DALLAS — A potential 10-month delay in the $650 million redevelopment of Denver International Airport’s main terminal highlights some of the key risks of a public-private partnership.
A finding in November that existing concrete used to build the original terminal falls short of the standards needed to proceed with construction has brought most work to a halt just four months after it began.
Construction risk usually involves unforeseen circumstances that delay completion of a project. In the case of a P3 where most risks are transferred from a government owner to a developer, the partners must resolve compensation issues based on a detailed contract signed before work begins.
An often related issue — regulatory risk — can also be a factor. The standards for concrete have advanced in the past 24 years in consultation with the Federal Aviation Administration.
“Airports are obviously heavily regulated and unique assets, and these issues and similar industry factors would be key elements in any airport related P3 transaction,” said Patrick Miller, partner at the law fim Faegre Baker Daniels in Chicago.
Denver’s airport delay involves concrete used to build the tent-roofed “Great Hall” terminal at DIA in the 1990s. Initial tests in November showed that the concrete lacked the compressive strength to support heavy cranes and structures that would be used in redeveloping the 24-year old terminal.
Great Hall Partners, a consortium of financial, engineering and construction firms led by international airport developer Ferrovial, disclosed the “relief event” in its December progress report.
“It is too early to determine final and specific impacts on the project,” the
Results of more detailed tests are expected in April, said airport spokesman Stacey Stegman.
“Great Hall Partners has estimated a 209-day delay,” Stegman said. “However, that isn’t based on test results, nor does it include any mitigation.”
The 209 days don't count weekends and holidays. With those included, the delay could be as long as 10 months. The project was originally expected to take four years, with Great Hall Partners maintaining the facility for 30 years beyond that. The total value of the contract is $1.8 billion.
After the April test results, Great Hall Partners would establish what design changes may be required, and seek cost compensation and schedule relief from the City and County of Denver, according to terms of the contract.
"While full information is not yet available, the delays to DIA’s Great Hall Project highlight the increased risks to projects with significant amounts of inherited assets compared to a new build or greenfield project," said Earl Heffintrayer, transportation analyst at Moody's Investors Service. "Utilizing the public-private partnership model to procure projects can only attempt to mitigate, not eliminate, these risks. "
"With the Great Hall Project, the weaker-than-expected strength of the existing concrete is a risk retained by DIA because the private sector cannot always efficiently price the risk of differing conditions going into a project, depending on the amount of information available upfront, so this risk typically remains with the public sector," Heffintrayer added. "DIA’s awareness of its retained risk allowed it to build adequate contingency and capacity at the beginning of the project in order to mitigate the adverse effects of any events that provide relief to the private party."
Though this is the airport’s first P3 project, it's not its first encounter with deficient concrete.
In 2007, DIA replaced nearly $11 million worth of slabs on one of it six runways afflicted with ASR or alkali-silica reactivity. The condition known informally as concrete cancer, involves a chemical reaction between silica in the aggregate, or rock, in the concrete and alkalis in the cement.
The chemical reaction creates a gel around the aggregate. When the gel absorbs water, swelling and cracking follows.
Great Hall Partners said a consultant reported that the inadequate concrete used in the terminal appeared resistant to ASR based on the first tests.
“There is no indication that it’s anything close to what occurred with the runways,” Stegman said.
Bill Davenport, spokesman for the American Concrete Paving Association, said that standards and concerns about ASR have heightened in consultation with the Federal Aviation Administration since DIA was completed in 1995.
“People think of concrete as one size fits all. But the reality couldn’t be farther from the truth,” he said. “There’s a lot of material science that goes on.”
S&P Global Ratings rates bonds used to finance the Great Hall project at BBB-minus, the lowest rung of investment grade, with a stable outlook.
“We could lower the rating if construction is substantially delayed or the project incurs significant cost overruns that project liquidity cannot support,” S&P warned in its 2017 report.
However, S&P reported on March 8 that the rating was not in imminent danger.
“In our view, the delays are due to issues beyond the project's control and we expect it will be granted additional schedule relief,” lead analyst Anubhav Arora said.
“As the situation has arisen due to a variation from baseline technical specifications, we see this as a valid relief event, and expect that the project will receive both schedule and cost compensation,” Arora added. “If the project is unable to receive adequate schedule relief and cost compensation from the City and County of Denver, and its liquidity cannot support delays in construction or cost overruns, it could lead to a rating downgrade.”
To finance the project, Denver Great Hall used $189 million of bond principal, matched with $73 million of equity and $479.2 million of progress payments.
S&P conferred a rating of “A” on $2.3 billion of bonds issued last year by Denver for DIA redevelopment based on the airport’s credit. Proceeds were earmarked for gate expansions at each of the airport's three concourses, and various other airport improvements. About $450 million was designated as Great Hall progress payments.
P3 projects differ from traditional government procurement arrangements in that they feature fixed-price, date-certain construction contracts and a payment for that asset made upon certain milestones being met. Availability payments can cover 25 years or more.
“P3 projects are usually financed with very high levels of debt (often 90% or higher), with the equity level sized to produce a target debt service coverage ratio falling within a very narrow band (typically 1.15x to 1.30x) once the asset is built and starts receiving revenues,” according to a Moody’s Investors Service report on how P3s are rated.
One of the key issues is construction risk, wherein the project is delayed beyond the original target date for substantial completion and the issuer runs out of liquidity to meet all its obligations before it is entitled to receive the availability payments.
“A P3 contract should have a ‘relief event’ regime that anticipates potential surprises or unforeseen conditions and then allows for additional time or compensation if the circumstance arises,” Miller said. “An investigation of the facts would be necessary to determine which contract clauses apply to the specific situation, and again, if there is an allegation of an error then a different set of contract provisions and potentially insurance would be involved.”
Some of the most notable failures of P3s have come from highway projects. Indiana Finance Authority took over an Interstate 69 highway
In Texas, the SH 130 Concession Co. filed for bankruptcy in 2016 when traffic projections on a section of the tolled highway failed to materialize.
One of the largest recent P3 projects involves a commuter rail line to DIA from downtown Denver called the Eagle P3, the first transit project under to use the P3 model. While the rail line is up and running, the private Denver Transit Partners that built the line under a $2.1 billion contract with the Regional Transportation District is suing RTD for $80 million over performance issues involving automated crossing barriers. RTD is countersuing, and the conflict led to a termination
Since the wireless crossing barriers failed to operate as expected along the A Line, DTP has had to pay flaggers at rail crossings for more than two years. DTP built the 23-mile A Line serving DIA, as well as the B and G lines to Denver’s northwest suburbs.
RTD said that more than 90% of the signals are operating within parameters and that discussions with the FRA continue. However, the problems RTD and DTP encountered show how P3s can face daunting hurdles from regulatory authorities, even after construction is completed.
At airports around the nation, P3s are seen as a way to hasten projects that would have taken much longer using conventional bond financing.
Kansas City, Missouri, is planning to use $1.8 billion of special obligation bonds to develop the new single-terminal project at Kansas City International Airport under a P3 arrangement.
The Port Authority of New York and New Jersey is working toward a $10 billion redevelopment of John F. Kennedy International Airport on the heels of a $8 billion P3 project at LaGuardia International Airport.
Issues with a glass curtain wall at LaGuardia’s Terminal B caused a four-month construction delay that cost about $6.4 million, or less than 1%, of the concession contract, according to Moody’s.
The LaGuardia redevelopment is the largest public-private-partnership in U.S. aviation history and one of the most complicated projects ever undertaken by developer Skanska, the leader of the consortium LaGuardia Gateway Partners. The first gates at Terminal B opened in December, clearing the way for work on other terminals as the airport remains operational.
In Los Angeles, a consortium known as LAX Integrated Express Solutions has a $4.9-billion contract to design, build, finance, and operate a people mover at Los Angeles International Airport. The contract was the largest in the city’s history.
Airport P3s were specifically authorized 23 years ago by the Federal Aviation Administration's Airport Privatization Pilot Program, designed to allow access to sources of private capital for airport improvement and development projects.
“P3s are game-changing transactions that can offer extreme upside to the public sector,” Miller said. “They are therefore tools that should be available for consideration by public officials. By the same token, they are not magic or automatically successful. They are complicated and must be implemented thoughtfully.”
