[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
HOW INFORMATION POLICY AFFECTS THE COMPETITIVE VIABILITY OF SMALL AND
DISADVANTAGED BUSINESS IN FEDERAL CONTRACTING
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INFORMATION POLICY,
CENSUS, AND NATIONAL ARCHIVES
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 24, 2008
__________
Serial No. 110-147
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.oversight.house.gov
U.S. GOVERNMENT PRINTING OFFICE
48-659 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania DAN BURTON, Indiana
CAROLYN B. MALONEY, New York CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri CHRIS CANNON, Utah
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of PATRICK T. McHENRY, North Carolina
Columbia VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota BRIAN P. BILBRAY, California
JIM COOPER, Tennessee BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
JACKIE SPEIER, California
Phil Barnett, Staff Director
Earley Green, Chief Clerk
Lawrence Halloran, Minority Staff Director
Subcommittee on Information Policy, Census, and National Archives
WM. LACY CLAY, Missouri, Chairman
PAUL E. KANJORSKI, Pennsylvania MICHAEL R. TURNER, Ohio
CAROLYN B. MALONEY, New York CHRIS CANNON, Utah
JOHN A. YARMUTH, Kentucky BILL SALI, Idaho
PAUL W. HODES, New Hampshire
Tony Haywood, Staff Director
C O N T E N T S
----------
Page
Hearing held on September 24, 2008............................... 1
Statement of:
Boston, Thomas, Ph.D., economist, Georgia Tech University;
Jon Wainwright, Ph.D., National Economic Research
Associates; Anthony Brown, senior association, MGT of
America; Anthony Robinson, president, Minority Business
Enterprise Legal Defense and Education Fund Inc.; and Earl
Peek, president, Diamond Ventures, LLC..................... 10
Boston, Thomas........................................... 10
Brown, Anthony........................................... 55
Peek, Earl............................................... 70
Robinson, Anthony........................................ 62
Wainwright, Jon.......................................... 19
Letters, statements, etc., submitted for the record by:
Boston, Thomas, Ph.D., economist, Georgia Tech University,
prepared statement of...................................... 12
Brown, Anthony, senior association, MGT of America, prepared
statement of............................................... 57
Clay, Hon. Wm. Lacy, a Representative in Congress from the
State of Missouri, prepared statement of................... 3
Peek, Earl, president, Diamond Ventures, LLC, prepared
statement of............................................... 72
Robinson, Anthony, president, Minority Business Enterprise
Legal Defense and Education Fund Inc., prepared statement
of......................................................... 64
Wainwright, Jon, Ph.D., National Economic Research
Associates, prepared statement of.......................... 21
HOW INFORMATION POLICY AFFECTS THE COMPETITIVE VIABILITY OF SMALL AND
DISADVANTAGED BUSINESS IN FEDERAL CONTRACTING
----------
WEDNESDAY, SEPTEMBER 24, 2008
House of Representatives,
Subcommittee on Information Policy, Census, and
National Archives,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m. in room
2154, Rayburn House Office Building, Hon. Wm. Lacy Clay
(chairman of the subcommittee) presiding.
Present: Representatives Clay, Yarmuth, and Turner.
Staff present: Darryl Piggee, staff director/counsel; Jean
Gosa, clerk; Alissa Bonner and Michelle Mitchell, professional
staff members; Charisma Williams, staff assistant; Leneal
Scott, full committee information systems manager; Charles
Phillips, minority senior counsel; and Emile Monette, minority
professional staff member.
Mr. Clay. The Information Policy, Census, and National
Archives Subcommittee will come to order.
Welcome to today's hearing entitled, ``How Information
Policy Affects the Competitive Viability of Small and
Disadvantaged Businesses in Federal Contracting.''
Without objection, the Chair and ranking member will have 5
minutes to make opening statements, followed by opening
statements not to exceed 3 minutes by any other Member who
seeks recognition. Without objection, Members and witnesses may
have 5 legislative days to submit a written statement or
extraneous materials for the record.
I will begin with the opening statement. It has long been
the policy of the Federal Government to assist minority and
other socially and economically disadvantaged small businesses
to become fully competitive and viable businesses. The
objective has largely been pursued through the Federal
procurement process by allocating Federal assistance and
contracts to foster disadvantaged business development.
Federal assistance has taken a variety of forms, including
targeting procurement contracts and subcontracts for
disadvantaged or minority firms, management and technical
assistance grants, educational and training support, and surety
bonding process.
There has been a large body of evidence concerning
discrimination. Court cases, legislative hearings, quantitative
studies and anecdotal reports detail the considerable
discrimination based on race and national origin that confronts
minority contractors in all parts of the country and in
virtually every industry.
The discrimination is not limited to one particular
minority group; instead, evidence shows businesses owned by
African Americans, Latinos, Asian, Pacific Islanders, and
Native Americans all must overcome discriminatory practices in
order to grow and prosper.
This subcommittee will look at some of the information,
data, and assumptions dealing with the subject of minority
contracting and Federal programs and how they deal with
discrimination against minority business. We will look at
disparities in the marketplace and help determine if those
disparities are the result of discrimination.
This hearing is the first in a series of hearings that will
hear testimony regarding recent data, studies, and other
evidence of discrimination against minority businesses,
including the abuse of the subcontractor status of minority
businesses. The courts will look closely to see that Congress,
while exercising its rights and duties to enact broad
discrimination remedy, tailors this legislation in this area
within the confines of relevant court decisions.
The courts must be convinced that Congress has strong
evidence of actual discrimination to fashion a constitutionally
sufficient remedy. We can assist by making sure this
information is current and relevant to present conditions.
[The prepared statement of Hon. Wm. Lacy Clay follows:]
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Mr. Clay. I now yield to the distinguished ranking minority
member, Mr. Turner of Ohio.
Mr. Turner, you are recognized for an opening statement.
Mr. Turner. Thank you, Mr. Chairman. I appreciate you for
holding a hearing on this issue.
Maintaining a high-performing, robust, small, disadvantaged
business contractor base is an important goal of our Federal
policy and our public policy. We meet today to discuss the
challenges facing minority-owned small businesses when they
compete for Federal contracts. This is a complex issue which
plays out at the intersection of procurement policy and
business judgment.
The attendant goal is that small businesses compete on a
level playing field with other contractors, while at the same
time ensuring that they have an active competitive market
available to the Government so that we can get the best value
for the American taxpayer.
Federal Government spends over $400 billion annually on
contracts. Federal Government currently has a goal of awarding
23 percent of its prime contracts to small businesses, and 5
percent of its prime and subcontracts for small, disadvantaged
businesses.
According to the Small Business Administration, which
administers the small, disadvantaged business program, in
fiscal year 2005 the Federal Government awarded nearly $21
billion in contracts to these firms, representing 6.55 percent
of the total expenditure for that year. In 2006 the Government
awarded contracts valued at nearly $23 billion to small,
disadvantaged businesses, representing 6.75 percent of the
total amount spent for that year.
Clearly, the data supporting these numbers is critical. I
am interested in reading the testimony from today's witnesses
about how Federal information policy affects competitive
viability for minority-owned businesses, how we can get an
accurate picture of the marketplace, and how we can improve
opportunities for this important segment of business owners.
Thank you, Mr. Chairman.
Mr. Clay. Thank you so much, Mr. Turner, and thank you for
joining us.
If there are no additional opening statements, the
subcommittee will now receive testimony from the witnesses
before us today.
Our first witness is Dr. Thomas Boston, economist,
professor of economics at Georgia Tech and principal of the
EuQuant Consulting Firm. He has done extensive research on
small and disadvantaged businesses, including work for the
Congressional Black Caucus Foundation and the U.S.
Congressional Small Business Committee to revise Federal
regulations regarding small, disadvantaged business.
Welcome to the committee, Doctor.
Mr. Boston. Thank you very much, Mr. Chairman.
Mr. Clay. Let me finish introducing everybody, and then we
will let you start it off.
Our second witness is Dr. Jon Wainwright, vice president of
National Economic Research Associates. Dr. Wainwright
specializes in labor, economics, statistics, and industrial
organizations. He has executive experience in analyzing the
effects of discrimination on minorities, women, and persons
over 40. Dr. Wainwright has testified as an expert witness in
Federal and State courts on these issues and has authored a
book and numerous research reports on these subjects.
Welcome, Dr. Wainwright.
Next we will hear from Mr. Anthony Brown, senior associate
of MGT of America, a national management consulting firm
specializing in assisting public sector entities, the
completion of disparity studies, complex statistical and social
research projects that evaluate evidence related to minority-
and women-owned firms. Disparity studies help determine whether
or not race or gender bias exists in Government and private
contracting.
Thank you for being here, Mr. Brown.
Our next witness will be Mr. Anthony Robinson, president of
the Minority Business Enterprise Legal Defense and Education
Fund Inc., an organization founded by the late Parren J.
Mitchell, a former Member of the U.S. House of Representatives
from Maryland.
As president of MBELDEF, Mr. Robinson and the organization
have actively participated in the passage and preservation of
major MBE legislation. Mr. Robinson, through MBELDEF's National
Lawyers Panel, has participated as a litigant or amicus on
occasions before congressional committees regarding issues of
importance to the MBE community.
Thank you, sir, for being here.
Our final witness, Mr. Earl Peek, president of Diamond
Ventures. Mr. Peek, a CPA, has an extensive background in
public accounting, commercial lending, and as an entrepreneur,
having run his own business for 8 years. He crafted minority
finance programs in the city of Atlanta and assisted many for
technical assistance organizations and business plan review
models, deal flow summaries, underwriting write-up techniques,
and more.
Thank you also for being here. We could probably use your
expertise on Wall Street today.
Thank you all for appearing before the subcommittee today.
It is the policy of the committee to swear in all witnesses
before they testify. Would you please all stand and raise your
right hands.
[Witnesses sworn.]
Mr. Clay. Thank you. Let the record reflect that the
witnesses answered in the affirmative.
I ask that each of the witnesses now give a brief summary
of their testimony. Please limit your summary to 5 minutes.
Your complete written statement will be included in the hearing
record.
Dr. Boston, you may begin.
STATEMENTS OF THOMAS BOSTON, PH.D., ECONOMIST, GEORGIA TECH
UNIVERSITY; JON WAINWRIGHT, PH.D., NATIONAL ECONOMIC RESEARCH
ASSOCIATES; ANTHONY BROWN, SENIOR ASSOCIATION, MGT OF AMERICA;
ANTHONY ROBINSON, PRESIDENT, MINORITY BUSINESS ENTERPRISE LEGAL
DEFENSE AND EDUCATION FUND INC.; AND EARL PEEK, PRESIDENT,
DIAMOND VENTURES, LLC
STATEMENT OF THOMAS BOSTON
Mr. Boston. Thank you, Mr. Chairman. Mr. Chairman,
Congressman Turner, and distinguished members of the
Information Policy Subcommittee, I thank you for allowing me to
testify on this important topic.
As you noted, Mr. Chairman, I am a professor of economics
at Georgia Tech, where I have taught since 1985. I am also the
owner of a consulting company, EuQuant, that specializes in
economic and statistical research. One of my primary areas of
research is minority business development.
Recently I was asked by the Congressional Black Caucus
Foundation to examine the policies of the small, disadvantaged
business program administered by the Small Business
Administration. Our primary objective was to determine whether
or not the $750,000 ceiling established for the personal net
worth of participating business owners had adversely affected
the ability of SDBs to increase their capacity.
As you know, the Federal Government established the SDB
program to mitigate the effects of decades of discrimination
against firms owned by minority and disadvantaged business
owners. In 1998 the personal net worth ceiling was established
to restrict the program's eligibility to only disadvantaged
minorities and other business owners who claimed disadvantaged
status.
Our study found the following: The ability of small firms
to secure bonding or gain access to capital is tied closely to
the owner's personal net worth; therefore, by capping personal
net worth, the SDB program has constrained the ability of firms
to secure bonding and finance, and therefore to perform large
contracts.
Our study found that there is a 40 percent relationship
between changes in SDB revenue and changes in their owners'
personal net worth; therefore, when personal net worth is
constrained, the revenue capacity of SDBs is also constrained.
We also found that if SDBs did not have to operate under
the current personal net worth ceiling and if they were treated
the same as our non-minority-owned firms, their current annual
revenue would be higher by almost $1 million. The personal net
worth ceiling has not been adjusted for inflation since 1998,
which means its real inflation-adjusted value in 2007 was
$550,000, and today it would be even much lower.
Furthermore, the current ceiling was not based on any
empirical study but was simply a policy decision. That decision
did not even take into consideration the fact that different
industries require different levels of capitalization, so today
SDBs in manufacturing or heavy construction have the same
ceiling as do SDBs in printing.
Mr. Chairman, our study recommended new industry-specific
ceilings that we believe meet the legal test of strict
scrutiny. In construction, we recommend a ceiling of $979,000;
in manufacturing, $1,043,000; and in professional and
scientific services, $1,026,000. We also recommend that the
ceiling be adjusted annually for inflation and that businesses
be allowed a 2-year transition period to remain in the SDB
program once their owner's net assets have reached the personal
net worth ceiling.
Finally, Mr. Chairman and committee members, we believe
ultimately the personal net worth ceiling should be replaced
with more industry-specific and business development criteria.
We are currently researching a business development index that
incorporates numerous company and industry variables into a
single metric that can be used to determine SDB program
eligibility. For the record, we have provided the executive
summary of the study we conducted for the Congressional Black
Caucus Foundation and will gladly provide copies of the current
research once it is completed.
Thank you very much.
[The prepared statement of Mr. Boston follows:]
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Mr. Clay. Thank you, Dr. Boston. I appreciate that.
We will now go to Dr. Wainwright. You may proceed with your
opening statement.
STATEMENT OF JON WAINWRIGHT
Mr. Wainwright. Thank you, Chairman Clay, Ranking Member
Turner, members of the committee. Thank you for the invitation
to appear here today.
My name is Jon Wainwright. I hold a Ph.D. in economics from
the University of Texas at Austin. Currently I am a vice
president with NERA Economic Consulting in Chicago, IL, and
Austin, TX.
Since 1989, I have devoted the greater part of my
professional life to studying race and sex discrimination and
its impact on business enterprise. Since 2000 I served as the
project director and principal investigator for 28 studies of
business discrimination, and, as Chairman Clay pointed out, I
have provided expert testimony in Federal and State court on
these and related matters.
I have provided to counsel a CD-ROM containing eight of
these studies, including one from the chairman's home town in
St. Louis, as supplementary material to my testimony today.
The primary bulwark against business discrimination has
been the use of public sector purchasing power to promote fair
and full access to Government contracting and procurement
opportunities for minority- and women-owned businesses. Section
8(a) and 8(b) at the SBA, the DB program at U.S. DOT, and the
SDB program are key examples of such policies at the Federal
level. Today I would like to address the current state of MBEs
as documented in several key Federal data bases and the
implications for the continuing need for the public sector to
use its purchasing power to help remedy the ill effects of
business discrimination.
In my written testimony I also offer some suggested
modifications to key Federal data bases that would enhance the
ability of social scientists and policymakers to meet the
strict scrutiny standard.
The first data base is the 2002 Survey of Business Owners
[SBO]. Nationally, large disparities are observed in the SBO
between the minority share of the business population and their
share of business sales and receipts. African Americans
comprise 12.7 percent of the population, but they were only 5.3
percent of U.S. businesses, and earned only 1 percent of
business receipts.
Hispanics and Latinos comprise 13.4 percent of the
population, but were only 7 percent of all businesses and
earned only 2.5 percent of business receipts.
Women comprise 51 percent of the population, but they
counted for only 28.9 percent of the businesses and earned only
10.7 percent of business receipts.
Asians and Pacific Islanders comprise 5 percent of the
businesses, yet earn only 3.8 percent of the receipts.
Native Americans comprise 0.9 percent of the businesses,
but earn only 0.3 percent of the receipts.
These disparities are adverse, very large. They are also
statistically significant, meaning they are unlikely to have
resulted from chance, alone. Let me repeat that: these
disparities are adverse, very large, and statistically
significant.
While the exact proportions vary, large, adverse, and
statistically significant disparities are observed in all 50
States and the District of Columbia for all minority groups as
well as for women. This is documented at tables 1A through F
and 2A through F in my written testimony.
It is a fair question to ask whether these large, adverse,
and statistically significant disparities result primarily from
discrimination or whether they result primarily from other non-
discriminatory factors. The evidence from these next data
sources suggest they result primarily from discrimination. We
have tested this hypothesis using the 2000 and 1990 Decennial
Census microdata, and presently conducting similar tests using
the American Community Survey microdata.
Even when holding these other factors constant using
regression analysis, the business disparities I have outlined
remain adverse, large, and statistically significant. Let me
repeat that: even when comparisons are made between similarly
situated business owners, the disparities facing minorities and
women tend to remain adverse, large, and statistically
significant. We observed similar results in States and
metropolitan areas throughout the country.
Lack of access to capital is the most frequently cited
obstacle among MWBEs. Credit market discrimination can
obviously have an important effect on the likelihood that these
firms will succeed.
On the Survey of Small Business Finances, we have used that
to document disparities in loan denial rates even when balance
sheets and creditworthiness statistics are held constant across
business owners. I have submitted for the record a 60-page
report that accompanied my Senate testimony a couple of weeks
ago on this particular issue.
Finally, in addition to statistical evidence, we have
conducted thousands of surveys and hundreds of in-person
interviews with MBEs and non-MBEs alike, and the results are
strikingly similar across the country and across different
industries. In general, MBEs report that they still encounter
significant barriers to doing business in the public and the
private sector, both as prime contractors and subcontractors.
There is also general agreement that without the use of
affirmative remedies, MWBE firms receive few, if any,
opportunities on Government contracts, as is the case on
projects without goals; thus, the continued operation of
programs such as 8(a), 8(d), DBE, and SDB was deemed essential
to MWBEs' survival.
Thank you. I will be glad to take any questions.
[The prepared statement of Mr. Wainwright follows:]
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Mr. Clay. Thank you so much, Dr. Wainwright.
Our next witness will be Mr. Brown.
Mr. Brown, you may proceed.
STATEMENT OF ANTHONY BROWN
Mr. Brown. Thank you, Chairman Clay and members of the
subcommittee. My name is Anthony Brown, and I am Chair of the
Government Affairs Committee of the Airport Minority Advisory
Council [AMAC]. AMAC is the only national nonprofit trade
association dedicated to promoting the full participation of
minority- and women-owned and disadvantaged businesses in
airport contracting.
I am also a senior associate partner at MGT of America, a
public sector consulting firm specializing in high-quality
research, including disparity studies. I was also previously a
vice president at the Memphis Shelby County Airport Authority.
I thank you for your invitation to speak to the committee
today on behalf of AMAC.
Recently the EEOC settled an outrageous hostile environment
lawsuit against a fuel supplier operating at a large Texas
airport. The plaintiffs in the case asserted that they were
subjected to racial slurs, threats of violence, and disparate
treatment in promotions and disciplinary action. While this
case was not about business owners, it does demonstrate the
persistence of racism in the aviation-related marketplace.
Airport executives work hard to level the playing field for
minority- and women-owned businesses. Business assistance
programs and contract goals help, but it is never easy. Many
times, even where there are contract goals, prime contractors
say we just can't meet the contract goal. Sadly, the truth
often is that they don't know where to find minority- and
women-owned businesses or they haven't tried.
This requires airport staff to step in and help majority
firms move beyond their established networks to give previously
excluded businesses the opportunity to prove themselves. But I
can tell you, changing long-established patterns of business
behavior which exclude the participation of minority- and
women-owned businesses is hard. The mentality of exclusion can
exist in contractors and public contracting officials, alike,
and it works like a one-two punch, eliminating minority- and
women-owned firms.
Programs like the disadvantaged business enterprise program
are crucial because they help us to ensure that airports across
the country provide opportunities to all qualified businesses,
not just those who have always gotten work in the past.
At MGT of America I oversee the completion of disparity
studies. I can tell you, based upon the many disparity studies
that have been conducted across the country, that
discrimination is still a serious problem.
I have with me today six examples of many recent airport-
related disparity studies. I would like to ask that they be
included in the record. These are just a small fraction of the
studies that have been completed, but they demonstrate the
statistical evidence of ongoing under-utilization of minority-
and women-owned businesses is overwhelming.
But don't just take my word for it. Listen to the stories
of the men and women who struggle every day to overcome
discrimination. One African American businessman in the midwest
has repeatedly run up against the Old Boys' Network. He has
been the subject of racial slurs, discriminatory attitude, and
recently found that he was being charged 50 percent more for
the tires on his buses than majority-owned firms. When this
business owner disguised his voice and called the same
distributor, he was given a lower price.
A Hispanic construction worker subcontractor on the east
coast was recently told by a majority prime contractor that
they would use him on the job, and that they then shopped his
price and bid to a much larger majority contractor and removed
him from the contract. With 25 years of industry experience, he
felt very strongly that there was significant racial bias
against his Hispanic-owned business.
A white woman business owner has experienced patronizing,
bullying, and discriminatory attitudes from the men she deals
with in other companies, and even among airport staff. She told
us that she has been referred to--excuse the expression--as a
bitch behind her back, and she explains that she often sends a
male employee to make the business pitch because it is more
likely to result in the winning bid than in other cases.
Another African American member based in the southeast
attempted to obtain venture capital from a fund specifically
established for under-served communities. Even in that context,
this business owner was asked to meet extraordinary conditions
that would not normally have been required of a majority-owned
business. Because of this, the denial of the venture capital
happened and the deal failed.
In closing, discrimination against minority and women
contractors in America is abundant and devastating. At best it
translates into higher cost and foreclosed opportunities, and
at worst it results in failed businesses.
All of this makes it imperative that we maintain important
programs like the DBE and ACDB programs. We hope that in the
future the Congress will strengthen both programs.
I would like to again thank the committee for this
opportunity and would again ask the committee to again support
the continued affect of these programs.
[The prepared statement of Mr. Brown follows:]
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Mr. Yarmuth [presiding]. Thank you, Mr. Brown.
Without objection, the reports that you referenced will be
included in the record.
Mr. Robinson.
STATEMENT OF ANTHONY ROBINSON
Mr. Robinson. Thank you, Mr. Chairman and Mr. Turner,
ranking member of the committee. My name is Anthony Robinson. I
represent the Minority Business Enterprise Legal Defense and
Educational Fund. MBELDEF, as we affectionately refer to it,
has been in the business of advocacy on behalf of minority
businesses for about 27 years. At least 20 of those years have
been spent dealing with the issues of discrimination in the
marketplace and how to overcome those discriminatory barriers
in order to assure the full and fair opportunity to minority
enterprises.
I am going to be rather short, because most of the
panelists have already covered many of the areas that I would
have, except to say that I would like to suggest to the panel
that there is a definite pattern in discriminatory practices as
it relates to ongoing discrimination in the marketplace. Mr.
Brown just touched on one of the first ones, and that is the
Good Old Boys' Network, which effectively restricts the
opportunities of minority contractors at various points in the
bidding and contracting process.
The other that I would like to cite, which represents an
ongoing pattern of discriminatory practices, would be unequal
access to bonding. Minority contractors also face
discrimination in obtaining bonding, which is often a
prerequisite to participating in public sector construction
contracts.
State and local studies, as well as extensive anecdotal
evidence presented at congressional hearings, have documented
the fact that minority enterprises are significantly less able
to secure bonding on equal terms with their white-owned
counterparts.
The other thing Mr. Brown also spoke to relative to a
specific anecdote but also represents a pattern and practice,
and that is that of bid shopping. It has been the construction
industry particularly has been and remains a closed network,
with prime contractors maintaining longstanding relationships
with subcontractors with whom they prefer to work.
One of the very interesting things about the bid shopping
process and maintaining preferences is that often we find the
pattern that when you have minority enterprise programs or
policies in place, that will incentivize, in some instances, at
least, majority firms to utilize and subcontract to minority
firms. However, when it comes to those projects that those
policies and mandates do not exist, that they will not utilize
those same firms on those primarily private sector contracting
opportunities.
The other pattern and practice is in price discrimination
by suppliers--again, cited by Mr. Brown in his anecdote--where
minority firms are frequently required to pay more for supplies
than their white counterparts.
And then finally unfair denial of the opportunity to bid.
It is common for minority contractors to bid on private sector
jobs; however, as I have already stated, only to be told when
it comes to private sector jobs that those opportunities do not
exist.
With that I am going to close and take any questions that
you might have.
[The prepared statement of Mr. Robinson follows:]
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Mr. Yarmuth. Thank you, Mr. Robinson.
Mr. Peek, welcome.
STATEMENT OF EARL PEEK
Mr. Peek. Good afternoon, Mr. Chairman and members of the
Information Policy, Census, and National Archives Subcommittee.
My name is Earl Peek, and I have 22 years of experience as a
CPA, a commercial lender, economic development lender, and also
a vice president with a minority bank as well as a majority
bank. Much of my experience covers the entire capital risk
continuum, including the formation of a venture capital firm
under the auspices of the Small Business Administration, the
Small Business Investment Company Program that I will talk
about later.
I have counseled thousands of entrepreneurs. I have done
hundreds of loans and financed businesses from every part of
the alphabet. More than 60 percent of minority- and women-owned
businesses, I have seen daily the obstacles to fulfilling the
contracts that many of my panelists and colleagues have
studied. I have watched many of them have many issues
fulfilling joint ventures and enter into various relationships.
Seven years ago I formed the management team that was a
majority/minority form to apply for a venture capital license
to be licensed by the SBA, in part because we saw many of these
issues in lending. The team that we formed had over 100 years
of experience, had deployed collectively over $1 billion of
capital, had done over 1,000 financings, and created or saved
over 30,000 jobs. The team consisted of MBAs, CPAs such as
myself, licensed professionals, and even those who teach
entrepreneurship and write national magazine articles. SBA told
us that we were unqualified and they denied our license.
We sued the SBA. We are now in the closing moments of
litigation with the SBA in the Federal courts for a denial of
our rights, but by suing we found out firsthand a look behind
the curtain of how the SBA operates the venture capital
program, which is the bedrock of capital that many of these
panelists cite the businesses endure.
We saw that SBA has only approved one black firm, one
minority firm in the last 10 years. They testified to this.
This is sworn testimony. We studied over 115 licensees in the
program and found that 0.0057 percent are minorities and women.
Just so that you all know, every venture capital firm has
between three to five members, of which only they found I think
between three and five out of several hundred were minority
owned or of some type of minority descent.
So I stand here today to talk to you about a report that
was presented by Dr. Timothy Bates. It will be submitted as a
part of the record. Dr. Tim Bates has studied SBA for the
better part of since the early 1970's. He submitted a 107-page
report, somewhat on Diamond but more generally on the program
returns of the deployment of capital through this program that
deploys more than $5 billion a year to venture capital firms in
loans and things of that sort to small businesses. Dr. Bates
concluded that SBA continues to use its exclusionary criteria,
evaluation, and methodologies to deny minority- and women-owned
businesses and management teams focused on SBA and SBIC capital
resources and/or assistance.
It is not just the SBA. The Wall Street Journal just
conducted a study with the National Venture Capital Association
and the SBA is like the private market. Venture capital
deployment of capital is largely a white dominated profession,
97 to 99 percent. These are studies that are also going to be
submitted as a part of the record today.
I have personally witnessed SBA officials, from political
appointees to Civil Service members, who testified under oath
that they do not keep records of race of the applicants, they
cannot tell you which SBIC licensees deploys capitals to a or
any minority- and women-owned business. They cannot tell
Congress when and under what criteria the SBICs have reported
investments to low- to moderate-income areas.
Further, the program analysts have testified that they have
no training in this area or no experience in this area. They
have no sensitivity. I found this somewhat appalling to see
that they even said that they do not believe this is a goal of
the SBA to make capital more broadly available to minorities or
women.
SBA has unreliable records that will not withstand any type
of public inspection or report to you as a body. And they do
not keep records of the applicants or the inquiries to the
program or the final disposition of anybody applied, whether
denied, or what happened to them. SBA does not evenly score the
applicants to the program.
These are not empty statements that I make, but these are
actual documents that the lawyers who instituted the action
against SBA have found and that SBA has reported and that SBA
has said under sworn oath in depositions as part of the
litigation process.
Capital is the bedrock of small business growth, and I hope
that, as I conclude this, that one thing that I found
appalling, that we will qualify to be a new market venture
capital firm program, which has sunset by Congress, but we
found out that SBA withheld a letter for 7 years showing that
we were eligible and qualified. Not only us, but a firm out of
New York, women and minority capital partners.
I urge this body to look at these efforts. Also, I can
offer solutions as a part of this testimony to remedy this
action, not only for my firm but for many across America and
many businesses that they have studied to deal with these
issues.
Thank you.
[The prepared statement of Mr. Peek follows:]
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Mr. Yarmuth. Thank you very much, Mr. Peek.
Well, first of all, let me say without objection the
reports that you referenced will be included in the record.
Mr. Peek. Thank you.
Mr. Yarmuth. So now, since you have offered to give us some
recommendations, why don't you proceed to do that?
Mr. Peek. I have seen five recommendations not only that I
understood from my experiences, but also Dr. Bates corroborated
in his studies. He is an esteemed economist I am sure Dr.
Boston and many others know of.
The first would be transparency. Treasury with the new
market tax credit program has a program where you can apply
online. They have a panel of independent reviewers and then
they look at the scoring and make sure it is uniform before
they approve people to dispense tax credits.
SBA is a very subjective process by people that are
untrained, and they need to look at that program as a model for
the SBIC program.
Second would be in the area of management qualifications.
Dr. Bates found that typical in minority- and women-owned firms
we gained our experience in economic development lending,
banking, and financing, and we are not necessarily members of
venture capital firms, and we can't say that we have worked 5
years together in the firm, which is the standard that SBA has.
So we need to expand the definition of what is considered
qualified management to dispense capital to minority- and
women-owned businesses.
Third there needs to be reporting and accountability.
During this process we never were able to find out the race of
the applicants to get financing, neither can we find the race
of the people who dispense it, so we never know if there is
sensitivity to this area or to the broader geography.
Fourth, there has to be some penalty for noncompliance.
Right now there is a bill in the Senate that sets forth to
increase the leverage, the amount of dollars that a person can
get if they are a licensed SBIC. What if they don't invest the
money? What if they don't make it more broadly available? There
should be some penalties for that.
Last, there needs to be some diversity. There needs to be
diversity amongst the management team. All of the
decisionmakings at SBA do not look like America, and they don't
necessarily have to be majority/minority. They just have to
look like the citizens of America who pay the taxes.
Mr. Yarmuth. Thank you very much for that.
This hearing is very timely for me, because I just met back
in my District a few weeks ago with a gentleman, a minority
business owner who was talking about the personnel net worth
ceiling and the impact it was having on him, so I am very
interested in the testimony related to that.
Dr. Boston, could you tell me what positive impact these
PNCs--I shouldn't say PNC. I don't want to confuse it with the
bank--but the net worth ceilings have, or are there any?
Mr. Boston. The only positive aspect of the personal net
worth is the fact that it is designed from a legal standpoint
to ensure that businesses that truly have some history or
relationship to disadvantaged status are eligible for the
program. But the way in which that is implemented actually
works adversely to the businesses actually being successful in
the program, simply because, as I mentioned during the
testimony, personal net worth is tied, particularly for small
business owners, to their ability to secure bonding, to raise
capital, to perform as prime contractors.
As a result, when they graduate from the program and are no
longer eligible and they go out into the market--we did a case
study of 17 firms. We found that those firms' revenue on
average dropped by about 45 percent, and it was because, again,
the constraints that were imposed on them while they were
participating in the program.
Mr. Yarmuth. Let's take the other side of this, because the
gentleman I was speaking with, my constituent, was saying he
can get a lot of jobs at a certain level, but there really is
no incentive for him to do a great job because it doesn't allow
him, because of these artificial constraints, he has no ability
to do larger jobs and jobs for which he thinks he has assembled
a pretty good resume. Is that something you are also finding?
Mr. Boston. Absolutely, Congressman. We are finding it from
both sides of the equation, both from the standpoint of
minority and disadvantaged businesses as well as corporations,
major corporations. For example, GSK and a number of other
corporations came and were supportive of the research because
what they were finding, in fact, was that the businesses that
they had mentored and grown, once they were able to get into
their value chain at a significant level, their owners reached
the personal net worth ceiling and then they were no longer
eligible to participate in the program.
So it has a detrimental affect on the ability of
corporations that are prime Government contractors to
participate in the program and grow firms. It also has adverse
consequences on minority-owned firms that are in the program.
Mr. Yarmuth. So it is really just not a ceiling on the
person's net worth; it is also, in effect, in some cases,
anyway, a ceiling on their potential?
Mr. Boston. Absolutely, because we found there is a very
close relationship between the firm's revenue and the owner's
personal net worth. We found that is about a 40 percent
relationship, so that when you cap personal net worth you are
also explicitly capping firm revenue.
Mr. Yarmuth. Thank you very much.
Mr. Chairman, I think my time is up. I will yield back.
Mr. Clay [presiding]. Thank you so much.
Let me ask Dr. Wainwright, whenever this subcommittee asks
the Census Bureau for information regarding contracts broken
down by race, the response is that the Commerce Department does
not track this information because it is not required to do so.
However, you cite a lot of data collected by the Department in
your testimony. How can the Commerce Department and other
Government agencies provide Federal procurement data by
agencies in the manner in which it is provided in the surveys
noted in your testimony? Can you clear that up for us?
Mr. Wainwright. Yes, Mr. Chairman. The data in my testimony
isn't tied directly to specific Federal Government contracts.
It is really Census data on self-employed business owners for
which we do track race and sex, and it is a special program,
the Survey of Business Owners, at the Census Bureau, which is
conducted every 5 years as part of the economic censuses that
specifically seeks to track minority- and women-owned
businesses.
However, my day job is doing disparity studies, and every
State and local government that runs a race-conscious
affirmative action program has to track not only who the prime
contractors are by their race and sex but who the
subcontractors are, and it is hard to believe that the Commerce
Department does not have that data or that someone in the
Federal Government doesn't have that data; otherwise, it would
be impossible to compile the type of statistics that
Representative Turner cited in his opening statement about how
much Federal money is going each year to SDBs. So if they are
not tracking that data, they certainly can and they certainly
should.
Mr. Clay. Thank you for that response.
Dr. Peek, I had a question for you. There have been
concerns about SBA's lack of implementation and restrictive
proposed rules of the women's contracting program that was the
subject of litigation. How would our actions and reforms to
SBICs help this program?
Mr. Peek. By instituting reforms in the SBIC program in
terms of the management diversity of the people who dispense
the capital and the qualifications for the people who can
actually invest in women- and minority-owned firms, when that
contractor rule is adjusted and the contracts that are created
with the ceilings that will be lifted here with the capital
will equal more businesses, more job creation, and things of
that sort.
I think that the efforts here would go right to helping the
women have the capital availability when that rule is enacted
and the rules are fully adopted by Congress.
Mr. Clay. Would you say that the lack of women's
contracting programs and investment in minorities and women is
a result of the lack of diversity at SBA and in managers SBA
approves to manage these programs?
Mr. Peek. Absolutely.
Mr. Clay. OK. In your testimony you note that Dr. Bates
concluded that SBA continues to use exclusionary criteria,
evaluation, and methodologies to deny minority- and women-owned
businesses access to capital. Can you speak a little about the
criteria in Dr. Bates' findings?
Mr. Peek. Yes. SBA deputy administrators sent out
information that says that in order for a firm to be considered
eligible they have to have two members that have worked in a
venture capital firm together for at least 5 years and they
would have had to perform what they call upper quartile of
returns in the venture capital industry. That is a nice
benchmark to have, but not many minorities and women have
venture capital firms in the first place, so you will have to
have that experience to go in.
So in that way it has a discriminatory effect and excludes
people who have experience in banking and economic development
and finance, which Dr. Bates has shown that these people have
gone and raised money from pension funds and other places and
had compatible returns to the S&P and the stock market, so
those standards need to be moved away or they need to be more
accommodating of experiences that are more common to minorities
and women today.
Mr. Clay. Thank you for that response.
Mr. Robinson, what recourse does a business person have
when confronting the types of discrimination you have
described?
Mr. Robinson. Very few, if not non-existent, recourse. We
had the slim hope that the 1866 Civil Rights Act would be a
vehicle to redress discriminatory conduct, but the recent
Supreme Court decision in the case of Dominoi v. McDonald
pretty much eviscerated that as being a viable option. As a
result, it is only in the viability of these affirmative
programs that we are talking about here does it hold out any
real hope for opportunity for these companies. They are not
getting it in the private sector to a great degree, and so
these programs remain a bedrock for that opportunity to take
place.
So strengthening these programs represents the most viable
option that exists, and that is why, again, I want to commend
you, Mr. Chairman, that these hearings are so critically
important in strengthening the viability, the base that these
programs need to operate from in order for them to remain
constitutionally viable.
Mr. Clay. So once Congress has a record of the performance
of the programs now, it should be incumbent upon Congress to go
back and revise the law in order----
Mr. Robinson. At least revise the appropriate predicate for
the laws that exist, because the court, in its determination of
what is narrowly tailored programs look at how recent the data
is before the Congress in determining as to whether or not that
data is stale, represents an appropriate predicate that can be
relied on that discrimination in the marketplace remains.
Mr. Clay. Thank you for that response.
Mr. Yarmuth, do you want a second round?
Mr. Yarmuth. I would like to followup with Dr. Boston on
the ceilings. Can you conceive of any alternative method of
achieving whatever required positive benefit you think that the
PNC provides that might be a little bit more conducive to
providing greater opportunity for minority contractors?
Mr. Boston. Yes, Congressman. The purpose of the personal
net worth again was to make sure that businesses that have
experienced discriminatory treatment in the past are those
businesses that have eligibility for the program. The program,
however, is also designed or established to be a program that
assists and promotes business development, and the personal net
worth ceiling actually prevents that, so you have a law that is
actually working against the intent of the program.
What needs to happen are a number of things. One is that
there needs to be some consideration of the industry
requirements for different businesses--manufacturing,
construction, or what have you. Again, there needs to be
consideration of where the business is in terms of its own
development relative to the industry. So there are a number of
criteria, both internal to the business as well as its
relationship to the industry--bonding requirements and other
kinds of things, capital requirements. Those things are
important.
What we are currently working on is a way in which we can
develop a multi-dimensional index that bundles all of these
criteria together, and with that multi-dimensional criteria
then you are a better position to determine what companies and
what state of development in that company should it be or
should it not be eligible, as opposed to using a single
criteria, personal net worth, that has, particularly as a
company grows, very little relationship to the business
dynamics within the company.
Mr. Yarmuth. Having been in business myself, I agree with
you totally on that one.
Mr. Brown, you mentioned in your testimony a mentality of
exclusion. Could you elaborate on that and tell us how it
actually plays out in real life?
Mr. Brown. Yes, Congressman. The mentality of exclusion
basically is a mentality that says minority- and women-owned
businesses don't belong at the table. It basically says the
status quo is fine, businesses are operating, the work that is
doing the Federal contracts is coming forth, it is being done,
the performance is good. And it says we don't have a problem.
The fact that no contracts are going to minority- and
women-owned businesses is not a problem, and that is the
mentality that is there. And it is there not only on the prime
contractors and large contractors, it is also there many times
on the staff, who have been at cities, airports, others, for a
number of years. They have become accustomed to those with whom
they deal and they don't see a problem in what is going on.
In fact, I have often witnessed the fact that many of them
feel that if a minority- and women-owned business gets the
contract, then we done them a favor, whereas they don't look at
the fact that there are millions of dollars of contracts that
go on every year, and they feel that those majority businesses
have earned the right to be at the table, but they feel that if
a minority- and women-owned business gets the contract then we
have done them a favor.
Mr. Yarmuth. Looking at all of the disparity studies with
which you are familiar, do you see this as forming some kind of
pattern that is geographic, or is this something that is broad
based across the country?
Mr. Brown. Our company, MGT, does disparity studies all
across this country from the west coast to the east coast and
the south. The under-utilization of minority- and women-owned
businesses and the under-utilization of all segments of that
community is seen. It is not geographical in nature. It is
across the Nation.
Mr. Yarmuth. I have nothing else, Mr. Chairman.
Mr. Clay. Thank you, Mr. Yarmuth.
Let me continue along that line of questioning, Mr. Brown.
We have heard a lot about discrimination today, but some would
say that the statistical disparities are actually caused by the
fact that minority firms are smaller, have less capacity, and
are less qualified. How would you respond?
Mr. Brown. Chairman Clay, I think the evidence is pretty
clear that it is not due to the ability of minority- and women-
owned businesses. It is not due to their interest in
contracting. Oftentimes, the size of the business and the fact
that it is small is caused by the discrimination in the
particular community or the segment in which that business
seeks to operate.
In other words, the discrimination has had a true and
adverse affect upon the ability of that business to grow and to
be able to handle larger contracts.
I can say in the many offices that I have held in airports,
it has been very frustrating when you have contracts that are
of a particular size and you will come in contact with very
qualified, very capable minority business owners who have been
limited in their abilities and their business's ability to
grow, not due to their vision, not due to their hard work, not
due to their ability, but simply due to the fact that no one
will give them the opportunity to do the work because of what
their racial or ethnic background is or their sex.
Mr. Clay. You know, you give us pretty good examples that
are very compelling, but isn't it possible that those business
owners are simply assuming that the problems they are facing
are caused by discrimination and couldn't the real problem be
something else?
Mr. Brown. One of the things we do when performing a
disparity study, we control for certain factors in that
disparity study. We control for factors that are economic in
nature or others in nature and are not related to race. Once we
control for those factors, we are also able to determine and
exclude those factors.
I will tell you that disparity studies from one end of the
country to the other control for those factors and find that it
is not, again, the size of the business, it is not, again, so
many other factors that are normal business factors. Leading to
the exclusion of those factors, coupled with the indication of
the anecdotal evidence that we gather and the experiences that
we gather, it is overwhelming that it can't be simply because
of some other factor other than the racial implications that
are found.
Mr. Clay. That is pretty compelling. Thank you for that
response.
Dr. Boston, what happens to minority firms that are
government contractors but not in the SDB program or have
graduated from the SDB program? How well do they do after
graduation?
Mr. Boston. Mr. Chairman, there are a number of things
happening. In the study, we examined the records of 47,000
firms that are registered with the Federal Government in the
Central Contractor Registry, and among those firms there were
10,000 minority-owned firms that had never become a part of the
SDB program. There was another 4,000 firms that had graduated
from the program, and we wanted to look at both of those, in
addition to the firms that were in the program.
What we found was that 10,000 that had never been in the
SDB program, they encountered significant disparities. Because
we had so much information, we could match these firms up
equally with non-minority Government contractors in terms of
their years of existence, the industry that they operated in,
their bonding capacity, and so on and so forth. What we found
is that these firms were operating at a significant
disadvantage in terms of revenue when they pursued both
Government contracts as well as private sector contracts. There
was a significant revenue disparity that they encountered that
could only be attributed to discrimination.
On the other side of the spectrum, for firms that had
graduated out of the program, we found that there are also
problems that they encounter. For example, we looked at the
records, a case study of 17 firms that participated in the SDB
program, and we followed these firms' revenue 2 years before on
a monthly basis and then 6 months after they left the program.
What we found is that the revenue of those firms after they
left the program decreased by 45 percent, and when we
interviewed the owners they mentioned a number of things.
One, they mentioned that firms that used them when they
were certified no longer use them. They didn't even get the
opportunity to bid any more. They indicated that they had not
been able to get the bonding capacity when they were in the
program that would allow them to be successful as prime
contractors. And they indicated that they had been graduated
out of a program into an industry, in many cases, that was very
concentrated, and as a result they were unable to be successful
because of the capital requirements.
So there were a number of barriers, both discriminatory and
industry-related barriers that they encountered.
Mr. Clay. Industry-related as institutional, lack of access
to credit?
Mr. Boston. Exactly.
Mr. Clay. Things like that.
Mr. Boston. Exactly, meaning access to bonding, access to
capital, those kinds of things. And, for example, when firms
had graduated out of a program into industries that are
concentrated and they have not had the capacity, because of the
personal net worth ceiling, to build bonding and gain access to
bonding or capital, then it makes it that much more difficult
for them.
Mr. Clay. If the personal net worth ceiling were
eliminated, what would you recommend as an alternative
criteria?
Mr. Boston. I would recommend, Mr. Chairman, something that
we call a business development index. This is an index, again,
that would look at the characteristics of the business, itself,
where that business is in terms of its startup and its growth
and its development, and the characteristics of the industry
that the business operates within, and then use those as a
criteria so that you could standardize this criteria, and along
this standardized criteria then you could select a threshold
above which then businesses are no longer eligible, which makes
much more sense because then you are talking about the
characteristics that it takes in order to operate successfully
in an industry, as opposed to just simply artificial criteria
of personal net worth.
Mr. Clay. And that is how you came up with your new
recommendations as far as dollar amounts with a trigger for
inflation, and per industry? Is that how you----
Mr. Boston. Maybe, the recommendation is operating within
the constraints that we have. In other words, we wanted to take
the existing $750,000 and make an adjustment to that, but we
also realized that ultimately that is not the solution. There
is a problem, because even when you adjust that and it goes up,
it is not sufficient in order to give those firms access to
bonding and capital. But we did adjust it by adjusting it for
inflation, by adjusting it for the amount of capital that is
required in different industries, and also by adjusting it by
the amount of revenue that these businesses would be able to
achieve if they were treated equally as non-minority-owned
firms.
Mr. Clay. So, in other words, it is time for a new model
for Government to adhere to?
Mr. Boston. Yes, Mr. Chairman.
Mr. Clay. Thank you for that response.
Dr. Wainwright, you state that the Supreme Court used
information on business discrimination against minorities
presented to Congress. Can you tell us how the court used this
information in the Adiron case?
Mr. Wainwright. Being an economist rather than a lawyer, I
am not sure that is my bailiwick, but the tenth circuit went to
great pains to pull together everything that had been put into
the Congressional Record up until the Adiron case and along
with the Justice Department brief at that time, so a real good
way to get caught up on the older evidence in the record is to
reference that decision. Certainly the Supreme Court looked at
that to underscore Congress' special role in eradicating
discrimination nationwide.
As Mr. Yarmuth pointed out, this is a nationwide problem,
but it shows up in every single region of the United States. In
the tables in my written testimony you will see broken down
specific disparity ratios for all 50 States and the District of
Columbia for Blacks, Hispanics, Asians, Native Americans, and
women, and it is amazing how pervasive they are.
Mr. Clay. Mr. Robinson, can you tell us how the court used
the information derived here in Congress on the Adiron case?
Mr. Robinson. Well, the court essentially looks at, and the
paradigm that the court has created for looking at this
evidence is to take the empirical data that these three
gentlemen to my right developed in their econometric models,
statistical, the regressional analysis, those kinds of things,
and then they say that is informed by the anecdotal evidence,
like what Mr. Peek has presented and what others have been
presented here today in written testimony, talk about the
anecdotal experiences of minorities and women as they operate
their businesses in the marketplace, and that those anecdotal
experiences inform the statistical disparities that are found.
It is from that the court draws its conclusion about
whether or not there is discrimination in the marketplace. It
looks for Congress to document that, as it uses race-conscious
remedies, affirmative remedies, to address this discrimination.
It is in that context that the Congress has the duty to act
and to provide the appropriate remedies, but that data must be
kept current. That information must be kept current before the
Congress moves on these issues.
Mr. Clay. Are there any relevant cases coming in the next
term of the Supreme Court that they may hear?
Mr. Robinson. Not that we are aware of in this term coming
up.
Mr. Clay. Let's give them a little more time.
Mr. Robinson. Yes.
Mr. Yarmuth. I just want to ask one other question. We
talked about the personal net worth ceiling as a structural
problem. We talked about the general mentality of exclusion.
Are there any other structural problems that you have seen in
the program that we might want to look at?
Mr. Boston. Yes, Congressman Yarmuth. We examined, based on
all these records that we had. We also identified close to 500
firms that were registered as small business concerns, but
their revenue indicated that they were not. They had, on
average, revenues that were well over $200 million.
Now, there are provisions in the regulations that allow for
transition periods, in some cases, when small businesses are
bought out, but it appeared, by what we looked at, that this
could not be the case for the large majority of these firms.
So there are large firms that are registering as small
business concerns, and one of the things that we recommend is
that there be an annual audit of those programs and of the
participation of businesses, and that audit ought to identify
and enforce regulations on the book to make sure that your
firms aren't fraudulently registering as small business
concerns, that process is eliminated.
One other factor is that the incentives to participate in
the program, there were, for example, price incentives and bid
incentives to use subcontractors in the program. Most of those
incentives have been eliminated, or at least they sunset and
they were not put back into place legislatively, except for the
Department of Defense. So there is very little incentive now
for minority firms or disadvantaged firms to even become
certified, because that is a process in itself, because the end
result is that there are not very many incentives left in the
program that they can actually take advantage of, so that is a
problem.
And then, finally, the other problem has to do with this
10,000 minority-owned firms that have never become SDB
certified. There needs to be a study to determine why those
firms are not and why they are encountering so much disparity,
because one of the things that the court mandates is that, in
addition to studying the effects of the program, one also has
to study what would happen but for the existence of the
program. In other words, what happens if businesses don't have
access to a program. Here we have 10,000 businesses and we
found significant disparities in their revenue, both from the
Government and the private sector, absent their participation
in the program, so that needs to be studied and those
business's experience needs to be tracked.
Mr. Robinson. Can I add to that, please?
Mr. Yarmuth. Yes, sir.
Mr. Robinson. Mr. Congressman, it was announced I think in
the past week that the SBA plans to no longer certify SDBs.
This could pose a huge problem for reasons that Dr. Boston has
indicated, because there is a real problem with the viability
of the numbers, the data. When the agencies represent that they
have met their goals that they established with the SBA on an
annual basis, I suggest to you that there are real problems
with those numbers. You find double counting, in addition to
the kind of fraud that Dr. Boston has indicated where companies
are literally misrepresenting their status--their status as
either small businesses, minority businesses, or 8(a)
companies, etc.
So this issue of the viability, the integrity of the data
is something that we would really encourage this committee to
begin to examine in a much more thorough fashion. Oversight is
just so, so critical around this issue, and this committee
specifically on the integrity of the data.
As it relates to structural issues, you know,
discrimination in the private sector remains a problem. There
are two ways that I think that the Congress can begin to
address that issue, and the first is to look at this whole
issue of subcontracting and the viability of the subcontracting
programs that exist with Federal agencies, and the
subcontractor reporting and how that is done, and the integrity
of that data that is reported to agencies relative to
subcontracting.
How the subcontracting program works, normally the horse is
already out of the barn before minority firms are even engaged
by major prime contractors, and we have to find a way to make
them an integral part of the process on the front end so that
their involvement with that prime becomes a material part of
the contract, itself, with the Government.
In addition to that, we would encourage the Congress to
consider a policy that we have been working with at State and
local levels of government, and that is a commercial
nondiscrimination policy which basically requires on the front
end an affirmative showing that you have not engaged in
discrimination in your other activities before becoming
eligible for work that the Federal Government would provide.
Mr. Yarmuth. Thank you, Mr. Chairman.
Mr. Clay. Thank you.
Let me ask a panel-wide question, and anyone can volunteer.
We will start with Mr. Peek.
Is there data collected in the Small Business Owners Survey
or any of the other business surveys conducted by the Census
Bureau that might serve as models for collecting information
for Federal Government contracts to minority contractors? Do
you know of any examples?
Mr. Peek. I cannot think of any now. I am not abreast to
all the data that is collected on the census. But I would
certainly defer to the economist in that area.
Mr. Clay. OK.
Mr. Wainwright. None of the existing Census Bureau programs
are contract based like that, but ostensibly all of this
Federal contracting is a matter of public record. The
subcontractors are a matter of public record. I don't know that
there is anything stopping Congress from mandating that reports
be issued on a regular basis at the contract level so that data
can be subject. That is what we call microdata. Rather than
aggregating it all together and saying so many billions of
dollars are spent during a quarter and so many millions are
spent with SDBs, actually put out there contract-by-contract
what those contracts are for, what codes they fill in, what the
status of the prime contractor was, who the first-tier subs
were, and make that data available for analysis and scrutiny
and shed some light on that contracting process. I think that
would be very, very useful information to have, but it is not
out there right now.
Mr. Clay. And it gets at the problem.
Mr. Boston. Mr. Chairman, there is a way in which it can be
done. There are some current gaps. But if you use the Central
Contractor Register, which is for Federal Government
procurement, that has a list of every firm that pursues or does
business with the Federal Government, both as a subcontractor
and a prime contractor, so they are registered there. We just
simply use, for example, small businesses, and that was close
to--excluding non-minority businesses, for example, businesses
owned by white women and others, there were close to 50,000
records there.
So on the characteristics of the businesses, the
information is actually maintained in the Central Contractor
Register.
On the other hand, there is also the Federal procurement
data system that gives information on contract awards. Both of
these data sets are very rich. What is missing from the Federal
procurement data is information on subcontracting activity.
That is really where the big gap is. If we collect information,
the Government begins to collect information on subcontracting
activity combined with these other data sets, then that is a
rich amount of information that we can begin to analyze in a
great deal of detail, the kind of discriminatory patterns that
we see, and document that to determine what is due to
discrimination and what is not and the way in which firms are
or are not treated equally based on race, gender, and other
kinds of criteria.
Mr. Clay. Thank you for that response.
Last question, and it is panel-wide and anyone can provide
examples if you have them--are any of you familiar with the
problem of abuse of subcontractor status of minority businesses
in Federal contracting?
Mr. Robinson. Yes.
Mr. Clay. Mr. Robinson, we will start with you.
Mr. Robinson. Yes. In fact, we have one of the firms here
today in the audience. But one of the big problems that you run
into--and I cited some of it in my testimony--is the whole
issue of bid shopping with subcontractors, the bait and switch.
You use a minority firm subcontracting firm to win a contract,
and once receiving that contract they no longer use that firm,
or they use the firm only minimally, certainly not within the
scope of work as it had been originally represented.
So the bid shopping is driving the minority firms' prices
down to the point where they can't be competitive. They can't
even be profitable in the work they are doing.
So you have bait and switch, you have bid shopping, and
things of that nature. Just getting the information out to the
firms in a timely manner so that they can, in fact, bid for
subcontracting opportunities, there is a host. I cite some of
those in my full written testimony of those kinds of abuses
that happen with subcontractors.
Mr. Clay. So there should be penalty for the bait and
switch?
Mr. Robinson. Say that again?
Mr. Clay. There should be penalty for bid shopping and bait
and switch?
Mr. Robinson. No question about it.
Mr. Clay. By the general contractor.
Mr. Robinson. Yes.
Mr. Clay. OK. Thank you.
Mr. Brown. I would also like to mention, Chairman Clay,
that there is another practice that is also somewhat rampant,
and that is, once the minority- or women-owned business begins
performance of the contract, there is often a practice of nit-
picking at the performance level of contractor to the extent
that, in other words, the minority- and women-owned contractor
is giving the subcontract, but there is an understanding that
there are going to be problems on the contract, and then,
through performance issues, they are going to exclude them and
then replace them.
Many times, unless you have an administrator of a DB
program at a locality and airport that has oversight, then
maybe that department head, coupled with that contractor, prime
contractor, will then exclude even after the contract award the
performance of the contract by the minority- or women-owned
business. You will often find many of them have stories and
complaints of their work be perfect, but yet the problem is
being found and being excluded after the fact of the contract.
So it is not even a guarantee after the award of a contract
that there is not issues that come up, and that is an area that
I have seen time and again.
The other aspect that I have also seen is we have talked
about bonding requirements and we have talked about insurance
requirements. You can have a project with, let's say, at an
airport a $40 million project. Then you look at how the bonding
and insurance requirements are set on that project by that
entity. In other words, if that entity has a $30 million bond
requirement for a $40 million project, it doesn't make sense,
but if that is the requirement then it is normally going to
exclude a large number of minority- and women-owned businesses.
For example, a bond on a project like that may be reasonable at
$5 million. There might be companies in that range that can
afford that type of bonding and get that type of bonding in the
community, but you have to look at where those are also being
set.
Another practice I have also, in fact, personally had the
issue of dealing with is when you talk about payment of
minority contractors. It is so important because minority- and
women-owned businesses don't have the types of financial
reserves that many majority businesses have, so what they need
is prompt payment. There will also be late payment, and there
will also be retainage held against that minority-owned
business.
So when you talk about the payment aspects that come along
under the program, those are vital to having minority
businesses that can continue to work on projects.
Mr. Clay. And so you recommend the payment schedule be
locked in for subcontractors?
Mr. Brown. The payments should be locked in, they should be
stronger regulations in regard to prompt payment.
I will tell you personally I had a situation where I had a
minority-owned business that was family owned called me and
said we haven't been paid. I checked on the project. Everybody
had been paid on the project but them, so I ordered--which is
allowable under my authority--that no more payments be made to
that prime contractor.
I received a call from the prime contractor 2 days later
that said, I hear you are holding my money. I said, yes, sir, I
am holding my money. He said, well, I want you to release my
money. I said, well, I want you to tell me why you haven't paid
these subcontractors. He actually came from Texas where he was
located, and we sat down and met and he paid those
subcontractors and then he received his payment. But unless you
have that type of oversight and are willing to do that type of
thing, then minority- and women-owned businesses face a
tremendous hurdle.
Mr. Clay. Thank you for that.
Mr. Wainwright. I might add as, appropro of the pilot
mitigation issue, there is a lot more effort goes into tracking
awards and commitments at Federal agencies as well as State and
local agencies that are working these programs then into
payments. What happens, there can be a lot of difference
between the original award amount and the final payment amount,
and a lot of the data you see reported is that front-end
effort. Agencies are--I won't say unwilling, but oftentimes
unable due to staff restrictions to track those contracts all
the way through to payment.
Another issue in particular with subcontractors is change
orders. Sometimes construction projects ultimately have more
money in the change orders than were in the original contract
award. Goals are almost never applied to the change orders or
tracked through the change orders, thus, of course, diluting
all of these wonderful percentages that we think we are getting
by reporting awards up front.
Mr. Clay. Thank you for that testimony.
Mr. Boston. Mr. Chairman, just a very quick comment about
something I am really passionate about. I think this will go a
long way to preserving minority business opportunity. There
needs to be, for lack of a better word, a commission to
standardize the method and approach of doing disparity studies.
The reason I say this is because what happens now, the Supreme
Court has said these programs have to meet strict scrutiny and
be narrowly tailored.
The problem is that the interpretation of that varies by
judges all over the country, so that if one, for example, is
hostile to the notion of affirmative action, then that program,
there can always be come deficiency found. So if that process
is standardized, then we know whether the existence of a
program meets the standard or it doesn't meet the standard,
whether there is sufficient evidence or there is not sufficient
evidence.
It would also save local jurisdictions, Federal and State,
hundreds of thousands of dollars in terms of commissioning
studies.
Mr. Clay. Sure. Thank you for that.
Mr. Peek, go ahead. Just finish us off.
Mr. Peek. Just one comment. As I hear these issues, I sell
money daily--not like Wall Street though. But I constantly run
into quick pay issues and hear we need money to mobilize on a
contract and we need money to pay our payroll because they are
holding, and all these issues, and, Mr. Chairman, I really
congratulate you and thank you passionately for taking on this
issue, because all these bottle up, but at some point it comes
back to capital and it comes back to access to capital.
I don't know what the remedy will be to where the
government provides credits or capital in this continuum of
process for contracting opportunity, but hopefully we can build
some solutions in here. I would be more than happy to submit
some after the hearing into the record that will deal with the
fact that there has to be the capital there for these guys,
when they have the opportunity, and we remedy these other
issues.
I know that those people who get the capital have to be
committed to tying this into it. It can't be a return on
investment. The return on investment is job creations and
expanding the tax base and creating an opportunity. Those have
to be built into this whole process.
Mr. Clay. Thank you for those closing comments. I am sure
that will be a subject of subsequent hearings.
This is a first in a series of hearings in order to build
an adequate record so that we can go back and revise current
law, to update it, and to make the program actually work.
Again, let me thank the entire panel of witnesses for your
testimony today, for your knowledge, for your expertise in this
area that is so vital to the economic growth of this country. I
appreciate each and every one of you for your commitment to
this issue of minority business development throughout this
country.
Before we adjourn, I want to restate that you do have up to
5 legislative days in which to revise and extend your remarks.
The Chair will ask unanimous consent that the written
testimony of Mr. Jack Thomas, assistant director of
certification and compliance for the city of St. Louis,
Lambert-St. Louis International Airport, be inserted in the
record. The testimony will be inserted.
That will conclude this hearing. Hearing adjourned. Thank
you.
[Whereupon, at 3:30 p.m., the subcommittee was adjourned.]
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