[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



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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.]
    [Additional information submitted for the hearing record 
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