Ter­mi­nal deal sign of things to come

The city’s first big part­ner­ship is likely the first of many us­ing pub­lic and pri­vate con­tracts.

The Denver Post - - FRONT PAGE - By Jon Mur­ray

Den­ver In­ter­na­tional Air­port’s pro­posed $1.8 bil­lion ter­mi­nal deal is poised to launch the city into a dif­fer­ent kind of con­tract­ing that hands over some con­trol of a pub­licly owned space to pri­vate in­ter­ests for decades.

Get ready: That com­plex, 34year con­tract could be a har­bin­ger of things to come. Mayor Michael Han­cock and other city lead­ers see prom­ise in pub­lic-pri­vate part­ner­ships, which in­fuse both pri­vate money and man­age­ment into pub­lic projects, as they pre­pare to build out the Na­tional Western Cen­ter with large, new event venues, ex­pand the con­ven­tion cen­ter and plot big changes to the Den­ver Per­form­ing Arts Com­plex.

But as the City Coun­cil pre­pares for a vote Mon­day night on DIA’S pro­posed ar­range­ment with a con­sor­tium led by a large Span­ish com­pany, some mem­bers ex­press mis­giv­ings about more such deals. Their skep­ti­cism al­ready has paused a con­sult­ing con­tract that’s seen as cru­cial to set­ting up a city of­fice ded­i­cated to shep­herd­ing such projects in the fu­ture.

A big con­cern in that camp is that early plans call for end­ing the elected coun­cil’s de­fault role as fi­nal ar­biter over those pub­licpri­vate part­ner­ship con­tracts, also called P3s.

In­stead, a draft frame­work calls for for­mal coun­cil in­volve­ment in set­ting pa­ram­e­ters be­fore ne­go­ti­a­tions start.

That would give its mem­bers more of a say up front — while also pro­vid­ing more cer­tainty for the pri­vate part­ners that the deal would go through with ad­min­is­tra­tive ap­proval.

“So we’ve tra­di­tion­ally had three forms of gov­ern­ment: the ex­ec­u­tive, the ju­di­ciary and the leg­isla­tive. And the P3 is kind of form­ing this hy­brid fourth arm of gov­ern­ment,” Coun­cil­man Paul Kash­mann told Han­cock this month dur­ing a wide-rang­ing dis­cus­sion in the weekly may­or­coun­cil meet­ing. “And I just think it does make sense for us to look at — as it takes a greater role in how we run our city — how that might need to play out.”

Han­cock held firm in his sup­port of part­ner­ships and the the­o­ret­i­cal prom­ise they of­fer — min­i­mized risk for the gov­ern­ment side in a project, the use of pri­vate cap­i­tal in­stead of or in ad­di­tion to pub­lic debt, and a set price for the work.

“There isn’t a may­oral con­fer­ence I at­tend that we’re not talk­ing P3s and what it means,” Han­cock replied to Kash­mann, “so that we can ac­com­plish the mis­sion of gov­ern­ment and the peo­ple — with­out re­ally sur­ren­der­ing the val­ues of rep­re­sen­ta­tive gov­ern­ment that we care so deeply about. (But) I think we should have that con­ver­sa­tion.”

Look­ing at part­ner­ships

Pi­o­neered over­seas, pub­lic-pri­vate part­ner­ships have be­come more com­mon in the United States over the last decade for trans­porta­tion projects, es­pe­cially for new and ex­ist­ing toll roads.

Of­ten, they’re ac­com­pa­nied by con­tro­versy over a rel­a­tive lack of trans­parency com­pared with tra­di­tional gov­ern­ment con­tract­ing, such as when pri­vate part­ners shield road-us­age pro­jec­tions as pro­pri­etary in­for­ma­tion.

Only re­cently have air­ports used P3s to fi­nance ex­pan­sion projects, in­clud­ing a $4 bil­lion part­ner­ship ap­proved last year for ren­o­va­tion and ex­pan­sion of a ter­mi­nal at Laguardia Air­port in New York City.

Such part­ner­ships may be new for Den­ver city gov­ern­ment, but they have been more com­mon at the re­gional and state lev­els in Colorado. Ex­am­ples in­clude Ple­nary Roads Den­ver’s 50-year con­tract to partly ex­pand U.S. 36 be­tween Den­ver and Boul­der, and then to man­age and col­lect tolls along the high­way.

An­other is Den­ver Tran­sit Part­ners’ con­struc­tion and op­er­a­tion of three com­muter rail lines, in­clud­ing the trou­ble-plagued Uni­ver­sity of Colorado A Line to DIA, in a 34-year con­tract with the Re­gional Trans­porta­tion District.

DIA’S pro­posed deal is with Great Hall Part­ners, a con­sor­tium led by Fer­rovial Air­ports and lo­cal part­ner Saun­ders Con­struc­tion.

Pri­vate in­ter­ests led by the Span­ish multi­na­tional com­pany would chip in some of the cost of a wide-scale, $650 mil­lion ren­o­va­tion of the Jeppe­sen Ter­mi­nal — in­clud­ing the re­lo­ca­tion of se­cu­rity screen­ing ar­eas to the up­per level and con­sol­i­da­tion of tick­et­ing — and man­age new main­floor ter­mi­nal con­ces­sions for three decades. Fer­rovial would re­ceive 20 per­cent of the in­come pro­duced by those shops and food stands, a take that in the end is fore­cast by the air­port to pro­duce a nearly 11 per­cent re­turn on the part­ners’ up-front in­vest­ment.

In most P3 con­tracts, the pri­vate part­ner may fi­nance debt at a higher in­ter­est rate, but pub­lic of­fi­cials typ­i­cally point to cost sav­ings that have the po­ten­tial to off­set that draw­back. Chiefly, firm pric­ing for the project passes along to the pri­vate part­ner the risk for most po­ten­tial over­runs, be­cause of fac­tors such as un­fore­seen in­creases in costs for ma­te­ri­als and la­bor.

No P3 is ex­actly alike. But ad­vo­cates ar­gue that the pub­lic ben­e­fits from pri­vate-sec­tor in­no­va­tion that oc­curs when project fi­nanc­ing is cou­pled with de­sign, con­struc­tion, op­er­a­tion and main­te­nance, as hap­pens in the most com­plete deals.

“That’s what it’s re­ally all about: For ev­ery dol­lar you pay an ar­chi­tect, the con­trac­tor gets about 10 bucks, and the main­te­nance and op­er­a­tion costs about $100 over the next 40 years,” said Frank M. Rapoport, a P3 ne­go­ti­a­tions at­tor­ney with the New York law firm Peckar & Abram­son. He also is the chief strat­egy ad­viser for the As­so­ci­a­tion for the Im­prove­ment of Amer­i­can In­fra­struc­ture. “(Pri­vate part­ners) know they’re stuck main­tain­ing this build­ing for 30 or 40 years.

“You know, of­ten they over­build it,” he said, to re­duce up­keep costs later on.

Track record

But in any P3 deal, ex­perts say, the devil is in the de­tails — and usu­ally there are reams. (DIA’S pro­posed con­tract fills nearly 15,000 pages.)

Of more than 40 ar­range­ments cited by Rapoport that are un­der­way in the United States, a hand­ful have run into prob­lems.

The most no­to­ri­ous is Chicago’s 2008 de­ci­sion to hand over con­trol of its park­ing me­ter sys­tem to pri­vate part­ners for 75 years, us­ing the $1.16 bil­lion up-front lease pay­ment to plug bud­get holes. An in­spec­tor gen­eral’s re­port found the city was short­changed at least $974 mil­lion in the poorly ne­go­ti­ated deal.

P3 skep­tics point out that part­ners some­times have over­es­ti­mated sav­ings or made mis­takes in fi­nan­cial pro­jec­tions that aren’t shared with the pub­lic. In a few cases, toll road part­ner­ships have gone bank­rupt be­cause road-us­age pro­jec­tions were over­whelmed by dips in traf­fic dur­ing the 2008 re­ces­sion, as hap­pened with deals in Texas and In­di­ana that in­cluded Fer­rovial’s sub­sidiary Cin­tra. (New in­vestors took over those part­ner­ships.)

Coun­cil­woman Robin Kniech voiced an­other con­cern at a com­mit­tee meet­ing last month.

“When you’re deal­ing with op­er­a­tions and main­te­nance, the No. 1 way you get sav­ings is through lower wages and ben­e­fits” for work­ers, Kniech said. “Ev­ery one pays the same for Win­dex. Ev­ery­one pays the same for mops and street sweep­ers. The one thing that changes from the pub­lic sec­tor to the pri­vate sec­tor tends to be the wages and ben­e­fits.”

Be­cause the con­tracts usu­ally last decades, they’re also prone to chang­ing so­cial, ur­ban or trans­porta­tion trends that can thwart their as­sump­tions.

“Con­tracts are very rigid doc­u­ments,” said Don­ald Co­hen, ex­ec­u­tive di­rec­tor of a group called In the Pub­lic In­ter­est, an Oak­land­based or­ga­ni­za­tion that has been crit­i­cal of pub­lic-pri­vate part­ner­ships. “This is why there is so much con­tract­ing lit­i­ga­tion in Amer­ica. … You’ve got to an­tic­i­pate what both sides want and ev­ery­thing that could go wrong.”

“Share the bur­den”

Han­cock and other city of­fi­cials have ex­pressed con­fi­dence in DIA’S ne­go­ti­a­tions with Fer­rovial and the city’s abil­ity to strike fair deals in the fu­ture to help with big projects.

“We have a cou­ple choices: You ei­ther raise taxes, you raise costs or you en­ter into the P3s that en­able us to level off the costs and to share the bur­den with pri­vate part­ners,” he told coun­cil mem­bers this month.

Han­cock and his Cab­i­net most solidly have en­vi­sioned pub­licpri­vate part­ner­ships po­ten­tially play­ing a role on the Na­tional Western Cen­ter cam­pus. The city and its in­sti­tu­tional part­ners are work­ing out $1.1 bil­lion in work for early phases of a 10-year mas­ter plan. But P3s could be con­sid­ered for the still-un­funded later phases, which call for a new arena and ex­po­si­tion cen­ter as well as re­de­vel­op­ment of the Den­ver Coli­seum site, and for some other as­pects.

City of­fi­cials also have said they might pur­sue part­ner­ships for parts of an ex­pan­sion of the Colorado Con­ven­tion Cen­ter and to help fi­nance big po­ten­tial changes to the Den­ver Per­form­ing Arts Com­plex, where an early vi­sion plan last year called for three or four pri­vately de­vel­oped res­i­den­tial high-rises as part of the im­prove­ments.

But city of­fi­cials are on the look­out for other ideas — which they say are more likely to be use­ful for large projects than small ones, given the com­plex­ity in­volved.

A state­ment pro­vided by Han­cock’s of­fice said the new P3 of­fice would “en­sure that only the projects that lever­age the most value for the city are con­sid­ered for a P3 model.” The city also would main­tain own­er­ship of pub­lic as­sets in any deal, the state­ment says.

But the com­plex­ity of the DIA deal, which has split the coun­cil, has spurred some of its mem­bers to scru­ti­nize closely the stille­volv­ing plans for more deals.

A coun­cil com­mit­tee on July 11 heard a pre­sen­ta­tion on city of­fi­cials’ re­quest to add $480,000 to an ex­ist­ing con­tract with the New York City of­fice of Arup Ad­vi­sory Inc., which al­ready has earned $475,000. That firm is as­sist­ing with the de­vel­op­ment of P3 poli­cies and prep work to launch the city’s pro­gram and P3 of­fice.

Fac­ing prob­ing ques­tions, City At­tor­ney Kristin Bron­son tried to pro­vide some as­sur­ance.

“All the con­cerns that the coun­cil has ex­pressed about P3s gen­er­ally is one of the rea­sons we want a P3 of­fice,” Bron­son said. “We’re not go­ing to stop look­ing at these kinds of op­por­tu­ni­ties, so let’s make sure that we have set up a thor­ough screen­ing process.”

But coun­cil mem­bers held out, say­ing they had plenty more ques­tions. An­other fi­nance com­mit­tee hear­ing on Arup’s con­tract ad­di­tion is planned for Aug. 22.

Na­tional Western Cen­ter mas­ter plan (from top); RJ San­gosti, The Den­ver Post; He­len H. Ri­card­son, The Den­ver Post

Den­ver Mayor Michael Han­cock and other city lead­ers see prom­ise in pub­lic-pri­vate part­ner­ships, which in­fuse both pri­vate money and man­age­ment into pub­lic projects, as they pre­pare to build out the Na­tional Western Cen­ter, top, with large, new event venues; ex­pand the con­ven­tion cen­ter, mid­dle; and plot big changes to the Den­ver Per­form­ing Arts Com­plex, bot­tom.

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