A bill sitting on Gov. David Ige’s desk and awaiting his signature aims to reform the state’s slow and cumbersome procurement process, in which protests by losing bidders help to stall new public roads, buildings and other much-needed infrastructure projects across the state.
But critics say the measure, Senate Bill 1329, goes too far, stripping away the necessary oversight of how public agencies award multi-million dollar contracts to private bidders and creating a situation in which backroom deals and corruption could more easily occur.
Specifically, they point to a provision that would remove a $10,000 cap on the bond that losing bidders in Hawaii pay if they want to appeal a protest decision. If Ige signs the bill into law, they would instead submit a bond worth 1% of the contract value, with no cap.
Bidders forfeit the bond if they lose their appeal. Lifting the cap would prevent most local firms from appealing decisions on the larger and more expensive contracts awarded by Hawaii’s public agencies, said Anna Oshiro, a local attorney who often handles procurement cases. It would make appeals prohibitively expensive, even when they have merit.
“That’s very concerning. It removes any realistic oversight of the decisions on protests on large projects,” said Oshiro, a director at the firm Damon Key Leong Kupchak Hastert. “The cost is just going to be too high.”
The more affordable bonds aren’t causing frivolous appeals to flood the system, nor are they causing Hawaii’s procurement delays, Oshiro said.
She pointed to Department of Commerce and Consumer Affairs records that show the agency’s hearing officers on average heard five procurement appeal cases annually over the past seven years. (The agency did hear 16 such appeals in 2012, according to those records.)
Instead, it’s often the state agencies’ own slow response in issuing a decision on the initial bid protests, before the appeals, that causes the delay, Oshiro said. SB 1329 also calls on public agencies to issue a decision within 75 days.
The state Department of Transportation has had to respond to at least 125 bid protests since 2012. The agency reported that only seven of those protests moved on to the appeals process, which is the step that triggers the bond requirement.
Nonetheless, the DOT strongly supports removing the bond cap. Those seven cases delayed projects worth hundreds of millions of dollars, according to the agency’s deputy director for highways, Ed Sniffen.
“I’m absolutely not against protests, and if we do something wrong in our specifications … we’re happy to correct them,” Sniffen said. “We just want to make sure that the projects, the funding and the improvements are not delayed based on baseless or frivolous claims.”
Earlier this month, however, a state judge sided with a company that challenged DOT on appeal for a road improvements contract valued at nearly $25 million. Without the bond cap, the appeal never would have happened, Oshiro said.
“You want to try to push along the process. I understand that,” she said, but making it more expensive to appeal “doesn’t address that at all.”
It’s an obscure provision but it could have big impacts on how major contracts are awarded across the state in the future, she added.
“It’s definitely going under people’s radar,” Oshiro said. “It’s potentially going to be a real problem and people aren’t going to realize it until their hands are tied.”
How to best keep bid protests from tying up progress on much-needed infrastructure improvements and other projects in Hawaii has been discussed “in tremendous detail” in recent years, local construction industry officials say.
Legislative leaders say they’re trying to balance the need to expedite the islands’ often slow and clunky procurement process with providing proper oversight and transparency.
“State procurement has just been a really difficult issue over many, many years,” said Rep. Sylvia Luke, who chairs the House’s prominent Finance Committee. It was among the last legislative committees to review SB 1329, and it’s where the language removing the cap on bond amounts was inserted.
“We basically took what the admin suggested,” Luke said, referring to the Ige administration. “In their mind, they thought this would resolve a significant number of protests.”
A coalition of 19 air carriers that provide service to Hawaii and whose fees fund local airport upgrades, came out in strong support to lift the bond cap and called bid protests “an impediment to state growth.”
“The ability to challenge an improperly awarded bid is an important tool, but not one that should be used arbitrarily or without risk to the entity challenging the award,” the Airlines Committee of Hawaii stated in testimony on a separate bill that had aimed to remove the cap.
Occasionally, Sniffen said, a company will protest a procurement that it didn’t even bid on. Protest-related delays to upgrading the islands’ roads, bridges, guardrails and other infrastructure has been a challenge – “and more so recently,” he said.
“Delays to those projects, it just impacts the system … and the money that we can put out in the economy.”
However, Oshiro pointed to a recent appeal in which a state judge found that state officials had violated procurement ethics laws, citing it as an illustration of why it’s important to keep bonds affordable.
If not for the $10,000 cap, the appeal never would have happened, she said.
Her client, Maui Kupono Builders, was initially awarded a nearly $25 million contract by the DOT to rebuild and repave nearly 10 miles of Kamehameha Highway near Wahiawa. However, the company saw its award reversed after a rival bidder, Grace Pacific, protested.
Court records show the dispute centered on whether Maui Kupono needed to list the trucking companies that would have transported materials as subcontractors.
Normally, the trucking companies are considered vendors in the procurement process, Oshiro said. Nonetheless, the issue raised by Grace Pacific prompted DOT to reverse the award to Maui Kupono.
Maui Kupono appealed, and the challenge advanced to the state’s First Circuit Court where Judge John Tonaki sided with Maui Kupono earlier this month.
In his decision, Tonaki said that DOT had violated state laws requiring “ethical public procurement” because its deputy director took a direct phone call from the president of Grace Pacific before the agency reversed its decision in that company’s favor.
“These events gave the impression of a behind-the-scenes nontransparent deal inuring to the clear benefit of Grace Pacific,” Tonaki wrote in his decision.
None of that would have come to light, however, if not for the appeal and Maui Kupono’s ability to afford the $10,000 bond, Oshiro said.
Without the cap, Maui Kupono would have had to provide a $250,000 bond on the $25 million contract — and there’s no way the company could do that, she said.
Sniffen said the DOT disagreed with Tonaki’s decision. “From our perspective, we followed the law,” he said. He pointed to a state law that allows agencies to settle protests by mutual agreement and said that’s what DOT was doing when it was talking to Grace Pacific.
Still, local contractors said it’s important to be able to challenge agencies such as DOT.
“We understand that protests are a problem and that they slow up the process,” Tim Lyons, president of the Subcontractors Association of Hawaii, wrote in legislative testimony earlier this year. The group represents nine local construction trade organizations.
“However, we think it is important to remember that a protest is oftentimes a private contractor doing the work of government; that is, calling attention to some irregularity in the procurement process,” Lyons wrote.
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