Coalition Comments on Proposed Changes to Concessions Regulations

September 9, 2020

Subject:  Commercial Visitor Services – Concession Contracts Proposed Rule – National Park Service, RIN 1024-AE57

Commercial Services Program
National Park Service
1849 C Street, N.W., Mail Stop 2410
Concessions Contracts Revised Rule Comments
Washington, D.C. 20240

I am writing to you on behalf of over 1,800 members of the Coalition to Protect America’s National Parks (Coalition), a non-profit organization composed of retired, former and current employees of the National Park Service (NPS). The Coalition studies, speaks and acts for the preservation of America’s National Park System. As a group, we collectively represent over 40,000 years of experience managing and protecting America’s most precious and important natural, cultural, and historic resources.

We are writing to express our concerns regarding the concession contracts proposed rule. The National Park Service has proposed to revise its regulations that govern the solicitation, award, and administration of concession contracts to provide commercial visitor services in national parks under the Concessions Management Improvement Act of 1998 and the National Park Service Centennial Act. The National Park Service’s stated reason for the proposed changes is to “reduce administrative burdens and expand sustainable, high quality, and contemporary concessioner-provided visitor services in national parks.”

The Coalition to Protect America’s National Parks has reviewed the proposed changes and applauds the National Park Service (NPS, Service) for its efforts to improve some aspects of the regulations that have proven to be cumbersome to both the industry and the Service. For example, § 51.4(b) of the existing regulations states that the Director will not issue a prospectus for a concession contract earlier than 18 months prior to the expiration of a related existing concession contract. The intent of this rule was to reduce speculation for an existing concessioner; however, experience has shown that additional lead time can be helpful to both the incumbent and other potential offerors. The Proposed Change 2: Timing of Issuing Prospectuses, therefore, would be helpful to both the NPS and concessioners.

Other proposed changes to the rules do not appear to be helpful to both the Service and the concessioners.  Many appear to be weighed in the financial favor of concessioners to the detriment of the Service, the visiting public, and the United States taxpayers.

Congress established the national parks to preserve their resources unimpaired for the enjoyment of future generations. Further, in the Concessions Management Improvement Act of 1998 (1998 Act), Congress was clear that “…the development of public accommodations, facilities, and services in units of the National Park System shall be limited to those accommodations, facilities, and services that (1) are necessary and appropriate for public use and enjoyment of the unit of the National Park System in which they are located; and (2) are consistent to the highest practicable degree with the preservation and conservation of the resources and values of the unit.” Several of the proposed changes to the existing concessions contract regulations do not meet this clear intent of Congress and the Coalition does not support the following changes to the regulations for the reasons stated:

Proposed Change 1: New Concession Opportunities

The coalition notes that there appears to be a typo near the end of the proposed new paragraph § 51.4 (c).  The paragraph in the draft regulation ends with “…the preservation and conversation of the resources and values of the unit.” This needs to be changed to “…the preservation and conservation of the resources and values of the unit,” to be consistent with the 1998 Act.

Proposed Change 5: Definition of Major Rehabilitation

This proposed change has several sub-parts. The Coalition objects to the NPS proposal to decrease the construction cost threshold for what constitutes major rehabilitation from 50% of the pre-rehabilitation value to 30% of the pre-rehabilitation value as this change would allow more construction projects to qualify for increased leasehold surrender interest (LSI) under § 51.64 or new LSI under § 51.66. The NPS stated, “the International Facility Management Association identifies 30% as the threshold for when a rehabilitation is ‘critical’ to the structure, and this change ‘better aligns’ with this industry standard than does the 50% threshold in the existing definition.” Further, the NPS believes that broadening the opportunities under which LSI may be obtained would facilitate important and needed capital improvement projects.

The fallacy of this argument is two-fold. First, under the 1965 Concession Management Act, concessioners received a form of compensation called “possessory interest.” Using this formula, they received compensation at the end of the terms of their contract based on “reconstruction costs less depreciation not to exceed fair market value.” However, under the possessory interest formula, the NPS found significant deterioration in these facilities as concessioners had not maintained the facilities, which needed significant capital improvements and investment during the next contract cycle. Had the facilities been maintained at a higher standard, concessioners would have received full reconstruction costs as long as the costs did not exceed fair market value. Yet many of the concessioners failed to maintain the facilities adequately.

Under the 1998 Act, the compensation formula changed, and the NPS oversight of concessioners also improved. Concessioners now are doing a better job of performing routine maintenance and cyclic replacements. However, with a change in the LSI threshold from 50 to 30 percent, concessioners will likely wait and “bundle” projects so they can meet the threshold of 30 percent of the pre-rehabilitation value. This will lead to more LSI credit to concessioners for maintenance that should have been routine.  The expense to the NPS for this increase was not quantified in the analysis of the proposed regulations.  The analysis does make a presumption that the expense to the NPS can be made up by “increased franchise fees.” However, the NPS is under considerable pressure and scrutiny to keep franchise fees low and there is no evidence that franchise fees will increase under the reduced threshold.

It is also important to understand that the full value of the LSI is taken into consideration when the financial feasibility analysis is conducted prior to the release of the prospectus. The 1998 Act specifies that a franchise fee established by a contract reflects the probable value to the concessioner of the privileges granted by that contract. This value is based upon a reasonable opportunity for net profit in relation to the capital invested and the obligations of the contract. Thus, the concessioner is receiving a lower franchise fee in consideration of the capital they have invested, and they will receive a cash payout of the LSI at the end of the term of the contract. In effect, they are being paid twice for their LSI investment.

The Coalition recommends the construction cost threshold for major rehabilitation and acquiring leasehold surrender interest remain at 50% of the pre-rehabilitation value. Further, the Coalition encourages the Service to use the alternative leasehold surrender value formula authority in Section 405(a)(4) of the 1998 Act for the NPS to include an alternative formula in concession contracts where LSI is estimated to exceed $10 million.

Section 405(a) (4) of the 1998 Act describes two alternative LSI value formulas, as follows:

“Method A: a reduction [of LSI value] on an annual basis, in equal portions, over the same number of years as the time period associated with the straight line depreciation of the initial value (construction cost of the capital improvement), as provided by applicable Federal income tax laws and regulations in effect on the day before the date of the enactment of Public Law 105-391; or

Method B: such alternative formula [for determining LSI value] that is consistent with the objectives of Title 16 of the United States Code.”

Using the alternative formula (straight-line depreciation) will greatly reduce costs for both the concessioners and the Service. Neither party will have to perform complicated tracking of expenditures or endure the expense of arbitration if the parties cannot agree on an ending LSI value. The ending value of the LSI will be simplified and amortized over the life of the asset exhausted during the contracts term.

Proposed Change 6: Term of Concession Contracts

The Service is proposing to make several changes to the regulations regarding terms of concession contracts. One, they plan to remove the language at § 51.73 that states it is “the policy of the Director…that the terms should be as short as prudent, taking into account financial requirements of the concession contract, resource protection and visitor needs, and other factors the Director may deem appropriate.” The Service states it will “clarify that it may issue contracts for shorter or longer than ten years, never to exceed 20 years, depending upon the particular circumstances of the contract.”  The Coalition believes the language of the current regulations specifying that contract terms “should be as short as prudent” should be retained to conform to the language of the Concessions Management Improvement Act that clearly requires that a concessions contract “shall generally be awarded for a term or 10 years or less.” 54 U.S.C. § 101914.

The second part of the proposed changes is also troubling. The Service is proposing to revise § 51.73 to allow the Director to include in contracts “optional term or terms of one year or more, provided that the total term of the contract, including all optional terms, does not exceed 20 years.” These optional years would be exercised when a concessioner performs favorably during an annual review and meets other performance criteria. The NPS states these optional contract years could “incentivize the concessioner to focus on high performance.” The same options could be used if there have been “substantial interruption of or change to operations due to natural events or other reasons outside the control of the concessioner.”  The Service listed extraordinary, unanticipated events as examples of when these “options” would be used. The Director would determine whether or not to issue an option. The number of options available under any one contract are not restricted.

Under the proposed changes, a 10-year contract could become a 20-year contract, or perhaps a 23-year contract with three one-year continuations under § 51.23 of the current regulations (the Director may award non-competitively an extension or extensions of an existing concession contract for additional terms not to exceed three years in the aggregate…The Director may award such extensions…to avoid interruption of visitor services).

One of the primary reasons for the 1998 Act was to improve service to visitors. Requiring competition for contracts on a regular basis since 1998 has resulted in better service to the public, improved facilities, and more innovation in operations. Although from a concessioner’s perspective, competing for concession contracts is time consuming and expensive, they remain worthwhile investments. From the perspective of the Service, preparing prospectuses is expensive and time consuming. Preparing fewer prospectuses would likely save money; however, it may result in poorer long-term facility conditions and service to visitors.

The Coalition recommends optional terms under § 51.73(b) be limited to three years in total, with none being longer than one year each, and that the language of the draft § 51.73(b) be revised to say “…in increments of at least one year, not to exceed a total of three years,…”.

Further, the language of the draft § 51.73(a) creates confusion by including the parenthetical phrase “(unless extended in accordance with this part)” directly after “…a term of more than 20 years.”.  This implies that if a concessioner has a contract of 20 years that it could be extended beyond that period, when § 51.73(b) states that no contract can exceed 20 years.  Further, the language of this section does not account for the three one-year extensions allowed under § 51.23 of the current regulations. The Coalition urges the NPS to revise the language in § 51.73(a) and (b) to make clear that 1) a contract cannot be extended for more than a total of three years under § 51.73(b), 2) the outer limit of a contract’s term is 20 years, and 3) to conform the language of this section with that found in § 51.23 in the existing regulations in order to eliminate any confusion.

Proposed Change 10: Concessioner Rates

The last change of concern to the Coalition is the proposed rate setting methodologies to be used by the concessioner. In Section 406 of the 1998 Act, it states that concessioners can “set reasonable and appropriate rates and charges for facilities, goods, and services;” however, those rates are required to be approved by the Secretary of the Interior.

The proposed new regulatory language at § 51.82 appears to significantly curtail the ability of the Secretary to carry out his oversight role and approve rates:

“(c) The Director shall identify the rate approval method to be used for each category of facilities, goods, and services to be provided when preparing the prospectus for a concession contract. The Director will use the least burdensome and most market-based method that is appropriate. Whenever the Director determines that market forces are sufficient to ensure reasonable and appropriate rates, the Director will make a competitive market declaration, and rates and charges will be approved based upon what the concessioner determines the market will bear. Other rate approval methods will be used only when the Director determines that market forces are inadequate to establish the reasonableness of rates and charges for the facilities, goods, or services. The Director will monitor rates and charges and competition and may change the rate approval method during the term of the contract to reflect changes in market conditions.”

The proposed regulation is telling the Director to bypass all other rate determinations methods and make “… a competitive market declaration, and rates and charges will be approved based upon what the concessioner determines the market will bear.”

Most parks are in remote locations and competitive markets are scare; however, concessioners will seek properties hundreds of miles away and state that because they match the quality or character of the hotel or facility, they should be used as a comparable.  This places a significant burden on the Service to determine the inadequacy of market forces, while concessioners have significant resources with which to develop rate comparisons. Under this proposed regulatory change, prices to visitors will rise and many visitors will be priced out of staying in iconic national parks.  As a result, the Coalition opposes the draft changes to § 51.82 (a) and (b) and recommends that the current regulatory language in § 51.82 (a) and (b) be retained without change.  This is the only way our national parks will truly remain available to all Americans as Congress intended.

The Coalition supports the new draft paragraph § 51.82(d) that would establish rules for how the Director responds to requests from existing concessioners to change rates and charges to the public. With the additional language requiring the Director to respond to concessioner rate changes requests within 30 days, concessioner concerns about certainty and timeliness of rate approvals should be alleviated.

We appreciate the opportunity to comment on these proposed changes.

Sincerely,