The why’s or why not’s for a P3 for the Great Hall Development at DIA

great hall contract dia
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DIA Public Private Partnership (P3)

$1.8 billion, 34-year Terminal Renovation

City Council clears $1.8 billion terminal partnership for takeoff at Denver International Airport
34-year deal with Ferrovial Airports calls for big security changes, management of new concessions

The terms of a Public Private Partnership (P3) are not found in some legal form book. The goals of the public and private institutions vary

i.  the municipal body may not want to bear the risk of the venture,

ii.  the private organization may have greater expertise for the project,

iii.  the enterprise may be able to deliver the services more efficiently,

iv.  the governmental body may not have the financial capacity for the endeavor,

v.  the company may bring a different vision,

vi.  the proposed project may require an increase in supervisory personnel who would be terminated at its end—the private entity brings a bridge infusion of staff,

vii.  etc.

What is going on with the development contract recently executed by the City and County of Denver with the DIA Great Hall, LLC?

denver dia Public Private Partnership great hall

The Denver Regional Council of Governments and the City/County consumed almost 15 years between original conception and full operational opening. The proposal was greeted negatively by the incumbent airlines, but eventually the capacity limitations created by the old airport’s runway design convinced the tenants and the FAA to build the new tented terminal and extensive runway complex.

faa dia runway terminal

At the final stages of opening of the new DIA, the baggage system designed by the City/County contractor, not under the direction of the airlines, was tested and showed an unusual capacity to scatter clothes and other luggage contents underneath its tracks designed to move the bags from planeside to the main terminal. The centralized bag management system was not preferred by the tenants before implementation and after its operation, by the passengers.

End result: DIA received its first flight on February 28, 1995. The scoreboard:

  • 16 months behind schedule
  • a cost of $4.8 billion
    • nearly $2 billion over budget
  • the project employed 11,000 workers.

→  Maybe that’s the reason why the City/County chose a P3?

kim day ceo diaPerhaps not; the current DIA management team is impressive. Its CEO was awarded the Airport Director of the Year in the large/medium airports category by Airport Revenue News plus Ms. Day has 35 years’ experience in airport management, beginning her career as an architect. The rest of the team is also strong in relevant work.

→  Inadequate or incompetent staff does not appear to be a relevant.

The Denver Mayor explained the goals of the Great Hall project:

The Great Hall project will include upgrades for the entire terminal, including escalators and elevators, restrooms and other infrastructure that is now more than 22 years old. Other benefits include:

  • Enhancing the security of the terminal by removing today’s exposed checkpoints.
  • Increasing TSA throughput by an estimated 50-70 percent.
  • Increasing capacity of the terminal to accommodate future growth.
  • Better utilization of airline ticket spaces, increasing check-in counter space.
  • Creating a new meeting/greeting area at the south end of the terminal, and a new “front door” from the plaza to the airport, including a children’s play area and flight information displays.
  • Creating a new international passenger welcome center with seating, food and retail.
  • Improving food and retail offerings in the terminal.
  • Upgrading entire facility: escalators, elevators, restrooms, security and more.
  • Curbside improvements for increased passenger drop-off capacity, including an express drop off location adjacent to the TSA checkpoints for passengers without checked bags. 

→  None of these tasks appear to beyond the competence of the existing staff.

ferrovial airports dia Public Private Partnership

Ferrovial is a Madrid, Spain-based, global 73 year old company, which started out building railroads (its name is the Spanish word for railroad). It added to its inventory of private operation of civic facilities when in 2006 Ferrovial led a consortium to buy a privatized BAA, Limited for £10 billion. The company’s airport portfolio includes Heathrow, Glasgow, Aberdeen and Southampton with a total passenger count of 90 million passengers (DIA’s count is 58.3M).

  • Its management of LHR Heathrow Airport was recognized by SKYTRAX WORLD AIRPORT as Best Airport for Shopping.
  • Ferrovial Agroman and a team were awarded a contract to demolish old Terminal 2 at Heathrow and to build a brand new facility including gates. That is useful experience but quite different from redevelopment of a terminal WHILE it is still operating. The City/County requested, received and reviewed a detailed plan for the Jeppesen Terminal transition.

Its capitalization as of 12/31/2016 was $14,581,082,730.03.

→  That’s impressive, but Ferrovial is neither exceptionally more qualified or financially more capable than DIA.

As summarized by the article (the basic contract is 157 pages and the full document runs 1,500 pages), the primary financial terms are:

Complex setup provides contractual assurances that the marquee renovation will be delivered on time and on budget, and they argue that it provides a reliable partner at a time when DIA also will roll out separate projects for gate expansions and other changes that could include adding a seventh runway.

1. up-front cost split with Ferrovial’s Great Hall Partners on the set-price $650 million renovation, with DIA paying for 74 percent.

•  comment: Ferrovial’s investment of 26% is repaid later (see 4)

2. the airport also will be responsible for a contingency fund covering up to $120 million in large unforeseen construction and design costs, potentially because of airline needs, DIA’s decisions, surprises lurking behind the walls or changes in airport regulatory requirements.

•  comment: the developer should be knowledgeable (expert) about construction and design costs

3. the 30 years of concession operation, DIA will pay Ferrovial annually for capital repayment and an operations/maintenance reimbursement, totaling $1.2 billion.

•  comment: basically the 26% of the upfront costs (1) is a loan without interest.

4. DIA will receive 80 percent of revenue from the new concessions, while Ferrovial reaps 20 percent.

5. DIA has estimated Ferrovial’ s profit on its initial $82 million equity investment at a minimum 4.8 percent, as long as it meets the contract’s requirements — but it likely will be closer to 10.8 percent, based on concessions performance, and could go still higher.

→  Those are not the numbers which would make this a P3 risk shifting or sharing agreement. The contract pays Ferrovial well, and involves a deferred cost for the initial build. DIA also has an exposure of $120M for unexpected costs.

The Mayor exclaims that the Great Hall Renovation “is expected to create 400-450 construction jobs, more than 800 permanent jobs and generate an additional $3.5 million in annual taxes and general fund revenue for the City of Denver.” Arguably (if the P3 standard argument that private contractors are more fiscally conservative), a DIA managed redevelopment would result in more jobs.

There were concerns expressed by the Council about the length of the contract and protection of existing concessions’ employees. The contract can and does address those comments (it can be terminated early; the employees have protection and prevailing minimum wages are required).

It is hard to come to solid conclusions about such a lengthy contract, but it is hardtop discern why a P3 was selected.

There is a comment at the hearing which may express the real reason why this form of agreement was used:

“By supporting this contract tonight, the citizens of Colorado will no longer have anyone to complain to” about some terminal problems, said Joyce Foster, a former state senator and Denver council member. “I know that sounds tempting, but your hands will be tied — along with the next three decades of elected officials … I’m here now to hopefully change a few minds.”

→  Perhaps, the 1995 delayed DIA opening really has some lasting political baggage?

“Curiouser and curiouser!” Cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English).”
― Lewis CarrollAlice’s Adventures in Wonderland & Through the Looking-Glass

 


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