The federal investigation that has cast a new cloud over the city’s rail project may also complicate efforts by the Honolulu rail authority to solicit companies for a public-private partnership to finish the 20-mile rail line, observers say.

At a minimum, the uncertainty surrounding the federal investigation and the long delay in release of federal funding for the Honolulu rail project will cause companies to reassess the risk involved in joining the project, and that could prompt them to submit higher bids for the estimated $1.4 billion in construction work needed to complete the rail line.

Kalbert Young, a former member of the Honolulu rail board who has studied public-private partnerships, said the private sector regards so-called P3 projects as investment opportunities, and savvy investors carefully study the risks of any investment.

The Honolulu Authority for Rapid Transportation has been served with three federal grand jury subpoenas in recent weeks, and uncertainty about how the Federal Transit Administration will respond to that federal investigation represents “another risk factor that the private entity would weigh when deciding whether or not to participate,” Young said.

The city’s plan for completing the final 4.16 miles of the rail line through the city center proposes that the P3 partner finance the construction, which is expected to cost about $1.4 billion. The proposed deal would also include a contract with the P3 partner to operate and maintain the entire 20-mile rail line for 30 years.

Above all, the P3 bidders will want to know how the city intends to repay the construction costs and finance the maintenance and operations of rail in the decades ahead. Any uncertainty surrounding those aspects will add to the risk, and given recent events, “I think there is a fair amount more uncertainty,” Young said.

“The way these things work is, if I’m going to get paid more, I’m willing to assume more risk,” said Young, who is the chief financial officer of the University of Hawaii system. “But if there’s too much risk and I don’t think I’m getting my money’s worth, I’m not going to participate.”

Part of a recovery plan

The P3 plan is a key piece of the rail “recovery plan” that was submitted to the Federal Transit Administration last year to convince the FTA to release nearly $744 million in federal funds for the project. The FTA is expected to complete its review of that plan by the end of this month.

House Speaker Scott Saiki said he assumes the FTA will want to see some progress on the P3 plan before it approves the rail recovery plan, and the recovery plan needs to be approved before the FTA will release more federal funding for the Honolulu project.

“That’s why HART is in a pickle, because I’m not sure if private entities would want to bid on a P3 contract with these subpoenas that are pending,” Saiki said.

Potential bidders will have the same concern as the state, “which is we don’t know the scope of this investigation, and we don’t know who is implicated, we don’t know what the wrongdoing is, if there is any wrongdoing. We just don’t know what this investigation is about,” he said. “There is so much uncertainty about the federal subpoenas.”

Risk versus reward

Andrew Robbins, executive director of HART, said international P3 bidders with the capacity to take on the project are very sophisticated, and “when you have a mega-project, it’s not unheard of that there are things that happen sometimes that are happening here.”

Robbins briefed potential P3 bidders about the federal subpoenas in an online conference on Friday, stressing that the FTA is a separate agency from the Department of Justice, which is investigating rail.

“The FTA is not involved in that, and in my discussions with the FTA, the FTA wanted to emphasize to me that they continue forward on the project unencumbered by the investigation going on separately by DOJ,” Robbins told the potential bidders.

In a meeting of HART’s Finance Committee last week, Robbins said, “Yes, there’s some risk involved in working with that issue. There’s risk in working here in Hawaii, an isolated location and so forth. Primarily what they’re looking at is…what’s the opportunity, what’s the risk, can they manage the risk, can they make a profit. It’s major business opportunity here.”

He also said he does not see any reason the FTA would withhold the federal funding.

“My view of it is, if there was somebody in the last 10 years here who did something of a criminal nature, then I think we all want that person identified, or persons identified, and they should face the music for whatever they did, but that shouldn’t stop a project that has significant community benefits,” Robbins told the committee Thursday.

Robbins said this is not the first time a federal investigation was launched in the middle of a transit project, “so FTA has been through this before, and I think the (Department of Justice) investigation will run in parallel,” he said. “We have to focus on moving the project forward. FTA is focused on that as well.”

HART officials cited the Washington D.C. Metrorail Silver Line extension that became embroiled in allegations that a contractor falsified data on concrete panels used on the project. Federal funding of the project continued despite that investigation, according to a HART spokesman.

HART officials have said the P3 plan is designed to shift the risk involved in construction of the most challenging stretch of the rail line to the private partners. Those partners will be required to complete work properly and on time if they want to get paid, according to HART.

‘Desperate measures’

But Kelii Akina, CEO of the nonprofit public policy think tank Grassroot Institute of Hawaii, worries that the city is contemplating an “unhealthy” P3 in which the P3 partners will have a great deal of leverage.

Grassroot Institute has supported public-private partnerships in other cases, but in this instance Akina said adopting the P3 strategy was “one of the desperate measures” the city has taken to try to cope with the escalating costs. That puts the city in a poor negotiating position, he said.

“The actions by the federal government are going to affect the credibility and the popularity of the rail project, and that has a political impact upon funding,” Akina said. “In any case, the city has to take a look at the spectre of potential loss of some measure of federal funds.”

And if the cost of the project continues to increase or the FTA withdraws any portion of the $1.55 billion it has pledged for rail, “the city is going to be very hard pressed to find partners that are willing to come in.”

“What the city is looking at is a plan to … have private entities fund the rail up front and perform work with the guarantee that no matter what they’re going to get paid, and that guarantee of payment takes away all incentive from the private entity to make the project successful and efficient, because they’re going to get paid anyway,” he said.

Grassroot Institute has been critical of the rail project in the past, but is now focusing its efforts on “fiscal responsibility,” Akina said.

A deal to be made

Senate Ways and Means Committee Chairman Donovan Dela Cruz, who is a leading advocate for P3 agreements at the state Legislature, said he doubts the companies interested in the Honolulu rail project will be scared off by recent events.

“Government is probably many times entangled in these kinds of situations,” Dela Cruz said. That might include federal or local investigations, audits or other controversies, and “I don’t think they’re that unfamiliar with government, to some extent, having screwed up,” he said.

“So, they’re just going to have to assess, is this so-called screw-up bad enough too dissuade them,” or will they still pursue a deal with the city and see how the situation plays out, Dela Cruz said.

However, the official timetable for rail calls for the city to award a P3 contract by the end of this year, and the federal investigation could easily last longer than that.

Dela Cruz said the city may also be able to sweeten the deal by offering potential P3 partners development rights to public lands along the rail route. “They’re going to have to negotiate with the city,” he said.

In any event, Dela Cruz said the city should pursue a P3 agreement for rail. “I think it’s in the best interest of the taxpayer that they look at other ways to finance this thing” other than from taxes, he said.