Evaluating and Implementing Airport Privatization and Public-Private Partnerships (2021)

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42 Introduction Chapter 4 discusses how to define a project and an airport’s goals in relation to a project and the procurement process. It also describes how to assess the organizational capacity necessary to deliver a project. This chapter will focus on how airport owners find alignment between a project itself and what they intend to achieve with a selected project delivery method. The chapter also discusses how to engage stakeholders so that the airport’s constituents are educated and aware of project delivery method decisions. At the end of this chapter, users will be able to • Describe the factors that are assessed to determine whether a P3 delivery method is suitable in meeting the owner’s project goals. • List the steps taken to assess the financial, technical, and commercial potential for a project to be successful as a P3. • Understand the role a “project champion” plays and the importance of engaging stake- holders like airlines and the business community early in the P3 process. Project Suitability for Alternative Project Delivery Screening projects to determine their appropriateness for P3 delivery allows the airport owner to consider how the delivery method may leverage project-specific characteristics to most effectively utilize public funds. Where long-term “value for money” (VfM) can be enhanced, a P3 could be effective. C H A P T E R 5 Selecting a Project Delivery Method Chapter 4: Project Planning • Determining Project Goals and Project Delivery Goals • Organizational Capacity • P3-Enabling Authority, Policies, and Procedures • Internal Resources • External Resources • Building Internal Capacity and Engaging Advisors Chapter 5: Selecting a Project Delivery Method • Project Suitability for Alternative Project Delivery • Opposition or Lack of Buy-In • Aligning Stakeholder Interests • Determining P3 Feasibility • Evaluating Project Delivery Options • Leveraging a P3 to Address “Non-Core” Airport Needs Chapter 6: Structuring the Procurement Process Chapter 7: Procurement— Advertisement to Shortlist • Ensuring Transparency and Accountability • Project Advertisement • Evaluation of Proposals and Shortlist • Collaborative Dialogue • Performance-Based Requirements • Stimulating Innovative Approaches • Essential Procurement Documents Chapter 8: Procurement— Preferred Proponent to Financial Close • Reaching Commercial and Financial Close • Protests • Third-Party Disputes • Commercial Close • Financial Close • Work During the Negotiation Period • The Federal Aviation Administration’s Airport Investment Partnership Program Chapter 9: Contract Management and Oversight • Contract Management • Dispute Resolution • Meeting Key Performance Indicators • Assessing Market Interest • Selecting the Procurement Approach • Payment Mechanisms • Incentives and Disincentives • Essential Procurement Documents • Risk Allocation and Its Role in Procurement • Understanding the Risks • Unsolicited Proposals • Private Negotiations • Educating Decision- Makers

Selecting a Project Delivery Method 43 When screening projects to determine their suitability for P3 project delivery, the following should be considered: • Funding and financing. The airport owner should consider the project’s financial plan within the context of other airport priorities. Even with adequate access to funds (often at a lower cost of capital than private funds), a P3 delivery may help an airport achieve goals such as retaining debt capacity for other projects or transferring revenue risk. By the same token, a shortage of project funds is not necessarily a reason to explore a P3. A project that is not publicly financeable will not become financially viable simply because a private entity becomes involved. • Technical complexity. Since a P3 relies on the transfer of risk to deliver the greatest VfM, projects with complex scopes of work often provide the greatest opportunity to benefit from the ingenuity of the private sector through alternative technical concepts that reduce devel- opment costs and/or enhance operational revenue. The LaGuardia Terminal B project is an example where the design was greatly enhanced by P3 procurement. • Project scale. The higher transaction costs of a P3 compared to other delivery methods are typically better suited to large projects. There are exceptions, such as at Everett Paine Field and the Austin South Terminal, where transaction costs were kept low to enable smaller projects to utilize a P3. • Core competency. Projects for which the airport lacks experience and does not foresee repeating in the future are strong candidates for a P3 since outside expertise will be required, and there is not a risk of losing institutional knowledge as could be the case for a project type that the airport regularly develops. • Long-term project cash flows. Private investors may see an opportunity to enhance revenue as a way to enhance their return on investment, making projects that generate positive cash flows attractive. This is not to say that projects with limited or no revenue cannot be devel- oped as a P3 using availability payments—the Los Angeles International Airport automated people mover being a prime example. • Completed (or nearly complete) environmental processes. Projects that have completed or made significant efforts to complete environmental processes are projects that are most likely to succeed and move forward. Those projects that have not completed the requisite environ- mental and planning processes are those that are likely to be delayed while those efforts are completed. • Clear understanding of project development risks. Private developers consider their risk in determining their bid for a project and add contingency to account for uncertainty. Limiting Value for Money Analysis The concept obtaining the best “bang for the public buck” is conceptually appealing, but challenging to assess. Some infrastructure owners, such as the State of Virginia Office of Transportation Public–Private Partnerships, require a detailed public sector analysis and competition study to determine if the public is better off under the P3. However, quantitative VfM analysis is considered ineffective by others, since it necessarily requires numerous assumptions about future cash flows and conditions that are difficult or impossible to objectively to set. Furthermore, VfM cannot be validated by looking at historical outcomes since it is not possible to compare an alternate reality in which a P3 was selected (or not selected) for a project.

44 Evaluating and Implementing Airport Privatization and Public-Private Partnerships unknown factors that could cause increases in costs or delays in approval is essential. The more the airport knows about risks such as geotechnical issues, utilities, and interfaces with third parties, the less contingency developers will add to their bids and the better value the airport will achieve. • Community support. The airport owner should consider community support both for the project and for a P3 delivery. Community support often indicates that the project planning and development will go smoothly and provide a final asset that meets the needs of its stake- holders. On the other hand, a P3 can be a way to develop controversial projects by reducing political interference. Constructing a terminal to enable commercial flights at Everett Paine Field is a prime example of the private sector taking on a project that may have lacked political support for public development. Figure 7 shows common screening criteria used to evaluate whether P3 or alternative delivery methods meet a project’s goals and the airport owner’s needs. Project screening ultimately allows airport owners to prioritize projects that would most likely be good candidates for P3 delivery. The process also allows owners to determine whether there are issues that may impede the procurement process, entice a low number of proposers, or result in a project that does not meet the owner’s ultimate goals. For instance, environmental permitting processes for greenfield developments can influence project feasibility and jeopardize private sector involvement. For the Everett Paine Field project (see Appendix C for full case study), the airport owner, Snohomish County, conducted an environmental assessment in 2012 and again in 2018 regarding the impact of two commercial airline gates. Considering the lengthy nature of environmental processes, Snohomish County opted to contain development to two gates rather than issue new environmental documents even though additional commercial gates were financially viable. Snohomish County had to weigh the costs of new environmental approvals and potential schedule delay against the potential benefits of additional gates. This instance is illustrative to airport decision-makers for two reasons: first, airport owners should consider the maximum amount of commercial space that a developer may be interested in, particularly if environmental processes occur years before procurement begins; and second, this example shows that the screening process Figure 7. Screening criteria for P3s.

Selecting a Project Delivery Method 45 helps an airport owner to analyze the costs and benefits of decisions that influence the financial feasibility and overall schedule of a project. Questions that an airport owner may consider during the screening process include the following: • What are the project’s goals and what does the airport owner intend to achieve with the project delivery method? • How will success be defined for the project? • Is the project a part of the core business of the airport? Or is it a one-off where the airport does not expect to do a similar project in the foreseeable future? • Does the airport owner have the appropriate legislative authority in place to undertake a P3 arrangement? Does the project meet the statutory eligibility criteria? • Is the project cost high enough to justify the additional upfront cost to implement a P3? • Does the project complexity facilitate an opportunity for private sector innovation? • Is the anticipated asset life a good match for a long-term financing structure? • Would project operations and maintenance be candidates for private sector performance? • Does the nature of the project as a brownfield or greenfield impact the potential structuring of a P3 arrangement? • Which stakeholders will be impacted by the project? What concerns are they likely to have? • Who is the project champion that will shepherd the project? To ask these questions, an airport owner typically takes three steps: 1. Determine whether the goals for the project (the physical and functional nature of the project itself) and goals for the procurement (the process by which a developer is selected) align. 2. Assess project delivery options to weigh challenges and opportunities relative to the airport’s context. 3. Consider the project’s financial viability for a P3. This process is critical to informing decision-making for future P3 project success. The next section will describe best practices for each of these steps in determining whether it is feasible to procure the project as a P3. Refer to Chapter 6 for more information on determining project feasibility. Potential Obstacles: Opposition or Lack of Buy-In Airport P3s are more challenging than toll road and other infrastructure deals. Key reasons for this are the many stakeholders involved with airports; that airports are seen as a “front door,” representing the community to visitors; and the numerous different systems that work in tandem for successful operation (e.g., ground access, check-in, security screening, gate management, and so forth). This results in many more people and organizations being interested in airport projects compared with other infrastructure, making it more likely that there will be opposition to the project and/or the P3 delivery mechanism. Educating stakeholders about the process and making as many of them as possible allies (or at least not active opponents) of the project are critical for success. Airports are inherently political because of their governance structure and close relation- ships with elected bodies. Airport projects are frequently among the largest in a community. The importance of airports as economic generators means that many stakeholders are interested in their development. Projects with strong project champions have a greater likelihood of reaching the finish line. Champions help translate to critical stakeholder groups (such as the traveling public or political

46 Evaluating and Implementing Airport Privatization and Public-Private Partnerships decision-makers) the importance of the project, the relevance and need for private party engagement, and how the project will function. Importantly, the project champion should be relentlessly optimistic, helping to keep the momentum going during the inevitable setbacks that occur with a major project. There are two types of champions—those in a political role and those playing a leadership role within the airport. The lack of a champion can pose an obstacle to an airport owner pursuing a P3 project because a political champion or a champion at the executive leadership level is an essential part of demystifying and building the case for a P3. A P3 can be successful even through changes in airport or sponsor leadership, but it takes work and often repeating steps to educate new decision-makers. The original consideration for the Landside Access Modernization Program P3 at Los Angeles International Airport was developed under Mayor Antonio Villaraigosa, who left office in 2013. The incoming mayor, Eric Garcetti, then continued this strategy for project delivery. Similarly, the CEO of Los Angeles World Airports retired just as the procurement process was beginning. Staff members who provided both key leaders with evidence of the benefits of the P3 helped to keep the procure- ment on track and spent considerable time assuaging the concerns of stakeholders about the P3. Stakeholder Considerations: Aligning Stakeholder Interests Beginning in the project planning phase, an airport owner should identify the stakeholders that are likely to be influenced by the project. Stakeholders that may be influential for your project include, but are not limited to, the following: • Airport executives and staff • Airlines and other airport tenants • The business community (potential proposers, contractors, and other vendors) • Government oversight entities (FAA, TSA, local agencies) • Union and non-unionized labor • Minority, women-owned, and/or disadvantaged business enterprises • Political stakeholders (e.g., mayor, city council, or governing board) • Environmental advocates • Airport users • The public Each of these stakeholders is impacted by a potential project in different ways. When first considering whether alternative delivery meets its needs, an airport must determine who is going to be most impacted (and at what point) and what level of awareness they have of the project in this planning stage. An airport owner also has to consider what level of knowledge and under- standing each stakeholder has regarding alternative delivery and P3s. Airport owners identify these stakeholders and potential issues in the planning stage to consider different scenarios that may impact the delivery method chosen, the schedule for procuring and executing the project, and the sources and uses of funding and financing for the project. Obtaining stakeholder support (or at least minimizing vocal opposition) is critical for success. Beyond the planning and selection phase, airport owners should continue to check in with their stakeholders throughout the project and revise their understanding of stakeholders’ inter- ests and actions in relation to the project. Stakeholders that are not sufficiently engaged are more likely to impede the progress of a P3. Ideally, airport owners need to engage the business community, airlines, and the public in a holistic manner that mitigates the risks posed by stakeholders. A “bottom-up” community engagement strategy allows the transaction not only to be market driven by allowing private industry to engage with the airport owner but also to be transparent to the public. In Gary Stakeholder engagement is not a “check the box” exercise. Stakeholders and their level of involve ment and interest in a project change over time.

Selecting a Project Delivery Method 47 Indiana, one of Gary Mayor Freeman-Wilson’s legal advisors for the airport project noted that the transaction’s momentum relied on continually educating the airport’s stakeholders on the airport’s strategy because “everyone cannot hear all the information at the same time.” The role of the Ad Hoc Committee helped to keep a broad array of stakeholders engaged, held the City and Airport Authority accountable to a timeline, and allowed the private sector to provide feedback on the project elements most likely to make the deal mutually beneficial. The advisor stressed that decision-makers were conscious of public opinion. This required the Ad Hoc Committee to approach project delivery methods as impartial to what was the “best” form of project delivery until the deliberative procurement process was complete. Engaging Airlines As with any major airport project, the view of the airlines is especially important to consider. The impact, if any, on airline rates and charges, operations, and competitive balance should be understood and conveyed at the appropriate time. Some projects, such as the Austin South Terminal, may be deeply unpopular with airlines for competitive reasons. Others, such as the Los Angeles International Airport landside program, may have little or no impact on the air- lines. The case studies developed for this research suggested that airlines are typically not for or against P3 as a project delivery mechanism. Rather, their primary focus is ensuring that the airport is building the right project at the right time at a reasonable cost. Timeframe for Engaging Stakeholders Balancing transparency and engagement with confidentiality and project definition is one of the key challenges of a P3. On the one hand, stakeholders are more likely to support the project when they have a role in the decision-making process and can see how their concerns are being addressed. On the other hand, too much openness can cause a project to succumb to opposition before it is fully formed. There is no right answer to engaging stakeholders. What is important is identifying the issues that are likely to be important and developing a stakeholder engagement plan for each constituency. The plan should include what to do if information leaks to stake- holders (or the press) before intended, and the airport loses control of messaging to the airport community. Some questions to consider in timing stakeholder engagement include the following: • How strong is the relationship with the stakeholders most affected by the project? • Are stakeholders aware of the project? • Is the project likely to be controversial to the stakeholder group? • Is the P3 delivery mechanism likely to be controversial? • How likely is information to remain confidential if shared with stakeholders? • Will the project directly impact stakeholder operations? • Is stakeholder input important for refining the design/timing/financing of the project? Determining P3 Feasibility After using a screening process to ascertain a project’s suitability for a P3 and assessing orga- nizational capacity to manage the procurement of a P3, airport owners usually consider which projects may be feasibly delivered through a P3 or other alternative means. The project feasi- bility process considers whether a P3 delivery helps an organization reach its project objectives, whether delivery of the project as a P3 represents a value proposition for the public sector, and how the private sector will view the opportunity. Project feasibility analyses also consider the private sector view by assessing the financial and technical components of the project and then determining if there is private sector appetite and capability that match the airport’s needs.

48 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Figure 8 depicts some of the key decision points in the overall P3 planning and procurement process. From high-level screening to initial feasibility considerations, assessing project feasi- bility helps airport owners arrive at an informed decision to procure a project as a P3. Evaluating Project Delivery Options Rigorous assessment during the planning process helps owners determine the best way to deliver a project. Once a project is selected, the airport owner looks at how best to structure and procure a potential P3 project. Airport owners typically debate the merits (and costs) of a range of delivery methods available for a project. The goal is to find the delivery method that best aligns with the objectives and needs of the owner’s project. The airport owner’s team then develops inputs and utilizes a variety of tools, such as revenue or financing studies, preliminary design and cost estimates, risk assessment, financial feasibility assessment, and business case studies. While designed to be used for surface transportation projects, the FHWA Center for Innova- tive Finance Support (CIF$) and the Build America Transportation Investment Center (BATIC) Institute: An AASHTO Center for Excellence are two governmental entities that provide imple- mentation resources to those using alternative project delivery and/or project financing tech- niques. The primary considerations for P3 project delivery by airport owners reflect common themes in surface transportation and airport projects. CIF$ and the BATIC Institute provide in-person training, web educational resources, white papers, and other resources that apply to airport practitioners. CIF$ “conducts research and provides tools, training and technical assis- tance to help the transportation community vet and implement innovative strategies to fund and deliver transportation improvements.” The center has developed a wide array of policy and technical guides, as well as analytical tools, to inform decision-making about P3s. Both entities have published numerous technical guides, available at https://www.fhwa.dot.gov/ipd/ and http://www.financingtransportation.org/, which describe the process and form of studies that have been used to assess P3 feasibility. Although P3s can offer access to capital, they do not provide new funding; in fact, P3s need a revenue stream to work. When a P3 project does not generate a discrete stream of revenue, the public entity will allocate eligible funds such as general airport revenues, PFCs, state or federal grant funding, or other forms of funding derived from within the airport to repay the private party. Because private capital is more expensive than capital derived from public sources such as bonds or taxes, a P3 may not be cost-effective or appropriate if there is not sufficient risk transfer to justify higher costs. Financial feasibility analyses help airport owners to determine which delivery option may result in the optimum value to the public. Financial viability assessments use cash flow and Planning RFQ and Select Short- Listed Bidders Procurement Initial Project FeasibiIity Conduct Risk Assessment Draft Procurement Documents Final Contract Award Concept Development Approve and Issue Final RFP Select Preferred Bidder Figure 8. High-level view of planning and procurement process steps. While a P3 can offer access to capital, it does not provide new funding; in fact, P3s need a revenue stream to work.

Selecting a Project Delivery Method 49 valuation models. Financial modeling is primarily used by airport owners to determine an airport’s ability to afford the project. Public entities generally weigh the benefits and costs of P3 delivery by analyzing the VfM, or the difference in cost of delivery between a private capital approach and a public approach. This form of study allows the public entity to quantify and analyze the costs and benefits of a variety of procurement models. Best Practice: Leveraging a P3 to Address Non-Core Airport Needs Medium- and small-hub airports seek private investment not only to access capital to grow but also to find operators that can manage and maintain the airport and achieve lifecycle cost efficiencies. Airport practitioners should consider what services are essential to their mis- sion and find opportunities to leverage private sector expertise to address non-core activities. Everett Paine Field (also known as Snohomish County Airport in Washington State) did not see operating commercial service at Everett Paine Field as an organizational strength since the air- port was primarily used to support Boeing’s widebody aircraft assembly facilities. The structure of the lease agreement between the airport and the developer, Propeller, gives Propeller access to the curb of the terminal, which means that Propeller engages directly with transportation providers and levies fees as it sees fit. This access gives Propeller a financial upside to capture and also offloads the responsibility for negotiating terms and monitoring compliance from the county to the private operator. Other medium- and small-hub airports, such as airports in San Juan, Puerto Rico, and in Gary, Indiana, have used the relationship with private operators to address lifecycle or infrastructure investments that they could not otherwise make without a private party. Lessons Learned: Los Angeles International Airport Landside Access Modernization Program A primary reason that Los Angeles World Airports selected a P3 for two major compo- nents of its landside program is that the facilities are not core assets. Los Angeles World Airports had no experience with automated people mover systems or ConRAC facilities and is unlikely to develop either type of facility in the future. Thus, there is no loss of institutional knowledge by utilizing a P3. Neither project included revenue risk, and Los Angeles World Airports has strong access to the capital markets. Los Angeles World Airports recognized it would need to develop (or procure) significant new expertise to both construct and operate the facilities. Therefore, P3 delivery made sense even aside from financial considerations.