An $8.7 million hydrogen technology investment fund the state was supposed to start months ago has been held up by a dispute over who should manage the project.

The fund was created by lawmakers in 2006 to help finance companies working to develop clean-burning hydrogen fuel from renewable resources such as wind and water.

In early August, the Department of Business, Economic Development and Tourism selected H2 Energy to run the program. However, H2 Energy was the lowest-ranking choice of a DBEDT evaluation committee that reviewed three qualifying proposals.

The state Procurement Office ruled in September that the contract should have been awarded to the highest-ranking company, which was Kolohala Holdings LLP.

In October, DBEDT Director Ted Liu said the issue would be resolved in about a month. But it's been more than two months, and DBEDT has yet to award the contract.

Instead, the agency is arguing that its own internal evaluation committee may have wrongly ranked Kolohala as the top bidder. DBEDT also has entered into discussions with an unidentified third party that may seek some of the same hydrogen fund money sought by Kolohala.

Kolohala, which partnered with Hawaii Angels and the Hawai'i Natural Energy Institute, has retained legal representation and is considering its options, said Robert Robinson, managing partner for Kolohala. Robinson said Kolohala has had no recent contact with Liu, but declined to comment further.

DBEDT's failure to award the contract to Kolohala is generating criticism from at least one lawmaker. Senate Vice President Donna Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), said DBEDT does not seem to want to give the management contract to Kolohala.

"He (Liu) has gone and started negotiating with a third party," Kim said. "Now that's not good faith. It's so blatant what he's trying to do. He does not want to give (the contract) to Kolohala."

Liu said it may not be in the best interest of the state to follow through on the award of the hydrogen fund management contract to Kolohala.

In a Nov. 13 letter from DBEDT to the state Procurement Office, Liu said the three staff members that reviewed contract proposals all had pre-existing relationships with the bidders, which could impact their impartiality.

In addition, agency staff would not have ranked Kolohala the highest bidder had they known Kolohala would actually receive the contract, according to Liu's letter. Committee members assumed their ranking of bidders was only a recommendation and not a selection of who should get the contract.

"I believe the fact that the subject solicitation was based upon an erroneous basic assumption and may have rendered the entire process flawed," Liu wrote. "It may not be in the best interest of the state to abide by the result of a flawed process."

If DBEDT determines the process flawed, the agency could be free to alter or cancel the original contract award, which may open the door to others seeking some or all of the $8.7 million hydrogen fund. The agency has had talks with a third party that could bring $15 million to $20 million a year in hydrogen technology-related funding to Hawai'i, Liu said. DBEDT would be remiss to ignore that new opportunity, Liu said.

"That change of circumstance, if it occurs, and we're working on it, would mean that one of the objectives of the (original) procurement is moot now," Liu said in a recent telephone interview. "Whether the premature encumbrance of all or a portion of the fund is in the state's best interest is really part of the question that I'm asking."

A decision by the unnamed third party on whether to invest in Hawai'i is expected sometime before April. However, the issue could come to a head as soon as Tuesday. That's the deadline set by state Procurement Office Administrator Aaron Fujioka for DBEDT to either award the contract or justify why the contract hasn't been awarded.

Lawmakers originally set aside $10 million for the hydrogen fund; however, $800,000 of that money already has been given to the University of Hawai'i to help fund a Big Island hydrogen power park. Another $500,000 has been set aside to cover administrative costs.

Reach Sean Hao at shao@honoluluadvertiser.com.