State officials are taking the first steps on what could be a $300 million project to redevelop the former Kapalama Military Reservation, a 55-acre piece of land crucial to alleviating overcrowding at Honolulu Harbor, which is expected to run out of cargo space within five years.

Transportation Department officials in October sought proposals to plan the conversion of the state-owned area, now occupied by a mix of nearly 100 small businesses, rambling warehouses, and a University of Hawai'i marine research center, all operating on short-term leases.

Ultimately, state officials plan to move all the existing tenants and use the land for expanded commercial cargo operations in the harbor, which receives 98 percent of all consumer goods coming into Hawai'i.

"Developing Kapalama is one of the most pressing needs we have," said Tim Guard, president of McCabe, Hamilton & Renney, a stevedoring company. "It can't be stressed enough. There's an urgency to get that facility up and running."

State officials hope to begin construction on Kapalama by 2010 but say many obstacles lie ahead, not least of which is funding the huge project.

"We've had plans for harbor improvements for years, so it's significant that we're finally getting to work on the implementation of them now," said Barry Fukunaga, deputy DOT director for harbors.

With almost $1 million from the state Legislature, the DOT this year sought contractors to inventory existing conditions in the Kapalama area, survey it for significant historical features, and help start the planning and redevelopment process, said Sandy Pfund, head of the Hawai'i Harbors Project, which is partnering with the state on the redevelopment plans.

State officials hope to pick contractors for each phase of the work by early next year, she said.

"Right now, we're gathering all the information we need to determine the best way to undertake the improvements," Fukunaga said.

Any expansion of Honolulu Harbor is complicated by the large number of competing interests in the area. However, a 1997 harbors master plan for Hawai'i says cargo operations should be given priority over all other users.

"While the the economic value of commercial fishing, ocean mining, passenger cruises, excursions and ferries, etc. cannot be denied, commercial harbor planning must first address Hawai'i's life-sustaining cargo operations," the report concluded.

With the amount of cargo arriving in the state growing at a rate of 3 to 4 percent a year, the existing cargo operations of Matson Navigation and Horizon Lines are running near capacity. Both companies have made substantial investments in recent years to increase efficiency within their own limited container yards on Sand Island, Guard said.

"If they weren't so efficient in the ways they already handle cargo containers, we'd already be in a lot of trouble," he said.

Developing the Kapalama area will increase existing space for container cargo operations by almost 50 percent, at least temporarily alleviating the need to develop another expensive harbor somewhere in the state, officials said.

In addition to moving existing tenants, state officials say, they are planning to expand pier space in the area, dredge nearby harbor space, and create the infrastructure necessary to support major container cargo operations.

Early plans call for developing about 2,000 linear feet of berthing space, enough for two modern container ships, and almost 70 acres of yard area in a rectangular configuration, Fukunaga said. The area is directly across the Kapalama Basin from an existing container yard for Horizon Lines, which could move its entire operation into the new facility, allowing Matson to expand into space vacated by Horizon.

The Kapalama area, acquired by the state from the military in 1994, is considered the ideal location for a container terminal because of its relatively underused space and its close proximity to the Young Brothers interisland shipping terminal, allowing for cargo to be efficiently transhipped to Neighbor Islands.

While existing Kapalama tenants are worried about losing their inexpensive, close-to-town sites, Fukunaga said all of them have known for years that relocation would come eventually.

"Part of the challenge is finding new space for all of the 98 tenants. We've told them what's happening and try to keep them informed. They know nothing is going to happen to them overnight," he said.

Fukunaga said state officials want to explore the possibility of creating a public-private partnership that could help offset the development costs of the Kapalama project.

"If we have to rely on the old, traditional ways of funding everything through the Legislature, we'd be stuck," he said. "The idea of a partnership with private business can help us accelerate the process and get more achievable results a lot sooner."

Reach Mike Leidemann at mleidemann@honoluluadvertiser.com.