PHOTO ILLUSTRATION BY KIP AOKI / KAOKI@STARBULLETIN.COM

A black eye for business

The Superferry shutdown will leave investors wary of future isle ventures, observers say

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Hawaii has just received a $300 million black eye to go along with its already battered reputation as a place to do business.

Venture capitalists here and on the mainland say the abrupt shutdown of the Hawaii Superferry by the courts and protesters will likely scare away potential investors.

Local government officials share the concerns.

"I can't imagine anyone who wants to invest hundreds of millions of dollars into Hawaii 's economy and to create new jobs and not look at this, shake their head and take their money somewhere else," says City Councilman Charles Djou.

But Superferry opponents say the lesson for business and the state is to not take shortcuts when it comes to the environment.

If the Lingle administration and the ferry's owners had paid attention to environmental concerns in the first place, they would not be in the middle of this swirling controversy, opponents contend.

Jonathan Ornstein -- who has generated his own share of controversy as the head of Mesa Air Group's new interisland airline go! -- says the Superferry shutdown sends the message that potential mainland investors "have to be cognizant of the concerns of the people you hope to service, and you have to work with all the parties who have an interest or a possible impact on your business."

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TOM FINNEGAN / TFINNEGAN@STARBULLETIN.COM About 50 people on bodyboards and surfboards and in canoes blocked the Superferry's entrance into Kauai's Nawiliwili Harbor on Monday.

Hawaii already is widely regarded as a tough place to do business, but the court actions and environmental protests that indefinitely shut down the Hawaii Superferry last week could chase away future investment in the state.

Local and mainland venture capitalists, as well as state officials, say the last-minute snafu on a $300 million project that was six years in the making is sending a negative message to the nation about Hawaii's ability to embrace new business.

"From an investment point of view, this is absolutely a black eye," said Rob Robinson, president of Hawaii Angels, a private investors group. "You have mainland investors and you have local investors all putting their money in on a good-faith basis, and then to have this thing stopped at the eleventh hour because of legal questions makes the environment for investing here look extremely unstable. This certainly is counter to the governor's attempts to create an innovation-based economy, and to develop our infrastructure and our economy."

On Aug. 23, days before the Superferry was to start service, the Hawaii Supreme Court ruled that the state must conduct an environmental assessment for the project. The Superferry rushed into service in spite of the ruling, but a Maui judge shut it down after two days by granting a temporary restraining order requested by environmentalists. On Kauai, meanwhile, protesters took to the water to stop the ship from docking there.

Service to both islands remains in limbo.

Tig Krekel, vice chairman of New York-based J.F. Lehman & Co., the majority investor of Hawaii Superferry, said he never expected this level of intensity when the investment firm put in the bulk of the Superferry's $92 million in equity investment.

"It's like putting a sign up that Hawaii is closed for new investment," said Krekel, who spends several months a year at his home on Maui. "It's an unfortunate, chilling message to any prospective investor in the Hawaii economy."

Peter Ziebelman, a venture capitalist for Palo Alto Venture Partners in Silicon Valley and a part-time Maui resident, said the state needs to review its procedures for attracting businesses.

"I think it's a wake-up call for the state to take a look at how it can help businesses service customers rather than create an unpredictable process that makes it much more difficult for early-stage companies," he said.

Ziebelman said Hawaii isn't unique in having a business climate and a political process that can "sometimes clash heads," but he added that from the mainland it doesn't look like a straightforward process.

"I think there's really two sides to it," Ziebelman said. "One, the people of Hawaii need a Superferry; they need an alternative to air transportation. So there is this unmet need.

"But at the same time, the ferry needs to address the concerns of the local population of each island, and startups need to be able to understand those concerns and create a process to address them over time."

Gov. Linda Lingle said at a tourism conference on Tuesday that the Superferry should not be singled out for an environmental assessment, and that she is concerned that the court's ruling could extend to other state harbor and airport improvements.

"This does hurt the visitor industry," she said. "It also hurts our reputation as a place to do business, to be treated fairly. In my opinion, the Superferry is not being treated fairly."

City Councilman Charles Djou said the Superferry situation could create problems, such as outside companies being less interested in bidding to build the city's mass transit system.

"Because of all the problems with the Superferry," Djou said, "it would raise some very serious concerns with outside companies as to how hostile Hawaii is to businesses in general. It might cause businesses to put in higher bids than they otherwise would in other jurisdictions."

Or, Djou said, businesses might ignore Hawaii altogether.

"I definitely think this whole circus related to the Superferry gives Hawaii a black eye and I definitely think it's bad for business," he said.

Bill Spencer, president of the Hawaii Venture Capital Association, said the shutdown of the Superferry sends a "terrible message" about investing in Hawaii and that many of the environmentalists "really don't have a clear grasp on the issue."

"This is something that is uniquely suited to Hawaii," Spencer said. "It meets an important need not just for families that want to visit other islands, but for small businesses and large businesses that want to use the ferry to transport goods between the islands.

"I think it would really hurt the niche farming community that could use this as an option to get products to restaurants and stores quickly and, economically, it not just shines a bad light on the climate for doing something innovative, but it really has a trickle-down effect for other businesses that would have convenient transportation for their business model."

John Garibaldi, president and CEO of the Superferry, said the company's investors are committed to Hawaii and seeing the Superferry succeed.

As far as what this means for future investments in Hawaii, Garibaldi said the shutdown creates "a very significant cloud."

"Future investors will have to look at Hawaii from a very, very concentrated basis to make sure it's right for them," he said.

Rob Parsons, a board member of Sierra Club Hawaii and the Maui Tomorrow Foundation, said the state and the Superferry have no one to blame but themselves.

"I'm for legal environmental review, and this is a case where there's so many things that don't add up that it just leaves you scratching your head that decisions could be made that would allow this to go ahead without abiding by Hawaii Revised Statutes," said Parsons, a former Maui County environmental coordinator under ex-Maui County Mayor Alan Arakawa.

"I think that, in itself, sets a very bad precedent -- that an operation of this size that obviously has impact throughout the island would escape legal environmental review."

In the end, it all may boil down to perception, said Emily Mendell, vice president of strategic affairs for the Arlington, Va.-based National Venture Capital Association.

"There's a big psychological component to investing, and something like this doesn't help the psychology of investment in Hawaii," she said. "That said, experienced investors should go into an opportunity knowing all of the risks of any venture. And it would appear that this would have been a risk that would have been apparent from the outset."

Web of blame surrounds stalled ferry

It should have been smooth sailing for the Hawaii Superferry.

With more than three years of planning, at least one court ruling in its favor, overwhelming support from the Lingle administration and a green light from the Legislature, the waters appeared calm for the planned Aug. 28 launch of the interisland service.

But now, as the massive, $85 million, 349-foot Alakai vessel idles in Honolulu Harbor unable to ferry passengers to Maui and Kauai -- by court order in one case, civil disorder in the other -- it's clear that the best-laid plans, in this case, went severely awry.

"It didn't have to be this way," said Sen. Gary Hooser (D, Kauai-Niihau).

So how did the Superferry become a superfiasco?

Finger-pointing began as quickly as word spread of the Supreme Court's Aug. 23 decision, ordering that the state perform an environmental assessment for the project.

Still to be decided is whether the ferry will be allowed to operate while the assessment is being done -- a proposal that could have been accomplished in the Legislature.

Environmental groups blame the state. The state says it did nothing wrong. Opponents blame the ferry's operators. Some ferry supporters fault the Supreme Court for disagreeing with a lower court's ruling. Politicians blame other politicians.

"I don't think anyone comes out of this one looking very good," said Neal Milner, a University of Hawaii political scientist who has been watching the ferry drama play out. "Maybe down the road they'll look better, but it doesn't look good now.

"It's not a good issue for anybody, and I assume the blame will go back and forth."

At the heart of the issue is $40 million appropriated by the state to upgrade state harbors for the use of the ferry.

The money was first requested by Gov. Linda Lingle and set aside in the 2005 budget approved by the Legislature, but not before some wrangling over the source of funds being general obligation bonds or reimbursable bonds. Reimbursable bonds, which require the company to repay the debt, ultimately were chosen.

Senate lawmakers threatened to withhold the money, but Superferry officials warned that without the funding, the project would probably sink, and funding was restored. Also that session, a Senate proposal calling for an environmental impact statement of the ferry project passed one committee before it was held in the Transportation and Government Affairs Committee, chaired at the time by Sen. Lorraine Inouye (D, Hilo-Honokaa).

Later in 2005, the Department of Transportation began work on the harbor upgrades, prompting the lawsuit filed by Maui Tomorrow, the Sierra Club and Kahului Harbor Coalition seeking an environmental assessment or impact statement.

The state contends that the harbor work simply extended existing facilities -- an action exempt from the requirement of an environmental study. State officials also argue that no other ship is being required to do an environmental study.

Maui Circuit Judge Joseph Cardoza ruled that the groups lacked standing to challenge the project. (The groups' appeal of that ruling led to the recent order by the Supreme Court.)

Debate over the ferry was not as loud at the Legislature during the 2006 session -- the $40 million was left in place -- as opposition to the project grew at the community level . The Legislature did pass a Senate proposal requiring the Department of Transportation to hold statewide public meetings on the ferry project.

The ferry became a 2006 campaign issue as Democratic gubernatorial challenger Randy Iwase joined a chorus of protesters calling for a halt to the project until an environmental impact statement was done.

With concern mounting on neighbor islands and county councils passing resolutions calling for more environmental study, the issue was taken up again by lawmakers in the 2007 session. Led by the three-member Maui delegation, the Senate introduced a proposal calling for an environmental impact statement before the project continued.

What ultimately passed out of the chamber was a watered-down version of the bill that called for an environmental assessment to be performed while the Superferry conducted its business.

Though first hailed as a compromise, ferry officials described it as problematic, adding that the language would have prevented the service from starting as planned.

Senate Bill 1276 was passed 21-4 by the Senate but died after never getting heard in committee by the House, where it was referred to the Transportation Committee headed by staunch ferry supporter Rep. Joe Souki (D, Waihee-Wailuku).

If there was a point where everything went wrong, to critics of the Superferry and the Lingle administration, this was it.

"We offered them a compromise which would not have impeded their business and would not have had them pay for it," Hooser said. "And the DOT rejected it. The Superferry rejected it, and consequently the House did, too."

Jon Van Dyke, a law professor at the University of Hawaii's Richardson School of Law and a faculty member of its Environmental Law Program, had testified in support of the Senate proposal and said he was surprised by the House's position.

"I think there was an attempt to try to find a compromise, but then the House killed the whole bill ... so that's why we are where we are," Van Dyke said. "The Senate worked hard on it and debated it and came up with something I thought everyone could live with, so I was surprised that the House deep-sixed it."

Souki, who has supported the ferry and said he believes his constituents also support the project, called it disingenuous for opponents to say they are simply looking out for the environment.

"Those who are opposed to the ferry and the initiators of the EIS (proposal) just want to kill the ferry," he said. "They're opposed to the ferry, they want to sink the ferry and there's no ifs, ands or buts.

"This (court action) just may do it, I don't know."

While Souki has taken much of the criticism for bottling up the measure, the House leadership had supported his decision.

"The House's position all along has been one of providing additional options for the consumers of our state," said House Majority Leader Kirk Caldwell (D, Manoa). "I think our concern was trying to provide forms of alternatives and try to help our economy."

Lingle has strongly defended the work of her administration and new Transportation Director Barry Fukunaga, who assumed the post this year after previously heading the department's Harbors Division.

She also said lawmakers who are criticizing her administration had ample time to pull the plug. "We were clear in saying an environmental assessment was not needed," Lingle said. "We told the Legislature that and during Barry Fukunaga's confirmation proceedings this came up.

"He was very clear on his position and they confirmed him anyway."

Lingle also cited two other instances in which Democrats, who outnumber Republicans 4 to 1 in both chambers, could have required more environmental work. "The Legislature had two big bites at the apple here," she said.

The most recent opportunity was the proposal in SB 1276 that was tabled by the House last session. But even before that, she said, lawmakers could have required more study.

"They could have not voted to allow us to have that $40 million," Lingle said. "They knew what we were going to do with it -- that we were going to make these harbors ready so that people would have a new way to get between the islands.

"It was up to the Legislature to fund it. They had a choice and they made a choice and we think it was the right choice."