HART cule nnuosese HONOLULU AUTHORITY = RAPID TRANSPORTATION Andrew s. Robbins [EXECUTIVE DIRECTOR AND CEO David. Uchiyama ‘DEPUTY EXECUTIVE DIRECTOR AND COO November 13, 2019 Tobias Marya The Honorable Kirk Caldwell oan Mayor Terrence Mee City and County of Honolulu ae 530 South King Street, Room 300 ‘Mele hun Bunngraber Honolulu, Hawaii 96813 Jade Butay Jon Henry Fes Wes Frystack Dear Mayor Caldwell: ford Fuhigpn Thank you for your letter of October 28, 2019. As | explained to the media regarding — weierx mans the issue of an “Off-Ramp” for the P3 procurement, the context and concept of an Sym Merny “off-ramp” has changed (but was not eliminated) from when this was first discussed Stuy sonsrews prior to the decision to proceed with a P3 procurement for the City Center Guideway & omth 2 Stations, Pearl Highlands Garage & Transit Center, and Operations & Maintenance contract. At that time, we did not know if we would have interested bidders in the combination of design, build, finance, operate and maintain. Therefore, it made sense to discuss the concept of starting a P3 process which begins with the qualifications stage, and having an “off-ramp” to move out of P3 and into a “Design-Build (DB)” or other procurement method. At this point in time, we have P3 bidders qualified and actively engaged in preparing proposals and spending considerable sums of money at their own risk in doing so. Our primary task now is to ensure as best as possible that we receive bids that are within the affordability limits set by HART and the City. With this, the concept of an “off-ramp” has evolved primarily into one of ensuring affordability. | should also point out underlying every “P3” procurement is “DB.” DB is the contracting method embedded in the P3 process, which more specifically is expressed as “Design-Build-Finance- Operate-Maintain (DBFOM.) So for the Honolulu Rail Project, our P3 is inclusive of DB contracting, Bidders have also raised concerns in the past about the discussion of an “off-ramp” whereby the concept was misinterpreted as one that could lead to canceling the procurement altogether. Both HART and the City, under our joint procurement, have since assured bidders that there is no intent ‘to cancel the procurement, and instead, that the discussion was mainly aimed at ensuring affordability. Having listened, however, to your concerns as expressed in your letter, and those expressed through media channels, HART has in response, published the attached to discuss the issue of the “Project Contingency Plan” related to the P3 procurement. CITY AND COUNTY OF HONOLULU, All Pace, Suite 1700, 1099 Alakea Street, Honolulu, Hawaii 96823 Phone: (808)7686159 Fax: (608)7685110 www. honclultranst orgThe Honorable Kirk Caldwell, Mayor Page 2 November 13, 2019 | sincerely hope this addresses the concerns expressed in your letter. | appreciate your assurance that the City looks forward to working toward a successful conclusion to the P3 procurement process. Very truly yours, Ljer—— S. Robbins Execittive Director and CEO Attachment cc: HART Board of Directors City Council Members Mr. Roy K. Amemiya, Jr., Managing Director Mr. Rick Keene, Managing Director's OfficeLa 1.2 P3 PROJECT PROCUREMENT CONTINGENCY PLAN INTRODUCTION Background ‘As explained in recent Honolulu Authority for Rapid Transportation ("HART") Board meetings and to media outlets, the concept of an “off-ramp” from the P3 project, procurement to an alternate project procurement method such as Design-Build ("DB"), has evolved from when first discussed prior to the approval to proceed with a P3 procurement. At that time, it was not known if teams of bidders would be interested in bidding on a P3 procurement for the City Center Guideway and Stations ("CGS"), and operations and ‘maintenance of the full alignment of the Honolulu Rail Transit Project ("HRTP") and thereby taking on the combined responsibilities of design, build, finance, operate and maintain. The P3 procurement process has proceeded since this time with multiple bidders actively engaged on the procurement. Therefore, the context of an “off-ramp" has changed to focus ‘on contingency planning in the event that no bids are received or the bids received are outside the affordability limits set out by HART and the City. These risks are not unique to the P3 process. This Plan is being provided in response to the Mayor's letter of October 28, 2019 and does rnot imply and is not intended to Imply, any Intent to cancel the P3 procurement, which actively continues. In response to the Mayor's letter of October 28, 2019, and in weighing the risk of exposing certain contingency plans to bidders, HART has set out in Section 2 of this Plan a summary of the contingency plans that may be utilized in the event that no proposals are received for the procurement of the design, construction and financing of the City Center Guideway and Stations segment and the operation and maintenance of the full alignment of the HRTP on a P3 basis (the "P3 Project") In Section 3 of this Plan, we summarize mitigating measures that may be employed to address affordability of proposals. Current Status Following completion of the Request for Proposals Part 1 (often referred to as a "Request for Qualifications", or "RFQ") stage of the procurement for the P3 Project, HART and the City (collectively, the "City Parties") shortlisted Priority-Listed Offerors to proceed to the Request for Proposals Part 2 ("RFP") stage of the procurement. Since the launch of the RFP on May 3, 2019, the Priority-Listed Offerors have been actively engaged in the RFP process. Much due diligence has been conducted and project understanding has advanced rapidly in the carrying out of the P3 procurement process, and both HART and the City have greatly Increased thelr operational readiness for the P3 Project. Through this period of active engagement with the Priority-Listed Offerors, the City Parties have developed a good understanding of the challenges facing the Priority-Listed Offerors, not just on this P3 Project, but also more widely within the fixed price design and construction market in the US and globally. In particular, recent media reports highlight significant shift in the mindset of North American heavy civil contractors engaged in fixed-price "mega-projects* such as the HRTP, with some firms considering either scaling back or exiting the space entirely. These market challenges apply to both DB and P3 procurements. The City Parties remain focused on mitigations to address these challenges to ensure a successful procurement for the HRTP P3 Project.3a CONTINGENCY PLAN If no proposals are received or all the Priority-Listed Offerors withdraw from the procurement process, then the design-bulld-operate-maintain ("DBOM") contract with Hitachi Rail Honolulu Joint Venture ("HRH3V") would continue in place for the purposes of the installation of the systems. The remaining design and construction elements could be procured on a DB basis either as a single package or multiple packages (i there are a lack of contractors willing to wrap the design-build work due to market conditions). The pool of contractors that would be capable of doing such work is small and will be aware of this project and it is likely that one or more design-build contractors currently working in an active P3 consortium would be among the pool of interested bidders. As a result, the relevant contractors would already be familiar with the requirements of the HRTP. Further, the technical requirements would have already benefited from due diligence and optimization through the P3 Project procurement process and the City Center utility relocation (“CCUR") works and enabling works would have already been identified and planned for. For all of the reasons noted, HART could quickly move to an alternative procurement on a DB basis and could manage such procurement efficiently to reduce the delay impact of a ‘new procurement, although the risks retained by the City Parties (particularly with respect. to Interface and integration) would be higher. HART notes that affordability and other challenges will remain under a DB procurement and would continue to need to be addressed as set out under section 3. Additionally, the City will have to pursue operations and ‘maintenance that is outside the scope of the DBOM independently. period of up to 12 months (based on bidders likely already familiar with the project) Is estimated to be required to re-start and complete a DB procurement and issue a notice to proceed. Given the schedule contingency being carried by HART and assuming a re-start of procurement promptly after the date for proposal submission for the P3 Project has passed, it is not anticipated that such an event will delay the commencement of full revenue service by December 2025. (Other options considered as part of HART's contingency planning include procurement on a design-bulld-finance basis and design-build-finance-maintain basis, in each case with the BOM contract with HRHIV continuing in place. HART notes that affordability and other challenges will remain under these alternate options and would continue to need to be addressed as set out under section 3. MITIGATION STRATEGY ‘As a result of the ongoing successful Implementation of the mitigation strategies set out below, HART believes the P3 Project procurement will ultimately be successful Addressing Affordability Concerns A key procurement risk is that the Priority-Listed Offerors submit to us, either during the procurement process or in their proposals, that the P3 Project cannot be implemented within the affordability limit defined for the capital and/or the operation and maintenance portions of the P3 Project. Affordability challenges raised by the Priority-Listed Offerors may be addressed (and are being addressed) by the City Parties prior to proposal submission (through addendum and approval of alternative technical concepts) and/or after proposal submission (by issuing a request for best and final offers) using the following means: (a) Reducing costs through schedule optimization: to the extent that the Priority- sted Offerors can define an accelerated construction schedule, this will reduce the cost of the design and construction work. Over the past months, HART has therefore been focused on optimizing the CCUR works and access dates for the Priority-Listed Offerors in order to allow the Priority-Listed Offerors the ability to base their proposals on an accelerated construction schedule. HART is also analyzing the32 33 () © @ Oy 0 feasibility of early completion incentives. Detailed sequencing and schedule discussions are planned with the Priority-Listed Offerors Identifying cost savings offered by alternative technical concepts: the RFP allows the Priority-Listed Offerors to submit alternative technical concepts. These alternative technical concepts enable the Priority-Listed Offerars to bring private sector innovation to reduce the overall cost of the P3 Project and allow for submission of proposals that fall within the affordability limits. ‘The City Parties will need to remain open to these alternative technical concepts to enable us to benefit from the cost savings that they may bring. Minimizing contingency pricing for risks transferred to the Developer: through the process of requests for clarification and discussions with the Priority- sted Offerors (currently underway), the City Parties are continuing to optimize the risk allocation under the project agreement by ensuring that the risks that are transferred to the Developer are those that can be managed and priced (or insured) by the Developer. This continual review and optimization of the risk allocation is, helping to address affordability challenges by minimizing the risk contingency pricing included in the proposals. Minimizing contingency pricing for risks retained by City Parties: the equity participants and third party financiers within P3 consortia typically do not assume @ 100% recovery on future claims for events entitling them to claim compensation or schedule or performance relief from the City Parties. These stakeholders assess risks retained by the procuring agency/ies and will price in contingency of thelr own for high value and high probability risk items. Affordability challenges can therefore be further addressed by reducing that contingency pricing by: (!) demonstrating to the Priority-Listed Offerors during the RFP process that the City Parties have put in place, or are putting in place, robust risk mitigation strategies to lower the Priority-Listed Offeror’s assessment of the probability of retained risks occurring; and/or (i) ensuring that the drafting of the contractual terms is sufficiently clear to lower thelr assessment of the probability of a failed claim. Reducing costs by minimizing any unnecessary “gold plating”: through the process of requests for clarification and discussions with the Priority-Listed Offerors currently underway the Clty Parties are ensuring and will ensure that the technical requirements do not include any unnecessary "gold-plating” requirements that add unnecessary cost without bringing value to the end-users of the HRTP. Reducing financing costs through the pursuit of a TIFIA loan: the sharp decline in US Treasury rates this year has further increased the potential for a TIFIA loan to reduce Developer private financing costs. Continuing efforts to apply for, and make a federal TIFIA loan available to the future successful Priority-Listed Offeror would provide the option to swap out any Developer bank or bond financing with a low TIFIA interest rate. This would likely Improve pricing affordability, or Possibly convert an otherwise non-affordable proposal into an affordable one. Only One Priority-Listed Offeror If only one proposal is received or all but one of the Priority-Listed Offerors withdraws, leaving only one Priority-Listed Offeror, then the City Parties are entitled to continue with the procurement of the P3 Project under HAR §3-122-59, with the sole Priority-Listed Offeror without the need to cancel and re-procure, Effective Procurement Strategy Procurement on a P3 basis remains the best solution available to the City Parties. Procurement on a design-bulld basis would not resolve potential affordability challenges norcurrent market challenges referred to in section 1.2. These would exist under a DB model also. To ensure a successful P3 Project procurement, the City Parties are currently focused on the following procurement activities, in addition to those outlined in section 3.1 above with respect to addressing the affordability challenges: (@) (b) © «@) Continued engagement with the Priority-Listed Offerors: to enable the Priority-Listed Offerors to do what they do best and bring private sector solutions to the P3 Project, we will continue to actively engage with the Priority-Listed Offerors. ‘This includes meetings with senior executives of the Priority-Listed Offerors and meetings focused on the scheduling of the works; Well-managed procurement process: the City Parties will need to continue to ensure that requests for clarification are responded to in a timely manner and to Continue to remain open to suggestions from the private sector as to how the risk allocation, technical requirements and contractual terms can be optimized to offer the greatest value for money and enable submission of proposals that are within the affordability limits; HRHJV: the City Parties will continue to work closely with HRHJV to enable the relevant core systems scope elements to be brought into the P3 Project on a cost- efficient basis; and TIFIA: the City Parties will continue to work with the Bulld America Bureau to apply for a TIFIA loan allocation and make it available to the P3 Project to reduce financing costs.