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

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33 Project Planning Introduction P3s have several characteristics that are distinct from other project delivery methods used by airport owners. Central among these are navigating an often-unfamiliar procurement process, considering lifecycle benefits and costs in addition to constructing the project, engaging with different actors than in a typical procurement (e.g., equity funds), and evaluating the best value for the airport. As a result, selecting a project to be delivered via P3 and planning for its pro- curement is a more time- and resource-intensive process than traditional project delivery. This chapter will explain how an airport owner may assess and enhance its organizational ability to execute a project as a P3 and the steps that go into identifying, evaluating, and setting up the project for success. At the end of this chapter, users will be able to • Describe the importance of defining a project’s goals, both in terms of a project’s intended functional performance and an airport’s goals for project delivery. • Understand the steps to determine whether an airport has the legal and regulatory authority to pursue P3. • Identify the necessary organizational capacity—drawing from internal and external resources such as personnel, procedures, trainings, and advisors—to execute a P3 procure- ment process. C H A P T E R 4 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

34 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Determining Project Goals and Project Delivery Goals One of the major reasons for P3 failure is a lack of clarity regarding the airport’s goals. This is where the airport does the important thinking about its appetite for risk, project “must-haves” versus “nice-to-haves,” the amount of project control it is willing to cede to a private partner, and how success is measured. The airport’s prioritization of goals guides the procurement process and evaluation of proposals. An airport owner needs to consider both the intended functional performance of the project (“what does this project do?”) and the owner’s goals as they relate to project delivery (“what method of procurement best serves what we want to do?”). It is important to distinguish between the project itself, consisting of the scope of work and technical elements, and the way the project is delivered. Project delivery is the process by which all procedures and components of designing and building a project are organized and compiled in an agreement that results in a completed project. P3s expand this definition by including financing, operations, and maintenance to varying degrees. The airport owner will have technical objectives that comprise the scope of work for the project (e.g., performance standards, quality of materials, and quality of service) and also have project delivery goals such as an accelerated schedule, constrained price, or inte- grated design and construction phases to capture efficiencies. Just as important as identifying project and delivery goals is assessing the relative importance of each. As with any major project, tradeoffs exist among project scope, cost, timing, and other priorities. The clearer the airport owner’s understanding of its goals, the better able it will be to design a procurement process that meets them (see Table 1). Because P3s typically include the ongoing operation of the facility in addition to project devel- opment, more airport departments are likely to have a significant role in the process than for other procurement mechanisms. An airport owner may determine these goals by convening multidisciplinary (or inter-division) workshops with staff that are most closely connected to the project, as well as incorporating the viewpoints of airlines and key stakeholders. Bringing together these diverse internal stakeholders helps airport executives gain consensus about what is best for the airport. The intended outcome of the workshops is to help the airport executive committee understand the total scope of the project and the airport’s project delivery goals. The airport should aim to determine, at a high level, what project elements are necessary in the scope of work, what project elements may be useful for a developer to propose innovative approaches, what risks are necessary to retain or transfer, and the owner’s project delivery goals. Determining goals early in the planning and selection process helps the airport owner assess the value of the extra time, effort, and resources needed to utilize a P3. Lessons Learned: South Terminal Austin-Bergstrom International Airport, Texas In April 2013, airport leadership began considering leasing the terminal to over- come capacity constraints at the main Barbara Jordan Terminal. Speaking at the 2018 Example Project Development Goals Example Procurement Goals New development of an asset (i.e., terminal) Expedited procurement schedule Improve customer service Ability to access private financing Increase number of gates Reduce lifecycle costs Generate a new stream of airport concessions revenue Transfer risk/responsibilities Improve operational efficiency Overcoming stakeholder resistance to project Table 1. Example project development and project procurement goals.

Project Planning 35 Airport P3 Summit, Austin-Bergstrom International Airport Executive Director, Jim Smith, explained that The South Terminal was initially driven by competitive position with the ultra-low-cost business model. There was a time, 4 years ago, when low-cost carriers didn’t have a presence in central Texas, and we wanted to capture those carriers. We initiated discussion with Allegiant and some of the others about differentiating our service offerings by coming up with an ultra-low-cost terminal, where their rents would be about almost half the [rents of airlines located in the] main terminal. This proposition generated interest to an extent that we decided to start the project. Airport practitioners should consider their airports’ internal capacity to educate decision- makers, negotiate with developers, and conduct a more rigorous procurement process. Since market conditions are “different every time you do a transaction,” Smith noted, “[transactions] tend to take longer than originally anticipated. The amount of effort to negotiate commercial terms and the contract, in addition to the extra consultant support you’ll need, is different compared with other methods that [airports] have comfort with.” As with many of the case studies in this report, airport practitioners typically educate their stakeholders—elected decision-makers to airlines—to secure the support needed to successfully close a transaction. The education process, combined with the long-term nature of negotiations, can impact the overall transaction timeframe. A well-defined mutual understanding of project goals helps establish the parameters for transaction success. Per Smith, “In Austin, we see our job as growing air service access. We see there’s real value to having a P3 partner with contacts and the ability to influence airlines to consider Austin as a hub, facilitating new service relative to our competition. You can’t quantify everything.” The clear goal of attracting ultra-low-cost carriers to Austin-Bergstrom International Airport not only assisted the airport in selecting a lessor capable of reaching that goal but also broken down barriers to stakeholder support. The terminal project was predicated on the fact that rents for carriers in Terminal A would be significantly different from rents for carriers in the main terminal. Smith noted, “We had opposition from the main carriers, which carried over to our council meetings. It was an uphill battle to convince the council that it made sense in that environment.” Yet, the city council voted twice in support of this expanded air service and affordability approach, despite the concerns of the existing airline tenants. A convincing argument was made because the airport was able to show the benefit of the project’s goal in expanding air service to the central Texas market and increasing passenger traffic at Austin-Bergstrom International Airport. Organizational Capacity A clear-eyed assessment of the airport’s resources is essential before embarking on a P3. The expertise and commitment of time and funds are typically far greater in a P3 than other pro- curement methods. If the airport cannot dedicate the needed resources or has gaps in critical knowledge, the path forward becomes challenging. Although each project is unique, there are three typical “swim lanes” of expertise to consider for a P3: • Legal expertise to help design the competition and negotiate the development or concession agreement. • Technical expertise to develop project specifications and evaluate bidder responses during the procurement process, as well as provide oversight during the development and opera- tional phases. • Financial expertise to evaluate proposer qualifications and risk taken by the airport.

36 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Within these three broad categories, there may be target resources needed for the project in question. An important consideration is whether key staff have the time to dedicate to the P3 process while also carrying out their regular responsibilities. Where deficiencies in resources are identified, the airport may turn to outside personnel such as consultants or a staff-sharing arrangement with other government agencies. To establish this foundation, it’s important to review what makes P3s different from tradi- tional public sector contracting, as described in Chapter 2. The following is a quick refresher on what makes P3s different from traditional DBB project delivery: • In a P3, the private sector is assuming responsibility for some role(s) or some services/ functions that traditionally are provided by the public sector. • A P3 agreement centralizes project delivery under one contract with one private party (often this private party is a consortium of private sector firms) instead of using separate contracts with different private parties performing (or self-performing) different phases such as design, construction, financing, and operation of the facility. • The transfer of risk from the airport owner to the private party is generally a higher transfer of risk than in other procurement methods. • A P3 establishes performance conditions that the private party must adhere to in order to receive repayment or transfers all or some revenue risk to a private party. • Unlike traditional contracting agreements, a P3 may use project financing, which is a form of financing for an asset that has an expected future revenue stream generated from a project or committed by a public agency to private investors. This expected revenue stream would serve as the means for repaying the upfront investment. The legal structure of a P3 project and the private developer entity, allocation of responsi- bilities and risks, and role of project finance are elements that are substantially different from traditional project delivery methods. Whether the airport’s project goals align with the charac- teristics of a P3 as a project delivery method is discussed in more detail in this chapter. During the project planning phase, airport owners must deliberately and carefully manage expectations and clearly communicate the benefits and drawbacks of alternative delivery methods to their stakeholders and the business community. The discussion that follows will first address how an airport owner might best prepare to conduct this planning and selection process. Then, the discussion will address how an airport may augment its existing capabilities with external resources. Finally, the discussion will cover how to screen alternative project delivery methods for a chosen project. Legal, Policy, and Regulatory Considerations: P3-Enabling Authority, Policies, and Procedures One of the first questions that airports considering P3 contend with is whether a project can be procured using DBFOM or another P3 alternative. Airport owners typically seek the answer by consulting their legal staff to determine whether the legal and procurement regulatory frame- work allows for the use of P3, commonly referred to as “P3-enabling authority.” The initial step in the planning and selection process is to determine the applicable airport entity (such as the airport authority, or city government, or other legal entity with procure- ment powers) to deliver the project as a P3, and to develop an understanding of the process that must be followed. This involves interpreting applicable statutes and regulations to assess the constraints that apply to the project delivery method. The legal analysis additionally entails understanding the financing methods available to fund the project. In the case of a construction or redevelopment project, such a financing method could be the debt obligations that an agency

Project Planning 37 is permitted to undertake and the options for making payments to the developer, such as rev- enue sharing or availability payments. Further, airport owners must understand the interaction between federal and local law to develop a procurement process that is consistent with the terms and conditions of federal regulations and federal grants. Procurement procedures are typically specified by statute, as described in Chapter 2. However, procedures may be silent or vague on key components, requiring legal research in determining how to proceed. Procurement regulations for P3s create the framework that allows public agencies to pro- tect public interests, establish procurement practices, and define project implementation agree- ments. Procurement regulation is important because it establishes the legal grounds on which P3 contracts can be formed and enforced. To private parties interested in proposing on potential P3 projects, the procurement regulatory framework provides comfort that the process is trans- parent and will yield results that match the level of effort needed from the private sector to bid on the project. Procurement regulation typically includes provisions that specify which entities have authority to use P3s and which models and processes are approved for use (such as project type, sector type, and/or delivery model), as well as where P3 projects may be located geographically. Procurement regulation may also address the role of private and project financing strategies, such as the legal responsibilities of private parties that contribute equity to a project and the recourse available to public agencies that use project finance. In some jurisdictions, procurement regulations explicitly name project delivery methods that are acceptable to use or name the roles of public and private parties in contractual agreements. In areas where procurement regulations do not make those distinctions, some interpret the absence of regulation as an opportunity to be flexible in making decisions as to which project delivery model or procurement method is most appropriate. The following checklist is a guide to assessing if the procurement rules and procedures are amendable to a P3: • Does the airport owner have the legal authority to pursue delivery of the project using an alternative project delivery method? – Your legal counsel may find that your airport does not have specific authority (i.e., a statute that names alternative project delivery methods), but neither do the airport’s procurement powers limit the ability to procure a P3. In this instance, your legal counsel will describe the feasibility of procuring and awarding the project given the broader legal context and institutional history of the airport. • Can the airport take the revenue risk for the project (i.e., a position where the airport could have a return or loss on investment)? – To determine whether your airport has this legal authority, an airport owner should look at the state statutes that govern the airport’s procurement ability, city or county ordinances that give the airport its powers (if applicable), and the airport’s procurement and contract policies. – The airport owner should engage its legal counsel to understand its legal and regulatory environment, particularly if any issues may impede the owner’s ability to use alternative delivery methods. – Does the airline use and lease agreement structure affect the airport’s ability to take revenue risk? Have the airlines been engaged regarding the potential for P3? • Do existing procurement rules allow for a dynamic process (and provide the confidentiality required for success) that includes processes such as the following: – Private one-on-ones/negotiations? – Option to lease? – Pre-development agreement? The Importance of “I Don’t Know.” At the outset of the process, it is likely that there will be more unknowns than certainties. That is expected and perfectly okay. The purpose of this process is to ask the questions, identify gaps in competency and abilities (on behalf of both the public and private parties), and find the information needed to make the best decision for the project procurement.

38 Evaluating and Implementing Airport Privatization and Public-Private Partnerships – Two-step procurement [request for qualifications (RFQ) and request for proposals (RFP)]? – Consideration of alternative technical concepts from bidders? – Paying a stipend to bidders not selected? Internal Resources The ability to execute a P3 successfully depends upon the airport’s “organizational capacity,” or the airport owner’s staff and available financial resources, policies, and procedures consti- tuting the project planning and selection process. Given the legal, risk, and financial complexity of the P3 method, the planning, selection, and procurement processes are correspondingly complex. Consequently, airport owners should consider the strength and availability of resources (internal talent and external advisors), as well as take stock of the existing processes and procedures that would support the planning and selection process. Airport owners must first consider their airport’s internal staff resources. Staff involved in procurement, finance, strategy, construction, design and engineering, operations and main- tenance, and project management are typically involved in the P3 process. Staff should be well versed in alternative delivery and be organized in a multidisciplinary (or inter-division) team to manage feasibility and procurement processes. Training staff in P3 best practices and engaging those staff in creating common project goals will make it easier for the airport to communicate one message to the business community about the project and the intended impact of the P3 on the airport’s traveling public. In assessing internal resources, it is critical to conduct a realistic assessment of both the expertise and availability of staff (who, after all, have their regular duties to attend to). Questions to consider include the following: • What expertise is required to deliver this project? • Are there aspects of the project that the airport does not have the expertise for in-house? If so, can the airport access consultants or shared resources that can meet this need? • What is the expected timeframe for the procurement process? • Do staff have the availability to work on the P3 project (managing the procurement process, design and construction phases, and post-construction performance) in addition to their ongoing responsibilities? • Does the airport have the budget to engage necessary external resources? External Resources Once an airport owner determines its existing internal capabilities, an owner may contract with technical, financial, and legal advisors to supplement the team. External advisors fill any gaps in the team’s capability or knowledge and sometimes act as an extension of airport staff. P3 projects typically have far higher transactional costs than traditional delivery, in part because owners require extensive external resources. These advisors work together as a team with airport staff to evaluate project feasibility, ensure that the procurement processes reflect the goals the airport has defined, and support both the procurement and contract management functions. An airport owner should consider ways to best integrate its advisors throughout the process and ensure that advisors are working in tandem. For instance, multiple systems needed to be integrated into the capital and operating contract in Denver International Airport’s Great Hall project. Defining the limits of the project was challenging because Denver International Airport had several consultants managed by different divisions that oversaw individual elements of the project, such as utilities, janitorial, elevators, retail, construction, and security. Having one master technical advisor to manage these details could have brought efficiency to developing technical details of the project and maintaining consistency among the different components.

Project Planning 39 An airport owner should identify ideal times to engage external advisors to make sure the owner is gaining the right advice at the right time. It would not be useful, for example, if a financial advisor were selected after an airport had already determined the project’s financial feasibility and began to engage the business community. One way to identify when to hire an external advisor is to conduct an initial market sounding to allow for both potential developers and advisors to respond to the airport’s interest in alternative delivery. Advisors and develop- ers may propose solutions, alternatives, and information that the airport requires to assess the expertise necessary to enact a successful P3 transaction. Another way to identify when to hire an external advisor is to start by engaging a consultant to advise the airport on the expertise that will be needed and help with the process of engaging the needed services. Los Angeles World Airports followed this path, bringing in project-specific consulting services to help recommend the delivery method and initiate the P3 process. Lessons Learned: St. Louis Lambert International Airport Procurement In March 2017, the City of St. Louis submitted a preliminary application for the St. Louis Lambert International Airport for a 50-year lease under the FAA’s APPP (now AIPP). The process was driven initially by a political action committee called Grow Missouri (Cooperman, 2019). When then-mayor Francis Slay announced plans to consider leasing the airport to a private operator, he cited the upfront payment as a motivating factor for using a P3 (Thorsen, 2017)—although how those funds would be utilized was not articulated to the public. The City pledged not to spend any taxpayer funds on the transaction. Rather, the mayor indicated that Grow Missouri paid “in the low six figures,” on behalf of the City to cover expenses related to the City’s application to the AIPP program, which would not be reimbursed until, and unless, the deal was closed. After St. Louis Lambert International Airport was accepted into the AIPP program, the City’s RFP to engage consultants to advise the City regarding the transaction called for compensating the City’s sell-side advisors utilizing proceeds from the transaction closing (City of St. Louis, Missouri, 2017). The financial backing of Grow Missouri and the organization’s subsequent inclusion on the sell-side advisory team selected by the City (along with Moelis and McKenna) generated concern about the P3 (Cooperman, 2019). Arrangements in which advisor payment is contingent on closing a transaction create several poor incentives. These include limiting the pool of consultants to companies that can take a major risk of not being paid and creating a conflict of interest that could interfere with the City getting the unbiased advice that is critical to success. An advisor would be hard-pressed to advise the City to abandon a transaction if doing so resulted in the advisor not being paid. While this arrangement is common for more straight- forward financial transactions, such as municipal bond issuance, it is unsuitable for the complexity and uncertainty inherent in an airport P3. In its proposal to the City/Airport Advisory Services’ RFP, Ernst & Young, a firm with long P3 history including the Los Angeles International Airport’s Landside Access Modernization Program transaction, indicated that not paying advisors until the transaction closes can “create perverse incentives for advisors, as well as potential challenges related to ethics and professional obligations” (Ernst & Young Infrastructure Advisors, LLC, 2017).

40 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Furthermore, several high-profile St. Louis figures, including former Mayor Slay, became lobbyists for entities with interest in the transaction. Despite interest from 18 potential bidders submitting qualifications to operate the airport, Mayor Linda Krewson cancelled the AIPP process in December 2019, stating “really very little public support for moving forward with a private operator of our airport.” Best Practice: Building Internal Capacity and Engaging Advisors Airports that successfully procure a P3 assemble the internal capacity needed to do so and will typically engage external advisors to compensate for any knowledge or experience gaps. Here are some common actions taken by airports to build their ability to manage a complex procurement process: • Define project goals and project delivery goals and describe a vision of success. • Identify a lead staff member or consultant that can be dedicated to educating decision-makers. • Identify a lead that can serve as a liaison to stakeholders. • Assign a task lead dedicated to managing the procurement process. • Assign a task lead that is dedicated to future contract management, oversight, and perfor- mance of due diligence post-contract award. • Determine if staff have adequate time to manage procurement/future contract and if advisors are needed to act as an extension of the owner’s staff. • Determine if staff are capable of performing required feasibility or contract drafting or if advisors are needed to act as an extension of the owner’s staff. • Determine if training or additional skill-building is necessary for staff engaged in the P3 procurement process. • Convene an internal working group to manage the project across disciplines/divisions. • Establish guidelines and regulations for P3 procurement so that process steps and division of labor among staff are clear. • Budget for staff assignments and external advisors (if needed). • Budget for other transaction costs. During the planning and selection phase, airport staff typically go through an iterative, and not necessarily linear, process that attempts to identify solutions to the issues named above. This list is intended to help you consider all of the “unknowns” that influence the structure and speed of procurement, but it is certainly not exhaustive and it is not necessary to complete before moving forward with a project. If a P3 remains a consideration as the project planning progresses, more detailed assessments of the elements in the checklist will be required. This iterative process, as shown in Figure 6, will continue until enough information is available to make the final determination that a P3 will (or will not) be utilized.

Project Planning 41 Figure 6. High-level project development phases, key tasks, and iterative nature of planning phase.