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
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