Link: Los Angeles Business Journal
Clear Track for Rail Car Bids
By FRANCISCO VARA-ORTA - 11/16/2009
Los Angeles Business Journal Staff
The last-minute derailment of a $300 million pact between rail car manufacturer AnsaldoBreda and the county’s transportation agency was greeted as a big loss.
But, in fact, many are cheering the Oct. 30 collapse of the deal, which would have supplied 100 rail cars to Los Angeles County’s growing subway and light-rail network.
Los Angeles County Supervisor Michael Antonovich and other critics said they didn’t trust the Italian company to deliver cars on time, within budget and to specification. Moreover, they disliked relying on a proposed AnsaldoBreda rail car assembly plant to be the anchor of an ambitious clean tech manufacturing center planned for downtown Los Angeles. Now, they can start fresh.
“We knew the emperor had no clothes, but Los Angeles city insiders and special interests attempted to ram through a substandard outfit, creating costly delays in the MTA’s ability to seek a legitimate firm to build rail cars,” said Antonovich, a board member of the Los Angeles County Metropolitan Transportation Authority.
“AnsaldoBreda’s failure is a significant victory for county taxpayers as the MTA is now obligated to secure a cost-effective contract with a reputable company who will build quality rail cars, on budget and on time,” he added.
With less than 12 hours left before the Oct. 30 midnight deadline, AnsaldoBreda walked away from its deal to manufacture the cars after failing to agree to penalties for late delivery. Leaving with it was the company’s promise to build those cars in a $70 million plant with 650 workers in the proposed clean tech redevelopment zone.
However, the MTA is preparing to release a bid for proposals for at least 100 new rail cars within two months. And rail car makers such as Germany’s Siemens and Canada’s Bombardier that already have rail cars and small service operations in Los Angeles have expressed interest.
“Los Angeles is definitely already a great market that’s only going to become more alluring to us with all these projects,” said Talal Zouaoui, a spokesman for Montreal-based Bombardier. “We will review the next request for proposals and wouldn’t rule out anything at this point, including setting up more operations such as a plant if it makes business sense for us.”
The companies have good reason to be interested. Los Angeles County is expected to be a hot market for rail cars thanks to the passage of Measure R, a half-cent sales tax that will pay for its expanding rail network over the next 30 years – and likely additional contracts.
Meanwhile, the city’s Community Redevelopment Agency is looking into inquiries from about 20 companies expressing interest in establishing a plant at the clean tech site, including one major sustainable energy company agency officials declined to name, said Len Betz, the agency’s project manager.
Greg Freeman, author of an economic impact report on AnsaldoBreda’s proposed plant and vice president of economic and policy consulting at the Los Angeles County Economic Development Corp., said officials shouldn’t be devastated.
“Los Angeles still is the nation’s largest manufacturing sector, with a lot of diverse skilled workers capable of bringing another manufacturing company or even another rail manufacturer,” Freeman said. “It’s not like no one wants to come here and this was our only chance.”
Political cost
Still, the collapse of the yearlong deal comes at a political and economic cost for its supporters.
Los Angeles Mayor Antonio Villaraigosa spent political capital lobbying for the contract with the assistance of labor, which would have been able to organize the plant’s workers. His efforts helped delay a final vote on the deal at least five times this year amid MTA staff concerns over AnsaldoBreda’s performance.
Much was at stake. Freeman’s LAEDC report estimated AnsaldoBreda’s plant would generate $369 million in economic activity annually, including 2,240 full-time jobs in Los Angeles County with annual earnings of $91.1 million.
“It’s a total disappointment,” said Richard Katz, who serves on the MTA board and is a liaison to Villaraigosa’s office. “But it’s really their loss, as we know we are becoming the nation’s leading rail market with half-a-dozen rail projects coming on line in the next decade.”
However, MTA management became disillusioned with AnsaldoBreda, which in 2003 was awarded a $159 million contract to deliver 50 light-rail cars by May 2007. Thus far, more than two years after the deadline, the company has delivered a total of 27, but each is 6,000 pounds more than the MTA weight limit, incompatible with other cars, and cannot run on the Green and Blue lines, said MTA spokesman Marc Littman.
“All rail car manufacturers have problems and experience delays as these cars aren’t products that you just go to a showroom and pull off the shelf because they are custom made,” Littman said. “But we’ve never seen delays like this though.”
As part of that original deal, the MTA had the option of ordering 100 additional rail cars, which the agency now needs to complete various projects. But earlier this year, MTA staff, including former Chief Executive Roger Snoble and successor Art Leahy, recommended putting the order for more cars out to bid.
However, AnsaldoBreda struck back, gradually sweetening the deal by offering to build an energy-efficient green factory at the downtown manufacturing complex, pay unionized workers top wages and have a money-back guarantee in the form of a $300 million performance bond if it failed to deliver up to MTA’s specifications.
That got the support of Villaraigosa, the Los Angeles County Federation of Labor, the AFL-CIO and environmentalists, with the board bowing to pressure and setting the Oct. 30 deadline. But just hours before the deadline, AnsaldoBreda officials refused to sign the deal. According to a Nov. 3 letter sent by company Chief Executive Salvatore Bianconi to Leahy, the final draft of the agreement included a clause that would require the company to pay “unlimited additional liquidated damages” if it failed to deliver on time, which he said the company was forbidden to agree to under Italian law.
Littman, however, said AnsaldoBreda wanted a 10-month limit on penalties that would be about $5,000 a day per car that is late. Littman said that would come out to a maximum of $13 million to $15 million and undermine the $300 million guarantee.
“So now we are all on to Plan B,” Littman said.
Riding on Plan B
Back in June, the MTA, at Antonovich’s request, unanimously passed a motion to start preparing a new bid for rail cars just in case the AnsaldoBreda deal fell through. Now, that’s scheduled to be released right after Jan. 1.
“We know there is significant interest in going after that contract, but these manufacturers didn’t take it seriously because they thought AnsaldoBreda had it locked up,” said Michael Cano, Antonovich’s transportation deputy. “Now we can try to get a better deal and maybe a better tenant at the clean tech center.”
The 20-acre CleanTech Manufacturing Center, at Santa Fe Avenue and 15th Street, just south of the Santa Monica (10) Freeway, would form the anchor of a planned four-mile-long, 2,236-acre manufacturing corridor running all the way to Alameda Street. AnsaldoBreda was supposed to open up its plant in 2011.
Project manager Betz said that the agency is looking for a major tenant or smaller tenants that meet the same requirements to which AnsaldoBreda agreed. They include producing an environmentally responsible product such as renewable energy, recycling or clean transportation. The plant also would have to be energy efficient and nonpolluting with workers receiving good pay.
Freeman said that the MTA could still demand that the signee of the next rail car contract has to bring jobs to the county, either through opening a plant or service center, or using local suppliers. However, MTA officials believe that could alienate some manufacturers from bidding on the L.A. market.
Moreover, he noted that such a requirement could violate federal law, which prohibits transportation agencies using federal funds from giving special consideration in a competitive bid process to companies offering local incentives, such as job creation. The idea is that federal funds should be used to most efficiently get the best transit deals.
The MTA is expected to decide Dec. 10 what funding sources for the rail pact it will seek at its next meeting. Littman said the issue may ultimately mean the clean tech center and the rail contract are permanently separated.
“While the new rail car contract and manufacturing center have been tied together most of this year under the AnsaldoBreda proposal, the two now are separate matters,” Littman said. “But we’re moving forward and now all parties have more freedom to see what makes the best sense.”
Los Angeles Business Journal, Copyright © 2009, All Rights Reserved.
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