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Bonding Metro

It wouldn’t be Metro if there weren’t drama.

Metro has not obtained performance or payment bonds to cover all the planned construction of four new light rail lines, and some officials say that could put taxpayer dollars at risk.

Metro President Frank Wilson said the transit agency has not made a final decision, but tentatively plans to use a different form of risk management, called parent guarantees, to make sure the four major companies fulfill their obligations and pay their subcontractors on the $1.46 billion contract.

The four companies are Parsons Transportation Group, Granite Construction Co., Kiewit Texas Construction L.P. and Stacy and Witbeck Inc. They have formed a joint venture known as “Houston Rapid Transit.”

Wilson’s announcement at a July board meeting aroused the concern of the national surety industry, which provides the bonds for construction projects by public agencies. Some local officials also questioned the decision.

Texas statute requires public agencies to obtain performance bonds on construction contracts larger than $100,000 and payment bonds on contracts larger than $25,000. Metro did use performance bonds during the construction of the Main Street rail line.

“By Metro not putting these bonds in place the taxpayer is potentially liable,” said Peter Brown, a Houston City Council member and mayoral candidate. “We do these for every major project at the city of Houston. Metro has been planning the light rail project for a long time, and if they needed to find protection for the taxpayers through another means they should have taken that up with the Legislature this past session.”

[…]

Wilson said that Metro was complying with the state law but had to explore a different method because performance bonds for a $1.46 billion contract would be too expensive and difficult to obtain. “We went out and got 100 percent performance bonds, just not in the traditional way,” he said. Bond underwriters object because they can’t get business from the contract, he said.

Wilson said that the contract ensures the four parent companies share “joint and several liability” for the proper building of the new light rail system. “They have pledged their corporate assets,” he added.

[…]

A parent guarantee is written into contract language, while a performance bond is issued by a regulated, third-party underwriter with deep pockets, said Peter Linzer, a University of Houston business law professor. Although a parent company involved in a joint venture may also have deep pockets, and may pledge to make good on any disputes or failures of subcontractors, there is still some risk it could go under.

“There is no doubt in my mind that a performance bond is not the same as a parent guarantee,” Linzer said.

I’m not a finance guy, so I’m not going to try to analyze this stuff. I get that the issue is the risk that the public could wind up on the hook in the event things go south. What I don’t see in this story, maybe because it’s not possible to accurately quantify at this point, is how big this risk is. Metro is claiming their way of doing this is less expensive, and that the tradeoff in increased risk is minimal. How valid are those claims? I don’t have a feel for that based on this story.

On a tangential note, Metro and the Medical Center have settled the lawsuit filed by the Med Center over stray current from the Main Street line. One less thing for Metro to have to deal with.

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One Comment

  1. Baby Snooks says:

    I guess we have a train that devours cities as well as a tower that devours subdivisions. Life in Houston.

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