Denver International Airport stumbled badly when it chose a public-private partnership for a revamp of its Great Hall, according to an analysis of what went wrong with a P3 deal that was terminated in 2019 at a cost of nearly $184 million.
The
After a value for money analysis did not favor one approach over another, the airport opted for a design-build-finance-operate-maintain P3 that commenced in August 2017.
"(The airport) had the financial resources and significant experience with both delivery methods; it had little to no experience with delivering a project via a P3 contracting approach," the report said, pointing to micromanaging on the airport's part.
Great Hall Partners, LLC, led by Spain-based developer Ferrovial Airports, was criticized for its inexperience with U.S. airports and loss of key personnel, while noting the company's participation in a London Heathrow Airport P3 involved projects for terminals that were not in operation, unlike Denver's Great Hall, which continued operating. Ferrovial did not respond to a request for comment.
Phillip Washington, who joined Denver airport as its CEO last year, told the city council's Business, Arts, Workforce & Aviation Services Committee earlier this month that P3s do work and that the report, which was requested by the committee, provides a blueprint for doing them correctly.
"We did not do this report to point fingers at anybody," he said. "We did it to be constructive to allow this region, other municipalities around the country to understand how best to do these types of projects."
DIA, the
The report said the failure of the Great Hall P3 is not a reflection on other potential P3 projects.
"Assuming the (value for money) analysis is suitable, and the appropriate contractor team and owner personnel are assembled, P3 remains a viable approach to deliver projects of all sizes," it said, adding that the language of the agreement needs to be restrictive, not permissive.
While setting rules the P3 contractor must follow is essential, the contract should be negotiated with benchmarks "that enable and support making a termination decision quickly and at the lowest-possible cost," it added.
Washington said P3s should ideally transfer risk to the private sector.
"That was a major reason why a P3 was desired," he told the committee. "At the end of the day though, the risk matrix turned upside down and most of the risk was transferred to the government entity."
City Council Member Debbie Ortega said elected officials were not given enough time to evaluate the agreement, while airlines had limited input.
Paul Kashmann, who is also on the council, said he regretted his vote for the P3 and called the analysis "the most gently written evaluation of a mess this size that I've ever seen."
The deal gave Great Hall Partners an uncapped 20% share of concession revenue from new shops and restaurants, the report said. Upon completion of the project's design and construction phases, it would have been responsible for 30 years of operation and maintenance for specific parts of the airport.
Development and design work on the project in the Jeppesen Terminal began in August 2017 with the construction contract commencing in July 2018. The work involved building new airline ticketing/check-in space and a security checkpoint.
The P3 began to unravel in early 2019 in the wake of projected completion delays and concerns over what the contractor said was defective concrete in the existing structure. There were also disputes about compensation that sent the parties to mediation then to a contractual dispute resolution panel, according to the report.
In August 2019, DIA
Termination payments totaling $183.6 million were made to the developer and its affiliates funded mostly with proceeds from airport bonds issued in 2018, according to
Breakage, termination, and settlement of outstanding claims and costs accounted for $55.5 million of the payments, the report said, while $128.1 million reimbursed Great Hall Partners for its equity investment and net lender's liability to repay bonds it sold.
The developer group, which sold $189 million of tax-exempt bonds for the project in 2017 through the Public Finance Authority,
Robert Poole, director of transportation policy at Reason Foundation, said he was not aware of another case of a failed airport P3 like Denver's and he lauded the analysis as a positive step.
"(The airport) paid a high price for a badly written, long-term P3 agreement and for not really understanding what they were supposed to get out of doing the complex DBFOM option compared to the conventional various other methods of procurement that they said all came out about equal," he said after reviewing the report. "It really suggests they didn't know what they were doing."
Poole noted that while U.S. airport P3s are not as popular as those for highways, activity has increased in recent years with Port Authority of New York and New Jersey deals for LaGuardia and
P3s could become more prevalent given the huge cost of repairing, replacing, and expanding aviation facilities. U.S. airports face an estimated $115 billion in infrastructure needs over the next five years, according to the Airports Council International-North America.
In July, Denver sold $1.64 billion of revenue bonds for the airport. Ahead of the sale, Moody's Investors Service
Bond proceeds
The airport's 2023-27 capital plan is estimated to cost $2.9 billion of which $2.157 billion is to be financed with bonds.
