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8 SESSION 2A Pre-Procurement Brett Simon, LeighFisher, Moderator Panelists David Narefsky, Mayer Brown Clay McCoy, PJ SOLOMON Li Pei Wang, Port Authority of New York and New Jersey Jay DeWitt, City of Phoenix Brett Simon introduced the panelists and stated that one of the most challenging aspects of P3s is getting started. David Narefsky reviewed the legal and regulatory considerations associated with the pre-procurement process. He stated that grant assurancesâin particular, requirements regarding revenue diversionâare essential in terms of compliance with federal requirements, regardless of the type of P3. Narefsky highlighted AIPP statutory requirements and noted several key recent changes in the AIPP. These changes included removing limits on participating airports and allowing government owners to take the proceeds of the lease and use them off-airport, independent of the grant assurance program, provided they receive approval of 65% of the airlines serving the airport (by landed weight or number). He also highlighted issues related to P3s and grant assurances and noted that private parties are still subject to compliance with grant assurances on how airlines are treated with regard to rates and charges. Narefsky highlighted the applicability of local laws and regulations and noted the diversity of rules and governing agreements across the country. He stated that in recent years, state legislatures generally have been more favorable to legislation authorizing P3s, although requirements are still very inconsistent and may not apply to airports. He added that state and local laws also are very important for term length, performance security, right-of-way responsibility, data protection, and actions or authority that must remain with the government agency. Narefsky highlighted other relevant public policy considerations such as open records laws, competitive bidding, noncompete requirements and restrictions, and state and local taxes to which the P3 counterparty may be subject.
9 Narefsky stated there are several key considerations that regularly arise with P3 procurement methods, including transparency, the selection criteria and methodology, the degree of risk transfer, financing options, and funding sources. He noted that workforce policy considerations such as the prevailing wage, local hiring, labor agreements and protections, and other requirements generally have limited impact on the implementation of P3 projects. Simon asked how changes to the AIPP align with local rules and regulations. Narefsky responded that the intent was that local airport owners and government might be more favorable to considering P3s if they could retain equity interest in the asset. He added that some local governments can legally be investors and some cannot; these new flexibilities must be reconciled with state and local constitutional provisions regarding government ownership. He added that it is possible that some of the same benefits that partial privatization provides could be accomplished by a combination of ongoing revenue sharing and terms and provisions in transaction documents, which give government owners similar types of control, rights and protection, and benefits. Simon asked whether the examples of unsolicited bids that have ultimately not resulted in a project or deal would stop other investors from developing unsolicited bids. Narefsky responded that unsolicited bids are episodic, and developers make judgments on the context in which they make sense. He added that it is hard in general for unsolicited proposals to proceed, and that this is particularly true for airports because of their inherently public nature. Clay McCoy highlighted the universe of airport investors and noted that in 2017 and 2018, more than $150 billion was raised globally. He added that because the U.S. airport investment market is developing more slowly, transactions are often spurred by unsolicited proposals that lead to a procurement process. McCoy stated that it is important for investors to see that there is broad stakeholder buy-in for private investment before moving forward. He noted that airports have historically launched requests for proposals (RFPs) or requests for qualifications (RFQs) that do not close or change form, or they make changes at the RFP or RFQ stage around which investors cannot adjust. McCoy noted that âindustry daysâ can be very helpful for bringing the public and private sectors together to leverage ideas and experience. He noted that these conversations should happen before an RFQ, to help inform the transaction and determine what privateâsector expertise is needed to understand the available options. Once internal stakeholders are aligned on what is important to them and what they want out of the project, marketing to private investors can begin. Through the RFQ process, the public sector can look at the ideas and experience of potential partners. McCoy stated that it is important to ensure that specific stakeholder concerns are addressed in the best way possible and that any restrictions or requirements included in
10 legal documents should be reflected in the financial offer. He added that private partners will look at two key variables: allocation of risk and long-term alignment of interests. McCoy described the valuation process, during which bidders develop a detailed financial model for the term of the lease and run a discounted cash flow analysis; develop forecasts for airport operations; and project cash flows. Roger Johnson asked why risk allocation shifts from bidder to bidder. McCoy responded that within a standard RFP process, the public authority puts out a lease agreement or a use agreement P3 contract that is essentially a wish list for risk allocation. Throughout the RFP process, the bidder will mark up that agreement or contract on the basis of what it is willing to accept. In response to a question about obtaining buy-in from local political leaders, McCoy stated that investors try to meet with as many decision-makers as possible to determine whether there is sufficient buy-in and good intent to justify investing time and resources in further negotiations. Narefsky stated that in the case of P3s, the public sector will often provide a stipend to short-listed bidders to offset the resources the investors expend throughout the process. In response to a comment on the continuous turnover that can happen in local government, Narefsky stated that it is important to look beyond the political landscape. There are other important considerations, such as the asset in question and who makes the decisions about it. McCoy added that if there is broader buy-in for the project among local residents and businesses, it is possible to overcome political turnover. Li Pei Wang highlighted the pre-procurement process for the ongoing LaGuardia Terminal B project. He noted that the Port Authority of New York and New Jersey (PANYNJ) spent a tremendous amount of time on pre-procurement. Technical efforts included coming up with a design that balances airside, terminal, and landside resources and engaging design consultants to identify a way to implement the plan on paper, including evaluating constructability and logistics phasing. Wang stated that pre-procurement survey efforts covered environmental, building, and lease agreements. PANYNJ also considered financial operations and maintenance (O&M) requirements and conducted interviews, studies of value for money (VFM), and risk assessments for all permutations from P3, DB, and DBFOM. Wang stated that PANYNJ considered whether to modernize or redevelop the existing terminal but that, ultimately, it decided that a new terminal was needed to correct existing deficiencies and accommodate future forecasted demand. Wang reviewed the time frame for the redevelopment procurement. The effort began in 2009, and the request for information (RFI) was issued in 2012. He noted that there was uncertainty as to whether the marketplace would be willing to take on a project that was so big and complex. Therefore, PANYNJ used the pre-procurement process to determine interest, which was overwhelming.
11 Wang stated that developing a project briefing book was very helpful for the RFQ stage. The book was a signal to developers that the project was moving forward and included potential design guidelines. PANYNJ included stringent submission requirements in the RFQ and used a very prescriptive form to limit the total number of responses. Wang noted that, at the end of the RFQ process, a P3 was still an option. PANYNJ then moved forward with developing the RFP, which took 9 months. Margaret McKeough noted that it took a long time to get to the RFI phase and asked whether that time frame could have been shortened. Lysa Scully responded that in the early stages, there was a vision for the project, but no advocate or champion for it, and there were many other competing priorities. She added that 2011 was the year in which PANYNJ decided to pursue a P3. Wang added that, given the complexity of the project, the time spent in Phase 1 was necessary and fruitful. In response to a question from Sheri Ernico, Scully stated that PANYNJ paid a stipend to the three final proponents while working with the preferred proponents. PANYNJ held at least 80 collaborative dialog meetings with proponents over the course of 9 months; the stipend was a demonstration of commitment and recognition of the time and resources the proponents committed to the bidding process. Jay DeWitt highlighted the pre-procurement process for and status of the City of Phoenixâs P3 deal for airport parking operations, which is still in process. He stated that Phoenixâs population growth has been among the highest in the nation in recent years, and the airport is hundreds of miles from any other large hub airports. Origin and destination traffic is growing approximately 5% to 7% annually, which leads to parking revenues. DeWitt noted that parking generates close to 25% of airport revenues, but the rapid adoption of transportation network companies and growth in outside parking operator business have limited the increases in parking revenue. DeWitt stated that investors have expressed an interest in airport operations for the past several years and that parking was identified as underperforming expectations, with the potential for an additional 20% in revenue that is not being realized. He stated that the deal in process is a 30-year lease DBFOM arrangement, with a lessee preference for a longer term. The deal includes an up-front payment and an annual revenue share percentage and portion of transportation network company trip fees above an established threshold. The investor preferred a higher up-front payment and lower annual payments, but the city negotiated a compromise between the two. The investment will fund a new parking garage near a future Sky Train station and replace two existing parking areas. Ownership reverts back to the airport at the end of the lease. The positive differential in net present value over base case pro forma is approximately 20%. DeWitt noted that the up-front payment reduces future debt requirements and shifts the market risk to the private-sector partner. The deal also offers the airport a parking revenue guarantee and provides more competitive parking products and better customer services to customers. He added that the city council sets a limit to parking fee increases.
12 DeWitt stated that the city began with an RFI, followed by an RFQ and RFP, all of which were preceded by outreach efforts and data gathering. In response to a question from Valerie Holt as to why the revenue stream was undervalued, DeWitt stated that historically, there had been no competition, and the city had done no advertising and had not implemented variable rates, yield management practices, or other measures to improve revenue. A 2016 increase in parking rates was the first one in 10 years. In response to a question from Holt on the lesseeâs flexibility in raising rates, DeWitt stated that the lessee has considerable flexibility, but the city will likely implement a cap that will increase with inflation on an annual basis. An audience member asked whether there were any requirements over the 30-year lease term that allow the city to control how the lessee manages customers. DeWitt responded that there are some limits and requirements on keeping facilities in good repair, all of which will be included in the RFP. In response to an audience member question, DeWitt stated that there is existing debt on the parking garage that will be reduced by payments. Louis Wolinetz stated that airports are generally reluctant to give up revenue. DeWitt stated that the driver for the deal is that the city will see increased revenues. In response to a question from Simon, DeWitt clarified that the city did pay the proponents a stipend, which was essential for keeping them engaged throughout the protracted process. The terms of the stipend allow the city to retain intellectual property (IP) rights to all proposals. Narefsky asked whether the deal included any noncompete considerations (e.g., restricting the city from licensing additional off-airport parking facilities). DeWitt responded that the lessee would like the city to not build additional parking facilities that would compete with airport parking, but that the city had made no guarantees or representations accordingly. In response to a question from Simon, DeWitt confirmed that the airlines and FAA had been involved in and informed of the planned transaction. In response to an audience member question on whether the city had right of first refusal should the investor sell the agreement, DeWitt responded the city would take the portion of the proceeds above and beyond the value of the agreement today and has the right to approve the party to the sale.
