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HOW INFORMATION POLICY AFFECTS THE COMPETITIVE VIABILITY OF SMALL AND DISADVANTAGED BUSINESS IN FEDERAL CONTRACTING

HEARING

BEFORE THE

SUBCOMMITTEE ON INFORMATION POLICY,

CENSUS, AND NATIONAL ARCHIVES

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

SEPTEMBER 24, 2008

Serial No. 110–147

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

SUBCOMMITTEE ON INFORMATION POLICY, CENSUS, AND NATIONAL ARCHIVES

WM. LACY CLAY, Missouri, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

JOHN A. YARMUTH, Kentucky

PAUL W. HODES, New Hampshire

MICHAEL R. TURNER, Ohio

CHRIS CANNON, Utah

BILL SALI, Idaho

TONY HAYWOOD, Staff Director

(III)

C O N T E N T S

Page

Hearing held on September 24, 2008 ..................................................................... 1

Statement of:

Boston, Thomas, Ph.D., economist, Georgia Tech University; Jon Wainwright, Ph.D., National Economic Research Associates; Anthony Brown,

senior association, MGT of America; Anthony Robinson, president, Minority Business Enterprise Legal Defense and Education Fund Inc.;

and Earl Peek, president, Diamond Ventures, LLC .................................. 10

Boston, Thomas ......................................................................................... 10

Brown, Anthony ......................................................................................... 55

Peek, Earl .................................................................................................. 70

Robinson, Anthony .................................................................................... 62

Wainwright, Jon ........................................................................................ 19

Letters, statements, etc., submitted for the record by:

Boston, Thomas, Ph.D., economist, Georgia Tech University, prepared

statement of ................................................................................................... 12

Brown, Anthony, senior association, MGT of America, prepared statement

of ..................................................................................................................... 57

Clay, Hon. Wm. Lacy, a Representative in Congress from the State of

Missouri, prepared statement of .................................................................. 3

Peek, Earl, president, Diamond Ventures, LLC, prepared statement of ..... 72

Robinson, Anthony, president, Minority Business Enterprise Legal Defense and Education Fund Inc., prepared statement of ............................. 64

Wainwright, Jon, Ph.D., National Economic Research Associates, prepared statement of ........................................................................................ 21

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HOW INFORMATION POLICY AFFECTS THE

COMPETITIVE VIABILITY OF SMALL AND

DISADVANTAGED BUSINESS IN FEDERAL

CONTRACTING

WEDNESDAY, SEPTEMBER 24, 2008

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON INFORMATION POLICY, CENSUS, AND

NATIONAL ARCHIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m. in room

2154, Rayburn House Office Building, Hon. Wm. Lacy Clay (chairman of the subcommittee) presiding.

Present: Representatives Clay, Yarmuth, and Turner.

Staff present: Darryl Piggee, staff director/counsel; Jean Gosa,

clerk; Alissa Bonner and Michelle Mitchell, professional staff members; Charisma Williams, staff assistant; Leneal Scott, full committee information systems manager; Charles Phillips, minority senior

counsel; and Emile Monette, minority professional staff member.

Mr. CLAY. The Information Policy, Census, and National Archives Subcommittee will come to order.

Welcome to today’s hearing entitled, ‘‘How Information Policy Affects the Competitive Viability of Small and Disadvantaged Businesses in Federal Contracting.’’

Without objection, the Chair and ranking member will have 5

minutes to make opening statements, followed by opening statements not to exceed 3 minutes by any other Member who seeks recognition. Without objection, Members and witnesses may have 5

legislative days to submit a written statement or extraneous materials for the record.

I will begin with the opening statement. It has long been the policy of the Federal Government to assist minority and other socially

and economically disadvantaged small businesses to become fully

competitive and viable businesses. The objective has largely been

pursued through the Federal procurement process by allocating

Federal assistance and contracts to foster disadvantaged business

development.

Federal assistance has taken a variety of forms, including targeting procurement contracts and subcontracts for disadvantaged or

minority firms, management and technical assistance grants, educational and training support, and surety bonding process.

There has been a large body of evidence concerning discrimination. Court cases, legislative hearings, quantitative studies and anVerDate 11-MAY-2000 14:52 May 05, 2009 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 U:\DOCS\48659.TXT KATIE PsN: KATIE
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ecdotal reports detail the considerable discrimination based on race

and national origin that confronts minority contractors in all parts

of the country and in virtually every industry.

The discrimination is not limited to one particular minority

group; instead, evidence shows businesses owned by African Americans, Latinos, Asian, Pacific Islanders, and Native Americans all

must overcome discriminatory practices in order to grow and prosper.

This subcommittee will look at some of the information, data,

and assumptions dealing with the subject of minority contracting

and Federal programs and how they deal with discrimination

against minority business. We will look at disparities in the marketplace and help determine if those disparities are the result of

discrimination.

This hearing is the first in a series of hearings that will hear testimony regarding recent data, studies, and other evidence of discrimination against minority businesses, including the abuse of the

subcontractor status of minority businesses. The courts will look

closely to see that Congress, while exercising its rights and duties

to enact broad discrimination remedy, tailors this legislation in this

area within the confines of relevant court decisions.

The courts must be convinced that Congress has strong evidence

of actual discrimination to fashion a constitutionally sufficient remedy. We can assist by making sure this information is current and

relevant to present conditions.

[The prepared statement of Hon. Wm. Lacy Clay follows:]

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Mr. CLAY. I now yield to the distinguished ranking minority

member, Mr. Turner of Ohio.

Mr. Turner, you are recognized for an opening statement.

Mr. TURNER. Thank you, Mr. Chairman. I appreciate you for

holding a hearing on this issue.

Maintaining a high-performing, robust, small, disadvantaged

business contractor base is an important goal of our Federal policy

and our public policy. We meet today to discuss the challenges facing minority-owned small businesses when they compete for Federal contracts. This is a complex issue which plays out at the intersection of procurement policy and business judgment.

The attendant goal is that small businesses compete on a level

playing field with other contractors, while at the same time ensuring that they have an active competitive market available to the

Government so that we can get the best value for the American

taxpayer. Federal Government spends over $400 billion annually on contracts. Federal Government currently has a goal of awarding 23

percent of its prime contracts to small businesses, and 5 percent of

its prime and subcontracts for small, disadvantaged businesses.

According to the Small Business Administration, which administers the small, disadvantaged business program, in fiscal year

2005 the Federal Government awarded nearly $21 billion in contracts to these firms, representing 6.55 percent of the total expenditure for that year. In 2006 the Government awarded contracts valued at nearly $23 billion to small, disadvantaged businesses, representing 6.75 percent of the total amount spent for that year.

Clearly, the data supporting these numbers is critical. I am interested in reading the testimony from today’s witnesses about how

Federal information policy affects competitive viability for minority-owned businesses, how we can get an accurate picture of the

marketplace, and how we can improve opportunities for this important segment of business owners.

Thank you, Mr. Chairman.

Mr. CLAY. Thank you so much, Mr. Turner, and thank you for

joining us.

If there are no additional opening statements, the subcommittee

will now receive testimony from the witnesses before us today.

Our first witness is Dr. Thomas Boston, economist, professor of

economics at Georgia Tech and principal of the EuQuant Consulting Firm. He has done extensive research on small and disadvantaged businesses, including work for the Congressional Black Caucus Foundation and the U.S. Congressional Small Business Committee to revise Federal regulations regarding small, disadvantaged business.

Welcome to the committee, Doctor.

Mr. BOSTON. Thank you very much, Mr. Chairman.

Mr. CLAY. Let me finish introducing everybody, and then we will

let you start it off.

Our second witness is Dr. Jon Wainwright, vice president of National Economic Research Associates. Dr. Wainwright specializes in

labor, economics, statistics, and industrial organizations. He has

executive experience in analyzing the effects of discrimination on

minorities, women, and persons over 40. Dr. Wainwright has testiVerDate 11-MAY-2000 14:52 May 05, 2009 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 U:\DOCS\48659.TXT KATIE PsN: KATIE
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fied as an expert witness in Federal and State courts on these

issues and has authored a book and numerous research reports on

these subjects.

Welcome, Dr. Wainwright.

Next we will hear from Mr. Anthony Brown, senior associate of

MGT of America, a national management consulting firm specializing in assisting public sector entities, the completion of disparity

studies, complex statistical and social research projects that evaluate evidence related to minority- and women-owned firms. Disparity studies help determine whether or not race or gender bias exists

in Government and private contracting.

Thank you for being here, Mr. Brown.

Our next witness will be Mr. Anthony Robinson, president of the

Minority Business Enterprise Legal Defense and Education Fund

Inc., an organization founded by the late Parren J. Mitchell, a

former Member of the U.S. House of Representatives from Maryland.

As president of MBELDEF, Mr. Robinson and the organization

have actively participated in the passage and preservation of major

MBE legislation. Mr. Robinson, through MBELDEF’s National

Lawyers Panel, has participated as a litigant or amicus on occasions before congressional committees regarding issues of importance to the MBE community.

Thank you, sir, for being here.

Our final witness, Mr. Earl Peek, president of Diamond Ventures. Mr. Peek, a CPA, has an extensive background in public accounting, commercial lending, and as an entrepreneur, having run

his own business for 8 years. He crafted minority finance programs

in the city of Atlanta and assisted many for technical assistance organizations and business plan review models, deal flow summaries,

underwriting write-up techniques, and more.

Thank you also for being here. We could probably use your expertise on Wall Street today.

Thank you all for appearing before the subcommittee today.

It is the policy of the committee to swear in all witnesses before

they testify. Would you please all stand and raise your right hands.

[Witnesses sworn.]

Mr. CLAY. Thank you. Let the record reflect that the witnesses

answered in the affirmative.

I ask that each of the witnesses now give a brief summary of

their testimony. Please limit your summary to 5 minutes. Your

complete written statement will be included in the hearing record.

Dr. Boston, you may begin.

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STATEMENTS OF THOMAS BOSTON, PH.D., ECONOMIST, GEORGIA TECH UNIVERSITY; JON WAINWRIGHT, PH.D., NATIONAL

ECONOMIC RESEARCH ASSOCIATES; ANTHONY BROWN, SENIOR ASSOCIATION, MGT OF AMERICA; ANTHONY ROBINSON,

PRESIDENT, MINORITY BUSINESS ENTERPRISE LEGAL DEFENSE AND EDUCATION FUND INC.; AND EARL PEEK, PRESIDENT, DIAMOND VENTURES, LLC

STATEMENT OF THOMAS BOSTON

Mr. BOSTON. Thank you, Mr. Chairman. Mr. Chairman, Congressman Turner, and distinguished members of the Information

Policy Subcommittee, I thank you for allowing me to testify on this

important topic.

As you noted, Mr. Chairman, I am a professor of economics at

Georgia Tech, where I have taught since 1985. I am also the owner

of a consulting company, EuQuant, that specializes in economic

and statistical research. One of my primary areas of research is minority business development.

Recently I was asked by the Congressional Black Caucus Foundation to examine the policies of the small, disadvantaged business

program administered by the Small Business Administration. Our

primary objective was to determine whether or not the $750,000

ceiling established for the personal net worth of participating business owners had adversely affected the ability of SDBs to increase

their capacity.

As you know, the Federal Government established the SDB program to mitigate the effects of decades of discrimination against

firms owned by minority and disadvantaged business owners. In

1998 the personal net worth ceiling was established to restrict the

program’s eligibility to only disadvantaged minorities and other

business owners who claimed disadvantaged status.

Our study found the following: The ability of small firms to secure bonding or gain access to capital is tied closely to the owner’s

personal net worth; therefore, by capping personal net worth, the

SDB program has constrained the ability of firms to secure bonding

and finance, and therefore to perform large contracts.

Our study found that there is a 40 percent relationship between

changes in SDB revenue and changes in their owners’ personal net

worth; therefore, when personal net worth is constrained, the revenue capacity of SDBs is also constrained.

We also found that if SDBs did not have to operate under the

current personal net worth ceiling and if they were treated the

same as our non-minority-owned firms, their current annual revenue would be higher by almost $1 million. The personal net worth

ceiling has not been adjusted for inflation since 1998, which means

its real inflation-adjusted value in 2007 was $550,000, and today

it would be even much lower.

Furthermore, the current ceiling was not based on any empirical

study but was simply a policy decision. That decision did not even

take into consideration the fact that different industries require

different levels of capitalization, so today SDBs in manufacturing

or heavy construction have the same ceiling as do SDBs in printing.

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Mr. Chairman, our study recommended new industry-specific

ceilings that we believe meet the legal test of strict scrutiny. In

construction, we recommend a ceiling of $979,000; in manufacturing, $1,043,000; and in professional and scientific services,

$1,026,000. We also recommend that the ceiling be adjusted annually for inflation and that businesses be allowed a 2-year transition

period to remain in the SDB program once their owner’s net assets

have reached the personal net worth ceiling.

Finally, Mr. Chairman and committee members, we believe ultimately the personal net worth ceiling should be replaced with more

industry-specific and business development criteria. We are currently researching a business development index that incorporates

numerous company and industry variables into a single metric that

can be used to determine SDB program eligibility. For the record,

we have provided the executive summary of the study we conducted for the Congressional Black Caucus Foundation and will

gladly provide copies of the current research once it is completed.

Thank you very much.

[The prepared statement of Mr. Boston follows:]

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Mr. CLAY. Thank you, Dr. Boston. I appreciate that.

We will now go to Dr. Wainwright. You may proceed with your

opening statement.

STATEMENT OF JON WAINWRIGHT

Mr. WAINWRIGHT. Thank you, Chairman Clay, Ranking Member

Turner, members of the committee. Thank you for the invitation to

appear here today.

My name is Jon Wainwright. I hold a Ph.D. in economics from

the University of Texas at Austin. Currently I am a vice president

with NERA Economic Consulting in Chicago, IL, and Austin, TX.

Since 1989, I have devoted the greater part of my professional

life to studying race and sex discrimination and its impact on business enterprise. Since 2000 I served as the project director and

principal investigator for 28 studies of business discrimination,

and, as Chairman Clay pointed out, I have provided expert testimony in Federal and State court on these and related matters.

I have provided to counsel a CD-ROM containing eight of these

studies, including one from the chairman’s home town in St. Louis,

as supplementary material to my testimony today.

The primary bulwark against business discrimination has been

the use of public sector purchasing power to promote fair and full

access to Government contracting and procurement opportunities

for minority- and women-owned businesses. Section 8(a) and 8(b) at

the SBA, the DB program at U.S. DOT, and the SDB program are

key examples of such policies at the Federal level. Today I would

like to address the current state of MBEs as documented in several

key Federal data bases and the implications for the continuing

need for the public sector to use its purchasing power to help remedy the ill effects of business discrimination.

In my written testimony I also offer some suggested modifications to key Federal data bases that would enhance the ability of

social scientists and policymakers to meet the strict scrutiny standard.

The first data base is the 2002 Survey of Business Owners

[SBO]. Nationally, large disparities are observed in the SBO between the minority share of the business population and their

share of business sales and receipts. African Americans comprise

12.7 percent of the population, but they were only 5.3 percent of

U.S. businesses, and earned only 1 percent of business receipts.

Hispanics and Latinos comprise 13.4 percent of the population,

but were only 7 percent of all businesses and earned only 2.5 percent of business receipts.

Women comprise 51 percent of the population, but they counted

for only 28.9 percent of the businesses and earned only 10.7 percent of business receipts.

Asians and Pacific Islanders comprise 5 percent of the businesses, yet earn only 3.8 percent of the receipts.

Native Americans comprise 0.9 percent of the businesses, but

earn only 0.3 percent of the receipts.

These disparities are adverse, very large. They are also statistically significant, meaning they are unlikely to have resulted from

chance, alone. Let me repeat that: these disparities are adverse,

very large, and statistically significant.

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While the exact proportions vary, large, adverse, and statistically

significant disparities are observed in all 50 States and the District

of Columbia for all minority groups as well as for women. This is

documented at tables 1A through F and 2A through F in my written testimony.

It is a fair question to ask whether these large, adverse, and statistically significant disparities result primarily from discrimination or whether they result primarily from other non-discriminatory factors. The evidence from these next data sources suggest

they result primarily from discrimination. We have tested this hypothesis using the 2000 and 1990 Decennial Census microdata, and

presently conducting similar tests using the American Community

Survey microdata.

Even when holding these other factors constant using regression

analysis, the business disparities I have outlined remain adverse,

large, and statistically significant. Let me repeat that: even when

comparisons are made between similarly situated business owners,

the disparities facing minorities and women tend to remain adverse, large, and statistically significant. We observed similar results in States and metropolitan areas throughout the country.

Lack of access to capital is the most frequently cited obstacle

among MWBEs. Credit market discrimination can obviously have

an important effect on the likelihood that these firms will succeed.

On the Survey of Small Business Finances, we have used that to

document disparities in loan denial rates even when balance sheets

and creditworthiness statistics are held constant across business

owners. I have submitted for the record a 60-page report that accompanied my Senate testimony a couple of weeks ago on this particular issue.

Finally, in addition to statistical evidence, we have conducted

thousands of surveys and hundreds of in-person interviews with

MBEs and non-MBEs alike, and the results are strikingly similar

across the country and across different industries. In general,

MBEs report that they still encounter significant barriers to doing

business in the public and the private sector, both as prime contractors and subcontractors. There is also general agreement that

without the use of affirmative remedies, MWBE firms receive few,

if any, opportunities on Government contracts, as is the case on

projects without goals; thus, the continued operation of programs

such as 8(a), 8(d), DBE, and SDB was deemed essential to MWBEs’

survival.

Thank you. I will be glad to take any questions.

[The prepared statement of Mr. Wainwright follows:]

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Mr. CLAY. Thank you so much, Dr. Wainwright.

Our next witness will be Mr. Brown.

Mr. Brown, you may proceed.

STATEMENT OF ANTHONY BROWN

Mr. BROWN. Thank you, Chairman Clay and members of the subcommittee. My name is Anthony Brown, and I am Chair of the

Government Affairs Committee of the Airport Minority Advisory

Council [AMAC]. AMAC is the only national nonprofit trade association dedicated to promoting the full participation of minorityand women-owned and disadvantaged businesses in airport contracting.

I am also a senior associate partner at MGT of America, a public

sector consulting firm specializing in high-quality research, including disparity studies. I was also previously a vice president at the

Memphis Shelby County Airport Authority.

I thank you for your invitation to speak to the committee today

on behalf of AMAC.

Recently the EEOC settled an outrageous hostile environment

lawsuit against a fuel supplier operating at a large Texas airport.

The plaintiffs in the case asserted that they were subjected to racial slurs, threats of violence, and disparate treatment in promotions and disciplinary action. While this case was not about

business owners, it does demonstrate the persistence of racism in

the aviation-related marketplace. Airport executives work hard to

level the playing field for minority- and women-owned businesses.

Business assistance programs and contract goals help, but it is

never easy. Many times, even where there are contract goals, prime

contractors say we just can’t meet the contract goal. Sadly, the

truth often is that they don’t know where to find minority- and

women-owned businesses or they haven’t tried.

This requires airport staff to step in and help majority firms

move beyond their established networks to give previously excluded

businesses the opportunity to prove themselves. But I can tell you,

changing long-established patterns of business behavior which exclude the participation of minority- and women-owned businesses

is hard. The mentality of exclusion can exist in contractors and

public contracting officials, alike, and it works like a one-two

punch, eliminating minority- and women-owned firms.

Programs like the disadvantaged business enterprise program

are crucial because they help us to ensure that airports across the

country provide opportunities to all qualified businesses, not just

those who have always gotten work in the past.

At MGT of America I oversee the completion of disparity studies.

I can tell you, based upon the many disparity studies that have

been conducted across the country, that discrimination is still a serious problem.

I have with me today six examples of many recent airport-related

disparity studies. I would like to ask that they be included in the

record. These are just a small fraction of the studies that have been

completed, but they demonstrate the statistical evidence of ongoing

under-utilization of minority- and women-owned businesses is overwhelming.

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But don’t just take my word for it. Listen to the stories of the

men and women who struggle every day to overcome discrimination. One African American businessman in the midwest has repeatedly run up against the Old Boys’ Network. He has been the

subject of racial slurs, discriminatory attitude, and recently found

that he was being charged 50 percent more for the tires on his

buses than majority-owned firms. When this business owner disguised his voice and called the same distributor, he was given a

lower price.

A Hispanic construction worker subcontractor on the east coast

was recently told by a majority prime contractor that they would

use him on the job, and that they then shopped his price and bid

to a much larger majority contractor and removed him from the

contract. With 25 years of industry experience, he felt very strongly

that there was significant racial bias against his Hispanic-owned

business.

A white woman business owner has experienced patronizing, bullying, and discriminatory attitudes from the men she deals with in

other companies, and even among airport staff. She told us that

she has been referred to—excuse the expression—as a bitch behind

her back, and she explains that she often sends a male employee

to make the business pitch because it is more likely to result in the

winning bid than in other cases.

Another African American member based in the southeast attempted to obtain venture capital from a fund specifically established for under-served communities. Even in that context, this

business owner was asked to meet extraordinary conditions that

would not normally have been required of a majority-owned business. Because of this, the denial of the venture capital happened

and the deal failed.

In closing, discrimination against minority and women contractors in America is abundant and devastating. At best it translates

into higher cost and foreclosed opportunities, and at worst it results in failed businesses.

All of this makes it imperative that we maintain important programs like the DBE and ACDB programs. We hope that in the future the Congress will strengthen both programs.

I would like to again thank the committee for this opportunity

and would again ask the committee to again support the continued

affect of these programs.

[The prepared statement of Mr. Brown follows:]

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Mr. YARMUTH [presiding]. Thank you, Mr. Brown.

Without objection, the reports that you referenced will be included in the record.

Mr. Robinson.

STATEMENT OF ANTHONY ROBINSON

Mr. ROBINSON. Thank you, Mr. Chairman and Mr. Turner, ranking member of the committee. My name is Anthony Robinson. I

represent the Minority Business Enterprise Legal Defense and

Educational Fund. MBELDEF, as we affectionately refer to it, has

been in the business of advocacy on behalf of minority businesses

for about 27 years. At least 20 of those years have been spent dealing with the issues of discrimination in the marketplace and how

to overcome those discriminatory barriers in order to assure the

full and fair opportunity to minority enterprises.

I am going to be rather short, because most of the panelists have

already covered many of the areas that I would have, except to say

that I would like to suggest to the panel that there is a definite

pattern in discriminatory practices as it relates to ongoing discrimination in the marketplace. Mr. Brown just touched on one of the

first ones, and that is the Good Old Boys’ Network, which effectively restricts the opportunities of minority contractors at various

points in the bidding and contracting process.

The other that I would like to cite, which represents an ongoing

pattern of discriminatory practices, would be unequal access to

bonding. Minority contractors also face discrimination in obtaining

bonding, which is often a prerequisite to participating in public sector construction contracts.

State and local studies, as well as extensive anecdotal evidence

presented at congressional hearings, have documented the fact that

minority enterprises are significantly less able to secure bonding on

equal terms with their white-owned counterparts.

The other thing Mr. Brown also spoke to relative to a specific

anecdote but also represents a pattern and practice, and that is

that of bid shopping. It has been the construction industry particularly has been and remains a closed network, with prime contractors maintaining longstanding relationships with subcontractors

with whom they prefer to work.

One of the very interesting things about the bid shopping process

and maintaining preferences is that often we find the pattern that

when you have minority enterprise programs or policies in place,

that will incentivize, in some instances, at least, majority firms to

utilize and subcontract to minority firms. However, when it comes

to those projects that those policies and mandates do not exist, that

they will not utilize those same firms on those primarily private

sector contracting opportunities.

The other pattern and practice is in price discrimination by suppliers—again, cited by Mr. Brown in his anecdote—where minority

firms are frequently required to pay more for supplies than their

white counterparts.

And then finally unfair denial of the opportunity to bid. It is

common for minority contractors to bid on private sector jobs; however, as I have already stated, only to be told when it comes to private sector jobs that those opportunities do not exist.

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With that I am going to close and take any questions that you

might have.

[The prepared statement of Mr. Robinson follows:]

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Mr. YARMUTH. Thank you, Mr. Robinson.

Mr. Peek, welcome.

STATEMENT OF EARL PEEK

Mr. PEEK. Good afternoon, Mr. Chairman and members of the Information Policy, Census, and National Archives Subcommittee. My

name is Earl Peek, and I have 22 years of experience as a CPA,

a commercial lender, economic development lender, and also a vice

president with a minority bank as well as a majority bank. Much

of my experience covers the entire capital risk continuum, including the formation of a venture capital firm under the auspices of

the Small Business Administration, the Small Business Investment

Company Program that I will talk about later.

I have counseled thousands of entrepreneurs. I have done hundreds of loans and financed businesses from every part of the alphabet. More than 60 percent of minority- and women-owned businesses, I have seen daily the obstacles to fulfilling the contracts

that many of my panelists and colleagues have studied. I have

watched many of them have many issues fulfilling joint ventures

and enter into various relationships.

Seven years ago I formed the management team that was a majority/minority form to apply for a venture capital license to be licensed by the SBA, in part because we saw many of these issues

in lending. The team that we formed had over 100 years of experience, had deployed collectively over $1 billion of capital, had done

over 1,000 financings, and created or saved over 30,000 jobs. The

team consisted of MBAs, CPAs such as myself, licensed professionals, and even those who teach entrepreneurship and write national magazine articles. SBA told us that we were unqualified and

they denied our license.

We sued the SBA. We are now in the closing moments of litigation with the SBA in the Federal courts for a denial of our rights,

but by suing we found out firsthand a look behind the curtain of

how the SBA operates the venture capital program, which is the

bedrock of capital that many of these panelists cite the businesses

endure.

We saw that SBA has only approved one black firm, one minority

firm in the last 10 years. They testified to this. This is sworn testimony. We studied over 115 licensees in the program and found that

0.0057 percent are minorities and women. Just so that you all

know, every venture capital firm has between three to five members, of which only they found I think between three and five out

of several hundred were minority owned or of some type of minority descent.

So I stand here today to talk to you about a report that was presented by Dr. Timothy Bates. It will be submitted as a part of the

record. Dr. Tim Bates has studied SBA for the better part of since

the early 1970’s. He submitted a 107-page report, somewhat on Diamond but more generally on the program returns of the deployment of capital through this program that deploys more than $5

billion a year to venture capital firms in loans and things of that

sort to small businesses. Dr. Bates concluded that SBA continues

to use its exclusionary criteria, evaluation, and methodologies to

deny minority- and women-owned businesses and management

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teams focused on SBA and SBIC capital resources and/or assistance.

It is not just the SBA. The Wall Street Journal just conducted

a study with the National Venture Capital Association and the

SBA is like the private market. Venture capital deployment of capital is largely a white dominated profession, 97 to 99 percent.

These are studies that are also going to be submitted as a part of

the record today.

I have personally witnessed SBA officials, from political appointees to Civil Service members, who testified under oath that

they do not keep records of race of the applicants, they cannot tell

you which SBIC licensees deploys capitals to a or any minorityand women-owned business. They cannot tell Congress when and

under what criteria the SBICs have reported investments to lowto moderate-income areas.

Further, the program analysts have testified that they have no

training in this area or no experience in this area. They have no

sensitivity. I found this somewhat appalling to see that they even

said that they do not believe this is a goal of the SBA to make capital more broadly available to minorities or women.

SBA has unreliable records that will not withstand any type of

public inspection or report to you as a body. And they do not keep

records of the applicants or the inquiries to the program or the

final disposition of anybody applied, whether denied, or what happened to them. SBA does not evenly score the applicants to the program.

These are not empty statements that I make, but these are actual documents that the lawyers who instituted the action against

SBA have found and that SBA has reported and that SBA has said

under sworn oath in depositions as part of the litigation process.

Capital is the bedrock of small business growth, and I hope that,

as I conclude this, that one thing that I found appalling, that we

will qualify to be a new market venture capital firm program,

which has sunset by Congress, but we found out that SBA withheld

a letter for 7 years showing that we were eligible and qualified. Not

only us, but a firm out of New York, women and minority capital

partners.

I urge this body to look at these efforts. Also, I can offer solutions

as a part of this testimony to remedy this action, not only for my

firm but for many across America and many businesses that they

have studied to deal with these issues.

Thank you.

[The prepared statement of Mr. Peek follows:]

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Mr. YARMUTH. Thank you very much, Mr. Peek.

Well, first of all, let me say without objection the reports that

you referenced will be included in the record.

Mr. PEEK. Thank you.

Mr. YARMUTH. So now, since you have offered to give us some

recommendations, why don’t you proceed to do that?

Mr. PEEK. I have seen five recommendations not only that I understood from my experiences, but also Dr. Bates corroborated in

his studies. He is an esteemed economist I am sure Dr. Boston and

many others know of.

The first would be transparency. Treasury with the new market

tax credit program has a program where you can apply online.

They have a panel of independent reviewers and then they look at

the scoring and make sure it is uniform before they approve people

to dispense tax credits.

SBA is a very subjective process by people that are untrained,

and they need to look at that program as a model for the SBIC program.

Second would be in the area of management qualifications. Dr.

Bates found that typical in minority- and women-owned firms we

gained our experience in economic development lending, banking,

and financing, and we are not necessarily members of venture capital firms, and we can’t say that we have worked 5 years together

in the firm, which is the standard that SBA has. So we need to expand the definition of what is considered qualified management to

dispense capital to minority- and women-owned businesses.

Third there needs to be reporting and accountability. During this

process we never were able to find out the race of the applicants

to get financing, neither can we find the race of the people who dispense it, so we never know if there is sensitivity to this area or to

the broader geography.

Fourth, there has to be some penalty for noncompliance. Right

now there is a bill in the Senate that sets forth to increase the leverage, the amount of dollars that a person can get if they are a

licensed SBIC. What if they don’t invest the money? What if they

don’t make it more broadly available? There should be some penalties for that.

Last, there needs to be some diversity. There needs to be diversity amongst the management team. All of the decisionmakings at

SBA do not look like America, and they don’t necessarily have to

be majority/minority. They just have to look like the citizens of

America who pay the taxes.

Mr. YARMUTH. Thank you very much for that.

This hearing is very timely for me, because I just met back in

my District a few weeks ago with a gentleman, a minority business

owner who was talking about the personnel net worth ceiling and

the impact it was having on him, so I am very interested in the

testimony related to that.

Dr. Boston, could you tell me what positive impact these PNCs—

I shouldn’t say PNC. I don’t want to confuse it with the bank—but

the net worth ceilings have, or are there any?

Mr. BOSTON. The only positive aspect of the personal net worth

is the fact that it is designed from a legal standpoint to ensure that

businesses that truly have some history or relationship to disVerDate 11-MAY-2000 14:52 May 05, 2009 Jkt 000000 PO 00000 Frm 00085 Fmt 6633 Sfmt 6633 U:\DOCS\48659.TXT KATIE PsN: KATIE
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advantaged status are eligible for the program. But the way in

which that is implemented actually works adversely to the businesses actually being successful in the program, simply because, as

I mentioned during the testimony, personal net worth is tied, particularly for small business owners, to their ability to secure bonding, to raise capital, to perform as prime contractors.

As a result, when they graduate from the program and are no

longer eligible and they go out into the market—we did a case

study of 17 firms. We found that those firms’ revenue on average

dropped by about 45 percent, and it was because, again, the constraints that were imposed on them while they were participating

in the program.

Mr. YARMUTH. Let’s take the other side of this, because the gentleman I was speaking with, my constituent, was saying he can get

a lot of jobs at a certain level, but there really is no incentive for

him to do a great job because it doesn’t allow him, because of these

artificial constraints, he has no ability to do larger jobs and jobs

for which he thinks he has assembled a pretty good resume. Is that

something you are also finding?

Mr. BOSTON. Absolutely, Congressman. We are finding it from

both sides of the equation, both from the standpoint of minority

and disadvantaged businesses as well as corporations, major corporations. For example, GSK and a number of other corporations

came and were supportive of the research because what they were

finding, in fact, was that the businesses that they had mentored

and grown, once they were able to get into their value chain at a

significant level, their owners reached the personal net worth ceiling and then they were no longer eligible to participate in the program.

So it has a detrimental affect on the ability of corporations that

are prime Government contractors to participate in the program

and grow firms. It also has adverse consequences on minorityowned firms that are in the program.

Mr. YARMUTH. So it is really just not a ceiling on the person’s

net worth; it is also, in effect, in some cases, anyway, a ceiling on

their potential?

Mr. BOSTON. Absolutely, because we found there is a very close

relationship between the firm’s revenue and the owner’s personal

net worth. We found that is about a 40 percent relationship, so

that when you cap personal net worth you are also explicitly capping firm revenue.

Mr. YARMUTH. Thank you very much.

Mr. Chairman, I think my time is up. I will yield back.

Mr. CLAY [presiding]. Thank you so much.

Let me ask Dr. Wainwright, whenever this subcommittee asks

the Census Bureau for information regarding contracts broken

down by race, the response is that the Commerce Department does

not track this information because it is not required to do so. However, you cite a lot of data collected by the Department in your testimony. How can the Commerce Department and other Government agencies provide Federal procurement data by agencies in the

manner in which it is provided in the surveys noted in your testimony? Can you clear that up for us?

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Mr. WAINWRIGHT. Yes, Mr. Chairman. The data in my testimony

isn’t tied directly to specific Federal Government contracts. It is

really Census data on self-employed business owners for which we

do track race and sex, and it is a special program, the Survey of

Business Owners, at the Census Bureau, which is conducted every

5 years as part of the economic censuses that specifically seeks to

track minority- and women-owned businesses.

However, my day job is doing disparity studies, and every State

and local government that runs a race-conscious affirmative action

program has to track not only who the prime contractors are by

their race and sex but who the subcontractors are, and it is hard

to believe that the Commerce Department does not have that data

or that someone in the Federal Government doesn’t have that data;

otherwise, it would be impossible to compile the type of statistics

that Representative Turner cited in his opening statement about

how much Federal money is going each year to SDBs. So if they

are not tracking that data, they certainly can and they certainly

should.

Mr. CLAY. Thank you for that response.

Dr. Peek, I had a question for you. There have been concerns

about SBA’s lack of implementation and restrictive proposed rules

of the women’s contracting program that was the subject of litigation. How would our actions and reforms to SBICs help this program?

Mr. PEEK. By instituting reforms in the SBIC program in terms

of the management diversity of the people who dispense the capital

and the qualifications for the people who can actually invest in

women- and minority-owned firms, when that contractor rule is adjusted and the contracts that are created with the ceilings that will

be lifted here with the capital will equal more businesses, more job

creation, and things of that sort.

I think that the efforts here would go right to helping the women

have the capital availability when that rule is enacted and the

rules are fully adopted by Congress.

Mr. CLAY. Would you say that the lack of women’s contracting

programs and investment in minorities and women is a result of

the lack of diversity at SBA and in managers SBA approves to

manage these programs?

Mr. PEEK. Absolutely.

Mr. CLAY. OK. In your testimony you note that Dr. Bates concluded that SBA continues to use exclusionary criteria, evaluation,

and methodologies to deny minority- and women-owned businesses

access to capital. Can you speak a little about the criteria in Dr.

Bates’ findings?

Mr. PEEK. Yes. SBA deputy administrators sent out information

that says that in order for a firm to be considered eligible they

have to have two members that have worked in a venture capital

firm together for at least 5 years and they would have had to perform what they call upper quartile of returns in the venture capital

industry. That is a nice benchmark to have, but not many minorities and women have venture capital firms in the first place, so you

will have to have that experience to go in.

So in that way it has a discriminatory effect and excludes people

who have experience in banking and economic development and fiVerDate 11-MAY-2000 14:52 May 05, 2009 Jkt 000000 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 U:\DOCS\48659.TXT KATIE PsN: KATIE
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nance, which Dr. Bates has shown that these people have gone and

raised money from pension funds and other places and had compatible returns to the S&P and the stock market, so those standards

need to be moved away or they need to be more accommodating of

experiences that are more common to minorities and women today.

Mr. CLAY. Thank you for that response.

Mr. Robinson, what recourse does a business person have when

confronting the types of discrimination you have described?

Mr. ROBINSON. Very few, if not non-existent, recourse. We had

the slim hope that the 1866 Civil Rights Act would be a vehicle to

redress discriminatory conduct, but the recent Supreme Court decision in the case of Dominoi v. McDonald pretty much eviscerated

that as being a viable option. As a result, it is only in the viability

of these affirmative programs that we are talking about here does

it hold out any real hope for opportunity for these companies. They

are not getting it in the private sector to a great degree, and so

these programs remain a bedrock for that opportunity to take

place.

So strengthening these programs represents the most viable option that exists, and that is why, again, I want to commend you,

Mr. Chairman, that these hearings are so critically important in

strengthening the viability, the base that these programs need to

operate from in order for them to remain constitutionally viable.

Mr. CLAY. So once Congress has a record of the performance of

the programs now, it should be incumbent upon Congress to go

back and revise the law in order——

Mr. ROBINSON. At least revise the appropriate predicate for the

laws that exist, because the court, in its determination of what is

narrowly tailored programs look at how recent the data is before

the Congress in determining as to whether or not that data is stale,

represents an appropriate predicate that can be relied on that discrimination in the marketplace remains.

Mr. CLAY. Thank you for that response.

Mr. Yarmuth, do you want a second round?

Mr. YARMUTH. I would like to followup with Dr. Boston on the

ceilings. Can you conceive of any alternative method of achieving

whatever required positive benefit you think that the PNC provides

that might be a little bit more conducive to providing greater opportunity for minority contractors?

Mr. BOSTON. Yes, Congressman. The purpose of the personal net

worth again was to make sure that businesses that have experienced discriminatory treatment in the past are those businesses

that have eligibility for the program. The program, however, is also

designed or established to be a program that assists and promotes

business development, and the personal net worth ceiling actually

prevents that, so you have a law that is actually working against

the intent of the program.

What needs to happen are a number of things. One is that there

needs to be some consideration of the industry requirements for different businesses—manufacturing, construction, or what have you.

Again, there needs to be consideration of where the business is in

terms of its own development relative to the industry. So there are

a number of criteria, both internal to the business as well as its

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relationship to the industry—bonding requirements and other

kinds of things, capital requirements. Those things are important.

What we are currently working on is a way in which we can develop a multi-dimensional index that bundles all of these criteria

together, and with that multi-dimensional criteria then you are a

better position to determine what companies and what state of development in that company should it be or should it not be eligible,

as opposed to using a single criteria, personal net worth, that has,

particularly as a company grows, very little relationship to the

business dynamics within the company.

Mr. YARMUTH. Having been in business myself, I agree with you

totally on that one.

Mr. Brown, you mentioned in your testimony a mentality of exclusion. Could you elaborate on that and tell us how it actually

plays out in real life?

Mr. BROWN. Yes, Congressman. The mentality of exclusion basically is a mentality that says minority- and women-owned businesses don’t belong at the table. It basically says the status quo is

fine, businesses are operating, the work that is doing the Federal

contracts is coming forth, it is being done, the performance is good.

And it says we don’t have a problem.

The fact that no contracts are going to minority- and womenowned businesses is not a problem, and that is the mentality that

is there. And it is there not only on the prime contractors and large

contractors, it is also there many times on the staff, who have been

at cities, airports, others, for a number of years. They have become

accustomed to those with whom they deal and they don’t see a

problem in what is going on.

In fact, I have often witnessed the fact that many of them feel

that if a minority- and women-owned business gets the contract,

then we done them a favor, whereas they don’t look at the fact that

there are millions of dollars of contracts that go on every year, and

they feel that those majority businesses have earned the right to

be at the table, but they feel that if a minority- and women-owned

business gets the contract then we have done them a favor.

Mr. YARMUTH. Looking at all of the disparity studies with which

you are familiar, do you see this as forming some kind of pattern

that is geographic, or is this something that is broad based across

the country?

Mr. BROWN. Our company, MGT, does disparity studies all across

this country from the west coast to the east coast and the south.

The under-utilization of minority- and women-owned businesses

and the under-utilization of all segments of that community is

seen. It is not geographical in nature. It is across the Nation.

Mr. YARMUTH. I have nothing else, Mr. Chairman.

Mr. CLAY. Thank you, Mr. Yarmuth.

Let me continue along that line of questioning, Mr. Brown. We

have heard a lot about discrimination today, but some would say

that the statistical disparities are actually caused by the fact that

minority firms are smaller, have less capacity, and are less qualified. How would you respond?

Mr. BROWN. Chairman Clay, I think the evidence is pretty clear

that it is not due to the ability of minority- and women-owned businesses. It is not due to their interest in contracting. Oftentimes,

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the size of the business and the fact that it is small is caused by

the discrimination in the particular community or the segment in

which that business seeks to operate.

In other words, the discrimination has had a true and adverse

affect upon the ability of that business to grow and to be able to

handle larger contracts.

I can say in the many offices that I have held in airports, it has

been very frustrating when you have contracts that are of a particular size and you will come in contact with very qualified, very

capable minority business owners who have been limited in their

abilities and their business’s ability to grow, not due to their vision,

not due to their hard work, not due to their ability, but simply due

to the fact that no one will give them the opportunity to do the

work because of what their racial or ethnic background is or their

sex.

Mr. CLAY. You know, you give us pretty good examples that are

very compelling, but isn’t it possible that those business owners are

simply assuming that the problems they are facing are caused by

discrimination and couldn’t the real problem be something else?

Mr. BROWN. One of the things we do when performing a disparity

study, we control for certain factors in that disparity study. We

control for factors that are economic in nature or others in nature

and are not related to race. Once we control for those factors, we

are also able to determine and exclude those factors.

I will tell you that disparity studies from one end of the country

to the other control for those factors and find that it is not, again,

the size of the business, it is not, again, so many other factors that

are normal business factors. Leading to the exclusion of those factors, coupled with the indication of the anecdotal evidence that we

gather and the experiences that we gather, it is overwhelming that

it can’t be simply because of some other factor other than the racial

implications that are found.

Mr. CLAY. That is pretty compelling. Thank you for that response.

Dr. Boston, what happens to minority firms that are government

contractors but not in the SDB program or have graduated from

the SDB program? How well do they do after graduation?

Mr. BOSTON. Mr. Chairman, there are a number of things happening. In the study, we examined the records of 47,000 firms that

are registered with the Federal Government in the Central Contractor Registry, and among those firms there were 10,000 minority-owned firms that had never become a part of the SDB program.

There was another 4,000 firms that had graduated from the program, and we wanted to look at both of those, in addition to the

firms that were in the program.

What we found was that 10,000 that had never been in the SDB

program, they encountered significant disparities. Because we had

so much information, we could match these firms up equally with

non-minority Government contractors in terms of their years of existence, the industry that they operated in, their bonding capacity,

and so on and so forth. What we found is that these firms were operating at a significant disadvantage in terms of revenue when

they pursued both Government contracts as well as private sector

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contracts. There was a significant revenue disparity that they encountered that could only be attributed to discrimination.

On the other side of the spectrum, for firms that had graduated

out of the program, we found that there are also problems that

they encounter. For example, we looked at the records, a case study

of 17 firms that participated in the SDB program, and we followed

these firms’ revenue 2 years before on a monthly basis and then

6 months after they left the program. What we found is that the

revenue of those firms after they left the program decreased by 45

percent, and when we interviewed the owners they mentioned a

number of things.

One, they mentioned that firms that used them when they were

certified no longer use them. They didn’t even get the opportunity

to bid any more. They indicated that they had not been able to get

the bonding capacity when they were in the program that would

allow them to be successful as prime contractors. And they indicated that they had been graduated out of a program into an industry, in many cases, that was very concentrated, and as a result

they were unable to be successful because of the capital requirements.

So there were a number of barriers, both discriminatory and industry-related barriers that they encountered.

Mr. CLAY. Industry-related as institutional, lack of access to

credit?

Mr. BOSTON. Exactly.

Mr. CLAY. Things like that.

Mr. BOSTON. Exactly, meaning access to bonding, access to capital, those kinds of things. And, for example, when firms had graduated out of a program into industries that are concentrated and

they have not had the capacity, because of the personal net worth

ceiling, to build bonding and gain access to bonding or capital, then

it makes it that much more difficult for them.

Mr. CLAY. If the personal net worth ceiling were eliminated,

what would you recommend as an alternative criteria?

Mr. BOSTON. I would recommend, Mr. Chairman, something that

we call a business development index. This is an index, again, that

would look at the characteristics of the business, itself, where that

business is in terms of its startup and its growth and its development, and the characteristics of the industry that the business operates within, and then use those as a criteria so that you could

standardize this criteria, and along this standardized criteria then

you could select a threshold above which then businesses are no

longer eligible, which makes much more sense because then you

are talking about the characteristics that it takes in order to operate successfully in an industry, as opposed to just simply artificial

criteria of personal net worth.

Mr. CLAY. And that is how you came up with your new recommendations as far as dollar amounts with a trigger for inflation,

and per industry? Is that how you——

Mr. BOSTON. Maybe, the recommendation is operating within the

constraints that we have. In other words, we wanted to take the

existing $750,000 and make an adjustment to that, but we also realized that ultimately that is not the solution. There is a problem,

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cient in order to give those firms access to bonding and capital. But

we did adjust it by adjusting it for inflation, by adjusting it for the

amount of capital that is required in different industries, and also

by adjusting it by the amount of revenue that these businesses

would be able to achieve if they were treated equally as non-minority-owned firms.

Mr. CLAY. So, in other words, it is time for a new model for Government to adhere to?

Mr. BOSTON. Yes, Mr. Chairman.

Mr. CLAY. Thank you for that response.

Dr. Wainwright, you state that the Supreme Court used information on business discrimination against minorities presented to

Congress. Can you tell us how the court used this information in

the Adiron case?

Mr. WAINWRIGHT. Being an economist rather than a lawyer, I am

not sure that is my bailiwick, but the tenth circuit went to great

pains to pull together everything that had been put into the Congressional Record up until the Adiron case and along with the Justice Department brief at that time, so a real good way to get caught

up on the older evidence in the record is to reference that decision.

Certainly the Supreme Court looked at that to underscore Congress’ special role in eradicating discrimination nationwide.

As Mr. Yarmuth pointed out, this is a nationwide problem, but

it shows up in every single region of the United States. In the tables in my written testimony you will see broken down specific disparity ratios for all 50 States and the District of Columbia for

Blacks, Hispanics, Asians, Native Americans, and women, and it is

amazing how pervasive they are.

Mr. CLAY. Mr. Robinson, can you tell us how the court used the

information derived here in Congress on the Adiron case?

Mr. ROBINSON. Well, the court essentially looks at, and the paradigm that the court has created for looking at this evidence is to

take the empirical data that these three gentlemen to my right developed in their econometric models, statistical, the regressional

analysis, those kinds of things, and then they say that is informed

by the anecdotal evidence, like what Mr. Peek has presented and

what others have been presented here today in written testimony,

talk about the anecdotal experiences of minorities and women as

they operate their businesses in the marketplace, and that those

anecdotal experiences inform the statistical disparities that are

found.

It is from that the court draws its conclusion about whether or

not there is discrimination in the marketplace. It looks for Congress to document that, as it uses race-conscious remedies, affirmative remedies, to address this discrimination.

It is in that context that the Congress has the duty to act and

to provide the appropriate remedies, but that data must be kept

current. That information must be kept current before the Congress moves on these issues.

Mr. CLAY. Are there any relevant cases coming in the next term

of the Supreme Court that they may hear?

Mr. ROBINSON. Not that we are aware of in this term coming up.

Mr. CLAY. Let’s give them a little more time.

Mr. ROBINSON. Yes.

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Mr. YARMUTH. I just want to ask one other question. We talked

about the personal net worth ceiling as a structural problem. We

talked about the general mentality of exclusion. Are there any

other structural problems that you have seen in the program that

we might want to look at?

Mr. BOSTON. Yes, Congressman Yarmuth. We examined, based

on all these records that we had. We also identified close to 500

firms that were registered as small business concerns, but their

revenue indicated that they were not. They had, on average, revenues that were well over $200 million.

Now, there are provisions in the regulations that allow for transition periods, in some cases, when small businesses are bought out,

but it appeared, by what we looked at, that this could not be the

case for the large majority of these firms.

So there are large firms that are registering as small business

concerns, and one of the things that we recommend is that there

be an annual audit of those programs and of the participation of

businesses, and that audit ought to identify and enforce regulations

on the book to make sure that your firms aren’t fraudulently registering as small business concerns, that process is eliminated.

One other factor is that the incentives to participate in the program, there were, for example, price incentives and bid incentives

to use subcontractors in the program. Most of those incentives have

been eliminated, or at least they sunset and they were not put back

into place legislatively, except for the Department of Defense. So

there is very little incentive now for minority firms or disadvantaged firms to even become certified, because that is a process in

itself, because the end result is that there are not very many incentives left in the program that they can actually take advantage of,

so that is a problem.

And then, finally, the other problem has to do with this 10,000

minority-owned firms that have never become SDB certified. There

needs to be a study to determine why those firms are not and why

they are encountering so much disparity, because one of the things

that the court mandates is that, in addition to studying the effects

of the program, one also has to study what would happen but for

the existence of the program. In other words, what happens if businesses don’t have access to a program. Here we have 10,000 businesses and we found significant disparities in their revenue, both

from the Government and the private sector, absent their participation in the program, so that needs to be studied and those

business’s experience needs to be tracked.

Mr. ROBINSON. Can I add to that, please?

Mr. YARMUTH. Yes, sir.

Mr. ROBINSON. Mr. Congressman, it was announced I think in

the past week that the SBA plans to no longer certify SDBs. This

could pose a huge problem for reasons that Dr. Boston has indicated, because there is a real problem with the viability of the

numbers, the data. When the agencies represent that they have

met their goals that they established with the SBA on an annual

basis, I suggest to you that there are real problems with those

numbers. You find double counting, in addition to the kind of fraud

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representing their status—their status as either small businesses,

minority businesses, or 8(a) companies, etc.

So this issue of the viability, the integrity of the data is something that we would really encourage this committee to begin to examine in a much more thorough fashion. Oversight is just so, so

critical around this issue, and this committee specifically on the integrity of the data.

As it relates to structural issues, you know, discrimination in the

private sector remains a problem. There are two ways that I think

that the Congress can begin to address that issue, and the first is

to look at this whole issue of subcontracting and the viability of the

subcontracting programs that exist with Federal agencies, and the

subcontractor reporting and how that is done, and the integrity of

that data that is reported to agencies relative to subcontracting.

How the subcontracting program works, normally the horse is already out of the barn before minority firms are even engaged by

major prime contractors, and we have to find a way to make them

an integral part of the process on the front end so that their involvement with that prime becomes a material part of the contract,

itself, with the Government.

In addition to that, we would encourage the Congress to consider

a policy that we have been working with at State and local levels

of government, and that is a commercial nondiscrimination policy

which basically requires on the front end an affirmative showing

that you have not engaged in discrimination in your other activities

before becoming eligible for work that the Federal Government

would provide.

Mr. YARMUTH. Thank you, Mr. Chairman.

Mr. CLAY. Thank you.

Let me ask a panel-wide question, and anyone can volunteer. We

will start with Mr. Peek.

Is there data collected in the Small Business Owners Survey or

any of the other business surveys conducted by the Census Bureau

that might serve as models for collecting information for Federal

Government contracts to minority contractors? Do you know of any

examples?

Mr. PEEK. I cannot think of any now. I am not abreast to all the

data that is collected on the census. But I would certainly defer to

the economist in that area.

Mr. CLAY. OK.

Mr. WAINWRIGHT. None of the existing Census Bureau programs

are contract based like that, but ostensibly all of this Federal contracting is a matter of public record. The subcontractors are a matter of public record. I don’t know that there is anything stopping

Congress from mandating that reports be issued on a regular basis

at the contract level so that data can be subject. That is what we

call microdata. Rather than aggregating it all together and saying

so many billions of dollars are spent during a quarter and so many

millions are spent with SDBs, actually put out there contract-bycontract what those contracts are for, what codes they fill in, what

the status of the prime contractor was, who the first-tier subs were,

and make that data available for analysis and scrutiny and shed

some light on that contracting process. I think that would be very,

very useful information to have, but it is not out there right now.

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Mr. CLAY. And it gets at the problem.

Mr. BOSTON. Mr. Chairman, there is a way in which it can be

done. There are some current gaps. But if you use the Central Contractor Register, which is for Federal Government procurement,

that has a list of every firm that pursues or does business with the

Federal Government, both as a subcontractor and a prime contractor, so they are registered there. We just simply use, for example,

small businesses, and that was close to—excluding non-minority

businesses, for example, businesses owned by white women and

others, there were close to 50,000 records there.

So on the characteristics of the businesses, the information is actually maintained in the Central Contractor Register.

On the other hand, there is also the Federal procurement data

system that gives information on contract awards. Both of these

data sets are very rich. What is missing from the Federal procurement data is information on subcontracting activity. That is really

where the big gap is. If we collect information, the Government begins to collect information on subcontracting activity combined with

these other data sets, then that is a rich amount of information

that we can begin to analyze in a great deal of detail, the kind of

discriminatory patterns that we see, and document that to determine what is due to discrimination and what is not and the way

in which firms are or are not treated equally based on race, gender,

and other kinds of criteria.

Mr. CLAY. Thank you for that response.

Last question, and it is panel-wide and anyone can provide examples if you have them—are any of you familiar with the problem

of abuse of subcontractor status of minority businesses in Federal

contracting?

Mr. ROBINSON. Yes.

Mr. CLAY. Mr. Robinson, we will start with you.

Mr. ROBINSON. Yes. In fact, we have one of the firms here today

in the audience. But one of the big problems that you run into—

and I cited some of it in my testimony—is the whole issue of bid

shopping with subcontractors, the bait and switch. You use a minority firm subcontracting firm to win a contract, and once receiving that contract they no longer use that firm, or they use the firm

only minimally, certainly not within the scope of work as it had

been originally represented.

So the bid shopping is driving the minority firms’ prices down to

the point where they can’t be competitive. They can’t even be profitable in the work they are doing.

So you have bait and switch, you have bid shopping, and things

of that nature. Just getting the information out to the firms in a

timely manner so that they can, in fact, bid for subcontracting opportunities, there is a host. I cite some of those in my full written

testimony of those kinds of abuses that happen with subcontractors.

Mr. CLAY. So there should be penalty for the bait and switch?

Mr. ROBINSON. Say that again?

Mr. CLAY. There should be penalty for bid shopping and bait and

switch?

Mr. ROBINSON. No question about it.

Mr. CLAY. By the general contractor.

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Mr. ROBINSON. Yes.

Mr. CLAY. OK. Thank you.

Mr. BROWN. I would also like to mention, Chairman Clay, that

there is another practice that is also somewhat rampant, and that

is, once the minority- or women-owned business begins performance of the contract, there is often a practice of nit-picking at the

performance level of contractor to the extent that, in other words,

the minority- and women-owned contractor is giving the subcontract, but there is an understanding that there are going to be

problems on the contract, and then, through performance issues,

they are going to exclude them and then replace them.

Many times, unless you have an administrator of a DB program

at a locality and airport that has oversight, then maybe that department head, coupled with that contractor, prime contractor, will

then exclude even after the contract award the performance of the

contract by the minority- or women-owned business. You will often

find many of them have stories and complaints of their work be

perfect, but yet the problem is being found and being excluded

after the fact of the contract.

So it is not even a guarantee after the award of a contract that

there is not issues that come up, and that is an area that I have

seen time and again.

The other aspect that I have also seen is we have talked about

bonding requirements and we have talked about insurance requirements. You can have a project with, let’s say, at an airport a $40

million project. Then you look at how the bonding and insurance

requirements are set on that project by that entity. In other words,

if that entity has a $30 million bond requirement for a $40 million

project, it doesn’t make sense, but if that is the requirement then

it is normally going to exclude a large number of minority- and

women-owned businesses. For example, a bond on a project like

that may be reasonable at $5 million. There might be companies

in that range that can afford that type of bonding and get that type

of bonding in the community, but you have to look at where those

are also being set.

Another practice I have also, in fact, personally had the issue of

dealing with is when you talk about payment of minority contractors. It is so important because minority- and women-owned businesses don’t have the types of financial reserves that many majority businesses have, so what they need is prompt payment. There

will also be late payment, and there will also be retainage held

against that minority-owned business.

So when you talk about the payment aspects that come along

under the program, those are vital to having minority businesses

that can continue to work on projects.

Mr. CLAY. And so you recommend the payment schedule be

locked in for subcontractors?

Mr. BROWN. The payments should be locked in, they should be

stronger regulations in regard to prompt payment.

I will tell you personally I had a situation where I had a minority-owned business that was family owned called me and said we

haven’t been paid. I checked on the project. Everybody had been

paid on the project but them, so I ordered—which is allowable

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under my authority—that no more payments be made to that

prime contractor.

I received a call from the prime contractor 2 days later that said,

I hear you are holding my money. I said, yes, sir, I am holding my

money. He said, well, I want you to release my money. I said, well,

I want you to tell me why you haven’t paid these subcontractors.

He actually came from Texas where he was located, and we sat

down and met and he paid those subcontractors and then he received his payment. But unless you have that type of oversight and

are willing to do that type of thing, then minority- and womenowned businesses face a tremendous hurdle.

Mr. CLAY. Thank you for that.

Mr. WAINWRIGHT. I might add as, appropro of the pilot mitigation issue, there is a lot more effort goes into tracking awards and

commitments at Federal agencies as well as State and local agencies that are working these programs then into payments. What

happens, there can be a lot of difference between the original

award amount and the final payment amount, and a lot of the data

you see reported is that front-end effort. Agencies are—I won’t say

unwilling, but oftentimes unable due to staff restrictions to track

those contracts all the way through to payment.

Another issue in particular with subcontractors is change orders.

Sometimes construction projects ultimately have more money in

the change orders than were in the original contract award. Goals

are almost never applied to the change orders or tracked through

the change orders, thus, of course, diluting all of these wonderful

percentages that we think we are getting by reporting awards up

front.

Mr. CLAY. Thank you for that testimony.

Mr. BOSTON. Mr. Chairman, just a very quick comment about

something I am really passionate about. I think this will go a long

way to preserving minority business opportunity. There needs to

be, for lack of a better word, a commission to standardize the method and approach of doing disparity studies. The reason I say this

is because what happens now, the Supreme Court has said these

programs have to meet strict scrutiny and be narrowly tailored.

The problem is that the interpretation of that varies by judges

all over the country, so that if one, for example, is hostile to the

notion of affirmative action, then that program, there can always

be come deficiency found. So if that process is standardized, then

we know whether the existence of a program meets the standard

or it doesn’t meet the standard, whether there is sufficient evidence

or there is not sufficient evidence.

It would also save local jurisdictions, Federal and State, hundreds of thousands of dollars in terms of commissioning studies.

Mr. CLAY. Sure. Thank you for that.

Mr. Peek, go ahead. Just finish us off.

Mr. PEEK. Just one comment. As I hear these issues, I sell money

daily—not like Wall Street though. But I constantly run into quick

pay issues and hear we need money to mobilize on a contract and

we need money to pay our payroll because they are holding, and

all these issues, and, Mr. Chairman, I really congratulate you and

thank you passionately for taking on this issue, because all these

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bottle up, but at some point it comes back to capital and it comes

back to access to capital.

I don’t know what the remedy will be to where the government

provides credits or capital in this continuum of process for contracting opportunity, but hopefully we can build some solutions in here.

I would be more than happy to submit some after the hearing into

the record that will deal with the fact that there has to be the capital there for these guys, when they have the opportunity, and we

remedy these other issues.

I know that those people who get the capital have to be committed to tying this into it. It can’t be a return on investment. The return on investment is job creations and expanding the tax base and

creating an opportunity. Those have to be built into this whole

process.

Mr. CLAY. Thank you for those closing comments. I am sure that

will be a subject of subsequent hearings.

This is a first in a series of hearings in order to build an adequate record so that we can go back and revise current law, to update it, and to make the program actually work.

Again, let me thank the entire panel of witnesses for your testimony today, for your knowledge, for your expertise in this area

that is so vital to the economic growth of this country. I appreciate

each and every one of you for your commitment to this issue of minority business development throughout this country.

Before we adjourn, I want to restate that you do have up to 5

legislative days in which to revise and extend your remarks.

The Chair will ask unanimous consent that the written testimony of Mr. Jack Thomas, assistant director of certification and

compliance for the city of St. Louis, Lambert-St. Louis International Airport, be inserted in the record. The testimony will be

inserted.

That will conclude this hearing. Hearing adjourned. Thank you.

[Whereupon, at 3:30 p.m., the subcommittee was adjourned.]

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