With more questions than answers, single terminal proposal at KCI flies into headwinds

A billion dollar project. An incomplete design. And a complex and exclusive no-bid deal with a private company.

All on a fast-track timetable with more questions than answers.

That’s the path Kansas Citians will have to navigate over the coming months as they decide whether to replace the both beloved and hated horseshoe terminals at Kansas City International Airport.

The proposal: A new, single terminal designed, built and financed by Burns & McDonnell, a longtime Kansas City firm that presented its plan to the city last week.

After five frustrating years trying to build a terminal, is jumping at this deal worth the risk?

“This may be a terrific bid, it may be an extraordinary bid, but it may not be,” said Peter Kirsch with Kaplan, Kirsch & Rockwell in Denver, which advises airport providers on development projects. “The real risk is the city takes the bid because it is a bird in hand, and doesn’t do deep analysis.”

Burns & McDonnell CEO Ray Kowalik argues that urgency and exclusivity are justified because the company is taking all of the risk. It’s spending millions to keep ahead of a tight schedule so that voters will be able to decide in November whether to move forward at all.

If the new terminal opens, Burns & McDonnell will turn it over to the city to own, maintain and operate – and that makes it a rare deal in America.

“Which, by the way, we would not do in any other city,” Kowalik said.

He has given the City Council until June 15 to agree not to modernize KCI with any other company.

‘Skin in the game’

From the start, city and company officials have called the KCI proposal unique. Others agreed and said the effort is worth looking into.

Traditionally, most airport construction is done on a design-bid-build sequence, where the airport hires an architect, hires engineers and then breaks the project up into pieces that it puts up for bid from qualified companies. Bidding ensures the deal goes down at the best price.

Increasingly, cities, states and federal agencies are exploring ways to work with businesses more directly in marriages of convenience called public-private partnerships. They essentially hire a business to take charge of a project and also run the operation for a number of years once it’s done.

Businesses pursue these partnerships as a way to profit from not only the construction but also the operation of the toll road or other project.

“Governments have become more interested in doing public-private partnerships, so why shouldn’t an airport try to find something similar? It’s intriguing and could possibly be a good thing,” said Victor White, director of airports for the City of Wichita Airport Authority, which completed a new airport terminal two years ago.

For instance, the airport White previously worked at in Orlando couldn’t afford two new terminals, so it found a London-based company to privately finance and then manage it.

He pointed to other airports where public-private partnerships involving the airlines were used to build terminals, such as New York’s John F. Kennedy International Airport and Dallas’ Love Field.

“New isn’t necessarily bad. Old isn’t necessarily good,” said Geoffrey Yarema, an attorney who is advising Los Angeles and Denver on airport projects.

A key advantage of a partnership is that it transfers some risks away from the city and to the developer, including change orders that increase costs, time delays and other “complexities for agencies that don’t build billion-dollar projects all the time,” Yarema said. “The contractor has more skin in the game.”

In exchange, Burns & McDonnell is demanding exclusive rights to design, build and pull off the financing if voters say yes in November.

“We get 14 months after the election to put together one of the most complicated financing transactions that you’re ever going to see. We think that’s a pretty reasonable trade-off,” said David Frantze, a real estate attorney representing Burns & McDonnell.

Potential deal-breaker

A keystone of the Burns & McDonnell proposal surfaced more than a year ago. It’s the $1 billion price tag.

Southwest Airlines, other carriers operating at KCI and the city’s aviation department agreed on how much a one-terminal design at KCI could cost and how much the airlines felt they could cover financially with the fees they pay to use the airport.

The actual number was $963,937,423, though it has been referred to repeatedly as $1 billion.

Burns & McDonnell’s offer is that it will commit to a guaranteed maximum price on the project that will come close to that amount. It’s almost certain to be higher. The estimate was based on 2015 costs, and construction prices in the Kansas City area generally increase 6 percent to 8 percent a year, Frantze said.

The company says it doesn’t have much wiggle room with its guarantee.

“If the guaranteed maximum price comes in at $1.2 billion, there’s no deal from anybody,” Frantze said.

A key concern is that neither the company’s guaranteed price nor the $1 billion target were tested in a competitive bidding process.

There will be one avenue for competition. Burns & McDonnell’s document said it will seek bids from contractors, subcontractors and suppliers to determine what that guaranteed maximum price needs to be.

Some in the industry are surprised that one company could win such a large project without any form of public bidding.

“Sole source? No bid? On a billion-dollar project?” said Rich Golaszewski, an expert in air transport economics at GRA Inc. in the Philadelphia area.

An unsolicited proposal is no reason to abandon competitive processes, said Laura Turley, an associate with the International Institute for Sustainable Development. Competitive bidding on public projects is essential to discovering the right price.

In a 2015 paper, she suggested several ways to introduce competition even after an unsolicited offer comes in. One, called a Swiss challenge, would open the process to competing offers but allow the company making the original bid to match the winning bid. Another seeks bids through several stages and automatically puts the maker of the original offer in the final round.

There even are ways to instill competition when the project comes with an established price tag, like the $1 billion number Burns & McDonnell said it needs to meet.

Turley said British Columbia sought competitive bids on a highway project after setting the price tag up front based on its own due diligence. The bidders competed on everything else, showing how they could add value through environmental protection, noise barriers and the quality of their work.

Concerns that bids would delay the KCI project and add to its cost make sense, Turley said. But forcing competition on factors other than price would help ensure that the city gets the most value for its money over the full life of the airport, not just the cheapest price tag up front.

Other surprises

Since Burns & McDonnell asked for exclusive rights to the deal last week, this new path to a new KCI has been pockmarked with surprises and missing answers to key questions.

One surprise: The company’s offer was not the only unsolicited terminal proposal to reach City Hall.

When Mayor Sly James first laid out the Burns & McDonnell offer to The Star a little more than a week ago, he left the impression that its proposal was the only offer.

But according to City Manager Troy Schulte, in the last year at least three other unsolicited proposals were floated to the city — by firms in New York, Australia and Europe.

However, Schulte said, the other ideas were non-starters and more expensive than what the airlines deemed affordable.

Each, he told The Star, would have taken away the city’s operation of KCI. That wasn’t going to happen in Kansas City.

It was a critical difference and one reason Burns & McDonnell’s plan stood apart.

In receiving the company’s offer last Thursday, City Councilwoman Alissia Canady noted that Burns & McDonnell had not yet outlined its qualifications to handle the KCI project even while asking for the exclusive arrangement. Kowalik, who became CEO less than five months ago, acknowledged at the meeting that he wished it had, and said it would.

One question Burns & McDonnell could answer: How many of its projects focused on terminals and their security set-ups and baggage handling compared with just runways and control towers? Those are not part of this deal.

City officials ask other questions.

How much money will Burns & McDonnell invest in the deal along with its financing partner, Kansas City-based Americo, a group of insurance companies led by Michael Merriman. How much of a return do they expect on their investment?

Kowalik told The Star it might be about $100 million combined but added that the amount depends on how the financing works out. Frantze told city officials the investment return would be spelled out in the definitive agreement with the city, which isn’t due until next year.

The offer presented to the city would allow for a 1 percent sales tax at the airport to help meet the financing needs. Won’t there be enough money from the financing Burns & McDonnell is lining up?

It’s in there just in case, as a precaution, Frantze said in reply to the question from City Councilman Jermaine Reed.

Trust – but verify

Burns & McDonnell CEO Kowalik outlined the KCI proposal to city council members Thursday with a heart-felt presentation and said the company deserves the city’s trust

“Burns & McDonnell invests in what we believe in and Kansas City is at the top of that list,” he said.

The company, which has about 5,700 employees spread across North America and overseas, has kept its headquarters in the city for 119 years. Its employees pay millions of dollars in city earnings taxes. They travel through KCI to and from jobs 33,000 times a year.

It’s clear that the June 15 deadline to cut an exclusive deal on the airport rests on a bed of trust.

But where are the airlines? They’re the key to this deal working out because ultimately they’re on the hook financially if the airport doesn’t generate enough money to make the annual debt payments.

The airlines held a meeting on May 12 but have not said whether they’ve accepted Burns & McDonnell’s proposal or will sign off on the financial commitments it requires them to make.

City officials have assurances from Kowalik that they will.

He said the airlines are frustrated with the city because they thought two years ago they had a way to build the new terminal.

“They’re not overly excited about getting too public about it until they see from the city that they’re serious about building a new terminal,” he said. “Once we take some action you’ll see a lot of support from the airlines.”

Kansas City’s purse is protected by commitments that Burns & McDonnell will be responsible for unforeseen cost overruns that may come up once construction is underway. Small overruns could become a temptation to cut corners, but the company said the city will have design specifications that it can use to enforce the deal.

Much larger overruns during construction would pose more serious problems.

“Suppose the thing comes in at a billion and half (dollars)?” said Golaszewski, the air transport economics expert. “Then you’re basically gambling on Burns & McDonnell to honor their deal.”

Burns & McDonnell is privately owned and doesn’t make its financial statements public, but it said when Kowalik took the CEO post that in 2016 it logged sales of $2.8 billion. Kansas City would need to know not only that the company could absorb a 50 percent cost overrun but also that it would do so.

“If it goes over by $500 million, does Burns & McDonnell have the resources to stand behind that, the $500 million to finish or get it open?” Golaszewski said.

Amid all the commitments, promises and questions, the new terminal at KCI represents one of the largest projects the city has ever sought to undertake.

“Burns & McDonnell, bless their hearts, are not doing this out of philanthropy,” Kirsch said. “They’re doing this because it’s a good business deal. And so it’s really important for the city to analyze: Is this the best way to design and build and finance a terminal, or are there other mechanisms that would be better?”

This story was originally published May 21, 2017 at 7:00 AM with the headline "With more questions than answers, single terminal proposal at KCI flies into headwinds."