to business development of the area. Indeed, the University of Michigan and many of the state’s other public universities already have similar arrangements for their bookstores; they lease university space to private bookstores on campus in exchange for a percentage of gross sales.

Given the benefits of public-private partnerships, why does a university fail to choose the partnership structure? Many university administrators cite concerns about losing oversight of residence halls. However, the flexibility of PPPs and the creativity of the private sector enable a university to retain as much control as they desire. Other concerns involve developers taking advantage of universities, but that applies to any university project. A final concern is that universities want to create and maintain "living and learning communities" where they incorporate academics into residence hall life. But a university can still accomplish this within a public-private partnership by explicitly structuring the project to accommodate it.

While residence hall PPPs cannot supply a quick fix for the University of Michigan’s current project, all state public universities should consider employing this innovative partnership for future housing projects. By drawing on the private sector’s expertise, the state’s universities can concentrate their resources to excel in their core mission.

Laura J. Davis is an adjunct scholar with the Mackinac Center for Public Policy and a graduate of the University of Michigan law school. Davis was a summer 2004 research assistant. She is coauthor of the study “Privatizing University Housing” with the Reason Foundation.

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