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

Chapter:Chapter 8 - Procurement Preferred Proponent to Financial Close

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Suggested Citation:"Chapter 8 - Procurement Preferred Proponent to Financial Close." 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 8 - Procurement Preferred Proponent to Financial Close." 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 8 - Procurement Preferred Proponent to Financial Close." 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 8 - Procurement Preferred Proponent to Financial Close." 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 8 - Procurement Preferred Proponent to Financial Close." 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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78 C H A P T E R 8 Introduction Many airports seek final regulatory approval from a city council or airport governing board to award the contract after a proposer is selected. The period between the announcement of the selected proposer (called the “preferred proponent”) and contract award (the financial and commercial close of the transaction) can take several months. As a result, the airport owner and preferred proponent must carefully manage the process to mitigate potential risks, including the risk of delay to the work or the risk that commercial terms may change if negotiations take longer than anticipated. At the conclusion of this chapter, users should be able to • Describe the risks that arise before commercial and financial close, such as protests, disputes, and negotiations. • Understand the differences between an airport P3 and a privatization project involved in the FAA’s AIPP. Reaching Commercial and Financial Close The announcement of the preferred proposer begins the negotiations that lead to commer- cial and financial close, which is the point at which legal agreements are executed, funding is secured, and the private partner can begin its work in earnest. Identification by the airport Procurement—Preferred Proponent to Financial Close 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

Procurement—Preferred Proponent to Financial Close 79 owner of the preferred proponent does not mean that the proposer will become the private partner, nor is legal risk eliminated at this phase. Transactions can be derailed after the selec- tion of a preferred proponent. One example is the failure of the Westchester Country Regional Airport AIPP transaction to proceed due to political issues. Another example is the cancellation of Chicago Midway Airport’s first AIPP transaction attempt when the winning proposer was unable to close its financing. Protests A potential developer that takes issue with an aspect of a procurement may formally object by filing a protest. Protest procedures are governed by the applicable procurement laws or are set forth in the RFP. Typically, there is a set time in which to file a bid protest, and the statute or RFP will specify the information that must be submitted, including the basis for the objection. The agency has a specified period in which to respond to a protest, and its options generally entail denying the protest, setting aside the evaluation, requiring a new procurement, or cancelling the project. Where the protest is denied, the party filing the protest may typically appeal, which is governed by a similar process. Thereafter, if the appeal is denied, the party filing the protest may have the option to file a lawsuit in a court of competent jurisdiction to hear the dispute. As protests often involve questions of law, agencies generally seek legal advice in evaluating and responding to a protest, and often on an expedited basis, as protest periods are usually short, generally 5 to 10 days after notice of the event giving rise to the claim. Protests may be filed at almost any time during procurement, though they are most frequently submitted by shortlisted entities that are not selected as the preferred proposer. Other common protests include those from respondents not selected for the shortlist or potential bidders objecting to the terms of the solicitation. When a protest is filed while procurement is ongoing, the agency must evaluate whether to continue with the procurement unchanged, issue an addendum, withdraw the document and reissue, or cancel the procurement in its entirety. Bid protests in P3 projects can be particularly complicated because there are numerous potentially aggrieved entities, including design and construction firms, financiers, and operations and maintenance vendors. Additionally, airport P3s are subject to strict financing conditions that may be impacted if there are procurement delays, such that agencies must take care to ensure that a protest does not derail an otherwise viable project. Given the number of potentially affected entities, it is critical that the procurement documents comply with applicable laws and carefully set out the requirements of the procurement to avoid ambiguity or an allegation that proper procedures were not followed. Third-Party Disputes In addition to protests, projects may face resistance from third parties, which can challenge projects on a number of grounds. Legal advisors play a significant role in minimizing the poten- tial for disputes by ensuring that governing laws and regulations are followed within the latitude afforded to the procuring agency and by developing and presenting a justifiable defense when a challenge is presented. The most common form of objection from the public concerns the environmental approvals; other types of objections may concern the transparency of the bidding process or other issues affecting the financing of the project. For airport projects, a critical component of the envi- ronmental approvals and a frequent target of challenges is noise. Given the breadth of people affected by noise-related issues, challenges concerning noise can halt airport growth, adversely influencing the viability of an airport P3. For example, noise-related challenges in Southern California have limited the growth potential of such airports as Long Beach Airport and John

80 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Wayne Airport. Noise-related challenges from local communities resulted in noise abatement procedures that require curfews and limitations on the aircraft that can service the airports. These types of restrictions may limit the private sector’s interest in pursuing P3 projects to the extent that they represent significant constraints on airport operations. The potential for third-party challenges exists over the life of a project, including challenges from the public and third parties affected by the project. Also, legal advisors play a role in disputes filed by the developer, whether such a dispute concerns payment terms, a request for a change order, or day-to-day contract compliance issues. Depending on the size of a project, there may be several layers of legal advisors for a P3 project. For projects that are small enough, the agency may have the in-house legal capability to address the relevant legal issues that arise during procurement and project delivery. Larger projects often require collaboration between in-house and outside legal counsel. The procuring agency may seek counsel on procurement issues, dispute resolution, contract-based issues, right of way, labor and employment, privacy and confidentiality, and any number of other legal issues that require specialized expertise. Commercial Close Commercial close represents the point at which the business terms (e.g., transaction value, milestones, performance metrics, and development projects) and conditions are fully agreed to and the lease agreement is executed. Reaching commercial close entails negotiating the final terms of the agreement. As discussed in other sections, a draft lease agreement is often appended to the solicitation documents, allowing proposers to assess the terms and tailor their proposals and bids around the contractual requirements. Proposers are frequently permitted to submit anticipated requests to amend the draft terms with their proposals. Often with the assistance of counsel on both sides, the airport owner and preferred proposer negotiate to finalize the commercial aspects of the deal, including contractual terms and conditions that govern the parties’ relationships. Also, the negotiation period addresses technical aspects of the project, whether construction specifications or operations and main- tenance standards. Negotiation additionally allows for the incorporation of proposal excep- tions, which are deviations in the proposal from the technical requirements with which the owner agrees, and alternative technical concepts, including those from the preferred proposer and the other bidders. The risk involved with negotiation is that owners spend months if not years preparing commercial and technical terms, but in short order may face a request to reconsider those terms. Both private developers and owners should evaluate whether any requested adjustments to the baseline documents interfere with the intricate web of complex conditions that will remain in place and attempt to limit this conflict before the execution of the agreement. A critical risk during this period is the inability to agree on the terms of the agreement, resulting in the breakdown of the negotiation and dismissal of the preferred bidder. Should this occur, most solicitations state that negotiations cannot recommence with a bidder with which the airport owner was unable to reach commercial close. The owner’s options are set out in the solicitation documents and generally include negotiating with the next preferred bidder, commencing a new procurement, or terminating the project. To mitigate this risk, the solicitation generally requires that bids from all proposers be valid for a set time after submission, providing the owner with alternatives if an agreement cannot be reached with the preferred bidder. No matter the option, the owner can expect to incur costs and delays that compromise the project’s utility, which are magnified when the project was intended to serve a critical aviation need.

Procurement—Preferred Proponent to Financial Close 81 Financial Close In addition to commercial close, the private partner must reach financial close with its funding partners and lenders to start the project. Reaching financial close entails satisfaction of all predicates to receipt of financing by the private partner, including of any conditions precedent. Financial close may occur simultaneously with commercial close, though in many jurisdictions, financial close follows commercial close, frequently within a set time period thereafter. Condi- tions for financing vary based on the nature and scope of the project, but often entail such critical aspects as the receipt of permitting, land acquisition, funding approvals, and filing of security interests. The airport owner has a vital role to play to facilitate financial close, as the owner has a strong influence, if not outright control, over land use issues and funding. For example, the trans- action may require FAA approval, particularly for a full AIPP transaction; TSA approval where the private entity is assuming control of the Airport Security Plan; or Committee on Foreign Investment in the United States approval if the operator has foreign interests. It is therefore incumbent on the airport owner of an airport project to work diligently with relevant oversight authorities, including the FAA, to obtain all required clearances and operation permits so that the private partner can achieve financial close. Where obligated to cooperate by law or agree- ment, an airport authority may assume risks or face liability if it does not assist the private partner with its obligations. The private partner likewise must accomplish critical steps, including by providing the airport owner with the necessary information to secure relevant permits and operating authority. Airports present unique prerequisites to achieving regulatory approval, including information for security clearances to obtain airport access rights and the development of security protocols. In addition to providing information to the owner, the private partner must work to execute lending and credit agreements. Delays in completing these agreements that affect financing may impede commencement of work, such that the private entity must ensure that it does not breach applicable timeframes in its negotiations with the owner. Work During the Negotiation Period Several months may elapse while the processes previously described are occurring. The airport owner and private partner may, under certain circumstances, make use of this time by entering into pre-development agreements to start certain aspects of the work before reaching commer- cial and financial close. For example, if the P3 project entails DB construction, the owner may permit the private partner to commence early aspects of design. The ability to do this is limited to work that can be done before securing necessary access rights, whether to the premises or to confidential information about the airport’s systems. Certain projects may be more appro- priate for early work. For example, a new terminal on unoccupied land would not necessarily require much early access to confidential security information to commence design, whereas construction over an existing terminal may not be appropriate until all necessary clearances are obtained. A critical consideration for work during the negotiation period is that one party must assume the risk that commercial and financial close will not be reached. The private partner may be allowed to commence early work at-risk so that it bears the risk of not receiving payment unless the transaction is finalized, or the airport owner may enter a separate agreement compensating the private party for the work while negotiations are underway. In any case, early work, particu- larly work that involves access to the site or information, often requires bonding or other types of closing security to protect the owner. Determining whether early work is appropriate and which party bears the risk is project-specific and depends on the criticality of the work, and in each case will be a topic of negotiation after announcement of the preferred bidder.

82 Evaluating and Implementing Airport Privatization and Public-Private Partnerships The Federal Aviation Administration’s Airport Investment Partnership Program At this point, the guidebook has described the full procurement process for projects procured using a P3. If a project is a privatization, however, one path that can be taken is involvement in the FAA’s AIPP. An airport owner that intends to participate in the AIPP must first receive FAA approval through an application process. The AIPP application must contain summary narratives describing the project, the process used to select a private operator, and a schedule for project completion. The application must also contain the airport’s financial statements and a copy of the RFQ/RFP that the airport intends to use. After securing a spot in the program, the owner is responsible for negotiating a use agreement with airlines (65% of which must approve the transaction), selecting a private operator to manage the airport, negotiating an agreement with the private operator, and preparing a final application for submittal to the FAA. The process to select a private operator and negotiate an agreement is similar to that documented in this guidebook. The airport submits a final application to the FAA when an operator is selected for contract award. The FAA then conducts a 60-day public review and comment period, and the U.S. DOT, FAA, and TSA may conduct a public meeting in the community to solicit public comment. Finally, the FAA completes its review and publishes the agency decision. If the application is approved, the FAA monitors the legal settlement and transfer of the airport from the public owner to the private operator. Lessons Learned: Luis Muñoz Marín International Airport, San Juan, Puerto Rico Luis Muñoz Marín International Airport is the only successfully operating project of the FAA’s APPP (now AIPP), due in part to the clear benefit that private operation offered to the airport owner. Given the condition of the airport’s existing infrastructure and its revenue- generating potential, there was a clear upside for a developer to manage the airport and accept revenue risks—both for the private developer and for the airport owner. The owner achieved the objective of major redevelopment and infrastructure improvement that it did not have the financial capacity to enact, while the private operator accepted revenue risks as part of the contract. The benefits, costs, and the relationship between airport owner and private operator were easy to articulate to airport stakeholders, which contributed to the airport’s successful participation in the AIPP. The relationship complexity among project parties (airport owner, developer/operator, and airlines) can pose hurdles that must be overcome before financial close. The MOU among the Puerto Rico Ports Authority, project operator, and the airlines was onerous to forge. The airlines had majority voting power and were involved throughout the project development process, adding a layer of complexity in procurement decision-making. Public sector commitments and interagency collaboration and communication can help establish the path for a successful procurement process. Despite some public opposition, the project had strong institutional support from U.S. federal agencies. The U.S. Transportation Secretary at the time guaranteed that the privatization of Luis Muñoz Marín International Airport would not negatively impact current employees. The project also exemplified the goals that Congress had intended for the FAA pilot program. The Puerto Rico Ports Authority also made sure to include the FAA every step of the way. The Puerto Rico Ports Authority’s active engagement and transparency during each stage of the project helped to build relationships and trust between the two organizations and contributed to the project’s success.

Next: Chapter 9 - Contract Management and Oversight »
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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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