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37–636 PDF 2007

S. HRG. 110–211

MINORITY ENTREPRENEURSHIP: ASSESSING THE

EFFECTIVENESS OF SBA’S PROGRAMS FOR THE

MINORITY BUSINESS COMMUNITY

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 22, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo.gov/congress.senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine,

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

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CONTENTS

Page

OPENING STATEMENTS

Kerry, the Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship .......................................................................................... 1

Snowe, the Honorable Olympia J., a United States Senator from Maine .......... 3

Cardin, the Honorable Benjamin L., a United States Senator from Maryland .. 5

Tester, the Honorable Jon, a United States Senator from Montana ................... 5

TESTIMONY

Jenkins, Calvin, Deputy Associate Administrator for Government Contracting

and Business Development, U.S. Small Business Administration, Washington, DC ............................................................................................................. 6

Wainwright, Dr. Jon, vice president, National Economic Research Associates,

Inc., Austin, Texas ............................................................................................... 26

Robinson, Anthony W., president, Minority Business Enterprise Legal

Defense and Educational Fund, Largo, Maryland ............................................ 35

Miera, Bill M., chief executive officer, Fiore Industries, Inc., Albuquerque,

New Mexico ........................................................................................................... 60

Galaviz, Fernando, chairman, Small Business Association for Technology,

Alexandria, Virginia ............................................................................................. 73

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Cardin, the Honorable Benjamin L.

Opening statement ........................................................................................... 5

Galaviz, Fernando

Testimony .......................................................................................................... 73

Prepared statement .......................................................................................... 75

Jenkins, Calvin ........................................................................................................

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 9

Response to post-hearing questions from:

Senator Kerry ............................................................................................ 100

Senator Snowe ........................................................................................... 105

Senator Lieberman .................................................................................... 108

Kerry, the Honorable John F.

Opening statement ........................................................................................... 1

Post-hearing questions posed to Calvin Jenkins and subsequent

responses ....................................................................................................... 100

Lieberman, the Honorable Joseph I.

Post-hearing questions posed to Calvin Jenkins and subsequent

responses ....................................................................................................... 108

Miera, Bill M.

Testimony .......................................................................................................... 60

Prepared statement .......................................................................................... 62

Robinson, Anthony W.

Testimony .......................................................................................................... 35

Prepared statement with attached letters of complaint ................................ 37

Snowe, the Honorable Olympia J. ..........................................................................

Opening statement ........................................................................................... 3

Post-hearing questions posed to Calvin Jenkins and subsequent

responses ....................................................................................................... 105 

Page

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Tester, the Honorable Jon

Opening statement ........................................................................................... 5

Wainwright, Dr. Jon

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 28

Supplementary material may be accessed on the Committee’s Web site

at http://sbc.senate.gov/20070522.cfm

Disadvantaged Business Enterprise Availability Study for Missouri

Race, Sex, and Business Enterprise: Evidence from Denver, Colorado

Race, Sex, and Business Enterprise: Evidence from the State of

Illinois and the Chicago Metropolitan Area

Race, Sex, and Business Enterprise: Evidence from the State of

Maryland

Race, Sex, and Business Enterprise: Evidence from the Commonwealth of Massachusetts

Race, Sex, and Business Enterprise: Evidence from the State of

Minnesota

Race, Sex, and Business Enterprise: Evidence from the State of

Washington

COMMENTS FOR THE RECORD

Zamora, Peter, regional counsel, Mexican American Legal Defense and Educational Fund (MALDEF), Washington, DC ...................................................... 112

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MINORITY ENTREPRENEURSHIP: ASSESSING

THE EFFECTIVENESS OF SBA’S PROGRAMS

FOR THE MINORITY BUSINESS COMMUNITY

TUESDAY, MAY 22, 2007

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 10 a.m., in room SR–

428A, Russell Senate Office Building, the Honorable John F. Kerry

(Chairman of the Committee) presiding.

Present: Senators Kerry, Cardin, Tester, and Snowe.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. This hearing of the Small Business Committee

will commence. I appreciate everybody taking the time to come

here today.

I have called this hearing to give the Committee an opportunity

to take a look at a critical area of business development and

growth in our Nation, one that has proven to be a challenge, but

nevertheless has provided a very significant base of growth, and

importantly, a significant door-opener of opportunity for segments

of our country that have often had to struggle to be able to get that

opportunity.

As we all know, one of our Nation’s greatest assets is our diversity, but we have to fight to make sure that that diversity is given

appropriate opportunity to share in all of the opportunities of our

country, and the strength of that diversity is really one of the

things that allows us to be the most competitive Nation in terms

of the marketplace.

The number of businesses in our minority communities continues

to grow and that adds to our competitive advantage. Over the last

10 years, minority business enterprises accounted for over 50 percent of the 2 million new businesses started in the United States,

and there are now more than 4 million minority-owned companies

in the United States with annual sales totaling about $694 billion.

These businesses cross the entire industrial base, from financial

services and health care to construction and transportation.

But, and there is an important but, while the numbers of minority-owned businesses hold promise for the future, and obviously

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that growth is important, it is clear that much more needs to be

done to encourage and strengthen the minority business community and to guarantee the opportunities within it. The potential for

small business growth and entrepreneurship has simply not been

fully tapped and barriers continue to exist for many minority business owners.

SBA’s Office of Advocacy has analyzed the most recent business

census data from 2002, noting that although minorities make up 32

percent of our population, minorities own only 18 percent of small

businesses. The Minority Business Development Agency looking at

the same census data notes that the number of minority-owned

firms has grown by 35 percent over the 5-year period that was surveyed, but the average gross receipts for those firms dropped by 16

percent. In fact, the average gross receipts of minority firms was

$162,000, which was considerably lower than the $448,000 average

gross receipts of non-minority firms.

Clearly, we still have a ways to go before we can say that there

is parity between majority-owned and minority-owned firms. We

also must ensure that we are doing as much as possible to open

the doors to Federal contracting for minority-owned businesses.

The aforementioned disparities are why we need Federal contracting programs like 8(a) and its business counseling counterpart,

7(j). These programs to help minority and disadvantaged firms access Federal contracts are needed to help these firms break into

the Federal market. We also need more lending and investment opportunities through the SBA, and quite frankly, we need to find innovative ways to create access to capital in the commercial market.

The question today is whether SBA’s contracting and access to

capital programs are meeting the needs of those that they were created to help. One of the keys to small business growth is access to

capital, an area where minority firms also still lag behind. When

we look at SBA lending, the share of loan dollars to minorities is

largely stagnant. And more interestingly, minorities who have obtained SBA loans have seen their average loan size shrink by more

than those to non-minorities.

For example, over the past 7 years, the share of loan dollars to

African Americans in the 7(a) lending program, which is SBA’s

largest small business lending program, only increased from 3 to

4 percent, yet African American firms constitute 5 percent of all of

the minority firms. This gap is important to address, because as

the SBA’s Office of Advocacy study found, higher percentages of

black-owned businesses use loans from the Government or guaranteed by the Government. Therefore, SBA can and should be doing

more.

Changing demographics make it all the more urgent that we address the challenge of minority entrepreneurship. We can’t afford

to leave any segment of our society behind. According to U.S. census projections, between 1995 and 2050, we are going to add 131

million new citizens to our country and 90 percent of that growth

is going to come from the minority population.

To address the substantial gap in small business ownership and

the minority community, I have introduced the Minority Entrepreneurship Development Act of 2007, co-sponsored by Senators

Cardin, Landrieu and Clinton, and this bill would give grants to

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historically Black colleges and universities, Hispanic-serving institutions, and tribal colleges to help train the entrepreneurs of the

future. This bill was adopted last year in Committee as part of S.

3778, the bipartisan reauthorization bill and I hope we can help to

open the door to entrepreneurship to minority communities by

passing it this year.

We also need to do more to expand access to capital in the minority community. Small business can’t grow unless they have access

to working capital and loans to purchase land or equipment, and

I am concerned that the very programs that were created to reach

the underserved, especially minority communities, such as the 7(a)

and 504 lending programs, are not being sufficiently accessed by

these communities. That is why we included a provision in the

lending bill that we marked up last week to create an Office of Minority Business Development in the SBA.

We also adopted this provision last year, and I think Senator

Snowe and I believe very strongly that if we have offices at SBA

dedicated to women, veterans, Native Americans, and faith-based

community initiatives, we should have an office that focuses on minority business development, and that will increase contracting,

counseling, and capital to firms owned by minorities.

As the country changes, and it is obvious that it will based on

demographics that I just mentioned, it is really important that we

make sure that we fulfill the promise embodied in our laws with

respect to opening the doors of opportunity. You don’t do that by

just passing the law, you do it by guaranteeing its implementation.

It is more and more important that we at the Federal level show

we really value the contributions that citizens make from every

segment of our society to the marketplace of our country, and we

are determined to do that as effectively as we can.

I am delighted to be joined by our Ranking Member, Senator

Snowe. Thank you.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, A UNITED STATES SENATOR FROM MAINE

Senator SNOWE. Thank you, Chairman Kerry, for calling this

timely hearing on the subject of minority entrepreneurship. Just

last week, the U.S. Census Bureau announced that over 100 million people, or one in three U.S. residents, are classified as an ethnic or racial minority. According to a study released last month by

the SBA Office of Advocacy, minorities own approximately 18 percent of the 23 million firms in America. Additionally, there are now

over four million minority-owned businesses across the country, accounting for over $591 billion in revenues.

As former Chair of this committee and now ranking member, I

have championed an aggressive contracting agenda that promotes

entrepreneurship and opportunities for minority-owned and

women-owned small businesses, as well as for businesses located in

Historically Underutilized Business Zones. In the coming weeks, I

plan to work very closely with you, Chairman Kerry, to develop a

bipartisan small business contracting package that will address

ways to promote small business utilization of key SBA entrepreneurship programs, including the 8(a) and HUB Zone programs.

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This morning we will be hearing from SBA and a panel of expert

witnesses about ways we can improve SBA’s vital minority entrepreneurship programs and services to SBA to make sure that these

laws are fully consistent with the intent and obligations under the

law in fulfilling our responsibilities within these programs.

The SBA is responsible for administering and implementing programs to ensure that minority-owned small businesses achieve economic self-sufficiency and realize their tremendous potential. The

SBA’s minority entrepreneurship programs, especially the Small

Disadvantaged Business and the 8(a) Business Development Program for Small Disadvantaged Businesses have provided real economic opportunities to minority communities across America. Unquestionably, we have achieved some real progress, but we can do

better.

Unfortunately, the effectiveness of these programs have been repeatedly called into question. Four recent reports of the SBA Inspector General found that the SBA, number one, does not track

compliance with 8(a) regulations; second, the SBA improperly

maintains an 8(a) data base; third, the SBA improperly supervises

mentor-prote ́ge ́ arrangements between 8(a) firms and large businesses; and fourth, the SBA fails to ensure that 8(a) contracts go

to more than a handful of participating firms.

These conclusions are echoed by the Government Accountability

Office, which found that over the last 2 years, the 8(a) program has

been vulnerable to fronting and fraud by large business concerns

and that subcontracting opportunities for small disadvantaged

businesses were not properly enforced on Hurricane Katrina reconstruction projects in the Gulf Coast. It is my sincere hope that the

SBA will explain to us this morning the specific corrective remedies

the agency has taken to rectify these problems.

In conclusion, I again look forward to working with Chairman

Kerry on this issue and developing a bipartisan contracting package that builds on what was included in last year’s SBA reauthorization package. But more importantly, we must make sure that

these programs are working as intended and as developed under

the law to make sure that those who should be benefiting from

these programs actually are. Also, we must ensure that we can extend these programs and to reach out into the disadvantaged communities and to make sure that the minorities are benefiting from

the intent and purpose of these programs that are so worthwhile.

I am disturbed by the many reports that have been developed

that have indicated some serious fundamental problems that have

yet to be addressed, so I am hoping that we are going to hear this

morning from Mr. Calvin Jenkins of the Small Business Administration as to how the agency is responding to many of the issues

that have been raised by the SBA’s Inspector General.

Thank you, Chairman Kerry.

Chairman KERRY. Thank you very much, Senator Snowe. Thanks

for your previous work on this and we look forward to working with

you on it.

Senator Cardin.

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OPENING STATEMENT OF THE HONORABLE BENJAMIN L.

CARDIN, A UNITED STATES SENATOR FROM MARYLAND

Senator CARDIN. Mr. Chairman, first, thank you for holding this

hearing. I concur with both your statement and Senator Snowe’s

statement.

The dilemma we face is that while the largest number of new

small businesses are in the minority communities, we are not providing the type of assistance needed so these companies can grow

to their full potential. As you have laid out, we need to find out

how we can be more aggressive in dealing with that disparity.

It is particularly important in Maryland. Prince George’s County

has the fourth-largest number of African American firms in the

country and I have heard from my small business minority owners

about the problems they have faced basically in getting capital. You

hear about health care, number one, but after health care, it is access to capital and it is access to Government procurement.

I am interested in how we can improve the 8(a) program so that

minority businesses get the technical assistance they need to be

able to obtain the type of opportunities through the procurement

process. I was disappointed in the President’s budget that cut a lot

of the funding for these programs, and I hope that we will be able

to do much better as we consider the budgets that go through the

Congress.

In the loan programs, the microloan programs are particularly

valuable to small businesses, minority businesses. They get a larger share of the microloans, which just shows you a small amount

of money can make a huge difference. But when we look at the 7(a)

program and the 504, the number of minority businesses participating in these programs are not what I think they should be.

So I really do thank you for holding these hearings so that we

can figure out how we can provide the type of help and assistance

to minority small businesses that will allow them to continue to

grow, helping America as far as our economic growth is concerned,

and living up to the American dream of providing opportunities for

all of our citizens.

Chairman KERRY. Thank you very much, Senator Cardin. That

is a very important point you underscore about the microlending.

First is the 7(a), and the other distinction we may follow up on

later.

Senator Tester.

OPENING STATEMENT OF THE HONORABLE JON TESTER, A

UNITED STATES SENATOR FROM MONTANA

Senator TESTER. Thank you, Mr. Chairman and Ranking Member Snowe. I appreciate also the fact that you are holding this

hearing.

In Montana, we have a large minority base called Native Americans. We have unemployment at 85 percent and, quite frankly, the

role that the SBA can play and hopefully will be playing in the economic development through small businesses in our Indian Country is critically important.

I look forward to Mr. Jenkins’ testimony and I will have some

questions for him after he is done.

Chairman KERRY. Terrific. Thank you, Senator.

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Mr. Jenkins, if we could invite you to the table, the SBA’s Deputy Associate Administrator for Government Contracting and Business Development. We are delighted to have you here with us

today.

If I could just mention, we are a little under the gun in that we

have an 11:30 a.m. conflict, or I do, anyway. I don’t want anybody

to be shortchanged, so I want to make sure we get to cover the waterfront here as well as possible.

Mr. Jenkins, if you can summarize in the 5 minutes we normally

give our witnesses; your full testimony will be placed in the record

as if read in full. Thanks.

STATEMENT OF CALVIN JENKINS, DEPUTY ASSOCIATE ADMINISTRATOR FOR GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC

Mr. JENKINS. Chairman Kerry and Ranking Member Snowe and

other distinguished Members of this Committee, I thank you for

the opportunity to testify regarding minority entrepreneurship and

the effectiveness of SBA’s programs. I am Calvin Jenkins, Deputy

Associate Administrator for the Office of Government Contracts

and Business Development. I appreciate the opportunity to testify

today on behalf of Administrator Preston regarding the operations

and successes of SBA’s activities associated with minority businesses, as well as to briefly discuss our continued efforts to enhance and ensure a continued accessibility of our product and services to entrepreneurs in our Nation’s most underserved markets.

Minority-owned small businesses have a dramatic impact on the

U.S. economy, creating jobs and driving economic growth. According to SBA’s Office of Advocacy, in 2002, minorities owned 4.1 million firms that generated $694 billion in revenues and employed 4.8

million workers. Of the 23 million non-farm firms, 6.8 percent were

owned by Hispanic Americans, 5.2 percent by African Americans,

4.8 percent by Asian Americans, 0.9 percent by American Indians

or Alaskan Natives, and 0.14 percent by Native Hawaiians or other

Pacific Islanders.

Entrepreneurs, including minority entrepreneurs, face a number

of challenges as they pursue their dreams and begin to create and

expand their businesses. These challenges include access to capital,

the cost of health insurance, the need for training and technical assistance, access to Federal contracts, and regulatory burdens. SBA

has focused on addressing the challenges of minority business, in

particular, minority-owned small businesses and entrepreneurs.

There are many areas of the country that have significantly higher unemployment and lower income levels than the Nation’s averages. Federally defined economically distressed markets, which are

typically based in inner city and rural areas, include Low/Moderate

Income, Historic Underutilized Business Zones, Enterprise Community, Empowerment Zones, and New Market Tax Credit Zones.

Higher levels of business formation and growth in these areas can

promote job creation, business ownership, and economic vitality

where they are most needed. In many cases, SBA’s financial, technical, and contracting programs are especially well-designed to

meet the needs of small businesses in these ‘‘place-based’’ commuVerDate 11-MAY-2000 09:09 Jan 09, 2008 Jkt 037636 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\37636.TXT DianeA PsN: DianeA
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nities, as well as in ‘‘people-based’’ communities on which it is also

focused.

In short, one of our principal jobs at the SBA is all about increasing access to the tools that we presently have available to the people and communities that need them most. SBA made great strides

in addressing the needs of minority and entrepreneurs and small

businesses. I am pleased to share with you the results of our efforts

in increasing access for the underserved communities.

The number of minority loans approved by the SBA has increased from 12,010 in fiscal year 2001 to 34,627 in fiscal year

2006, and loan dollars have increased from less than $3.5 billion

in fiscal year 2001 to more than $6.7 billion in fiscal year 2006.

The number of loans to women approved by the SBA has increased

from 9,986 in fiscal year 2001 to 23,454 in fiscal year 2006. Loan

dollars have also increased from $2 billion in fiscal year 2001 to

more than $3.4 billion in 2006.

Through April 30 of 2007, the end of the first 7 months of the

Federal Government’s fiscal year, SBA has approved 20,186 loans

for $3.7 billion for minorities, and 13,723 loans for $2 billion for

women.

During the period from 2001 through 2006, the number of minority-owned small businesses that have received commercial credit

through SBA’s 7(a) and 504 programs has almost tripled and has

increased from less than 25 percent total loans approved to 32.3

percent of total loans approved. In an effort to expand support for

microborrowers, the SBA has piloted the Community Express Program. This 7(a) pilot was designed specifically to reach underserved

markets and provide both financial assistance and technical assistance. The latter is provided through leveraging the skills of the

agency’s counseling and training partners.

Equity in Government contracting—the mission of our Office of

Government Contracting and Business Development is to increase

small business access to procurement opportunities utilizing various educational, training, consultant forums. The office is also responsible for increasing public awareness of SBA’s Government

Contracting and Small Business Preference Programs through targeted market outreach initiatives in underserved markets and public-private partnership.

For example, SBA continues to provide access for small and disadvantaged businesses to be able to compete in Federal marketplaces. The Office of Government Contracts and Business Development works to create an environment for maximum participation

by small, disadvantaged, and HUB Zone businesses in Federal

Government contract awards and large prime subcontracts.

Each year, our Government spends billions of dollars purchasing

goods and services from private firms. Congress has established a

governmentwide small business goal of 23 percent for small businesses, 5 percent for small disadvantaged businesses, and 3 percent for HUBZone small businesses. SBA negotiates goals annually

with each Federal agency on an individual basis. The Federal

achievement toward the SDB goal for fiscal year 2005 was $21.7

billion, or 6.92 percent which exceeded the 5 percent statutory goal.

In terms of expected performance for fiscal year 2007 and 2008,

we believe that we have set the bar very high. Some of our more

8

ambitious goals include the following. A fiscal year 2008 budget

targeting a total of $85 billion in prime Federal contract dollars to

be awarded to small businesses. SBA will focus on expanding bonding opportunities for more small business, especially minorityowned businesses and businesses located in underserved communities.

The goal for fiscal year 2007 is a total of 5,200 bid and final bond guarantees. The final bond guarantee will result in $566 million in

contract revenues and the creation of over 4,800 jobs, of which $226

million in contract revenues and 1,950 new jobs will benefit contractors facing special competitive opportunity gaps.

SBA has requested for its fiscal year 2008 budget an additional $500,000 to examine how to best serve the 8(a), HUBZone, and

Small Disadvantaged Business communities, as well as women and

veterans. The agency recognizes a need for improvement in these

areas and is evaluating how best to make these improvements.

SBA will also support small business facing special competitive

opportunity gaps by expanding bonding opportunities——

Chairman KERRY. Mr. Jenkins, I am sorry. I hate to interrupt

you. I apologize for doing that, but I did ask you to summarize. You

are now going through your entire written testimony, which is

going to be part of the record. We are already at 4 minutes over

the alloted time. I want to be fair, but if you can summarize, it

would help us so we can ask some questions and get at it.

Mr. JENKINS. OK. I will just summarize by saying I know that

the Committee will agree with the Administration that there is still

a great deal of work to be done in creating opportunities for minorities and entrepreneurs in America. The President, Administrator

Preston, and the SBA are committed to continue to forge ahead to

achieve the goals that we have set for ourselves to not only leave

a lasting legacy of accomplishments behind, but more importantly,

to make the dream of thousands of aspiring entrepreneurs a reality.

I will be happy to answer questions the Committee may have.

[The prepared statement of Mr. Jenkins follows:]

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Chairman KERRY. Thank you, Mr. Jenkins. I appreciate that.

In the beginning of your testimony, you listed—first of all, we are

all glad to see the growth in certain sectors, as I acknowledged in

my opening comments. The issue is not whether there is growth or

not. As Senator Cardin said, one of the fastest-growing areas is

small business entrepreneurs. The question is, are the programs

working as effectively as they ought to be and are we opening up

contracting to the degree that we ought to be, so that we are really

maximizing this opportunity?

There is a huge wealth disparity in America. The average wealth of an African American family in the United States is about $6,100.

The average of a white family is about $67,000. So it is a big, big

gap.

And while we see people starting up, as Senator Cardin also

mentioned, there is the disparity. They get a lot of microloans, so

they are getting small amounts of money, but they are not getting

the 7(a) or 8(a) at the level they ought to be, and the technical assistance particularly, which a lot of people feel is the key to the

SBA.

Can you sort of address that for us? Maybe I will simplify the

question with that predicate by saying you mentioned challenges

that still remain—the access to capital, the cost of health insurance, the need for training and technical assistance, access to Federal contracts. These are problems that almost anybody faces. Is

there something that you believe also is particular to the minority

community beyond those issues?

Mr. JENKINS. Well, I think a lot of what small businesses face

in general is what minorities face, especially when you look at it

in terms of Federal procurements. For example, 10, 15 years ago,

there was a very visible relationship with the contracting officer

and, let us say, a small business or minority business. Today, the

system has been replaced by automation and so there is less interaction, personal interaction. So I think knowing the systems, knowing how to do business with the Federal Government, I think it is

important that we get that information to minority businesses as

well as small businesses in general and I think they can——

Chairman KERRY. So there is a knowledge deficit that you think

is—an experience deficit——

Mr. JENKINS. Yes.

Chairman KERRY [continuing]. That you have got to make up,

particularly with respect to minority businesses.

Mr. JENKINS. Yes. I believe it is key that the SBA makes its programs aware, that the minority community is aware of the programs and that they take full advantage of these programs.

Chairman KERRY. Is it fair to say that that is the reason that

the 8(a) program exists, because there are challenges that are actually based on race that still exist for minority business owners?

Mr. JENKINS. Yes, there are, and the 8(a) program, as you are

aware, is a business development program, and our key piece there

is to provide business development assistance. As part of that, contracts are available, but the key there is to make sure that they

are aware of the program and how to best leverage the program.

Chairman KERRY. Now, with respect to that leverage, let me address that for a moment. One of the major concerns that we hear

16

from 8(a) participants is the lack of contracts that come from the

program. We all understand that being in the 8(a) program doesn’t

mean that you have an automatic flow of contracts, et cetera, but

many participants are sitting in the program for 3 to 4 years before

they get a contract, and by the time they actually begin to see some

benefit, boom, they are out of the program.

Of the 10,000 or so 8(a) firms that are part of the program, can

you share with us how many actually get contracts per year?

Mr. JENKINS. Well, roughly, it takes a firm who is entering the

8(a) program about 16 months to 2 years before they receive some

kind of contract assistance. The key with the 8(a) program is different from the Small Disadvantaged Business Program in that

there is a potential for success requirement so that it requires

firms to be in business for at least 2 years so that they have a

sense of how to create revenues for their business.

What we try to do through our district offices is to help the firm,

one, develop a good business plan, and then, two, market the agencies that actually purchase the product and services that they look

to provide. And so that becomes the key, not a shotgun approach,

but more a very targeted approach so that they are not wasting

their resources and their energy trying to reach out to too many

agencies, versus being very specific to those that offer the product

and services they offer.

Chairman KERRY. That said as an approach, do you know how

many actually get contracts, how many firms get work out of the

program each year?

Mr. JENKINS. I don’t have the actual number. I do know that in

fiscal year 2005, the 8(a) program did about $10.5 billion——

Chairman KERRY. Could you check for us?

Mr. JENKINS. Sure.

Chairman KERRY. Could you make that one of the things on a

punch list here to get to the Committee for the record, so we could

determine that?

Mr. JENKINS. Sure.

Chairman KERRY. What are you doing specifically to help program participants get the most out of their contracting preference,

because 8(a) gives you a contracting preference.

Mr. JENKINS. That is correct.

Chairman KERRY. What is happening to guarantee that that

preference is, in fact, beneficial to minority business owners?

Mr. JENKINS. Well, one of the keys is when a firm enters the 8(a)

program, they are assigned to a district office in their geographic

area. They are also assigned a specialist that works with the firm,

that works with them in developing their business plan, but also

that works with the Federal agencies that procure the product or

services the firms offer.

We also leverage our Procurement Center representatives. As

they look at procurements that are coming down that may be available to firms that are small business or firms in the 8(a) program,

they coordinate with the various district offices to ensure that

those opportunities are made aware and firms are identified to go

after those requirements.

Chairman KERRY. One of the keys is the Technical Assistance

Program which is really important to a lot of startup early compaVerDate 11-MAY-2000 09:09 Jan 09, 2008 Jkt 037636 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\37636.TXT DianeA PsN: DianeA
17

nies. There is a specific line item called the 7(j), which you are familiar with, which is in the Minority Business Development Program. This is specifically for technical assistance, but your agency

removed that line item. Elsewhere in the budget, it says that $1.5

million is to be used to fund that. But the lack of a line item is

important because there is no guarantee that any money is being

spent on technical assistance and there is no transparency. What

are we to make of that?

Mr. JENKINS. Well, Administrator Preston has made it very clear

that he is supporting providing the necessary levels of business development assistance to the firms that are in the 8(a) program——

Chairman KERRY. Why not fund the 7(j)? I mean, just last week,

we were informed that the money that at one time came out of the

7(j) program to support training is now gone.

Mr. JENKINS. No, I don’t believe that is correct. We currently are

supporting with the funding that we have in fiscal year 2007, as

well as what we received in 2006 went toward——

Chairman KERRY. Would you check on that? I may be incorrect,

but I just would like to get this for the record. If you would check

what the 7(j) money was used for or is used for and perhaps provide the Committee with a detailed explanation of what it went for

last year and what it is slated to be used for this year, because my

understanding is it is not going to technical assistance.

Mr. JENKINS. Well, that falls directly under my office. Last year,

what we did, we hired third-party technical assistance providers

and we provided literally thousands of 8(a) firms in the program

training around the country to various district offices. Our plan is

to continue that effort in fiscal year 2007, as well.

Chairman KERRY. So you will third-party contract?

Mr. JENKINS. That is exactly right. We leverage—one of the

things in providing technical assistance is, one, use the 7(j) funds

we were given to provide third-party assistance, folks who have expertise in providing this assistance. We also leverage our resource

partners, such as our SBDCs. We are currently working very closely with our SBDCs to develop some products that we think will be

very helpful to the 8(a) firms, and then look at other resources, as

well, within the agency. But in fiscal year 2006 and fiscal year

2007, we used 7(j) funds specifically for providing that third-party

assistance.

Chairman KERRY. I appreciate that.

Now I’d like to discuss the net worth limitations associated with

the 8(a) program. There is the $250,000 limitation for entering and

then you can’t exceed $750,000 in net worth or you’re removed

from the program. Those haven’t been updated in more than a decade, and one of the things we hear is that maybe that is squeezing

some people out who need the assistance to get in, and that it is

early in pushing people out. Could you react to that?

Mr. JENKINS. Sure. We believe that those levels currently that

are set are appropriate. It is the net worth of the individual, not

the net worth of a business. There has been a lot of confusion as

to whether or not it is the business net worth. This is the individual and the statute, the Small Business Act, allows for two exclusions, the equity in one’s home, as well as the investment in

one’s business. So when you look at even the $250,000 net worth,

18

it probably accounts for close to 95 percent of all Americans. When

we look at the average net worth of someone that enters the 8(a)

program, it is probably somewhere in the $60,000, $70,000 range

when you make those two exclusions. The same thing is with the

$750,000 net worth. Again, those two exclusions take place and it

is just the individual net worth.

Chairman KERRY. Is that a determination that has been made

recently? I mean, has there been some analysis within SBA to actually conclude what you just said to us, or—I mean, over 10 years,

values have changed significantly in the country.

Mr. JENKINS. Mm-hmm.

Chairman KERRY. You don’t think it is appropriate after a 10-

year shift in property values, asset values, income values, wages,

all these different kinds of things, that that threshold might not

need some kind of indexing or updating, because it seems to

squeeze downwards rather than be expansive, which is what you

would want to be. Two-hundred-fifty-thousand dollars 10 years ago,

I don’t know what the value is today, but it certainly is different

by some significant component over 10 years, perhaps even as

much as doubled. Who knows.

Mr. JENKINS. Yes. No, there have not been any recent analyses

that SBA has conducted on that, but the only thing that I can, once

again, say is that it excludes the equity in one’s home and excludes

the investment in the business, and so the $250,000—and what we

see, again, is the average individual that comes into the 8(a) program is well below the $250,000. So it would sort of argue against

a need to increase it when the average is coming well below that.

Chairman KERRY. Thank you very much, Mr. Jenkins.

Senator Snowe.

Could I just mention something? I have been following the clock

here, trying to keep my time, but it keeps repeating itself. Could

we just do a total time on it? That would be helpful. Thanks.

Senator SNOWE. Thank you, Mr. Chairman.

Mr. Jenkins, I appreciate the statistics that you have given in

terms of how much progress has been made with respect to these

programs, but your testimony really didn’t address many of the

fundamental concerns that have been raised in a series of Inspector

General reports since 2004, the most recent from March of 2006.

The testimony from the second panel this morning will raise a

number of issues that have been a concern of this Committee and

obviously a concern of those who will be testifying.

For example, Mr. Robinson is going to talk about substantial examples of abuses and exploitation of small minority-owned businesses. I mean, it is a concern. He cites a number of individuals

who, at great risk, come forward to tell their story. Now, have

these individual cases come to your attention and what is the SBA

doing about them?

Mr. JENKINS. Well, first of all, I believe that Administrator Preston is very concerned to ensure that we have adequate levels of

oversight of the 8(a) program. Certainly the 8(a) program is a program that if we are not—if we don’t have the proper levels, then

it could create some problems where the benefits are not going to

those who they are intended for.

19

One of the things that we have done under Administrator Preston is we are conducting some studies, top-to-bottom review, for example. We are currently reviewing the mentor-prote ́ge ́ program.

We have an outside contractor that is working with us to evaluate

that program.

We are looking at one of the keys when someone talked about

making sure that more firms receive contracts in the program. We

have a provision in our regulations called the Competitive Business

Mix which require firms to wean themselves off of 8(a) contracts

when they get into the transitional year. We are looking at that to

make sure that we are properly—have oversight over that, as well

as the joint venture provisions in the program.

So there are about three or four areas that we are working on

that we believe do address some of the concerns that are in the IG

and GAO reports.

Senator SNOWE. Have you had any examples of abuses? Have minority-owned businesses come to your attention, such as the ones

that have been cited in Mr. Robinson’s testimony?

Mr. JENKINS. Yes. I mean, we are aware of certain abuses and

we are looking at ways to, one, improve our regulations, and two,

improve our overall oversight.

Senator SNOWE. I guess my question is what aggressive oversight

is the SBA providing with respect to these programs? I mean, that

is the bottom line because many of these issues have been raised

repeatedly. With respect to contract bundling, many of those issues

have not disappeared. Many of these contracts that have been bundled have gone forward without the SBA’s review. So there is no

aggressive effort on the part of SBA to examine some of these

major flaws with respect to programs that are supposed to help minorities throughout the country. So what do you do, for example,

when there is such a case of exploitation and abuse? What kind of

action does SBA take?

Mr. JENKINS. Well, first of all, we look to ensure that our regulation—one, are our regulations adequate in terms of preventing the

problem or do we have an issue with the abuse, with something

that is more—that would be referred to our Office of Inspector General? But the key is to ensure that we have adequate regulations,

that our staff is adequately trained. A lot of the program is actually

monitored and administered in our district offices and we conduct

routine training with our staff to ensure that they are catching any

possible abuse and that the firms are getting the benefits.

Senator SNOWE. Can you please enumerate for the Committee

what specific changes have been made to the 8(a) program and the

Small Business Disadvantaged Program that respond directly to

the issues raised by the Inspector General?

Mr. JENKINS. We have not issued any new regulations. We are

currently in the process of developing new regulations that we believe will go directly to some of the issues that are raised in both

the——

Senator SNOWE. When do we expect that to be completed, I

mean, because these reports came out in 2004, 2005, and now the

most recent was 2006. So when do we expect this process to be

completed?

Mr. JENKINS. We hope during this fiscal year.

20

Senator SNOWE. During this fiscal year?

Mr. JENKINS. This fiscal year, that we will have some draft regulations that will go through the process.

Senator SNOWE. And what changes do you hope to accomplish?

Mr. JENKINS. Well, I think the——

Senator SNOWE. Because these issues were raised with Administrator Preston early on——

Mr. JENKINS. Sure.

Senator SNOWE [continuing]. Back in February during a hearing.

So at what point do we expect to have those changes, and which

specifically can we expect?

Mr. JENKINS. I think one of the things that we are concentrating

on is our oversight of the program, to ensure that we have adequate oversight of the programs, that we have procedures that address any of the potential issues that have come up, that they have

very clear guidance for both the firms that are in the program as

well as for our staff that is administering the program.

Senator SNOWE. Are you aware of a number of companies, large

companies, that are not complying with their subcontracting goals,

I mean, they are basically a front? They draw small businesses in.

We will hear that in subsequent testimony, that they draw small

businesses in, but yet when it comes time to issue those subcontracts, small business participation is far below what they originally indicated and promised.

Mr. JENKINS. Yes. That has been an issue for Federal procurement for a number of years, when a small business takes time, effort, and resources to make a proposal to a large firm to get on a

team and after the large firm has received the contract, there have

been instances where the small businesses were pushed off the

team. We are certainly very concerned about that.

We have worked very closely with the procuring agencies that

really have the authority to enforce whether or not there is good

faith effort. The law talks about good faith effort on the part of the

large business prime and the only one that has the authority to enforce that is the contracting officer at the agency. So where we are

notified by small businesses, we bring that to the contracting officer’s attention and we try to increase our oversight of that large

business prime through our subcontracting program.

Senator SNOWE. I think that enforcement and heavy penalties

might help them to exercise a good faith effort, because that clearly

hasn’t been demonstrated in a number of instances and it continues to be a persistent problem. Thank you, Mr. Jenkins. Thank

you, Mr. Chairman.

Chairman KERRY. Thank you, Senator Snowe, an important line

of questioning. Senator Snowe doesn’t need any assistance in defending what she is asking, but I might comment that you didn’t

answer her question specifically about what she could expect when

and what is being specifically implemented on the 8(a).

Mr. JENKINS. Well, at this point, as I mentioned——

Chairman KERRY. When could we expect those changes?

Mr. JENKINS. Well, because of the process, the clearance process

that any proposed regulations will go in, it will be very difficult for

me to give a specific date. Our plan is to have regulations in place

21

by the end of the fiscal year. Earlier this year, and I believe late

last year——

Chairman KERRY. Why does it take so long? Why does this drag

on? I mean, as the Senator said, the Inspector General reported on

a lot of this stuff last year. It just seems like nobody is really moving this with any sense of priority.

Mr. JENKINS. Well, we—in the public notice, we identified areas

that we were going to address in the Advance Notice of Rulemaking. That was made available to the public earlier this year as

well as late last year. There are specific areas that we are working

on. We are currently reviewing that internally, but——

Chairman KERRY. Do you have a plan as to when the promulgation will take place? Is there a plan? Is there a business plan here

or a date?

Mr. JENKINS. There are dates, but understanding the process,

once regulations are released by an agency, then they do go to Office of Management and Budget——

Chairman KERRY. Sure. There are timeframes for all that.

Mr. JENKINS. Exactly. Our plan is to get those regulations

cleared through SBA and over to OMB well before the end of this

fiscal year.

Chairman KERRY. Senator Cardin.

Senator CARDIN. Thank you very much, Mr. Chairman.

Mr. Jenkins, thank you for your testimony. But I am going to tell

you, I am disappointed that we are not getting more specifics as

to the topic of our hearing, and that is helping minority small businesses. I am somewhat surprised that there isn’t a greater acknowledgement of the problems that are out there with the current

programs and the challenges of the budget support to your agency.

We are trying to work together to help minority businesses and

it would be helpful if we had more specific direction from SBA as

we try to improve the programs. It just points out, Mr. Chairman,

the need for the special office within SBA to deal with minority

businesses so that we have a focus on this issue.

The one area—well, there is more than one, but the one area

that you are specific about in your testimony, you say that for the

fiscal year 2008 budget you are targeting a total of $85 billion in

prime Federal contracting dollars to be awarded to small business.

Mr. JENKINS. That is correct.

Senator CARDIN. How much of that will it be a goal to award to

minority small businesses?

Mr. JENKINS. Well, currently, the rules talk—the statute requires

a 5-percent goal and what the SBA will do is continue to negotiate

that with the various agencies. Over the past 5 years, that goal has

been exceeded, from anywhere from 6 percent to as much as 7 percent.

Senator CARDIN. Do you think that is a reasonable percentage,

considering that Senator Snowe pointed out one-third of our population is now minority and approximately 50 percent of the new

small businesses are minority? Is that what you think is the right

goal for this country?

Mr. JENKINS. This is the statutory goal——

22

Senator CARDIN. I understand the statutory goal. I am asking

your view. You are on the front lines. You are dealing with the

businesses. Is that the right goal for this country?

Mr. JENKINS. I can’t answer that, Senator. The only thing I

could——

Senator CARDIN. Who could answer it in the agency as to what

needs are out there? You are the one who we rely upon to give us

the information. I think it is not. I think we should be doing better

than that. But it would be nice if we had your experienced view

on that as to what we should be shooting for. Do you have a specific number as to—these are prime contracts we are talking about?

Mr. JENKINS. These are prime contracts, prime contracts to small

businesses.

Senator CARDIN. I must tell you, I get complaints all the time

from small minority businesses in my State about the difficulty in

getting prime contracts.

Mr. JENKINS. In terms of the specific goals, certainly there is always room for improvement in terms of—and that is one of the

things the SBA does. We negotiate individually with each of the

Federal agencies. Some agencies will give us a higher goal and we

will achieve higher than the 5 percent. Others will be at the 5 percent.

Senator CARDIN. Well, let me go to the 7(a) and the 504 loan programs. The information that we have is that from fiscal year 2001

to fiscal year 2006, the share of loan dollars to African Americans

has risen only 1 percent, from 3 percent to 4 percent. For Hispanics, the share of the dollars have risen from 6 percent to 8 percent. Are you satisfied with those numbers?

Mr. JENKINS. No. I don’t think Administrator Preston is satisfied

and he——

Senator CARDIN. What are you doing to increase those numbers?

Mr. JENKINS. We are currently working with our Office of Capital

Assistance to look at ways of increasing the program, looking at the

specific programs we have. I mentioned the Community Express

Program has been very successful in reaching these underserved

communities?

Senator CARDIN. Are you going to have specific recommendations

for how we can get those numbers up?

Mr. JENKINS. I believe the agency is looking at ways of how to

get these numbers up, yes.

Senator CARDIN. And do you have any thoughts as to what that

number should be? Should it be—what percentage should be going

to minority businesses?

Mr. JENKINS. No, I cannot commit to a number.

Senator CARDIN. I didn’t think so. And last, Mr. Chairman, I

know my time is running out, on the 8(a) program, you talk in your

testimony about the importance of the program for mentoring, procurement assistance, business counseling, training, financial assistance, technical assistance, and yet the budgets have been reduced

in those areas. Does that mean that we are spending too much

money on technical assistance within 8(a)?

Mr. JENKINS. No. I believe we have the opportunity to leverage

all of SBA’s resources——

23

Senator CARDIN. Are you satisfied with the level of service presently being provided for technical assistance?

Mr. JENKINS. No, and we are looking at ways to increase the

technical assistance to all the firms that are in the program.

Senator CARDIN. Well, I hope so, because I must tell you, that

is another area that I get tremendous concern from the minority

small businesses in my community, that SBA is not doing enough

to help these firms in moving forward with procurement opportunities. I understand we have a desire for success. They must be successful, be able to succeed on their own—but in order to get there,

they need help and that is your responsibility.

Mr. JENKINS. That is correct.

Senator CARDIN. And I would have hoped that you would have

been a little bit more specific and forthcoming about what we can

do to improve the 8(a) program, because we get complaints. I agree

with the Chairman. The income levels are of concern to businesses

in my community. They haven’t been changed in many years. I

would just hope we could work together to try to improve these

programs so these percentages are more in keeping with the population of this country and with the new business starts in this

country.

Thank you, Mr. Chairman.

Chairman KERRY. Thank you, Senator Cardin.

Senator Tester.

Senator TESTER. Thank you, Mr. Chairman, and I want to thank

you, Mr. Jenkins, for your testimony.

I want to switch a little bit to Native Americans. I am looking

at some charts here that show that the 7(a) loans, about 1 percent

go to Native Americans, and evidently the 504 is so small it doesn’t

register on the chart. The question I guess I have for a start is how

do the requests equate with the amount given? In other words,

when you are getting loan requests from Native American minorities, how do those requests stack up with the amount loaned?

Mr. JENKINS. I don’t have the number. Basically what happens

is, as you are aware, the SBA guarantees loans. So the first contact

is through our marketing effort through the district offices and

then on channeling the businesses through the various banks in

which SBA has a relationship with.

Senator TESTER. OK. So you have no way to monitor that——

Mr. JENKINS. No.

Senator TESTER [continuing]. That ability? So do you have the

ability to monitor success, then, of the loans that are guaranteed?

Mr. JENKINS. Yes. We have the Loan Monitoring System at SBA

in which we look at the performance of all of the loans within the

7(a)——

Senator TESTER. Can you tell me how the minority loans stack

up against the other loans, and specifically could you tell me how

the Native American loans, from a success rate standpoint, stack

up?

Mr. JENKINS. I don’t have that with me, but I am sure we can

get that——

Senator TESTER. I would like to get that from you.

24

Is there anything you are doing in Indian Country to let people

know what is out there as far as program availability and help

educate them on how to access those programs that SBA offers?

Mr. JENKINS. Yes. That is really the foundation of our district offices to make sure constituents in their particular geographic areas

are aware of all of the SBA’s programs to leverage any of our resource partners that may be there to also get the word out.

Senator TESTER. Is there a special effort being made to let people

know, because, I mean, the amount of money that is being lent is

almost, truthfully, almost nonexistent in areas of our State where

under the best conditions there is 50 percent unemployment, and

it rises up over three-quarters unemployment almost as a rule.

Mr. JENKINS. Sure.

Senator TESTER. So is there any instruction given to those district offices to get out there and explain to the folks who are the

entrepreneurs, the minority entrepreneurs, what is available?

Mr. JENKINS. Yes, there is. Administrator Preston has an initiative to ensure that we reach the underserved markets, that we increase lending to all of the communities within the underserved

market. And so, once again, leveraging our resource partners, because sometimes a firm may not get the loan and we need to know

that in order to provide some business assistance to them.

Senator TESTER. I would ask a similar question as to what was

previously asked as to if you think we are making an adequate

amount of loans in Indian Country throughout the United States,

but I know your answer would be no, and it should be if it is not.

I think that there needs to be a concerted effort on the part of SBA

across the board, particularly in Indian Country, to educate folks.

I want to touch a little bit on banking, if I have got a minute.

You guys guarantee these loans to the banks. Is there any oversight done to the banks, I mean, as far as if they are working the

system?

Mr. JENKINS. Yes. We have a very stringent oversight. We look

at, as part of the Loan Monitoring System, not only do we look at

the individual loans themselves, but we also look at the performance of the individual banks.

Senator TESTER. As far as the percentage that is paid and the

percentage that you are guaranteeing?

Mr. JENKINS. Oh, yes. Yes.

Senator TESTER. OK. The dollars that are lent—and there are

several figures here—I don’t know if they are individual or cumulative, but $6.7 billion in fiscal year 2006 to minorities is what I

have from your testimony. Those dollars, are they all for startup,

or do you know that, or are some of them for continuing, and what

percentage each way, and do you have the ability to know that?

Mr. JENKINS. Sure. I don’t have the breakdown, but they are the

total. They cover startups all the way to more mature businesses.

Senator TESTER. Just in closing real quick, and thank you, Mr.

Chairman, Mr. Jenkins, I do appreciate your testimony. I hope that

the SBA sees some sort of urgency—I do—as far as education and

letting people know. There is a reason why there isn’t the kind of

investment in Indian Country that there ought to be, and we need

to determine what that is so that we can move forward. I mean,

25

there are people with good ideas all over and I would hope that you

would make it a priority.

Mr. JENKINS. Sure.

Senator TESTER. Thank you. Thanks, Mr. Chairman.

Chairman KERRY. Thank you, Senator Tester.

Mr. Jenkins, can you stay for the testimony of the folks following?

Mr. JENKINS. Sure.

Chairman KERRY. I think it would be important for you to hear

what they have to say. Too often, we have panels arranged that

way and I am going to try to see if we can change that as we go

forward.

But I think you can tell from the Members of the Committee, Mr.

Jenkins, there is a real anxiety here on the committee about the

implementation of this program. You just look at this chart up here

and you see the distribution and it is very, very disturbing when

you measure it, particularly—look at the microloans. You have got

22 percent. Look at what is going to African Americans in terms

of microloans versus the larger loans of either the 7(a) or the 504.

The 504 is, what, 2 percent. I mean, it is just crazy on its face. It

is almost insulting and it is unacceptable.

I am going to, I think, ask Senator Snowe if she would join with

me and with other Members of the Committee in writing a very

specific letter to the Chairman asking for a more detailed and precise set of expectations of what we can look for as we go forward

here, because we all hear this. We go out, anywhere we go in the

country, we talk to people, the people that we are supposed to be

helping, that this program has been set up to serve, and this isn’t

to serve us. This isn’t to help the folks who are in the program administering it. This is for the people out there who need it.

It does a disservice to everybody if there isn’t a kind of energy,

a lift, a push to try to say, hey, let us do better. Let us expand this.

That reverberates throughout the community. People feel it and

they know it when they see that kind of activity. But it just frankly

seems like nothing is happening.

And when you look at the lending level differential there, you

know, they are up, but they are smaller. The technical assistance

is less. It is just not accomplishing what it ought to be, and you

yourself have acknowledged there is a race-based need for this because there are problems out there.

So we ask you to think about that. We are going to leave the

record open for a couple weeks to submit some questions in writing

from colleagues and staff at the end of this. And I am glad you can

stay because I want you to hear what our next panel has to say.

Thank you.

I would invite the next panel, if they would, to come forward, Dr.

Jon Wainwright, vice president of National Economic Research Associates; Mr. Tony Robinson, president of the Minority Business

Enterprise Legal Defense and Education Fund; Bill Miera, the

CEO of Fiore Industries; and finally, Mr. Fernando Galaviz, chairman of the Small Business Association for Technology. Thank you

all for taking time to be here.

26

Again, if I could ask each of you to summarize your testimonies

in the 5 minutes, and we will proceed. Why don’t you lead off, Dr.

Wainwright.

STATEMENT OF JON WAINWRIGHT, VICE PRESIDENT, NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC., AUSTIN,

TEXAS

Dr. WAINWRIGHT. Thank you, Chairman Kerry, Ranking Member

Snowe, Members of the Committee. Thank you for allowing me to

appear here today. My name is Jon Wainwright. I hold a Ph.D. in

economics from the University of Texas at Austin and currently am

a vice president with NERA Economic Consulting. I would like to

ask the Committee’s permission to supplement my testimony with

additional written materials, if needed.

Chairman KERRY. Without objection, so done.

[The supplementary material referred to by Dr. Wainwright may

be accessed on the Committee’s Web site at http://sbc.senate.gov/

20070522.cfm.]

Dr. WAINWRIGHT. For almost 20 years, I have devoted the greater

part of my professional life to studying race and sex discrimination

and its impact on business enterprise in the United States. Since

2000, I have served as the policy director and principal investigator

for 22 studies of business discrimination. I have authored a book

on the subject and have provided expert testimony in Federal and

State courts on these matters.

The primary bulwark against business discrimination in the

United States has been the use of public sector purchasing power

to support the endeavors of Minority-Owned Business Enterprises,

or MBEs, and to promote fair and full access to Government contracting opportunities. Programs such as 8(a) and 8(d) and 7(a) of

the SBA and the DBE program of the U.S. DOT are key examples

of such policies at the Federal level.

I would like to address myself today to the current state of MBEs

in the United States and discuss statistics from some key publicly

available data sources. The first is the 2002 Survey of Business

Owners. We have already heard some statistics from that today.

Large disparities are observed in this survey between minority

share of the business population and the corresponding share of

business sales and receipts.

For example, although African Americans comprised 5.3 percent

of all U.S. businesses in 2002, they earned only 1 percent of sales

and receipts. Hispanics and Latinos, 7 percent of the businesses,

but only 2.5 percent of receipts. Asians and Pacific Islanders, 5 percent of businesses, but only 3.8 percent of receipts. Native Americans, 0.9 percent of businesses, but only 0.3 percent of receipts. As

you mentioned, Chairman Kerry, 18 percent, roughly, minority

business share in the United States, but only 7.5 percent, roughly,

of the sales and receipts for the business population.

Not only are these disparities very large, they are also statistically significant, meaning they are unlikely to have arisen due to

chance. Similar results are observed in all 50 States and the District of Columbia and in all major industry sectors.

Now, it is a fair question to ask whether these disparities arise

primarily from discrimination or whether they are due to other poVerDate 11-MAY-2000 09:09 Jan 09, 2008 Jkt 037636 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\37636.TXT DianeA PsN: DianeA
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tentially non-discriminatory factors. The evidence strongly suggests

they result from discrimination. I have tested this hypothesis using

microdata from the 2000 and the 1990 Decennial Censuses. The advantage of Census data is that it allows us to compare business

owners while holding a variety of other potentially non-discriminatory factors constant. Even when this is done, however, disparities

facing MBEs remain large and statistically significant.

Lack of access to capital and credit is among the most frequently

cited obstacles to success among MBEs. Discrimination in the credit market can obviously have an important effect on the likelihood

of success in business. The Survey of Small Business Finances

Data allows us to test for business discrimination in credit markets. These data contain complete balance sheet and credit history

information for each business interviewed, the same information

that would be available to a loan officer in deciding whether or not

to grant credit. These data show that minority-owned firms are

substantially and statistically significantly more likely to be denied

credit than are white-owned firms with similar balance sheets and

similar credit histories. We also find that when minority-owned

firms do receive loans, they are obligated to pay higher interest

rates than comparable white-owned firms.

In addition to statistical evidence, we have conducted thousands

of surveys and hundreds of personal interviews with MBEs and

non-MBEs alike. The results are strikingly similar across the country. In general, minorities report that they still encounter significant barriers to doing business in the public and private sector

marketplaces as both prime contractors and subcontractors, including stereotypical attitudes about their qualifications, double standards in performance, bonding and credit discrimination, and supplier price discrimination.

There is also general agreement among MBEs that without the

use of affirmative remedies such as subcontracting goals, these

firms would receive few, if any, opportunities on Government contracts, as is the case on projects without such goals. Thus, the continued operation and effective operation of programs such as 8(a),

8(d), and 7(a) were deemed essential to MBE survival.

In conclusion, it is fairly easy to specify in a general way the economic consequences of these programs. They have improved economic opportunities for minorities and women in business and,

therefore, improved the competitiveness and efficiency of the American economy. I am optimistic that the statistical and anecdotal

evidence will one day show that programs such as 8(a), 8(d), and

7(a) are no longer necessary because MBEs have achieved parity,

competitive parity, with their majority-owned counterparts. However, my own research shows that this day has not yet arrived.

Thank you, and I will be pleased to answer any questions.

[The prepared statement of Dr. Wainwright follows:]

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Chairman KERRY. Thank you very much, Dr. Wainwright. We

appreciate it very much.

Mr. Robinson.

STATEMENT OF ANTHONY W. ROBINSON, PRESIDENT, MINORITY BUSINESS ENTERPRISE LEGAL DEFENSE AND EDUCATIONAL FUND, LARGO, MARYLAND

Mr. ROBINSON. Good morning, Mr. Chairman, Senator Snowe,

Senator Cardin, and Senator Tester. Thank you for the opportunity

to come before you today. My name is Anthony Robinson and I am

president of the Minority Business Enterprise Legal——

Chairman KERRY. Your voice carries well, but why don’t you just

pull the microphone over so that the record can handle it. There

you go.

Mr. ROBINSON. My name is Anthony Robinson. I am with the Minority Business Enterprise Legal Defense and Educational Fund,

affectionately referred to as MBELDEF. MBELDEF was founded in

1980 by former Congressman Parren J. Mitchell as a national advocate for the minority business community. We work with businesses in every sector of the economy and every corner of the country. We appreciate the Committee for providing us this opportunity.

Since the Federal Government’s first efforts to level the contracting playing field in the 1970s, there has been substantial

progress for minority businesses. The growth of MBEs has been

dramatic. In fact, in some measure, MBEs have outpaced the

growth among all firms. However, minority firms continue to account for a disproportionately smaller share of overall business

than do non-minority firms, and they make less money.

As the Chairman has already noted, minority groups represent

32 percent of the population, but only 18 percent of the Nation’s

businesses. But it is even more important to note that minority

businesses receive only 6 percent of total business receipts and employ only 3 percent of the Nation’s civilian labor force.

The plight of the minority entrepreneur is brought into stark relief when he is faced with having to survive without minority contracting programs like the 8(a) and the SDB Programs. After the

Supreme Court decisions in Croson v. city of Richmond in 1989 and

Adarand v. Pena in 1995, many State and local governments eliminated programs designed to provide opportunities to MBEs. In the

wake of these decisions to curtail and eliminate programs, studies

have shown that minority firms have fared markedly worse where

there are no goal programs in place.

What are the reasons for these disparities in contracting? Why

are minority firms at such a disadvantage in our economy? One

study concluded that the gap that exists has not in any way been

caused by a lack of effort on the part of the minority entrepreneur.

The same study went on to note that discriminatory conditions that

previously existed and continue to exist were deep and pervasive

and have not been fully reversed.

I am here to relate the experiences of real business owners who

have confronted discrimination. I hope the Committee will seek to

understand how very difficult it is for these business people to

come forward and share their stories. By coming forward, they are

putting their businesses in jeopardy of being frozen out of future

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business opportunities with larger companies that dominate their

market or industry. In the interest of time, I can only provide a

short synopsis of the difficulties they have experienced. I would ask

further permission to submit a number of supporting documents for

the record after this hearing.

Chairman KERRY. We would welcome that.

Mr. ROBINSON. Thank you. The first example is of Mr. Maurice

Coates, an African American mechanical contractor who solicited a

quote for HVAC equipment from his supplier and then relied on

that quote. The supplier, a majority company, mistakenly faxed to

Mr. Coates a lower quote supplied to Coates’ majority competitor.

When Mr. Coates called the supplier and asked for the same price

quote provided his competitor, the supplier replied that they reserved the right to provide better pricing to their better customers.

Mr. John McDonald, an African American expert in institutional

real estate, had a contract with Domino’s Pizza to acquire and

build several stores. After being the only African American to attend a Domino’s convention, he received a call asking him to agree

to unreasonable amendments to his contract with Domino’s. When

he refused, the Domino’s representative told him, ‘‘I don’t like

doing business with you people anyway,’’ and threatened to ruin

his business, which they did.

Mr. Soo San Choi, an Asian American nuclear chemist, was the

victim of an attempt by a majority company to use him as a straw

man in order to obtain an 8(a) contract. Over the course of the

ploy, the 5-foot-tall, 82-year-old Mr. Choi was subjected to intimidation, coercion, and ultimately financial ruin.

The C. Earl Peek, who is with us at this hearing, is a young African American entrepreneur and exactly the type of young businessman who should be leading the growth of minority businesses. Instead, Mr. Peek is embroiled in a race discrimination lawsuit

against SBA where between 2000 and 2004, 95 percent of SSBIC’s

investment dollars went to white-owned and managed firms. The

SBA’s own IG found that Mr. Peek’s firm was subjected to ill treatment and bias.

Mr. Fernando Galaviz, who sits with me on this panel, an Hispanic business owner, teamed with an Asian-owned company, both

with excellent performance evaluations as subcontractors to Northrop-Grumman. As a result, Centech, Mr. Galaviz’s firm, experienced, assisted Northrop-Grumman in winning the contract. As a

result, the prime awarded 52 of 130 slots to Centech for their contribution in obtaining the award. After the first year on a 5-year

contract, the prime removed both minority firms. A similar experience with a Mr. Paul Curtis in Southern Florida.

I see my time has ended. I end by saying these few examples are

only the tip of the iceberg. Many, many more firms experienced

similar discrimination, and many others hoped that I would tell

their stories here today despite the risks to their businesses. I just

don’t have the time to tell them all. We must work together to ensure these businesses and others like them get the support that

they need.

Thank you for this opportunity, and I will be happy to entertain

any questions that you have.

[The prepared statement of Mr. Robinson follows:]

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Chairman KERRY. Mr. Robinson, thank you, and as I said, your

full testimony is placed in the record. Obviously, during the questions and answers, we look forward to any other examples that you

would like to put before the Committee. We thank you for it. It is

very important testimony and we understand how some of those

folks are reluctant to come forward, so it makes it very difficult.

Mr. Miera.

STATEMENT OF BILL M. MIERA, CHIEF EXECUTIVE OFFICER,

FIORE INDUSTRIES, INC., ALBUQUERQUE, NEW MEXICO

Mr. MIERA. Chairman Kerry, Ranking Member Snowe, and Members of the Committee, thank you for the opportunity to speak before you today on the importance of preserving and strengthening

small and disadvantaged businesses. My name is Bill Miera and I

own a technology company in New Mexico. I serve on the board of

the U.S. Hispanic Chamber of Commerce Board of Directors, where

I chair the Federal Procurement Committee. I also serve on the

board of the New Mexico 8(a) and Minority Business Association,

the largest 8(a) association in the Nation, where I chair the HighTech Committee. In addition, I serve on the board of the Professional Aerospace Contractors Association, where I serve as the

small business representative. I also serve on the Greater Albuquerque Chamber of Commerce and I was on the board on the Rio

Grande Minority Purchasing Council, among others.

Seventeen years ago, I started Fiore Industries, a graduate 8(a)

company specializing in high-technology products and services for

the Federal Government. While we have enjoyed success over the

years, we are probably about one-third the size we would be if not

for several obstacles.

One major obstacle we faced was contract bundling. We previously won two consecutive contracts as a prime with the Air

Force Research Laboratory for Directed Energy Systems Development. Based on our performance, the contract grew to $2.5 million

per year. Unfortunately, high-level decisionmakers within the

agency decided to bundle our contract. In order for us to continue

on the project, we were forced to team with another prime, a large

business, and we had to be the subcontractor. Our team won the

contract, but the new large prime eliminated our subcontract by

adding a surcharge of nearly 40 percent to our work.

This is one of the problems with bundling. Primes bring you in,

but rarely intend to give you work. In this case, all they really

wanted was to eliminate my company as a competitor with no repercussions. Half of our work was contracted out to other contractors who were non-competitors to the prime and about half was

taken in-house by the prime. The contract cost taxpayers $475,000

a year in increased expenses in order to save approximately

$50,000 in administrative costs. This is a false economy that also

fails to account for decreases in performance by the prime due to

the only competitor being eliminated and decreases in innovation.

Most patents, as you know, come from small businesses, not large.

Another obstacle we encountered was reduction in support from

our local SBA office. We received outstanding help and support

from the SBA when we started. Nevertheless, budget cuts and personnel transfers to Washington have decimated the number of staff

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at the local office, resulting in a drastic reduction of support the

local office provides to the small business community.

This is not limited to New Mexico alone. A fellow Hispanic business owner and board member at the U.S. SEC, Mr. Massey

Villareal, was told by his local Business Opportunity Specialist in

Texas after he received his 8(a) certification that, ‘‘After you receive

your certification, don’t call me because I am too busy to help you.’’

This is not the type of encouragement that SDBs expect from the

SBA.

Currently, my company needs infrastructure upgrades. I hesitate

approaching the SBA for help in the form of loan guarantees because the local office does not have sufficient staff. While the current office has dedicated workers, they do not have sufficient resources to accomplish their mission.

For these reasons, I believe it is critical that SBA funding be

adequately restored and sufficient personnel be assigned to the

field offices. To a new entrepreneur who hasn’t learned the system,

there was just absolutely nothing like a real person to talk to in

a local SBA office.

Another obstacle for SDBs is the failure of Federal agencies to

meet their small business contracting goals and a lack of increase

in the total small business goal of 23 percent. Additionally, new

small business categories only redistribute dollars from one deserving group of small businesses to another. This has resulted in

much fewer 8(a) contracts available for competition.

On the positive side, Fiore is an example of why the 8(a) program

is so critical. Eight years ago, we won a $12 million competitive

8(a) contract with the Department of Energy. Our performance

gave us the qualification to bid on similar contracts with the national laboratories. More importantly, it gave us the resources to

create our own laboratory. This allowed us to win a full and open

competition with the Department of Justice to develop a new technology for stopping vehicles in high-speed chases using smart

pulse-shaped microwaves. Absent our new laboratory, we would not

have won the contract nor developed this unique technology.

If I could quickly, with my remaining time, I disagree respectfully with the SBA on previous testimony and I want to quickly

turn to just a small part of my written testimony, especially around

the net worth issue. I want to point out that in 1988, the average

price for a gallon of gasoline was 91 cents. Now it is more than $3.

The price of an average home was $91,000. Today, it is $251,000.

A typical truck for a contractor is a Ford F–150. In 1988, it was

$13,000 and today it runs $30,000.

In addition, the limit on staying in the program means that the

strong ties that personal wealth has to business loans, that we are

not allowing the businesses to grow fast enough.

Mr. Chairman, I thank you and Ranking Member Snowe for inviting me to testify and I look forward to any questions. Thank you.

[The prepared statement of Mr. Miera follows with attachments:]

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Chairman KERRY. Thank you very much, Mr. Miera. Very helpful

testimony.

Mr. Galaviz, thank you, sir, for being here.

STATEMENT OF FERNANDO GALAVIZ, CHAIRMAN, SMALL

BUSINESS ASSOCIATION FOR TECHNOLOGY, ALEXANDRIA,

VIRGINIA

Mr. GALAVIZ. Thank you, sir. Chairman Kerry and Ranking

Member Snowe and Members of the Committee, it is important—

I would like to focus my testimony, opening testimony on solutions.

It is important that we all keep in mind that Federal program

managers are responsible, and you make them responsible, to assure that they have qualified companies to perform the work. The

marketplace has changed dramatically in the last 30 years within

the minority and the small business community, where there is significant competition, and therefore program managers at the Federal Government level have a wide range of options on firms to select.

The challenges of a startup firm, you are talking about the 8(a)

program, you are talking about the disadvantaged program, these

are developing programs, and you asked the question, how can a

firm build a capability in order to be responsible in meeting the requirements of the Federal client? And also keep in mind there is

a myth that even though you have in the legislation that there is

an 8(a) sole source program, that really is not true because for the

most part, on all 8(a) contracts under $3 million that can be awarded sole source legally, what happens is there is competition because

you are competing with a wide range of firms to present your credentials. So seldom really is the 8(a) program given a sole source

contract.

Now, how these firms develop capability, particularly, for example, that really you keep talking about disadvantaged goals or minority goals, but in reality, there is no disadvantaged direct contracting because that was eliminated because of the Adarand decision. So the only thing you have left really is the 8(a) program on

direct contracting and you have the small business program.

So what really is left to develop capability is the subcontracting

program, and everyone in this room knows that that program is basically, unfortunately, a farce or a lie. All of us, regardless of what

your religion believes or what your moral, we are all participants,

Federal Government people, elected officials, small business community, we all participate in a big lie and know that the subcontracting program, it is not a true program.

So therefore what we recommend is that we eliminate the socalled need for corporations to have subcontracting plans because

really they are not enforceable. Major corporations have shared

many times that they don’t care about how much you penalize

them, because even if you penalize them on a piece of work, even

if they don’t get their profits, they are happy just to get the G&A

and overhead that comes from that work that maybe should go to

a small business.

So what we recommend is that we totally overhaul the program

to be market-driven, to be market-driven where on contracts over

$2 million, instead of companies having to submit subcontracting

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plans, they submit a plan for subcontracting strategy which is evaluated as part of the proposal. And the major corporations, when

they select a company to be a partner, will provide them a subcontracting team agreement right away that is only executable at the

time of the contract award if the major corporation wins the contract.

That way, there is a legal linkage right at the beginning, because

right now what they do is they sign team agreements and team

agreements are useless. And keep in mind that small business cannot get into legal battles with major corporations. They cannot get

involved because politically, they cannot get involved because you

would be blackballed. Plus, corporations have bigger pockets.

So what we recommend, Mr. Chairman and Committee, is for

there to be a look at how we can streamline the subcontracting program to be really market-driven and eliminate the taxpayer having

to pay for all this monitoring, which is useless. And with all due

respect to our friends at SBA, whenever we come—SBA 20 years

ago did try to bring the private sector in to show them to be cooperative. It might be more legislation if they don’t pay attention.

As far as bundling, OK, the Air Force put a program on to allow

a group of small firms to come in an informal joint venture in order

to bid on large jobs. The program was in place. It was a proactive

program. Then SBA comes around and tells the Air Force, no, we

agree in principle, but because you didn’t sign the Memorandum of

Understanding, that program, you cannot use it. So I recommend

that if you look at the Air Force’s informal joint venture program

and institute it and get SBA to work with all Federal agencies to

institutionalize that program across the Federal sector, I think you

will see an improvement on the bundling issue.

[The prepared statement of Mr. Galaviz follows:]

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Chairman KERRY. Thank you, Mr. Galaviz.

Let me just say to all of you, your testimony has been really important and very, very informative. Mr. Jenkins, I am glad you

were able to stay here and listen to this because I think it is like

night and day, to be honest with you. I mean, there are just two

different worlds here that we are hearing about.

I need to go over for that 11:30 a.m. meeting that I mentioned.

Senator Cardin is going to Chair in my absence. I am going to get

back here. I want to follow up and I didn’t want to shortchange

anybody here. So I appreciate your indulgence in letting me do

that.

But I really do want to follow up on a number of things that

have been said. I think it is very important testimony. It is a very

important challenge to this Committee. It is an important challenge to the SBA, because clearly the bundling/subcontracting is

not working and it is ripping off a lot of companies. I mean, it is

just an unfair practice. So we need to dig into it. I know my colleagues will do that in my absence. I will try not to be repetitive

when I get back, but I thank you for your indulgence and I will

come back. Senator Cardin, thanks for chairing in my absence.

Senator Snowe, do you want to take over?

Senator SNOWE. Thank you, Mr. Chairman.

Thank you all very much for your testimony. I think it has been

very useful to hone in on some of the key flaws and weaknesses

with the existing programs and also for your recommendations on

what we can do to act upon some of these failures. Regrettably,

these flaws and weaknesses have been ongoing for so long and repeatedly and that has had an impact on the minority community.

The question is now where do we start to address some of these

issues, and certainly through the Small Business Administration or

through the Congress or totally revamping these programs.

I think, Mr. Miera, you mentioned several things that were certainly very disturbing, examples of why these programs are simply

not working to their potential and ultimately affecting the potential

of the minority community. We have heard these examples across

the board in many forms. But you mentioned that the Government

is actually back-sliding on Federal contracting with Minority Business Enterprises and 8(a) firms. So obviously we are moving in the

wrong direction.

You also recommend that the Office of Federal Procurement Policy oversee the implementation and the compliance with these programs rather than the Small Business Administration. Can you

comment on that, because I think that is an interesting point. I

would like to know why you think SBA might not be up to it. I

mean, the SBA obviously hasn’t demonstrated its oversight capability thus far, so I understand your skepticism, but could you expound further on that?

Mr. MIERA. One of the reasons that I think it is critical is that

even if the SBA steps up and really advocates strongly, for instance, in the case of unbundling a contract or something like that,

the problem is that they have to go to the agency itself and that

is their limit of who they can go to. So once they go to the agency,

if the agency has no interest and there is no repercussions to them,

there is no reason for them to reverse their decision. And so it has

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to be outside of an agency, and I think that is the logical place, so

that if the SBA doesn’t have any success there, that once they can

go somewhere else, there is a larger club that they can wield. I

mean, obviously, there has been a lot of back-sliding, and if there

is no motivation, if there is no repercussion, then it is just not

going to happen.

Senator SNOWE. Well, it is interesting to your point that even the

GAO has indicated that the SBA has never raised the issue of the

threat of penalties——

Mr. MIERA. Right.

Senator SNOWE [continuing]. You know, the penalty provisions

that now exist under the law. I am not so sure that the SBA has

ever exercised those penalties for large contractors who use small

businesses as fronts. Does anybody know of any examples with respect to SBA and how they have addressed these issues?

Mr. MIERA. I don’t personally, but one thing that I will tell you

is that I worked about 9 years in a very large business and I can

tell you that it is the problem with subcontracting. While there are

good people in those companies that will do the right thing, in general, large businesses and large entities are driven by—a large

business is driven by the stockholders and there is absolutely no

motivation if it doesn’t hit the bottom line. And if there are no repercussions, if there are no penalties, there will be no action. I can

guarantee that. I have seen that and that is one of the big problems.

Senator SNOWE. Mr. Galaviz, do you have any examples of where

the SBA has aggressively enforced or pursued some of these issues

to enforce compliance?

Mr. GALAVIZ. About 20 years ago, it did make an effort to have

a couple—trade associations to work with SBA and to encourage

them. That did not quite work, and then there was liquidation

damages added a few years later. If you look at the whole history

of what has happened in the last 10 years, I don’t think there are

more than three or four times in the whole Federal Government

where liquidation damages have been used.

Madam Chair, the sad part about it that really—there is in the

legislation now the authority for contracting officers to make major

corporations accountable, but the fact is that the management of

the agencies, and that happens whether it is Democratic or Republican, the leadership, they are not forceful enough to have their

contracting officers to manage the element of the subcontracting requirements.

As far as the other side of the story is that contract personnel,

they say they have so many things to deal with in managing and

executing a contract that this is just another thing that they have

to deal with and is not a priority to them.

The SBA itself in the last decade has not really been effective,

and when we have gone and talked to them, we get a lot of bureaucratic responses and nobody really wants to take on the effort. The

suggestion that I have made to the Committee is a suggestion I

have been making now for 6 years to different people, and it is

really a simple solution. It is so simple that it is too complicated

because they feel, you know, it cannot be that simple, but it is a

simple solution that we propose.

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Senator SNOWE. Mr. Robinson.

Mr. ROBINSON. I am unaware of any situation in which SBA has

vigorously enforced relative to subcontracting and bundling. One of

the things I think the Committee needs to take into consideration

were the changes that happened in procurement with FARA and

FASA. When those streamlining reforms came into the procurement process, a lot of the socio-economic issues that were normally

key to how a contracting officer operated were eliminated.

And so the regulatory constraints, if you will, that a contracting

officer had to take into consideration relative to subcontracting,

8(a), those kinds of things, with FARA and FASA, they were totally

eliminated and thus that took the restraints off of contracting officers, the sensitivity, if you will, at a minimum, off of contracting

officers. So I think the Committee needs to look at that issue if you

are going to look at this from a systemic standpoint and how you

bring more enforcement into that process.

Senator SNOWE. Do you think SBA is capable of enforcing compliance?

Mr. ROBINSON. No. Institutionally, no. Even where they have institutional power, let us say with the 8(a) program, I mean, technically with the 8(a) program under 95–507, SBA is the prime contractor. But they have delegated much of that responsibility away

and at least instances that I am aware of—we just had a situation

with an 8(a) contractor, F&L Construction Company here in the

District, and appeals to SBA to address that issue, the complaints

that this company was having—exemplary performance at Walter

Reed Hospital, and yet the appeals to SBA to come in and carry

out their role, their institutional role, went unheard.

Senator SNOWE. So this company went to SBA——

Mr. ROBINSON. Yes.

Senator SNOWE [continuing]. And there was no response?

Mr. ROBINSON. There was——

Senator SNOWE. Was this recent?

Mr. ROBINSON. This is recent, yes. This has been within the last

year.

Senator SNOWE. OK.

Mr. ROBINSON. It was within the last year.

Senator SNOWE. At Walter Reed——

Mr. ROBINSON. At Walter Reed Hospital, that is correct.

Senator SNOWE. Have you heard of anybody getting any response

from SBA on these particular questions, and certainly the egregious examples of discrimination that you raised in your testimony,

have you ever heard of an instance where SBA has responded appropriately?

Mr. ROBINSON. Not appropriately, no. I gave the case of Mr. Soo

Choi up in Pittsburgh. That was an 8(a) contract. The prime contractor just literally took the contract and acted as a prime, and

this was an 8(a) contract, once again. And his appeals to SBA, to

the Corps of Engineers, went unheeded.

Senator SNOWE. Well, it is clear they have to do something fundamentally different. I think that is undeniable.

Mr. Wainwright, you have obviously indicated in your testimony

statistics that buttress and reinforce the disparities and the discrimination that continue to exist with these 8(a) programs and is

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illustrated by these graphs. How would you recommend from what

you know on how we should proceed? I mean, the real question is

whether or not you can change the culture in an agency to do what

it is required to do. We have systematically had these reports. We

are dealing with contract bundling and fronting by large companies

fronting. The examples are replete, unfortunately.

Dr. WAINWRIGHT. Certainly, changing the culture is important. I

think that takes top-down leadership. I just would add a slightly

different take on some of this from a completely different perspective. Just to be fair to SBA and the other State and local governments around the country that are trying to enforce and protect

these affirmative remedies, you have to keep in mind the legal

landscape in the last 20 years for such remedies has become quite

perilous ever since the Croson decision. It has really chilled out a

lot of State and local governments, who are many of my clients.

From the moment they enforce, take a contract away from a low

bidder for not meeting the subcontracting goals, not meeting the

good faith efforts, they are slapped with a lawsuit that threatens

to take the entire program away. So consequently, you see oftentimes very tepid approaches to enforcement in the interest of keeping the program from going away entirely.

So some of the—to be fair to the public sector entities, they are

in a real bind as far as having had a lot of the teeth taken out of

their ability to aggressively enforce things. Does that excuse some

of the stories we have heard here today? Absolutely not, but I just

wanted to put that in as a recommendation, or as an observation.

Senator Cardin, you mentioned earlier, what should the goal be,

when you were questioning Deputy Administrator Jenkins. Certainly not 5 percent. We heard in the statistics 18 percent of the

businesses in the country are minority-owned. That doesn’t even

include women. Now, I believe the SDB designation does include

women—I could be wrong about that—but a 5-percent goal is clearly, at best, locking in the status quo ante from discrimination in

this country. So the goal certainly could go higher and I think that

would go a long way toward helping these communities.

Obviously, a high goal in an environment where the agencies

can’t even get the 5 percent goal right is still problematic. So I

think there are many, many things that have to happen simultaneously in order to really, as you said, Senator Snowe, allow these

programs to live up to their potential. But certainly they are very,

very important programs.

The other thing to keep in mind is that there are hardly any programs like this in the private sector. While some major corporations have developed really good supplier diversity programs, I

think those still remain the exception rather than the rule, and we

have to keep in mind that the private sector represents 90 percent

of the activity in this country. So for the burden to be on the public

sector to do all this by themselves is difficult and somewhat reminiscent of the boy with his finger in the dike trying to keep this

problem from bursting forth.

Senator SNOWE. Thank you and thank you all for your very illuminating testimony.

Thank you, Mr. Chairman.

Senator CARDIN. [Presiding.] Thank you, Senator Snowe.

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I want to join in thanking you all for being here. We hear the

numbers, the statistics. You put a face onto it. You give us some

of the specific examples, which I know are difficult to come by because of the concern that business people have about being able to

continue with their businesses and retribution. But I very much

appreciate the way that all of you have added to the record here

because I think it is going to be helpful in our work.

I want to go back to procurement for one moment with the subs

and primes. Of course, it would be a lot easier if we had higher

numbers of prime contractors. Then we wouldn’t have to worry

about whether there is a sincere effort to deal with the sub issue.

I had a meeting with small business people in my community

about compliance with these requirements and they brought up the

budget issues, not just the budget issues in SBA, but the budget

issues in agencies, that a lot of the agencies don’t have the technical capacity to do what is required under law or to, in fact, carry

out a good faith effort to make sure that these goals are met and

that efforts are made to be more inclusive.

I am just interested in your observations, whether we have an

attitude issue among various Federal agencies that is reflective in

some of the examples, Mr. Robinson, that you cited, or whether this

is just a fact that people are busy. Agencies are busy. They don’t

have enough resources to handle their work, so they look for an

easy way out and don’t do what they should be doing as far as

making sure our laws are not only complied with in number, but

in spirit. Who wants to take a jab?

Mr. GALAVIZ. Our experience has been that it all depends on the

leadership. If a cabinet secretary, let us say, like at the Department of Transportation demonstrates that it is important to the

secretary for them to do business with minority firms, 8(a) and

small businesses, and they are consistent with our policy statements, then you see it that all of a sudden the whole system works.

Where there is no leadership on top, they just move on. NASA is

a good example of where they really worked the program. So it depends who is the coach and who is the leader.

Mr. MIERA. My experience has been primarily with DOD, and

while there is no question that there is a requirement for some contract bundling, there just are issues that can’t be dealt with any

other way.

My experience has been that there is an attitude problem, and

what I have seen in the past is that some contracting officers and,

in fact, the technical program managers, just to take the burden

off of their plate, have just bundled contracts when it wasn’t really

necessary, that they just didn’t want to have as much work as they

used to have.

And the problem is that, as I said before, unless people’s behavior in this area is really forced to change and until there is an institution that is built and that will maintain itself, unless people

are forced to change, they will go back to what they feel comfortable doing and these folks have not supported minority business programs. They feel that it has been shoved down their throat

and if there is any opportunity to eliminate those kind of activities,

they are going to do it.

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And I have seen them use bundling as an excuse. Oh, we just

don’t have the money to pay for additional contracting officers. As

I showed in my example, it is a false economy. I mean, the government has ended up actually paying more money to eliminate a couple of contracting officers.

Senator CARDIN. Mr. Robinson.

Mr. ROBINSON. I think it is an attitude problem, yes. I think it

is also a personnel problem in that you have fewer people in the

procurement process. Somebody made mention of PCRs, and we

have seen just a dramatic decline in the number of PCRs that are

involved in the process. And so long as, from a systemic standpoint,

so long as you have the problems that were created by FARA and

FASA, you know, bundling is going to be here and the only way

to ameliorate that is to create a set-aside for small businesses and

minority businesses that becomes an institutional part of the procurement process. But with the advent of FARA and FASA, you

know, systemically, you are going to have a problem with bundling.

Bundling is going to be a mainstay in the procurement process.

Senator CARDIN. Dr. Wainwright.

Dr. WAINWRIGHT. I would just say a lot of my experience has

been at the State and local level. We just completed a study for the

State of Maryland last year where we worked with all the major

State agencies and I expect a lot of the things that we have observed at the State and local level are true in the Federal level as

well. As has been mentioned, people are spread thin. Certainly, the

people that are responsible for implementing compliance with minority business programs are often, at the State and local level,

one-person shops with way too much on their plate to effectively do

their jobs.

The other thing we have noticed, and I suspect this is true in the

Federal agencies, as well, is the people that are responsible for implementing and ensuring compliance with the SDB goal programs

hierarchically within the organization don’t have authority over the

contract administrators. They are at a lower level where their observations and recommendations really carry no weight with the

people who are administering the contracts and the major procurements.

So they are set up in the organizational framework without the

necessary tools they need to effectively, even if they don’t have the

attitude problems, if they are sincerely dedicated to doing their jobs

and seeing these programs work, they can’t really trump a veto by

a contract administrator.

Mr. GALAVIZ. If you take the Air Force, to use an example, the

Air Force in the last 10 years has taken a significant number of

programs that are worth, on a particular direct contract, a $100

million award at Colorado Springs, the C–4 contract, that went

small business set-aside. The Vandenberg Range, which is the most

sophisticated range in the world, after being for many years run by

major corporations, the Air Force moved that to the small business

community, and that was a $474 million award. The Nextance contract, which is a contract vehicle which is used internationally by

the Air Force and other DOD, they created a segment of small

business which half of the small businesses were minority firms.

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So there is, for example, with the Air Force a role model that this

Committee can use, and the SBA—I have gone, I have even gone

to the White House to have included in some Presidential speeches

what the Air Force has been doing and no one ever used it. Even

SBA, in order to get credit for their own programs, even though

they did not do the work for the Air Force, they should use that

as an example.

So it is a situation of leadership and attitude, and what the Air

Force has shown, and so has the Department of Energy, that the

small business community, including minority communities, there

is enough capability for them to deal with this large bundling contracts. And also, it is good business for the taxpayer, quite frankly,

for there to be this bundling contracts.

So the real answer, instead of fighting the system, is for the leadership of this Committee to propose that, let us say that 20 percent

of the bundling contracts should be set aside for small businesses.

And I can assure you, Mr. Chairman, there is enough capability in

this United States of the small business community to be able to

be competitive. It has been demonstrated by the Air Force many

times and also by other DOD agencies.

Senator CARDIN. Well, I agree with the thrust that leadership is

the principal driving force. If an agency head wants to make it

work, not only will it work, but the people that work in the agency

will know that that has got to be done. There is never enough

money in a budget to do everything an agency wants to do, and

they make their own priority judgments, but also, I think, budget

support is important. So we need to make sure the agencies have

adequate budgets.

Let me just move on to the area of finance and deal with the 7(a)

program and the 504 program. Those numbers are just not acceptable. What changes are needed in the programs in order to make

it easier for minority small businesses to participate in the major

funding programs?

Mr. ROBINSON. One of the principal things that can be done, of

course, is opening up the distribution chain so that minorities are

more involved in the chain that actually interfaces with minority

businesses. As noted in the peak example, you have very few minority firms in the SSBIC Program, which is your venture capital

program. And so opening that up so that you have more minority

firms, we have some very capable firms that operate in the venture

capital community, yet they find it extremely difficult to be involved in the SSBIC Program of SBA. So getting more minorities

involved in what I call the distribution chain for access to capital

would go a long way to opening up more opportunities—more finance for minority firms.

Senator CARDIN. If you have other suggestions in regards to how

we can improve this program, please let us know. This Committee

is very interested in trying to improve the SBA laws as relate to

minority opportunities. I know in talking with the Chairman, his

legislation that he has introduced plus other efforts are being made

to strengthen the tools that are available, understanding, of course,

that we need to work on leadership and attitude as part of what

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vate sector, as well, in order to make better progress on expanding

opportunity in America.

Dr. Wainwright.

Dr. WAINWRIGHT. I would just circle back, since it is almost apropos to your comment, to the net worth issue. I don’t know if that

binds in the 7(a) program or not. I believe it probably does. We

did—you know, the $750,000 figure, nobody seems to really know

where that came from. Senator Kerry suggested it was at least 10

years old. We have some anecdotal evidence it is more like 30 years

old, that it was pulled out in the 1970s when some of these programs were initially put forward.

We did some simple inflation indexing, assuming that it was only

10 years old, and it puts the number, and certainly Administrator

Jenkins is right that the threshold does not include equity in your

business or in your primary residence, but regardless, that

$750,000 number, even if it were 10 years old, ought to be around

$1 million. And quite frankly, it is probably a lot older than that

and, consequently, the indexing—I don’t know what a gallon of

milk was in 1970, but it was probably quite a bit—or a gallon of

gas was probably 30 cents a gallon, or 35 cents a gallon.

So that would go a long way, I think, toward enhancing fairness

in the program while maintaining the purpose of the net worth cap

in the first place which is to make sure that the benefits of the program are going to the firms that really need them.

Mr. ROBINSON. In that regard, we did some adjusting for infla- tion on that number and the number is more like $1.3 million, I

think, if it is 10 years old. If it is 30 years old, then that number

is much greater than that.

We have identified this issue of access to capital as a fundamental impediment to building capacity. As you have noted in your

statistics, the number of minority firms has grown exponentially.

It has been the fact that the firms lack capacity, and in operating

in a global market, you need capacity in order to operate that, and

we have found this issue of personal net worth to be one of several

impediments to building capacity in firms.

The number—I recall the hearing very vividly where the

$750,000 number came into play and that was about 1989, which

was soon after the Wedtech scandal had hit the 8(a) program and

there was all this concern about minority millionaires being involved in the program. And I recall specifically, I think it was Senator Nunn at the time who was Chairman of the Small Business

Committee, and the issue was, why $750,000? There is no adjustment for industry or anything of that nature. And the answer was,

it was less than a million.

Mr. GALAVIZ. If I may give, because I am the oldest person in

this room—[off microphone]—the concept was that basically this

was just a business—and it was also the concept that—let us focus

on the firms that need developing, the younger firms, because the

whole concept was that it does not count the value of your home,

OK. It does not count the value of your business. So the idea was

to make those businesses stronger, because a lot of firms after

being in the 8(a) program do not continue being in business. They

fail. Let us force these entrepreneurs to put their resources into

their business. So if they want to take advantage of these Federal

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programs, let them then commit that they can have the $5 million

home that they want, OK, but instead of buying that $50,000 car,

let us put it into the business, and that was the basic concept.

Senator CARDIN. Well, clearly we can do better under these programs. The fact that there has been no adjustment in law for over

10 years is certainly something we need to look at, because the pool

of applicants are smaller than otherwise, which would give you a

broader pool if we change that. It gives you the opportunity to

bring in more minority businesses. So it is something we need to

clearly consider.

Let me again, on behalf of our Committee, thank each of you for

your testimony here today. As the Chairman indicated, the record

will stay open and additional questions may be asked. Again, thank

you all.

I have one more question to ask, I have been told, because Senator Kerry is on his way back, so that gives me a chance to ask

one more question on these issues.

Let me go to technical assistance, which is an area that I hear

about frequently, on ways in which the SBA has not been as effective. For a company to be able to deal with the procurement issues,

they need help in dealing with Government procurement. I understand the rules of Section 8(a) that require a company to have

shown some degree of strength. Are you satisfied with the current

services being provided by SBA, the budget support for helping minority businesses prepare for Government procurement work?

Mr. MIERA. Well, I can answer that as a small business owner

and the answer is absolutely not. I mean, it was in part of my testimony, but it has been devastating to most, especially young, new

starting businesses the lack of resources in the local SBA office, I

mean, and the technical support that they receive when they are

there. It is just critical for a brand new company, somebody that

is just getting started and doesn’t really understand Washington or

how to get contracts, to be able to walk into the office and have

somebody there that is not only going to give them the technical

assistance, but also you were asking about the loan assistance.

There needs to be somebody there.

And while I understand the temptation in an agency when their

budgets are being cut to increase efficiencies by moving people to

Washington, it just doesn’t help the people that need the help.

They need to be out in the field. It is critical.

Senator CARDIN. Does anyone else wish to comment?

Mr. GALAVIZ. Mr. Chairman, one of the things that SBA did a

few years ago that helped a lot, and that is to have firms that

apply for the 8(a) program to go through a seminar ahead of time,

before they would turn in the application, and I don’t know whether that is happening now. But that was a very important help to

the firms because it gave a reality check to the firms. Do you really

want to get into this business? Do you realize there is a big difference between dealing with the Federal Government and dealing

with the private sector and that it takes a significant amount of

more resources to do business in the Federal sector?

The basic concept and reality is that technical assistance is best

given by the private sector, people who are in business that know

about business, OK. And with all due respect to a lot of folks at

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SBA, they are very fine, committed people, but none of them have

run a business. None of them have ever been responsible in making

a business be profitable.

So basically when you talk about this technical assistance, as

long as the SBA management and this Committee realizes that the

development of the firms in the first 4 years of being in business,

it is important there is significant assistance to them regarding

what it takes in order to succeed, because a major failure that we

find is that people also have an attitude sometimes when they

enter into the 8(a) program as if the Government or SBA is going

to put their contracts on their lap.

And what we now tell our members in our association, think of

SBA only as a person to certify you in the 8(a) program and think

of the 8(a) program only as another contract vehicle, but do not any

longer expect for the SBA to give you the technical assistance, and

for sure do not expect for SBA to really go and find contracts for

you.

Back 20 or 30 years ago, SBA did a much better job of working

with agencies in making sure that there were 8(a) contract opportunities. Today, if the Administrator of SBA spent more time at

home talking to cabinet officers and asking the cabinet officers to

definitely have 8(a) contract awards instead of politicking all over

the country, that would make a big difference, because we have

learned in the past that when a cabinet officer—it doesn’t matter

what kind of administration it is, but when they know that the

SBA’s leadership is dealing on a personal basis with a cabinet officer, then things do happen in that agency.

Senator CARDIN. Thank you very much.

Thank you, Mr. Chairman.

Chairman KERRY. [Presiding.] Thank you, Senator Cardin.

Thanks a lot for carrying on here. I really appreciate that enormously. I gather you have covered quite a bit of territory and I appreciate that very, very much. Thank you for doing so.

Can I just follow up? Mr. Galaviz, what you just said is very important because under the Clinton administration, I think Erskine

Bowles and others, they sat at the cabinet table, but this Administration specifically chose to downgrade the SBA, not just in budgeting, but in its presence, and I think that has had an impact. I

think that when people know that nobody is there sort of pushing

and there is no advocacy and there is no flag, it is not on the agenda.

Mr. GALAVIZ. Mr. Chairman, regardless of what administration,

no question as an individual, in my view of being involved in this

thing for 40 years, there is no question that Mr. Bowles, Administrator Bowles, was to me the most effective administrator in the

history of the Small Business Administration, and because why?

He was a bottom-line businessman. He worked on problems in a

very simple and very honest way and he also did his homework.

I wish we could find more—with all due respect to the present

Administrator——

Chairman KERRY. Yes.

Mr. GALAVIZ. [continuing]. I wish we could find more Mr. Bowles.

Chairman KERRY. Well, I appreciate your saying that. Personally, let me just say that I think that Administrator Preston has

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worked effectively with the Committee. I think he has started out

in an earnest way to try to grapple with some problems that he has

inherited and I still am hopeful that he is going to step up on some

of these things. And I think that he has a lot to get a handle on

in a short period of time, but we are anxious to work with him and

hopefully he can change a lot of this as quickly as possible.

Some of it is tough because OMB and the Administration are

squeezing on the budget. I am confident he asked for more than he

got, and he has to struggle to some degree with what he has. But

administratively, notwithstanding the budget constraints, a lot

could be done and you all have articulated that.

I don’t want to go over areas that already been discussed. I have

a pretty good summary here of some of the things you have been

asked, but let me just ask you quickly, and if this was asked, just

tell me and we will stay with the record. But on the subcontracting, Mr. Miera, how do we best get at that? I mean, this is

something we have heard for a long time. In some cases, primes

will use people to get the contract and then they dump them afterwards and different things happen. That is sort of what you have

described. You get squeezed out or they eliminate competition.

What is the most effective way for us to deal with this—is there

something statutorily we can do or is this simply a matter of administrative oversight and enforcement?

Mr. MIERA. Well, I think it is both. I think the SBA has to come

on stronger on enforcing the subcontracting plans. There is no

question they need to do a better job at that. But also, one of the

things that I have seen in non-Federal entities, if you will, is that

until a behavior becomes institutionalized, it has to have some kind

of motivation, and what I have seen in other institutions is that

they have awarded contracts where part of the award fee was dependent on how well they executed their subcontracting plan. That

is absolutely the only thing that I have ever seen work.

There are other ideas that have been tried, for instance it comes

into play when you are giving an award and it is taken into account in the evaluation and maybe in past performance. Those

things are so far apart from the direct bottom line that an organization looks at, that they do not work. But the annual or semi-annual award fee, when there is actually an effect on the bottom line

to the company, that is all I have ever seen work. So there has to

be some teeth put into the executing on the subcontracting plans

or, in my opinion, it just never happens.

And I think that should be across the board. It is not just with

the large prime contractors. We need to be careful as more contracts are bundled, they end up being larger contracts even with

small businesses, because while there has been an increase in the

number of dollars that have gone to minority businesses, if you

look at the actual number of contracts, and, the number of businesses, that has not done as well. So we want to make sure——

Chairman KERRY. Because of the bundling?

Mr. MIERA. Exactly. So you get a couple of small businesses——

Chairman KERRY. What is the fundamental reason they are bundling? Are they bundling to avoid the administrative overhead of

doing more of the contracts? Are they bundling because it is a simVerDate 11-MAY-2000 09:09 Jan 09, 2008 Jkt 037636 PO 00000 Frm 00098 Fmt 6633 Sfmt 6633 C:\DOCS\37636.TXT DianeA PsN: DianeA
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pler way of getting the money out the door? Or is it a way to take

care of people that you want to take care of?

Mr. MIERA. Absolutely all of the above. What I have seen is that

there is a real requirement. There is no way around it. There have

been lots of cuts in the administrative ranks and there are not

enough contracting officers and there are some efficiencies, not all,

but there are some efficiencies to bundling.

But what I have also seen is that contracting officers and program managers have used it as an excuse. They never supported

minority business programs. They never supported the 8(a) program. And if there is any method that they can use to not have

to go to contractors like that, they will use it.

So I have seen it just as an excuse, where they say, oh, well, we

don’t have enough contracting officers. But as I showed in my example, it is false economy. In actually, many times where there are

subcontracting requirements, it has cost the Government and the

taxpayers more money to bundle a contract where there is subcontracting involved than if they would have just hired another contracting officer to administer the contract.

Mr. GALAVIZ. Mr. Chairman, with all due respect, think of you

building a home and deciding not to have a general contractor, and

for the electrician to do this and the plumber to do that. Basically,

the fact is that it makes sense many times to bundle in order for

that Government official to have one point of contact, one point of

accountability, and then have the work be done.

So I think it is realistic to say that bundling is here to stay. Bundling is not going to go away. And it is difficult to manage. Even

President Bush’s Executive order that he put in 2 years after he

took office, although it was a good faith effort, but that Executive

order is not working.

The fact is that while you were away, we stated that several

agencies have demonstrated, like the Air Force, where there is significant capability in the small business community and the minority community to handle major contracts. As I stated, the Air Force

has demonstrated on providing direct awards, competitive awards

of $800 million or $474 million. The civilian agencies like the Department of Energy have set aside an important contract that was

awarded to a small business on a competitive basis that was almost

a half-a-billion-dollar contract. And there was a lot of competition

for those contracts.

So basically, bundling is here to stay and the best solution is to

have a set-aside to say, of all the bundling contracts, 20 or 25 percent will be set-aside on a competitive basis for the small business

community, and then if you let SBA and the Air Force complete

their negotiations to have the informal joint venture so that a lot

of small business can gather to meet the 51 percent, the 50 percent

rule as a prime contractor for small business set-asides, then between that and having the set-asides for bundling, that will be

really the long-term solution, the only solution.

On the subcontracting, with all due respect, it is best to get the

Government out of monitoring. Get SBA out of the subcontracting

business. But have this Committee—have the leadership of this

Committee to design a program that is private-sector-driven and

where it gets the parties, the subcontractor and the prime conVerDate 11-MAY-2000 09:09 Jan 09, 2008 Jkt 037636 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 C:\DOCS\37636.TXT DianeA PsN: DianeA
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tractor, in the legal subcontractor arrangement and that that arrangement is submitted with that proposal so the Government can

evaluate.

Today, Mr. Chairman, if a major prime wants a $200-million contract and they say in their subcontracting plan that they are going

to give 20 percent, that is $40 million. But what really happens is

when the contract starts, only $8 million is really distributed within the subcontract to small business. The other $32 million is later

on to be determined who is going to do the work over the 5 or 10

years of the contract. So what happens is a good portion of that $32 million never gets

to the subcontractors. It goes to the prime because that means

more money to their pockets, which really means that the evaluators of that proposal, the Federal evaluators, only were able to

get to know at the beginning what 80 percent of the work was

going to be done by what companies. Now, would anyone in this

room buy a house without looking at the master bedroom and the

kitchen? And the way the thing works, that is exactly what we are

doing. We let this corporation submit their plans. They don’t award

the contracts at the beginning, when the contract starts, and no

one knows who later on—small business will not get the subcontract contracts.

Chairman KERRY. Well, we are going to take a look at that.

Dr. WAINWRIGHT. Mr. Chairman——

Chairman KERRY. Yes, sir.

Dr. WAINWRIGHT. I would just add, I think I agree with both

these gentlemen in that you have to tie the subcontracting plan to

the profits of the contractor, not just their ability to get the award,

but once—because, you know, once the award is won, they can blow

off the subcontractor——

Chairman KERRY. And then the game gets played and the money

gets distributed and there is no back-up on that. Is there not sufficient oversight or follow-up on that now? No?

Dr. WAINWRIGHT. [Shaking head.]

Chairman KERRY. OK. Well, we have to take a look at that. Obviously, it is not working right and that is a very good point of accountability, so we ought to be taking a look at that.

One quick question before we wrap up here. On the venture capital dollars, SBA’s shrinking venture capital dollars, I wrote the

Administrator last year and he wrote back to say they were making a lot of effort to reverse those things with aggressive outreach

efforts and that a number of minority-led firms are in the process

of applying for SSBIC licenses. That was a year ago. Do we have

a sense of how we are doing on that in your judgment, any of you?

Mr. Robinson?

Mr. ROBINSON. At best I can tell, very poorly. I don’t see anything that I am aware of that would suggest that the SBA has

moved forward aggressively to include more minorities as Special

Small Business Investment Companies. So I have seen no real

movement on that.

Chairman KERRY. Mr. Miera

Mr. MIERA. What I have seen in my experience is that the few

folks that are left in the field are barely keeping their heads above

water, much less putting anything new in line.

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Chairman KERRY. Well, let me wrap up by saying to everybody,

Senator Snowe knows these issues as well as anybody in the Congress and I have been on this Committee for a fair amount of time

or I wouldn’t be sitting in this Chair. I have never seen the SBA

at loggerheads with the community it is supposed to serve to as

great a degree as it is today, and it is baffling to a lot of us on this

Committee on both sides of the aisle. It is very frustrating.

And I hope, Mr. Jenkins, you kind of go back there, and I think

it is time for us to think about when we get the Administrator

back. I have been trying to give him a fair amount of time to kind

of get a handle on things and be able to get his feet under him over

there, but we have to figure out how we are going to turn this relationship around, because we are hearing from too many of the clients in the community that it is not working for them correctly.

And we always expect a wrinkle here or there and there are always things that you can adjust a little and there are tweaks and

so forth, but this is bigger than tweaking and adjusting. This is

some sort of fundamental breakdown, and part of it goes to the

budget issue which we have been screaming about here also on a

bipartisan basis for a couple of years.

This notion, you know, Hector Barreto used to come in here and

say, well, we are doing more with less. I mean, that was great rhetoric, but it just isn’t happening. There is less happening with less

and it is not happening as well as it used to be.

So it baffles me, because the SBA has the ability to have its own

budget paid many times over by the companies that expand the tax

base of this country. And when you look at it, you can take some

of the icons of the effort over the years, ranging from the FedExes

to the Intels to the Callaway Golfs and run down a long list of

them. But you can take less prominent ones and find a sufficient

return to the Federal Treasury to have paid this budget many

times over. So, I mean, this nickel-and-diming just doesn’t make

sense. I don’t know whose ideological juices are getting pumped by

it, but it is really counterproductive.

So on that note, folks, we are going to try to pursue this, and I

will spend some time with the Ranking Member, and we will talk

together about how we can do this in a bipartisan and thoughtful

way.

We appreciate your testimony here very much. Thank you all.

We stand adjourned.

[Whereupon, at 12:17 p.m., the Committee was adjourned.]

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COMMENTS FOR THE RECORD

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114

115

Æ