The U.S. Department of Transportation's Maritime Administration wanted assurances from the state that no environmental assessment be required for harbor improvements for Hawai'i Superferry because delays to harbor access could put its loan guarantees at risk.

The federal government added the condition to $140 million in loan guarantees in January 2005 because Superferry was a new operation that depended on $40 million in state harbor improvements. The federal government, which had suffered heavy financial losses when other shipbuilding projects failed, wanted confirmation that the harbor work would be completed and that no environmental issues were outstanding.

But far from smoothing the way for Superferry, the state's exemption of an environmental assessment led to a state Supreme Court challenge that has thrown the project's future into doubt.

Several environmentalists said the Maritime Administration, the state and Superferry executives should have anticipated there might be legal challenges. Environmentalists claim it was an unnecessary risk not to conduct an environmental assessment at the outset.

"All the way through, it was clear that this was a concern and that we believed that an environmental review was the minimum," said Jeff Mikulina, the director of the Sierra Club's Hawai'i chapter. "It's really unfortunate that here we are, years later, right on the verge of operations, and now they are forced to do it."

Others said it is understandable the federal government might want assurances from the state but that it was Superferry that agreed to the conditions of the loan guarantees.

"At the end of the day, there are very few entities in this whole sorry mess that end up looking good, with the exception of the people who ultimately challenged it when they raised these issues way back," said John Harrison, the former coordinator of the University of Hawai'i-Manoa Environmental Center. "There was not a question that these were issues."

The Maritime Administration, in a written reply to Advertiser questions yesterday, outlined the reasons for its loan-guarantee condition.

"It was determined that because this was a new ferry operation, and significant infrastructure work had to be performed in order for the ferries to operate, the Maritime Administration needed to be assured that prior to issuing any loan guarantee, that the ports would be available for ferry operations," the Maritime Administration said.

The Advertiser reported on Sunday that the state Department of Transportation was aware of this condition when it ruled in February 2005 that the harbor improvements were exempt from an environmental assessment.

STATE'S DECISION

The decision whether to require an environmental assessment was entirely up to the state, but Superferry executives had told the state that an environmental assessment would jeopardize the loan guarantees for the construction of the Alakai and a second ferry.

The state Supreme Court's ruling that an environmental assessment is necessary has put the Superferry project on hold, prompting warnings from Superferry chief executive officer John Garibaldi and the Maritime Administration's Sean Connaughton about the risks of default and the exposure to federal taxpayers.

The loan guarantees helped the Superferry finance ferry construction and are backed by the federal government, so the government would be responsible for paying $140 million of debt in the event of a default.

Connaughton, the administrator of the Maritime Administration, told the Maui Circuit Court in a declaration last week that the delay in ferry service "greatly increases the likelihood of a default whereby the United States government would be called upon to make good on its guarantee of the vessel financing."

INOUYE ON SIDELINE

U.S. Sen. Daniel K. Inouye, D-Hawai'i, who has been supportive of the loan-guarantee program in the past, did not take a position on the loan guarantees for Superferry and urged the Maritime Administration to follow its criteria, according to his staff.

Jennifer Goto-Sabas, Inouye's chief of staff in Honolulu, said the senator was influenced some by his experience with the failed "Project America," the largest loan guarantee ever approved by the Maritime Administration.

The guarantee involved American Classic Voyages, which had been operating interisland cruises in Hawai'i and had a contract to build two new cruise ships at a Mississippi shipyard as part of "Project America."

But American Classic went bankrupt after the Sept. 11, 2001, terrorist attacks, defaulting on the loans and costing the federal government $187 million.

The Maritime Administration had paid out $490 million to cover defaults over the previous several years, including $330 million linked to various American Classic projects. The Government Accountability Office and the inspector general for the U.S. Department of Transportation found that the Maritime Administration had failed to protect taxpayers from the losses.

CALLED A BOONDOGGLE

The GAO, the investigative arm of Congress, found that the Maritime Administration had waived its financial criteria on several of the loan guarantees and did not insist on safeguards.

At the time, U.S. Sen. John McCain, R-Ariz., described the American Classic loan guarantees as "one of the most incredible boondoggles in recent history."

Norwegian Cruise Line bought a hull and other leftover material from "Project America" and took it to a shipyard in Germany for use in its plans for interisland cruises in Hawai'i. Inouye and U.S. Rep. Neil Abercrombie, D-Hawai'i, obtained a federal exemption in 2003 that allowed Norwegian to use up to three foreign-built ships for cruises between the Islands instead of stopping first at a foreign port, as required for foreign ships under federal law.

Connaughton, of the Maritime Administration, told Congress in testimony in March that the administration has notably improved the management of the loan-guarantee program since the critical audits. He said the government has an outstanding portfolio of $2.9 billion in loan guarantees for vessels and shipyard modernization.

The loan guarantees are intended to help private companies obtain long-term financing.

Connaughton said the Maritime Administration has not asked for federal money for new loan guarantees since 2001, but Congress has provided money to help finance projects, including the Superferry.

Connaughton said the Maritime Administration no longer asks for federal money "because it believes this program is a form of corporate subsidy, and that shipowners and shipyards should rely on their own creditworthiness to obtain financing in the private sector.

"Further, the taxpayers should not bear the risk of default by private companies."

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.