A Guidebook for Increasing Diverse and Small Business Participation in Airport Business Opportunities (2015)

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32 C H A P T E R 5 Although the Part 23 and Part 26 Programs are a big step forward in increasing diverse busi- ness participation, airports can “dig deeper” to level the playing field and promote opportunities for diverse businesses, regardless of federal requirements. Several contracting methods to promote and increase opportunities for diverse business par- ticipation include: • Limiting eligibility to compete for a contract or lease to small business concerns. • Encouraging small businesses that are also owned and controlled by socially and economically disadvantaged individuals to seek DBE certification. • Offering smaller-sized, direct leasing opportunities for concessions. • Breaking the scope of a contract into smaller, lower dollar amounts and lower risk projects. • Developing good working relationships and communications with the joint venture participants. • Relaxing bonding and insurance requirements. 5.1 Small Business Set-Asides A small business set-aside is a procurement solicitation for goods or services (i.e., professional; contractual) or a concession opportunity in which the eligibility to compete for the contract or lease is limited to small business concerns. The philosophical underpinning of a small business set-aside is to assist firms in landing contracts in a narrower competitive field so that these firms may gain additional experience and capacity to perform services to public agencies, increase their business profile, and thrive economically. Small business set-asides are welcomed by small business advocates and policymakers. The general business community tends not to oppose small business set-asides when they are offered as small prime contract opportunities, probably because large firms tend not to be interested in very small business offerings. On December 6, 2011, FAA’s Civil Rights Office posted question-and-answer guidance relat- ing to the implementation of the “Fostering Small Business Participation” element of the Part 26 regulation. FAA clarified that race- and gender-neutral set-asides are permitted tools for increas- ing DBE participation through neutral methods. Small business set-asides also are utilized in local and small business programs. The City and County of San Francisco has a small local business set-aside program for non-federally funded contracts codified in its administrative code. The code requires city departments to set aside a certain percentage of construction and services contracts for award to very small LBEs, includ- ing minority- and woman-owned firms. San Francisco International Airport (SFO) follows a similar approach for Part 26–governed contracts. SFO’s Small Business Element program, dated Contracting Methods to Obtain Diversity

Contracting Methods to Obtain Diversity 33 March 2, 2012, states that the airport’s contract set-aside strategy is to “[e]stablish race-neutral small business set-asides for contracts under a specified amount (i.e., under $1 [m]illion). Com- petition will be limited to small businesses only” (333). Although the San Francisco Administrative Code does not contain contract set-aside man- dates for leases and concessions, SFO has created and implemented a concessions small business set-aside program. A January 2013 RFP advertised and distributed by SFO identified a single concession activity in a specific location: “Boarding Area E Newsstand Lease, a Small Business Enterprise Set-Aside.” The minimum requirements were that the “Proposer must be a certified Small Business Enterprise and to be so certified must provide verification of certification in the proposal and be certified by at least one of the [following] agencies . . . Proposer must be certified at the time of the proposal submittal, not after. Joint venture entities are not acceptable for this opportunity” (335). The RFP accepted small business enterprise certifications from the California Unified Certification program, the San Francisco Contract Monitoring Division (which certified local small firms), and the SBA. 5.2 Direct Contracts Some airports are offering more smaller-sized, direct leasing opportunities for their conces- sions and dividing larger contracts into smaller packages in their procurement opportunities. A concessions manager commented that “breaking up the dominance of the prime conces- sionaires has contributed the most to the success of their [ACDBE] program” and that “it may be easier to use a master concessionaire model but a mix works well and it works well to have some of those direct leasing opportunities with small and ACDBE businesses when possible.” As an illustration, San Diego International Airport (SAN) awarded a yogurt business a conces- sion as a prime ACDBE. The RFP stipulated that “no one firm could have more than 30% of the square footage” in a concession. The large primes viewed the yogurt concession as too small for them, but it was the right size for an ACDBE. Practice Tip: Breaking the scope of a contract into smaller, lower-dollar amounts and lower-risk projects makes it more advantageous for a small or local business to compete with larger companies. Direct contracts also are proven to be a best-in-industry practice for achieving more participa- tion from diverse businesses in procurements of construction, professional services, goods, and other services. Procurement and purchasing managers recommend that large projects should be unbundled to level the playing field and allow for greater participation among small businesses and more flexibility for airports. Procurement managers recognize that the smaller the projects, the more likely a small business will be able to participate. 5.3 Concessions Joint Ventures U.S. DOT defines a joint venture as “an association of an ACDBE firm and one or more other firms to carry out a single, for-profit business enterprise, for which the parties combine their property, capital, efforts, skills and knowledge, and in which the ACDBE is responsible for a distinct, clearly defined portion of the work of the contract and whose shares in the capital

34 A Guidebook for Increasing Diverse and Small Business Participation in Airport Business Opportunities contribution, control, management, risks, and profits of the joint venture are commensurate with its ownership interest” (49 CFR § 23.3). In July 2008, FAA issued ACDBE Joint Venture Guidance (JV Guidance) to clarify the Part 23 requirements concerning joint ventures and to provide information and direction to airports, ACDBE Program staff, and various stakeholders on the structure, implementation, and counting of joint venture arrangements in the ACDBE Program. The JV Guidance also assists ACDBEs and non-ACDBE partners in developing joint ventures that comply with Part 23. As noted in the JV Guidance, the preamble to Part 23, revised in 2005, states: As a policy matter, we believe it is preferable for ACDBE joint venture participants to actually have a defined role in the revenue-generating activities of the business (e.g., the joint venture runs four food- service locations in the airport, and the ACDBE is directly responsible for one of them). There is a greater likelihood of confusion, counting, and other administrative difficulties, as well as of abuse, when ACDBE participation is claimed for joint ventures in which the ACDBE participant has only a vaguely defined role in the entity as a whole (385). An airport’s ACDBE program must require businesses subject to ACDBE goals at the airport (except car rental companies) to make good faith efforts to explore all available options to meet goals, to the maximum extent practicable, through direct ownership arrangements with ACDBEs, including joint ventures and franchises. An airport should review joint venture agreements and supporting documents to ensure that the proposed joint venture arrangement meets all requirements of Part 23 and Part 26, and that capital contribution, control, management, risks, profits, ownership, and work to be performed by the ACDBE are clearly addressed. When an ACDBE performs as a participant in a joint ven- ture, only the portion of the gross receipts equal to the distinct, clearly defined portion of the work of the concession that the ACDBE performs with its own forces can be counted toward ACDBE goals (§ 23.55(d)). In reviewing a joint venture agreement, it is important to ask questions to understand and evaluate the proposed arrangement. Questions to address include: • Is the ACDBE certified? • Does the agreement meet the Part 23 definition of a “joint venture”? • What are the amounts and sources of capital contributions? • Are capital contributions commensurate with ACDBE ownership? • How does the ACDBE participate in the overall and day-to-day management of the venture? • Is management by the ACDBE commensurate with ownership? • How does the ACDBE participate in risks and profits of the joint venture? • What portion of the work will the ACDBE perform? • What is the distinct, clearly defined portion of the work assigned to the ACDBE that can be counted toward ACDBE goals? It also is essential to involve the DBELO, concessions staff, and property staff throughout the review process. Once the agreement has been approved and executed, additional work is needed to develop good working relationships and communications with the joint venture participants. 5.4 Construction Joint Ventures and Partnerships Construction companies or suppliers of goods often unite to bid on and/or perform a con- struction contract or supply agreement. As a result, construction or supplier group members (participants) form a joint venture. A venture between participants can be structured as an

Contracting Methods to Obtain Diversity 35 entity (corporation, limited liability company, limited partnership, or partnership) or a non- entity (consortium or a master subcontract relationship). Generally, joint ventures are formed to undertake a specific project for a fixed period of time, whereas formal partnerships’ arrange- ments are permanent and all partners are owners and are involved with all ventures and activities of the partnership and are often referred to as informal partnerships. Whether it is an entity or a non-entity, there should be an agreement that delineates the rights and obligations of the partici- pants. The airport should also review and approve these joint venture and partnership arrange- ments to ensure that the provisions of these agreements are being implemented as intended. Practice Tip: Encouraging joint ventures for airport construction projects can increase participation by small and diverse businesses in these contract opportunities. Joint ventures are complex because of the number of parties involved and the variety of sub- stantive provisions generally required in both the venture agreement and in the contract between the venture and the customer. Consequently, venture agreements should be carefully developed to govern and accommodate two sets of relationships: (1) the “outside” relationship between the venture and the customer; and (2) the “inside” relationships among the participants. A joint venture by construction firms allows firms to combine their property, money, skill, and knowledge to compete (for) and complete projects. Although a joint venture does not limit liability among the inside participants in the way it does between the joint venture participants and the owner (i.e., if there is a default by any mem- ber, the remaining financially responsible members are required to complete the job), the ben- efits of a joint venture relationship can outweigh any negatives. Benefits of joint ventures include: • Risk is spread proportionately to each member’s interest in the joint venture. • Specialized abilities can be combined. • Bid estimates can be made increasingly accurate, because members of the joint venture can compare estimates with each other. • Bonding capacity can be spread. • Bids on major projects can be submitted which otherwise one contractor could not do alone. • Talent, resources, and equipment can be pooled. • Areas of operation and expertise are increased among the participating members of the joint venture. Joint ventures can be encouraged in several ways to help increase diverse business participa- tion. The City of Oakland, California, for example, has adopted joint venture regulations for construction projects, allowing a business that is bidding or competing for city contracts to associate with a certified small local business enterprise (SLBE) to compete for contracts as a joint venture. Certified joint ventures receive bid discounts depending upon the SLBE percent- age of participation. In 2000, six of the seven DBE architecture firms in the Indianapolis area created an umbrella entity. This partnering of experience and skills allowed them to bid and win the contract for the design of the $100 million parking garage and ground transportation center at the new midfield terminal at the Indianapolis Airport. It also earned them a 10 percent role in a joint venture that was created for the new terminal building and concourse.

36 A Guidebook for Increasing Diverse and Small Business Participation in Airport Business Opportunities 5.5 Cart and Kiosk Programs Airports’ cart and kiosks programs allow small businesses to have an increasing presence in concession programs, and to “test the waters,” particularly if they are new to the airport conces- sion environment. Many airports supplement their retail offerings through product carts where there is insufficient space or passenger exposure to support a full retail unit. Product carts also are sometimes used to sell individual specialty products (e.g., souvenirs, games, and eyewear). Some airports offer electronic vending kiosks that sell items such as electronics, cosmetics, and over- the-counter medical supplies. Concession agreements for carts and kiosks typically have a shorter contract term and represent a reduced investment (14). In 2011, for example, 13 percent of the overall concession revenue at Las Vegas McCarran International Airport (LAS) was produced by 12 self-service vending units and 46 stand- alone carts and wall-unit kiosks. The Clark County Department of Aviation also hired a firm to develop, lease, and manage a “Business Incubation” program at LAS. This pushcart concession program offers small retailers contract opportunities without the costs associated with devel- oping a traditional inline store. The program is also designed to provide local companies with short-term, flexible leasing agreements to test new business ideas. Philadelphia International Airport (PHL) has a similar program. In September 2012, Denver International Airport (DIA) unveiled its new specialty leasing program that included 24 retail merchandising units (RMUs) and 24 kiosks throughout the three airport concourses. One of DIA’s goals was outreach to small businesses and minority- and women-owned businesses for these contract opportunities. 5.6 Mentor/Protégé Programs Airport operators can implement business development programs or mentor/protégé pro- grams in their DBE and ACDBE programs. They must use U.S. DOT’s business development program guidelines (Appendix C of 49 CFR Part 26) and/or its mentor/protégé program guide- lines (Appendix D of 49 CFR Part 26). These guidelines outline the requirements, objectives, and roles and responsibilities of participants in mentor/protégé programs. Practice Tip: A mentor/protégé program can further the development of DBEs by assisting them, among other things, to move into non-traditional areas of work and/or compete in the marketplace outside the DBE Program. A program must be based on written development plans that set forth the objectives of the parties and their respective roles, the duration of the arrangement, and the services and resources to be provided by the mentor to the protégé. In addition, the program must be approved by the U.S. DOT and the recipient agency. Requiring a written plan approved by both agencies helps ensure that the DBEs involved maintain their independence and retain their certification status. Note that only certified DBEs can be involved in a mentor/protégé agreement. Accordingly, a protégé firm must be certified before it begins participation in a mentor/protégé arrangement and must remain certified throughout the relationship. A mentor/protégé arrangement exists when an experienced company or individual (mentor) provides assistance and training to a DBE (protégé) with business planning/financing, record keeping, bonding, capitalization and/or formation, or other activities. A mentor also can provide

Contracting Methods to Obtain Diversity 37 a protégé with working capital as long as the loans are arms-length transactions and memorial- ized. In no way can the day-to-day control of the firm be relinquished by the DBE as a require- ment of a loan. Part ownership in a DBE by a non-disadvantaged entity, including a mentor, is permitted; however, any property, equipment, supplies, or other services which are sold, rented, or donated to the DBE, as well as any investment by non-disadvantaged individuals, must be reported to the certifying agency, and any financial investment by the mentor cannot provide the mentor with control over the protégé. Illustrative mentor/protégé programs include the following: • The Port of Portland (the Port) initiated one of the first and most successful mentor/protégé programs in 1995 based on the findings of a 1994 assessment of why small MBEs and WBEs were not participating in Port projects. The Port’s program is designed to build effective work- ing relationships between leaders of mature, established companies and emerging minority- and women-owned companies. Since the development of the mentor/protégé program, the protégé firms have benefited from the knowledge and experience of the well-established firms, and have improved their financial strength and bidding status. The success of protégé firms in meeting established business objectives has been consistent, and there has been a high rate of graduating firms. • DFW instituted a mentor/protégé program in its marketing department. One of the early mentees was a small, African-American female-owned public relations and advertising firm. The firm participated in the program for 3 years and became a joint venture partner on DFW’s business-to-business and business-to-consumer contract with an international, full-service agency specializing in integrated marketing. • JMAA’s out-of-the box thinking to level the playing field and enhance small and local business participation in airport concessions is to use already-certified firms as mentors to help other smaller businesses understand the certification process. Nashville International Airport also has a mentor/protégé program that provides classroom style training on topics such as bond- ing, operations, and succession planning to small businesses. • The Port Authority of New York and New Jersey (Port Authority) launched its mentor/ protégé program in 2002, and the first class of protégé firms graduated from the inaugural 3-year program in April 2005. Many of the protégé firms reported increases in their businesses as a result of their participation. The objective of this program is to increase the number of Port Authority–certified MBEs and WBEs capable of bidding successfully on larger construction contracts with the Port Authority and other public and private organizations. This mentor/ protégé program is a major example of how public and private partnerships help strengthen the regional economy, create new business opportunities, and broaden workforce participation.