Clinton seeks overhaul of oldest and biggest set-aside program for minorities

July 20, 1995|By Thomas W. Waldron | Thomas W. Waldron,Sun Staff Writer

President Clinton said yesterday that he wants to overhaul the government's oldest and largest set-aside program for minority contractors.

There's plenty to fix.

For many years, auditors and analysts have highlighted a litany of problems with the so-called 8(a) program administered by the Small Business Administration. The program annually funnels billions of dollars of work to companies owned by minorities and women.

The analysts have found that most SBA program work is awarded without competitive bidding, a small number of firms win the lion's share of contracts, and many minority-owned firms don't survive leaving the program because they are unprepared for marketplace competition.

"There's no question that these programs have helped to build up firms owned by minorities and women, who historically have been excluded from the old-boy networks," Mr. Clinton said. "But as with any government program, set-asides can be misapplied and misused, even intentionally abused."

Susan Au Allen, head of the U.S. Pan Asian American Chamber of Commerce, had a similar assessment: "It had a good intention but the system doesn't work well."

Launched in 1969 during the Nixon administration, the SBA's program was designed to give small, minority-owned businesses a push into the economic mainstream.

Many owners have found the program a lucrative long-term resource for their businesses.

As early as 1981, the General Accounting Office, an arm of Congress, called the program "a promise unfulfilled." Today, many of the program's flaws remain. They include:

* From the beginning, the program directed huge amounts of federal work to a small number of firms.

In fiscal year 1994, 50 firms received a quarter of the $4.4 billion in 8(a) work contracted. The companies that had federal work averaged $20 million apiece, according to the GAO. More than 2,800 firms -- 56 percent of the 5,155 qualified for the program -- won no work.

Some companies that gained a foothold in SBA contracts have clung to it for years. I-Net Inc., a Bethesda computer-services company, for example, received $126 million in SBA set-aside work between 1987 and 1993.

Procurement officers say it's easier to meet their agencies' minority-contracting goals by handing out large contracts to a small number of dependable firms.

* Meeting those minority-contracting goals also leads agencies away from the standard practice of competitive bidding.

Federal departments awarded just over $2 billion in new contracts in 1994. Only 18 percent were awarded through competitive bidding by minority-owned firms. Under the law, contracts for less than $3 million for services and $5 million for goods can be awarded without competitive bidding.

* While the SBA limits the program to "disadvantaged" business owners, some millionaires continue to receive lucrative government contracts because the SBA doesn't include their business equity in their net worth. In 1994, auditors checked 50 minority-owned companies and found 35 owners with net assets of more than $1 million.

* The program has been a magnet for fraud over the years. In some cases, white male business owners created dummy corporations fronted by a woman or a minority member to qualify for the set-aside work. Mr. Clinton called for stricter enforcement of eligibility standards.

* The law allows firms to remain eligible for contracts for nine years, after which they are expected to be able to compete in the open market. But many companies falter or end up bankrupt after they leave.

A prominent Maryland example is the Stephens Engineering Co., a Prince George's County firm owned by Wallace O. Stephens. The company won several contracts through the program but suffered after it "graduated" in 1991. Earlier this spring, Gov. Parris N. Glendening, an ally of Mr. Stephens, proposed a state bailout of the firm but withdrew the idea after harsh criticism that he was aiding a political friend.

Of the 710 firms that left the program in 1993, more than 250 went out of business, 40 scaled back operations and another two dozen were purchased by non-minority owned firms, according to Minorities in Business Insider, a newsletter that tracks the program.

Despite the problems, the program continues to serve an important need, say many people involved.

"The program has provided the contracting opportunity to make it easier in the early stages for disadvantaged companies to develop," said Fernando Galaviz, owner of a Virginia firm enrolled in the SBA program and vice chairman of the National Association of 8(a) companies.

Mr. Clinton also called for a federal program to benefit businesses, whether owned by minorities or not, that locate in distressed areas.

That has not been a goal of the SBA program and only a fifth of the set-aside money goes to firms located in minority areas. Most of the money instead goes to companies in relatively affluent suburbs such as Maryland's Montgomery County.

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