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

Letter

Background

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.

Increase in 8(a) Federal Contracting with ANC Firms

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.

Dollars to ANC Firms Governmentwide Have Increased

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.

Increasing Percentage of Total 8(a) Dollars Obligated to ANC Firms

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.

Sole-Source Contracts Represent Majority of 8(a) ANC Obligations for Selected Agencies

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.

Federal Agencies Contract with ANC Firms for a Variety of Services Worldwide

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.

Agency Officials View Contracting with ANC Firms as Quick and Easy, but Rules Not Always Followed

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.

Sole-Source 8(a) Contracts to ANC Firms Viewed as Expedient

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.

ANC 8(a) Awards Help Agencies Meet Small Business Goals

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.

Required Notifications of Contract Modifications Not Always Done

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.

Contracting Officials Not Consistently Monitoring Subcontracting

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.

ANCs Use the 8(a) Program to Increase Revenue and Provide Benefits

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.

8(a) Program among Revenue Sources for ANCs to Provide Benefits

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.

Key Practice Is Creation of Multiple 8(a) Subsidiaries

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.

ANCs Pursue Other 8(a) Business Strategies

We found a variety of other strategies that ANCs use to generate revenue, as discussed below.

Relying on Outside Expertise

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.

Creating Partnership Arrangements

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.

Forming Holding Companies

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.

Improvements Needed in Oversight of ANCs in the 8(a) Program

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.

SBA Oversight of ANCs in the 8(a) Program Is Not Adequate

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.

Not Tracking Secondary Lines of Business across Multiple 8(a) Firms Owned by One ANC

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.

Not Consistently Determining Whether Other Small Businesses Are Losing Contract Opportunities

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.

Failing to Determine Substantial Unfair Competitive Advantage

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.

Not Ensuring That Partnerships between ANCs and Large Firms Operate As Intended

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.

Not Collecting Information on ANC Participation

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.

Conclusion

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Comments from the Small Business Administration

Appendix III: Comments from the Department of Homeland Security

Appendix IV: Comments from the Department of the Interior

Appendix V: Comments from the National Aeronautics and Space Administration

Appendix VI: Comments from the Department of State

Appendix VII: Comments from the Department of Energy

Appendix VIII: Comments from the Native American Contractors Association

Appendix IX: Alaska Native Corporations with Subsidiaries Participating in the 8(a) Program

Regional Corporations (12)

Village Corporations (33)

Urban Corporations (4)

Appendix X: Benefits That Alaska Native Corporations Provide to Their Shareholders

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.

Other Direct Benefits:

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.

Indirect Benefits:

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.

Appendix XI: Example of an Alaska Native Corporation Owning Subsidiaries That Market Their Capabilities under Overlapping NAICS Codes

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.

Appendix XII: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

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.