Honolulu Rail Contract to Italian Firm Under Fire

Adrienne LaFrance/Civil Beat

One of the companies that lost its bid to design, build, operate and maintain the city's $5.5 billion rail project is not going down without a fight.

In protesting the city decision to award the "core systems" contract to Ansaldo Honolulu, Sumitomo Corp. is raising a number of questions about how the decision was made.

Honolulu Mayor Peter Carlisle trumpeted $218 million in savings from the selection of Ansaldo Honolulu and characterized the value of the contract as $574 million. However a Civil Beat review of the proposal shows that the city would pay almost double that.

Attention on the details of this key contract comes as the City Council Transportation Committee on Wednesday will hear a presentation from the administration on the Ansaldo contract and on a separate contract for construction awarded to Kiewit Pacific Co. This will be the first opportunity council members will have to ask questions about the decision.

"Council members have many questions and concerns," Transportation Chairman Breene Harimoto told Civil Beat. "I think you're going to see many of those concerns coming up from all council members."

The vice president for systems and equipment of Ansaldo rival Sumitomo told Civil Beat that, in the eleventh hour of a long and competitive bidding process, the city abandoned its stated goal of finding a "best-value" contract, and opted to go with the contract that appeared to be the least expensive in the short-term.

"The process is clearly established as a best value for the city and taxpayers," said Sumitomo Vice President Gino Antoniello. "The criteria that was to be used was consistently used, up until the best and final offer. It seems to me that up until that point, the best-value criteria was very important, but beyond that, it seems it was just thrown out in favor of the lowest bidder."

"Definitely not," said the city's chief rail planner, Toru Hamayasu. "That's a low-bid contract. That's not what we did. The criteria on how to evaluate was very clearly spelled out, and I don't remember all of them but that's how we valued it, and they are listed in the order of importance in terms of the weight. The experience, financial capacity, pricing realism, all of those were combined to make the best value."

The issue of up-front versus overall cost is important for a number of reasons. The city is seeking $1.55 billion in federal funds for construction, and its financial plan is under scrutiny. Lower costs make the plan, which has not been completed, look better. The city is relying on the federal funds and revenue from a .5 percent surcharge on the GET to pay for construction. Operations and maintenance expenses would at least in part come from the city's general fund and would be ongoing expenses borne by taxpayers.

"Importantly, for the FTA to see how costs are really coming in, we review those contracts," Federal Transportation Administration Administrator Peter Rogoff told Civil Beat last week. "The greater specificity and certainty we have to the actual project cost, it gives us greater comfort to know that the project's sponsor can afford the project."

Three Very Different Proposals

Civil Beat's examination of proposals submitted by three companies bidding for the contract finds Ansaldo did not present the least expensive proposal. The lowest bid was from Pittsburgh-based Bombardier, which was disqualified from the process sometime after submitting a final best offer on Feb. 24.

"What did they do wrong? That too is a potential challenge or protest so I don't want to paraphrase it any other way," Hamayasu said.

A representative of Bombardier declined to comment. Sumitomo's Antoniello says he is moving forward with formal protest proceedings next week.

All three proposals are available for public inspection at Honolulu Hale. But of the three, the least financial information is available about the winning bidder. The Ansaldo bid is redacted more heavily than either of the two others.

Staffers in the city's purchasing department said city lawyers instruct them what to redact. Hamayasu said he plays no role in that process.

"Well, sorry, but I haven't seen the redacted versions," Hamayasu said. "Two reasons for the redactions: One is what the attorneys (determine) to be considered whatever frustrates (the project). The other more clear one is to keep secret their confidential (proprietary) information. Whatever they ask to be kept confidential, we honor that."

Cost Comparison

While Ansaldo had the lowest price in the design/build phase of the project, its costs were higher than the disqualified bidder when looked at over the life of the project. Sumitomo came in higher than Ansaldo.

The proposals reviewed by Civil Beat offer a clearer picture of the complete cost of the potential contracts than what the city presented. Officials continue to tout the "core systems" contract they want to award to Ansaldo Honolulu as a $574 million agreement. But the contract would actually be what's called a Design, Build, Operate and Maintain contract. The $574 million figure does not include Ansaldo Honolulu's bid for an additional $167 million "intermediate period" of operations and maintenance before the rail line is complete, or its bid for an additional $339 million for the first five years of operations and maintenance.

If those projections pan out, Ansaldo Honolulu would get $1.1 billion, almost twice as much as the $574 million the city announced in a press conference last week.

"I know what you're trying to do and I'll be honest, it's really hard to say, 'Over so many years, we're going to be spending over a billion dollars' or whatever," Hamayasu said. "What is the cost of the contract? Yeah, it's going to be more than $573 (million). You cannot start adding those components because the third component is uninflated 2011 dollars."

Hamayasu acknowledged, however, that the two accepted proposals used the same financial approach, so comparison is possible, even if he can't definitively say what the city will have to pay.

"How much we're going to be paying, we don't know," Hamayasu said. "But we know what the relative cost is in making the selection."

An analysis of the relative costs presented in the three proposals — including the proposal by Bombardier that was disqualified — show large discrepancies in what each company proposed spending on the design-build phase versus the later operations and maintenance phases.

Where Bombardier would have spent $697 million on the first phase, the company proposed spending $87 million and $176 million on the operation and maintenance phases.

Where Sumitomo proposed spending $689 million on the first phase, it proposed spending $274 million and $240 million in subsequent phases.

The winning bidder, Ansaldo, proposes spending $574 million on the initial phase, but $167 million and $339 million on the subsequent operations and maintenance phases.

Those differences in relative cost may be significant down the road. The city will have to cover the cost of funding operations and maintenance, so a lower design-build cost with a higher operations and maintenance cost may mean more burden on taxpayers.

"You're just getting to the real sore points here," Hamayasu said when asked about how shifting costs could play out over the years. "I know that's the accusation Sumitomo (is making), so I can't answer that part. Certainly we stand by our selection."

Ansaldo Honolulu's bid for the design-build phase was more than $100 million lower than either competitors' bids.

"You're filing $100 million less and you're not really $100 million less, so you really ding the taxpayers twice," Antoniello told Civil Beat. "One, by not making $100 million readily available for local jobs, and two, because you're burdening the city with a tremendous debt. Saddling the city with long-term debt for $100 million more in operations and maintenance."

Asked how operations and maintenance costs factored into the total costs of the three proposals, Mayor Carlisle deferred to Hamayasu.

"I know nothing about it," Carlisle told Civil Beat on Tuesday. "Talk to Toru, OK? Good luck."

Asked about the possibility of increasing costs for taxpayers, Carlisle dismissed the notion as "speculation."

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