Contract Management: Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls for Tailored Oversight
Published: 2006-04-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Alaska Native corporations (ANC) were created to settle land claims with Alaska Natives and foster economic development. In 1986, legislation passed that allowed ANCs to participate in the Small Business Administration's (SBA) 8(a) program. Since then, Congress has extended special procurement advantages to 8(a) ANC firms, such as the ability to win sole-source contracts for any dollar amount. This report identifies (1) trends in the government's 8(a) contracting with ANC firms, (2) the reasons agencies have awarded 8(a) sole-source contracts to ANC firms and the facts and circumstances behind some of these contracts, and (3) how ANCs are using the 8(a) program. GAO also evaluated SBA's oversight of 8(a) ANC firms.
section_title: What GAO Found
paragraphs: While representing a small amount of total federal procurement spending,8(a) obligations to firms owned by ANCs increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year 2004, obligations to ANC firms represented 13 percent of total 8(a) dollars. Sole-source awards represented about 77 percent of 8(a) ANC obligations for the six procuring agencies that accounted for the vast majority of total ANC obligations over the 5-year period. These sole-source contracts can represent a broad range of services, as illustrated in GAO's contract file sample, which included contracts for construction in Brazil, training of security guards in Iraq, and information technology services in Washington, D.C. In general, acquisition officials at the agencies reviewed told GAO that the option of using ANC firms under the 8(a) program allows them to quickly, easily, and legally award contracts for any value. They also noted that these contracts help them meet small business goals. In reviewing selected large, sole-source 8(a) contracts awarded to ANC firms, GAO found that contracting officials had not always complied with certain requirements, such as notifying SBA of contract modifications and monitoring the percent of work that is subcontracted. ANCs use the 8(a) program to generate revenue with the goal of providing benefits to their shareholders. These benefits take many forms, including dividend payments, scholarships, internships, and support for elder shareholders. A detailed discussion of the benefits provided by the ANCs is included as appendix X of the report. Some ANCs are heavily reliant on the 8(a) program for revenues, while others approach the program as one of many revenue-generating opportunities. GAO found that some ANCs have increasingly made use of the congressionally authorized advantages afforded to them. One of the key practices is the creation of multiple 8(a) subsidiaries, sometimes in highly diversified lines of business. From fiscal year 1988 to 2005, ANC 8(a) subsidiaries increased from one subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs. SBA, which is responsible for implementing the 8(a) program, has not tailored its policies and practices to account for ANCs' unique status and growth in the 8(a) program, even though SBA officials recognize that ANCs enter into more complex business relationships than other 8(a) participants. Areas where SBA's oversight has fallen short include: determining whether more than one subsidiary of the same ANC is generating a majority of its revenue in the same primary industry, consistently determining whether awards to 8(a) ANC firms have resulted in other small businesses losing contract opportunities, and ensuring that the partnerships between 8(a) ANC firms and large firms are functioning in the way they were intended. During our review, SBA officials agreed that improvements are needed and said they are planning to revise their regulations and policies.

section_title: Letter
paragraphs: In December 1971, Congress enacted the Alaska Native Claims Settlement  Act (ANCSA) to resolve long-standing aboriginal land claims and to foster  economic development for Alaska Natives. This legislation created Alaska  Native corporations (ANC), which would become the vehicle for  distributing land and monetary benefits to Alaska Natives in lieu of a  reservation system. ANSCA permitted the conveyance of about 44 million  acres of land to the ANCs, along with cash payments of almost $1 billion in  exchange for extinguishing the aboriginal land claims in Alaska. Regional  corporations were required to be formed as profit-making entities, while  village, urban, and group corporations could decide whether to be profit or  nonprofit entities. As of December 2005, there were 13 regional  corporations and 182 village, urban, and group corporations. ANCSA does  not set any requirements on how ANCs are to use the profits they  generate.
In 1986, legislation passed that allowed ANC-owned businesses to  participate in the Small Business Administration’s (SBA) 8(a) program— one of the federal government’s primary means for developing small  businesses owned by socially and economically disadvantaged individuals.  This program allows the government to award contracts to participating  small businesses without competition below certain dollar thresholds.  Congress has repeatedly emphasized in legislation the business  development aspects of the 8(a) program. Each 8(a) firm, including those  owned by ANCs, must qualify as small under an industry size standard as  measured by number of employees or average revenues from the previous  3 years, and must be majority-owned by a disadvantaged individual or a  qualified entity, such as an ANC. Firms approved as 8(a) participants can  receive business development assistance from SBA and are eligible to  receive contracts that agencies offer to SBA for the 8(a) program. In 1998,  SBA started negotiating memorandums of understanding (MOU) that  allowed federal agencies to contract directly with 8(a) firms. The MOUs  (also called partnership agreements), delegate contract execution  responsibility to the agencies and require them to monitor certain  requirements of the contract.
Since 1986, Congress has extended special procurement advantages to  ANC firms beyond those afforded to other 8(a) businesses. Table 1 shows  the advantages.
Recently, a number of high-dollar, sole-source 8(a) contracts awarded to  ANC firms have attracted the attention of Congress and the media. This  report identifies (1) trends in the government’s 8(a) contracting with ANCs  from fiscal years 2000 to 2004; (2) the reasons agencies have awarded 8(a)  sole-source contracts to ANC firms and the facts and circumstances  behind some of these contracts; and (3) how ANCs are using the 8(a)  program. In addition, we evaluated SBA’s oversight of 8(a) ANC firms,  given these companies’ unique procurement advantages.
To gather data on federal 8(a) contracting with ANCs, we identified each  ANC firm’s Data Universal Numbering System (DUNS) number and used  this information to obtain data from the Federal Procurement Data System  (FPDS) for fiscal years 2000 through 2004. We tested the FPDS data for  reliability by comparing this information with procurement data submitted  by six agencies that accounted for almost 85 percent of total 8(a) ANC  obligations over the 5-year period: the departments of Defense, Energy,  the Interior, State, and Transportation and the National Aeronautics and  Space Administration (NASA). We planned to include the Department of  Homeland Security’s data in our trend analysis but did not do so for two  reasons. First, because the department became operational in March 2003,  FPDS data would reflect only part of fiscal year 2003 and beyond. Second,  we found that the data from Homeland Security were inconsistent, and  therefore questioned the reliability of the data overall.
We analyzed documents provided by SBA’s headquarters and Alaska  district office and interviewed officials from those offices. We reviewed   16 large, sole-source 8(a) contracts awarded to ANC firms by the six  agencies cited above as well as by the Department of Homeland Security  and interviewed appropriate contracting officials. We traveled to Alaska  and met with executives representing 30 ANCs, including each of the   13 regional ANCs and 17 village or urban corporations. Of the   30 corporations, 26 were participating in the 8(a) program and 4 were not  at the time of our review. We also spoke with Alaska Native shareholders  and reviewed the companies’ annual reports and other relevant  documentation. Figure 1 depicts the sites we visited in Alaska.
We also spoke with representatives from small businesses, an 8(a)  association, and the Native American Contractors Association. Our work  included a detailed review of the laws, regulations, and legislative history  that afforded ANCs their special 8(a) provisions. Appendix I contains more  details on our scope and methodology. We conducted our review from  April 2005 to March 2006 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: ANSCA created 12 regional ANCs, each representing a region of Alaska,  and a 13th corporation for Alaska Natives living outside Alaska. There are  also 182 village, urban, and group corporations located within the   12 regions. In most cases, the regional corporations received a mixture of  surface and subsurface rights to land while the village, urban, or group  corporations received only surface rights. Some village corporations opted  out of the ANCSA settlement to receive surface and subsurface rights to  their former reservation lands and relinquished all ANSCA benefits,  including claims to additional land, monetary payments, or shares of stock  in a regional corporation. Additionally, in some cases, village corporations  merged with each other or with the regional corporation.
The legislative history of ANSCA is focused on economic development for  the benefit of Alaska Natives. Each eligible Alaska Native is generally  entitled to membership both in the corporation established for his or her  village and in the regional corporation in which the village is located. As  shareholders, Alaska Natives are entitled to a voice in the management of  and a share in the lands, assets, and income as decided by the board of  directors of the corporations, which own and manage the land and money.  ANCSA implemented restrictions that generally allow original  shareholders to transfer shares only under certain circumstances, such as  divorce or through a gift or a will. Additionally, four of the   30 corporations we reviewed have chosen to issue new stock to  descendants of the original shareholders or those who did not have the  opportunity to enroll as a shareholder originally.
ANCs vary widely in number of shareholders and profitability. Table 2  illustrates some examples.
For ANC firms in the 8(a) program, SBA has specific oversight  responsibility for    accepting the firm into the 8(a) program, which includes ensuring that  the ANC does not have more than one 8(a) firm in the same primary  line of business, defined by a North American Industry Classification  System (NAICS) code;    verifying each firm’s size status to ensure that it qualifies as small  under the NAICS code assigned to the procurement; and    annually reviewing 8(a) firms to track their progress in the 8(a)  program.
There is a 9-year limit to participation in the 8(a) program, and firms— including ANC firms—are required to obtain a certain percentage of non- 8(a) revenue during the last five years to demonstrate their progress in  developing a viable business that is not reliant on the 8(a) program. SBA’s  district offices are responsible for tracking the business mix of 8(a) and  non-8(a) revenue on an annual basis. If a firm does not meet its required  business mix during one of the last five years, SBA invokes a plan of  remedial action for the next year, in which the firm reports to SBA its  progress toward compliance with the required business mix. Until the  required mix is demonstrated, the firm will not be eligible for sole-source  8(a) contracts. Currently there are over 9,400 firms in the 8(a) program.
section_title: Increase in 8(a) Federal Contracting with ANC Firms
paragraphs: From fiscal year 2000 to 2004, the federal government obligated a total of  about $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent, went  through the 8(a) program. About 13 percent of total 8(a) dollars were  obligated to ANC firms in fiscal year 2004. Further, from fiscal year 2000 to  2004, sole-source awards accounted for 77 percent of ANC 8(a) contracts  for the six agencies in our trend analysis. The sole-source 8(a) contracts  that we reviewed demonstrate the wide diversity of services provided by  ANC firms worldwide.
subsections: section_title: Dollars to ANC Firms Governmentwide Have Increased
paragraphs: Our analysis, based on FPDS data, shows that federal dollars obligated to  ANC firms through the 8(a) program grew from $265 million in fiscal year  2000 to $1.1 billion in 2004, with a noticeable increase in 2003. Over the   5-year period, about 63 percent of the government’s obligations to ANC  firms went through the 8(a) program. Figure 2 shows the breakdown  between 8(a) and non-8(a) dollars obligated to ANC firms.
section_title: Increasing Percentage of Total 8(a) Dollars Obligated to ANC Firms
paragraphs: We also analyzed the percentage of total 8(a) dollars obligated to ANC  firms from fiscal years 2000 to 2004. Total obligations to all 8(a) firms grew  from about $5.8 billion in fiscal year 2000 to about $8.4 billion in fiscal year  2004. The percentage obligated to 8(a) ANC firms grew from about   5 percent to about 13 percent during this time period. Whereas obligations  to 8(a) ANC firms decreased only slightly between fiscal years 2003 and  2004, dollars obligated to other 8(a) firms decreased by almost $2 billion  during that same time frame. SBA officials could not explain the decrease.  Figure 3 depicts this trend.
section_title: Sole-Source Contracts Represent Majority of 8(a) ANC Obligations for Selected Agencies
paragraphs: For the six agencies included in our 8(a) trend analysis, sole-source  obligations to ANC firms increased from about $180 million in fiscal year  2000 to almost $876 million in fiscal year 2004. Over the five-year period,  sole-source obligations represented about 77 percent of these agencies’  total obligations to 8(a) ANC firms.
Figure 4 depicts the trend in 8(a) sole-source obligations to ANC firms for  the six agencies.
section_title: Federal Agencies Contract with ANC Firms for a Variety of Services Worldwide
paragraphs: In recent years, ANC firms have performed a wide variety of services for  the federal government, spanning 18 broad industries, across the United  States and overseas. The services included facilities support services;  construction; professional, scientific, and technical services; information  technology services; and manufacturing. Our review of selected large sole- source 8(a) contracts further demonstrates the wide diversity of services  provided by ANC firms, as shown in table 3.
Chugach Management Services,  Inc.
Chugach Management Services,  Inc.
ASRC Airfield & Range Services,  Inc.
Ahtna Technical Services, Inc.
Ahtna Technical Services, Inc.
Field Support Services, Inc.
KUK/KBRS Global, a joint venture  between Kuk Construction LLC  and Kellogg Brown & Root  Services, Inc.
Washington  D.C.
Bowhead Information Technology  Services, Inc.
Washington  D.C.
Bowhead Support Services, a  division of Bowhead  Transportation Company, Inc.
section_title: Agency Officials View Contracting with ANC Firms as Quick and Easy, but Rules Not Always Followed
paragraphs: In general, acquisition officials at the agencies we reviewed told us that  the option of using ANC firms under the 8(a) program allows them to  quickly, easily, and legally award contracts for any value. They also  pointed out that awarding 8(a) contracts to ANC firms helps agencies meet  their small business goals. Our review of 16 large sole-source contracts  found that contracting officials had not always complied with  requirements to notify SBA when modifying contracts, such as increasing  the scope of work or the dollar value, and to monitor the percentage of the  work performed by 8(a) firms versus their subcontractors.
subsections: section_title: Sole-Source 8(a) Contracts to ANC Firms Viewed as Expedient
paragraphs: Agency officials told us that awarding sole-source contracts to 8(a) ANC  firms is an easy and expedient method of meeting time-sensitive  requirements. Some examples follow.
An Army contracting official told us that his agency’s limited  contracting staff was the primary reason his office awarded an 8(a)  sole-source contract to an ANC firm for base operations support. The  official added that this contract had been competitively awarded three  times previously to large businesses, but in 1999 his office decided it  did not have the staff to administer another full and open competition.
Another Army official commented that she had to fill an urgent  requirement for water and fuel tanks in support of the war in Iraq.  Rather than directly award to a large manufacturer, which would  require a justification and approval process for a sole-source award,  the contract went sole source to an 8(a) ANC firm as a quicker  acquisition strategy given the time-sensitive nature of the requirement.    An e-mail in the contract file from a NASA official remarked that a sole- source award to an ANC firm would save much time as opposed to  having to work through a competitive process, since the office was  running short on available staff. Another NASA official stated that the  additional resources needed to run a competitive procurement would  likely negate any monetary savings that might be gained through  competition.
Another contracting official told us that it was the “unofficial” policy in  his organization that for urgent requirements over the competitive  limits for other 8(a) firms, an ANC firm is sought out. He described  contracting with ANC firms as an “open checkbook” since sole-source  awards can be made for any dollar amount.
We found one example, however, where the process of awarding to an  8(a) ANC firm was not particularly expedient. An ANC firm proposed a  price for a State Department construction contract that was almost twice  as much as the government’s original cost estimate. The State Department  negotiated extensively for over a month, requesting four different price  proposals from the contractor. At one point, the contracting office  considered terminating the solicitation and awarding competitively to a  prequalified firm, but due to time constraints the department decided to  accept the ANC firm’s final proposal, which was still slightly over the  government’s estimate.
In another example from our file review, the Interior Department’s  GovWorks awarded a sole-source 8(a) contract on behalf of the  Department of Defense’s (DOD) Counter Intelligence Field Activity (CIFA)  to an ANC firm. The contract was primarily to consolidate and co-locate  the space available for contractor personnel, but also included some work  to oversee construction and facilities program management. This  contractor, which specialized in information technology services, told us it  had been approached by CIFA for this project because it had successfully  obtained space for another government agency. When awarding the  contract, GovWorks did not consider any alternatives other than sole- source contracting with the ANC firm because CIFA had requested that  firm. Contractor officials told us that the cost of the office space was  incidental to a larger project for CIFA, yet we found that over 80 percent  of the contract price was for the space. Furthermore, although SBA’s  Alaska district office had accepted the contract under the 8(a) program, a  subsequent size determination found that at the time of award, the  contractor did not qualify as small under the size standard for the  contract.
We also found an example where an agency could have competed the  contract had there been adequate acquisition planning, but chose to award  sole-source to an ANC firm because it was easier method. The Immigration  and Naturalization Service awarded a facilities operation and  maintenance contract for a federal detention facility. A contracting official  who reviewed the presolicitation and pre-award packages told us that this  was a recurring requirement and the contracting officer should have  known well in advance that the existing contract was expiring. With  sufficient acquisition planning the agency could have awarded an   8(a) competitive contract, according to this official. However, he was  advised by the contracting officer that awarding to an ANC firm was the  quickest and easiest method and avoided competition. We reviewed the  contract file and did not find a formal acquisition plan that addressed the  strategy used. We reported in 2003 that the lack of adequate advanced  planning by the Immigration and Naturalization Service for several  detention center contracts limited opportunities for competition.
section_title: ANC 8(a) Awards Help Agencies Meet Small Business Goals
paragraphs: The Small Business Reauthorization Act of 1997 directed the President to  establish a goal of not less than 23 percent of the federal government’s  prime contracting dollars to be awarded to small businesses each fiscal  year. As part of this goal, Congress has directed that 5 percent of prime  contract dollars be directed to small, disadvantaged businesses. SBA is  charged with working with federal agencies to ensure that agency goals, in  the aggregate, meet or exceed these goals.
Several contracting officers told us that they had turned to 8(a) ANC  contracts as a way to help their agencies meet small business goals. ANC  firms in the 8(a) program are deemed in legislation as socially and  economically disadvantaged. Because contract awards can be categorized  by agencies to allow them to take credit in more than one small business  category, awards to 8(a) ANC firms can be applied to the agencies’ overall  small business goal as well as to their small, disadvantaged business goal.  One Energy contracting official told us that there is tremendous pressure  to award contracts to small businesses, so she turns to 8(a) ANC firms  whenever possible. A NASA official told us that his contracting office had  been aggressive in promoting socioeconomic development with small  disadvantaged businesses and had particularly wanted to award a contract  to benefit the Native American community. Although several small  businesses expressed interest in NASA’s requirement for technical and  fabrication support services, rather than compete the procurement, NASA  opted for a sole-source award with an 8(a) ANC firm.
section_title: Required Notifications of Contract Modifications Not Always Done
paragraphs: SBA regulation requires that, where the contract execution function is  delegated to the agencies, they must report to SBA all 8(a) contract  awards, modifications, and options. Further, the MOUs between SBA and  the agencies require the agencies to provide SBA with copies of all 8(a)  contracts, including modifications, within 15 days of the date of award.  However, we found that contracting officers were not consistently  following this requirement. While some had notified SBA when  incorporating additional services into the contract or when modifying the  contract ceiling amount, others had not.
One contracting official told us that SBA has “stepped aside” when it  comes to overseeing 8(a) contracts and that it would not occur to her to  coordinate a contract modification, such as a scope change, with SBA. We  also found the following example where the contracting officer was under  the impression that the scope of work could be expanded to include any  additional lines of business not in the original contract because it was a  sole-source 8(a) ANC contract.
The Department of Energy awarded an $8.5 million sole-source  contract to an ANC firm for administrative and general management  consulting services, but one year later broadened the scope of work to  include 10 additional lines of business related to facilities management  support and engineering services. The additional work almost tripled  the cost of the contract, raising it to $25 million. None of these changes  were coordinated with SBA, despite the fact that SBA’s letter to the  Department of Energy approving the procurement clearly stated that if  the statement of work was changed, SBA would have to re-determine  the appropriateness of the NAICS code and the acceptability of the  offer under the 8(a) program. The contracting official acknowledged  that the scope change should have been coordinated with SBA, but her  understanding was that because it was an ANC firm, anything could be  added to the contract regardless of the dollar amount. By adding  additional lines of business to the contract, the contracting officer was  potentially improperly expanding beyond the scope of the contract.  Moreover, by not notifying SBA, the agency had no assurance that this  ANC firm qualified as small under the contract’s additional lines of  business.
We found that SBA’s letters to the agencies approving 8(a) procurements  did not always reiterate the notification requirement. Of the 16 contract  files we reviewed, we found only five cases where the letter requested that  all contract modifications be coordinated with SBA. Four of these  specifically requested the agency to forward a copy of any scope changes.  SBA officials could not explain why the acceptance letters were  inconsistent. SBA officials in Alaska recently revised their approval letter  template, which now requests copies of contract modifications if  additional work is being added to the original contract or an option year is  being exercised.
section_title: Contracting Officials Not Consistently Monitoring Subcontracting
paragraphs: The “limitations on subcontracting” clause in the Federal Acquisition  Regulation requires that, for 8(a) service contracts with subcontracting  activity, the 8(a) firm must incur at least 50 percent of the personnel costs  with its own employees (for general construction contracts, the firm must  incur at least 15 percent of the personnel costs). The purpose of this  provision, which limits the amount of work that can be performed by the  subcontractor, is to insure that small businesses do not pass along the  benefits of their contracts to their subcontractors. For the 16 files we  reviewed, we found almost no evidence that the agencies are effectively  monitoring compliance with this requirement, particularly where 8(a) ANC  firms have partnered with large firms. As a result, there is an increased  risk that an inappropriate degree of the work is being done by large  businesses rather than by the ANC firms.
The procuring agency and the 8(a) firm both play a role in ensuring  compliance with the limitations on subcontracting clause. The MOUs  between SBA and the procuring agencies state that the agencies are  responsible for the monitoring. SBA’s regulation requires the 8(a) firms to  certify in their offers to the appropriate SBA district office that they will  meet the applicable percentage of work requirement for each contract  when subcontracting.
In general, the contracting officers we spoke with were confused about  whose responsibility it is to monitor compliance with the subcontracting  limitations. Some thought it was SBA’s responsibility; one asserted that the  contractor was responsible for self-monitoring; and others acknowledged  that it was their responsibility but were not monitoring it formally. For the  contracts in our file review, SBA’s letters to agencies approving the 8(a)  procurements were not consistent in reminding contracting officers to  include the limitations on subcontracting clause in the contract. Six of the  letters did not include this language. We brought this discrepancy to the  attention of SBA officials, who stated that all approval letters should  contain this requirement as standard language. In addition, we found that  two of the awarded contracts did not contain the limitation on  subcontracting clause, as required. The responsible contracting officials  told us the clause should have been included and was omitted as a result  of an oversight.
We also found that contracting officers were unclear about how to  monitor the subcontracting requirements under indefinite quantity  contracts, under which agencies place task or delivery orders. SBA’s 8(a)  regulation states that for indefinite quantity service or supply contracts,  the participant must demonstrate semi-annually whether it has performed  50 percent of personnel costs with its own employees for the combined  total of all task or delivery orders at the end of each 6-month period. This  does not mean that the 50-percent minimum requirement applies to work  performed under each individual task order or that a contractor must meet  the requirement cumulatively for all work performed under all task orders  at any given point in time. We found contracting officers who  misinterpreted the regulation to mean that the contractor must perform  the required percentage over the life of the entire contract. As a result, one  contracting officer decided it was too difficult and thus did not monitor  the subcontracting effort.
In one example from our file review, the Energy Department awarded a  sole-source indefinite quantity contract for a construction project to an  8(a) ANC firm primarily because this firm had a previous business  relationship with the large incumbent contractor and planned to use the  incumbent as a subcontractor for the new contract. The contracting  officer believed that the limitations on subcontracting must be  demonstrated by the end of the entire contract period. We reviewed an  invoice that showed that cumulatively for all tasks to date, the subcontract  labor costs made up 90 percent of the total labor, which would indicate  the need for attention to be paid to the 6-month task order review  requirement.
An agency contracting official told us that it is not uncommon for large  businesses to approach him wanting to know how to “partner” with an  ANC firm. Furthermore, representatives from one ANC firm told us that an  agency had awarded it a “pass-through” contract, or one where the  subcontractor performs most of the work, to take advantage of the 8(a)  ANC firm’s ability to obtain sole-source contracts. The agency wanted to  contract with a particular business, but could not award a sole-source  contract directly to that business. The agency awarded the contract to the  ANC firm and required it, through a directed subcontracting plan, to  subcontract with the desired business.
When asked what recourse contracting officers would take if they found  an 8(a) firm to be out of compliance with the limitations on  subcontracting, some agency officials responded that they had no plan in  place. In fact, one contracting officer commented that he would be  “laughed out of the office” if he brought up the compliance issue as a  reason for terminating the contract. Several contracting officials told us  that they review the cost proposals to assess how much work was planned  to be subcontracted out, but they do not follow up during contract  performance to ensure that the prime contractor complies with the plan.  In one case, we found that an 8(a) ANC firm’s technical proposal to the  Department of Transportation for an information technology consolidation  project included an intention to subcontract with a large firm, yet did not  clearly delineate the breakout of work between the firms. From reviewing  the agency’s evaluation of the proposal, we did not find any evidence that  contracting officials questioned the relationship or the division of labor  prior to contract award. Later, however, the contracting officer modified  the contract to require the 8(a) firm to provide semi-annual subcontracting  reports that would detail the subcontracting percentage for the previous   6 months.
section_title: ANCs Use the 8(a) Program to Increase Revenue and Provide Benefits
paragraphs: ANCs use the 8(a) program as one of many tools to generate revenue with  the goal of providing benefits to their shareholders. ANCs participating in  the 8(a) program have various business strategies to maximize revenue.  For example, some own multiple 8(a) subsidiaries, either in niche markets  or diversified industries. Others recruit outside expertise to manage their  8(a) operations. Additionally, many form partnerships—with other ANCs  or other businesses—and holding companies for increased efficiencies.
subsections: section_title: 8(a) Program among Revenue Sources for ANCs to Provide Benefits
paragraphs: Federal contracts awarded through the 8(a) program are one of a number  of sources of revenue, such as timber, tourism, real estate, or market  investments, for ANCs participating in the 8(a) program. Corporations  consolidate their income to fund operations at the parent level, to invest in  subsidiary operations, and to provide benefits to shareholders. Figure 5  shows a sample ANC’s revenue sources.
Some corporations rely on federal contracting with 8(a) subsidiaries as a  primary revenue source, while others do not. For example, of the five  corporations whose subsidiaries comprised 76 percent of the  government’s 8(a) ANC dollars from fiscal years 2000 to 2004, three  depend almost exclusively on current, exited, or planned participants in  the 8(a) program for their revenues. However, for the other two  corporations, 8(a) subsidiaries are only one investment in a diversified  portfolio that includes energy services, telecommunications, and oil-field  and mining support. We also interviewed four corporations that do not  participate in the 8(a) program, relying instead on telecommunications,  real estate, tourism, natural resources, and other investments.
The ANCs we reviewed do not track the benefits provided to their  shareholders specifically generated from 8(a) activity. Thus, an explicit  link between the revenues generated from the 8(a) program and benefits  provided to shareholders is not documented. However, ANCs do track  benefits generated from their consolidated revenue sources. Benefits vary  among corporations, but include dividend payments, scholarships,  internships, burial assistance, land gifting or leasing, shareholder hire,  cultural programs, and support of the subsistence lifestyle. For more  information on benefits, see appendix X.
We found that sizable 8(a) revenues do not guarantee a higher level of  shareholder benefits, as two of the five ANCs that account for most of the  8(a) ANC dollars obligated from fiscal years 2000 to 2004 demonstrate.
One corporation, which provides sizable benefits, credits the 8(a)  program with its continued existence, its return to profitability after  declaring bankruptcy, and its ability to provide monetary benefits. In  the early 1990s, the corporation was required to pay off its debts before  paying any dividends. Its board and management attribute its return to  profitability to its heavy participation in the 8(a) program. By 2004, the  ANC paid out dividend amounts that were among the highest of all  regional corporations. An original shareholder owning 100 shares, for  example, received $3,500 in dividends in 2004. The ANC also provided a  number of other benefits to its shareholders, their spouses and  descendants, such as scholarships and a business assistance program.
In contrast, another ANC with a high level of activity in the 8(a)  program is currently unable to provide a comparable level of monetary  benefits. This corporation encountered a few years of heavy losses due  to lawsuits and management malfeasance. Since being in financial  recovery for the past 5 years, it has not been allowed to issue dividends  to shareholders. However, it provides other benefits, such as  scholarships and protection of land and subsistence rights for its  shareholders.
We also found that a high level of benefits can exist even if an ANC is not  participating in the 8(a) program at all. For example, at the time of our  review, one regional corporation received all of its revenues from its  diverse non-8(a) investments, including real estate, natural resources,  telecommunications, tourism, golf resorts, casino gaming, construction,  and oil-field services. From 2000 to 2004, this corporation provided  dividend payments that were substantially higher than any others we  reviewed and also provided a number of additional types of benefits to its  shareholders.
section_title: Key Practice Is Creation of Multiple 8(a) Subsidiaries
paragraphs: To generate revenue, many ANCs own multiple businesses in the 8(a)  program, taking advantage of their special ability to do so. Many of the  subsidiaries have offices that are located outside of Alaska, which is not  prohibited by statute or regulation. As Figure 6 demonstrates, the number  of 8(a) ANC subsidiaries has increased markedly.
As of December 2005, 49 ANCs owned a total of 154 8(a) firms and   30 ANCs owned more than one 8(a) firm. See appendix IX for a listing of  these 49 ANCs. The corporation owning the most subsidiaries had a total  of 14 active or graduated 8(a) subsidiaries. The five corporations that  represented the largest volume of 8(a) ANC dollars from 2000 to 2004  owned a total of 45 active and exited 8(a) subsidiaries, or 24 percent of the  total. Regional corporations have been more active than the village and  urban corporations in forming multiple subsidiaries.
SBA’s 8(a) regulation requires that the subsidiaries of each ANC be  certified in the 8(a) program under a different primary NAICS code,  representing different lines of business. However, the 8(a) businesses can  pursue work in an unlimited number of secondary NAICS codes,  regardless of their primary line of work declared at the time they apply to  the 8(a) program. This means that an 8(a) subsidiary of an ANC may  pursue government contracts under any of its primary or secondary  NAICS codes, including those that overlap with the secondary NAICS code  of another 8(a) subsidiary owned by the same parent corporation.
ANCs use their ability to own multiple businesses in the 8(a) program, as  allowed by law, in different ways. The following table summarizes some of  the practices we identified in our interviews with ANCs and our review of  their documentation.
According to SBA data, 36 ANC firms exited the 8(a) program from 1998  through 2005. Eleven subsidiaries exited because they completed their   9-year term in the program. The remaining 25 subsidiaries exited the  program before completing the full 9-year term. Of these, seven graduated  early from the program after exceeding SBA’s size standards for revenue  or number of employees. Though no longer 8(a) participants, these  subsidiaries are obligated to continue to perform work on previously  awarded 8(a) contracts, including any priced options that may be  exercised. Another subsidiary lost its 8(a) status after failing to file  paperwork with SBA. Other subsidiaries dissolved, became inactive, or  were sold to other businesses.
section_title: ANCs Pursue Other 8(a) Business Strategies
paragraphs: We found a variety of other strategies that ANCs use to generate revenue,  as discussed below.
subsections: section_title: Relying on Outside Expertise
paragraphs: Although all of the ANCs that we reviewed retained a board composed  entirely of Alaska Natives, several have recruited outside executives who  are not Alaska Natives to manage the parent corporation or their 8(a)  operations. Some corporations recruited these executives for their specific  experience in the 8(a) program, which they gained working on other  government contracts or in operations at other 8(a) ANC subsidiaries.  Some corporation executives stated that this managerial expertise was a  key factor to success in the 8(a) program. For example, representatives  from one corporation told us that its 8(a) subsidiary suffered after its  executive left to work at another ANC. Some of these managers command  salaries significantly higher than those of the executives at the parent  corporation. For example, in 2004, a corporation paid one of its chief  executive officers for 8(a) operations almost $1 million — more than three  times as much as the highest-paid executive of the parent corporation.
Additionally, a few ANCs hire outside marketing firms to assist them with  securing contracts. One such firm provides services such as locating  potential contracts for its ANC client, interviewing potential partners on  the project, meeting with contracting agencies, and following up with the  contracting officer after award.
section_title: Creating Partnership Arrangements
paragraphs: Another business strategy is to create partnerships with individuals or  other businesses to gain access to capital, experience, or expertise. For  example, one corporation entered into a partnership by sharing subsidiary  ownership with another ANC when it did not have the necessary capital to  create a new subsidiary. The other corporation benefited from the  partnership because it was new to the 8(a) program and needed the other  corporation’s experience.
In addition to ownership arrangements, many ANCs pursue other types of  partnerships, such as joint ventures and mentor-protégé relationships, as a  business strategy to better position themselves for federal contract  opportunities through the 8(a) program.
Joint venture agreements. A “joint venture” is an agreement between an  8(a) participant and one or more businesses to work together on a specific  8(a) contract. With SBA’s approval, an 8(a) subsidiary may enter into an  unlimited number of joint venture agreements. Of the 26 corporations we  interviewed that were participating in the 8(a) program, 22 owned  subsidiaries that participated in a total of 57 joint venture agreements. In  2001, a joint venture between two ANCs was awarded a $2.1 billion  contract by the National Imagery and Mapping Agency.
Mentor-protégé agreements. SBA established the mentor-protégé program  to encourage relationships between 8(a) businesses and other firms that  act as mentors to provide technical, financial, and other assistance to their  protégés. An 8(a) subsidiary may be a protégé to only one mentor at a  time. Of the ANCs that we interviewed that were participating in the 8(a)  program, 19 owned a total of 24 subsidiaries participating in mentor- protégé agreements.
section_title: Forming Holding Companies
paragraphs: ANCs create holding companies – non-8(a) subsidiaries that provide  shared administrative services to other subsidiaries, for a fee – which also  aid their participation in the 8(a) program. Of the 30 corporations we  interviewed, 11 had formed holding companies. Two corporations had  established three separate holding companies.
Figure 7 shows a sample ANC with a holding company for subsidiaries in  and outside of the 8(a) program.
SBA requests that ANCs seek approval before forming a holding company,  which must be wholly-owned by the parent ANC for the subsidiaries to be  eligible for the 8(a) program. During the course of our review, we found  one holding company that was 80-percent owned by the parent ANC and  20-percent owned by two holding company executives. SBA’s records,  however, showed the company as 100-percent owned by the parent ANC.  A representative of the holding company told us that the ownership  arrangement was changed after SBA’s initial approval of the holding  company. The company did not notify SBA of the change because the  holding company is not itself a participant in the 8(a) program and it  wholly owns all of its subsidiaries, thereby maintaining compliance with  the minimum 51-percent ownership requirement. SBA points to the statute  and its regulations, which show that ANC 8(a) participants must be  majority-owned by an ANC or a wholly-owned entity of an ANC.  Therefore, subsidiaries under a partially-owned holding company are no  longer eligible to participate in the 8(a) program. Since this situation came  to light, the ANC and the holding company executives rescinded the   20-percent ownership arrangement to maintain compliance with SBA  requirements. Further, the SBA Alaska district office revised its template  letter approving a change in ownership to clarify the restrictions on  ownership of a holding company.
ANC executives told us the benefits of holding companies included:  Greater efficiencies. The holding companies can provide accounting,  human resources, legal, marketing, or other services, allowing the ANC to  operate more efficiently. Since subsidiaries underneath the holding  company do not need to perform these functions, they may employ fewer  administrative staff and instead employ only technical staff. A lean staff is  especially important since subsidiaries can become ineligible for the 8(a)  program when they exceed a certain number of employees.
Consistent policies and procedures. Some corporations established  holding companies to facilitate consistent policies, procedures, and  corporate governance across the subsidiaries.
Easier administration. Corporation officials cited several administrative  benefits to establishing holding companies, including the following  examples:    The holding company’s smaller board allowed for faster decisions than  assembling the parent corporation’s entire board.
Only one entity—the holding company—would be audited by the  Defense Contract Audit Agency as opposed to each of the individual  subsidiaries.
The holding company saved time on security clearances. For example,  for a contract involving classified work, the holding company  management and board of directors already had security clearances,  saving the time of performing background checks on the corporation- level management and board of directors.
Coordination among subsidiaries. One corporation official told us that  the holding company helps prevent competition among its subsidiaries for  the same contracting opportunities.
Legal protection. Representatives from two corporations stated that the  holding company separates the parent company from most liability that a  subsidiary may incur. For example, if the subsidiary went bankrupt, the  parent corporation generally could not be held legally or financially  responsible.
section_title: Improvements Needed in Oversight of ANCs in the 8(a) Program
paragraphs: SBA has not tailored its policies and practices to account for ANCs’ unique  status in the 8(a) program and growth in federal contracting, even though  officials recognize that ANCs enter into more complex business  relationships than other 8(a) participants. SBA officials told us that they  have faced a challenge in overseeing the activity of the 8(a) ANC firms  because ANCs’ charter under ANCSA is not always consistent with the  business development intent of the 8(a) program. The officials noted that  the goal of ANCs—economic development for Alaska Natives from a  community standpoint—can be in conflict with the primary purpose of the  8(a) program, which is business development for individual small,  disadvantaged businesses.
However, the officials agreed that improvements are needed in their  oversight and said they are considering various actions in this regard. They  told us that they are planning to revise their regulations and policies to  address ANCs’ unique status in the 8(a) program. Moreover, they are now  in the process of implementing a new, automated data collection tool to  more readily collect information on 8(a) firms. It is expected to be  operational during fiscal year 2007.
subsections: section_title: SBA Oversight of ANCs in the 8(a) Program Is Not Adequate
paragraphs: SBA’s oversight has fallen short in that it does not  track the business industries in which ANC subsidiaries have 8(a)  contracts to ensure that more than one subsidiary of the same ANC is  not generating the majority of its revenue under the same primary  NAICS code;    consistently determine whether other small businesses are losing  contracting opportunities when large, sole-source contracts are  awarded to 8(a) ANC firms;    adhere to a legislative and regulatory requirement to ascertain whether  8(a) ANC firms, when entering the 8(a) program or for each contract  award, have, or are likely to have, a substantial unfair competitive  advantage within an industry;    ensure that partnerships between 8(a) ANC firms and large firms are  functioning in the way they were intended under the 8(a) program; and    maintain information on ANC 8(a) activity.
SBA officials from the Alaska district office reported to headquarters in  the most recent quality service review that the make-up of their 8(a)  portfolio is challenging and requires more contracting knowledge and  business savvy than usual because the majority of the firms they oversee  are owned by ANCs and tribal entities. The officials commented that these  firms tend to pursue complex business relationships and tend to be  awarded large and often complex contracts. We found that the district  office officials were having difficulty managing their large volume and the  unique type of work in their 8(a) portfolio. When we began our review,  SBA headquarters officials responsible for overseeing the 8(a) program did  not seem aware of the growth in the ANC 8(a) portfolio and had not taken  steps to address the increased volume of work in their Alaska office.
subsections: section_title: Not Tracking Secondary Lines of Business across Multiple 8(a) Firms Owned by One ANC
paragraphs: As discussed above, ANCs can create multiple 8(a) subsidiaries that can be  based across the United States. SBA’s Alaska district office, which is  responsible for overseeing most 8(a) ANC contracting activity, does not  track the business industries in which the subsidiaries win 8(a) contracts  under secondary NAICS codes. Thus, SBA is not ensuring that a firm’s  secondary NAICS codes do not, in effect, become the primary business  line by generating the majority of revenue. This situation could allow an  ANC to have more than one 8(a) subsidiary perform most of its work  under the same primary NAICS code, which SBA regulation does not  allow. Appendix XI shows an example of an ANC with subsidiaries  marketing their ability to perform work in a number of different industries.
Headquarters officials told us that they do not monitor the industries from  which 8(a) participants receive revenue because they do not want to stifle  the growth of the company. However, the officials acknowledged that they  would be concerned if a subsidiary’s primary industry revenue source  changed without SBA being notified. They have not developed a plan to  increase monitoring of ANCs’ secondary NAICS codes, even though many  of these firms take advantage of their ability to obtain contracts under  secondary lines of business.
section_title: Not Consistently Determining Whether Other Small Businesses Are Losing Contract Opportunities
paragraphs: We found cases where SBA did not take action when incumbent small  businesses lost contract opportunities when an 8(a) ANC firm was  awarded a large sole-source contract. For example:    The Department of Transportation awarded an information technology  contract to an 8(a) ANC firm in an effort to support transition to a  single integrated infrastructure. According to the department’s  acquisition plan, the goal is to create a more mission-effective, secure,  and cost-effective computing environment that will provide common  services. Previously, this service was being provided under separate  contracts with eight small businesses. The consolidation project will  likely discontinue the work performed by these small businesses and  replace it with the single infrastructure managed by the 8(a) ANC firm.  One of the incumbent small businesses protested the award to our  agency. In its submission to our bid protest office, SBA acknowledged  that it had not conducted the required adverse impact analysis, but  asserted that it had viewed the requirement as “new” and therefore had  incorrectly concluded it was not required to perform the analysis. SBA  also noted that the 8(a) regulation provides that, even where there is a  presumption of adverse impact, SBA “may”—rather than “shall”— determine whether adverse impact exists. SBA interprets this to mean  that it has the discretion to accept a contract into the 8(a) program  even where one of the contractors meets the presumption of adverse  impact.
The scope of an Air Force base contract with an ANC firm has been  expanded as additional base civil engineering services, previously  provided by small businesses, have been absorbed into the contract.  Since the initial contract award, the estimated contract value has  increased by $46 million to nearly $600 million. The contracting official  coordinated these changes with SBA via e-mail. Rather than  disapproving the request or evaluating the impact on other small  businesses, SBA only expressed concern that the contracting officers  were absorbing work into the contract that was well within the  capability of other 8(a) contractors, indicating that it was “troubled”  over the loss of a prime contracting opportunity for other small  businesses. The contracting officer told us that the Air Force has now  decided to stop adding services to the contract and will maintain the  other existing small business contracts.
When a procuring agency is interested in offering a requirement to a  specific participant in the 8(a) program for a sole-source contract, the  agency is required to send SBA an offering letter with information on the  description of the work, the NAICS code, anticipated dollar value of the  requirement, and the names and addresses of any small business  contractors that have performed on the requirement during the previous  24 months, among other things. At the time that SBA accepts a  procurement for award into the 8(a) program, it is required to consider  whether individual small businesses, a group of small businesses in a  geographical area, or other business programs will be adversely  impacted. Adverse impact is determined to be present where, among  other things, a small business has been performing the requirement  outside the 8(a) program and this work represents 25 percent or more of  its revenue.
In almost all cases for the 16 large sole-source contract we reviewed,  SBA’s letters to the agencies approving the procurements contained  boilerplate language: “a determination has been made that acceptance of  this procurement will cause no adverse impact on another small business  concern.” The language in the acceptance letters suggests that SBA  conducted a formal adverse impact study, yet this was not the case for any  of the contracts we reviewed. The letters do not clarify whether the  determination was made based on a formal adverse impact study or  whether no determination was required because the requirement was new  or previously had been performed by a large business. SBA officials told us  that the language is intended to encompass all situations where there is no  adverse impact.
SBA officials stated that it is difficult for them to ensure that other small  businesses are not negatively affected because they are relying on the  procuring agency to provide the procurement history, and, in their view,  procuring agencies are not always forthcoming. During our review, the  Alaska district office revised its standard letter to agencies to state that the  adverse impact determination was made based on the procurement history  the agency provided to SBA in its letter offering the procurement to the  8(a) program. The letter also now states that the determination that  acceptance of the procurement will cause no adverse impact on another  small business was made on the basis of the agency’s identifying the  requirement as new or not identifying an incumbent contractor.
section_title: Failing to Determine Substantial Unfair Competitive Advantage
paragraphs: In determining the size of a small business concern owned by a socially and  economically disadvantaged Indian tribe (or wholly owned business entity of  such tribe) each firm’s size shall be independently determined without regard to  its affiliation with the tribe, any entity of the tribal government, or any other  business enterprise owned by the tribe, unless the Administrator determines that  one or more such tribally owned business concerns have obtained, or are likely to  obtain, a substantial unfair competitive advantage within an industry category.
SBA has incorporated this language into its 8(a) regulation, but is not  making the determinations that these business concerns have obtained, or  are likely to obtain, a substantial unfair competitive advantage. In fact, the  agency has no procedure in place to make these determinations. Officials  told us that the language in the statute is confusing and that they are not  sure how to implement it. They had not taken steps to obtain clarification  and make any needed revisions to the 8(a) regulation or their standard  operating procedures. SBA officials noted that the amount of participation  by ANCs in the federal contracting market is so minimal when compared  to all other businesses that they do not expect an ANC would have a  substantial unfair competitive advantage in one industry.
section_title: Not Ensuring That Partnerships between ANCs and Large Firms Operate As Intended
paragraphs: SBA is required to approve partnerships between 8(a) and other firms,  such as mentor-protégé and joint venture arrangements, to ensure the  agreements are fair and equitable and will be of substantial benefit to the  8(a) concern. Where SBA concludes that an 8(a) concern brings very little  to the joint venture relationship in terms of resources and expertise other  than its 8(a) status, SBA regulations state that SBA will not approve the  joint venture agreement. SBA officials told us that they work closely with  the partnership firms to ensure that the 8(a) company has control in the  joint venture and will be gaining from the relationship. Further, SBA’s  regulations state that SBA will not approve a mentor-protégé relationship  that it determines is merely a vehicle to enable a non-8(a) participant to  receive 8(a) contracts.
We found indications that oversight of these partnership relationships,  particularly in the context of ANCs’ unique provisions and large  businesses that want to take advantage of those provisions, may not be  adequate. For example, representatives from an ANC firm told us that its  mentor firm exploited it for its 8(a) status. In pursuit of a particular  contract, the Alaska-based subsidiary invested in an office and staff in  Arkansas at the advice of its mentor. When the contract was not won, the  mentor deserted the protégé, and the subsidiary was left to search for  federal work on its own in Arkansas.
ANC firms in the 8(a) program provide information to SBA on their  partnership arrangements as part of the annual review process, and SBA is  reliant on this information to assess the partnerships’ success. Therefore,  SBA may not obtain all necessary information to determine if the  partnership is working as intended, even though SBA has primary  responsibility to monitor these arrangements.
We found examples where the procuring agency had concerns about a  partnership situation, but did not report its concerns to SBA, nor did SBA  ever inquire whether the partnership was working as intended.
A State Department program official told us that his office had good  intentions when it identified a joint venture between an 8(a) ANC firm  and a large firm for a sole-source 8(a) award of an international  construction services contract. In line with the business development  aspect of SBA’s mentor protégé program, the State Department official  had envisioned that the ANC firm would gain construction experience  from the globally recognized larger partner and then compete on its  own for other construction work at the State Department. However,  the official, who was also the contracting officer representative,  expressed concern that all the actual construction work was being  subcontracted out and the joint venture was only doing construction  management, which was not the intent when the requirement was  offered to the 8(a) program. Moreover, in an e-mail to the contracting  officer, this official suggested that the contractor had some  performance problems and may have been circumventing the prices  negotiated in the contract by using subcontracts for all the work. The  program official never made these concerns known to SBA, nor did  SBA ever inquire whether the partnership was working as intended.
According to State Department officials, the contracting officer looked  into the matter and found the concerns were unfounded.
In another example at the State Department, officials had some  concerns that the 8(a) ANC firm was a front company for the large  business in a joint venture for another construction project. In  response to the concerns, representatives from the joint venture  presented information to State officials on the role of the ANC firm,  stating that it was involved with management from top to bottom and  that the large firm would provide construction expertise where needed.  We found no evidence that State officials contacted SBA about this  issue at the time.
SBA recognizes that the mentor-protégé aspect of the 8(a) program can be  an important component of the overall business development of small  businesses. However, officials believe that joint ventures between mentors  and their protégés may be inappropriate for 8(a) sole-source contracts  above competitive thresholds set for other 8(a) firms. SBA cites  complaints that non-8(a) firms have received substantial benefits through  the performance of large sole-source 8(a) contracts as joint venture  partners with tribally-owned and 8(a) ANC firms. Further, where the joint  venture involves a large business mentor, SBA recognizes a perception  that large businesses may be unduly benefiting from the 8(a) program.
section_title: Not Collecting Information on ANC Participation
paragraphs: SBA lacks adequate data regarding the 8(a) program in general and does  not collect any information on ANCs’ 8(a) activity. SBA could not provide  us with reliable data for ANC revenues in the 8(a) program, even though  all program participants are required to report this information annually.  An SBA official explained that the district offices stopped using the  database that collects this information and therefore the agency had no  recent data on 8(a) participants’ revenues. Overall, data on ANC 8(a)  contracting activity were not readily available. There is no mechanism in  place for agencies to code 8(a) awards to ANCs in FPDS, for example.
section_title: Conclusion
paragraphs: The complex nature of some ANCs’ 8(a) business practices, combined  with the competing ANCSA and 8(a) program goals of economic  development for Alaska Natives versus development of individual small  businesses, create the need for SBA to tailor its regulations and policies as  well as to provide greater oversight in practice. Furthermore, since  agencies can contract directly with ANC firms, they too have responsibility  to ensure that these firms are operating in the program as intended.
Without this level of oversight, there is clearly the potential for unintended  consequences or abuse.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Administrator of SBA take the following five  actions when revising relevant regulations and policies:
Ascertain and then clearly articulate in regulation how SBA will  comply with existing law to determine whether and when one or more  ANC firms are obtaining, or are likely to obtain, a substantial unfair  competitive advantage in an industry.
In regulation, specifically address SBA’s role in monitoring ownership  of ANC holding companies that manage 8(a) operations to ensure that  the companies are wholly owned by the ANC and that any changes in  ownership are reported to SBA.
Collect information on ANCs’ 8(a) participation as part of required  overall 8(a) monitoring, to include tracking the primary revenue  generators for 8(a) ANC firms to ensure that multiple subsidiaries  under one ANC are not generating their revenue in the same primary  industry.
Revisit regulation that requires agencies to notify SBA of all contract  modifications and consider establishing thresholds for notification,  such as when new NAICS codes are added to the contract or there is a  certain percentage increase in the dollar value of the contract.
Once notification criteria are determined, provide guidance to  the agencies on when to notify SBA of contract modifications  and scope changes.
Consistently determine whether other small businesses are losing  contracting opportunities when awarding contracts through the 8(a)  program to ANC firms.
We also recommend that the Administrator of SBA take the following five  actions to improve practices pertaining to SBA’s oversight.
Standardize approval letters for each 8(a) procurement to clearly  assign accountability for monitoring of subcontracting and for  notifying SBA of contract modifications.
Tailor wording in approval letters to explain the basis for adverse  impact determinations.
Clarify MOUs with procuring agencies to state that it is the agency  contracting officer’s responsibility to monitor compliance with the  limitation on subcontracting clause.
Evaluate staffing levels and training needed to effectively oversee ANC  participation in the 8(a) program and take steps to allocate appropriate  resources to the Alaska district office.
Provide more training to agencies on the 8(a) program, specifically  including a component on ANC 8(a) participants.
To ensure that agencies are properly overseeing ANC 8(a) contracts, we  recommend that the Secretaries of the Departments of Defense, Energy,  Homeland Security, the Interior, State, and Transportation and the  Administrator of NASA take the following action:
Work with SBA to develop guidance to agency contracting officers  on how to comply with requirements of the 8(a) program such as  limitations on subcontracting and notifying SBA of contract  modifications, particularly when contracting with 8(a) ANC firms.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the departments of Defense, Energy,  Homeland Security, Interior, State, and Transportation and to NASA and  SBA. We received written comments from SBA, Homeland Security, the  Interior, NASA, State, and Energy. We received official oral comments  from Defense and Transportation. We also received written comments  from the Native American Contractors Association. The written comments  we received are included as appendixes II through VIII.
In its written comments, SBA took issue with several aspects of the report.  Its letter did not indicate whether or not it plans to implement the  recommendations we made, but in a subsequent email the agency  expressed disagreement with several of them. SBA’s comments and our  views on them follow.
The agency referred to the concerns we raise as “subjective” and  stated that our analysis relies “far too heavily on isolated individual  anecdotes” to support findings and recommendations pertaining to  8(a) ANC activity. We strongly disagree with this characterization.
Our findings are supported by the facts we gathered and our  analysis of regulations, policies, contract files, ANC annual reports,  FPDS and agency data, and other relevant documentation, as well  as interviews with agency contracting officers and acquisition  officials, SBA officials in headquarters and the Alaska district  office, and representatives of 30 ANCs. The findings we developed  and the shortcomings in oversight we found directly support the   10 recommendations we make to SBA. Further, it is an undisputed  fact that there has been significant growth in federal dollars  awarded to 8(a) ANC firms in recent years, as recognized by SBA  in its comment letter. Clearly, 6 of the 7 procuring agencies in our  review--which account for most of the government’s 8(a) dollars to  ANC firms--agree that there is a need for them to work with SBA to  develop guidance for contracting officers in light of the unique  procurement advantages Congress has provided 8(a) ANC firms.
SBA believes that our report should cite federal dollars to women- owned and other small business categories and the government’s  achievement of small business goals in general. That information is  not relevant to this report. Our review focused specifically on ANC  activity in the 8(a) program, as set forth in appendix I, which  outlines our scope and methodology.
SBA states that it has recently taken a number of steps to improve  oversight of the 8(a) program, including taking into consideration  special provisions afforded to 8(a) ANC firms, Native Hawaiian  Organizations, and Indian tribes. It is unclear what steps SBA is  referring to. While we note in our report that SBA officials told us  they were planning to revise regulations and policies, we were not  provided with any evidence that this or any other planned action  had been taken, despite our requests for the information.
SBA states that it is “conjecture” to make recommendations  pertaining to data on 8(a) ANC activity until the lack of data  explaining 8(a) participants’ economic activities, including ANC  firms, is resolved. Our recommendation on data collection is  intended to address this very gap. It is directed at SBA because that  agency is responsible for managing the 8(a) program. We found  that SBA lacked adequate data on the 8(a) program in general and  was not collecting any information on ANC firms’ activity  specifically.
SBA pointed out that the statutory language refers to “substantial”  unfair competitive advantage, a change we have made to the  report. SBA found our focus on this issue unreasonable, stating  that all 8(a) participants have been accorded a competitive  advantage. During our review, it was clear that SBA had in place no  policy or procedure to make unfair competitive advantage  determinations. We do not understand how SBA can ignore the fact  that Congress has directed it to make these determinations  specifically for ANC firms in the 8(a) program.
SBA refers to the tone of our report as “unsettling” and suggests  that it could lead readers to conclude that we have concerns with  the fact that agencies can count 8(a) ANC contracts toward their  federal small business goals. We express no concerns of the kind.  Rather, our concerns, as reflected in the recommendations to SBA,  pertain to the level of oversight it is exercising over 8(a) ANC  activity.
In an e-mail sent after the comment letter, SBA expressed  disagreement with several of the recommendations but did not  address the others. It stated that its annual reviews track  ownership changes and the business mix of all 8(a) participants  and that its regulations require contracting officers to report  contract modifications. These comments are not responsive to our  recommendations. Our recommendations specifically discuss  monitoring ownership of ANC holding companies, tracking primary  revenue generators across 8(a) ANC subsidiaries, and establishing  thresholds for notification of 8(a) contract modifications. SBA  disagreed with the recommendation on determining whether other  small businesses are losing contracting opportunities, stating that  it already does so for all 8(a) sole-source offerings. As illustrated  by the examples in our report, this is not the case.
SBA’s written comments are included as appendix II.
The Department of Homeland Security agreed with the recommendation  affecting it and indicated it would partner with SBA to ensure that the  department’s contracting officers have a thorough understanding of all  contracting regulations on awarding contracts under SBA’s 8(a) program.  Homeland Security requested that we reflect that the department has only  been in existence since 2003 and that FPDS data would not be available  for the 5-year period. We agreed and added this point to our explanation of  why we did not include the department in our trend analysis. In addition,  the department stated that, in providing us a list of contracts awarded to  firms with the DUNS numbers we provided, officials did not indicate that  it included all contracts awarded to ANC firms. Homeland Security  attempted to reconcile the identified missing contracts from the list of  contracts awarded to ANCs; however, we still determined that the  agency’s data were inadequate to include in our trend analysis. Homeland  Security’s written comments are included as appendix III.
The Department of the Interior agreed with the recommendation affecting  it and proposed that an interagency work group be established and headed  by the SBA to develop guidance for contracting officers. The department  also provided specific comments on the contract awarded to an ANC firm  on behalf of DOD’s Counter Intelligence Field Activity (CIFA). The Interior  Department said that the referenced contract was not awarded to the ANC  firm “because CIFA…had requested that firm.” The evidence we gathered  from the contract file, as well as interviews with the contracting officer  and the ANC firm, support the facts as we have stated them. CIFA, through  a preauthorization letter, had arranged with the ANC firm to provide a  variety of urgently needed services and requested that GovWorks award  the contract to that firm. Interior’s written comments are included as  appendix IV.
NASA agreed with the recommendation affecting it and indicated that it  will work with the SBA to develop guidance and to provide whatever  assistance SBA may need to address the recommendations directed to it.  NASA’s written comments are included as appendix V.
The State Department agreed with the recommendation affecting it, stating  that it will work with the SBA to develop standardized guidance to  contracting officers on monitoring limitations on subcontracting and SBA  notification of contract modifications. The State Department noted that  the contract negotiations involving an 8(a) ANC joint venture took place in  a compressed acquisition cycle and that SBA was in direct contact with  the venturing parties at the time they were negotiating the contract. State  concludes that because of SBA’s “simultaneous interaction” with the  venturing parties and with State’s contracting officer, a formal request for  SBA intervention would have been superfluous. However, our discussion  focuses on the concerns about the extent of work being performed by the  8(a) ANC firm versus that of its joint venturing partner. These issues were  raised within the State Department several months after the contract was  awarded, and SBA was not notified at that time. The department also  suggested some technical changes, which we incorporated as appropriate.  The department’s written comments are included as appendix VI.
The Department of Energy did not comment on the recommendation. It  stated that our report gives the impression that agencies rely  “significantly” on the ANC program to achieve small business goals. Our  report does not state or imply that. Rather, we note that contracting  officers have turned to 8(a) ANC firms as a way to help them meet their  goals. The department also pointed to a perceived inconsistency in the  report dealing with the “limitations on subcontracting” clause as it  pertains to construction contracts. We disagree; the section in the report  on this matter clearly establishes that the limitation for construction  contracts is different than for other services. Energy’s written response is  included as appendix VII.
In official oral comments, DOD agreed with the recommendation, stating  that the development of additional guidance by the department to ensure  the effective oversight of 8(a) ANC contracts is necessary and that the  department will work closely with SBA to develop this guidance. DOD  added that, prior to commencement of these efforts, it is imperative that  SBA undertake the actions we recommended for revising its relevant  regulations and policies and improving its oversight practices concerning  8(a) ANC contracts, as these changes will form the basis of the new or  expanded DOD-specific guidance.
In official oral comments, the Department of Transportation agreed with  the recommendation. Transportation also provided some technical  comments that we incorporated as appropriate.
We also received written comments from the Native American Contractors  Association. The association believes that we should more fully  acknowledge the legal and policy basis of 8(a) program rules for Native  Entities. We believe the report thoroughly explains the legislative basis for  8(a) ANC firms’ procurement provisions and that it sets forth the rules for  ANC firms as compared to those for other 8(a) firms. The association also  raised several broader issues that impact the entire federal procurement  system that it believes we should have included, such as in the areas of  contract bundling, acquisition workforce, improper counting toward small  business goals, and modifications to contract scope. While these are areas  that we have reported on in the past, the focus of this audit was on 8(a)  ANC contracting. Contrary to the association’s assertion, we do place  certain findings—particularly with regard to the limitations on  subcontracting and notification to SBA of contract modifications—in the  context of the 8(a) program in general. For example, our  recommendations to SBA on these issues are not limited solely to 8(a)  ANC contracting activity. In technical comments provided separately, the  association suggested that, for context, we include reference to total  federal procurement spending on goods and services. We have added this  information as a note to figure 3. The association’s comments are included  as appendix VIII.
We are sending copies of this report to the Secretaries of Defense, Energy,  Homeland Security, the Interior, State, and Transportation; the  Administrators of SBA and NASA; the Director, Office of Management and  Budget; the Native American Contractors Association; and other interested  congressional committees. We will make copies available to others upon  request. In addition, this report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you or your staff have questions about this report, please call me at  (202) 512-4841 or schinasik@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. See appendix XII for a list of major contributors to this  report.
section_title: Appendix I: Scope and Methodology
paragraphs: We conducted our work at the Small Business Administration (SBA),  including its national headquarters and district office in Anchorage,  Alaska; the Departments of Defense, Energy, Homeland Security, the  Interior; State, and Transportation, and the National Aeronautics and  Space Administration (NASA). We traveled to Alaska and met with  representatives of 30 Alaska Native corporations (ANC). We also met with  representatives of the Native American Contractors Association in  Washington, D.C. and interviewed officials from a number of small  businesses as well as representatives from an 8(a) association. We  reviewed relevant legislation, including the Alaska Native Claims  Settlement Act (ANSCA) for background on the ANC corporate structure  and the Small Business Act and other relevant legislation to understand  the pertinent procurement advantages that ANC firms receive in the 8(a)  program.
To identify overall trends in the government’s contracting with ANCs, we  obtained data from the Federal Data Procurement System (FPDS) for  fiscal years 2000 through 2004. To gather data on federal 8(a) contracting  with ANCs, we identified each ANC firm’s Data Universal Numbering  System (DUNS) number and used this information to obtain data from  FPDS and agencies. To assess the reliability of the procurement data used  in our 5-year trend analysis, we (1) compared FPDS and agency data to  verify the accuracy of the data; (2) reviewed related documentation,  including contract files; and (3) worked closely with agency officials to  identify and resolve any data problems. When we found discrepancies, we  brought them to the agency’s attention and worked with them to correct  the discrepancies before conducting our analyses. We determined that the  data were sufficiently reliable for the purposes of our report. We had  planned to include Homeland Security in our trend analysis, but did not do  so for two reasons. First, since FPDS only includes Homeland Security  contract data for part of fiscal year 2003 and beyond, we were unable to  confirm the reliability of the data for the purposes of our 5-year trend  analysis. Second, we found that the data from Homeland Security were  inconsistent and therefore questioned the reliability of the data overall.  For example, the data provided did not include contracts awarded by  Immigration and Customs Enforcement and contained other data errors,  such as contracts recorded with either an incorrect dollar value or as sole  source when awarded competitively.
To assess the trends in government 8(a) sole-source contracting with  ANCs from fiscal years 2000 to 2004, we reviewed data from the six federal  agencies that, according to FPDS, comprise about 85 percent of total  federal dollars obligated to ANCs via the 8(a) program. These agencies  were the departments of Defense, Energy, the Interior, State, and  Transportation and NASA, which obligated about $2.5 billion in sole-  source contracts to ANCs for fiscal years 2000 through 2004. To  understand the facts and circumstances surrounding specific contract  awards, we reviewed contract files, interviewed agency contracting  officers, and reviewed any relevant bid protests for 16 large dollar value,  sole-source 8(a) contracts at seven agencies. Whereas we included six  agencies in our 8(a) sole source trend analysis, we added the Department  of Homeland Security to our contract file review. To identify two sole- source contracts awarded by Homeland Security, we began reviewing the  contracts with the largest dollar awards from the data provided, but had to  exclude a number of the largest contracts from our file review due to  errors in the data. We brought significant data errors to the attention of  Homeland Security officials and the department stated that it has initiated  corrective action. For the seven agencies, we selected contracts based on  high ultimate award values and high dollars obligated to date that  represented a variety of contractors and services. We made the initial  contract selections based on the available data at that time.
To assess how ANCs use the 8(a) program, we reviewed documentation  and spoke with representatives from 30 Alaska Native corporations—all   13 regional and 17 selected village or urban corporations—and some of  their 8(a) subsidiaries. In selecting corporations to interview, we  considered diversity in geography, financial strategy and profitability, and  participation in the 8(a) program. Tables 5 and 6 show the corporations  included in our review.
Additionally, we visited seven villages with populations that had a high  percentage of Alaska Natives to understand the lifestyle and livelihood of  the Alaska Native people. We selected these villages based on diversity in  geography, population, average per capita income, and shareholder culture  and history. We also attended a shareholders’ annual meeting at one of  these villages to observe communication and relations between  shareholders and corporate management. Table 7 shows the villages we  visited.
To understand the structure, shareholder population, and involvement in  the 8(a) program of each corporation, we examined annual reports and  other documentation from our selected 30 corporations and spoke with  Alaska Native shareholders. We also interviewed ANC executives on  corporate governance, strategies for participation in the 8(a) program, and  benefits provided to shareholders. Additionally, we met with executives at  selected subsidiaries participating in the 8(a) program to understand their  structure, business strategies, and relationship to their parent  corporations.
To establish whether SBA’s oversight over ANCs in the 8(a) program is  adequate, we reviewed relevant regulations and operating procedures to  understand the requirements for oversight of the 8(a) program and of ANC  8(a) activity. We interviewed SBA officials at the Alaska district office and  reviewed relevant files to understand that staff’s oversight role and  workload priorities. Finally, we analyzed documents from and spoke with  SBA headquarters officials in the Washington, D.C. office to understand  their oversight of district offices and the 8(a) program and whether the  officials have assessed and addressed the impact of increased ANC activity  on the 8(a) program.
section_title: Appendix II: Comments from the Small Business Administration
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: Comments from the Department of the Interior
section_title: Appendix V: Comments from the National Aeronautics and Space Administration
section_title: Appendix VI: Comments from the Department of State
section_title: Appendix VII: Comments from the Department of Energy
section_title: Appendix VIII: Comments from the Native American Contractors Association
section_title: Appendix IX: Alaska Native Corporations with Subsidiaries Participating in the 8(a) Program
subsections: section_title: Regional Corporations (12)
section_title: Village Corporations (33)
section_title: Urban Corporations (4)
section_title: Appendix X: Benefits That Alaska Native Corporations Provide to Their Shareholders
paragraphs: Through our review of documentation provided by the 13 regional and   17 village or urban Alaska Native corporations (ANC) included in our  review, as well as interviews with corporation representatives and  shareholders, we gained an understanding of how the corporations  communicate with and obtain input from their shareholders and of the  benefits they provide.
The ANCs communicated with their shareholders through surveys, Web  sites, newsletters, annual reports, local media, shareholder committees,  and annual and other periodic meetings. Some had “open door” policies,  which gave shareholders the opportunity to voice their opinions to  management at any time. Additionally, corporations took steps to reach  out to shareholders both out of state and in the villages. For example, one  corporation’s officials conducted the annual meeting via Web cast and  noted that Internet attendance was beginning to outpace in-person  attendance. Another corporation rotated its annual meeting among  Anchorage, Seattle, and its regional hub. Additionally, several of the  regional corporations regularly traveled to their villages to seek input.  Steps taken by one to facilitate village outreach included moving the  location of its annual meeting from the regional hub to the villages;  holding the meeting in the native language; and investing in a boat to  facilitate transport to the region’s villages.
Shareholder preferences for benefits differed among corporations. For  example, one corporation stated that its shareholders prioritized  protection of their land and the subsistence lifestyle. Shareholders of  other corporations placed a greater value on dividends, scholarships,  training, and job opportunities. investing in an insurance company when other insurance companies  were reluctant to insure shareholders’ homes; and    subsidizing heating oil for residents of a small, remote community  north of the Arctic Circle, absorbing a loss of $2.75-$3.00 per gallon.
Some regional corporations stated that they required sizable revenues to  provide benefits to a large shareholder base. Of the corporations we  reviewed, the 13 regional corporations had approximately 102,000  shareholders, and the 17 village and urban corporations had about   17,000 shareholders. Overall, the corporations we reviewed saw a   31 percent increase in their number of shareholders since incorporation.  The number of shareholders at two regional corporations more than  doubled since incorporation.
The 30 ANCs included in our review reported providing three categories of  benefits    dividends,    other direct benefits, and  Dividends: In 2004, the 30 corporations paid a total of $121.6 million in  dividends. Eleven corporations issued no dividends. Of the corporations  that issued dividends, payments ranged from $1.71 per share to $171.00 per  share. In a given year, a shareholder may have received a dividend from  his or her village corporation and an additional dividend from his or her  regional corporation.
Corporate officials noted that dividend payments, no matter how small,  meant much to their shareholders in many rural villages where basic  necessities were expensive—for example, milk cost $12 per gallon and  fuel cost $5 per gallon.
Original shareholders received 100 shares upon incorporation. One village  corporation’s 137 shareholders owned as few as one and up to 200 shares,  with an average of about 50 shares.
A third of the ANCs created permanent funds to build up a reserve for  future dividends. Two corporations told us that these funds allowed them  to issue dividends even in years when they were unprofitable.
Half of the ANCs established policies specifying an amount or percentage  of net income to be distributed as shareholder dividends. For example,  one corporation’s board required an increase in its annual dividend  amount by 10 percent over the previous year. Another corporation  annually distributed 66 percent of its average net income for the prior   5 years to shareholders. The result of this policy coupled with some  unprofitable years was that in 2004, this ANC paid 100 percent of its  income in dividends to shareholders.
subsections: section_title: Other Direct Benefits:
paragraphs: Shareholder hiring preference and job opportunities. All of the  corporations we interviewed reported a hiring preference for  shareholders. Some corporations extended this preference to  shareholders’ families, other Alaska Natives, and/or other Native  Americans.
Other employment assistance programs. In addition to offering a  shareholder hire preference, corporations made efforts to encourage  other shareholder employment. Nine of the 30 corporations offered a  management training program. Some corporations had agreements  with partner companies encouraging shareholder hire. One corporation  had a preference to conduct business with shareholder-owned  businesses. Another corporation’s employment assistance programs  included mentoring; one-on-one counseling; business and career fairs;  survey of shareholders over 18 seeking employment; and tracking  shareholder employment status and interests in a database.
Benefits for elder shareholders. Twelve of the 30 corporations we  interviewed reported issuing benefits for elder shareholders. Some  corporations paid additional regular dividends to elders, while others  made one-time financial payments. Two corporations made in-kind  benefits for elders, such as a lunch program or a bus service.
Scholarships. Almost all corporations offered scholarships for  shareholders.
Mentor program, which allows its youth to participate in the  corporation. Corporate officials told us that they instituted mentoring  and internship programs to lead to future involvement of shareholders  in management and leadership roles.
Burial assistance. Twenty-two of the 30 corporations reported  providing some kind of assistance to the family of a deceased  shareholder. Forms of burial assistance include cash, life insurance  payments, or in-kind donations.
Land leasing, gifting or other use. Most of the village and urban  corporations we interviewed leased, gifted, or made other use of the  land given to the village corporation in the Alaska Native Claims  Settlement Act settlement for shareholders. For example, one  corporation gifted five acres to any shareholder who requested it.
Community infrastructure. Several corporations invested in the  infrastructure of their villages. For example, after the Department of  the Interior’s Bureau of Indian Affairs ceased barge service to its  remote village, one corporation established a transportation company  that became the only mechanism to bring goods to the community.  Other projects included remodeling the community washateria and  administering and subsidizing a village’s cable and Internet utilities.
section_title: Indirect Benefits:
paragraphs: Support of the subsistence lifestyle. Corporations took steps to protect  and maintain the subsistence lifestyle of their shareholders. One  corporation built in subsistence leave into its personnel policy. Another  corporation leased its land for “fish camps,” or plots along a river for  shareholders to catch and smoke fish in the summertime.
Cultural preservation. Twenty-four of the 30 corporations we  interviewed invested in cultural and heritage programs, which included  museums, culture camps, or native language preservation.
Establishment and support of affiliated foundations or nonprofit  organizations. Twenty-one of the 30 corporations established affiliated  foundations or nonprofit organizations.
Donations to other nonprofit organizations. Almost all of the  corporations donated to various nonprofit organizations. For example,  one corporation donated to organizations that advocate for Alaska  Natives, such as the Alaska Federation of Natives, Alaska Native Arts  Foundation, Alaska Native Justice Center, and Get Out the Native Vote.
Support to other corporations. Some regional corporations provided  various kinds of assistance to the village corporations in their regions.  For example, one regional corporation is trying to develop 8(a)  partnerships with its village corporations to help them enter the 8(a)  program with lower start-up and administrative costs. Other regional  corporations provided recordkeeping, natural resources, and  regulatory and community planning services for their village  corporations.
section_title: Appendix XI: Example of an Alaska Native Corporation Owning Subsidiaries That Market Their Capabilities under Overlapping NAICS Codes
paragraphs: One Alaska Native corporation that we reviewed owned seven subsidiaries  participating in the 8(a) program, with six of them marketing their abilities  to perform work in the same line of business.
section_title: Appendix XII: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Michele Mackin, Assistant  Director; Theresa Chen; David E. Cooper; Barry DeWeese; Art James, Jr.;  Julia Kennon; Jeff Malcolm; Meaghan Marshall; Sylvia Schatz; Robert  Tagorda; and Tatiana Winger made key contributions to this report.