Honolulu’s troubled rail project could save as much as $570 million by getting a private sector contractor to finance the final push for the 21-station, 20-mile line, according to a report released Monday.

The report by real estate investment management firm JLL was commissioned by the Ulupono Initiative, an investment firm that encourages sustainable solutions in food and energy policy in Hawaii, with the support of the Oahu Economic Development Board.

The Honolulu Authority for Rapid Transportation is already using a concept known as “design-build” in contracts to complete the rail line. This means that a single contractor is responsible for both design and construction, rather than HART relying on separate contracts for the two phases.

HART Rail guideway near Aiea cemetery. 15 nov 2016
A private contractor could help finance the rest of the Honolulu rail project, saving the city hundreds of millions of dollars, according to a new report. Cory Lum/Civil Beat

But HART could be even more efficient by also incorporating project financing into its contracts for the last 4.2 miles of guideway and a Pearl Highlands Transit Center. Under this scenario, the contractor lines up short-term financing to keep the money flowing to complete the project, and does not get paid until the work is finished.

The contractor has an incentive to get the project done on time and within the budget since it must repay lenders, according to the report. This leads to greater efficiencies and, in essence, transfers risk from the public sector to the private contractor. It also makes it less likely that HART would change the scope of the project, potentially adding to further delays.

The savings could be substantial, the report states. In other projects, such as the Evergreen Line rapid transit in Vancouver, getting the contractor to cover financing can save 10 percent to 15 percent, compared to a design-build project.

The JLL analysis pegged Honolulu’s potential savings at 6 percent to 15 percent, which translates to $248 million to $570 million when interest is factored in. HART has not yet contracted for the building of the final 4.2 miles of guideway to city center, estimated at $1.32 billion, or for the Pearl Highlands Transit Center, expected to cost $315 million.

That type of contracting would reduce some risks for HART, but not all. The report says that unforeseen issues in relocating utilities, contamination, property acquisition and other areas could still drive up costs unexpectedly.

HART cooperated with JLL, providing figures and other information, spokesman Bill Brennan said.

“We appreciate the work they put into it,” he said. “We don’t disagree that design-build-finance is something to look at.”

He added, however, that the method of contracting has not been attempted in Hawaii, and that estimated cost savings on mainland projects might not translate to the state’s unusual circumstances.

HART would still have to pay interest to the contractor, he said, and the rate could be higher than what HART could get on its own through something like a general obligation bond. The bidding process for that type of contract can take a long time, he said, and doesn’t always result in an agreement.

Delays already have been quite costly to the rail project. The report estimates that further setbacks could cost taxpayers close to $114 million per year.

The report emphasizes that even increased involvement with private sector partners will not avoid the need for more public financing. The project faces a shortfall of at least $2 billion, and state legislators are considering various measures to address the gap. The project has been financed so far through a combination of an Oahu-only 0.5 percent surcharge on the general excise tax and $1.55 billion from the Federal Transit Administration.

The report also considered alternatives in which a contractor would take on even more responsibilities, including operation and maintenance of the completed system. But those options don’t make sense, the report concluded, because HART has already agreed to a five-year contract for operations and maintenance.

The report also suggests several strategies for bridging a gap in operations and maintenance costs, such as digital and traditional advertising in rail stations and parking revenue.

The Ulupono Initiative was founded by Pierre and Pam Omidyar. Pierre Omidyar is the CEO and publisher of Civil Beat.

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