Concessions Contract Will Cost Grand Canyon National Park $100 Million, But Benefit Park In Long Run

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Grand Canyon National Park is spending $100 million to make a contract for the South Rim concessions business, which includes the El Tovar Hotel, more appealing to bidding companies/Xanterra Parks & Resorts

A new concessions contract for businesses on the South Rim of Grand Canyon National Park will cost the park $100 million, an amount that could impact just about all operations in the park, Superintendent Dave Uberuaga said Wednesday. In the long run, however, the move stands to benefit both the park and its visitors, observers believe.

Though costly -- the $100 million appears to be the largest sum the National Park Service has ever paid to make a concessions contract more appealing -- the transaction aims to make this contract, and others down the road, more competitive by making them somewhat more affordable to a range of companies.

“Competition drives services, drives quality, drives a lot of things in terms of what the visitor will experience," Superintendent Uberuaga said during a phone call. "So it enhances ... whatever the concession is to carry out. In general, the competitive nature creates better services and a higher return to the government.”

Many key park concessions long have been managed largely by four companies -- Xanterra Parks & Resorts, Delaware North Companies Parks & Resorts, Forever Resorts, and Aramark Leisure.

Xanterra long has been involved with operations at Grand Canyon, Yellowstone, Zion, Death Valley, and Crater Lake national parks; Delaware North has run lodging and dining operations at Yosemite National Park, and recently acquired the contract at Shenandoah National Park; Forever Resorts has operated the Grand Canyon Lodge on the park's North Rim, as well as lodgings and other services in such parks as Mammoth Cave, Isle Royale, Badlands, and Big Bend; and Aramark has operations in Olympic, Mesa Verde, Denali, and Glacier Bay national parks.

As each year of operations passes, the companies make investments into the properties, investments that can amount to multi-million-dollar sums, or, in the case of Xanterra at the Grand Canyon, roughly $200 million. And when concessions contracts come up for bid, those sums can cost winning bidders if they oust the incumbent -- when Delaware North won the contract for Shenandoah, it had to pay Aramark $10.3 million -- or they can dissuade other companies from bidding.

"It limits the flexibility of the park to have any competitive bidding on any of these concession contratcts," David Nimkin, director of the National Parks Conservation Association's Southwest Region, said Wednesday. "Who's going to bid if they’re going to have to compete against a benefit that Xanterra has from having all that money and equity, essentially, tied up in federal real estate? It doesn’t put the Park Service in a fairly strong negotiating posture.”

To break, in essence, such strangleholds, Congress in 1998 rewrote the Park Service's concessions business by passing the Concessions Management Improvement Act. In short, this measure aimed to reduce preferential right situations, institute franchise fee distribution changes, mandate new competitive bid requirements, and increase accountability and oversight. These changes seemed to take hold most recently at the Grand Canyon, where earlier this month the Park Service awarded roughly half of the South Rim's concessions business to Delaware North. Delaware North will, though, have to pay Xanterra $41 million in "leaseholder surrender interest (LSI)" fees that reflect Xanterra's investments in those operations.

When Grand Canyon this week released the prospectus for the remaining concessions on the South Rim -- lodging at El Tovar, Bright Angel, Phantom Ranch on the canyon floor, and the mule rides into the canyon, as well as the Thunderbird and Kachina Lodges, Maswik Lodge, retail and food service at Hermits Rest, retail service at Hopi House and Lookout Studio, and transportation services such as bus tours and taxi service -- it was the second time it floated the contract. Failing to find any bidders the first two times, the Park Service agreed to pay down the LSI fees by $100 million with hopes of making the 15-year contract appealing to companies other than just Xanterra. Still, it leaves another $57 million that would be owed Xanterra if another company wins the contract.

Whether any other company bids on the contract is yet to be seen. Regardless, the park will go ahead and pay Xanterra the $100 million when the new contract takes effect, whichever company lands it.

Though the buy-down is aimed at preventing monopolies in concessions and improve services, the short-term impact at the Grand Canyon could be wide-ranging as roughly $75 million of the $100 million is being loaned the Grand Canyon by other parks across the country that will have to be repaid in about five-to-seven years. The money from those other, unspecified, parks came from unobligated funds they had from franchise fees they collected and which will eventually be needed for projects in their own parks.

"As I understand it, all of them will have enough revenues in FY15 to cover whatever projects they did have," explained Superintendent Uberuaga. "They just lost their savings account, unobligated money. The intent is for us to pay that back to each of the individual parks that the money was redirected from.”

While Superintendent Uberuaga has been squirreling away some funds from franchise fees in recent years, that amounts only to about $25 million, leaving his staff to come up with $75 million for the repayments. The superintendent believes he can do that in as little as five years, in part because the new concessions contracts require the winning bidder to pay the park at least 14 percent in franchise fees per year. But some of the repayment will likely come from other operations at the park, he acknowledged.

On Wednesday morning the superintendent met with his staff for several hours to go through all projects on the table, consider the possible impacts of cuts on them, and explore ways to come up with the millions of dollars needed for the repayment. No immediate decisions were made.

“I don’t have anything specific in terms of programs, but the direction we’ve given ourselves is what can we reduce in the programs? What scope can we reduce? Can we delay some of this? Do we really need to fix X, Y, Z today, can we buy a year (before implementing them)?" Superintendent Uberuaga said.

"The speculation part of it right now, there’s already enough concern, people wondering what it is. I don’t even have enough information to give them any specifics," he went on. "At this point, we’re just drilling it down right now to figure it out. The main point is we don’t have money for all the scope and extent of the programs that we did in the past. Does it mean one’s going to go away? Hell no. Does it mean that we might have two less people in it? Very likely. That’s the first effort, to hang on to what we’ve got and reduce the scope and scale.”

The internal Park Service loan was just one alternative the agency looked at to make the concessions contract more appealing. In the end, though, it made the most sense, the superintendent said.

"The goal was to have a buy-down strategy and we were reluctant to get there because we kept thinking that we were going to get a bid. And once we didn’t, it was like, well, what are our real alternaties? And in the short-term, as our comptroller would say, we have to look internally to solve our own problems," he said.

While the arrangment and the repercussions have made many of the park's 300 or so employees nervous, Superintendent Uberuaga said they understood the goal.

"It does create concerns for everybody, which is definitely justified, and we’re just going to be as committed to them, be transparent, be fair, be professional, and we’re going to communicate as soon as we have anything to everybody," he said. “This will be a setback, and a readjustment, but as I told them, this is millions of dollars in the long run that will come back to the park and the Park Service. In the short term, we have to make a transition and scale back some of the things we like to do.”

Back at the NPCA, Mr. Nimkin thought that while there might be short-term pain for the park operations, the long run would make for a healthier business operation.

“However they get it, however that’s retired, I think carrying that kind of liability is a burden. And if there are creative ways to improve the flexibility of the park through a real competitive bidding process, I think that’s a good thing," he said from his Salt Lake office. "There are a lot of unknowns. I don’t know where the money would be coming from, how it would be allocated. But I know that carrying that kind of liability is not a healthy situation.”

Comments

For a park facing a $150+ million project to replace the water service to the South Rim this is assinine. The cross canyon water line is failing frequently with increasing severity and the park has to find a replacement within the next few years. By comparison $150 million exceeds the capital budget of the entire NPS. It is widely recognized that the Canyon is going to have to cover most if not all of the cost of this critical infrastructure itself. Realize no water = South Rim CLOSED, making the hotel operations irrelevant.

Glacier recently awarded its major contract to a new firm through the competitive process with no paydown of the accumulated investment.

At Glacier, the possessory interest (accumulated investment) was $25 million. Xanterra had to pay $22 million for Glacier Park Inc.'s accumulated possessory interest while the NPS paid $3 million.

http://www.concessions.nps.gov/docs/news/IMR/GLAC002-14_Business_Opportu...

I want to make sure I have this right. Nobody, including Xanterra (current concessionaire), placed a bid the first two times. Now the NPS is going to give the winning bidder -possibly Xanterra- $100 million.

My concern is that rather than bringing new players to the table, this will just make it cheaper for those already there (Xanterra, Aramark, Delaware North, Forever Resorts).

I am not trying to be snarky. I just want to be sure that I understand what is going on.

Thank you,

Mike

You basically have it right, Mike. The motivation is to bring the net value of the buildings back to the NPS. Right now, Xanterra holds about $157 million worth of the South Rim concessions (it was $198 million before DNC won the first half of the Rim's business and agreed to pay $41 million to Xanterra.).

Without doing that, for a company other than Xanterra to win the next concessions contract, they'd have to write a check to Xanterra for $157 million for the improvements Xanterra has made over the years...a staggering sum that few likely could justify.

But pulling all the value back to the NPS, the park can ask for a higher franchise fee and gain more in the long run.

Thanks Kurt. By any chance do you know what the franchise fee (%) was in the first two bid requests?

Mike

My guess is that it was a minimum 14%....vs. 3.6 percent under the existing contracts. If a bidder could figure out a way to offer the park better than 14%, it could help their chances of landing the deal.

It looks like that the minimum was originally 10% with regular depreciation LSI or 5.3% with staightline depreciation LSI. Then in June, the minimum was changed to 5.9%.

https://www.fbo.gov/utils/view?id=d75757d79f7a7ab7d4293f74326e2675

Buffalo (NY) Business FirstTuesday, August 12, 2014 Delaware North wins Grand Canyon pact James Fink, Buffalo Business First Reporter Adding to its footprint and presence in the Grand Canyon National Park, the federal National Park Service awarded Buffalo-based Delaware North Cos. a long-term contract to operate the Yavapai Lodge and other select visitor services in the popular destination.Delaware North Cos. Parks & Resorts, an affiliate of Delaware North Cos., was awarded the 15-year contract following a lengthy bidding and review process by the National Park Service. Besides the 358-room Yavapai Lodge, the pact also calls for Delaware North to operate the Trailer Village RV campground.Terms were not disclosed.Delaware North takes over the operations on Jan. 1, replacing Xanterra Parks & Resorts.“This is a great example of our three-legged approach in which our business development, financial, and operations teams work collaboratively on a new business opportunity,” said Rick Abramson, Delaware North Cos. Parks & Resorts president.Delaware North already has a significant presence in the Grand Canyon, where it has two stores inside the park — the Grand Canyon Village Marketplace and Desert View Market — both of which offer retail, grocery and food service options to visitors. Delaware North also operates the Tusayan General Store, located about one mile outside of the park.The Grand Canyon National Park in Arizona welcomed more than 4.5 million visitors last year.

m13cli,

NPS split Xanterra's current concession contract into two separate contracts. The smaller one has been awarded to DNC. This articles addresses the larger one that has had its deadline extended at least once and now has been just re-issued.

Does anyone know exactly what Xanterra invested in at the Grand Canyon to accumulate a nearly $200 million value?