Rail board reaches critical point for public-private partnership plan

The board of the Honolulu Authority for Rapid Transportation is nearing a pivotal decision on whether to solicit new partners in the development, operation and maintenance of the city’s 20-mile rail line, a proposal that could eventually involve billions of taxpayer dollars.

The idea — described by one board member as a worthwhile “gamble” — is being advanced by HART Executive Director Andrew Robbins, who contends the “public-private partnership” initiative could be key to finishing the rail line within the current budget and without further delays.

Honolulu Mayor Kirk Caldwell told the HART board he supports the plan to hire a developer to construct the last five miles of the rail line and also operate and maintain the rail system for decades into the future so long as it won’t cause the city to absorb any more cost overruns.

While Caldwell said he still has questions about the so-called “P3” idea, he is urging the board to publicly support the plan. The board took no action on the issue at a Sept. 6 meeting but is scheduled to consider it again Sept. 27.

The city pledged in 2012 to complete rail’s elevated guideway and 21 stations for $5.26 billion, but estimates of the construction and financing costs for the project have now ballooned to about $9 billion. The project was supposed to be completed in 2019 but some now doubt it will be finished even by the city’s new completion date of late 2025.

The Federal Transit Administration is withholding about $745 million in federal funding for the rail project until HART provides an acceptable “recovery plan” that demonstrates how the city will complete the project and where the money will come from.

Robbins said the P3 plan would provide one of the last pieces of that puzzle by spelling out for the FTA the method the city will use to finish construction. Once the public-private partnership solicitation is launched, Robbins said HART will immediately begin to update its recovery and financial plans to persuade the federal government that rail is back on track.

Until now, HART has generally used a straightforward “design-build” approach in which contractors bid to design and build a segment of the project. But that has resulted in expensive change orders and claims from contractors that contributed to the cost overruns.

In December 2015, HART froze the solicitation of bids for the design and construction of the last segment of the rail line through the Honolulu city center, one of the most difficult and complex pieces of the project.

HART has spent almost a year studying the possibility of using a public-private partnership to complete the rail line, and the board in July authorized HART staff to spend up to $8.5 million to hire consultants to prepare a request for proposals for the P3 effort.

During a discussion of the issue in July, HART board Vice Chairman Terrence Lee said that “based on everything I’ve read and I’ve been told, it seems like a worthwhile, for lack of a better term, gamble to spend that money because of the prospect of saving so much more and shifting all of the unknown risk to the P3 contractor so that we don’t have to deal with the risk of cost escalations and change orders and all these other things.”

However, if HART goes through the P3 process and the bids are not acceptable, Lee wondered, “have we lost time — critical time — to pursue the only option we have, which is (design-build). Have we lost critical time such that we’ve raised the cost of the project?”

Some estimates are that the cost of completing rail can increase by more than $100 million for each year the project is delayed, and it generally takes longer to secure contracts under public-private partnerships than under the design-build process.

According to a P3 study commissioned by HART, it typically takes 18 months to work though the procurement process for a P3 contract, but only nine to 12 months for a design-build contract.

Robbins said he expects the potential bidders to quickly evaluate the economics of a public-private partnership for the Honolulu rail project and let HART know if the idea won’t work. If that happens, HART will use an “off-ramp” to abandon the P3 process and turn its focus back to design-build, he said.

Using a public-private partnership for the rest of the rail construction would require HART and the city to work together to negotiate with a new private-sector partner and investors who would finance, design and build the last segment of the rail line and operate and maintain the entire rail line for 30 years.

The process will be complex, in part because HART is responsible for constructing the rail line, while the city is responsible for maintaining and operating the system in the years ahead using city funds.

HART estimates construction of the last segment of rail guideway between Middle Street and Ala Moana Center, along with eight stations and the Pearl Highlands Transit Center and garage, will cost about $1.4 billion, Robbins said.

The city’s operations and maintenance cost is expected to be about $127 million a year once the rail line is completed in 2025, he said.

It is hoped the entities competing for a P3 contract will bid low on construction of the segment through the city center in order to secure 30 years of guaranteed payments from the city for the operation and maintenance of the rail line, Caldwell said. Those payments over time will amount to “many billions of dollars,” he said.

The winning bidder would be responsible for dealing with change orders and other unanticipated expenses.

A “white paper” prepared by HART that compared a conventional design-build project to the P3 concept concluded a public-private partnership could save an estimated $46 million in construction costs and $300 million in maintenance and operating costs.

Robbins called those “very conservative” estimates and stressed an important benefit of the public-private partnership would be “to provide more cost and schedule certainty. It’s not necessarily about saving big dollars as opposed to providing more of a guarantee that you’re going to fit within budget and schedule.”

Caldwell said he wants language included in the procurement specifications that limits the city’s share of rail’s construction costs to no more than $214 million, which is what the city is already being required to pay under the rail recovery plan.

The procurement also should limit the city’s obligations for maintenance and operating costs to no more than $127 million a year, which is the estimated cost to the city under the latest rail financial plan, Caldwell said. That number would be adjusted upward for inflation in the years ahead.

“I want to make sure that the taxpayers of the City and County of Honolulu are not going to pay any more than they would have paid under the recovery plan that was submitted to the FTA” last year, Caldwell told the HART board.

An existing rail maintenance and operations contract adds another layer of complexity to the P3 idea. The city in 2011 awarded a $1.4 billion contract to Ansaldo Honolulu JV that includes operating and maintaining the completed rail system for five years, with an option to renew for another five years.

It is unclear how the Ansaldo contract would fit with a new P3 plan that tasks a new company with those responsibilities. Robbins said HART is looking at moving Ansaldo’s work under the existing contract to the new P3 contract.

“They will become part of the P3 team that will be engaged to deliver city center,” he said.