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Editor’s note: This article is part of a series on Hawaii’s runaway school bus costs. Read other articles in the series.

Twenty years ago, the Hawaii school bus industry was dominated by a powerful contractor who formed phony companies to circumvent the state’s efforts to prevent a monopoly.

Back then, the competition for school transportation contracts was fierce, and the big contractor became the target of his smaller competitor, who filed a lawsuit to expose the bigger company’s shady practices.

After a court battle that lasted years, the little guy finally won.

And that’s how , perhaps better known for the stylized yellow rabbit on its large fleet of tropical green tour buses, came to be the biggest school bus contractor today.

“In the old days, when I was there, Roberts was not even part of the Hawaii School Bus Association,” George Okano told Civil Beat. Okano is a veteran state transportation procurement officer who started in 1980 and became head of the procurement office in 1991. He left the job in 2001.

“At that time, there was a lot of fear among the smaller guys that Roberts was out to get them,” Okano said.

As it turned out, the smaller operators weren’t necessarily the ones in Roberts’ crosshairs. The company set its sights on Chiaki Matsuo, whose two companies, Laupahoehoe Transportation and Central Transportation, dominated the school bus industry. Matsuo was intent to keep it that way.

Roberts had only been in the business a few years, but it was Matsuo who found himself on the losing end of a lawsuit alleging that he was setting up shell corporations and engaging in other unfair practices in order to drive out competitors.

The lawsuit diminished Matsuo’s power, drained his financial resources and eventually put him out of business. He died while the appeal was still going on.

The legal victory gave Roberts the leverage it needed to gain a stronger foothold in the student transportation industry.

And it made state officials back away from a bidding process they’d put in place to fight monopolization and collusion in the school bus business.

When Laupahoehoe went under, Okano said, Roberts Hawaii was the only one positioned to take over its state contracts — many of which were on the Big Island.

Roberts soon grew into the state’s single largest school bus contractor, a position it has held ever since. In the years since the court case, Roberts Hawaii School Bus has won more than half of school bus routes put out for bid by the state, according to a Civil Beat analysis of hundreds of bid documents spanning 11 years. In 2011 alone, the company was low bidder on $7 million worth of student transportation contracts.

History Holds Lesson For Future

Civil Beat has been investigating skyrocketing costs in the school bus transportation business in recent years. The two-fold increase in the Hawaii Department of Education’s transportation budget over the past six years has lawmakers threatening to cut off funding and district officials scrambling to take money from other programs and projects to pay the bus companies’ demands.

A Civil Beat analysis of contract documents covering the past 11 years shows that in 2007 bus companies abruptly stopped bidding against each other. The dearth of competition — which ended just as abruptly in 2011 — also has sparked a federal investigation. Several bus company owners told Civil Beat they have been questioned by FBI agents about possible collusion and price-fixing.

Senate Education Committee Chair Jill Tokuda has called a hearing for Friday to explore the lack of competition and what district officials plan to do about it. She was not satisfied with a report the district recently gave to the Legislature because it didn’t address the issue of competition.

Competition used to thrive, with dozens of small mom-and-pop school bus operations throughout the state. Sometime after 1970, the number began dwindling and now Hawaii has only about a dozen contractors for its roughly 800 school bus routes, which include about 300 special ed routes.

Roberts Hawaii continues to dominate the industry — and the suspicions of other contractors.

“We’re so afraid, because we’re small companies, and big companies like Roberts can swoop in and just take it away,” said Moana Dudoit, CEO of Molokai-based Dudoit Bus Service, which employs 22 people.

Roberts Vice president Roy Pfund did not return repeated phone calls from Civil Beat for this or other stories in our Taken For A Ride series.

A World War II Venture

Robert Iwamoto Sr. established Roberts Rent-A-Car on Kauai in 1941, to buy a single taxi. The company bought its first bus in 1950. In 1957, Roberts purchased Kauai’s first air-conditioned motorcoach — now a hallmark of the state’s tourism industry. Robert Iwamoto Jr. inherited the company after his father’s death in 1983.

Roberts has since blossomed into a conglomerate with 1,400 employees, according to news reports, a fleet of more than 1,000 vehicles for bus, tour and charter services, and a distinctive bright yellow rabbit logo ().

It now holds at least 14 active business licenses in Hawaii, according to the state’s . Its business operations range from developing software and real estate to operating dinner cruises, the Holoholo Trolley, the dinner stage show and airport shuttle services.

1. Roberts Hawaii
2. Roberts Hawaii Cruises
3. Roberts Hawaii Express
4. Roberts Hawaii Holdings
5. Roberts Hawaii Hotels
6. Roberts Hawaii Leasing (fueling operations)
7. Roberts Hawaii Real Estate
8. Roberts Hawaii School Bus
9. Roberts Hawaii Shore Excursions $29 Tours
10. Roberts Hawaii Showtime
11. Roberts Hawaii Shuttles
12. Roberts Hawaii Submarines (investments)
13. Roberts Hawaii Technology Group (software development)
14. Roberts Hawaii Tours

It also has two dissolved companies — Roberts Hawaii Properties and Roberts Hawaii Rent-A-Car Systems — and one expired license: Roberts Hawaii Limited Partnership.

But even in 2011, the company continued its expansion, with the purchase of , and 25 shuttle buses designed to , which was awarded the state’s exclusive airport shuttle contract last year.

A Latecomer to School Bus Scene

Roberts Hawaii didn’t get into the school bus business until 1981. The number of student transportation contractors was falling at the time, having peaked at around 50 in the 1970s.

For that reason, up until the ’90s, competition among the companies was fierce, Okano said, because those left were trying to survive.

And Roberts did change the business climate for school bus operators. But not by running roughshod over its smaller competitors.

In 1993, Roberts changed the school bus business dramatically with its against its arch-rival.

The case offers an unusual look into an industry that has been unwilling to discuss its business openly.

It was no secret that Chiaki Matsuo with his two companies, Laupahoehoe Transportation Co. and Central Transportation Services, had been winning many bus contracts.

But then two new companies suddenly appeared and successfully bid on a number of lucrative routes on Oahu, Maui and the Big Island.

The contracts were to run from from 1991 to 1997, and were the first offered under a new set of rules put in place by the state Department of Accounting and General Services aimed at preventing monopolization and other unfair practices in the bus business. The procurement process was later moved over to the Department of Education.

But in 1991, according to testimony in the 1993 trial and a 1995 appellate court ruling, DAGS was suspicious that a small group of companies was conspiring to control the bidding process.

So it tightened the procurement process, including prohibiting companies from subcontracting out or selling contracts to another bidder. It required bus companies to have their own base yards and banned them from using buses that had been leased or supplied by another bidder. DAGS also said that except under certain circumstances, the state could not award more than 50 percent of the routes in any county or on one island to the same bidder.

“DAGS included the foregoing provisions to guarantee fairness, to prevent collusive bidding practices that DAGS suspected had occurred in the past, to address price fixing, and to insure that bidders were truly independent,” according to the appellate court ruling.

During the trial, Okano, then the state’s contract specialist and investigator, testified that the state suspected “prior collusive bidding practices” between Laupahoehoe and T & N Transportation, a company that was formed to bid on Big Island routes.

At the time, according to the lawsuit, Matsuo’s Central Transportation Services was the largest bus company on Oahu, controlling 207 out of 263 routes, or nearly 80 percent of the market.

Matsuo met with DAGS about the new contract requirements and figured what he thought would be a way around them, according to the court case. Two days before the bids were submitted, he secretly helped form another company, Double K Transportation Services. Double K bid on dozens of routes, as did Roberts through its School Transportation Inc. Double K came in under STI and was eventually awarded the routes when the lowest bidder couldn’t get financing and had to drop out.

Roberts protested to the state, accusing Double K of being a shell corporation set up by Central and Matsuo. The state investigated and Okana even went to Double K’s “base yard,” which he found to be a vacant lot. In fact, its zoning designation wouldn’t even allow it to be a base yard.

Roberts eventually filed its lawsuit over the Oahu contract and another contract on the Big Island which followed a similar pattern.

In the Oahu case, according to the appellate decision, DAGS never looked at the relationships between Central and Laupahoehoe and Double K. Double K executives denied any relationship with Central, so the state allowed the contract to go on.

But during trial, Roberts was able to show that there was a clear link between the two companies. A Double K official who had been fired came forward and “changed his tune,” as the court ruling puts it. Central ran the daily operations of Double K which leased a dozen buses from the bigger company, something the state had tried to prohibit. Central managed Double K’s books and did all of its bus maintenance, too.

A year after the Oahu routes went out for bid, DAGS asked for bids for Big Island routes where Laupahoehoe, Matsuo’s other company, was the big contractor. It operated 91 of 141 routes or about 64 percent of the market.

STI, a Roberts company, was trying to break into the Big Island market and ran into what turned out to be a similar situation to the one it had faced on Oahu. This time the shell company was called T & N Transportation Services, and had been put in place by Matsuo. The company’s company president was a friend of Matsuo’s, a retired high school coach who had been working for Laupahoehoe “sweeping its office and washing buses,” the court decision recounts.

As with Double K, Matsuo was in on the preparation of bids and his own companies came in higher than the shells he was backing. On the Big Island, T & N was the low bidder, beating out both STI and another Roberts company, Roberts Hawaii School Bus.

In its 1995 ruling, the appellate court found Central and Laupahoehoe had formed shell corporations to circumvent DAGS’ rules, although there was “low probability” the companies could have monopolized the Oahu and Big Island markets.

Okano said that he and his colleagues at DAGS at the time blamed the fiasco on the law requiring contractors to bid 10 percent less than the next-lowest bidder if they wanted to win more than 50 percent of the routes in a given county.

They came to believe that while well-intended, the anti-monopoly law, when combined with already intense competition among contractors, helped create a toxic environment.

“It was that clause that we believe led Laupahoehoe to create these other companies,” he told Civil Beat.

As a result, the state got rid of that clause in its — but not before Roberts benefitted from it.

Politically Plugged In

The state’s other school bus contractors consider Roberts a formidable force.

Dudoit said she lives in constant fear that “Roberts or the other big companies will jump onto our island and take it all away.”

Student transportation is her livelihood, and has been since she inherited the company from her father in 1964. She can describe each of her eight school bus routes in detail, and tell you exactly how much she’s paid to run each of them.

By contrast, Roberts Hawaii’s holdings are so broad that on the company’s in 2011, school buses didn’t even make a list of services that have helped the company weather the “volatile tourism cycles” over the years.

Contractors like Dudoit, when they speak of Roberts Hawaii and the family that runs it, do so in guarded tones.

“You know, Robert (Iwamoto) was a pretty strong person and had good contacts in the Legislature,” said Lindy Akita, CEO of another Kauai-based school bus company, Akita Enterprises. He did not explain the significance of those legislative relationships, though.

The state’s campaign finance records are difficult to search through, but a Civil Beat review of some political campaigns showed that in 2010, Chad Q. Iwamoto, a Las Vegas resident whom the records list as vice president of Roberts Hawaii, gave $6,000 to Gov. Neil Abercombie. Tiffany Iwamoto, listed as a homemaker at the same address, gave another $6,000 to Abercrombie.

Iwamoto Jr.’s daughter, Kim Coco Iwamoto, also served on the elected Hawaii State Board of Education from 2006 until a new appointed board replaced the elected one in 2011. An examination of shows she recused herself from dozens of conversations and votes that would have had an impact on student transportation contracts.

Campaign finance records show that in 2010 Iwamoto contributed $300 to Senate Education Committee chair Jill Tokuda and $1,900 to House Education chair Roy Takumi.

But even with its longstanding political ties, Roberts Hawaii may not have as much sway this year with transportation costs and lack of competition in the spotlight. At Friday’s hearing, education leaders will be exploring different levels of budget cuts and the impact they would have on students.

That means Roberts, as the biggest contractor, could end up the biggest loser.