A majority of Honolulu City Council members are calling on city transit officials to delay final approval of a rail transit contract worth up to $1.4 billion, an agreement that would be the largest contract in city history.
Council members said they are alarmed at published reports of huge financial losses by the publicly traded parent company of Ansaldo Honolulu JV, and are concerned about the parent company’s plans to stanch the financial bleeding in part by selling off the would-be Honolulu rail contractor.
Ansaldo Honolulu JV in March won a contract for up to $1.4 billion to design, build, operate and maintain the rail cars for the Honolulu system.
Lawyers for the city’s Honolulu Authority for Rapid Transit are reviewing performance and payment bonds put up by Ansaldo to assure that the rail work will be completed. Assuming those bonds pass legal muster, HART is tentatively scheduled to give final approval to the contract next week.
But City Council members, including Chairman Ernest Martin and Councilwoman Tulsi Gabbard, urged the city to delay finalizing the contract until the city knows more about the financial stability of Ansaldo’s Rome-based parent company, Finmeccanica SpA.
Finmeccanica, which is Italy’s largest defense company, announced this week it had suffered a third-quarter net loss of 790 million euros, or more than $1 billion.
The stock value of Finmeccanica has plummeted since January to lose nearly half its original value, and Bloomberg Businessweek reported Tuesday the stock price of the company dropped to its lowest level since 1996 after the most recent quarterly loss was made public.
"We need to really question the wisdom of moving forward and executing a contract with a company that is being sold and restructured, and by some accounts this is happening as a result of discovering unprofitable contracts and inefficiencies within the transport division of the parent company," Gabbard said.
"I think there are definitely a lot of questions and causes for concern with such a huge contract that we’re looking to execute here with the city. That really needs to be taken under consideration."
Martin also expressed concern about the financial stability of Ansaldo and Finmeccanica, and said HART should take this opportunity to rebid the entire contract to design, build and operate the rail system to try to get a better price.
"This is not coming from people who oppose rail," Martin said of the alarm raised by Council members. "This is coming from people who support rail."
Council Budget Chairwoman Ann Kobayashi and Councilman Ikaika Anderson said they also want the city to delay the contract, and Councilman Tom Berg in September introduced a resolution urging HART to reverse the contract award to Ansaldo. That resolution failed to pass.
Toru Hamayasu, interim executive director of HART, said the city already has assessed Ansaldo’s financial stability, and officials have said they are confident it can carry out the contract.
The transit agency is gathering information to make sure there have been no significant changes. Whether or not the contract could be delayed, "depends on what we find," Hamayasu said.
The contract requires Ansaldo Honolulu to design and build 80 rail cars for Honolulu for $574 million. The company also will handle interim operations and maintenance for the system during construction for an additional $167 million, and will provide regular operation and maintenance for the rail system for five years after it becomes fully operational for an additional $339 million.
The city also has an option to extend the operations and maintenance contract for Ansaldo for another five years from 2024 to 2029 for an additional $317.6 million.
"Obviously, we’re concerned anytime there is a discussion about the financial stability of the contractor, but we’re more focused on the contract obligation," Hamayasu said. "What we have to focus on is the integrity of their proposal and offer — can they still deliver the product that they promised? And much of that is guaranteed by bonds."
The contractor was required to protect the city by providing $360 million in performance bonds to guarantee the performance on the contract, and another $360 million in payment bonds to guarantee payment to the subcontractors on the job, Hamayasu said.
He said those bonds are adequate to cover the city’s risk on the project, and said Finmeccanica was also required to put up a line of credit as a guarantor commitment for an additional $50 million.
Ansaldo Honolulu is a joint venture formed last year between two Italian-based transit companies, AnsaldoBreda and Ansaldo STS. The two rail companies have worked on projects in Copenhagen, Denmark, Taipei and Riyadh, Saudi Arabia, and are both owned or part-owned by Finmeccanica.
Finmeccanica Chief Executive Officer Giuseppe Orsi has said he is overhauling the company’s finances to sell off civilian components, including the AnsaldoBreda train-manufacturing unit, and will focus instead on military businesses.
In explaining those plans, Orsi mentioned "structural problems" in the train-making unit of the company. AnsaldoBreda has been losing money for years, and Bloomberg reported the restructuring plan was launched "after discovering unprofitable contracts and inefficiency at aeronautics and transport divisions" of Finmeccanica.
Accounts published on Tuesday stated Finmeccanica is also considering selling its ownership stake in Ansaldo STS, and Hamayasu said the city is trying to determine if that is correct.
The Ansaldo Honolulu contract already has been the subject of controversy.
The contract is being challenged by Canadian-based competitor Bombardier Transportation, which submitted a bid that was $234 million less than Ansaldo’s. Ansaldo also bid for the rail contract before the company had obtained a Hawaii contractor’s license.
