Public–Private Partnerships: What Are the Lessons Learned? (2020)

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15 SESSION 2B Pre-Procurement Sheri Ernico, LeighFisher, Moderator Panelists Steve Sisneros, Southwest Airlines Galen Beaufort, City of Kansas City Dan Reimer, Denver International Airport Roger Johnson, Jacobs Steve Sisneros stated that airline-led P3s are one of the most successful examples of airport P3s. Southwest has led four projects, with one still underway, including a new $500 million terminal and $200 million garage in Dallas, a concourse expansion in Fort Lauderdale, and a $500 million project at Los Angeles International Airport, among others. He noted that Los Angeles World Airports (LAWA) is one of the leaders in airline-led projects. Sisneros noted that airlines generally work hard to build relationships with domestic airport partners and are treated as valued stakeholders, which is not always the case internationally. He added that the earlier an airport is involved in projects and planning, the more likely the airport is to get what it needs. Galen Beaufort stated that the City of Kansas City aviation department worked with stakeholders, including airlines, to evaluate whether to renovate the existing facility or build a new one. The topic was contentious for several years, but the city was able to get an agreement in place for construction of a new terminal. Beaufort stated that the idea came to the city council as a sole source contract from a local firm partnered with local financiers, but the city council passed an ordinance requiring voter approval of the demolition of the terminal or construction of a new terminal or both. Beaufort stated that convincing the voting public that new construction and demolition of the old terminal was a good idea became part of the pre-procurement process. Accepting a sole source bid ultimately became very difficult, for political reasons, and the city council decided to pursue an RFQ process. Beaufort stated that the development agreement included a two-step decision-making process. The city established a project management committee that included representatives from the airlines, developers, and city managers to make decisions about design and scope. A steering oversight committee to which issues could be elevated included the director of aviation and an airline representative. Beaufort noted that one lesson learned was to spend more time educating elected officials and the citizenry on what a P3 is and what its advantages and disadvantages are.

16 Dan Reimer provided background on the Denver International Airport’s Great Hall Project to renovate the main landside terminal. The goal of the project was to consolidate the ticketing operation and expand the Transportation Security Administration (TSA) checkpoint, and the procurement process took approximately 3 years, from 2014 to 2017. Reimer stated that the airport held an outreach event in December 2014 and offered to have one-on-one meetings with interested bidders, at which point 18 entities expressed interest. An RFQ was issued in spring 2015, after which four out of five respondents were short-listed and one-on-one communications were held with each short-listed bidder. The RFP reflected both bidders’ and owners’ priorities. Reimer stated that after the RFP was issued, the airport entered into a year-long negotiation phase and then executed the agreement in 2016. The project is currently in the design and construction phase. Reimer outlined the terms of the agreement, which is a 34-year agreement with a 4-year design and construction period and 30-year O&M period. The developer has a license to build the project and manage the program on behalf of the city and county for 30 years. There is a $1.8 billion maximum contract liability, including a $650 million fixed price for design and construction and a $120 million contingency. Roger Johnson stated that while he has been retired for a year, he previously ran LAWA’s landside access modernization program, which was designed to address significant traffic and other terminal access challenges. The $6.5 billion program included construction of an automated people mover (APM), six stations, a consolidated rental car facility (CONRAC), terminal interfaces, garages, and roads. The largest components, the APM and CONRAC, were both financed through a P3, and the $5 billion APM contract was the largest ever awarded by the City of Los Angeles. Johnson noted that there were many reasons for pursuing P3s for these projects, and that financing was not the primary motivation. Broad objectives included controlling capital costs; minimizing finance costs; expediting delivery; capturing economies of scale; and minimizing the impact on existing operations. He stated that using a DBFOM approach for the APM and CONRAC achieved all but one of those objectives (minimizing finance costs). Johnson noted that the APM is the only one LAWA will ever build and will be a critical facility. Minimizing the risk to LAWA for operating that facility was cited as being very important. In response to a question from Sheri Ernico, Reimer stated that Denver selected a P3 delivery model on the basis of a traditional VFM analysis. He added that Denver had prior experience with P3s and was open to experimenting further with similar models. The appeal is less with the financing and more with the expertise and innovation that the private sector provides and the ability to shift the construction and financial risk to the private operator. In response to a question from Benjamin DeCosta, Reimer clarified that the predevelopment agreement did not have to be approved by the city council, although the contract did. Denver paid the developer for the IP generated through the predevelopment

17 agreement process. He added that there was a competitive selection process from RFQ to RFP and that one of three bidders was selected to enter into exclusive negotiations. Sisneros added that the key question for evaluating P3s is whether a private developer can bring the project to market sooner. From a purely financial perspective, a P3 will never show greater benefits. Ernico asked Sisneros and Beaufort how community benefit agreements (CBAs) have affected P3 deals. Beaufort responded that in Kansas City, the genesis of the CBA concept began with community members who wanted some of the funding going to private developers to be invested in distressed areas. After several months and many conversations with council members, the airport was able to pass a modified agreement that satisfied FAA and the airlines. All programs in the final CBA are directly related to terminal construction, such as bus transportation for workers to the site, extended childcare hours for workers, and an apprentice program for workers on site. Sisneros responded that airlines want to be good stewards and partners to local communities, but that there is a challenge when CBA components are not related to the specific airport project and affect airline rates and charges. Valerie Holt asked whether Denver’s licensing agreement was developed specifically for the Great Hall project. Reimer responded that the two primary reasons for the licensing agreement were because it avoided conveying interest in real property (which would have conveyed possessory interest tax) and avoided creation of a buffer or barrier between the city and county and its airline partners. In response to a question from Simon, Sisneros stated that under new accounting rules, Southwest’s terminal investments are on the airline’s books during construction and then drop off once the asset is acquired by the airport. He noted that in the case of the LAWA project, the goal was to have no capital expenditure or cash flow impact on the company. For that project, Southwest did not do a specific return on investment analysis but based the decision on a commercial plan looking forward 10 years. He added that Southwest is looking at ways to take on more projects without jeopardizing the airline’s credit ratings. Beaufort noted that it is also helpful to build into the RFQ and RFP that the city will negotiate with the preferred bidder but retains the option to keep the procurement open and negotiate with other bidders if needed or until the contract is signed.