Honolulu Managing Director Doug Chin says growing costs associated with delays to the city’s rail project could halt construction of the line before it really gets under way.

Pacific Business News characterized Chin’s stance in a May 20 article:

“City Managing Director Doug Chin said ‘unwarranted delays’ will mean additional costs to the project. He said former Gov. Linda Lingle’s refusal to sign the final environmental impact statement last year added $129 million to the project’s cost.

“‘It’s no secret that lawsuits and delays result in higher project costs,’ Chin said. ‘That’s why it’s imperative that we keep rail transit on track, which means bringing the project in on time and on budget. If delays continue, we will eventually price ourselves out of being able to do this project.'”

The final environmental impact statement (EIS) was completed in mid-June 2010. Lingle stepped down as governor in December 2010. According to Chin, during that period — about six months — project costs for rail grew by $129 million.

Is he right?

Where He Got His Info

Following Civil Beat’s guidelines for Fact Checks, we contacted Chin to find out where he got his information.

City officials told Civil Beat Chin was referring to figures compiled by the city’s Rapid Transit Division. Rapid Transit Chief Toru Hamayasu told Civil Beat the $129 million was calculated using contractor estimates, and included adjustments for inflation.

“The delay ties in to multiple contracts,” Hamayasu wrote in an email. “Because the project could not proceed, that affected multiple contracts and the project is still dealing with delay claims based on that. Right now the contract delay costs for that period are estimated to be about $69 million.”

Hamayasu said inflation costs were estimated for half a year, from June 2010 to December 2010.

“The Inflation cost of $60 million is for the six-month delay from June 2010 to December 2010, while we waited for the acceptance of the EIS,” Hamayasu wrote. “Inflation costs are calculated to be about $120 million a year, assuming 3 percent inflation on the base project cost of about $4 billion. So for the six-month period, projected inflation costs are $60 million.”

He said the reason inflation wasn’t calculated using the most up-to-date $5.3 billion price tag is because that figure already includes inflation.

Hamayasu told Civil Beat that if rail contractors are delayed through no fault of their own, they are eligible to recoup their lost costs. Civil Beat wanted to know why city contracts with penalties for delays were awarded when there were clearly scheduling factors out of the city’s control.

“City contracts do not have ‘delay penalties’ for the City,” Hamayasu replied. “It’s important to first understand the basic structure of these construction contracts. As with most construction contracts and in order to ensure contractors deliver in a timely manner, the contracts include a work schedule that indicates when certain portions of work should be completed. It’s the prudent thing to do — without these timetables, contractors would not be able to prepare responsible cost proposals. If the contractor, through no fault of their own, is unable to meet those timelines due to unwarranted or unforeseen delays, then they can ask to recoup some of those delay costs.”

Hamayasu said that with a project as large as rail, if one section is delayed, it can cause a ripple effect.

“So the delay incurred for that six-month period can impact other contracts down the road,” Hamayasu said. “In this case, the contracts affected include the West Oahu Farrington Highway Guideway contract; the Maintenance and Storage Facility contract, the Kamehameha Highway Guideway contract and any subcontracts that may have been affected under the main contractor’s purview.”

How Big a Delay Did Lingle Cause?

It’s reasonable for Chin to consider Lingle’s handling of the EIS as a delay. But whether it was a six-month delay is another story. That would mean that the city expected her to accept thousands of pages of documents on one day.

The city can’t say it was surprised by her approach. The former governor did not keep it a secret that she wanted her own independent financial review for rail. In January 2010, half a year before the EIS was completed, she said she would order her own review of the project. Just before stepping down as governor, she released the findings of the review, which claimed rail would cost far more than previous estimates indicated.

At the time, Honolulu Mayor Peter Carlisle dismissed the review, calling it “shoddy (and) biased”.

Lingle described for herself in a September 2010 press release why she felt it was her duty to complete the financial review before signing off on the EIS.

She said: “While I understand the desire of rail supporters to want to see the project start, and recognize that some candidates may have a vested political interest in giving the public a false impression that I am somehow delaying approval of the final EIS, I have a legal responsibility to ensure that the environmental impact statement complies with Hawaii’s environmental law. Moreover, I have a fiduciary responsibility to do an objective, common sense financial analysis of what this project – the most expensive public works project in our state’s history – will cost Hawaii taxpayers over the long-term.”

Lingle added that the EIS wasn’t actually ready for her signature in September, two months after she received it. She said in the press release that the Office of Environmental Quality Control was still examining the EIS to make sure it complied with state environmental laws.

It is true that former Mayor Mufi Hannemann provided a draft EIS to Lingle in December 2009, and that Lingle refused to start the review process until she received the final EIS six months later.

But Lingle said she wanted a final document before reviewing the project.

Whether everything was put on hold for six months the way Chin implies by using his inflation estimate is questionable. Not only would he give her no time to review the EIS under his schedule, but it implies that nothing else could have held up the rail project at the same time.

Inflation

Another issue with Chin’s statement is his use of inflation.

Three percent was the inflation factor cited by Hamayasu. However, at no point during the six months Lingle refused to sign the EIS did inflation rates for the U.S. reach 3 percent. (Though it should be noted that since December, inflation rates have steadily increased, peaking in April at about 3.2 percent.)

According to USInflationCalculator.com, a website maintained to track inflation, June to December 2010 showed modest inflation growth compared to previous years. The table below depicts the findings.

Year June July August September October November December
2010 1.1% 1.2% 1.1% 1.1% 1.2% 1.1% 1.5%

The Bureau of Labor Statistics reports inflation in 2010 averaged 1.5 percent, down from 2.7 percent in 2009.

That said, while the national percentage for inflation was at 1.5 percent, inflation for construction-specific industries could have been higher. Inflation for energy, for example, jumped 4.4 percent from November to December 2010. Construction is heavily impacted by rising energy costs, because, for example, many products shipped to Hawaii reflect the increasing fuel prices.

Estimating the impact of inflation is tricky.

The chairman of Infrastructure Management Group (IMG), the company that did the financial review for Lingle, explained why he felt inflation could not be used in an example like rail. Steve Steckler wrote Civil Beat in an email:

“Since inflation, the tax base and tax revenues usually move together, it is inappropriate to say that a delay of any kind reduces the affordability of the project. Accordingly, no one in the financial world ever uses such an argument. Delays only add to the net, inflation-adjusted cost of a project if a contractor is idle while still being paid, or if costs go up faster than the revenues to pay for them.

“There are, of course, cases in which costs and revenues do not move together, and this might be one of them, but not in the way Mr. Chin’s remarks imply. Here’s why: The city boasted several times during the delay period that its tax revenues from the GET were coming in higher than expected. It then went on to announce later in the year that construction bids had come in significantly lower than planned. This means that the rail project, according to the city’s statements, became more affordable, not less affordable, during the delay.

“The city cannot have it both ways; that is, arguing that the delay cost $129 million while also arguing that tax revenue went up and costs went down during the same period.”

Hamayasu disagrees with Steckler’s analysis. He wrote Civil Beat:

“This is a false analogy. First, Mr. Steckler is confusing the “cost of delay” with “affordability”. We have always said that we have a balanced project and that we continue to be able to afford it. The delay did not cause the project to be unaffordable. We were able to make up the cost of the delay. It’s true that GET revenues for that same period have come in on target. It is also true that there are costs associated with delays – that’s a fact. We have never said that we could not afford the project due to delays. Because of sound fiscal management, which has resulted in the lower construction costs, and with GET revenues on track we are in an even better fiscal position to handle unexpected delays. A good financial plan always includes a sufficient buffer to address unknowns, including unforeseen delays. But we should always be transparent, and point out that these delays do cost money.”