New Effort to Increase Competition at the Grand Canyon; Is it Legal? Effective? Or Nothing More Than a Short-Sighted Prelude to Higher Prices and Further Starvation of Our National Parks?

Over the decades that Xanterra and its predecessors have held the contract at the South Rim of the Grand Canyon, it built up a Leasehold Surrender Interest of some $200 million which it would, of course, be entitled to collect from any new contractor that the Park Service might select when the contract is re-competed. Needless to say, the requirement to pay that sum is a substantial disincentive to any offeror choosing to bid on the contract and a real barrier to its making a profit if "lucky" enough to be selected for award.

In an effort to reduce that disincentive, several months ago, the Park Service put a small portion of Xanterra's contract work, i.e., its grocery, food service and general retail stores (and a portion of the LSI) in a separate request for proposals, on which it selected another firm, Delaware North.

Now the Park Service has announced another new approach intended to increase competition for Xanterra's remaining concessions work - one that has wide-spread implication and is of dubious legality. That is, in a decision straight from Director Jarvis, if an offeror other than Xanterra is awarded the contract for this work, the new contractor will not have to pay Xanterra a $200 million LSI - rather, it would only have to pay a "more manageable" $57 million dollars.

How? Why? The answer - the Park Service plans to borrow $100 million in franchise fee revenues that it has accumulated ($25 million from the Grand Canyon and $75 million from other national parks) to pay down Xanterra's LSI. At the same time, as a means of repaying this loan, NPS will raise the minimum franchise fee at the South Rim from 3.8 percent to 14 percent. NPS sees this not only as a way to increase competition but to generate a higher return to the government as well.

The purported authority to do all this is Public Law No. 111-88, the FY 2009 Interior Appropriation Act. However, both the continuing viability of that authority and whether all of these funds are still available for expenditure by NPS are two very significant questions.

Moreover, the likelihood of a higher return to the government is fairly remote because the funds borrowed from the parks' accounts will have to be repaid out of the increased franchise fees on the new contract - thus, substantially reducing the net return to the government. The scheme also raises a number of additional questions including:

  1. What impact will shifting $100 million have on the already cash-starved parks that will be "lending" that sum to this effort?
  2. Since the minimum franchise fee at the South Rim is going to being quadrupled (and profit potential reduced accordingly):
  • will competition really be enhanced?
  • can any contractor, even Xanterra, make a profit on the contract without a correspondingly substantial increase in prices at the South Rim? (This is even more the case for a contractor that would also have to pay a $57 million LSI).
  • if only Xanterra bids, or is awarded the contract, what end will have been served except to squeeze or eliminate its profit or force either or both a reduction in the stated "minimum" franchise fee or an increase in prices?

Legality aside, the scheme seems more like a shell game or just the movement of money from one pocket to the other, rather than a real solution to NPS' problem. While paying down Xanterra's $200 million LSI is perhaps the way that competition at the South Rim can be increased, making the South Rim concessions contract the means of financing that pay-down is highly anti-competitive. Consequently, if creating a level playing field on which competition can be maximized on the South Rim, without bankrupting any other park(s), is truly what the government desires, then it behooves the agency to do one or both of the following: (1) split the remaining work covered by Xanterra's existing contract into a number of smaller, "digestible" concessions opportunities and/or (2) convince Congress to appropriate sufficient funds to buy down Xanterra's LSI.

Only by reducing any new company's LSI burden and setting the minimum franchise fee at a level where a company can make a reasonable profit, will competition be possible.