Leaning Into Green: A New Frontier in P3 Financing Emerges with University Energy Infrastructure Deals
Public-private partnerships (P3) have been an attractive option in infrastructure financing for decades, and in recent years it has become a preferred choice to develop sustainability projects as well — for reasons of operating efficiency and, often, because of newly introduced Environmental, Social and Governance (ESG) targets or requirements.
Often energy and infrastructure projects are community-based: building or upgrading a public entity like a town or state utility; or structured via a special purpose vehicle (SPV) backed by government-issued debt.
Today there is a new type of participant. A microcosm of a small city—and sometimes just as large. American universities are getting in the action, looking at P3s to bolster their endowments in the short term, leveraging private sector expertise to subcontract non-core services, and upgrade their existing infrastructure to become more sustainable and efficient. The pipeline for these university P3 projects at Societe Generale is growing, and a recent University of Iowa project should serve as a model for creativity and meeting multiple objectives all at once.
Class is In Session
P3 financing for universities isn’t easy. Each project is bespoke, with schools differing widely in their objectives and governance. The deal-making process is intensive and structuring for mutual benefits across parties becomes challenging. Many concession agreements in energy and infrastructure — like the Iowa deal, which lasts 50 years — are also locked in for long periods of time. So, although “green” P3s are newer in nature, these projects are somewhat old school too. They are a test of the trust in an investment bank’s relationships, its network, and its skill in financial engineering and flexibility.
The Iowa project is great illustration. With four diverse participants — the university, existing clients for the bank in energy provider ENGIE and infrastructure investor Meridiam, as well as climate change solutions investor Hannon Armstrong — the deal will enable Iowa to operate coal-free by 2025 and will provide for regular upgrades to the utility system. The transaction consists of an asset monetization similar to a sale-leaseback, a handover of the existing energy system, and specified physical upgrades to implement the regular University five-year Capital Improvement Plan. Importantly, the transaction aligns with five of the United Nations Sustainable Development Goals
Structuring proved key. In the immediate term, the University of Iowa was keen to make sure its campus partner would implement its green energy objectives, and to make sure that energy, heat and water would continue to be provided once there was a handover of the system to a private partner. As often with P3, timing the transaction was a challenge, and beyond that, due diligence was required to ensure private partners could execute on future obligations, as penalties for failure to do so could be quite severe.
When taken in retrospect, successful P3 transactions often seem to fit well together and create win-win-win solutions for stakeholders.
The best deals, in reality, are often the products of careful negotiation. That is particularly the case for this growing class of P3 participants in higher education. Some schools will have a better feel for the concession agreements, having utilized similar models for other services like dining or residence hall development. Their motivations and time horizons will be different. Scale and revenue generation will determine the kinds of partners that can bid the project, and these can be vary considerably even between an Ivy League institution and a public flagship. Each project almost seems sui generis.
Still, these P3s are shaped around common objectives. Ultimately, deal terms must strike a good balance between public and private partners, as well as for Societe Generale as the lender. The University of Iowa project followed the structure of a recent precedent from Ohio State University, where the concession term, scope and continuity of services was also crucial. With each engagement, we are further able to learn from bidding consortia as they take an outlook on utility systems to understand what will be needed as technology for energy, water and heat decades into the future. Using this data, we are able to widen the market for P3 possibilities.
Finally, the P3 trend comes at an extraordinary time for universities in the era of the COVID-19 pandemic. Like many industries, higher education is being forced to contemplate new operating models after the virus disrupted classes and graduation ceremonies seemingly overnight. Apart from striking at the heart of close-knit campuses and affecting the on-campus experience— the intangible value proposition for many schools — today’s challenges have left many schools with immediate and existential financial decisions.
The U.S. University P3 area is a worthy and growing space for both energy and infrastructure operators and investors, as well as for Societe Generale. New scrutiny will be lent to criteria like the university’s credit rating — Iowa, for example, was rated as Moody’s Aa1 — and other risks incumbent in the term and particulars of each project. As it should be. However, many expect the pipeline to continue to grow to alleviate the financial and operational burdens on universities.
But with scores of institutions across America that are centuries old, having survived myriad extreme and difficult events over their lifetimes, that is unlikely to chase potential P3 partners away. Indeed, if the University of Iowa is indication, it will likely be the opposite.
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