The poor relations between the Israeli government and the Jerusalem municipality on the one hand and the private developers who built the first light rail in Israel on the other have cost Jerusalem residents prolonged delays in an essential public transportation project, and have put tens of millions of shekels into the hands of the lawyers hired by both sides. Now that the state is about to go ahead with more light rail lines in Jerusalem, the Greater Tel Aviv metropolitan area, and the north, the Ministry of Finance is promising that the lessons have been learned, and that this outrageous dynamic will not repeat itself with the next light railway lines.
Ministry of Finance Accountant General Rony Hizkiyahu decided last week to terminate the negotiations between the state and CityPass, the operators of the Jerusalem light rail, on the extension of the Red Line, which has been operating in Jerusalem since 2011. After agreements were reached on the matter before the last Passover holiday, the state's representatives asserted that the CityPass group had revoked the understandings and wanted to reopen the discussions. The Red Line's extension was then made part of the tender for building the Jerusalem light rail Green Line, the value of which is now nearing NIS 10 billion.
French company Alstom, which was to have supplied and maintained the additional trains, has lost an estimated €1 billion over 20 years as a result of this decision, while CityPass's loss is a relatively minor NIS 110 million. The loss for Jerusalem residents will take the form of another delay, this one of 6-12 months (according to the Ministry of Finance) or 3-4 years (according to the developers), in the completion of the extensions.
NIS 50 million on lawyers
The extensions of the Red Line were designed to connect the Hadassah Ein Kerem medical center, the Hebrew University Givat Ram campus, and important Jerusalem neighborhoods to the only light rail line currently operating in the city. The 13.7-kilometer central section of the line is regarded as a great success, carrying a daily average of 140,000 passengers. The planned 7.5-kilometer extension is designed to increase the daily number of light railway trips by 90,000, thereby reducing the number of vehicles on the capital city's crowded roads.
CityPass's franchise for the central section gave it an excellent bargaining position in the negotiations with the state for the extension of the line, while the parties have been in an arbitration proceeding involving counter claims between the parties amounting to nearly NIS 2 billion. The cumulative cost of the lawyers hired by the developers is estimated at a minimum of NIS 50 million. A source linked to one of the parties in the arbitration, however, told "Globes" this week that he was convinced it would continue for many years, because the developers had created unrealistic expectations about the amounts they thought they would win.
A government source admitted that there was no possibility of preventing in advance lawsuits by the developers in the coming projects, saying, "The only way to ensure that there are no lawsuits is not to build projects. Infrastructure in a city center is a complicated thing, with water, electricity, cables, blockages - all of this creates friction.
"Incidentally, there are also changes in budget projects, with cost overruns and legal problems that inflate the costs of projects. If we want Israel to be an advanced country, there will be friction, but we're doing everything possible to disperse the risk in order to minimize the friction in the next projects."
The source added, however, that the risk of such lawsuits by a future franchise winner had been significantly reduced by the lessons learned from the Red Line. The main change is a major enlargement in the infrastructure work that the state itself will carry out, instead of the private franchise holder. The franchise holder had difficulty obtaining permits from the municipality on time, and the many delays caused unending friction with residents. The state is also planning to take the demand risks on itself, in other words, to guarantee minimum revenue for the franchise holder, as was done with Highway 431, for example.
There is also an opportunity for the franchise holders to draw conclusions. For example, Ashtrom, which was a partner in the franchise winner and in the engineering, procurement, and construction (EPC) contractor for the railway, reported a NIS 250 million loss on the construction work. Relations between the various concerns making up the original franchise holder deteriorated over the years. The fact that Alstom is not joining forces with CityPass in the tender for construction of the Green Line is being interpreted by the market as evidence of tension between them.
CityPass: Damage to a successful project
CityPass stated, "The Ministries of Finance and Transport are everywhere portraying the light rail as a dazzling success. The project is also being presented overseas as their pet project, under the heading, 'Join the Success.' The Ministry of Finance's policy, which has one main consequence - serious damage to this successful project - is therefore unclear to us.
"Parties in the Ministry of Finance misled us for a long time, and created an illusion over months of negotiations aimed solely at preventing the signing of an agreement. The Jerusalem public will pay the heavy price of the policy by these parties in the Ministry of Finance, because the extension of the lines will be delayed by several years. It would have been better had the Ministry of Finance considered its outrageous behavior towards developers and investors from the private sector, including, among other things, failure to honor agreements that the Ministry of Finance itself had drawn up and signed."
Published by Globes [online], Israel Business News - www.globes-online.com - on July 5, 2017
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