So I’ve been extremely interested in the new airport that the city’s been talking about for over 5 years now. It’s a massive project, estimated at around $1B, and has just recently had a proposal for private financing of the entire project. No cost to taxpayers, no sales taxes, no municipal bonds, and no private/public financing. Straight up private financing of a $1B new airport is absolutely unprecedented in the states, and will surely set a new benchmark for other airport expansion projects throughout the country.
To me, it sounds like it’s almost too good to be true! How can a city get a new airport and not have to pay for it at all? Not only are we not paying for it, we’re not even supporting it with municipal bonds! That’s crazy! To me it looks like it boils down to a few different issues. How is this possible? Who is taking on the risk? How much risk is there? And will we get a quality airport that is maintainable?
So how is this possible? A local design firm, Burns & McDonnell, who just so happens to be a massive employment boom to KC, decided to cut through all the red tape and offer their own private financing. This means that they’ll use their own private financing with re-payment of said financing through estimated annual airline revenues in the sum of $88M annually. This comes out to a cost of $11 per customer flying in/out of the airport, up from the current $6/customer.
This means that we, the citizens of KC, aren’t on the hook for the risks here. That’s awesome! But it does mean that it is all hinged on this one company. So what do they get out of it? They get exclusive rights to building and expanding the airport. I think that’s an important consideration that may have some unintended consequences. For example, waving our right to go through a more competitive bidding process. But it also comes with an expedited timeline, and a bid that to a layman, seems to be extremely competitive despite the lack of the competitive bidding process.
For their part in offering their exclusive services and financing, Burns & McDonnell, secure the rights to repayment of debt through a claim of $88M/annual airport revenues. The problem here, is that the current revenue stream can only support $57.7M in financing. With the expansion, increased traffic, and cost saving in efficiencies, the airport is expected to increase its revenues to make up the $35M gap. I’d really like to dig into the books to see how they are coming up with that number and see if it makes sense.
So there does seem to be some hidden risks involved with such a large project relying on revenue streams that are non-existent as of now. The airlines state that most of the revenues will come from increased parking revenues, slightly higher airfare, increased retail sales, and savings in efficiencies. But that’s still almost a 60% increase in revenues in just 5 years. Seems possible, but still risky. I’m assuming that there are strong financial models to support such an endeavour that is adding a $1B cost to one of KC’s largest employers.
What do we get for the $1B investment? A single terminal airport with added 35 gates, increased parking, exit/dropoff drive through lanes to decrease traffic. Seems like a great deal, and as I have said, seems almost too good to be true. With the increased costs of private financing, it’s expected that Burns & McDonnell will be running at a reported 3% margin. That’s scary when you think of the scope of the project and the revenue stream it’s expected to use to repay their debts. If the $1B project goes over, then Burns & McDonnell foots the bill. If the airport’s revenue stream doesn’t increase with the projected model, then Burns & McDonnell gets squeezed real tight.
So what’s the worry? It would worry me about the risk of such a large project pushed down to a privately financed source, that’s such a vital resource to the public. If I didn’t know Burns & McDonnell, that would really freak me out, just thinking about all the ways they could cut corners and squeeze pennies. But this company is known for taking on massive jobs, and lots of airport construction, and doing a great job. The only concerns that I hear from the council that seems legitimate is how exactly the contract is put together. They want to ensure local contractors get most of the bids for construction. They also want to make sure that we get what we pay for. That it’s constructed to the highest quality standards and achieves its purpose of modernizing and improving our airports.
As a liberal hippie, that’s adamantly against corporate greed, I think this is a pretty awesome use of market forces to improve a necessary service to the public. As always, the devil is in the details, but from the broad strokes this seems like a win/win. I hope they don’t push it too fast because it looks like they should give other companies a chance to match the deal. But it seems as if all the financial models are based on completing this job as soon as possible. So after 5+ years of debate, I think this is probably our best option and I hope they figure it out. New airport and we don’t have to pay for it! Sometimes capitalism isn’t all bad 😉
Also published on Medium.