onolulu rail transit roject p3 viability...

HONOLULU RAIL TRANSIT PROJECT

P3 Viability Assessment

March 19, 2017

Honolulu Rail Transit Project P3 Assessment

Agenda

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Background & Overview

Public-Private Partnerships (P3) Overview

P3 Options for Honolulu Rail Transit

Value Capture and Monetization

Conclusion

Honolulu Rail Transit Project P3 Assessment 3

Executive Summary

• JLL conducted an assessment of potential alternative finance and delivery structures, such as Public-Private-Partnerships (“P3”) for the remaining elements of the Honolulu Area Rail Project: the $1.32 billion Section 4 “City Center Guideway and Stations” (4.2 miles across 8 stations from Kalihi to Ala Moana Center Station), the $315 million Pearl Highlands Transit Center, and system-wide O&M (~$140 million per year).

• The study concludes categorically that public funding is required to bridge the nearly $2 billion capital funding gap, whether through a G.E.T. extension or other public revenue sources. The reason for this is simple: P3 does not constitute free money and the project was never designed for full cost-recovery.

• System to provide subsidized transportation [farebox revenues will not cover O&M, much less capital costs]

• Reduced Project footprint limits commercialization opportunities

• TOD do no offer short term funding opportunity for the rail

• Joint development agreements are possible, but take time and do little to address total funding shortfall.

• P3s do not mean free money. Private Partner must be compensated for its investment; however, Honolulu Rail Transit Project does not offer full cost recovery. P3, however, do offer other potential benefits, such as cost and schedule certainty.

• After a multiple criteria analysis, including a value-for-money assessment, it was determined that a Design-Build-Finance P3 appears to be superior to other models in delivering the remaining segments of the Project. The Private Partner provides gap financing during construction, providing City with greater cost and schedule certainty. Value-for-Money assessments found that DBF may yield a potential 6-15% lifecycle cost savings versus the planned Design-Build structure. This would allow authorities to defer payment until AFTER project is completed and public enjoying benefits of system.

• JLL also recommends that the Honolulu Department of Transportation Services engage a management team to explore monetization opportunities. Any revenues from monetization and commercialization efforts would be useful in contributing towards the annual O&M costs, which currently lack a designated funding source.

Background and Overview

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Assessment Background

• To help the City and County of Honolulu, State of Hawaii, and the Honolulu Authority for Rapid Transportation (HART) deliver remaining segments of the Honolulu Rail Transit Project in the timeliest and most cost-effective manner possible, JLL was engaged to undertake a viability assessment of potential alternative finance and delivery structures, such as Public-Private-Partnerships (“P3”).

• JLL assessment focused exclusively on Plan A, constructing the rail system between East Kapolei to Ala Moana Center, as this option maximizes public benefits.

• JLL assessment is not a “funding” study, but instead looks at finance and delivery options that can accelerate delivery, reduce public sector risk, lower life-cycle asset costs and/or create additional value-capture and monetization opportunities.

• Due to the fact that project is advanced and mostly under contract, JLL’s focus has been primarily on delivery of the $1.32 billion Section 4 “City Center Guideway and Stations” (4.2 miles across 8 stations from Kalihi to Ala Moana Center Station), the $315 million Pearl Highlands Transit Center, as well as system-wide O&M.


Project Background

PROJECT SCOPE• 20.1 mile rail line across 21 stations from Kapolei in west

Oahu to downtown Honolulu in the east. • Project divided into 4 sections.

PROJECT OBJECTIVES• Reduce traffic congestion and passenger car use;• Provide affordable public transportation;• Support tourism and help the economy via job creation during

and after construction; • Enable transit-oriented development around rail stations;• Reduce carbon emissions and pollution from the use of fossil

fuels and support the State goal of using 100% clean energy by 2045; and

• Reduce dependence and costs of imported oil.

OVERVIEW• Approved by voters in 2008. Construction began in 2012. • To date, PAYGO system (with some commercial paper)• Construction of the guideways were bid out by section using

design-build contracts. To date, section 1-3 are under contract.

• Construction of stations were bid by section, using design-bid-build and design-build contracts.

• Ansaldo holds 5-year Core Systems O&M contract.• Capital costs currently estimated at $8.2 Billion (65% increase

since 2012) and full rail line expected to open in late 2025 (~7 year delay).

HISTORY• Project has experienced delays and cost overruns due to:

• Shortage of available funding (tax revenue shortages on pay-go system);

• Lawsuits that caused multi-year project delays (thereby increasing costs);

• Macroeconomic factors: recession and subsequent rise in inflation (i.e. in 2014, annual rate of construction inflation reached 14%);

• Microeconomic factors: labor, supply prices, etc.

FUNDING STATUS• Project primarily expected to be funded through a State

Legislature-approved General Excise Tax (G.E.T.), which is due to expire in 2027. Expected G.E.T. revenues through 2027 are insufficient to cover full project cost.

• Without a revised financial plan for completion of the full rail line, the City of Honolulu will need to repay the FTA $712 million in grant monies and will also relinquish the remaining $838 million. The revised financial plan is due to FTA in April 2017.


Key Considerations

• Capex primarily funded through GET and Federal Grants on Pay-as-you-Go (PAYGO) basis;

• Farebox Recovery Rate (FRR) anticipated between 27-33% of O&M costs [not anticipating full cost recovery or capital repayment];

• Constrained monetization opportunities:

• Minimized Project station footprint limits commercial opportunities;

• Transit Oriented Developments are rail-dependent and while one may consider value-capture mechanisms like Tax Increment Financing (TIF) to support rail construction and operations, these revenues will not be available for many years. Also, the nature of the TOD’s are such that most incremental tax benefits will likely be needed to fund other basic infrastructure and improvements.

• Policy parameters and Project objectives may limit revenue generation opportunities (i.e., Pearl Highlands Parking, limits of advertising, etc.)

Funding Shortfall: With existing G.E.T. and FTA Grants, HART asserts that it has adequate funding to complete sections 1-3. Funding shortfall thus includes:

• Section 4 “City Center Guideway and Stations (CCGS)” (estimated $1.32 billion with contingency);

• Pearl Highlands Transit Center and Parking Garage (estimated at $315 million with contingency)

• Financing Costs: TBD

• Capital Assets Replacement Program (CARP) ($150 million through 2030) and Additional Rail Cars ($45 million)

• Rail System Operations and Maintenance: At an expected $140 million per year in O&M costs, most risks remain with City (despite third party contracts).

Value Capture

Financial Strategy: Since inception, Project financial strategy focused on public funding:


Key Risks

Cost Risks Project Funding Risks

Capital • Capital Cost Risks (principally for CCGS and Pearl Highlands, particularly if subject to funding shortfall or other delays)

• Dynamic market conditions• Project schedule (permitting, rights of way,

utility relocations, etc.)• Uncertain interest rates and financial

markets• Credit rating• Under-estimation of Capital Asset

Replacement Program costs• Funding shortfalls for major maintenance

results in deferred maintenance backlog (exponential increases)

• G.E.T. surcharge revenue availability• FTA Funding – delay or Congress may

decrease amount of available funds, impose new rules on project eligibility, and/or revise the criteria to evaluate projects

• Current PAYGO system – if actual funding is below forecasted amount, may delay project.

• Financing/Refinancing

Operating • Cost escalation (e.g. labor, energy)• Limited risk allocation• System integration and higher costs for bus

and Handi-van services

• Undetermined fare rate• Change in ridership forecast• Economic downturn• Appropriations/ funding shortfalls impact

service quality• Life-cycle / Handback• Commercial revenue


P3 Potential

Alternative Finance and Delivery Structures could be helpful for the following reasons:

• Reduce/transfer cost and schedule risk;

• Accelerate delivery;

• Eliminate costly delays due to funding shortfalls;

• Provide budget predictability;

• Allow State and City to pay ONLY AFTER COMPLETION (align repayment with delivery of public benefits);

• Potentially reduce capital and/or O&M costs;

• Leverage private sector expertise to extract greater value from assets (monetization opportunities); and

• Cap credit impact.

Challenges to a P3:

• Project still dependent on public funding (P3 not free money);

• Advanced construction presents integration and liability risk;

• Much of project life-cycle elements under contract (such as Core Systems Contract);

• Limited commercialization and monetization opportunities;

• Overlapping authorities (HART and DTS);

• Limited local P3 track-record; and

• May need enabling legislation for some options.

P3 Overview

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P3 & Alternative Finance & Delivery

• Federal, state and local governments have limited financial resources to devote to capital and operational expenditures

• In post-earmark Washington, intense competition for scarce federal funding, coupled with a growing backlog of authorized, but unfunded, projects

• Protracted appropriations delay delivery and exponentially increase costs

• Public authorities seek to extract value from existing assets

Key P3 & Alt Finance Drivers

• Access to new sources of financing / Accelerated Delivery of Infrastructure

• Monetization opportunities

• Life-cycle cost reduction / Operational efficiencies

• Risk allocation and incentivized performance

Public authorities across the globe are increasingly turning to P3 for the delivery of infrastructure and services (the “New Normal”)

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Extent of Ownership and Risk Transfer to the Private Sector

Low HighExtent of Private Sector Financing

Public-Private-Partnerships

Infrastructure Delivery Spectrum of Options

Traditional Delivery

Works & Service Contracts(DBB, CMAR, PDB, DB)

Privatization

Management Contracts(Peer partnerships, O&M

agreements, etc,)

Divestiture (Sale, Sale-leaseback, etc.)

Concessions(DBFOM, BOT, etc.)

Lease-like Agreements (LDO, DBOM, Lease-Backs )


P3 Overview

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• P3 refer to a wide range of contracting modalities, but generally refer to long-term forms of cooperation between public authorities and the private sector to ensure the financing, construction, renovation, management, operation and/or maintenance of an infrastructure facility.

• P3 allow for private financing of public works and the private provision of public services.

• P3 are typically long-term contracts for the provision of bundled services.

• Life-cycle focus (not just construction, but also maintenance and operation over the life of asset).

• Payment to the private partner is output and performance based.


Value Drivers of P3

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• P3 projects in the UK, on average, showed estimated cost savings of approximately 17% against a public sector comparator.* (Risk transfer accounted for 60% of the projected cost savings).

• European Construction Industry Federation found that global saving of P3s is estimated around 25% compared to traditional delivery

• Key cost-saving element in P3 comes from efficiency gains derived from bundling project elements (e.g. finance, design, construction, operation, and maintenance)

Delivery Approach Project Cost Savings/Revenues

DBFOM (Rail) Eagle Rail Project (Denver, CO) Winning P3 bid came in ~27% lower than original cost estimate (~$2.7 bn savings);

NPV of annual service payments to Concessionaire was 25% lower than estimate.

DBF (Rail) Evergreen Line (Vancouver, Canada) Cost Savings: 15-16% ($204-219 million) vs. DB option

O&M Concession Public Belt Railroad (New Orleans, LA) Revenues: >= $60 million over 40 years

Avoided capital costs to public entity ($30 million in short-term, unknown for long-term)

Monetization: Advertising Multiple, including WMATA (Washington, DC.) and LinkNYC. Revenues: $600,000 - $42 million/year

Monetization: Commercial

Concessions

CTA (Chicago, IL), MTA (New York, NY), MARTA (Atlanta,

GA)

Varies depending on opportunity.

Revenues: $200,000-$10 million/year

Monetization: Station

Integration/Joint Development

Lincoln Station, Evergreen Line (Vancouver, Canada) Private investment: 45% of project cost ($13 million)

Cost Savings: 30% by designing and building integrated station before operations start

Monetization: Parking CTA and Ohio State University O&M Contracts Revenues: ~$3.5 million/year to $483 million lump sum

DBFOM (Parking) Smithsonian Institution National Zoo Central Parking Facility Avoided capital costs to public entity (~$75 million)

*Source: Shendy, Riham, Zachary Kaplan, Peter Mousley. Toward Better Infrastructure: Conditions, Constraints, and Opportunities in Financing Public-Private Partnerships in Select African Countries. Washington, DC: The World Bank, 2011. Print. (p. 4 and 7)

Summary of Case Studies reviewed during this Assessment:

On average, P3 projects yield 15-25% cost savings as compared public/traditional procurements (i.e. DBB)


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• Transaction structuring should respond to a systematic process designed at ensuring that the sources of value generation are identified and maximized for each project.

• Multi-criteria analysis was undertaken to qualitatively assess a wide spectrum of potential finance and delivery options for their alignment with project goals, objectives, risks and current status.

• Given current project status, P3 options for capital project are somewhat limited, as compared with similar projects, but three clear options were identified:

• Design-Build-Finance (DBF)

• Design-Build-Finance-Maintain (DBFM)

• Design-Build-Finance-Operate-Maintain (DBFOM)

• Subsequently, a qualitative and quantitative assessment was undertaken to review whether these alternative structures would provide value for money (VFM) or other benefits when compared to DB procurement options.

• VFM assessment process included a risk analysis to identify and quantify value of risk transfer under P3 scenarios.


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P3 structuring typically involves consideration of component bundling, ring-fencing of risks, potential benefits from risk transfer, innovation, etc.


DBF Overview

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DESCRIPTIONWith DBF, design-builder assumes responsibility for the majority of design work, all construction activities, short-term financing, and the risk of providing these services for a fixed fee. • With DBF, a single contract is awarded for the design,

construction, and full or partial financing of a facility. • Responsibility for the long-term maintenance and operation of

the facility remains with project sponsor (HART/DTS). • This approach takes advantage of design-build (DB) efficiencies

and also allows the project sponsor to completely or partially defer financing during the construction phase of the project.

MOTIVATIONS FOR DBF There are two primary reasons that project sponsors use DBF:

• Owner cash flow constraints• Desire to defer payment

DBF partner assumes additional risks beyond those of a traditional DB contract, including the risk associated with future appropriations expected to make project funding available.

PRIVATE SECTOR FINANCING OPTIONSPrivate design-builders may use different approaches to finance their DBF costs. This includes the potential to access tax-exempt debt issued through a nonprofit public benefit corporation pursuant to IRS Revenue Ruling 63-20. The decision over which financing approaches is used is made directly by design-builders and is driven largely by their size, available cash and credit, and risk tolerance.

DBF ADVANTAGESDBF advantages are similar to DB approach. With DBF financing, however, project sponsors can advance construction prior to assembling all the funding required for the project. DBF model is particularly beneficial when short-term gap financing provided by design-builder allows sponsor to expedite Project implementation.

DEFERRED PAYMENT, NOT DEBTA DBF arrangement is a deferred payment and is generally not considered debt under usury law. Legally, the project sponsor is purchasing construction services and deferring payment for them.

PROCUREMENT PRACTICESAs with DB procurements, DBF procurements are awarded based on best value. This approach takes into account both the technical capabilities and qualifications of the DB team, as well as cost. In this case, a proposer's bid price will include its financing costs in addition to the design and construction of the project.


Case Study: DBF – Evergreen Line (Vancouver)

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Project Scope• 6.83 mi extension of existing SkyTrain system (driverless and automated)• 28 new SkyTrain Vehicles• 6 stations and provision for 2 potential future stations• Vehicle storage facility• Total Project Cost: $1.431 billion• Funding:

‒ $417 mn from Federal government; $400 mn from transit authority; $586 mn from Province of Columbia; $28 mn under a P3 arrangement for Lincoln Station

P3 Drivers• Reduce/transfer risks

• Having a single contract eliminates potential interface conflicts associated with multiple contracts.

• Transfer completion, schedule, cost overrun, and construction financing risks to private partner

• Lower cost than other options • Transit authority retains O&M of extension to manage operational

integration with existing system and for economies of scale

Timeline• RFQ Released: July 2010; Concession Agreement: December 2012; Start of

Operation: December 2016

Key Concession Elements• Concession Payments: Performance-based milestone payments ($889 mn,

with a portion of money retained during warranty period)• Term: 3.5 years, plus 2 year general warranty and 5 or 10 year warranties

for specific items

Outcomes/Savings• Total Project Cost Savings of 15-16%

• DBF option reduced project costs by 10% ($134 mn) over DB option

• P3 Concessionaire achieved additional 5-6% in cost savings ($70-85 million), below $1.431 bn budget


DBFM/DBFOM Overview

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DESCRIPTIONWith design-build-finance-maintain (DBFM) and design-build-finance-operate-maintain (DBFOM), responsibilities for designing, building, financing, operating and/or maintaining the Project are bundled together and transferred to a private partner.

In the case of the Honolulu Rail Transit Project, private investments would be repaid via availability payments. With an availability payment, project funding risk is retained by the public sector sponsor. City pledges availability payments to compensate the concessionaire for a set time period during which it receives a predictable, fixed income stream (subject to deductions for performance deficiencies). Payments owed to the concessionaire may be secured by a revenue pledge or subject to appropriations.

DBFM and DBFOM concessions often extend for a period of 30 to 50 years (or longer), and are awarded under competitive bidding.

These models shift a great deal of risk to private sector partners. City retains full ownership over the project.

ADVANTAGESDBFOM provide access to new sources of equity and financing, and deliver schedule and cost-efficiency benefits. City would only pay for completed works and would be able to align repayment with G.E.T. and other funding sources, avoiding the need to issue debt for CCGS and Pearl Highlands. Capital component of Availability Payments likely treated as debt upon delivery of asset.

PRIVATE SECTOR FINANCING OPTIONSAvailability payment P3 often involve private equity, federal credit assistance, and commercial debt; however, tax-exempt structures can also used.

MOTIVATIONS FOR DBFM/DBFOM Reasons that project sponsors use DBFM and DBFOM models:

• Risk Transfer• Desire to defer payments until after completion• Accelerate delivery• Lock-in lifecycle costs and asset management• Integration of O&M with design and construction• Innovation and life-cycle savings


Case Study: DBFOM - Eagle P3 Project (Denver)

Project Scope• 40.2 miles across 3 lines • 16 stations, including Union Station• 54 commuter rail cars• 1 Commuter Rail Maintenance Facility• Total Project Cost: $2.2 billion

‒ Includes: $1.03 Bn in FTA FFGA grant‒ Includes: $350 Mn in private financing

P3 Drivers• FTA Penta-P Program• Funding Needs of the Project

‒ Opportunity for private sector efficiencies ‒ Duration of financing

• Risk Transfer‒ Construction risk‒ Long-term O&M

Timeline• RFQ Released: August 2008• Concession Agreement : July 2010• Start of Operation: Opened in 2016 (29 miles)

Key Concession Elements• Contract Scope: Design-Build-Finance-Operate-Maintain

(DBFOM)• Concession Payments: Milestone and Availability Payment• Term: 34 years

Outcomes• Winning P3 bid came in $300 million (27%) lower than

public sector budget estimates

• Construction of 29 miles of rail completed in 7 years.

• Additional O&M cost savings

• Additional adjustments during contract execution resulted in total availability payments to Denver Transit Partners being reduced by about $2 billion.


P3 leveraging tax-exempt debt

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DBFM/DBFOM Financing Variations

63-20 Nonprofit Public Benefit P3 Structure

A wide variety of P3 financial structures exist - providing private partner opportunities to reduce private financing costs.


Availability Payments

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• P3 is not “free money” and private sector investments and costs need to be repaid.

• As cost-recovery not envisioned for Honolulu Rail Transit, only financially viable way to compensate a private partner under a DBFM/DBFOM would be through budget-based Availability Payments.

• Budget-based payments would begin after substantial completion of the Project (payment upon delivery).

• Fare revenue and other commercialization opportunities could be used to partially off-set public sector costs, but compensation credit risk would fall on the City.

• Long-term payment schedule locks in Project costs over asset life-cycle resulting in budget predictability.

• Credit rating agencies have specific guidance as to credit impact of P3 availability payments.


P3 Alternatives Summary

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P3 Alternative

Overview Benefits Challenges

Design-Build-Finance

• Private Partner assumes responsibility for design and construction activities, short-term financing, and the risk of providing these services for a fixed fee.

• City retains O&M responsibilities (through current contracts)

• City pays Private Partner after completion of CCGS and/or Pearl Highlands.

• City would issue bonds to compensate private partner upon completion.

• Design-Build Advantages• Accelerated delivery• Defers payment until completion• Addresses cash flow issues• Budget predictability• Cost and Schedule risk transfer• Should not require new legislation• On average 15% savings versus DB

• Market interest more reduced than with DBFM/DBFOM

• Slightly higher cost of financing (gap financing) than baseline case

• Need to initiate DBF procurement

• Some risks retained by HART and City

DBFM / DBFOM

• Private Partner assumes responsibility for design, construction, financing, and some level of O&M services for a specified fee.

• City pays Private Partner over term of P3 agreement, beginning after completion of CCGS and Pearl Highlands and based on performance levels.

• If G.E.T. is extended, City would probably not need to issue bonds, but capital component of Availability Payments would be considered debt by credit agencies (on-balance sheet financing)

• Accelerated delivery • Life-cycle integration benefits

(typically a 15-20% life-cycle savings)

• Payments begin only upon completion of project

• Long-term budget predictability• Risk transfer (including cost,

schedule and performance risk)• Additional monetization

opportunities• Incentivized innovation (to reduce

life-cycle project costs)• Potentially robust market interest

• Need for enabling legislation• Higher cost of financing than

DBF case• Need to initiate P3

procurement• Complications with existing

contracts (Core Systems)• Some risks retained by HART

and City


Key Risk Allocation Comparison

Phase Risk DB (Baseline) DBFDBFM

(25-50 Years)DBFOM

(25-50 years)

Development

Finance Public Private Private Private

Permitting /Easements

Public Public Public Public

Design and Construction

Schedule Shared Private/Shared Private/Shared Private/Shared

Cost-overruns Shared Private Private Private

Operation

O&M (Rolling Stock and associated equipment)

Shared (Ansaldo / DTS)

Shared (Ansaldo / DTS)

Ansaldo TBD

Operations (Stations)Shared

(Ansaldo / DTS)Shared

(Ansaldo / DTS)Private / Shared Private

Maintenance (Stations) Public Public Private Private

Maintenance, Major Repairs (Guideways and Stations)

Public Public Private Private

Capital Asset Replacement and Maintenance

Public Public Private Private

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Financing Considerations

• P3 can help manage risk by better aligning payments with Project benefits; but the question is what is the cost and value of these approaches as compared to the existing plan?

• Financial impact difficult to quantify at this time because of the number of variables; however, it is possible to discuss likely cost differential:

• DBF: City would borrow to compensate Private Partner upon completion of project. Imputed finance costs during construction would depend on many factors, but probably 25 – 50 BP above Aa1. Predictability of rail cost could offset some margin differential.

• DBFM/ DBFOM: It is unlikely the City would need to issue long-term debt, as Availability Payments would be covered by GET revenues (assuming a surcharge extension). Imputed financing costs within the Availability Payment would depend on financing structure (not-for-profit, tax exempt, gearing ratios, etc.), but private debt would likely fall at Aa2, with equity returns dependent on risk transfer. O&M life-cycle savings estimated at 10-15% versus existing estimates.

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Honolulu:• Solid Credit Rating:

‒ Aa1 (Moody’s) / F1 (Fitch)• Lack of certainty regarding Rail costs and potential

impact on City is impacting rating (Moody’s)


Risk Quantification Assumptions

• To quantify the benefits to the City of different approaches, a high-level risk assessment was undertaken. • Analyzed key risk: cost overruns.• Risk quantification is essentially probability x cost impact.• Risk modelling requires a determination of a Minimum, Maximum, and Most Likely cost impact values. There is no specific rule

for determining these values, so we used historic HART cost estimates as a starting point:

• Cost estimate comparisons between 2012 and 2017 for Pearl Highlands Garage and CCGS show that the 2017 budget exceeds the 2012 estimates by 89-117%. Retained risk may or may not materialize, but given the history of cost overruns and project delays, as well as past incidences of base cost estimates exceeding previous budgeted amounts (including contingencies), it is reasonable to assume that going forward there may be cost overruns that exceed the budgeted amounts.

• Using the cost differential of the base capex cost, we conservatively used one-quarter of that historic increase and applied it to the 2017 base capex (i.e. without contingencies) of $1.35 billion to calculate the minimum, maximum, and most likely cost impact values.

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Base Capex Costs Only(2017 vs. 2012)

Base Costs + Contingency (2017 vs. 2012)

2017 Base Cost vs. 2012 Base + Contingency

Pearl Highlands 49% 58% 29%

CCGS 144% 155% 112%

Total 117% 128% 89%

Cost Impact Base PercentageAssume 25% of historic

cost increase above capexCost Impact (=%*$1.35 bn) Rounded Cost Impact

Minimum Value 49% 12% $164,616,715 $164,600,000

Maximum Value 144% 36% $485,362,280 $485,400,000

Most Likely Value 117% 29% $395,980,084 $396,000,000


• By leveraging a P3 approach, it is estimated that the City would be protecting itself (insuring) against potential capital cost overruns with an average value of $261 million on the CCGS and Pearl Highlands.

• (Mode: $303 mn, Minimum: $121 mn, Maximum: $431 mn).

Value of retained risks are incorporated into Value for Money assessment. There are 2 methodologies for calculating risk:

1. Formula-Based Quantitative Risk Analysis (formula from U.S. DOT, FHWA)• Risk Value = Probability*(Min+Max+4*Most Likely)/6 = 75%*(Min+Max+4*ML)/6= $279,200,000

2. Quantitative Risk Analysis using Monte Carlo simulation• Risk modelling done using a Monte Carlo simulation (stochastic modelling) using Triangular distribution for the cost estimates

(using the previously derived minimum, maximum, and most likely cost impact values) and using normal distribution for the probability.

Retained Risk Calculation

Even though the formula-based quantitative risk analysis result is higher, JLL applied the more conservative results from the Monte Carlo simulation (mean of $261 million) as the retained risk in the VFM assessments.


Modeling Financial Impact

Key parameters: Construction Cost, years of amortization, debt structure.

Assumptions Baseline DBF DBFOM

Time (Years)a) Constructionb) Contract with P3 Partnerc) Operationd) Public Bond amortizatione) Private Loan amortizationf) Equity Dividend payment

a) 6 years, start in FY 2019b) N/Ac) By DTS & Ansaldo – 13 yearsd) 10 yearse) N/Af) N/A

a) 5 years, start in FY 2019b) 5 yearsc) By DTS & Ansaldo – 13 years d) 10 yearse) 1 yearf) N/A

a) 5 years, start in FY 2019b) 15 yearsc) By Concessionaire & Ansaldo – 13

yearsd) N/Ae) 10 yearsf) 10 years

Capital Cost • 100% General Obligation Bonds, backed by future G.E.T. revenues

• Bond Interest rate (fixed): 4%

• 100% private loan• Private loan interest rate (fixed):

1.5%• General Obligation Bonds Interest

rate (fixed): 4%

• 90% private loan• Private loan interest rate (fixed):

4.5%• 10% private equity, with 10%

return

O&M Costs (over 13 years)* • HART’s numbers • HART’s numbers • HART’s numbers with 15% efficiency savings.

*Note that the contract assumed for the financial model is for 15 years, but the number of years of operation is only 13 years. The contract start year (i.e. start of construction of CCGS) is assumed to be 2019, but the start of operations of Sections 1-3 are scheduled to start in 2021. Thus, there are 13 years of O&M costs accounted for in this financial analysis.


Value-for-Money Assessment - Summary

Lifecycle Cost SavingsLifecycle Costs (15 years)

• JLL ran 4 scenarios where the capital costs under DBF and DBFOM were discounted by 5%, 10%, 15%, and 20% to reflect P3 efficiencies, as compared to the baseline (DB) scenario. Further, the O&M costs under DBFOM were discounted by 15% versus HART estimates. The reductions are due to efficiencies gained by the private partner and based on industry averages and case studies. The lifecycle costs in the first table shows the total of capex with contingency, financing, retained risks, and O&M costs for each of the 3 options.

• The P3 options show lifecycle cost savings of 6-16% compared to the Baseline (DB) scenario, which is close to the earlier stated averages – that P3 projects yield 15-25% cost savings as compared public/traditional procurements (i.e. DBB).

• Note: All figures are estimates and meant to give an order of magnitude only. Figures are NOT discounted or presented as a net present value.

Capex discount Baseline DBF DBFOM

5% $3,926,300,000 $3,677,500,000 $3,648,100,000

10% $3,926,300,000 $3,570,400,000 $3,529,400,000

15% $3,926,300,000 $3,463,200,000 $3,410,900,000

20% $3,926,300,000 $3,356,200,000 $3,292,500,000

Capex discount DBF vs. DB DBFOM vs DB

5% -6% -7%

10% -9% -10%

15% -12% -13%

20% -15% -16%


Scenarios: 5% and 10% discount

Notes: All figures are estimates, rounded, and meant to give an order of magnitude only. Figures are NOT in NPV. The Public Partner is responsible for the costs highlighted in green under each scenario.

5% discount on capex Baseline DBF DBFOMCAPITAL COST

CCGS and Pearl Highlands Garage Capex $1,352,000,000 $1,284,400,000 $1,284,400,000Contingency $282,000,000 $267,900,000 $267,900,000

Total Capex (rounded) $1,634,000,000 $1,552,300,000 $1,552,300,000

FINANCING COSTSPRIVATE FINANCING

Origination Fee and Other closing costs (1.25%) $19,400,000 $17,500,000Interest (1.5% for DBF; 4.5% for DBFOM) $72,200,000 $540,800,000

PRIVATE EQUITYEquity Return (10%) $141,300,000

PUBLIC BONDPrincipal Amount $1,640,600,000 $1,650,500,000

Debt Proceeds $1,634,000,000 $1,643,900,000Cost of Issuance (0.40%) $6,600,000 $6,600,000

Interest (4%) $382,100,000 $384,400,000

Total Capex & Financing Cost $2,022,700,000 $2,034,900,000 $2,251,900,000

RISK

Retained Risks $261,000,000

Risk Adjusted Capex & Financing Cost $2,283,700,000 $2,034,900,000 $2,251,900,000

O&M COSTCost for 13 Years $1,642,600,000 $1,642,600,000 $1,396,200,000

TOTAL COST $3,926,300,000 $3,677,500,000 $3,648,100,000ANNUAL AVAILABILITY PAYMENT (13 YEARS) $301,200,000

Difference vs. Baseline - Total Cost -$248,800,000 -$278,200,000Difference vs. Baseline - % -6% -7%


CCGS and Pearl Highlands Garage Capex $1,352,000,000 $1,216,800,000 $1,216,800,00020% contingency $282,000,000 $253,800,000 $253,800,000







Interest (4%) $382,100,000 $364,200,000


RISK



O&M COSTCost over 13 Years $1,642,600,000 $1,642,600,000 $1,396,200,000


Difference vs. Baseline - Total Cost $0 -$355,900,000 -$396,900,000Difference vs. Baseline - % -9% -10%


Scenarios: 15% and 20% discount

Notes: All figures are estimates, rounded, and meant to give an order of magnitude only. Figures are NOT in NPV. The Public Partner is responsible for the costs highlighted in green under each scenario.









Interest (4%) $382,100,000 $343,900,000


RISK














Interest (4%) $382,100,000 $323,700,000


RISK








Capital Costs

• To date, funding sources for Infrastructure include G.E.T. and Federal Funds.

• Value capture and monetization opportunities to fund capital program are extremely limited:

• TOD is not a short-term funding opportunity and significant infrastructure investment is required within TOD, making it difficult to dedicate any potential value-capture to the Rail.

• Pearl Highlands may present a monetization or cost-recovery opportunity, but would require imposition of parking fees and real estate development.

• Some commercial concession opportunities may generate cash flow, but the timing of these revenues make them an unlikely source for capital purposes.

• Capital Asset Replacement Program and New Railcar Acquisitions assumed to be financed on a 80%/20% cost share basis with federal funds. Local cost share (20%) is assumed to be funded through general obligation bonds.

• Non-traditional financing could be available for capital costs and CARP (private debt and equity, private activity bonds (PABs), federal credit programs, such as TIFIA (Transportation Infrastructure Finance and Innovation Act), etc.).



Operations and Maintenance• Farebox Recovery Rate (FRR) is expected to be set between

27-33% of O&M costs. • Other potential funding sources assumed by HART include:

• Federal Funds (FTA Section 5307 Urbanized Area Formula Program), any "surplus funds" not used for ongoing capital needs can be used for preventative maintenance. While technically a potential source, this is a high risk funding source for many reasons.

• General Fund [the General Fund includes the real property tax, so it is assumed that some portion of revenue increases associated with TOD's would be dedicated to rail O&M].

• Highway Fund • Other

• Commercialization and monetization are critical to off-setting O&M costs (and helping fund CARP). Regardless of finance and delivery structure, consideration should be given to:• Digital and traditional advertising within stations and

throughout the rail transit system;• Concession contracts; • Parking revenue; • Station integration development opportunities;• Other

• Scope: 7,500 kiosks that replaces 6,000 pay phones.

Kiosks offer free wi-fi hotspot, phone and video calls,

emergency and civic services, internet-enabled tablet, power

charging station, digital advertising space.

• Revenues to Public Entity: $500 million over 12 years, or

the greater of 50% of generated revenues

• Cost: $200 m (funded by Private Partner) to build fiber optic

network and install and maintain kiosks

• Compensation Mechanism: The private partner pays the

City the greater of $500 million over 12 years or 50% of

generated revenues.

Example: LinkNYC (New York City)


Monetization: Technology and Advertising

34

Opportunity: • Digital and traditional advertising within stations and throughout the

rail transit system would provide a revenue source to help offset O&M costs.

• HART (now the City via Charter Amendment #4) owns the rights to advertising within the stations and the station plaza limits. But HART ceded advertising rights for 4 stations (Aloha Stadium, each of the UH campus stations, and airport).

Potential Value: Varies, depending on scope and location• Digital advertising in other cities have yielded $600k – $42 million/year• City Council proposed bill for print advertising on Honolulu buses

estimated to yield $6-8 million/year (2014 bill failed)

Challenges:• Community - Historic public opposition to outdoor advertising• Legal -

• Honolulu Law Sec. 13-6.10 & 13-10.5 does not allow advertising on the exterior of buses or ferries.

• Limits revenue opportunities. There is no specification on whether this apply to rail.

• Outdoor or external-facing advertising may be prohibited.• Hawaii DOT prohibits outdoor advertising on state right

of way (with some exceptions)• Honolulu Law Sec. 21-7.30 prohibits any sign which

advertises or publicizes an activity not conducted on the premises on which the sign is maintained. (Applies to outdoor spaces/streets/public right-of-ways)

• Scope: 50 high-definition digital advertising displays at 14

rail stations, including interactive touch screen displays and

a digital wall

• Revenues to Public Entity: Unknown, but WMATA

generates $20 m in ad revenues per year throughout the bus

and rail system. Digital displays estimated to generate at

least 4 times more revenue than the static ads they replace.

• Cost: No cost to WMATA; costs paid for by private media

company. Revenues are shared.

Example: Washington Metropolitan Area Transit

Authority (WMATA)


Monetization: Advertising (Additional Examples)

35


Monetization: Commercial Concessions

36

Opportunity:• Concession contracts may be awarded for multiple

assets e.g:• Naming rights/sponsorships to rail lines, bus

routes, transit stations, retail concessions, and special events

• Retail/food concessions• Vending machines• Leases for air rights over and adjacent to

stations• Etc.

• HART (now the City via Charter Amendment #4) owns the rights to any concession within the stations and the station plaza limits.

Potential Value: Varies, depending on opportunity

Challenges:• Space - Honolulu rail stations have small footprints

(due to early 2000s decision to limit station size to reduce scope and cost of land purchase), limiting scale of concession opportunities

• Jurisdiction - Four of 21 stations have non-compete restrictions on concessions unless approval is obtained from the land owner. (Note that the affected stations: Aloha Stadium, Leeward Community College (part of UH system), UH-West Oahu, Airport)

• Legal – For air rights, need to clarify development allowance/ zoning restrictions

Chicago Transit Authority (CTA)

• Scope: Tailored corporate investment - Apple invested in a station renovation and

transformation of an unused bus driveway into a plaza. In return, Apple was given

the rights to lease the plaza space for no charge for at least 10 years, to advertise

anywhere in the station at rates set by CTA, and to purchase station naming rights if

CTA decides to sell them.

• Benefit to Public Entity: $4 million in capital investment

• Payment Mechanism: one-time payment

NY Metropolitan Transportation Authority (MTA)

• Scope: Naming rights for station at new Barclays Stadium

• Revenues to Public Entity: $4 million over 20 years ($200k/year)

• Payment Mechanism: annual payments

• Scope: 99-year lease for air rights for 26 acres above rail tracks at Hudson Yards to

turn into a mixed-use community

• Benefit to Public Entity : $1 billion over 99 years

• Payment Mechanism: upfront payment and ground lease payments

Metropolitan Atlanta Rapid Transit Authority (MARTA)

• Scope: Vending machines for snacks and beverages, ATMs, carts, kiosks, and

newsstands. (Food items can not be prepared onsite. There is a cap on mark-up of

retail items.) Also piloted food truck concessions at stations for a few months.

• Revenues to Public Entity: ~$1 million/year

• Payment Mechanism: minimum guaranteed rent plus a percentage of sales

Examples


Monetization: Station Integration/ Joint Development

37

Overview:

• Evergreen Line originally planned to have 6 stations; Lincoln

Station added to project scope due to funding via P3, including

owners of nearby mall.

• Station is adjacent to the Coquitlam Centre Mall and will also

serve nearby planned residential and retail developments.

Benefits:

• Saved 30% in project costs by designing and building an

integrated station before rail line was in operation.

• New station supported TOD development and took advantage of

recent implementation of a new density funding mechanism

Funding and Partners ($28 m):

• City of Coquitlam ($15.32 m)

• Coquitlam Centre Pensionfund Realty Ltd. ($12.68 m)

• PPP Canada, Inc. ($7 m)

Opportunity:• Design and construction of stations that integrate with private real

estate could help to increase ridership, increase fare revenues, spur TOD, and enable private contributions to rail infrastructure.

• Some owners of land adjacent to Honolulu rail stations have expressed interest in designing and/or maintaining stations that integrates well with its developments and serves the larger community.

• Particular opportunities at Pearl Highlands Station (e.g. development atop transit center, connection to nearby mall, etc.)

Potential Value: Varies, but building an integrated station prior to rail operations may reduce overall project costs (i.e. avoids costs of rail shut downs/delays, mobilizing and de-mobilizing construction crews, contract change orders, etc.). Further, joint development may create matching funds/leverages new funding.

Challenges:• Any rebids or changes to awarded station DBB/DB contracts for

Sections 1-3 may spur penalty payments and lawsuits.• However, no contract has been awarded for City Center stations

and City Center will likely yield the most interest from developers given it has the highest building density and projected ridership of all four sections.

• City may need to come up with some financial incentives for developers.

• Current uncertainty as to procedures for implementation/point of contact for negotiations in Honolulu. Recommend for Honolulu to hire owner’s representation.

Example: Lincoln Station, Evergreen Line (Vancouver)


O&M Concession

38

• City could consider O&M concession once existing Ansaldocontract expires.

• O&M concessions involve transferring operations and maintenance responsibility to a third party over the term of the contract.

• O&M concessions can be structured in a variety of ways, with payments deriving from farebox revenues, savings (versus previous operating baseline), or performance-based payments

.

• Case study: Public Belt Railroad (New Orleans)

Scope• Responsibility for and use of 75 miles of track and all assets

(e.g. rolling stock, offices, real property, IT systems, tools, machinery, etc.)

P3 Drivers• Monetization/cash infusion to the City• Public opposition to outright sale of asset• Risk Transfer

‒ Capital construction risk‒ Long-term O&M

Key Concession Elements• Payments: Upfront, annual lease payments, and/or revenue

share• Minimum concession fee: $60 million over 40 years• Term: 40 years• Concessionaire responsible for all long-term business risks

(O&M, capital improvements, and carrier responsibilities)• City of New Orleans retains ownership of assets.

New Orleans Outcomes/Savings• City transfers all operational and capital

improvement risks to private sector for 40 years• Short-term CIP: $30 million (est.)

• City receives upfront cash infusion and annual lease payments worth at least $60 million

Potential Benefits for Honolulu Rail:

• O&M concession could represent a strategy for long-term asset management, creating significant cost savings and budget predictability.

• Upfront payment highly unlikely, given that Honolulu Rail does not provide cost recovery.


Monetization: Parking

39

Opportunity:• Charging fees and/or using a parking concession for

O&M for 4,100 parking spaces across 4 park-and-ride lots (East Kapolei, UH West Oahu, Pearl Highlands, and Aloha Stadium)

• Monetizing commercialization opportunities at Transit Center

Potential Value: Varies, depending on allowable rate regime and parking demand

Challenges:• Policy: no fares are currently anticipated, thus

making monetization impossible. (If fares were imposed, City may need to conduct a Fare Equity Analysis for any proposed rates, in compliance with FTA Title VI requirements.)

• Demand: greenfield parking lots with no historic usage data creates high demand risk for private sector.

Chicago Transit Authority

• Scope: 10-year Parking Lot Operator contract for 5,000 parking

spaces across 14 lots, and 600 spaces beneath rail line

• Revenues to Public Entity: ~$35 million over 10 years

• Payment Mechanism: Annual payment of $2.85 million minimum

guarantee and a percentage of net revenues above a set threshold

per year

Ohio State University

• Scope: 50-year concession (lease) to operate and maintain 16

garages, 196 parking lots, and 37,000 parking spaces

• Revenues to Public Entity: $483 million

• Payment Mechanism: Upfront, lump sum payment

Examples


Alternative Delivery – DBFOM for Pearl Highlands

Opportunity for Pearl Highlands Transit Center and Parking Garage:• Design-Build-Finance-Operate-Maintain the facility ($315 million

capex with contingency)• Project would feature:

• 8-level parking garage and bus transit center (structure envisioned to support two additional floors)

• ~1600 parking spaces• Off ramp• Foundation over a stream• Access to existing Pearl Highlands Shopping Center

• Joint Development/Air rights sale opportunities (see Monetization: Parking slide)

Potential Value: Varies, depending on full scope of work, allowable rate regime and demand

Challenges:• Policy: undefined fare rate regime at this time; no fees are

currently envisioned. (City may need to conduct a Fare Equity Analysis for any proposed rates, in compliance with FTA Title VI requirements.)

• Demand: greenfield nature of project will make demand-risk in a P3 highly risky, possibly requiring City credit backstop

Compensation Structure:• Given revenue uncertainty, only viable P3 approach would be

utilizing budget based availability payments.

• Scope: 30+ year DBFOM for a new, green central parking

facility with ~1300 spaces, a pedestrian bridge and midpoint

entry, bus drop-off and turn-around point, and other works

• Value/Benefits: ~$75 million capital project done off

balance sheet; development and operational risks

transferred to private partner

• Compensation Mechanism: upfront payment and annual

concession fee (fixed and/or variable) from private partner

Example: Smithsonian Institution National Zoo –

Central Parking Facility


Financing TOD

41

• TOD is not a viable source of funding for the transit infrastructure, but instead require their own investment strategy , as the vast majority of the sites require major infrastructure investments.

• There are various funding and financing options for TOD:

DIRECT FEES• User fees and transportation

utility fees• Congestion pricing

DEBT• Private debt • Publicly issued debt (Bonds)

• General obligation bonds• Revenue bonds• Private activity bonds• Certificates of

participation and lease revenue bonds

• Specialized debt (from federal and state – usually loans to fund roads/transit and can free up project funds for other uses)

• Revolving loan funds• State infrastructure banks• Grant anticipation revenue

vehicle (GARVEE) bonds• Railroad rehabilitation and

improvement financing (RRIF)

FEDERAL GRANTS• Transportation

• Congestion mitigation and air quality improvement program

• Transportation alternatives program

• Urbanized area formula funding program

• Community and economic development

• Community development block grant

• Economic development administration grants

ANCHOR INSTITUTIONS• Anchor institution partnerships

with nonprofit or private entities such as universities, hospitals, and corporations that are inextricably tied to their locations

VALUE CAPTURE• Developer fees and exactions

(usually one-time payments)• Special districts• TIF• Joint development (usually for

real estate around stations)

EQUITY• P3s• Infrastructure investment funds

CREDIT ASSISTANCE• Credit assistance tools• TIFIA (to fund roads/transit and

free up project funds for TOD)

Conclusion

42


Conclusions on Financial Impact

• Given that this project does not anticipate cost-recovery and presents limited monetization opportunities, public funding is required to bridge the nearly $2 billion funding gap, whether through the G.E.T. or other public revenue sources.

• Public funding is required. However, consideration should be given to P3 approaches to mitigate funding and project risks.

• Estimates demonstrate that P3 approach could provide significant value for the following reasons:

• Buy-down cost uncertainty (risk reduction)

• Delay payment until completion

• Potentially lock-in life-cycle savings

• Enhance monetization opportunities

• Under a DBF, Private Partner provides gap financing during construction, providing City with greater cost and schedule certainty. Industry experience suggest a potential 15% savings versus DB structure. DTS could also engage management team to explore monetization opportunities.

• Under a DBFM/DBFOM, Private Partner provides long-term financing, as well as assumes some O&M functions related to station management, operations, and monetization, allowing City to repay over term of contract. Although imputed financing costs are higher, longer term pay-back and incentivized performance ensure life-cycle management of asset and should result in significant O&M savings, as well as additional revenue generation.


Schedule Impact

DBF

DB (Baseline)

DBFM/DBFOM

Completed RFP Part I and Issued RFP Part II

44

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42019-2022

2015 2016 2023 2024 2025 20262017 2018

NTP: 08/2018

Construction(6 years)

Operational:12/2025

RFQ Prep (2)


2015 2016 2023 2024 2025 20262017 2018

NTP: 04/2018

Construction(5.5 years)

Today

RFQ (4)

RFP(4-5)

Financial Close

(2 mon)

Operational:01/2024

RFQ Prep and P3 Legislation

(5-6)


2015 2016 2023 2024 2025 20262017 2018

NTP: 10/2018

Construction(5.5 years)

RFQ(4)

RFP(6)

Operational:01/2024

Today

Today

Financial Close

(2 mon)

Notes:• All dates are estimates.• RFQ prep for DBFM/DBFOM is 3-4 months longer than DBF in order to account for additional time needed for P3-enabling legislation.• Time for a potential procurement for a P3 advisor is not included in any timelines.


Conclusion and Recommendations

• Given that this project does not anticipate cost-recovery and presents limited monetization opportunities, public funding is required to bridge the nearly $2 billion funding gap, whether through the G.E.T. or other public revenue sources.

• Alternative finance and delivery options could potentially help Honolulu finalize the Project in a timelier and more cost effective manner, when taking into account risk transfer.

• After a multiple criteria analysis, including a value-for-money assessment, it was determined that a Design-Build-Finance P3 appears to be superior to other models in delivering the remaining segments of the Project. Potential benefits include:

• Defer payments until Project completion;

• Greater security around cost and schedule risk as a result of the at-risk private finance.

• Anticipated savings: 15% versus DB (which is in line with recent examples, such as the Evergreen Line DBF)

• Other, such as addition of lender due diligence; limiting scope change; and enhanced enforceability.

• Under DBF, satisfactory performance is incentivized as private partner receives no payment as a result of work that was incomplete.

• O&M funding should be addressed sooner, rather than later.

• Hawaii would benefit from P3 enabling legislation for future infrastructure projects.

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onolulu rail transit roject p3 viability...

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