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Evaluating and Implementing Airport Privatization and Public-Private Partnerships (2021)

Chapter:Chapter 7 - Procurement Advertisement to Shortlist

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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 7 - Procurement Advertisement to Shortlist." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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67 Procurement—Advertisement to Shortlist Introduction As discussed in Chapter 6, an airport P3 requires substantive changes to the airport’s standard solicitation process to account for the complexity of a P3 procurement. Chapter 7 describes the procurement process between advertisement of the opportunity and “shortlist,” or when select proposers are qualified to respond to the RFP. This chapter also explains how evaluation criteria are determined and how innovation is incentivized through alternative technical concepts. The chapter concludes with a discussion of the documents that comprise the transaction itself— ranging from pre-development agreements to lease agreements to third-party agreements. At the conclusion of this chapter, users should be able to • Explain how to define evaluation criteria used for a “best-value” procurement. • Understand the importance of creating procurement documents that rely on performance- based criteria and the role of alternative technical concepts to stimulate innovative proposal responses. • Describe the purpose of transaction documents that form the legal basis of the P3. The P3 project delivery method helps an airport owner specifically ask, “How might a project be designed, constructed, financed, operated, and maintained to provide the best benefit for our constituents?” To answer that question, an airport owner will also consider the process by which a project is procured and the contract format that best serves the public’s interests (cost plus C H A P T E R 7 Chapter 4: Project Planning • Determining Project Goals and Project Delivery Goals • Organizational Capacity • P3-Enabling Authority, Policies, and Procedures • Internal Resources • External Resources • Building Internal Capacity and Engaging Advisors Chapter 5: Selecting a Project Delivery Method • Project Suitability for Alternative Project Delivery • Opposition or Lack of Buy-In • Aligning Stakeholder Interests • Determining P3 Feasibility • Evaluating Project Delivery Options • Leveraging a P3 to Address “Non-Core” Airport Needs Chapter 6: Structuring the Procurement Process Chapter 7: Procurement— Advertisement to Shortlist • Ensuring Transparency and Accountability • Project Advertisement • Evaluation of Proposals and Shortlist • Collaborative Dialogue • Performance-Based Requirements • Stimulating Innovative Approaches • Essential Procurement Documents Chapter 8: Procurement— Preferred Proponent to Financial Close • Reaching Commercial and Financial Close • Protests • Third-Party Disputes • Commercial Close • Financial Close • Work During the Negotiation Period • The Federal Aviation Administration’s Airport Investment Partnership Program Chapter 9: Contract Management and Oversight • Contract Management • Dispute Resolution • Meeting Key Performance Indicators • Assessing Market Interest • Selecting the Procurement Approach • Payment Mechanisms • Incentives and Disincentives • Essential Procurement Documents • Risk Allocation and Its Role in Procurement • Understanding the Risks • Unsolicited Proposals • Private Negotiations • Educating Decision- Makers

68 Evaluating and Implementing Airport Privatization and Public-Private Partnerships fee versus guaranteed maximum price). Selecting a developer capable of performing within the financial and technical parameters of a P3 agreement is one of the most critical steps in delivering a successful project. Ensuring Transparency and Accountability As with all open procurements conducted by public agencies, ensuring transparency and accountability is of prime importance to constituents. Airport staff, public officials, the travel- ing public, and the business community need to be educated on the concepts and terminology of a P3, as well as the use of private equity and transfer of risks. As a result, airport owners should make significant efforts to make the P3 selection process transparent. Fully disclosing the following can aid in transparency: • The stipend awarded to shortlisted proposers • Current and proposed contract standards • Rates and charges policy • Use of rates and charges revenue for other investments • Non-compete clauses or other limitations in making transportation improvements • Transaction costs incurred by the public sector Lessons Learned: Gary/Chicago International Airport, Management and Development Project At Gary/Chicago International Airport, a “bottom-up” community engagement strategy allowed the transaction to not only be market driven, by allowing private industry to engage with the airport owner, but also be transparent to the public. The transaction’s momentum relied on continually educating airport stakeholders on the airport’s strategy since “everyone cannot hear all the information at the same time.” The mayor of Gary and the airport authority established an Ad Hoc Committee to help keep a broad array of stakeholders engaged. This group held the City and Airport Authority accountable to a timeline and provided oversight for the procurement process. The group also allowed the City and Airport Authority to be conscious of public opinion and provide a forum where concerns could be voiced. This required the Ad Hoc Committee to approach project delivery methods impartial to what was the “best” form of project delivery until the deliberative procurement process was complete. An advisor to Mayor Freeman-Wilson and member of the Ad Hoc Committee noted, “one of the first things to evaluate is all the City’s assets and understand how to take advantage of them. The airport has been around for over 40 years, and it was unknown how to take advantage of its potential.” AFCO’s ability to bring investment and to serve niche corporate and charter aviation business is helping the City meet its broader job and land development goals, in addition to being profitable for the developer. While the project at the Gary/Chicago International Airport was financially feasible over the 30-year term of the concession, both the airport owner and developer needed to manage expectations around financial performance and results. Five years after the trans- action, the Airport Development Zone has not experienced significant growth or a major hotel development, and some stakeholders are concerned that the promised benefit of the transaction has not been seen yet. AFCO’s chief investment officer explained that success occurs over the lifetime of the deal—over 30 to 40 years, not 5 years. AFCO has been successful in meeting the investment performance requirements, but the public may

Procurement—Advertisement to Shortlist 69 not view the transaction as successful until passenger air service is increased, or a banner land development occurs. It is necessary, then, for both the developer and airport owner to continue to articulate the project’s long-term benefit and focus on incremental gains that satisfy the airport owner’s goals. Some agencies establish policies and procedures to ensure transparency is built into the procurement process. An airport owner may also convene stakeholder committees to oversee and provide input into the planning and procurement processes. Project Advertisement The procurement process is typically initiated by advertising the RFQ or by notifying the business community per regulatory or legal requirements. After solicitation, most public pro- curements observe a “cone of silence” period in which communication with proposers follows a structured process to preserve transparency and accountability. In this period, employees of the airport are unable to communicate with proposers outside of the specified procurement forums and official channels of conversation. This ensures that proposers do not gain a com- petitive advantage from information disclosed to only one bidder. Evaluation of Proposals and Shortlist Evaluation process steps are highly specific to an airport’s operating context. When proposals are submitted during the RFP phase, two-step procurement processes tend to have three review stages. In the first stage, a procurement manager would evaluate proposals based on pass/fail criteria to determine which proposers are responsive to the RFP requirements. In the second stage, the airport would convene a team of reviewers (a combination of internal staff and external advisors) to examine the financial and technical approaches proposed by teams. These reviewers may summarize responses for the benefit of the evaluation committee and may highlight approaches that are unfeasible or technically incorrect. The third stage is the scoring of proposals, shortlist, interviews, and award. The airport (or oversight agency) would convene a committee of evaluators (composed of internal stakeholders and external stakeholders, such as airlines, community members, and airport staff ). The evalu- ators then review the proposals in light of the criteria identified in the ITP. At this point, an airport may conduct interviews with proposers to gain additional information or clarification for the benefit of the evaluation committee. Finally, the evaluation committee scores proposals and selects a preferred proponent, or awarded proposer, based on the strength of their applica- tion in relation to the criteria outlined in the ITP. Collaborative Dialogue After the release of the shortlist, proposers get to work on their technical and price responses. Before the proposal is due, airport owners may ask proposers to provide questions in order to issue changes to the draft agreement included in the RFP or to clarify requirements in the ITP. Airport owners may also structure a series of meetings to facilitate collaborative dialogue, also known as “one-on-ones.” In these meetings, airport owners interact with the developer’s bid team and advisors. Airport owners should anticipate engaging their staff responsible for the

70 Evaluating and Implementing Airport Privatization and Public-Private Partnerships procurement and project as well as their external advisors. The bid team will generate detailed comments to the draft agreement, indicating where, in their opinion, risks or terms are not commercially or legally reasonable. Airport owners are not expected to accept all suggestions; instead, the owners must decide if and how to amend the draft agreement as they receive a wide variety of inputs from proposers. It is best practice that airport owners refer to the project goals and desired risk allocation they initially drafted during the planning phase of the project. Lessons Learned: Los Angeles International Airport’s Automated People Mover Los Angeles World Airports publicly announced that it was considering a P3 for the automated people mover project in August of 2015 (Barragan, 2015.). In June 2016, Los Angeles World Airports issued the RFQ for the DBFOM delivery model for the auto- mated people mover project. Five teams were then scored and shortlisted for the project. Due to the limited number of automated people mover developers known to be able to meet the minimum criteria, Los Angeles World Airports qualified constructors and the automated people mover system separately, then let them combine into consortia for the RFP. The five teams were issued the RFP on July 27, 2017. The RFP was returned by three bidders in December 2017 and the board began evaluating and scoring the proposals in January 2018. The financial and technical proposals were evaluated independently. The financial proposal provided 40% of the potential points. The technical proposal was weighed at 60% of the overall score and was composed of three components: technical merit, visual appeal, and user experience: • Technical merit. The automated people mover system portion evaluated the auto- mated people mover operating system’s technology and equipment components. The RFP ITP requested a comprehensive, well-reasoned approach to design and construc- tion management. The Approach to Maintenance of Traffic/Mitigation of Construction Impacts evaluated bidders’ understanding of the nuances and complexities both on site and off site and the commitment to managing the traffic of both areas. The Inclu- sivity portion of the evaluation helped to ensure local hiring and involvement in the development. • Visual appeal. Visual appeal was broken down further into two categories; Architec- tural Appeal of the Automated People Mover Fixed Facilities, focusing on the overall architectural vision and design, and Vehicle Aesthetics, focusing on the interior and exterior stylings of the automated people mover vehicles. Los Angeles World Airports valued the cohesive appearance of the automated people mover system with the rest of the airport and required that the architecture was preapproved for each team before submittal of the final proposal. In this way, Los Angeles World Airports was able to ensure that all final submittals met the guidelines. • User experience. Los Angeles International Airport wanted to ensure that the user experience would be preserved during the design and build phase and the operation and maintenance phase. The design and build phase required a mitigation plan to minimize the temporary loss of parking during construction and reduce any project- related traffic impacts and inconveniences to the public. During the operations and maintenance phase, Los Angeles World Airports asked bidders to offer precise, detailed, and credible commitments to enhance the user experience for the vehicles, stations, and/or pedestrian walkways, including commitments to improve user comfort and access for people with disabilities, increase ease of use, and provide technology and media enhancements.

Procurement—Advertisement to Shortlist 71 LAX Integrated Express Solutions was announced as the preferred proponent on January 24, 2018. LAX Integrated Express Solutions earned the highest technical score, had the lowest project cost of the three teams that proposed, and scored highest in all major technical scoring and evaluation categories: technical merit, visual appeal, and user experience. Los Angeles World Airports paid both losing submitters $2 million stipends for their efforts and the rights to own the ideas proposed in their bids. Two alternative technical concepts from losing teams were incorporated into the project’s final design, including one that removed the need to demolish and rebuild a parking deck, both saving money and reducing the impact on travelers during the construction period. Performance-Based Requirements Unlike traditional procurements, where an airport controls the project specifications, performance-based contract requirements are the foundation for a long-term relationship between the public and private sectors in a P3 arrangement. Once performance-based require- ments are set by the airport owner, the developer is then given greater flexibility to determine its approach to the design and construction of the project. During the procurement process, developers will use collaborative dialogue with the airport owner to negotiate the terms of the performance-based requirements. In a P3, the developer commits to a fixed public funds amount, date-certain delivery, and, for availability payment transactions, only receives compensation from an airport if the devel- oper meets the contractual performance obligations during each phase (for revenue risk deals, the developer’s compensation depends on revenues received, for instance through a terminal concession program). Only in limited circumstances can the developer seek additional com- pensation, so each decision on the approach to the project should be carefully considered and monitored throughout the project lifecycle. The developer’s decision-making will therefore be geared to minimize the occurrence of unintended consequences that could lead to future performance failures that could jeopardize its revenue stream. As a result, P3 projects primarily rely on performance specifications. Most P3 projects include long-term operations and/or maintenance and, consequently, P3 contracts should include perfor- mance requirements addressing long-term operations and maintenance. Contracts for revenue risk projects often rely heavily on built-in performance incentives since the developer bears the risk of lower revenues if the project must be shut down for repairs, as well as having to pay the cost of the repairs. Projects relying on payment of public funds during the operations period typically incorporate performance incentives in the form of deductions to fixed payments if the developer fails to meet performance obligations under the contract. A balance must be struck between looking to the private sector for design innovation and providing enough structure to the project so that private bidders understand the expectations and the airport owner can evaluate responses. For instance, Denver International Airport expe- rienced an unexpected challenge in the Great Hall Terminal Redevelopment when proposers struggled to design and provide indicative pricing for a concept without direction from Denver International Airport on aesthetic and engineering aspects of the concept. To align Denver International Airport’s desire for innovation and creativity and the proposers’ request for more prescriptive direction on the design, additional one-on-one design workshops with executives and marketing staff were held to clarify goals for the space and the services provided therein. An extension of this challenge was to develop the evaluation criteria in the RFP, which significantly impacted how the evaluation panel would judge proposals. The Denver International Airport executive team and legal team spent a great deal of time making sure the wording of that criteria

72 Evaluating and Implementing Airport Privatization and Public-Private Partnerships did not favor a particular concept and clearly conveyed Denver International Airport’s goals for the project. Unfortunately, the balance between objectivity in procurement and ensuring the airport priorities were met did not ultimately mesh for Denver International Airport, resulting in the termination of the developer. On the other end of the spectrum, P3s can fail if the sponsor is too prescriptive with its criteria. For example, Baltimore-Washington International Airport received no responses to its RFP to develop a hotel in the terminal core, in part because the solicitation dictated numerous project features that did not give respondents flexibility to design a facility to maximize their investment return. Lessons Learned: LaGuardia Airport Terminal B, New York A project that has significant challenges (e.g., construction amid congested airside/ roadside facilities) that require specialized expertise can benefit from innovative ideas in a P3. One example of innovation at LaGuardia and its Terminal B project was related to logistics risk. LaGuardia Gateway Partners reduced the logistics risk associated with construction staging by placing the terminal offline from the existing road and terminal building infrastructure. This phasing plan resulted in a reduction of the number of con- struction stages by 30% (down to 12 stages). The fewer construction stages also reduced the inconvenience experienced by the traveling public during construction. Additionally, both the airside layout and the concourse designs were innovative and effi- cient, providing the maximum space for aircraft movements and parking. The LaGuardia Gateway Partners design lead indicated that the terminal design “maximized the number of external corners using two L-shaped concourses, which optimized the space for aircraft parking.” The use of elevated pedestrian walkways above existing taxiways, the first such airport structure in the world, was a result of the alternative delivery model. This design, in addition to shifting the terminal closer to Grand Central Parkway, will reduce airport ground delays. The use of a P3 and a terminal operator leading the consortia resulted in a terminal design that addressed LaGuardia’s challenges with more innovation than what the public sector could have accomplished alone. In addition to design innovation, the P3 structure itself can incentivize a terminal operator to ensure that the airport design substantially increases revenues. Under Vantage, the total concessions spend per enplanement is projected to increase by 70% to $18.94 (all spend figures are in $2016). The spend includes five categories: (1) food and beverage, (2) duty free, (3) news and gift, (4) specialty retail, and (5) services. Table 5 details the projected increase in spend per enplanement for the new terminal. Food + Beverage Duty Free News and Gift Specialty Retail Services Total Existing Terminal B (2017) $6.97 $0.54 $2.50 $0.75 $0.38 $11.14 New Terminal B (2023) $8.58 $1.01 $2.66 $4.99 $1.70 $18.94 % Increase 23% 87% 6% 565% 347% 70% Source: Report of the Airport Consultant, LaGuardia Airport Terminal B Development Project, New York Transportation Development Corporation Special Facility Bonds Series 2016A and 2016B April 26, 2016. Table 5. Spend per enplaned passenger in existing Terminal B vs. new Terminal B ($2016).

Procurement—Advertisement to Shortlist 73 Best Practice: Stimulating Innovative Approaches Enabling bidders to improve the project design and/or reduce cost is a key benefit of P3s. Alternative technical concepts are utilized during the procurement process to bring innovation to the project. This opportunity, unique to P3s, enables an airport to benefit from the creativity and expertise of several bidding groups. The proponents benefit by enhancing their chance of a successful bid. If the alternative technical concepts they develop enable them to deliver the project faster, at a lower cost, and/or operate more efficiently, or enhance revenue the proponents can offer a more competitive bid. If a stipend is offered to unsuccessful bidders, that enables the airport to include the best concepts from all proponents in the final design. Other mechanisms can help stimulate innovation. An example from the toll road sector involves providing a fixed fee for a project; bidders compete to develop the most lane miles of road or have the greatest impact on traffic congestion. The winning bidder is the proponent that provides the most improvement for the funds available. This concept could be utilized in an airport environment. Lessons Learned: Los Angeles International Airport Automated People Mover The incentive to minimize price and win the proposal leads to innovative alternative technical concepts from competing proposers. In the instance of the automated people mover at Los Angeles International Airport, the preferred proponent had a competitive price proposal due to an innovative design improvement—the developer proposed engi- neering the guideway over two parking structures that otherwise would have needed to be demolished and rebuilt. This innovation also reduced the operational impact of the project on airport users. The winning proposer also proposed a financial innovation that, if adopted, could have enabled the use of lower-cost, tax-exempt debt rather than private activity bonds that are subject to the alternative minimum tax. Also, the final design incorporated concepts from the losing bidders that Los Angeles World Airports was able to use since both took the $2 million stipend that gave Los Angeles World Airports the right to use their designs. The preferred proposer’s cost estimate for the automated people mover was 4% lower than Los Angeles World Airports cost estimates. Also, Los Angeles World Airports was not forced to carry capitalized interest cost of bonds during construction. For projects as large as the automated people mover elements, financial and technical innovations can result in cost savings that overcome the additional cost of advisors needed for the P3 procurement. Essential Procurement Documents After beginning the solicitation process, an airport would begin working with subject-matter experts and external resources, particularly legal counsel, to draft the primary legal agreements that make up the P3 transaction itself. This section describes each of the transaction documents. The flow chart shown in Figure 15 summarizes the documents described in this section and the common sequencing of the release of those documents. The procurement timeline, including negotiations, can be extensive. Insufficient engagement with stakeholders that can stop the procurement process can cause delays. In the instance of Everett Paine Field, the airport’s introduction of commercial air service generated uncertainty around the results of the environmental review process and also prompted lawsuits brought by

74 Evaluating and Implementing Airport Privatization and Public-Private Partnerships the airport’s surrounding municipalities. The option-to-lease agreement, as a result, was in place for 2 years. Financial close on the Everett Paine Field project was further delayed due to slow interagency communications. Airport practitioners can sketch out the procurement timeframe and consider early stakeholder engagement to avoid potential public opposition or political risks that may arise during P3 procurements. Lease Agreement One of the most critical documents in the procurement process is the lease agreement (some- times called a development agreement or concession agreement or project agreement), which is the contract that contains the terms and conditions governing the relationship between the agency and the private partner. The lease agreement sets forth the commercial terms of the deal, establishing the payment mechanism, responsibilities of the parties, events of default, the processing of changes and amendments, and other compliance-related obligations of both the agency and the private developer, including environmental, labor, and third-party agree- ments. The lease agreement additionally contains terms governing insurance, indemnity, and other provisions allocating the respective liability of the parties, including responsibility for compliance with grant assurances and other federally imposed requirements, responsibility for obtaining permits, and liability for site conditions both known and unknown. Figure 15. Procurement and transaction documents (organized by the entity most likely to draft the document).

Procurement—Advertisement to Shortlist 75 Further, the lease agreement incorporates and mandates compliance with the technical speci- fications during construction and the operations and maintenance standards and provides remedies when either the agency or the developer does not meet its obligations. As the lease agreement governs the legal rights and liabilities of the parties, legal advisors often play a critical role in developing the agreement. Often a draft of either the agreement itself or, at a minimum, a term sheet specifying the general terms and conditions, is included with the RFP, allowing bidders to review the allocation of risks and price bids accordingly. A P3 lease agreement establishes contractual privity between the agency and the developer entity only and not with the various entities that make up the P3 developer team. The airport owner must pass through the developer entity to enforce the terms of the agreement and, there- fore, must ensure that the lease agreement renders the constituent entities liable for default so that the airport owner has recourse in the event of non-performance by one or more members of the developer team. A lease agreement typically requires that the individual entities execute guarantees providing for joint and several liability in the event of a default, which not only provides recourse against a non-performing firm but also provides an incentive for the developer team to collaborate to avoid one member rendering the entire entity in default. A P3 lease agreement is contrasted with management agreements, which were discussed in ACRP Report 66 (Ernico et al., 2012) and are frequently employed in the context of privatiza- tion of airport facilities. Management agreements are contracts that airport operators enter into with private sector entities to assume management of a component of airport operations. For example, an airport owner may enter into a management agreement with a terminal operator to operate a terminal, or a shuttle operator to provide shuttle service on airport grounds. These agreements are to provide specialized services and rarely do they entail a significant transfer of risk. Rather, the airport operator agrees to pay a set amount, without adjustment based on demand for the service provider. Where the private vendor’s service fails to meet the service levels specified in the contract, the owner may pursue remedies for breach of contract. In contrast, developer agreements in P3 projects contain different payment mechanisms and spread risks between the airport owner and private party. In a revenue-sharing model, the devel- oper’s payment is contingent on usage of the facility and subject to a minimum guaranteed payment. In an availability payment model, payments are conditioned on achieving compliance with metrics that measure the availability of the facility. Rather than being relegated to breach of contract remedies where the facility is not available, the owner’s payment is commensurate with the availability of the facility. The owner does not have to pay and then pursue contractual remedies (or withhold payment while the provider seeks contractual remedies). Management agreements may be considered as an alternative where the owner is uncomfortable with shifting the degree of control required of a P3. The lease agreement sets the framework for risk allocation, establishing which party bears which risks. P3 project delivery represents a fundamental shifting of risks from the public to the private sector, the extent of which is explained elsewhere in this guidebook. During the design and construction phase, the developer assumes the risk of compliance with the performance- based technical specifications, in part relieving the airport owner of risks associated with a defec- tive design based on the doctrine of United States v. Spearin and its state law equivalents, under which the designer of record is liable for additional costs if its design cannot be constructed. The owner and the developer share risks associated with prescriptive specifications, to the extent that the developer assumes the risk of non-compliance, while the owner retains the risk of a defective specification or a prescriptive specification that interferes with the ability to meet either other prescriptive specifications or a performance specification. In preparing the technical specifica- tions, the owner must consider this risk profile and adjust based on its tolerance. Ultimately, the greater the owner’s retained control, the greater the risks associated with a defective specification.

76 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Agreements Among Developer Entities In addition to the lease agreement executed between the agency and the developer, the devel- oper team executes agreements among its constituent entities. These agreements flow between the design-builder, financiers, and operations and maintenance vendors, in addition to the vari- ous subcontractors to each of them. In a complex P3, the separate entities that comprise the developer may establish a joint venture or partnership (sometimes referred to as a “developer”) to pursue the project and will enter a special purpose vehicle or partnership agreement governing this relationship. The airport owner does not always obtain, and is not always entitled to, copies of these agreements, nor does the airport owner generally have the ability to claim rights under them as a third-party beneficiary. As discussed previously, the agency will generally secure an indemnity agreement with the developer entity that requires the entities comprising the joint venture or partnership to satisfy the developer entity’s obligations in the event of default or non-performance. Third-Party Agreements Third-party agreements are contracts between the airport owner and third parties affected by the project. Depending on the size and reach of a P3 project, it can entail numerous third- party agreements. Third-party agreements are most frequently executed with utility owners whose utilities must be relocated, protected, or otherwise accommodated; adjacent landowners with whom temporary or permanent easements are needed; and private commercial enterprise whose business must be relocated or temporarily closed to accommodate the project. For an airport project, the most common agreements with third parties are with terminal operators, airlines, utility owners, airport services providers, vendors, and other private entities that may be operating within the terminal, including outsourced security agencies, ramp services, baggage handlers, caterers, parking operators, and fuel services providers. The airport owner will generally prepare the third-party agreements as far in advance as possible once it has a reasonable understanding of the project’s footprint and impact on third parties. While owners generally have little choice other than to negotiate individually with each third party, owners often prepare a template agreement that is modified in negotiations, with the intended result being a minimal difference between the agreements. During procurement, the agency will generally include the executed third-party agreements or the versions antic ipated to be executed with the RFP and will require in the lease agreement that the developer comply with all relevant conditions in the third-party agreements. During procurement, the need for addi- tional third-party agreements may arise, particularly where a proposer proposes to expand the project’s footprint, affect an entity that was not originally anticipated to be affected, or imple- ment a measure that has a greater impact than originally conceived. Lessons Learned: Los Angeles International Airport Automated People Mover The Los Angeles International Airport automated people mover required interfaces with numerous entities. Much of the guideway is not located on airport property, requiring agreements with the city for impacting roadways and other systems. Also, the auto- mated people mover connects with the Los Angeles County Metropolitan Transportation Authority (Metro) Crenshaw Line, expected to open in 2021. Before construction, Los Angeles World Airports entered memoranda of understanding (MOUs) for an expedited 21-day review of permits submitted by the contractor with the agencies responsible for water, power, sanitation, streets, street lighting, and building and safety.

Procurement—Advertisement to Shortlist 77 Legal, Policy, and Regulatory Considerations: Predevelopment Agreements (and/or Option-to-Lease Agreement) Some airports opt to select a developer based on qualifications (one-step procurement) and then establish a predevelopment agreement or option-to-lease agreement with the selected developer. This type of agreement is highly dependent on whether it is allowable by state law or policy. The pre-development agreement allows the airport to negotiate directly with its chosen developer and craft a lease agreement through a collaborative process. According to the FHWA’s Public-Private Partnership (P3) Procurement: A Guide for Public Owners, successful pre-development agreements share the following characteristics (Smith et al., 2019): • The [airport owner] sees the value of securing innovation and sweat equity from the developer during the project definition/feasibility/concept phase. The agency may be required to compensate the developer, at a pre-agreed rate or cost, for work it performs under the [project development agreement] if the project does not proceed to the delivery phase or if another entity is ultimately selected to deliver the project. • The benefit of early contractor involvement justifies reliance on a selection process that focuses primarily on qualifications with subsequent scope/price negotiations, in lieu of price competition involving unit prices, lump sum pricing or guaranteed maximum prices. In Appendix C, readers can find out more about the projects at Everett Paine Field in Washington state and Denver International Airport in Colorado. Everett Paine Field used an option-to-lease agreement to negotiate with the developer, and Denver International Airport used a pre-development agreement. The following checklist summarizes the steps for planning and enacting a P3 procurement: • Project Planning: – Determine project goals and scope – Conduct a high-level risk assessment to determine the airport owner’s risk tolerance (in other words, a rough estimate of which risks to retain, transfer, or share based on the owner’s goals and ability to manage or mitigate risks that come with the project) – Conduct a feasibility analysis – Select advisors to meet capabilities gap: technical, legal, financial – Conduct market soundings/requests for information/industry forum to assess the appetite for the project – Assess available funding and financing: grants and federal credit programs – Generate local government, airline, and other stakeholder support • Structuring of Procurement: – Two-step, RFQ-then-RFP process with best-value selection – Industry review process – Discussions/negotiations with proposers during the RFP – Avoid potential conflicts of interest – Have a robust confidentiality regime that works under applicable open records laws • During Procurement: – Public transparency and communication – Intense monitoring by airport – Continuity and well-executed transitions from pre-procurement to procurement and into project operations

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A public-private partnership (P3) can be a dynamic tool to help infrastructure owners achieve a range of objectives on projects, such as incorporating lifecycle project costs into decision-making, benefiting from innovation in design and construction techniques, or sharing certain performance risks.

The TRB Airport Cooperative Research Program's ACRP Research Report 227: Evaluating and Implementing Airport Privatization and Public-Private Partnerships expands upon research presented in ACRP Report 66: Considering and Evaluating Airport Privatization.

Supplemental materials to the report include a Comparative Deal Matrix database, a website for the P3 Readiness Assessment, and a presentation that communicates research findings to key technical and non-technical industry stakeholders.

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