Will $1 billion cover potential cost overruns on Honolulu's planned $5.4 billion commuter train?

That's what city officials have budgeted. If they're right, then the city's plan to be the general contractor on the project and hire guideway and station builders, buy vehicles and possibly operate the train could save money in the long run.

However, if history is any indication, there's a chance Honolulu's train could cost more than anticipated, and the city, not a general contractor, would have to absorb the extra cost.

Recently built rail systems, on average, experienced 40 percent cost overruns, according to an April 2008 report by the Federal Transit Administration.

Concerns that the project could go over budget have prompted some to urge the city to shift more project control and risk to private-sector partners willing to shoulder the burden if costs spiral. Such an arrangement could cost the city more money up front, but save money in the long run, if costs exceed expectations or ridership levels disappoint.

"They should at least entertain it as an option, and if it doesn't work out they can use another method," said City Council member Donovan Dela Cruz, a main proponent for such a public/private partnership. "At the very least (it would) prove to the taxpayer that what we're doing is actually the most fiscally responsible way to handle this. You want to make sure that the dependency on the taxpayer pocketbook is the last resort not the first resort."

Under current plans, the city will use a limited form of private partnership called design-build for the first 6.5-mile segment of the 20-mile train. That arrangement makes contractors responsible for designing a system that works. However, later construction contracts will be done under traditional design-bid-build arrangements, which puts design responsibility on the city.

"The main reason we're pushing right now for design-build for the first segment is to get the project out and under way in a timely manner, but as we move down to other segments we do want to move toward design-bid-build on a lot of the projects because we'll have more time to actually finalize the design," said city transportation Director Wayne Yoshioka during a recent public hearing.

Yoshioka added that current plans to break up guideway construction, station construction, vehicle purchasing and operations contracts will allow the city to keep a tight rein on companies working on the massive public works project. That should allow the city to stick to an ambitious timetable that could allow the first trains to start rolling by 2014.

It also will allow more, small local businesses to participate in the project, Yoshioka said.

"We're trying to maximize the involvement locally, so that's one of the ways we think we can achieve that," he said.

CITY ON THE HOOK

If things don't go as planned, the city will be on the hook for any construction and operating cost overruns exceeding $1 billion on the East Kapolei-to-Ala Moana elevated train.

Dela Cruz suggests the city enter into partnership with a private developer that would design, build, operate and maintain the elevated commuter rail. That one big contract could allow the city to fix system costs early, while placing the risk of cost overruns and delays on the contractor. Such risk-sharing would provide incentives to reduce costs, improve quality and decrease project construction costs.

Public/private partnerships have been used on numerous large public works projects on the Mainland. Driven in part by a lack of federal highway funds, public/private partnerships typically are used on highway projects where private partners can benefit from future tollway revenues. However, such partnerships are increasingly used on public transit projects such as trains.

For example, the eight-mile JFK Airtrain, which connects New York's John F. Kennedy International Airport to subway and commuter trains, was built under a design, build, operate and maintain contract. A major portion of New Jersey's $2.2 billion Hudson-Bergen Light Rail also was built under a similar arrangement. According to a 2007 Congressional report by the Federal Transit Administration, the Hudson-Bergen Light Rail project was completed one to two years ahead of schedule because of the use of a design, build, operate and maintain arrangement.

Overall, per-project cost savings ranged from $1 million to $38 million compared with estimates based on the design-bid-build approach to project delivery, according to the FTA study.

"As one project sponsor observed, under a design-bid-build approach contractors would sit back and leave it to the sponsor to resolve design problems," the report stated. "On the other hand, with design-build, the contractor team members must implement what they themselves design, and will come to the plate much faster to make sure the design works than under design-bid-build."

While partnering with the private sector could save money in the long term, the upfront costs likely would be higher, said Joe Uno, president of Honolulu engineering consultant J. Uno Associates.

"If you want to shift the risk to the design, build, operate and manage (approach), then you have to pay for that risk up front," he said. "On design-bid-build (projects) you keep the risk, but the risk might cost you money later because you run into bones on the way or because your ridership isn't as high as you projected."

There's also the risk that the city may not be abe to find a private partner or that private parties may find the projected cost of Honolulu's project unrealistic, said Robert Poole, director of transportation studies for the Los Angeles-based libertarian think tank the Reason Foundation.

FAULTY ESTIMATES?

Critics of Honolulu's planned commuter rail contend the city deliberately underestimates the costs of the planned commuter train to build and maintain public support for the project. City officials contend that estimated project costs are conservative and adhere to strict federal guidelines.

A private partner could provide a litmus test on whether current project costs are in line with reality, Poole said.

"That would be politically embarrassing if they couldn't get a design-build or a design, build, operate, maintain firm to commit to the typical fixed price for things like this except for a price that's much higher than the current estimates," he said. "The area where you hope to gain the most from design-build or design, build, operate, maintain is precisely the area where the risks of the overruns and schedule delays are the highest and that's rail transit."

Poole cautioned that partnering with the private sector also could lead to project delays if private sector partners encounter financial or legal problems.

Panos Prevedouros, a University of Hawai'i engineering professor, doubted that a public/private partnership would work for Honolulu's train. That's because political support for the projects has wavered. For example, in the current legislative session, state lawmakers are considering temporarily diverting tax revenues needed to build the train to help cover budget shortfalls.

"Every year they introduce bills to take that money away, so this is a very unsettled environment," Prevedouros said. "This is a very dicey project, so I don't think the private interests will approach it kindly. The project has to be highly desirable, therefore the possibility of politicians or the public actively opposing it are minimized. Then the private-sector banks, contractors and whatever are happy to participate."