DIA’S PRO­POSED TER­MI­NAL CHANGES RAISE QUES­TIONS

City Coun­cil un­der the gun to OK project – ren­o­va­tion and 30 years of pri­vate man­age­ment of food and re­tail out­lets – by month’s end

The Denver Post - - FRONT PAGE - By Jon Mur­ray

Den­ver In­ter­na­tional Air­port’s pro­posed $1.8 bil­lion ter­mi­nal part­ner­ship — com­bin­ing a wide-scale ren­o­va­tion with three decades of pri­vate man­age­ment of new food and re­tail out­lets — has raised scores of ques­tions from City Coun­cil mem­bers who are un­der the gun to ap­prove it by month’s end.

Many of their con­cerns, and those ex­pressed by ob­servers, drive to­ward an over­ar­ch­ing ques­tion: Is the 34-year pub­lic-pri­vate part­ner­ship con­tract, pro­posed with a team led by Madrid-based Fer­rovial Air­ports, a good deal for Den­ver?

But that ques­tion eludes clear-cut an­swers, as some coun­cil mem­bers have found in as­sess­ing both the fi­nan­cial as­pects and larger ques­tions sur­round­ing DIA of­fi­cials’ big bet on the 22-year-old air­port’s fu­ture.

Rafael Espinoza, who rep­re­sents north­west Den­ver, doesn’t like what he sees, in large part be­cause he thinks such a long part­ner­ship risks ty­ing the hands of fu­ture DIA and city lead­ers.

“I am com­pletely com­fort­able with us tak­ing the work that Fer­rovial has done the last year, pay­ing them $9 mil­lion for do­ing a good job, and then do­ing the work our­selves,” said Espinoza, re­fer­ring to the walk-away fee due to Fer­rovial if the con­tract isn’t ap­proved by the Sept. 1 dead­line spelled out in an ear­lier ne­go­ti­a­tions agree­ment.

“Den­ver would get 100 per­cent of the rev­enue,” he added, “and would be in

con­trol of the ter­mi­nal con­ces­sions as well as the ter­mi­nal — so that if any­thing changes in the next 34 years, we can adapt.”

A switch to a more tra­di­tional method of gov­ern­ment con­tract­ing might be pos­si­ble, DIA of­fi­cials ac­knowl­edge, but it’s look­ing less likely as lob­by­ing by DIA of­fi­cials and rep­re­sen­ta­tives of Fer­rovial, which is part of a multi­na­tional com­pany, gains steam. More coun­cil mem­bers have stated their sup­port ahead of a likely Aug. 14 vote.

On its face, the $650 mil­lion ren­o­va­tion at the cen­ter of the part­ner­ship is flashy — so much so that even some crit­ics, in­clud­ing Coun­cil­man Paul López, say they are strug­gling to square what they see as a wor­thy project with the long-term com­mit­ment ac­com­pa­ny­ing it.

The Great Hall project would ac­count for fast­grow­ing traf­fic that reached 58.3 mil­lion pas­sen­gers last year, mak­ing the Jeppe­sen Ter­mi­nal ca­pa­ble of han­dling 80 mil­lion a year. It would mod­ern­ize and re­lo­cate the se­cu­rity screen­ing ar­eas, which have vul­ner­a­bil­i­ties at their cur­rent main-floor lo­ca­tions, to the north ends of the up­per level; con­sol­i­date the air­lines’ ticket coun­ters on the south ends as more pas­sen­gers check in at self­serve kiosks; and cre­ate more in­come-gen­er­at­ing con­ces­sions spa­ces in a post-se­cu­rity area on the main floor, along with a new wel­come atrium near the ho­tel.

At the most ba­sic level, DIA would pay for the cost of its part­ner­ship with Fer­rovial’s Great Hall Part­ners mostly by draw­ing for decades on higher fees from its air­lines and in­come from its ter­mi­nal con­ces­sions, which it fore­casts would be much more pro­duc­tive un­der Fer­rovial’s over­sight than the cur­rent ones are. Of­fi­cials hope to tap Fer­rovial’s ex­pe­ri­ence in both over­see­ing large projects and run­ning U.K. air­ports, in­clud­ing Lon­don’s Heathrow, where it built two ter­mi­nals in the last decade.

The deal has drawn the op­po­si­tion of DIA’S ma­jor air­lines, in­clud­ing United, South­west and Fron­tier. One of their big­gest ques­tions in­volves DIA’S pro­jected uptick in air­line op­er­at­ing costs, to pay for this and other up­com­ing projects, that the air­port says would amount to about $1 per pas­sen­ger.

On the coun­cil, the fi­nan­cial com­po­nents have got­ten plenty of ques­tions.

But so have other fac­tors, in­clud­ing the coun­cil’s loss of ap­proval power over con­ces­sion oper­a­tor con­tracts in the ter­mi­nal spa­ces un­der Fer­rovial’s con­trol, the length of the con­tract, a lack of wage pro­tec­tions for con­ces­sion work­ers and con­tract as­sur­ances that, in pro­tect­ing Fer­rovial’s in­vest­ment, could put costly re­stric­tions on some fu­ture air­port ex­pan­sion de­ci­sions and other ter­mi­nal changes. (Air­port of­fi­cials say they con­sid­ered those terms care­fully.)

A num­ber salad

Af­ter a year of ne­go­ti­a­tions and coun­cil brief­ings, DIA in mid-july re­leased the 157-page main “devel­op­ment agree­ment” with Fer­rovial’s team.

The main con­tract was ac­com­pa­nied by nearly 15,000 pages of at­tach­ments and project spec­i­fi­ca­tions.

Those doc­u­ments are full of com­plex fi­nan­cial terms that some might see as akin to a num­ber salad.

The fig­ures in­clude an up­front cost split with the Great Hall Part­ners on the $650 mil­lion ren­o­va­tion (DIA would pay for 74 per­cent), bor­row­ing costs, 30 years of an­nual cap­i­tal and op­er­at­ing re­im­burse­ments from DIA to off­set some of the part­ners’ costs (to­tal­ing $1.2 bil­lion), plus rev­enue­shar­ing from the new con­ces­sions’ rents (DIA would get 80 per­cent and the part­ners 20 per­cent).

For the project, DIA also would be re­spon­si­ble for a con­tin­gency fund that would cover up to $120 mil­lion in un­fore­seen con­struc­tion and de­sign costs due to air­line needs, sur­prises lurk­ing be­hind the walls or changes in air­port reg­u­la­tory re­quire­ments. Ad­dress­ing the air­lines’ con­cerns over the project could re­sult in project changes charged to that fund.

DIA CEO Kim Day and other of­fi­cials have ar­gued that the con­tract, as com­plex as it is, gives the air­port as­sur­ances for a mar­quee ren­o­va­tion that it wouldn’t get on a stan­dard project that’s bid out the tra­di­tional way. It also would bring on a re­li­able part­ner at a time when DIA will have its hands full with gate ex­pan­sions and other projects else­where, she said.

“Cost is only one as­pect of a project,” Day said. “Risk and de­liv­ery on time and within a spec­i­fied bud­get are mon­u­men­tal el­e­ments that are im­por­tant, par­tic­u­larly to gov­ern­ment agen­cies.”

By the end of the con­tract, DIA says, the Fer­rovial team would pocket a profit es­ti­mated at a min­i­mum 4.8 per­cent, but likely closer to 10.8 per­cent on its ini­tial $82 mil­lion eq­uity in­vest­ment un­der the con­ces­sions earn­ings fore­cast. That profit could go still higher if the con­ces­sions pro­gram is more suc­cess­ful than pro­jected, but that would re­sult in more money for the air­port, too.

Pub­lic-pri­vate part­ner­ships like the one pro­posed at DIA have only re­cently been used to fi­nance projects at air­ports, in­clud­ing at La­guardia Air­port in New York City. They’ve been more typ­i­cal for ground trans­porta­tion projects, and they come with plenty of de­trac­tors who typ­i­cally cite a lack of trans­parency for some fi­nan­cial com­po­nents, the po­ten­tial for high prof­its and other is­sues.

DIA’S pro­posed con­tract’s ba­sic setup isn’t as sim­ple as a typ­i­cal pub­licpri­vate part­ner­ship — also called a P3 — in which a con­sor­tium of pri­vate part­ners puts up all or most of the money for a pub­lic project and then is re­paid over years or decades from tolls, fees or other rev­enue that re­sults from the project.

“What made this deal so com­pli­cated from the be­gin­ning is that in a typ­i­cal P3, you’d have the P3 part­ner just de­sign and con­struct the piece that they were going to op­er­ate,” Day said. “In this case, we have asked them to de­sign and build both the TSA check­point and ticket lobby that they won’t be op­er­at­ing,” along with the con­ces­sion spa­ces that they will.

So that ac­counts for the high up-front con­tri­bu­tion from DIA for the ren­o­va­tion. As­sis­tant city at­tor­ney Dan Reimer said other com­pli­cat­ing fac­tors for the terms in­cluded DIA’S in­sis­tence on re­tain­ing con­trol over the ter­mi­nal’s spa­ces and a say in how the con­ces­sions pro­gram over­seen by Fer­rovial will op­er­ate.

Num­ber-crunch­ing

DIA hasn’t pro­duced a re­cent anal­y­sis show­ing how the con­tract costs would com­pare to a setup in which the air­port sim­ply hires con­trac­tors for a ren­o­va­tion project and then over­sees op­er­a­tion and main­te­nance of the con­ces­sion spa­ces it­self over the same pe­riod of time, chief fi­nan­cial of­fi­cer Gisela Shana­han said. She said DIA did pro­duce such an anal­y­sis early in the process of con­sid­er­ing a P3.

Since then, DIA of­fi­cials say, they’ve had ac­cess to the Fer­rovial team’s fi­nan­cial mod­els and cal­cu­la­tions, but those haven’t been re­leased pub­licly be­cause Fer­rovial con­sid­ers them pro­pri­etary. Coun­cil mem­bers have been able to view that in­for­ma­tion in a brief­ing room.

Coun­cil mem­bers in­clud­ing Chris Hern­don and Mary Beth Sus­man have ex­pressed con­fi­dence in the strength of the con­tract terms for DIA, but oth­ers want more time — a sen­ti­ment sup­ported by Don­ald Cohen of a group called In the Pub­lic In­ter­est, an Oak­land-based or­ga­ni­za­tion that has been crit­i­cal of pub­lic-pri­vate part­ner­ships.

He sug­gested the coun­cil should hire a fi­nan­cial an­a­lyst that’s in­de­pen­dent of Mayor Michael Han­cock’s ad­min­is­tra­tion.

“The peo­ple of Den­ver — not the elected of­fi­cials — will be bet­ter served by them do­ing the hard work of un­der­stand­ing the fi­nances, the rev­enue, the (project) de­liv­ery and how much things are going to cost,” said Cohen, the group’s ex­ec­u­tive di­rec­tor.

“Ev­ery P3 that I can think of off the top of my head that didn’t do that went bad.”

Cohen said the pub­lic’s in­abil­ity to see the Fer­rovial team’s cal­cu­la­tions and pro­jec­tions points to a ma­jor con­cern with P3 deals: There’s a heavy re­liance on trust­ing pub­lic of­fi­cials’ judg­ment — even if they of­ten re­ceive out­side fi­nan­cial and le­gal ad­vice dur­ing ne­go­ti­a­tions, like DIA did.

So far, the coun­cil’s skep­tics haven’t slowed down the con­tract.

A coun­cil com­mit­tee voted 4-1 to ad­vance the con­tract on July 26. Since then, com­ments by other mem­bers sug­gest that DIA and Fer­rovial are near­ing the seven-vote thresh­old needed on the 13-mem­ber coun­cil for pas­sage this month.

“More com­fort­able”

Among coun­cil mem­bers now solidly in fa­vor is Coun­cil­man Wayne New, who rep­re­sents cen­tral Den­ver.

For weeks, he pep­pered DIA of­fi­cials with fi­nan­cial ques­tions and even­tu­ally pro­duced a fi­nan­cial anal­y­sis that he shared with his col­leagues last week.

New’s cal­cu­la­tions, gen­er­ally sup­ported by DIA, show that the project was likely to im­prove the air­port’s fi­nan­cial po­si­tion af­ter the 34-year term de­spite the mas­sive costs over that time. For him, that fi­nan­cial up­shot was com­pelling.

“From the in­for­ma­tion and the data they have given me, it gives me a bet­ter high-level fi­nan­cial pic­ture of the ar­range­ment for the devel­op­ment of the Great Hall,” New said. “(DIA) should have done this work, not me. But I feel more com­fort­able with it.”

The coun­cil will be­gin fi­nal con­sid­er­a­tion of its first ma­jor pub­lic-pri­vate part­ner­ship when the con­tract is in­tro­duced at its Mon­day night meet­ing. It al­ready has set a pub­lic hear­ing for Aug. 14, when a fi­nal vote is pos­si­ble.

“The peo­ple of Den­ver — not the elected of­fi­cials — will be bet­ter served by them do­ing the hard work of un­der­stand­ing the fi­nances, the rev­enue, the (project) de­liv­ery and how much things are going to cost.” Don­ald Cohen, ex­ec­u­tive di­rec­tor of In the Pub­lic In­ter­est

Pho­tos by RJ San­gosti, The Den­ver Post

The Great Hall project at Den­ver In­ter­na­tional Air­port would ac­count for fast-grow­ing traf­fic that reached 58.3 mil­lion pas­sen­gers last year, mak­ing the Jeppe­sen Ter­mi­nal ca­pa­ble of han­dling 80 mil­lion a year.

Pub­lic-pri­vate part­ner­ships like the one pro­posed at Den­ver In­ter­na­tional Air­port, left, have only re­cently been used to fi­nance projects at air­ports, in­clud­ing at La­guardia Air­port in New York City.

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