Educating the Educators

Getting the message out about what P3 can do for school districts will be a slow process. But the rewards on offer are significant, writes Paul Jarvis

Ever since Prince George’s County Public Schools (PGCPS) reached financial close on its landmark P3 project in January this year, the industry has been eagerly awaiting signs of a pipeline emerging in the schools sector.

So far, there has not been a big rush of school authorities pushing out K-12 education programs across the country.

However, there is broad agreement on the need for new schools in the US. “Across places like Maryland, Virginia and DC, schools are an issue and there are questions over how they can be replaced quickly and how they can be maintained,” says Brian Dugan, managing director at Edgemoor Infrastructure & Real Estate.

“As a country, we build things and don’t take care of them,” says Bob Hunt, managing director at advisor JLL’s public institutions division. “That is probably more of the case in schools, where districts often get the funding to build new schools but find it extremely difficult to get the funding necessary to maintain them.”

And it’s not just the long-term maintenance budgets that are a problem for school systems.

Their capital pots are rarely large enough to allow an authority to deliver more than one or two new schools in any given year.

“In most jurisdictions, local schools are financed by property taxes,” explains Robert Labes, partner at law firm Squire Patton Boggs. “The most obvious benefit of P3 is that it can deliver a faster end result for a lower cost, which will enable the local school district to keep property taxes down through P3, that will be attractive to the school district’s residents and commercial property owners.”

“To get funding released can be an arduous process, and because of the way that works it would have taken 16 years and for Prince George’s County Public Schools the typical state funding process would have taken 16 years to get the money it needed for all the schools,” points out Hunt.

As a result, P3 can offer some significant benefits to school authorities that find themselves strapped for cash.

“Authorities recognize the reality that districts often take a long time to be able to deliver these sorts of projects, so they are looking for expedited delivery, which the P3 model can offer,” says Darin Early, managing director of P3s at Gilbane Development, which worked on the PGCPS scheme.

For many school authorities, the ability to bring forward several projects at once reduces the number of potentially politically sensitive decisions it has to make. For example, if an authority has one crumbling school in a relatively wealthy area, and one in a poorer area, it may face accusations of bias over whichever one it chooses to replace.

“P3s can be used as a tool to support school districts that have a significant need for new school construction but have limited up-front financing capacity,” says Hilary Jackler, partner at law firm Kutak Rock, who worked on the PGCPS scheme.

Speed and the promise of tied-in maintenance are therefore attributes of the P3 model that are of particular interest for schools, and was an important element in the PGCPS thinking. In fact, the next major P3 opportunity in this space could come, once again, from Prince George’s County: in August this year, PGCPS sought technical and financial advisors to support the second phase of its program, known as Blueprint Schools. 

On the one hand, this shows that the school system clearly believes it is onto a winner with its use of the P3 model. Critics, however, might argue that the lack of concrete opportunities elsewhere suggests others remain unconvinced.

One of the difficulties here is the question of scale. To date, P3 projects have generally prospered when they have been large, such as the major transportation projects managed at a state level. Schools are managed at a much more local level, with smaller budgets to play with.

Realistically, bundling projects together would be the only way for many to create the kind of scale needed to make a P3 program stack up on a value for money basis.

“The transaction costs on a P3 project can be higher than a traditional design-build construction project,” explains Jackler, “so P3s typically make the most sense to implement where there are associated economies of scale and/or the construction timeline would be too long under traditional financing mechanisms.”

“I would expect bigger counties to look at the P3 model,” says Paul Choquette, vice chairman at Gilbane.

There is a belief that the rise of progressive P3s in the US - which see private partners get involved in the process at an earlier stage - could be a good fit for schools.

“The progressive procurement model would work well for bundled schools,” says Dugan. “It allows the authority to pick its development partner earlier in the process and finalize the design, technical specifications, commercial terms, and price in a more open, collaborative manner that includes a broader set of stakeholders. It allows several paths to advance in parallel and with input from all parties, versus a committed bid procurement in which most of the workstreams need to occur sequentially. 

“In addition, it’s difficult to grant access to the stakeholders and communities to all the shortlisted teams in a committed bid procurement. The authority needs to have the design, construction and operating performance specifications determined before a committed bid procurement, which is challenging when you’re dealing with multiple sites and different communities.” 

Challenging times

No matter how well the P3 approach might fit, there remain plenty of challenges in turning it into the model of choice for school boards across the country.

“Considering how schools are funded and the important role schools play in communities, a collaborative effort is required from a range of stakeholders, including state and local governmental authorities, the board of education, school employees, and community members,” says Jackler. “Additionally, many will be interested to confirm that the school district will remain the owner of the schools, how and when payments will be made to the private partner, and the allocation of responsibilities among the public and private partners.” 

Lindsay Stowell, executive vice president at JLL, agrees. “Political will is absolutely critical. There can be many misconceptions with P3s, such as the private sector being involved in the delivery of education. You need champions who can clearly articulate the way the project will work and stand up to criticism.”

In every nation where P3 has proliferated, there have always been concerns about the extent of private sector involvement in public services, and this is almost always most acute when it comes to social infrastructure like schools. “When people hear ‘P3’, they are concerned that the school district will be giving up too much power and control to the private sector and that they will be taken advantage of by the private partner,” says Labes.

Educating authorities and the public is therefore a critical part of enabling these types of projects to progress. “While P3s make sense to create efficient and speedy delivery of public projects, those deciding on ways to finance these public projects are accustomed to a traditional municipal finance structures and governing bodies and boards are very comfortable with these traditional financings,” adds Labes’ fellow partner, Alethia Nancoo. “It is about creating a narrative of why combining the public and private sectors makes sense for targeted schools.”

However, even if that narrative is developed and explained, P3s may face a more rigid challenge.

“One of the biggest hurdles is that state law may be written in a way that requires school districts to own or otherwise control their facilities,” says Labes. “Prince George’s County showed that P3 structures can be used without violating state law requirements, but it is something that people will pause on and have to be creative in their thinking.”

“Most school systems would require specific statutory authorization to undertake a P3 for school construction,” adds Jackler, highlighting her experience on the PGCPS program. 

From parents who may be worried about private interference in their children’s education, through school board members comfortable with the traditional approach, to those who must

be convinced to make the necessary legislative changes, there are a lot of people who will have to understand the benefits of the P3 model. “It’s a matter of herding everyone together,” says Nancoo.

“These things take time but both the public and private partners realize that the results are worth the effort,” adds Labes. “It often takes doing the legwork project-by-project until you eventually reach a critical mass.”

The hope from many in the industry is that Prince George’s County can provide the catalyst, helping others to recognize the opportunity that is available to them.

“We are getting calls from people seeking to understand what steps we took to determine that P3 was the right way forward,” says Choquette. “P3 is emerging as an extra tool for K-12 schools.” 

Stowell admits that things have initially been slow. “We have not seen the expected rising tide of interest for more of these projects, although the pandemic has likely played a role in this. Once things settle down, we would expect other districts with similar needs to explore the concept.”

“Once three or four have been done, you have a trend and it will gain traction,” Hunt continues. “We are not there yet. The jury is still out as to whether we will get to that critical mass for P3s in the K-12 market.”