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Denver International Airport Concessions Management PDF

104 Pages·2014·11.04 MB·English
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Denver International Airport Concessions Management Performance Audit February 2014 Office of the Auditor Audit Services Division City and County of Denver Dennis J. Gallagher Auditor The Auditor of the City and County of Denver is independently elected by the citizens of Denver. He is responsible for examining and evaluating the operations of City agencies for the purpose of ensuring the proper and efficient use of City resources and providing other audit services and information to City Council, the Mayor and the public to improve all aspects of Denver’s government. He also chairs the City’s Audit Committee. The Audit Committee is chaired by the Auditor and consists of seven members. The Audit Committee assists the Auditor in his oversight responsibilities of the integrity of the City’s finances and operations, including the integrity of the City’s financial statements. The Audit Committee is structured in a manner that ensures the independent oversight of City operations, thereby enhancing citizen confidence and avoiding any appearance of a conflict of interest. Audit Committee Dennis Gallagher, Chair Robert Bishop Maurice Goodgaine Jeffrey Hart Leslie Mitchell Timothy O’Brien, Vice-Chair Rudolfo Payan Audit Staff John Carlson, Deputy Director, JD, MBA, CIA, CRMA, CGAP Sonia Montano, Internal Audit Supervisor, CGAP, CRMA Tim Waddingham, Senior Internal Auditor, MS Kelsey Yamasaki, Senior Internal Auditor, MPP You can obtain copies of this report by contacting us at: Office of the Auditor 201 West Colfax Avenue, Department 705  Denver CO, 80202 (720) 913-5000  Fax (720) 913-5247 Or download and view an electronic copy by visiting our website at: www.denvergov.org/auditor City and County of Denver 201 West Colfax Avenue, Department 705  Denver, Colorado 80202  720-913-5000  FAX 720-913-5247  www.denvergov.org/auditor Dennis J. Gallagher Auditor February 20, 2014 Ms. Kim Day, Manager of Aviation Department of Aviation City and County of Denver Dear Ms. Day: Attached is our Denver International Airport (DIA) Concessions Management performance audit. The purpose of the audit was to assess both the Premium Value Concessions (PVC) Program and the Request for Proposal (RFP) process. Specifically, we sought to determine whether the PVC Program is sufficiently administered and managed in accordance with the governance surrounding the Program and whether that governance is sufficient to adequately meet the goals of the Program. Additionally, the audit analyzed whether the concessionaire RFP evaluation and selection process is administered fairly, is aligned with DIA’s business and development goals, and communicates upcoming concession opportunities appropriately. The opportunity for concessionaires to enter into direct negotiations with DIA for a concession agreement is invaluable. Well run concessions programs emphasize an equitable, appropriate, and transparent system of awarding concession agreements – whether to new or existing tenants. Our performance audit reviewed the current processes of obtaining and renewing concession agreements through various competitive selection methods. Our review identified several areas of opportunity that will improve DIA’s Concession Policy, as well as enhance DIA’s ability to reward the top performing concessions in the PVC Program. Our recommendations will improve transparency in the evaluation and selection of concession proposals submitted through the RFP Process. I remain concerned that DIA concession’s contracts are being operated and/or owned by an increasingly small group of companies and individuals. It is troubling that DIA would change the percentage limits that a concessionaire can hold – from 20% to 24% – to seemingly accommodate one large vendor. Additionally the methodology for calculating ownership percentages has been changed and this has also seemingly benefited the large concessions groups. If a slightly broader definition of what constitutes a business affiliation were to be applied the square footage percentage limits become meaningless with the largest DIA concessionaire having ties to over 35% of the square footage within a category. Another way of viewing this inequity can be found in the percentage of revenue reported: Within the Food and Beverage category, three entities and their affiliates make up half of all revenue in the category. To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. Ms. Kim Day February 20, 2014 Page 2 When the creation of DIA was first proposed it was promised that local ―mom and pop‖ operations would have a fair shot at taking advantage of the opportunities that this amazing economic generator can provide. During my years on City Council we heard this argument over and over again. Looking at the concessions ownership percentages I worry that the small retailer is being frozen out of the process. We hope that our findings and the thoughtful recommendations presented in our report will assist with the enhancement of an evolving, complex, and multi-layered concessions program at DIA. We applaud DIA for its desire to offer the traveling public an eclectic mix of options when they travel to Denver via its airport. Growing this program successfully will add value to the City. If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000. Sincerely, Dennis J. Gallagher Auditor DJG/tw cc: Honorable Michael Hancock, Mayor Honorable Members of City Council Members of Audit Committee Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer Ms. Janice Sinden, Chief of Staff Ms. Beth Machann, Controller Mr. Scott Martinez, City Attorney Ms. Janna Young, City Council Executive Staff Director Mr. L. Michael Henry, Staff Director, Board of Ethics Mr. Patrick Heck, Chief Financial Officer, Aviation Mr. John Ackerman, Deputy Manager of Aviation Commercial To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. City and County of Denver 201 West Colfax Avenue, Department 705  Denver, Colorado 80202  720-913-5000 FAX 720-913-5247  www.denvergov.org/auditor Dennis J. Gallagher Auditor AUDITOR’S REPORT We have completed our audit of the Concessions Management at Denver International Airport (DIA). The purpose of the audit was to assess both the Premium Value Concessions (PVC) Program and the Request for Proposal (RFP) process administered at DIA. Specifically, the audit aimed to determine whether the PVC Program is sufficiently administered and managed in accordance with the governance surrounding the program, and whether the governance surrounding the program is sufficient to adequately meet the goals of the PVC Program. Additionally, we sought to determine whether the concessionaire RFP evaluation and selection process is administered fairly, is aligned with DIA’s business and development goals, and communicates upcoming opportunities appropriately. This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Our audit found that although the PVC Program is administered in accordance with Rule 45, Rule 45—as written—is inadequate for the goals of the PVC Program. Most notably, Rule 45 does not consistently and significantly differentiate between top performers and non-top performers in the areas of customer service and financial performance. Additionally, not all minor merchandising categories foster legitimate competition, as some concessions were eligible for the Program Benefit despite having no competition through Phases 1 and 2 of the PVC Program. We also determined that the Rule 45 financial scoring metrics can be enhanced to better align with Program goals. Further, we analyzed the concentration of ownership policy and determined that the threshold was increased from 20 to 24 percent in October 2013, and that immediately prior to this change, one concessionaire exceeded the 20-percent cap. Finally, although the communication and outreach efforts of the DIA Business Development Division are adequate, we found that the evaluation and selection of bids in the RFP process lack transparency. We extend our appreciation to DIA staff who cooperated with us during our audit. Audit Services Division Kip Memmott, MA, CGAP, CRMA Director of Audit Services To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services that provide objective and useful information to improve decision making by management and the people. We will monitor and report on recommendations and progress towards their implementation. City and County of Denver – Office of the Auditor Audit Services Division REPORT HIGHLIGHTS Denver International Airport Concessions Management February 2014 The au dit assessed the Premium Value Concessions Program and Request for Proposal process to determine that proper controls are in place to ensure the evaluation and selection process is appropriate. Background Highlights In 2012, Denver International Airport The audit has three findings: (DIA) concessions generated nearly $250 million in revenue, of which Finding 1: DIA personnel and the third-party administrator tasked with nearly $50 million was remitted to implementing the PVC Program consistently adhere to Rule 45, which governs the airport. Concessions are selected the PVC Program at DIA. However, based on our analysis, Rule 45 provisions do through a competitive Request for not ensure that top performing concessions are consistently identified due to Proposal (RFP) process governed by ineffective scoring metrics and weaknesses with minor merchandising category City rules, regulations, and airport policies & procedures. To grow provisions. As a result, there are inherent inequities with the program as concession revenue and improve currently designed. performance, DIA management Finding 2: The DIA Concession Policy is outdated and can be revised to better developed the Premium Value meet the goals of the concessions program. Based on our review of the Policy, Concessions (PVC) Program. Through the sections related to revenue reporting and the RFP Evaluation Committee competition, the PVC Program awards top performers with the membership need to be updated and enhanced to reflect actual practices and opportunity to enter into direct close identified gaps. Additionally, the section of the Policy regarding negotiations for new concession concentration of concession ownership was increased when a concessionaire contracts in lieu of going through the exceeded the concentration percentage allowed by the policy. RFP process. Finding 3: DIA management and personnel are effectively communicating Purpose upcoming concession opportunities and requirements of operating a concession. The objective of our audit was to However, we could not determine if the actual evaluation and scoring of assess whether the PVC Program is proposals submitted under an RFP advertisement are fair and appropriate meeting the established goal of because DIA management and personnel do not maintain, document, or store encouraging concession revenue individual evaluation committee member comments and scores for each growth and if it is sufficiently proposal. City rules and regulations, in addition to DIA policies and procedures, administered in accordance with the should make it explicitly clear that all documents related to the evaluation and governance of the PVC Program. We scoring of proposals under an RFP advertisement are maintained for future also sought to determine if the review. Request for Proposal process as it relates to the evaluation, scoring, and selection of concessionaire For a complete copy of this report, visit www.denvergov.org/auditor proposals is administered fairly and or contact the Auditor’s Office at 720.913.5000 appropriately. TABLE OF CONTENTS INTRODUCTION & BACKGROUND 1 Overview of Denver International Airport Business Opportunities 1 DIA Commercial Division 1 Concession Request for Proposal Process 2 Concession Revenue and Opportunities at DIA 4 Premium Value Concessions Program 6 SCOPE 10 OBJECTIVE 10 METHODOLOGY 10 FINDING 1 11 The Premium Value Concessions Program Should Be Modified to Fairly, Accurately, and Consistently Identify and Reward Top- Performing Concessions 11 RECOMMENDATIONS 22 FINDING 2 23 Denver International Airport’s Concession Policy Is Outdated and Can Be Revised to Better Meet the Goals of the Concessions Program 23 RECOMMENDATIONS 31 FINDING 3 32 The Evaluation and Scoring of Proposals under the RFP Process Lack Transparency 32 RECOMMENDATIONS 37 APPENDICES 38 Appendix A – Rule 45: Premium Value Concessions Program 38 TABLE OF CONTENTS (continued) Appendix B – Denver International Airport Concession Policy 66 AGENCY RESPONSE 89 INTRODUCTION & BACKGROUND Overview of Denver International Airport Business Opportunities In addition to generating revenue from the rentals, fees, and charges received from the airlines that operate at Denver International Airport (DIA), non-airline sources account for a significant percentage of total airport revenue each year. In 2012, non-airline businesses accounted for approximately 46 percent of operating revenue at DIA.1 There are a plethora of business opportunities at DIA, ranging from routine procurement of goods and services to long-term concessions and construction opportunities. DIA’s concessions program consists of more than 171,000 square feet and over 140 merchant operators. In 2012, the concession program generated nearly $237 million in gross revenue and more than $50 million in revenue for DIA.2 Additionally, DIA has $1.5 billion in capital improvement projects planned to strengthen and grow the economic impact of the world’s tenth-busiest airport. Of that capital investment, $544 million is budgeted for a new Hotel and Transit Center, which will include a public plaza that will offer additional opportunities for concessions. Businesses and prospective concessionaires can find information they need to connect to the airport’s wide-array of economic opportunities on business.flydenver.com or at the DIA Commerce Hub, located in the Jeppesen Terminal.3 DIA Commercial Division The Commercial Division at DIA (Division) is tasked with identifying and developing new business opportunities to support DIA’s strategic objectives. The Division’s portfolio includes typical airport businesses such as airline leases, rental cars, parking, and concessions, as well as commercial real estate development and production of natural resources. The Division is charged with developing and monetizing all airport assets, including terminals, land, and minerals. The Division oversees the airport’s oil and gas production and leads the Airport City Denver real estate development program. 1 Denver International Airport Press Kit, July 2013, p. 17, accessed December 17, 2013, http://business.flydenver.com/info/news/pressKit.pdf. 2 2013 Mayor’s Budget Book. http://www.denvergov.org/Portals/9/documents/budget_2013/2013_Budget.pdf. 3 “Connecting Business to Opportunity: Business Opportunities,” Denver International Airport, accessed December 9, 2013, http://business.flydenver.com/bizops/index.asp. OOOffffffiiiccceee ooofff ttthhheee AAAuuudddiiitttooorrr Page 1 DIA management has identified the following three goals related to the Division’s mission.4 1. Continually reevaluate ways of doing things, always pushing the envelope to develop new approaches to improve operations, and the ability to respond to and anticipate changes in the dynamic airport industry 2. Work to better understand airport partners and passengers in order to be able to accommodate their needs both today and in the future 3. Balance essential elements to provide a competitive and vibrant environment Concession Request for Proposal Process DIA leadership works to build strong partnerships with the business community and ensure that local businesses have opportunities to help build a sustainable and successful future for DIA. The City and County of Denver and DIA are dedicated to increasing Minority/Women Business Enterprise, Disadvantaged Business Enterprise, and Small Business Enterprise participation in all DIA projects. DIA procurement procedures attempt to create a fair, transparent, and competitive process. Concessions at DIA are selected through a Request for Proposal (RFP) process. An RFP is defined as any solicitation of pricing for supplies where an award is made in consideration of best value and not necessarily lowest price from a responsive, responsible, qualified proposer. An RFP may also be referred to as a competitive sealed proposal.5 Whenever DIA has concession space to lease, the Business Development, Concessions Management, and Revenue Procurement teams work together to issue an RFP that describes the space available, concepts desired, City requirements for operating a concession at DIA, and documents that must be submitted, along with any other requirements. Concession RFPs issued by DIA fall under the following four categories: 1. Food/Beverage 2. Specialty Retail 3. Consumer Services 4. Entertainment/Amusement The RFP process is governed by various City rules and regulations and DIA policies and procedures. The primary rules and policies that govern the RFP process at DIA include:  Denver Revised Municipal Code (D.R.M.C.) – Outlines the formal procedures, which entail formal advertisement by official publication that precedes the issuance of any bidders’ proposal or request. It also outlines procedures with which City offices, agencies, and departments must comply when procuring goods and services through an RFP process. 4 2013 City and County of Denver Budget Book. 5 D.R.M.C. § 20-61. Definitions. City and County of Denver Page 2

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