Dive Brief:

• The pandemic is expected to slow the pace at which colleges take on public-private partnerships (P3s) paid for by user fees, Moody's Investors Service analysts explain in a new report.
• Their prognosis highlights the risks and limitations for colleges that use this type of P3 model, particularly in areas closer to the core of their academic mission, such as student housing.
• While the use of P3s generally is expected to grow post-pandemic, some projects will be more affected than others in the near-term, with student housing likely to stall and utilities to proceed.

Dive Insight:

Colleges' use of P3s was growing prior to the pandemic, as they tapped the private sector for help with a variety of campus operations ranging from housing and dining to, increasingly, utilities. P3s give colleges another option for financing capital projects, providing them with upfront funding and expertise in exchange for a degree of risk-sharing.

But the pandemic has strapped colleges financially, delaying spending on upgrades and new facilities and likely causing them to rethink their approach to financing such projects, the analysts note.

That will bear truer for some sectors than others, however. Utilities "remain poised" for continued P3 use as institutions seek to address aging infrastructure and meet energy efficiency goals, the analysts write. 

But student housing projects may not fare so well. Most students were forced to leave campus housing this spring, and many aren't returning for the fall. That may cause institutions to postpone student housing P3s already in the works, according to the report. 

Typically, student-housing P3s are structured so the private partner gets its investment back over time by charging fees to users — in this case, rent to students.

Many colleges refunded students for their spring housing expenses or offered them a discount on future campus living. The fact that institutions covered those costs despite not having a contractual obligation to do so indicates their importance to colleges, the analysts note.

"A core point here is that risk transfer is never complete," said Dennis Gephardt, vice president-senior credit officer at Moody's, noting that these facilities are usually located on colleges' property and get their customers from the school, making them a core part of the institution's strategy.

While colleges may be inclined to protect their reputations by helping students recoup money paid for housing they didn't receive, developers have an interest in filling beds. One developer wrote to two universities in May saying the schools could not alone restrict how many students can be in campus housing or lower their fees, pointing out the debt it took on for the project, Inside Higher Ed reported. 

One of the schools planned for 75% occupancy in P3 housing, which would put the project below the lender's financial performance benchmarks, the publication noted. That would require either the developer or the university to pay up.

Moody's analysts emphasized in their report that limitations around institutions' ability to fully transfer risk associated with demand to the private partner are in part why they include these and similar types of P3 projects in their calculations of colleges' adjusted debt.

Some colleges stepped in to provide support for struggling housing projects even before the pandemic, the authors note. Others didn't. The University of Oklahoma in 2019 didn't renew a lease for commercial space and parking at an underperforming demand-risk housing P3 on its campus. While the move limited the university's exposure to risk, they explain, the school hasn't escaped litigation and reputational damage.