Tuesday, August 15, 2017
City Council clears $1.8 billion terminal partnership for takeoff at Denver International Airport
34-year deal with Ferrovial Airports calls for big security changes, management of new concessions
By Jon Murray
The Denver (CO) Post
Denver International Airport has proposed a $1.8 billion partnership with a team led by Ferrovial Airports for a terminal renovation and 30 years of oversight over new concessions. DIA’s terminal is shown on Aug. 4, 2017.
The vast spaces beneath Denver International Airport’s signature tented roof will be in for massive changes after the City Council signed off early Tuesday morning on a controversial $1.8 billion, 34-year public-private partnership contract for the terminal.
The Great Hall contract — which combines a terminal renovation with 30 years of private management of new concession spaces — marks Denver city government’s first major public-private partnership at a city-owned building, infusing both private money and management into a public project.
Before the council’s 10-2 vote at 1:12 a.m., its members probed DIA officials and representatives of Ferrovial Airports, the lead private partner, about financial aspects of the deal. They also focused heavily on labor issues for the terminal’s current and future concession workers and on city contracting rules for minority and disadvantaged businesses that Ferrovial must follow.
“If you were troubled by some of the cost issues and overruns on the transit center and the hotel, you should like this deal,” Councilman Kevin Flynn said before the vote, referring to DIA’s last major project. The contract, he said, ensures that many cost risks will be borne by Ferrovial and its partners, instead of DIA.
“This is what international cities do — they make bold moves. And this is bold,” council President Albus Brooks said.
After weeks of intensive questioning from council members — including Monday night — the margin of the vote marked a victory for DIA officials.
The partnership with Madrid-based Ferrovial and Centennial-based Saunders Construction in the next four years will bring big changes for security screening as part of a larger $650 million renovation of the Jeppesen Terminal.
The most notable part of the plan for passengers is the relocation of all security screening to the north ends of the upper level, modernizing the checkpoints with faster technology. The project calls for consolidating ticketing areas — already shrinking as the airlines rely more on self-check-in kiosks — into smaller spaces.
In the ensuing three decades, Ferrovial — which operates London’s Heathrow Airport and is part of an international conglomerate — will manage expanded money-generating concessions spaces on the main floor, including contracting with the operators of retail and food outlets. A year ago, the Ferrovial team beat out two other final bid teams for the right to negotiate a deal.
But the council has faced a ticking clock: Without approval of the contract by Sept. 1, Ferrovial would have been owed a $9 million walk-away fee for the effort it put into negotiations.
Most council members have lauded the renovation plans, which also include a new main-floor welcome atrium on the hotel side of the terminal that DIA officials have compared to Union Station’s main hall.
But it was the long-term and private concessions management aspects of the nearly 15,000-page contract — a 157-page main “development agreement,” plus dozens of lengthy attachments and project specifications — that gave several members heartburn for the last several weeks.
Ultimately, several said they resolved enough concerns to be able to support the agreement.
“It’s not perfect, but it is strong,” Robin Kniech said about the contract and its protections of the airport’s interests. “The project is strong, and I’ve gotten to know this partner better.”
But fellow at-large council member Debbie Ortega said, before voting no: “I don’t have that comfort level that some of my colleagues do, in terms of where this deal is at. And I appreciate the work that everybody has put into it.”
Joining Ortega in voting no was Rafael Espinoza, who cited concerns about a range of issues, including the risks in such a long contract and the costs of a partnership arrangement. But “I don’t fear going forward if council chooses to go that direction,” he said.
One member, Stacie Gilmore, has recused herself from all votes related to the contract because her brother-in-law’s construction company is part of Ferrovial’s large bid team.
DIA officials say the complex setup provides contractual assurances that the marquee renovation will be delivered on time and on budget, and they argue that it provides a reliable partner at a time when DIA also will roll out separate projects for gate expansions and other changes that could include adding a seventh runway.
Last year, passenger traffic through DIA reached 58.3 million. All of those projects, including the terminal renovation, are geared toward expanding DIA’s capacity to 80 million a year.
Council members cite varying reasons for votes
For Councilman Chris Herndon, the current state of the 22-year-old terminal provided compelling reasons to vote yes.
“The vulnerabilities that we have with our current configuration (on the main floor) need to be immediately addressed,” Herndon said. “And that is the main reason why this should move forward. … No. 2 is modernization. We have a 1990s configuration in a 2017 international airport.”
Paul Kashmann said he agreed with Herndon’s reasons for the project — but he’s struggled more with the long-term considerations in the full contract and concerns expressed by the Unite Here union about job protections. At Kashmann’s prodding, a Ferrovial executive agreed Monday night to meet with the union to discuss its requests.
“The good thing that I’ve come to believe about this contract is that as opposed to my mortgage, there’s a lot more protections built in for the airport in this contract than I have in my mortgage,” Kashmann said.
Another council member concerned about labor protections, Paul López, said he planned to propose an ordinance that would protect workers’ jobs when concessionaires change at the airport by giving them the right of first refusal over new positions.
A rendering shows how the main floor of Denver International Airport’s terminal might look after one of the main security checkpoints is moved to the upstairs level. Plans call for more concessions in a post-security gathering area before passengers go downstairs to take trains to the concourses.
Financial details include upfront costs, annual payments
DIA’s proposed contract includes an up-front cost split with Ferrovial’s Great Hall Partners on the set-price $650 million renovation, with DIA paying for 74 percent. However, the airport also will be responsible for a contingency fund covering up to $120 million in large unforeseen construction and design costs, potentially because of airline needs, DIA’s decisions, surprises lurking behind the walls or changes in airport regulatory requirements.
Over the 30 years of concession operation, DIA will pay Ferrovial annually for capital repayment and an operations/maintenance reimbursement, totaling $1.2 billion. At the same time, DIA will receive 80 percent of revenue from the new concessions, while Ferrovial reaps 20 percent.
DIA has estimated Ferrovial’s profit on its initial $82 million equity investment at a minimum 4.8 percent, as long as it meets the contract’s requirements — but it likely will be closer to 10.8 percent, based on concessions performance, and could go still higher.
Ferrovial’s equity partner is JLC Infrastructure, an investment fund started by former NBA star Earvin “Magic” Johnson and Loop Capital.
Brooks pointed to Johnson’s role — as a black investor in a major city project — as a point of pride.
Denver’s costs will be covered by the income DIA generates from its operations, officials say. The airport is self-sufficient and does not draw on taxpayer money from city coffers.
After the renovation, many of the new concessions spaces will be in a post-security screening section on the north side of the main floor, where passengers will pass through on their way down to the concourse trains.
That plan is a bet by Ferrovial and DIA officials that the private manager can make terminal concessions more productive than they are now, compared to the much more popular concourse stands.
A breakdown of costs in Denver International Airport’s terminal renovation.
Intensive briefings helped build support for deal
Going into Monday’s meeting, DIA officials were hopeful they had locked up at least the seven votes needed for approval on the 13-member council after weeks of intensive briefings. But amid concern about the length of the deal, public-private partnerships and a loss of council power over most terminal concessions, some council members were seen as on the fence over the weekend.
Another complication has been in the mix: DIA’s major airlines, including United, Southwest and Frontier, have lodged financial concerns about fee increases they likely will shoulder, along with logistical objections to the security relocation. DIA officials have been meeting with airline representatives in recent weeks and say potential design changes are under discussion; those will be possible after the contract’s approval, either using the contingency fund or as separate projects, airport CEO Kim Day told the council.
United area manager Steve Jaquith testified Monday that the airline was more comfortable with recent computer simulations run by the airport of the new security setup but still was seeking more assurances and modifications — and a promise that the airlines wouldn’t bear extra costs for them.
“The simulations for the checkpoint area require that 28 of the 34 planned lanes in the current design must be open, or else a security queue flows into our (ticketing) lobbies,” he said.
“Your hands will be tied,” one speaker testified
Earlier in Monday’s meeting, council members listened to testimony from about two dozen people during a public hearing that lasted 50 minutes.
“By supporting this contract tonight, the citizens of Colorado will no longer have anyone to complain to” about some terminal problems, said Joyce Foster, a former state senator and Denver council member. “I know that sounds tempting, but your hands will be tied — along with the next three decades of elected officials. … I’m here now to hopefully change a few minds.”
Other speakers expressed concern about the length of the deal and labor issues for concessions workers, but the hearing also attracted many who were in favor, including construction contractors and current airport concessionaires who expressed excitement about the project. One industry estimate puts the number of construction jobs that will be generated by the terminal project at more than 11,000.
“I cannot imagine what our city would look like — or would not look like, perhaps — if we still had Stapleton (airport),” said Walter Isenberg, the president and CEO of Sage Hospitality, referring to DIA’s opening in 1995. “I think we can all agree it is time to reinvest and update the facilities.”
Here is the main document from the DIA-Great Hall Partners contract: