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The Honolulu Advertiser
Posted on: Monday, December 31, 2001

Savvy developer wins federal money to wire homelands

By Kevin Dayton
Advertiser Capitol Bureau Chief

A local politically connected company is eligible for as much as $400 million in federal loans to weave fiber-optic cable through Hawaiian Home Lands on six islands, even though much of the land is undeveloped and lacks roads, water and electricity.

"People cannot accept what they look at. ... And instead of saying, 'Wow, he actually found a way to do it,' they say, 'Oh, he must be politically connected.' "

Al Hee, Founder of Sandwich Isles Communications Inc.

Advertiser library photo • Nov. 21, 2001

With the ability to draw on federal money rather than finding private investors to pay for the start-up, the project has the potential to be one of the most expansive high-tech ventures ever undertaken in Hawai'i.

At the center of the project is Al Hee, who has hired a number of people with significant Democratic political connections and experience, including former legislators and several people connected with Kamehameha Schools.

The foundation for Hee's Sandwich Isles Communications Inc. was laid in 1994, when the Hawaiian Homes Commission awarded him the exclusive right to provide telecommunications services on all Hawaiian Home Lands.

The exclusive license was approved without any competition or bidding after Hee's plan was evaluated for the department by former state Sen. Mike Crozier.

Crozier said he is friends with Hee and considers him "a genius," but that he evaluated the proposal fairly.

With contract in hand, Hee applied for and received low-interest federal loans from the U.S. Department of Agriculture under a program designed to provide telecommunications services to sparsely populated rural communities that wouldn't otherwise get fiber-optic cable.

While Hee acknowledges that he moves easily in the world of Hawai'i politics, he said it would be wrong to assume he enjoys any special consideration, or that his company isn't fulfilling its mission to serve rural, mostly poor communities. He said he simply saw an opportunity to use a federal program to give the HawaiianHomes program a badly needed boost while also making money.

Hee said labeling him "politically connected" overlooks the good he is doing for Hawaiians.

"This is a part of the difficulty of doing business, is that people cannot accept what they look at," Hee said. "And what they should be looking at is, what is Sandwich Isles about? Sandwich Isles is about serving HawaiianHome Lands. ... And instead of saying, 'Wow, he actually found a way to do it,' they say, 'Oh, he must be politically connected.' "

Yearly salary of $1

Hee said he sunk money from his other businesses into the company during five years of clearing regulatory hurdles, and is being paid a salary of $1 a year.

"If you think there's a sweetheart deal in here, please tell me where it is so I can go get it," he said.

Part of the reason Sandwich Isles Communications has attracted interest in Hawai'i political circles is that the company has ties to a variety of politicians and current or former executives involved with Kamehameha Schools, another politically influential local institution.

Al Hee said his brother Clayton, chairman of the board of trustees of the Office of HawaiianAffairs, is not involved in the project. Sandwich Isles did hire Clayton Hee's wife, Lynne Waters, to produce videos for presentations to business leaders, homesteaders and others on the company's operations.

Among the company's 22 employees are former Democratic House Majority Leader Tom Okamura and former state Rep. Devon Nekoba, who both carry the title of agency coordination officer. Hee said the two advise company executives on government policy matters.

Hee said Nekoba was hired because Okamura has been ill and needed assistance.

Ties to Kamehameha Schools, formerly known as the Bishop Estate, include Gil Tam, the company's vice president of government and community relations, formerly director of administration and interim chief executive officer for Bishop Estate; and Robert Kihune, chief executive officer, now a Kamehameha Schools trustee.

The Hawaiian Homes Commission chairwoman in 1994, when the commission approved Hee's license, was Hoaliku Drake, the mother of former Bishop Estate trustee Henry Peters. Clayton Hee is a friend of Peters and was hired as a cultural affairs researcher for the Royal Hawaiian Shopping Center, a subsidiary of the former Bishop Estate/Kamehamaha Schools.

The new fiber-optic network Hee is building may not be profitable by itself, but it qualifies for ongoing subsidies from the Federal Communications Commission. In effect, the FCC will cover the operating costs of the network and pay Sandwich Isles a profit based on the value of the telecommunications equipment installed, Hee said.

With federal subsidies through the FCC's Universal Service Fund, Hee said Sandwich Isles would "probably not" be hurt from a business perspective, even if the network were not heavily used.

Sandwich Isles already has borrowed $40 million from the federal government to begin construction of the new network, including wiring subdivisions on Maui, the Big Island, Moloka'i and O'ahu. The company was recently cleared to borrow another $126 million.

New possibilities

Hee said he plans to borrow more than $400 million from the federal Rural Utilities Service to build what will eventually be a $500 million interisland fiber-optic network. He expects private money will be invested eventually, but no outside investors have been found so far.

Ray Soon, chairman of the Hawaiian Homes Commission, said the project offers new opportunities for Native Hawaiians to plug into the information age, providing them with vast new educational and business possibilities.

No one in Hawai'i was able to tap the Rural Utilities Service loans before, and Soon said Sandwich Isles will provide Hawaiian Home Lands with a better telecommunications system than it would have had otherwise.

Some Hawaiian Home lands are still served by telephone party lines. The federal money makes it possible to string fiber-optic wiring in areas that might never get it because of the high overhead and small dispersed population, according to Hee and Soon.

"Take an area like Ka'u: You can't bring high-volume capacity down to Ka'u and get it amortized with the number of residents down there," said Soon. "It's not going to happen."

Hawaiian Home Lands are tracts available at low cost to Native Hawaiians for businesses and homes. Because many are in remote rural areas, one of the greatest obstacles to developing land for Hawaiians has been the cost of infrastructure, such as roads, sewers, power and telephone lines.

Hee has promised to solve part of that problem by using the federal money to install the latest generation underground fiber-optic telecommunications network, wiring all 69 parcels of Hawaiian Home Lands, a total of 200,000 acres.

Crozier, who evaluated Al Hee's proposal as administrator of the land management division of the Department of Hawaiian Home Lands, said he knew Clayton Hee from their time in the state House together, and met Al Hee when he lobbied lawmakers for help financing a electrical generation project in Hilo.

"I would like to consider him a friend. I think he's a very honorable man," Crozier said.

Crozier said he "did the due diligence" and scrutinized Hee's proposal, then recommended the commission approve it. The commission agreed, and voted unanimously to grant Hee an exclusive license to provide telecommunications services on Hawaiian Home Lands.

Unparalleled case

The license was awarded under a section of the Hawaiian Homes Commission Act usually used to grant utilities what amount to easements, giving them access to install wires, pipes, poles or other equipment.

Francis Apoliona, spokesman for the Department of Hawaiian Home Lands, said that section of the act probably was not intended to grant monopolies to utilities, and the way the rule was used in this case is "unparalleled."

But until now, "I don't think anybody has ever come to the department to make that offer to us," Apoliona said.

There was no competitive process to decide who would get the license, but Hee points out the commission never has required utilities to compete for the right to provide services on Hawaiian Home Lands.

The scope of the investment Hee is planning is huge. He said it will cost $60 million to string undersea fiber-optic cable links between the islands. Environmental reports for the project indicate it will cost the company another $100 million to dig trenches and bury cable on the Big Island; $35 million to install cable on Oahu; $30 million on Maui, Moloka'i and Lana'i; and $10 million on Kaua'i.

When that money is spent, Hee will have wired together all Hawaiian Home Lands and built the state's third interisland fiberoptic network.

Sandwich Isles is free to sell telecommunications services to non-Hawaiians, and some observers have speculated that may be how Hee plans to make money. But Hee said the system was designed as a rural service for Hawaiians, not as a telecom provider for the state.

"I designed my system to serve Hawaiian Home Lands, and if there's excess capacity, I'm more than happy to lease lines to Verizon or to Oceanic or to anybody else, because it improves the level of service for everybody," Hee said.

The planned system includes lines along Nimitz Highway and through downtown Honolulu, running from Nimitz Highway along Alakea Street to the Hawaiian Home Lands in Papakolea. It also runs through Waikiki in a configuration that may help Sandwich Isles market its services to customers far from Hawaiian Home Lands.

Hee's project is advancing at a time when similar privately financed businesses on the Mainland are struggling or collapsing because the demand for data transmission services hasn't been nearly as strong as experts predicted.

"In terms of the need for a third interisland fiber system, I think the answer is that only the market will tell," said David Lassner, director of information technology services at the University of Hawai'i. "In general, from a customer perspective, we like to see more competition."

Other industry observers are pessimistic that Sandwich Isles' enormous undertaking ever will lead to a profitable business independent of federal subsidies.

Tough prospect

Those analysts, who asked that their names not be used because they might want to do business with Sandwich Isles, said the company is spending astonishing sums to provide service to relatively few far-flung customers, which translates to high costs and low revenue.

Roberta Purcell, assistant administrator of the telecommunications program of the U.S. Department of Agriculture's Rural Utilities Service, confirmed that the federal government will be covering the cost of Sandwich Isles' operations in its early years.

"As, obviously, they take on more and more consumers, then that percentage will shift," Purcell said. She estimated that 80 percent of the rural phone companies that receive loans from Rural Utilities Service need FCC subsidies to break even.

Sandwich Isles is predicting it will serve 20,000 lines by 2005, an ambitious goal considering the company now serves about 800 customers on several islands.

There are about 6,000 residential leases and 200 business leases on Hawaiian Home Lands now, but it isn't clear how much demand there will be for the telecommunication services Hee is offering.

Hee said he believes there is "pent-up demand" for such a system in Hawai'i, and that more people will want the services as they catch on to how to use it.

If Sandwich Isles gets serious about selling telecommunications services to non-Hawai'ians in the state's business centers, some analysts believe it will face fierce competition from Verizon and other telecom providers, including the media giant AOL-TimeWarner.

"They find uses for it," Hee said. "This glut that they talk about worldwide. Today, yes there's a glut, but you know what the glut does? The glut lowers prices and encourages people to find uses for it."

Reach Kevin Dayton at kdayton@honoluluadvertiser.com or 525-8070.