DEPARTMENT OF BUDGET AND FISCAL SERVICES. CITY AND COUNTY OF HONOLULU £20 SOUTH KING STREET, ROOM 206 » HONOLULU, HAWAII 96873 PHONE: (808) 78-3000» FAX (C08) 7683179 « INTERNET: way:honclu.gov MANUEL T VALBUENA. KIRK CALOWELL ormenecros KELLY. NISHIMURA November 20, 2020 CONFIDENTIAL - PROCUREMENT SENSITIVE INFORMATION Mr. Andrew S. Robbins Executive Director and CEO Honolulu Authority for Rapid Transportation 1099 Alakea Street, Suite 1700 Honolulu, Hawaii 96813 SUBJECT: Honolulu Rail Transit Project (“HRTP” or the “Project”) — The Path Forward Dear Mr. Robbins: | am writing in response to the report that you provided to the City regarding HART's proposed next steps for the Project (the “Report’) ‘Thank you for providing the Report and for the diligence of the HART staff in preparing the recommendations. | reviewed the Report with an open mind and gave it due consideration. | also shared the Report with the City’s P3 Evaluation Committee and procurement advisors from Purchasing and asked for their input. Based on the review of the Report and in consideration of your recommendations, we note that there was very little discussion in the Report of the findings of your meetings with the Priority-Listed-Offerors (‘PLOs"). In fact, much of the information in the Report has already been discussed. | determined there is nothing in the Report that would support changing my original determination to cancel this procurement, and instead further confirms my decision that cancelling the P3 Procurement is in the public interest. | hereby inform you that the City will not be rejoining the P3 procurement. In my letter dated August 24, 2020, | explained reasons for my decision to cancel the P3 procurement. Ifind that most of those reasons have not been overcome, the most significant of which are: Uncertainty of HART's Finances_ | expressed this as a major reason for not proceeding with the P3. Since the City’s withdrawal, the situation has further deteriorated. HART's budget for the P3 was originally $1.4 billion, without financing costs. During the evaluation period, the City was informed that HART could only certify $1.2 billion in funding, again without financing costs, to support the procurement. Now, due to project delays, cost increases and fundingMr. Andrew Robbins Executive Director and CEO November 20, 2020 Page 2 shortfalls, HART reports that it can only certify affordability of approximately $200 million. We learned this week, and it was mentioned in the Report, that another increase is expected to be made to HART's estimated costs to complete the project, which would further reduce the certifiable affordability amount, which in turn may not allow for an early works phase as proposed by HART in the Report. The concerns stated in my letter of August 24, 2020 still hold true. Impacts on Operations and Maintenance. | pointed out that substantial de-scoping or deferral of project elements and repackaging them as “priced options” would require the City to renegotiate the P3 operations and maintenance package. This would include renegotiating the technical specifications, compensation and deductions, and associated risk profile currently reflected in the project agreement and P3 O&M subcontract. We stated that the City was not inclined to invest the significant additional time, cost, and resources in such an endeavor without ‘a greater assurance of success. As the complications of such an undertaking have increased under HART's current proposal, the City's position on this issue is reaffirmed. Negotiations Are Not Likely to Succeed In the original report from the HART Evaluation Committee and in meetings with you prior to the City’s withdrawal from the procurement, 5 I did not believe such a negotiation would be successful. HART's current recommendation reflects that eee eee HR n fact, in a phased approach, as is being proposed, with uncertain funding and Uncertain timing, the proposed pricing wil likely increase, further escalating the amount of funding required. It seems the basis for your current recommendation is only that the P3, while will be less costly than an alternative approach. This assertion is highly speculative as the ultimate cost of the P3— and of an alternative approach — will not be known until a future date; however, the P3 approach inherently carries more price risk when the funding and the schedule are unknown at the time of contracting. Accordingly, | believe HART and the City should be transparent and discuss Project costs, schedule, the funding shortfall and forward-looking strategies with the Mayor, the HART Board, the City Council, the FTA and the public before proceeding with such a significant project that costs much more and will be delivered later than was promised just two years ago. Additional reasons for my decision that were included in my previous letter to you include: + The lack of transparency and potential regulatory consequences associated with confidentially negotiating and agreeing upon major reductions or deferral of P3 scope: |. and The Report does not address these mattersMr. Andrew Robbins Executive Director and CEO November 20, 2020 Page 3 The City believes it is an unacceptable risk to enter into a P3 Contract when HART has very limited funds for the contract, no projected source of future funds for the contract, and no stated plans to secure funds for the contract. The City is not willing to enter into a contractual commitment for a phased construction scope and schedule without any assurance that HART will have the funds to pay amounts that become due. Even if HART is able to defer work until funding materializes, costs will escalate and schedules will slip, with much greater consequences under a P3 delivery method than under a separate design-build delivery method. And if funding does not appear, HART and the City would likely be in a far worse position for having entered into the contract. We do not perceive certainty in such an arrangement, only risk, Further to the above matters from our original decision, the City has the following specific concerns: © Without addressing the funding gap that exists, the City is not willing to move forward with a multi-billion dollar contract award, * Without assurance of funding, the P3-phased approach does not provide cost or schedule certainty. The timing of funding could lead to schedule delays and related delay claims that are significantly higher in the P3 structure than under a design-build contract, due not only to the inclusion of private financing, but also to the multi-tiered structure of the P3. ‘+The Report states “the concerns raised by the City appear to have been with respect to the affordability of the design and construction elements and not the operations and maintenance pricing,” however, the City has a real and vested interest in the overall financial aspects of the Project. The City is directly responsible for the financing of the Project, as it currently issues bonds to provide cash flow for the Project, and is the grantee under the Full Funding Grant Agreement. In addition, as we have emphasized repeatedly, changes to D&C work will impact the O&M component, which is a direct City responsibility, ‘An important point to note is that a lack of adequate funding for D&C could lead the developer to terminate a P3 contract, including the O&M portion, in its entirety, leaving the City in an untenable position, There is also substantial risk inherent in trying to develop O&M terms and conditions around a D&C scope and schedule that is not, certain, but contingent upon available funding. From an O&M perspective, this is unacceptable. + CCUR work has regressed almost to a complete work stoppage. The parcel access dates provided to the PLOs as of the Setting Date no longer hold true, and there is great uncertainty as to the accuracy of timing of handover dates to the P3 Developer to begin construction, further increasing the risk to P3 schedule and cost certainty.Mr. Andrew Robbins Executive Director and CEO November 20, 2020 Page 4 The phased funding proposed by HART must be considered in the full context of the Procurement Code as stated in the Hawaii Administrative Rules §3-122-102(c) that a Portion of the total funds required for a contract may be permitted when an immediate solicitation will result in significantly more favorable contract terms and conditions to the State than a solicitation made at a later date. As mentioned above, the phased approach stil has cost, funding and schedule uncertainty, which may become more apparent in the future. There is a risk the FTA will deem these post-proposal modifications improper and the resulting contract could be determined ineligible for federal funding. HART generally refers to other phasing precedents. The one project that has been identified, the Eagle P3, is not comparable. The Eagle P3 involved a discrete, priced option that was included in the RFP before proposals were submitted. The base scope of work was funded, and even the optional scope had an anticipated, identified funding source. It did not involve breaking down the original, base scope of work into phases, without a clear source of funding for any of them, after proposals were submitted HART has not provided an acceptable solution to resolve the private financing issues oth City and HART determined that is required under the Hawaii State Procurement law. On that premise, HART's Evaluation Committee recommended HART now wishes to ursue a Best and Final Offer ("BAFO"), presumably with all PLOs, which would be in light of I want to address two other matters that were raised in the Report Proposed pricing for O&MMr. Andrew Robbins Executive Director and CEO November 20, 2020 Page 5 * TIEIAfinancing, TIFIA financing is mentioned in the Report. The City has never discouraged HART from seeking TIFIA financing that could be used by the developer to reduce financing costs. In fact, the City has assisted HART to prepare for meetings with the Rating Agencies to support this financing vehicle. However, a distinction that needs to be made is the City stated — from the very first day that TIFIA financing was mentioned and well before the decision was made to pursue a P3 structure ~ that the City would not serve as a guarantor to a third-party developer. HART did not anticipate that this would be an issue, as it expected that developers who would compete for this transaction would not need the City's guarantee and would likely be able to finance this project from their own balance sheet, and we reiterate: We agree with the pursuit of TIFIA financing. We do not agree to provide financial support and guarantees for the debt. | also want to point out that TIFIA is a debt instrument that will need to be repaid during the remaining construction period — it does not resolve a funding shortfall Itis for all the aforementioned reasons, and in supplement of all previous letters issued to HART regarding the P3, that the City will not re-join this procurement. Once HART cancels the P3 procurement, the City and HART can work on a unified approach on a path forward, bn sr fanuel T. Valbuena Acting Director Sincerely, cc: (redacted due to procurement sensitive information) Mayor Kirk Caldwell Hawaii Congressional Delegation ‘The Honorable Ron Kouchi, Senate President The Honorable Scott Saiki, Speaker, House of Representatives Honolulu City Council HART Board of Directors Mr. Roy K. Amemiya, Jr., Managing Director Mr. Rick Blangiardi, Mayor Elect Mr. Mike Formby, Managing Director Designate