Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
50 C H A P T E R 6 Introduction In Chapter 5, the research team described how an airport might screen and select projects that are most suitable for alternative project delivery. Next, the team explained how to determine if a project would be commercially and financially feasible to be delivered through alternative methods through a series of studies and engagement with the private sector. At this point, an airport would be ready to design a procurement process to move toward its end goals. Procurement processes articulate an airport ownerâs goals, performance requirements, incen- tives, and disincentives. The procurement process encompasses the initial development of the projectâs parameters, determining funding methods, and developing technical specifications, followed by the public bidding process in which the airport owner solicits bids to select a private developer. Procurement is often an extended, deliberative process that entails significant legal considerations and the potential for legal risks. The procurement process is complete upon reaching commercial and financial close, which is the point at which the airport owner and the developer have executed a contract and funded all initial commitments. This chapter discusses procurement activities that occur before the project is advertised to the business community as well as the most common and critical documents. At the conclusion of this chapter, users should be able to â¢ Understand how to assess private sector interest in a project and P3 as the delivery method. â¢ Describe the steps taken during a two-step procurement process. Structuring the Procurement Process Chapter 4: Project Planning â¢ Determining Project Goals and Project Delivery Goals â¢ Organizational Capacity â¢ P3-Enabling Authority, Policies, and Procedures â¢ Internal Resources â¢ External Resources â¢ Building Internal Capacity and Engaging Advisors Chapter 5: Selecting a Project Delivery Method â¢ Project Suitability for Alternative Project Delivery â¢ Opposition or Lack of Buy-In â¢ Aligning Stakeholder Interests â¢ Determining P3 Feasibility â¢ Evaluating Project Delivery Options â¢ Leveraging a P3 to Address âNon-Coreâ Airport Needs Chapter 6: Structuring the Procurement Process Chapter 7: Procurementâ Advertisement to Shortlist â¢ Ensuring Transparency and Accountability â¢ Project Advertisement â¢ Evaluation of Proposals and Shortlist â¢ Collaborative Dialogue â¢ Performance-Based Requirements â¢ Stimulating Innovative Approaches â¢ Essential Procurement Documents Chapter 8: Procurementâ Preferred Proponent to Financial Close â¢ Reaching Commercial and Financial Close â¢ Protests â¢ Third-Party Disputes â¢ Commercial Close â¢ Financial Close â¢ Work During the Negotiation Period â¢ The Federal Aviation Administrationâs Airport Investment Partnership Program Chapter 9: Contract Management and Oversight â¢ Contract Management â¢ Dispute Resolution â¢ Meeting Key Performance Indicators â¢ Assessing Market Interest â¢ Selecting the Procurement Approach â¢ Payment Mechanisms â¢ Incentives and Disincentives â¢ Essential Procurement Documents â¢ Risk Allocation and Its Role in Procurement â¢ Understanding the Risks â¢ Unsolicited Proposals â¢ Private Negotiations â¢ Educating Decision- Makers
Structuring the Procurement Process 51 â¢ Discuss how to assess project risks and allocate those risks so that procurement documents accurately designate the roles and responsibilities of the airport owner and developer. â¢ Describe the procurement documents that are necessary to solicit a developer. Assessing Market Interest After determining the financial and technical feasibility of a project, qualifications-based (also known as two-step) procurements are typically preceded by a âmarket sounding,â or an exercise in gaining feedback from private parties that would be impacted by the procurement. The market sounding may be informal, such as telephone calls with likely bidders and meetings with potential developers and financiers, or the market sounding may be more formal, such as a request for information (RFI) process and forum with the business community to solicit feedback on the potential projectâs scope. The goal of the market sounding is to determine whether there are sufficient numbers of qualified proposers interested in the project and whether the project scope needs adjustment to better meet market demand and current commer- cial terms. It is far better to find out a project is not considered financeable before committing to a procurement process. Regardless of the method of communicating with the business community, a successful market sounding exercise refines the project and improves the likelihood of a successful procurement by considering the following: â¢ Commitment to transparency. This includes a clearly communicated process for receiving feedback, responding to feedback, and transparency for the project procurement process overall. At the same time, some measure of confidentiality helps prospective proponents more candidly share their ideas with the sponsor. â¢ Clear project objectives. These include goals for the functional performance of the intended project and the airportâs goals for project delivery. It is very expensive for developers to propose on P3 projects given the rigorous nature of the procurement process. Developers are interested in projects for which the airport owner has conducted sufficient due diligence in understanding its goals and how a private developer might offer value to the airport. â¢ Characteristics of the project. It is important to delineate the potential role and responsibili- ties that a developer may take on the project. â¢ Commitment to labor and minority-owned and disadvantaged business enterprises. The workforce goals that the airport owner intends to attain during the project should be indi- cated. The market sounding exercise may include, particularly if conducted as a forum, an opportunity for developers to network with local businesses that would help potential proposers reach workforce goals. â¢ Contract structure. Information sufficient to solicit feedback on the commercial reason- ableness of different legal, risk, and revenue structures should be provided. â¢ Role of the airlines. The input of the airlines is essential for any major airport project, particularly if the project will impact airline operating areas and/or airlines will be providing funding (or serving as a financial backstop) for the project. Airline support can help a project gather momentum, while airline opposition can impede, or even stop, progress. Private proponents will want to understand what (if any) airline approvals are needed, and airlines will want to understand how the project will impact them operationally and financially. â¢ Stipend. This is the airportâs ability to provide a stipend to shortlisted proposers if the project proceeds as intended. As mentioned earlier, the pursuit costs for developers and the intel- lectual property disclosed by the developer are valued in millions of dollars. A stipend has several benefits, such as encouraging more participation by partially defraying the cost of bidding, encouraging bidders to submit a final bid rather than drop out during the process, and enabling the airport to utilize design ideas from non-selected bidders.
52 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Another part of a market sounding exercise is an RFI process. This process can provide feed- back from the market before a procurement is launched regarding a projectâs constructability, bankability, procurement process, and risks. Not all P3s use an RFI; whether it is part of the process depends on the airportâs confidence in market interest, the size and risk factors of the project, and procurement rules. An RFI sets out the high-level goals of the project and the airport ownerâs initial thinking about the project delivery method, including whether the project will be delivered as a P3, the type of P3 under consideration, and the duration of the agreement. While RFIs are not often required by law, agencies use the RFI to gauge private sector interest in a project and the P3 delivery method, typically as a screening tool to determine whether the private sector is willing to assume the risks associated with P3 delivery. The response to an RFI entails potentially inter- ested firms providing comments on the project, often highlighting examples of their relevant experience to position themselves for an eventual bid. An RFI may be issued in tandem with a public forum with members of the industry to discuss the project and to receive comments on the proposed terms. The following checklist of questions can help airport organizations assess private sector interest in a project: â¢ What are the developersâ P3 qualifications? Financial capability? Track record in meeting performance-based requirements? â¢ Are other studies or information needed to show sufficient due diligence regarding the feasibility of the project? â¢ Are there additional responsibilities that a developer can suggest to drive innovation, generate cost savings, or increase lifecycle efficiencies? Are there untapped revenue-generation capabilities that the airport owner has not thought of? â¢ What is the developerâs sense of the lease timeframe required to make the project financially feasible to the developer? â¢ Given the desired performance level and broad functional specification of the project, is the project too big or too small to generate private equityâs target return on investment? â¢ Given the projectâs characteristics and the airportâs goals, what contract structure is most suitable for the project? What risks are not acceptable for the developer to assume or mitigate? Are there risks that would be appropriate for the developer to assume that the airport has not proposed to transfer? â¢ Is pre-development work sufficient to begin a procurement process, or is there too much uncertainty in areas such as environmental approval, permitting, enabling projects, inter- agency agreements, legal issues, or other factors? â¢ Is the developer interested in bidding on the project and are there any issues that would stop the developer from doing so? Lessons Learned: Market Sounding Practices for Stewart International Airport When Stewart International Airport was acquired by the New York State Department of Transportation (NYSDOT), state legislators envisioned it as the fourth major airport for the New York City metropolitan region. That vision never materialized. Commercial air service grew slowly, but it never seemed to fully achieve its role as an economic develop- ment catalyst. Moreover, as an aviation facility, Stewart International Airport was not truly core to NYSDOT, which focused its mission on surface transportation. In 1994, New Yorkâs newly elected governor, George Pataki, included privatization as a promise in his economic platform. Governor Pataki pledged to make New York State a leader
Structuring the Procurement Process 53 in public asset operation and privatization (Ernico et al., 2012). The goals were to turn âthe airport over to the private sector and provide the Hudson Valley region with better air service, greater economic development, and a strengthened tax baseâ (Ernico et al., 2012, p. 95). NYSDOTâs goals, then, were to maximize the airportâs revenue potential and develop real estate to stimulate economic development in the region. To seek a P3 developer, Governor Pataki directed New York Stateâs economic develop- ment entity, the Empire State Development Corporation (ESD), to work with state agen- cies. NYSDOT, with the assistance of ESD, coordinated closely in structuring the complex procurement. In addition to satisfying New York State procurement requirements, the procurement also had to comply with procedures outlined in the APPP that included a preliminary application and approval by the FAA. As the first of its kind privatization in the United States, NYSDOT and ESD faced various risks and uncertainties. To help with the procurement process, they retained technical and legal advisors. In June 1997, the state formally began, through ESD, the process of soliciting bids for a 99-year lease of the airport and, potentially, the adjacent undeveloped lands as well. Specifically, the RFP âgave the bidders the option of proposing on (1) the airport, (2) just the undeveloped land (approximately 5,600 acres), or (3) both.â In April 1998, NYSDOT selected a subsidiary of National Express Group, a transportation firm based in the U.K., as the preferred bidder in response to the RFP. Three lessons learned emerged from Stewartâs experience in engaging with the business community before the procurement and during the RFP process: 1. Include a draft contract as part of the RFP. The state did not present a contract to SWF Airport Acquisition, Inc., until they were named the preferred bidder. That unneces- sarily delayed the implementation of the agreement. 2. Engage stakeholders early. NYSDOT and ESD proactively worked with internal and external stakeholders to reach consensus, thus increasing the likelihood of success. 3. Airport owners should provide as much information to proposers as possible, including offering a transparent description of how procurement decisions are made. NYSDOT made available to potential respondents all studies and financial information associated with the airport as well as providing opportunities to tour the facility. The goal of a market sounding exercise is to determine whether there is a sufficient level of competition expected to justify the procurement and generate enough competition to result in proposals that can deliver the best value for the airport. The questions posed during an RFI or market sounding interview or forum should provide the airport owner with enough information to determine the private sectorâs appetite for the project. Selecting the Procurement Approach Most, but not all, P3s utilize a two-step procurement that includes an evaluation of the qualifi- cations of potential proposers through an RFQ to develop a shortlist of entities that are eligible to bid in response to a subsequently issued RFP. Depending on the size and complexity of the project, as well as local procurement rules, airport owners may elect to abbreviate this process, such as by combining the RFQ and RFP into a single step or skipping steps entirely. This section focuses on the two-step procurement process, also known as âbest valueâ or qualifications-based selection. Traditional contracting practices are typically âone-stepâ procurements, meaning that a con- tractor is selected based on one response to an RFP and lowest cost (âlow bidâ) or by ranking on
54 Evaluating and Implementing Airport Privatization and Public-Private Partnerships preselected criteria. A two-step procurement method involves the selection of a developer using price and other key factors, such as qualifications and technical approach. The goal of a two- step procurement process is to determine which proposer offers the best overall value for the project. Another benefit of a two-step process is the opportunity for the airport owner to refine the RFP based on market feedback. The two-step procurement process uses an initial RFQ to shortlist developer teams (consortia of firms that would incorporate as a special purpose vehicle to deliver the project, if awarded) that can submit technical qualifications and price proposals. Then, the airport owner issues an RFP to the shortlisted teams. The RFP contains the instructions to proposers (ITP), which details how proposers must respond and the kind of information expected in the response, and the draft contract for the agreement. Before interviewing proponents and evaluating proposals, some airport owners engage in âone-on-oneâ conversations with proposers about the terms in the contract. After receiving feedback on the commercial terms of the contract from proposers, some airport owners issue a âfinal RFPâ which contains an updated ITP and draft contract that a proposer would agree to if awarded. The critical path chart shown in Figure 9 illustrates the process of a two-step procurement following the issuance of the first RFP draft. The chart illustrates an example of the amount of time elapsed between the first RFP release to shortlisted proposers to financial close. However, as shown in the case studies for this research, the timeframe for each step can vary greatly depend- ing on the project and local procurement rules. Once the requirements of the legal or regulatory framework have been determined, an airport owner would build an ideal two-step procurement schedule. Payment Mechanisms After determining the steps and schedule for the procurement process, airport owners then consider other features of the procurement process. Since alternative project delivery relies 45+ days Bid Preparation Commercial and FinancialClose 135+ days Figure 9. Two-step procurement process.
Structuring the Procurement Process 55 on integrated design and construction phases, the airport may design the method of payment to further drive contractual efficiencies and compel the developer to help the airport owner realize the projectâs goals. In a P3 agreement, the payment method can assist the airport in reach- ing specific goals, such as containing costs, benefiting from potential savings, and accelerating schedule and delivery. There are two payment methods commonly used in alternative project delivery agreements: revenue risk and availability payment. These mechanisms are sometimes combined. In revenue risk projects, the private proponent recoups its investment through the operating revenue of the project. For example, in the LaGuardia Central Terminal B project, the private developer, LaGuardia Gateway Partners, collects revenues from airline usage fees and terminal concessions. If revenues fall below the projections of LaGuardia Gateway Partners, its return on investment will be lower than expected. On the flipside, LaGuardia Gateway Partners benefits if revenues exceed expectations. In this way, the private proponent is accepting risk for the utiliza- tion of the asset. With availability payment projects, the airport owner contracts to provide milestone payments to the private developer for delivering the project and/or for meeting operating benchmarks. For example, the private developer contracted by Los Angeles International Airport for the auto- mated people mover will receive pre-defined payments for constructing the project and for keeping the train operating as planned, including meeting uptime measures and service quality metrics. The number of riders using the asset is not a factor in the total value of the monthly availability payment. Typically, the airport owner can issue penalties to the operator in an avail- ability payment deal for failing to meet contracted metrics. Airports consider a variety of factors when selecting one of the payment methods, including â¢ Budget concerns. Does the airport owner need to contain costs and/or seek savings due to budget constraints? Does the airport owner have limited budget to administer the payment method? â¢ Certainty of cost. Can the airport owner take advantage of a well-defined scope of work to drive cost certainty? â¢ Time and schedule. How can the airport owner use the payment method (or a complemen- tary payment incentive) to incentivize the design-builder to meet milestones or accelerate delivery? â¢ Type of construction. Given the type of construction for the project at hand, how can airport owners design a payment method that matches the complexity (or simplicity) of the design- builderâs scope of work? Incentives and Disincentives P3 procurement processes, while highly structured, are intended to evaluate proposers based on each P3 teamâs ability to perform the desired work to meet the airportâs project objec- tives, instead of evaluating how the work is to be performed. The P3 procurement process uses performance-based requirements, instead of prescriptive requirements, to communicate the air- portâs desired level of service to give proposers the freedom to determine how they will achieve quality levels. These requirements may be underscored through the use of incentives (and dis- incentives). Incentives may allow for accelerated payments or revenue sharing if the developer meets schedule milestones or certain levels of service; disincentives may require the payment of liquidated damages or a lowered availability payment if the project is delayed or does not perform to the airportâs specifications. Before beginning the procurement process, an airport would consider what incentives and disincentives best serve their goals. Incentives are typi- cally paired with one of the common payment methods previously listed (e.g., revenue risk or
56 Evaluating and Implementing Airport Privatization and Public-Private Partnerships availability payment) and typically do not stand alone as a means to compensate the developer. Some example incentives and disincentives are discussed in the following. Milestone Payments Milestone payment incentives are given to the developer for completing a project element by a pre-determined milestone or ahead of schedule. Disincentives may also be incurred for the failure to hit a pre-determined target. Milestone payment incentives require the airport owner to assess the developerâs performance at specific target dates, whereas a lump sum payment relies on the developerâs assessment of performance per the agreed cost schedule of elements. Milestone payment incentives are typically awards paid in addition to payments made through common payment methods. No Excuse Incentive Provision In the no excuse incentive provision, the developer is given an incentive payment to complete contract work on time, but there are no excuses for the failure to meet the completion date based on utilities, change orders, or weatherâanything short of force majeure events. This incentive not only encourages the developer to meet deadlines regardless of delays, but also minimizes claims and disputes during the construction period. If the developer completes the work at the scheduled completion date (or before it) despite any potential delays, the developer receives the full incentive. Should the deadlines not be met, liquidated damages may be assessed. Bidders will include the risk of incurring liquidated damages in their price proposals. Active Management Payment Incentive With an active management payment incentive, the developer takes steps to minimize opera- tional disruption during the construction period. The developer has the responsibility to moni- tor its performance through a monitoring/tracking element and must report the results to the airport owner. Liquidated Damages The airport owner (or more often, the private lender engaged by the developer) may institute liquidated damages as a disincentive for certain actions. Liquidated damages are payments due from the developer to the owner (or lender) for missing schedule deadlines. To select incentives/disincentives that best fit the project goals, airport owners need to consider the following questions: â¢ Constraining cost. Does the airport owner need to manage costs and incentivize the developer to perform within the budget? â¢ Schedule acceleration. Does the airport owner need to incentivize the developer to meet an accelerated schedule? â¢ Managing unforeseen risks. Does the airport owner need to mitigate the costs and schedule impact that unforeseen risks may pose and thereby require incentives or disincentives to compel the developer to manage those risks? Essential Procurement Documents After determining the delivery method, the projectâs feasibility, and market interest in the project, an airport would typically convene the internal and external personnel required to draft procurement documents. This section describes each of the procurement documents typically used in a two-step, or qualifications-based, procurement process. The flow chart in Figure 10 summarizes the documents described in this section and the common sequencing of the release of those documents.
Structuring the Procurement Process 57 First, it is helpful to visualize who is involved in drafting the procurement documents used in procurement as well as those engaged in procurement itself. Each airport has a unique procure- ment process that is informed by its regulatory and statutory environment. Before public solici- tation, an airport owner would convene its project manager, procurement staff dedicated to the project, and other subject-matter experts. The subject-matter experts could be either those from within the airport like the construction management or engineering staff or those from outside the airport like supporting design and engineering staff, procurement advisors, financial advisors, or legal advisors. In a collaborative process, these individuals draft the documents needed to communicate the airportâs goals, requirements, and processes for selecting a developer best suited to the project. Figure 11 shows those âat the tableâ during the pre-procurement period; Figure 12 shows those engaged in the procurement process. In these figures, it can be seen that the public and elected officials are not engaged in the procurement process. While these stakeholders are crucial to the overall process, as they benefit from the project directly, involving the public or elected officials directly in the procurement process tends to conflict with transparency and accountability prin- ciples embedded in public contracting regulations. The public and elected officials need to be aware of what is occurring during the procurement process, but the procurement should be strictly governed by the airportâs procurement regulations. The procurement process adds new stakeholdersâthe private proponents, lenders/financiers, and rating agencies. Request for Qualifications and Statement of Qualifications An RFQ describes the project concepts and the preliminary anticipated terms. For a P3 project, the RFQ will specify the delivery methodâincluding for a construction-related project whether it is intended to be DBO, DBOM, or DBFOMâas well as the anticipated length of the term and the general expectations for the private developer. RFQs are evaluated based on criteria published in the document, with an emphasis on the qualifications of the responding entities, focusing on prior history with the type of project and the selected delivery method. In response to an RFQ, interested entities submit a statement of qualifications (SOQ) that details their relevant experience and qualifications to deliver the project. The SOQ identifies the constituent entities that would compose the developer team, including the design-builder (often a separate designer and construction firm), financing entities, and the operations and maintenance vendors. The makeup of this team exemplifies one of the benefits of P3 project delivery. The airport owner obtains the benefits of specialized expertise from a consortium of Request for Proposals (RFP) Request for Qualifications (RFQ) Request for Information (RFI) An RFI allows the project owner to hold information- sharing meetings and obtain feedback from industry representatives. An RFQ asks prospective bidders to provide information demonstrating technical abilities, past performance and financial capacity. Short-listed, or qualified, bidders submit a binding bid by providing a response to the RFP. Figure 10. Sequence of essential procurement documents.
58 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Public Officials (i.e., City Council, Airport Board) Project Owner (Airport) Airport Staff (Executive Committee, Subject Matter Experts) Public Constituents and Business Community Federal Agencies (FAA, Build America Bureau) Advisors (Technical, Legal, Procurement) Airlines Pre- Procurement Stakeholders Figure 11. Pre-procurement stakeholders. private entities that is consolidated into a single point of contact under the umbrella of a single agreement. A respondent is evaluated based on the separate entities composing it and the likely synergy of the team. The respondents submitting SOQs that receive the highest evaluation scores are named to a shortlist of entities (typically three to five entities) permitted to submit a proposal or bid in response to the RFP. Request for Proposals and Proposal The RFP (including the draft development or lease agreement and supporting documents included in the RFP) is the most critical document in the procurement process. The RFP, which is issued only to shortlisted firms if there is a preceding RFQ, is the document in response to which interested entities submit a detailed proposal and bid to become the developer. The RFP contains a detailed description of the project, including the precise conditions for the projectâs term and the details of the developerâs obligations set out in an agreement or lease to be entered into by the parties. The RFP sets forth the technical specifications for the project, including those for the design and construction phase, as well as the operations and maintenance standards with which the developer must comply during the project term. For projects with significant construction activity, the technical specifications may include performance-based and prescriptive specifications, the former of which the developer is given latitude to meet and the latter of which are required elements of the project. Performance- based specifications are measured by reference to certain performance metrics. For example, for a new airport P3, the performance specifications may require that the airport be designed
Structuring the Procurement Process 59 to accommodate no fewer than 100 aircraft on the taxiways and apron at a time. In contrast, a prescriptive specification may state that the airport must have a set of parallel runways, inter- connected by 20 taxiways and two terminal facilities. The DB component of a P3 project is generally a mixture of performance-based and prescriptive specifications; however, the goals of P3 delivery are enhanced where the developer is given the latitude to meet performance speci- fications. This flexibility allows the private sector to innovate using its specialized knowledge. To comply with applicable law and regulations, airports may nevertheless have to meet unique requirements. To do so, airports may need to use prescriptive specifications for certain aspects of a project, including certain obligations that the airport operator may not be able to relinquish to the private sector. This could also affect certain airport systems that must be uniformly com- patible with systems at other airports. For example, the prescriptive specifications might call for a particular type of instrument landing system or air traffic control system that complies with federal regulations or is compatible with the current state of the art of aircraft technology. The degree of specificity in the technical specifications involves a tradeoff between room for innovation and the level of control that the airport operator is willing and able to cede to the private sector. Airport owners accustomed to DBB may be inclined to lean heavily on prescrip- tive standards and prepare a detailed conceptual design of the project in the RFP. DBB project delivery entails completion of the 100% design before a contractor is solicited for the project, whereas the design-build component of a P3 provides only technical specifications published in Procurement Stakeholders Airport Staff (Executive Committee, Subject Matter Experts) Project Owner (Airport) Private Proposers (Developers) Rating Agencies Lenders Advisors (Technical, Legal, Procurement) Airlines Federal Agencies (FAA, Build America Bureau) Figure 12. Procurement stakeholders.
60 Evaluating and Implementing Airport Privatization and Public-Private Partnerships the RFP instead of a completed design. Airport owners may be reluctant to relinquish significant control over the project. P3 airport owners often include a conceptual-level design, usually 30% or less complete, with the technical specifications for design and construction. The conceptual- level design shows most, if not all, of the prescriptive specifications and provides renderings of perceived or possible methods of complying with the performance-based specifications. Airport owners must strike an appropriate balance, as the more detailed the conceptual design is, the less able the design-builder will be to bring innovative concepts to the project. In response to the RFP, the shortlisted entities submit a proposal, which may consist of two parts: (1) a technical proposal and (2) a price proposal. (In an AIPP transaction, technical quali- fications may be demonstrated with the SOQ, so that only a price proposal is submitted in response to the RFP.) The technical proposal is the response to the technical requirements, setting forth the pro- poserâs approach to the project and highlighting innovative concepts that set it apart from the approaches of other proposers. The technical proposal addresses each phase of the project, including design/construction and operations/maintenance, outlining the responsibilities under- taken by each member of the proposer entity. The price proposal contains a bid that establishes the price and a payment schedule to com- plete the project in the manner contained in the technical proposal. The price proposal shows how the proposer intends to finance the project by including commitments from financiers, as well as the terms of payment over the life of the project and, where necessary, revenue projec- tions supporting the payments. The price may be an upfront payment, payments over time, or a combination of both, depending on the costs and value of the project and how the airport owner structures the procurement. Payments could be to the airport owner for a revenue-generating asset or from the airport owner for an availability payment deal. The airport owner evaluates proposals in accordance with applicable law and the criteria published in the RFP. Typically, the price and technical components are separately scored, with the technical reviewers not having access to price proposals and vice-versa. The separate scores are entered into a formula to determine the overall proposal score, and the entity receiving the highest score is considered the preferred proposer. As discussed in the following, the announce- ment of a preferred proposer commences negotiations to reach financial and commercial close to finalize the agreement to become the developer. The extraction of value from the private sector in a P3 project is not limited to the entity selected as the developer. One option from which airport owners may benefit is paying a stipend to unsuc- cessful proposers. The primary benefit of this stipend is that it serves as an agreement between the airport owner and the unsuccessful proposer that the airport owner may use any of the non- propriety concepts contained in the proposal in the project being procured or in future projects without further compensation. The airport owner can thereafter incorporate those concepts into the scope of work, benefiting from the optimal concepts of all the proposers, rather than being lim- ited to the scope of the successful proposal. Additionally, the payment of a stipend may encourage competition by defraying the costs of preparing a proposal to potential bidders, and, more criti- cally, incentivizing them to submit a valid bid rather than abandoning pursuit of the project if they do not believe they will be successful. Stipends are often optional; an unsuccessful proposer may forego the stipend, in which case the airport owner cannot adopt the concepts proposed. Risk Allocation and Its Role in Procurement Risk assessment occurs during different phases of project development. For the sake of this guidebook and its focus on preparing practitioners to implement a P3, the research team At its most basic, a P3 is a mechanism for assign- ing risks normally held by the public sector to a private proponent. This makes it perhaps the most important part of considering a P3.
Structuring the Procurement Process 61 has focused on risk assessment that occurs during the project feasibility phase. Efficient risk management involves assessing the cost of risks transferred to the private party and to the airport, reducing overall cost, and generating VfM (discussed further in the guidebook). Identification of key risks begins with the recognition of threats and opportunities (usually displayed in a register or matrix) and then evaluating the airportâs ability to transfer that risk or whether there is a need to retain the risk. The level of risk transfer suitable to the project and the airportâs risk tolerance should align with the level of risk transfer that an alternative delivery method would provide. For instance, if an airport decides to retain operational services for the asset for political and economic reasons, then the alternative project delivery method most suitable to the project would not transfer operations and maintenance to a private party, and design-build or DBF would be the best model to use for the project. Figure 13 demonstrates the balance that airport owners try to strike between the economic cost of the project and the cost of transferring or retaining risks in a P3. The figure shows that an owner must consider the impact of risk transfer on all-in costs (y-axis) and the initial contract cost (x-axis). Inefficient risk transfer is shown in two ways in the figure. First, if the owner retains too much risk then all-in costs are increasedâshown as the space to the left of optimal risk allo- cation. Second, if the owner transfers too much risk to a private party then the initial contract cost is higher because the private party needs more contingency to manage riskâshown as the space to the right of optimal risk allocation. Optimal risk allocation, shown as the curved line, occurs when the owner transfers enough risk that all-in costs and initial contract costs are balanced. Understanding the types of risks that occur on complex airport projects is the first step to helping airport owners create projects that accurately convey risk allocation in procurement documents and thereby avoid claims, disputes, and terminations after contract award. Examples of project risks include political and economic risks; site preparation and procure- ment risks; operations and maintenance risks; revenue or financing risks; termination and hand- back risks; and design and construction risks such as those related to errors and omissions, geotechnical, or acquisition and management of right of way. Risks may result in loss, and loss exposures generally fall into four categories: direct property losses, indirect property losses, liability losses, or injury to personnel. Risks, and the subsequent losses attributed to them, are transferred to varying degrees depending on the type of project delivery method. Table 2 shows how those risks may be different based on contract structure. Airport owners need to be aware of the types of risks and losses to identify contractual provi- sions best suited to manage those risks according to the project delivery type. An airport owner Figure 13. How value is generated in a P3 through risk allocation.
62 Evaluating and Implementing Airport Privatization and Public-Private Partnerships would do this by first creating a high-level risk matrix focused on connecting identified risks and losses to project delivery types. This would help an owner identify risks specific to its projectâs operating environment that require tailored contractual treatment versus risks that are typically transferred and suitable for treatment via best practice. Airport owners typically have two goals when using P3 delivery to transfer risk. First, owners intend to mitigate the uncertainty arising from the possible occurrence of given eventsâ particularly if the project is technically complex. Second, owners transfer risk that can be more efficiently managed by a private developer. The private developer may better manage risks because it possesses controls that reduce the cost or impact of a particular risk, or the private developer can absorb and manage risks that the airport owner simply cannot bear for the financial return the private party intends to gain from the project. Risk transfer, then, is expressed through a projectâs procurement documents and governing contracts. The projectâs legal agreement assigns risk to the party best able to manage that risk and defines procedures (including consequences like liquidated damages) that mitigate or share risk between the public and private parties. As shown in Table 3, a projectâs contract may use financial incentives, liquidated damages, and relief events, among other methods, to drive the private partyâs management of risk for greater performance or share in those risks to enable a private party to complete the project with lessened financial or technical risk. At its most basic, a P3 is a mechanism for assigning risks normally held by the public sector to a private proponent. Understanding the risks of the project and which risks are best taken on by the public or private sector is a critical part of the process. The private proponent will expect compensation for taking on risk; therefore, it is not cost-effective to transfer risks that are better managed by the public sector. For example, contractors are used to accepting risks regarding the delivery schedule for the project and the cost of construction. These risks are priced into their bids and balanced across a portfolio of projects so that the risk to the private company across all its activities is limited. When risks not normally assigned to the same company are included in a contract, the price of accepting that risk (i.e., contingency the proponent must put in its bid to protect itself from the risk) is higher, and some potential partners may cease pursuit of the project entirely. Thus, risk assessment and valuation are key to ensuring robust P3 competition and to extracting the best VfM for the public sector. Procurement Type Design Risk Construction Risk Financial Risk Operations and Maintenance Risk Ownership Risk Design-Build (DB) Design-Build- Finance (DBF) Design-Build- Operate- Maintain (DBOM) Design-Build- Finance- Operate- Maintain (DBFOM) Privatization Table 2. Typical risk transfer to the private sector by project delivery type.
Structuring the Procurement Process 63 One of the causes for P3s ending in termination or not reaching financial close is when air- port owners attempt to push too much risk (or the wrong risk) to the private sector. Often, this happens when the owner fails to fully understand the risk it is requesting the private sector take. Best Practice: Understanding the Risks A common mistake with P3s is airport owners rushing to procurement without understand- ing enough about the risks that it will ask the private proponent to take on. This is often due to political pressure to get projects going and/or an unwillingness to spend resources studying risks. Many airports assume that âthe private sector will deal with the risk.â This has several issues: â¢ The private sector prices risk in bidding on P3s. If a risk is undefined, bids will include a greater contingency to offset it. â¢ The goal of the project is to reach financial close successfully and run the project for its total lease concession term. If unforeseen risks cause litigation or the bankruptcy of a private propo- nent, the airport is not better off. â¢ The market is beginning to push back on taking on unknown risks. For example, Skanska Infrastructure Development announced it would exit the project development market in 2018 after issues with its I-4 toll road project in Florida and being assessed liquidated damages on its involvement in the LaGuardia Airport project. â¢ A P3 is a long-term âmarriageââthe operator and airport owner will be in business together for many years, so forging a strong collaborative relationship is essential. The following checklist provides guidance for considering key project risks and if analysis is needed before allocating them to the private sector: â¢ Identify the key project risks. â¢ Assess the probability and the level of impact of each risk. Types of Risk Transfer Explanation Financial Incentives/ Disincentives Some risks that are allocated by contract may be reinforced by financial incentives such as linking risk mitigation to milestone payments. Other risksâ financial consequences may be shared with the private party because it provides an incentive for the developer to engage in preventative risk mitigation. Financial consequences may be capped per occurrence and/or overall. The airport owner may also establish a claims process and identify a claim deductible. Conversely, liquidated damages may be used to ensure that losses that are not precisely quantifiable are mitigated. Relief Events Relief events are specified for circumstances that either are under the control of the airport owner or are most efficiently managed or assumed by the public agency. The occurrence of a relief event may entitle a contractor to time or money (or a combination) to make the contractor whole. The definition and allocation of risk for a relief event may differ greatly from project to project. Risk Sharing Risk-sharing provisions can include insurance premium sharing during the operations and maintenance phase; unavailability of insurance; performance security requirements; and treatment of project-specific risks such as earthquake, windstorm, hazardous materials, acquisition of right of way, indemnity (hold harmless) provisions, limitation of liability, waiver of subrogation (recovery rights), and insurance requirements. Table 3. Examples of risk transfer provisions. Optimal risk allocation seeks to minimize both project costs and the risks to the project by allocating particular risks to the party in the best position to control and manage them at the lowest cost.
64 Evaluating and Implementing Airport Privatization and Public-Private Partnerships â¢ Ensure each discipline (e.g., engineering, operations, finance, asset management, and so forth) is included in the process to avoid omitting or misevaluating risks. â¢ Include risk as a key part of outreach to the private sector in planning the procurement, particularly during the market sounding and RFQ process. Ask what type of risk proponents find acceptable and which types of risk might best be held by the public. â¢ Once again, it is perfectly OK to have a lot of unknowns early in the project planning. Simply going through the process of thinking about risk will facilitate a better alignment in the procurement. Source: LaGuardia Gateway Partners, Management Proposal for LaGuardia Airport CTB Replacement Project, May 2014. Figure 14. LaGuardia Gateway Partners risk register severity vs. likelihood. Lessons Learned: Risk Register for LaGuardia Terminal B, New York In its proposal to PANYNJ, LaGuardia Gateway Partners submitted a risk management plan that identified 26 risks for the Terminal B redevelopment. The plan presented a table addressing the following for each risk: (a) risk description, (b) likeli- hood of risk occurring, (c) severity of impact to project objectives, (d) triggering events, (e) ability to predict and control event, (f) timeline horizon, (g) response strategy, (h) residual risk assessment after implementation of response plan (probability/ severity), and (i) frequency of reassessment. The table also ranked each risk on its likelihood, impact severity, predictability, and controllability. LaGuardia Gateway Partners further indicated the root cause and mitigation strategy. Figure 14 displays the severity and likelihood of each risk and identifies the category of risk as a construction, force majeure, airport operation disruption, or safety risk. Table 4 provides details regarding the mitigation strategy and responsibility for certain risks.
Structuring the Procurement Process 65 Risk Description + Root Cause Mitigation Strategy Risk Responsibility Explanation Permit or approval delays from the Owner and third-party agencies, and utilities causing delays to the project Recognizing importance of stakeholder buy-in, having developer experience with obtaining these approvals SharedâOwner is responsible for delays in their approval process (constituting a delay event); developer for contractor delays Labor unrest in local unions, potentially resulting in union strikes and, consequently, work shutdown Developer experience with regional labor; attempt for no- strike clause in labor agreement DeveloperâStrike or labor dispute is NOT force majeure; developer's risk Delays, cost overruns, or developer impropriety that results in management, operations, or construction-related failures, thereby causing public relations issues Control public perception; schedule will deliver project ahead of airport owner's anticipated completion date; developer organization chart has ethics, safety, quality, and compliance officers directly reporting to project executives DeveloperâStandard risk allocation Fires, hurricane-force winds, tornadoes, floods, tsunami, named windstorms, or snow or ice storms that are not ordinarily encountered at LaGuardia Airport; event causing state of emergency that impacts project safety, loss of work in place and delay (force majeure) Developer maintains emergency action plan and adequate builder's risk insurance Airport OwnerâStandard risk allocation Demolition disturbing communications lines running from the former air traffic control tower to the existing air traffic control tower Developer will investigate existing facility in coordination with FAA and accordingly develop workplan Developerâ"Negligence by a lessee-related entity" is NOT force majeure A failure to follow standard operating procedures and safety protocols that causes injury to construction workers, the traveling public, or other third parties Developer builds culture of safety through site-specific safety plan. For particularly high- risk activities, project safety committee will review and approve work plans Developerâ"Negligence by a lessee-related entity" is NOT force majeure Breach of airport security via unauthorized access into airport operations area or leaking of confidential information causing danger to the public Developer will protect airport operations area and confidential information through robust badging, security officer and security information manager, and perimeter intrusion defense system DeveloperâObligation to have an airport security program approved by TSA Source: LaGuardia Gateway Partners, Management Proposal for LaGuardia Airport CTB Replacement Project, May 2014. Table 4. Mitigation strategy and responsibility for highest severity risks as identified by developer. Other Procurement Issues Unsolicited Proposals Before embarking on the procurement process, some airports allow interested entities to submit an unsolicited proposal for a P3 transaction that has not been let for bidding by the airport owner. Unsolicited proposals may contain as much detail as a proposal submitted in response to an RFP, though they often contain more general terms and may not include an exact bid price since the bid is not in response to a specific scope published by the agency and is made based on the less information. Where permitted, the applicable P3 legislation will provide a process that the agency must follow to maintain a competitive bidding process if it desires to pursue the
66 Evaluating and Implementing Airport Privatization and Public-Private Partnerships project identified in the unsolicited proposal, which often includes allowing other interested entities to submit proposals in response to a scope that the agency develops using the unsolicited proposal as a guidebook. In jurisdictions in which unsolicited proposals are an option, airport authorities may find them to be useful in developing projects. Unsolicited proposals may serve as a starting place for innovative concepts without the expenditure of resources to develop a solicitation from scratch. Private Negotiations (Also Known as a Sole-Source Contract) If an airportâs regulatory framework permits, the airport may engage in one-on-one nego- tiations outside of the public procurement process. Developers may approach an airport with a project concept, similar to an unsolicited proposal, but without an intent to embark on a competitive process. For instance, a no-bidding process was necessary for the Everett Paine Field project since the private developer, Propeller, came to the airport with the concept and was granted only a land lease, not an exclusive terminal development right. Similarly, Austin- Bergstrom International Airport expressed an interest in leasing the South Terminal and entered an option-to-lease agreement with a private developer, Highstar Capital, in 2016. The lease structure allowed Austin-Bergstrom International Airport to continue open competition with- out needing a public procurement process to award Highstar Capital the contract. Best Practice: Educating Decision-Makers Consistent and transparent communication with and education for key decision-makers is necessary for project success. The P3 projects at Denver International Airport and LaGuardia Airport show two different approaches to mitigating political risk and educating decision-makers. Since Denver International Airport is an agent of the City of Denver, the airport sought city council approval for the contract award. This strategy was risky in that the political environment might not support the selection of a P3 developer. Per the Denver International Airport CEO, âWe spent months providing information on Ferrovial and our contract . . . it is an under- statement to say that this was a heavy lift . . . we established a reading room in City Hall where councilmembers could review documents and ask questions of the team. While our mayor was on board with an early concept, we still had to prove to him that we negotiated the right deal for the city. And that we could live with these obligations and live up to the terms.â Regarding the city councilâs careful approach to contract award due to concerns about ceding control for 34 years, Denver Inter national Airportâs CEO stated âOur central message was âwe are not giving the airport away; instead, weâre developing a partnership with a partner that will follow our requirements.ââ She noted, âWhen you bring something to City Council that [is] a project theyâve never seen before, and they donât understand it, they perceive the project as risk to themârather than risk to the airport.â Political intervention and the lack of transparency can disrupt the procurement process and increase bidder costs. LaGuardiaâs extended procurement process for Terminal B, more than 2.5 years between RFP issuance and preferred proponent selection, made it highly challenging for bidders to maintain their commitments for the project. After Governor Cuomo announced a redesign competition in October 2014, PANYNJ postponed the preferred proponent selection from late November to February, and then to April, before finally naming the winner in May. Through the uncertain, evolving timeline, proposers active in the Terminal B procurement had to keep staff available and hold to initial financial forecasts, while continuing to incur costs. This delay caused Skanska to have to replace the construction partner. To mitigate political risk, airport owners can hold regular meetings between the private entity and the public grantor to exchange the latest information about risks and what is occurring behind the scenes.