[Senate Hearing 110-211]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-211
 
    MINORITY ENTREPRENEURSHIP: ASSESSING THE EFFECTIVENESS OF SBA'S 
              PROGRAMS FOR THE MINORITY BUSINESS COMMUNITY 

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 22, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship



      Available via the World Wide Web: http://www.access.gpo.gov/
                            congress.senate

                               __________

37-636 PDF                 WASHINGTON DC:  2007
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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia
                                       
                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director























                            C O N T E N T S

                              ----------                              
                                                                   Page

                           Opening Statements

Kerry, the Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship..................................     1
Snowe, the Honorable Olympia J., a United States Senator from 
  Maine..........................................................     3
Cardin, the Honorable Benjamin L., a United States Senator from 
  Maryland.......................................................     5
Tester, the Honorable Jon, a United States Senator from Montana..     5

                               Testimony

Jenkins, Calvin, Deputy Associate Administrator for Government 
  Contracting and Business Development, U.S. Small Business 
  Administration, Washington, DC.................................     6
Wainwright, Dr. Jon, vice president, National Economic Research 
  Associates, Inc., Austin, Texas................................    26
Robinson, Anthony W., president, Minority Business Enterprise 
  Legal 
  Defense and Educational Fund, Largo, Maryland..................    35
Miera, Bill M., chief executive officer, Fiore Industries, Inc., 
  Albuquerque, New Mexico........................................    60
Galaviz, Fernando, chairman, Small Business Association for 
  Technology, Alexandria, Virginia...............................    73

          Alphabetical Listing and Appendix Material Submitted

Cardin, the Honorable Benjamin L.
    Opening statement............................................     5
Galaviz, Fernando
    Testimony....................................................    73
    Prepared statement...........................................    75
Jenkins, Calvin..................................................
    Testimony....................................................     6
    Prepared statement...........................................     9
    Response to post-hearing questions from:
        Senator Kerry............................................   100
        Senator Snowe............................................   105
        Senator Lieberman........................................   108
Kerry, the Honorable John F.
    Opening statement............................................     1
    Post-hearing questions posed to Calvin Jenkins and subsequent 

      responses..................................................   100
Lieberman, the Honorable Joseph I.
    Post-hearing questions posed to Calvin Jenkins and subsequent 

      responses..................................................   108
Miera, Bill M.
    Testimony....................................................    60
    Prepared statement...........................................    62
Robinson, Anthony W.
    Testimony....................................................    35
    Prepared statement with attached letters of complaint........    37
Snowe, the Honorable Olympia J...................................
    Opening statement............................................     3
    Post-hearing questions posed to Calvin Jenkins and subsequent 

      responses..................................................   105
Tester, the Honorable Jon
    Opening statement............................................     5
Wainwright, Dr. Jon
    Testimony....................................................    26
    Prepared statement...........................................    28
    Supplementary material may be accessed on the Committee's Web 
      site
      at http://sbc.senate.gov/20070522.cfm
        Disadvantaged Business Enterprise Availability Study for 
          Missouri
        Race, Sex, and Business Enterprise: Evidence from Denver, 
          Colorado
        Race, Sex, and Business Enterprise: Evidence from the 
          State of
          Illinois and the Chicago Metropolitan Area
        Race, Sex, and Business Enterprise: Evidence from the 
          State of
          Maryland
        Race, Sex, and Business Enterprise: Evidence from the 
          Common-
          wealth of Massachusetts
        Race, Sex, and Business Enterprise: Evidence from the 
          State of
          Minnesota
        Race, Sex, and Business Enterprise: Evidence from the 
          State of
          Washington

                        Comments for the Record

Zamora, Peter, regional counsel, Mexican American Legal Defense 
  and Educational Fund (MALDEF), Washington, DC..................   112


    MINORITY ENTREPRENEURSHIP: ASSESSING THE EFFECTIVENESS OF SBA'S 
              PROGRAMS FOR THE MINORITY BUSINESS COMMUNITY

                              ----------                              


                         TUESDAY, MAY 22, 2007

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m., in room 
SR-428A, Russell Senate Office Building, the Honorable John F. 
Kerry (Chairman of the Committee) presiding.
    Present: Senators Kerry, Cardin, Tester, and Snowe.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A 
            UNITED STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. This hearing of the Small Business 
Committee will commence. I appreciate everybody taking the time 
to come here today.
    I have called this hearing to give the Committee an 
opportunity to take a look at a critical area of business 
development and growth in our Nation, one that has proven to be 
a challenge, but nevertheless has provided a very significant 
base of growth, and importantly, a significant door-opener of 
opportunity for segments of our country that have often had to 
struggle to be able to get that opportunity.
    As we all know, one of our Nation's greatest assets is our 
diversity, but we have to fight to make sure that that 
diversity is given appropriate opportunity to share in all of 
the opportunities of our country, and the strength of that 
diversity is really one of the things that allows us to be the 
most competitive Nation in terms of the marketplace.
    The number of businesses in our minority communities 
continues to grow and that adds to our competitive advantage. 
Over the last 10 years, minority business enterprises accounted 
for over 50 percent of the 2 million new businesses started in 
the United States, and there are now more than 4 million 
minority-owned companies in the United States with annual sales 
totaling about $694 billion. These businesses cross the entire 
industrial base, from financial services and health care to 
construction and transportation.
    But, and there is an important but, while the numbers of 
minority-owned businesses hold promise for the future, and 
obviously that growth is important, it is clear that much more 
needs to be done to encourage and strengthen the minority 
business community and to guarantee the opportunities within 
it. The potential for small business growth and 
entrepreneurship has simply not been fully tapped and barriers 
continue to exist for many minority business owners.
    SBA's Office of Advocacy has analyzed the most recent 
business census data from 2002, noting that although minorities 
make up 32 percent of our population, minorities own only 18 
percent of small businesses. The Minority Business Development 
Agency looking at the same census data notes that the number of 
minority-owned firms has grown by 35 percent over the 5-year 
period that was surveyed, but the average gross receipts for 
those firms dropped by 16 percent. In fact, the average gross 
receipts of minority firms was $162,000, which was considerably 
lower than the $448,000 average gross receipts of non-minority 
firms.
    Clearly, we still have a ways to go before we can say that 
there is parity between majority-owned and minority-owned 
firms. We also must ensure that we are doing as much as 
possible to open the doors to Federal contracting for minority-
owned businesses.
    The aforementioned disparities are why we need Federal 
contracting programs like 8(a) and its business counseling 
counterpart, 7(j). These programs to help minority and 
disadvantaged firms access Federal contracts are needed to help 
these firms break into the Federal market. We also need more 
lending and investment opportunities through the SBA, and quite 
frankly, we need to find innovative ways to create access to 
capital in the commercial market.
    The question today is whether SBA's contracting and access 
to capital programs are meeting the needs of those that they 
were created to help. One of the keys to small business growth 
is access to capital, an area where minority firms also still 
lag behind. When we look at SBA lending, the share of loan 
dollars to minorities is largely stagnant. And more 
interestingly, minorities who have obtained SBA loans have seen 
their average loan size shrink by more than those to non-
minorities.
    For example, over the past 7 years, the share of loan 
dollars to African Americans in the 7(a) lending program, which 
is SBA's largest small business lending program, only increased 
from 3 to 4 percent, yet African American firms constitute 5 
percent of all of the minority firms. This gap is important to 
address, because as the SBA's Office of Advocacy study found, 
higher percentages of black-owned businesses use loans from the 
Government or guaranteed by the Government. Therefore, SBA can 
and should be doing more.
    Changing demographics make it all the more urgent that we 
address the challenge of minority entrepreneurship. We can't 
afford to leave any segment of our society behind. According to 
U.S. census projections, between 1995 and 2050, we are going to 
add 131 million new citizens to our country and 90 percent of 
that growth is going to come from the minority population.
    To address the substantial gap in small business ownership 
and the minority community, I have introduced the Minority 
Entrepreneurship Development Act of 2007, co-sponsored by 
Senators Cardin, Landrieu and Clinton, and this bill would give 
grants to historically Black colleges and universities, 
Hispanic-serving institutions, and tribal colleges to help 
train the entrepreneurs of the future. This bill was adopted 
last year in Committee as part of S. 3778, the bipartisan 
reauthorization bill and I hope we can help to open the door to 
entrepreneurship to minority communities by passing it this 
year.
    We also need to do more to expand access to capital in the 
minority community. Small business can't grow unless they have 
access to working capital and loans to purchase land or 
equipment, and I am concerned that the very programs that were 
created to reach the underserved, especially minority 
communities, such as the 7(a) and 504 lending programs, are not 
being sufficiently accessed by these communities. That is why 
we included a provision in the lending bill that we marked up 
last week to create an Office of Minority Business Development 
in the SBA.
    We also adopted this provision last year, and I think 
Senator Snowe and I believe very strongly that if we have 
offices at SBA dedicated to women, veterans, Native Americans, 
and faith-based community initiatives, we should have an office 
that focuses on minority business development, and that will 
increase contracting, counseling, and capital to firms owned by 
minorities.
    As the country changes, and it is obvious that it will 
based on demographics that I just mentioned, it is really 
important that we make sure that we fulfill the promise 
embodied in our laws with respect to opening the doors of 
opportunity. You don't do that by just passing the law, you do 
it by guaranteeing its implementation. It is more and more 
important that we at the Federal level show we really value the 
contributions that citizens make from every segment of our 
society to the marketplace of our country, and we are 
determined to do that as effectively as we can.
    I am delighted to be joined by our Ranking Member, Senator 
Snowe. Thank you.

 OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED 
                   STATES SENATOR FROM MAINE

    Senator Snowe. Thank you, Chairman Kerry, for calling this 
timely hearing on the subject of minority entrepreneurship. 
Just last week, the U.S. Census Bureau announced that over 100 
million people, or one in three U.S. residents, are classified 
as an ethnic or racial minority. According to a study released 
last month by the SBA Office of Advocacy, minorities own 
approximately 18 percent of the 23 million firms in America. 
Additionally, there are now over four million minority-owned 
businesses across the country, accounting for over $591 billion 
in revenues.
    As former Chair of this committee and now ranking member, I 
have championed an aggressive contracting agenda that promotes 
entrepreneurship and opportunities for minority-owned and 
women-owned small businesses, as well as for businesses located 
in Historically Underutilized Business Zones. In the coming 
weeks, I plan to work very closely with you, Chairman Kerry, to 
develop a bipartisan small business contracting package that 
will address ways to promote small business utilization of key 
SBA entrepreneurship programs, including the 8(a) and HUB Zone 
programs.
    This morning we will be hearing from SBA and a panel of 
expert witnesses about ways we can improve SBA's vital minority 
entrepreneurship programs and services to SBA to make sure that 
these laws are fully consistent with the intent and obligations 
under the law in fulfilling our responsibilities within these 
programs.
    The SBA is responsible for administering and implementing 
programs to ensure that minority-owned small businesses achieve 
economic self-sufficiency and realize their tremendous 
potential. The SBA's minority entrepreneurship programs, 
especially the Small Disadvantaged Business and the 8(a) 
Business Development Program for Small Disadvantaged Businesses 
have provided real economic opportunities to minority 
communities across America. Unquestionably, we have achieved 
some real progress, but we can do better.
    Unfortunately, the effectiveness of these programs have 
been repeatedly called into question. Four recent reports of 
the SBA Inspector General found that the SBA, number one, does 
not track compliance with 8(a) regulations; second, the SBA 
improperly maintains an 8(a) data base; third, the SBA 
improperly supervises mentor-protege arrangements between 8(a) 
firms and large businesses; and fourth, the SBA fails to ensure 
that 8(a) contracts go to more than a handful of participating 
firms.
    These conclusions are echoed by the Government 
Accountability Office, which found that over the last 2 years, 
the 8(a) program has been vulnerable to fronting and fraud by 
large business concerns and that subcontracting opportunities 
for small disadvantaged businesses were not properly enforced 
on Hurricane Katrina reconstruction projects in the Gulf Coast. 
It is my sincere hope that the SBA will explain to us this 
morning the specific corrective remedies the agency has taken 
to rectify these problems.
    In conclusion, I again look forward to working with 
Chairman Kerry on this issue and developing a bipartisan 
contracting package that builds on what was included in last 
year's SBA reauthorization package. But more importantly, we 
must make sure that these programs are working as intended and 
as developed under the law to make sure that those who should 
be benefiting from these programs actually are. Also, we must 
ensure that we can extend these programs and to reach out into 
the disadvantaged communities and to make sure that the 
minorities are benefiting from the intent and purpose of these 
programs that are so worthwhile.
    I am disturbed by the many reports that have been developed 
that have indicated some serious fundamental problems that have 
yet to be addressed, so I am hoping that we are going to hear 
this morning from Mr. Calvin Jenkins of the Small Business 
Administration as to how the agency is responding to many of 
the issues that have been raised by the SBA's Inspector 
General.
    Thank you, Chairman Kerry.
    Chairman Kerry. Thank you very much, Senator Snowe. Thanks 
for your previous work on this and we look forward to working 
with you on it.
    Senator Cardin.

OPENING STATEMENT OF THE HONORABLE BENJAMIN L. CARDIN, A UNITED 
                  STATES SENATOR FROM MARYLAND

    Senator Cardin. Mr. Chairman, first, thank you for holding 
this hearing. I concur with both your statement and Senator 
Snowe's statement.
    The dilemma we face is that while the largest number of new 
small businesses are in the minority communities, we are not 
providing the type of assistance needed so these companies can 
grow to their full potential. As you have laid out, we need to 
find out how we can be more aggressive in dealing with that 
disparity.
    It is particularly important in Maryland. Prince George's 
County has the fourth-largest number of African American firms 
in the country and I have heard from my small business minority 
owners about the problems they have faced basically in getting 
capital. You hear about health care, number one, but after 
health care, it is access to capital and it is access to 
Government procurement.
    I am interested in how we can improve the 8(a) program so 
that minority businesses get the technical assistance they need 
to be able to obtain the type of opportunities through the 
procurement process. I was disappointed in the President's 
budget that cut a lot of the funding for these programs, and I 
hope that we will be able to do much better as we consider the 
budgets that go through the Congress.
    In the loan programs, the microloan programs are 
particularly valuable to small businesses, minority businesses. 
They get a larger share of the microloans, which just shows you 
a small amount of money can make a huge difference. But when we 
look at the 7(a) program and the 504, the number of minority 
businesses participating in these programs are not what I think 
they should be.
    So I really do thank you for holding these hearings so that 
we can figure out how we can provide the type of help and 
assistance to minority small businesses that will allow them to 
continue to grow, helping America as far as our economic growth 
is concerned, and living up to the American dream of providing 
opportunities for all of our citizens.
    Chairman Kerry. Thank you very much, Senator Cardin. That 
is a very important point you underscore about the 
microlending. First is the 7(a), and the other distinction we 
may follow up on later.
    Senator Tester.

OPENING STATEMENT OF THE HONORABLE JON TESTER, A UNITED STATES 
                      SENATOR FROM MONTANA

    Senator Tester. Thank you, Mr. Chairman and Ranking Member 
Snowe. I appreciate also the fact that you are holding this 
hearing.
    In Montana, we have a large minority base called Native 
Americans. We have unemployment at 85 percent and, quite 
frankly, the role that the SBA can play and hopefully will be 
playing in the economic development through small businesses in 
our Indian Country is critically important.
    I look forward to Mr. Jenkins' testimony and I will have 
some questions for him after he is done.
    Chairman Kerry. Terrific. Thank you, Senator.
    Mr. Jenkins, if we could invite you to the table, the SBA's 
Deputy Associate Administrator for Government Contracting and 
Business Development. We are delighted to have you here with us 
today.
    If I could just mention, we are a little under the gun in 
that we have an 11:30 a.m. conflict, or I do, anyway. I don't 
want anybody to be shortchanged, so I want to make sure we get 
to cover the waterfront here as well as possible.
    Mr. Jenkins, if you can summarize in the 5 minutes we 
normally give our witnesses; your full testimony will be placed 
in the record as if read in full. Thanks.

STATEMENT OF CALVIN JENKINS, DEPUTY ASSOCIATE ADMINISTRATOR FOR 
  GOVERNMENT CONTRACTING AND BUSINESS DEVELOPMENT, U.S. SMALL 
            BUSINESS ADMINISTRATION, WASHINGTON, DC

    Mr. Jenkins. Chairman Kerry and Ranking Member Snowe and 
other distinguished Members of this Committee, I thank you for 
the opportunity to testify regarding minority entrepreneurship 
and the effectiveness of SBA's programs. I am Calvin Jenkins, 
Deputy Associate Administrator for the Office of Government 
Contracts and Business Development. I appreciate the 
opportunity to testify today on behalf of Administrator Preston 
regarding the operations and successes of SBA's activities 
associated with minority businesses, as well as to briefly 
discuss our continued efforts to enhance and ensure a continued 
accessibility of our product and services to entrepreneurs in 
our Nation's most underserved markets.
    Minority-owned small businesses have a dramatic impact on 
the U.S. economy, creating jobs and driving economic growth. 
According to SBA's Office of Advocacy, in 2002, minorities 
owned 4.1 million firms that generated $694 billion in revenues 
and employed 4.8 million workers. Of the 23 million non-farm 
firms, 6.8 percent were owned by Hispanic Americans, 5.2 
percent by African Americans, 4.8 percent by Asian Americans, 
0.9 percent by American Indians or Alaskan Natives, and 0.14 
percent by Native Hawaiians or other Pacific Islanders.
    Entrepreneurs, including minority entrepreneurs, face a 
number of challenges as they pursue their dreams and begin to 
create and expand their businesses. These challenges include 
access to capital, the cost of health insurance, the need for 
training and technical assistance, access to Federal contracts, 
and regulatory burdens. SBA has focused on addressing the 
challenges of minority business, in particular, minority-owned 
small businesses and entrepreneurs.
    There are many areas of the country that have significantly 
higher unemployment and lower income levels than the Nation's 
averages. Federally defined economically distressed markets, 
which are typically based in inner city and rural areas, 
include Low/Moderate Income, Historic Underutilized Business 
Zones, Enterprise Community, Empowerment Zones, and New Market 
Tax Credit Zones. Higher levels of business formation and 
growth in these areas can promote job creation, business 
ownership, and economic vitality where they are most needed. In 
many cases, SBA's financial, technical, and contracting 
programs are especially well-designed to meet the needs of 
small businesses in these ``place-based'' communities, as well 
as in ``people-based'' communities on which it is also focused.
    In short, one of our principal jobs at the SBA is all about 
increasing access to the tools that we presently have available 
to the people and communities that need them most. SBA made 
great strides in addressing the needs of minority and 
entrepreneurs and small businesses. I am pleased to share with 
you the results of our efforts in increasing access for the 
underserved communities.
    The number of minority loans approved by the SBA has 
increased from 12,010 in fiscal year 2001 to 34,627 in fiscal 
year 2006, and loan dollars have increased from less than $3.5 
billion in fiscal year 2001 to more than $6.7 billion in fiscal 
year 2006. The number of loans to women approved by the SBA has 
increased from 9,986 in fiscal year 2001 to 23,454 in fiscal 
year 2006. Loan dollars have also increased from $2 billion in 
fiscal year 2001 to more than $3.4 billion in 2006.
    Through April 30 of 2007, the end of the first 7 months of 
the Federal Government's fiscal year, SBA has approved 20,186 
loans for $3.7 billion for minorities, and 13,723 loans for $2 
billion for women.
    During the period from 2001 through 2006, the number of 
minority-owned small businesses that have received commercial 
credit through SBA's 7(a) and 504 programs has almost tripled 
and has increased from less than 25 percent total loans 
approved to 32.3 percent of total loans approved. In an effort 
to expand support for microborrowers, the SBA has piloted the 
Community Express Program. This 7(a) pilot was designed 
specifically to reach underserved markets and provide both 
financial assistance and technical assistance. The latter is 
provided through leveraging the skills of the agency's 
counseling and training partners.
    Equity in Government contracting--the mission of our Office 
of Government Contracting and Business Development is to 
increase small business access to procurement opportunities 
utilizing various educational, training, consultant forums. The 
office is also responsible for increasing public awareness of 
SBA's Government Contracting and Small Business Preference 
Programs through targeted market outreach initiatives in 
underserved markets and public-private partnership.
    For example, SBA continues to provide access for small and 
disadvantaged businesses to be able to compete in Federal 
marketplaces. The Office of Government Contracts and Business 
Development works to create an environment for maximum 
participation by small, disadvantaged, and HUB Zone businesses 
in Federal Government contract awards and large prime 
subcontracts.
    Each year, our Government spends billions of dollars 
purchasing goods and services from private firms. Congress has 
established a governmentwide small business goal of 23 percent 
for small businesses, 5 percent for small disadvantaged 
businesses, and 3 percent for HUBZone small businesses. SBA 
negotiates goals annually with each Federal agency on an 
individual basis. The Federal achievement toward the SDB goal 
for fiscal year 2005 was $21.7 billion, or 6.92 percent which 
exceeded the 5 percent statutory goal.
    In terms of expected performance for fiscal year 2007 and 
2008, we believe that we have set the bar very high. Some of 
our more ambitious goals include the following. A fiscal year 
2008 budget targeting a total of $85 billion in prime Federal 
contract dollars to be awarded to small businesses. SBA will 
focus on expanding bonding opportunities for more small 
business, especially minority-owned businesses and businesses 
located in underserved communities.
    The goal for fiscal year 2007 is a total of 5,200 bid and 
final bond guarantees. The final bond guarantee will result in 
$566 million in contract revenues and the creation of over 
4,800 jobs, of which $226 million in contract revenues and 
1,950 new jobs will benefit contractors facing special 
competitive opportunity gaps.
    SBA has requested for its fiscal year 2008 budget an 
additional $500,000 to examine how to best serve the 8(a), 
HUBZone, and Small Disadvantaged Business communities, as well 
as women and veterans. The agency recognizes a need for 
improvement in these areas and is evaluating how best to make 
these improvements.
    SBA will also support small business facing special 
competitive opportunity gaps by expanding bonding 
opportunities----
    Chairman Kerry. Mr. Jenkins, I am sorry. I hate to 
interrupt you. I apologize for doing that, but I did ask you to 
summarize. You are now going through your entire written 
testimony, which is going to be part of the record. We are 
already at 4 minutes over the alloted time. I want to be fair, 
but if you can summarize, it would help us so we can ask some 
questions and get at it.
    Mr. Jenkins. OK. I will just summarize by saying I know 
that the Committee will agree with the Administration that 
there is still a great deal of work to be done in creating 
opportunities for minorities and entrepreneurs in America. The 
President, Administrator Preston, and the SBA are committed to 
continue to forge ahead to achieve the goals that we have set 
for ourselves to not only leave a lasting legacy of 
accomplishments behind, but more importantly, to make the dream 
of thousands of aspiring entrepreneurs a reality.
    I will be happy to answer questions the Committee may have.
    [The prepared statement of Mr. Jenkins follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Kerry. Thank you, Mr. Jenkins. I appreciate that.
    In the beginning of your testimony, you listed--first of 
all, we are all glad to see the growth in certain sectors, as I 
acknowledged in my opening comments. The issue is not whether 
there is growth or not. As Senator Cardin said, one of the 
fastest-growing areas is small business entrepreneurs. The 
question is, are the programs working as effectively as they 
ought to be and are we opening up contracting to the degree 
that we ought to be, so that we are really maximizing this 
opportunity?
    There is a huge wealth disparity in America. The average 
wealth of an African American family in the United States is 
about $6,100. The average of a white family is about $67,000. 
So it is a big, big gap.
    And while we see people starting up, as Senator Cardin also 
mentioned, there is the disparity. They get a lot of 
microloans, so they are getting small amounts of money, but 
they are not getting the 7(a) or 8(a) at the level they ought 
to be, and the technical assistance particularly, which a lot 
of people feel is the key to the SBA.
    Can you sort of address that for us? Maybe I will simplify 
the question with that predicate by saying you mentioned 
challenges that still remain--the access to capital, the cost 
of health insurance, the need for training and technical 
assistance, access to Federal contracts. These are problems 
that almost anybody faces. Is there something that you believe 
also is particular to the minority community beyond those 
issues?
    Mr. Jenkins. Well, I think a lot of what small businesses 
face in general is what minorities face, especially when you 
look at it in terms of Federal procurements. For example, 10, 
15 years ago, there was a very visible relationship with the 
contracting officer and, let us say, a small business or 
minority business. Today, the system has been replaced by 
automation and so there is less interaction, personal 
interaction. So I think knowing the systems, knowing how to do 
business with the Federal Government, I think it is important 
that we get that information to minority businesses as well as 
small businesses in general and I think they can----
    Chairman Kerry. So there is a knowledge deficit that you 
think is--an experience deficit----
    Mr. Jenkins. Yes.
    Chairman Kerry [continuing]. That you have got to make up, 
particularly with respect to minority businesses.
    Mr. Jenkins. Yes. I believe it is key that the SBA makes 
its programs aware, that the minority community is aware of the 
programs and that they take full advantage of these programs.
    Chairman Kerry. Is it fair to say that that is the reason 
that the 8(a) program exists, because there are challenges that 
are actually based on race that still exist for minority 
business owners?
    Mr. Jenkins. Yes, there are, and the 8(a) program, as you 
are aware, is a business development program, and our key piece 
there is to provide business development assistance. As part of 
that, contracts are available, but the key there is to make 
sure that they are aware of the program and how to best 
leverage the program.
    Chairman Kerry. Now, with respect to that leverage, let me 
address that for a moment. One of the major concerns that we 
hear from 8(a) participants is the lack of contracts that come 
from the program. We all understand that being in the 8(a) 
program doesn't mean that you have an automatic flow of 
contracts, et cetera, but many participants are sitting in the 
program for 3 to 4 years before they get a contract, and by the 
time they actually begin to see some benefit, boom, they are 
out of the program.
    Of the 10,000 or so 8(a) firms that are part of the 
program, can you share with us how many actually get contracts 
per year?
    Mr. Jenkins. Well, roughly, it takes a firm who is entering 
the 8(a) program about 16 months to 2 years before they receive 
some kind of contract assistance. The key with the 8(a) program 
is different from the Small Disadvantaged Business Program in 
that there is a potential for success requirement so that it 
requires firms to be in business for at least 2 years so that 
they have a sense of how to create revenues for their business.
    What we try to do through our district offices is to help 
the firm, one, develop a good business plan, and then, two, 
market the agencies that actually purchase the product and 
services that they look to provide. And so that becomes the 
key, not a shotgun approach, but more a very targeted approach 
so that they are not wasting their resources and their energy 
trying to reach out to too many agencies, versus being very 
specific to those that offer the product and services they 
offer.
    Chairman Kerry. That said as an approach, do you know how 
many actually get contracts, how many firms get work out of the 
program each year?
    Mr. Jenkins. I don't have the actual number. I do know that 
in fiscal year 2005, the 8(a) program did about $10.5 billion--
--
    Chairman Kerry. Could you check for us?
    Mr. Jenkins. Sure.
    Chairman Kerry. Could you make that one of the things on a 
punch list here to get to the Committee for the record, so we 
could determine that?
    Mr. Jenkins. Sure.
    Chairman Kerry. What are you doing specifically to help 
program participants get the most out of their contracting 
preference, because 8(a) gives you a contracting preference.
    Mr. Jenkins. That is correct.
    Chairman Kerry. What is happening to guarantee that that 
preference is, in fact, beneficial to minority business owners?
    Mr. Jenkins. Well, one of the keys is when a firm enters 
the 8(a) program, they are assigned to a district office in 
their geographic area. They are also assigned a specialist that 
works with the firm, that works with them in developing their 
business plan, but also that works with the Federal agencies 
that procure the product or services the firms offer.
    We also leverage our Procurement Center representatives. As 
they look at procurements that are coming down that may be 
available to firms that are small business or firms in the 8(a) 
program, they coordinate with the various district offices to 
ensure that those opportunities are made aware and firms are 
identified to go after those requirements.
    Chairman Kerry. One of the keys is the Technical Assistance 
Program which is really important to a lot of startup early 
companies. There is a specific line item called the 7(j), which 
you are familiar with, which is in the Minority Business 
Development Program. This is specifically for technical 
assistance, but your agency removed that line item. Elsewhere 
in the budget, it says that $1.5 million is to be used to fund 
that. But the lack of a line item is important because there is 
no guarantee that any money is being spent on technical 
assistance and there is no transparency. What are we to make of 
that?
    Mr. Jenkins. Well, Administrator Preston has made it very 
clear that he is supporting providing the necessary levels of 
business development assistance to the firms that are in the 
8(a) program----
    Chairman Kerry. Why not fund the 7(j)? I mean, just last 
week, we were informed that the money that at one time came out 
of the 7(j) program to support training is now gone.
    Mr. Jenkins. No, I don't believe that is correct. We 
currently are supporting with the funding that we have in 
fiscal year 2007, as well as what we received in 2006 went 
toward----
    Chairman Kerry. Would you check on that? I may be 
incorrect, but I just would like to get this for the record. If 
you would check what the 7(j) money was used for or is used for 
and perhaps provide the Committee with a detailed explanation 
of what it went for last year and what it is slated to be used 
for this year, because my understanding is it is not going to 
technical assistance.
    Mr. Jenkins. Well, that falls directly under my office. 
Last year, what we did, we hired third-party technical 
assistance providers and we provided literally thousands of 
8(a) firms in the program training around the country to 
various district offices. Our plan is to continue that effort 
in fiscal year 2007, as well.
    Chairman Kerry. So you will third-party contract?
    Mr. Jenkins. That is exactly right. We leverage--one of the 
things in providing technical assistance is, one, use the 7(j) 
funds we were given to provide third-party assistance, folks 
who have expertise in providing this assistance. We also 
leverage our resource partners, such as our SBDCs. We are 
currently working very closely with our SBDCs to develop some 
products that we think will be very helpful to the 8(a) firms, 
and then look at other resources, as well, within the agency. 
But in fiscal year 2006 and fiscal year 2007, we used 7(j) 
funds specifically for providing that third-party assistance.
    Chairman Kerry. I appreciate that.
    Now I'd like to discuss the net worth limitations 
associated with the 8(a) program. There is the $250,000 
limitation for entering and then you can't exceed $750,000 in 
net worth or you're removed from the program. Those haven't 
been updated in more than a decade, and one of the things we 
hear is that maybe that is squeezing some people out who need 
the assistance to get in, and that it is early in pushing 
people out. Could you react to that?
    Mr. Jenkins. Sure. We believe that those levels currently 
that are set are appropriate. It is the net worth of the 
individual, not the net worth of a business. There has been a 
lot of confusion as to whether or not it is the business net 
worth. This is the individual and the statute, the Small 
Business Act, allows for two exclusions, the equity in one's 
home, as well as the investment in one's business. So when you 
look at even the $250,000 net worth, it probably accounts for 
close to 95 percent of all Americans. When we look at the 
average net worth of someone that enters the 8(a) program, it 
is probably somewhere in the $60,000, $70,000 range when you 
make those two exclusions. The same thing is with the $750,000 
net worth. Again, those two exclusions take place and it is 
just the individual net worth.
    Chairman Kerry. Is that a determination that has been made 
recently? I mean, has there been some analysis within SBA to 
actually conclude what you just said to us, or--I mean, over 10 
years, values have changed significantly in the country.
    Mr. Jenkins. Mm-hmm.
    Chairman Kerry. You don't think it is appropriate after a 
10-year shift in property values, asset values, income values, 
wages, all these different kinds of things, that that threshold 
might not need some kind of indexing or updating, because it 
seems to squeeze downwards rather than be expansive, which is 
what you would want to be. Two-hundred-fifty-thousand dollars 
10 years ago, I don't know what the value is today, but it 
certainly is different by some significant component over 10 
years, perhaps even as much as doubled. Who knows.
    Mr. Jenkins. Yes. No, there have not been any recent 
analyses that SBA has conducted on that, but the only thing 
that I can, once again, say is that it excludes the equity in 
one's home and excludes the investment in the business, and so 
the $250,000--and what we see, again, is the average individual 
that comes into the 8(a) program is well below the $250,000. So 
it would sort of argue against a need to increase it when the 
average is coming well below that.
    Chairman Kerry. Thank you very much, Mr. Jenkins.
    Senator Snowe.
    Could I just mention something? I have been following the 
clock here, trying to keep my time, but it keeps repeating 
itself. Could we just do a total time on it? That would be 
helpful. Thanks.
    Senator Snowe. Thank you, Mr. Chairman.
    Mr. Jenkins, I appreciate the statistics that you have 
given in terms of how much progress has been made with respect 
to these programs, but your testimony really didn't address 
many of the fundamental concerns that have been raised in a 
series of Inspector General reports since 2004, the most recent 
from March of 2006. The testimony from the second panel this 
morning will raise a number of issues that have been a concern 
of this Committee and obviously a concern of those who will be 
testifying.
    For example, Mr. Robinson is going to talk about 
substantial examples of abuses and exploitation of small 
minority-owned businesses. I mean, it is a concern. He cites a 
number of individuals who, at great risk, come forward to tell 
their story. Now, have these individual cases come to your 
attention and what is the SBA doing about them?
    Mr. Jenkins. Well, first of all, I believe that 
Administrator Preston is very concerned to ensure that we have 
adequate levels of oversight of the 8(a) program. Certainly the 
8(a) program is a program that if we are not--if we don't have 
the proper levels, then it could create some problems where the 
benefits are not going to those who they are intended for.
    One of the things that we have done under Administrator 
Preston is we are conducting some studies, top-to-bottom 
review, for example. We are currently reviewing the mentor-
protege program. We have an outside contractor that is working 
with us to evaluate that program.
    We are looking at one of the keys when someone talked about 
making sure that more firms receive contracts in the program. 
We have a provision in our regulations called the Competitive 
Business Mix which require firms to wean themselves off of 8(a) 
contracts when they get into the transitional year. We are 
looking at that to make sure that we are properly--have 
oversight over that, as well as the joint venture provisions in 
the program.
    So there are about three or four areas that we are working 
on that we believe do address some of the concerns that are in 
the IG and GAO reports.
    Senator Snowe. Have you had any examples of abuses? Have 
minority-owned businesses come to your attention, such as the 
ones that have been cited in Mr. Robinson's testimony?
    Mr. Jenkins. Yes. I mean, we are aware of certain abuses 
and we are looking at ways to, one, improve our regulations, 
and two, improve our overall oversight.
    Senator Snowe. I guess my question is what aggressive 
oversight is the SBA providing with respect to these programs? 
I mean, that is the bottom line because many of these issues 
have been raised repeatedly. With respect to contract bundling, 
many of those issues have not disappeared. Many of these 
contracts that have been bundled have gone forward without the 
SBA's review. So there is no aggressive effort on the part of 
SBA to examine some of these major flaws with respect to 
programs that are supposed to help minorities throughout the 
country. So what do you do, for example, when there is such a 
case of exploitation and abuse? What kind of action does SBA 
take?
    Mr. Jenkins. Well, first of all, we look to ensure that our 
regulation--one, are our regulations adequate in terms of 
preventing the problem or do we have an issue with the abuse, 
with something that is more--that would be referred to our 
Office of Inspector General? But the key is to ensure that we 
have adequate regulations, that our staff is adequately 
trained. A lot of the program is actually monitored and 
administered in our district offices and we conduct routine 
training with our staff to ensure that they are catching any 
possible abuse and that the firms are getting the benefits.
    Senator Snowe. Can you please enumerate for the Committee 
what specific changes have been made to the 8(a) program and 
the Small Business Disadvantaged Program that respond directly 
to the issues raised by the Inspector General?
    Mr. Jenkins. We have not issued any new regulations. We are 
currently in the process of developing new regulations that we 
believe will go directly to some of the issues that are raised 
in both the----
    Senator Snowe. When do we expect that to be completed, I 
mean, because these reports came out in 2004, 2005, and now the 
most recent was 2006. So when do we expect this process to be 
completed?
    Mr. Jenkins. We hope during this fiscal year.
    Senator Snowe. During this fiscal year?
    Mr. Jenkins. This fiscal year, that we will have some draft 
regulations that will go through the process.
    Senator Snowe. And what changes do you hope to accomplish?
    Mr. Jenkins. Well, I think the----
    Senator Snowe. Because these issues were raised with 
Administrator Preston early on----
    Mr. Jenkins. Sure.
    Senator Snowe [continuing]. Back in February during a 
hearing. So at what point do we expect to have those changes, 
and which specifically can we expect?
    Mr. Jenkins. I think one of the things that we are 
concentrating on is our oversight of the program, to ensure 
that we have adequate oversight of the programs, that we have 
procedures that address any of the potential issues that have 
come up, that they have very clear guidance for both the firms 
that are in the program as well as for our staff that is 
administering the program.
    Senator Snowe. Are you aware of a number of companies, 
large companies, that are not complying with their 
subcontracting goals, I mean, they are basically a front? They 
draw small businesses in. We will hear that in subsequent 
testimony, that they draw small businesses in, but yet when it 
comes time to issue those subcontracts, small business 
participation is far below what they originally indicated and 
promised.
    Mr. Jenkins. Yes. That has been an issue for Federal 
procurement for a number of years, when a small business takes 
time, effort, and resources to make a proposal to a large firm 
to get on a team and after the large firm has received the 
contract, there have been instances where the small businesses 
were pushed off the team. We are certainly very concerned about 
that.
    We have worked very closely with the procuring agencies 
that really have the authority to enforce whether or not there 
is good faith effort. The law talks about good faith effort on 
the part of the large business prime and the only one that has 
the authority to enforce that is the contracting officer at the 
agency. So where we are notified by small businesses, we bring 
that to the contracting officer's attention and we try to 
increase our oversight of that large business prime through our 
subcontracting program.
    Senator Snowe. I think that enforcement and heavy penalties 
might help them to exercise a good faith effort, because that 
clearly hasn't been demonstrated in a number of instances and 
it continues to be a persistent problem. Thank you, Mr. 
Jenkins. Thank you, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Snowe, an important line 
of questioning. Senator Snowe doesn't need any assistance in 
defending what she is asking, but I might comment that you 
didn't answer her question specifically about what she could 
expect when and what is being specifically implemented on the 
8(a).
    Mr. Jenkins. Well, at this point, as I mentioned----
    Chairman Kerry. When could we expect those changes?
    Mr. Jenkins. Well, because of the process, the clearance 
process that any proposed regulations will go in, it will be 
very difficult for me to give a specific date. Our plan is to 
have regulations in place by the end of the fiscal year. 
Earlier this year, and I believe late last year----
    Chairman Kerry. Why does it take so long? Why does this 
drag on? I mean, as the Senator said, the Inspector General 
reported on a lot of this stuff last year. It just seems like 
nobody is really moving this with any sense of priority.
    Mr. Jenkins. Well, we--in the public notice, we identified 
areas that we were going to address in the Advance Notice of 
Rulemaking. That was made available to the public earlier this 
year as well as late last year. There are specific areas that 
we are working on. We are currently reviewing that internally, 
but----
    Chairman Kerry. Do you have a plan as to when the 
promulgation will take place? Is there a plan? Is there a 
business plan here or a date?
    Mr. Jenkins. There are dates, but understanding the 
process, once regulations are released by an agency, then they 
do go to Office of Management and Budget----
    Chairman Kerry. Sure. There are timeframes for all that.
    Mr. Jenkins. Exactly. Our plan is to get those regulations 
cleared through SBA and over to OMB well before the end of this 
fiscal year.
    Chairman Kerry. Senator Cardin.
    Senator Cardin. Thank you very much, Mr. Chairman.
    Mr. Jenkins, thank you for your testimony. But I am going 
to tell you, I am disappointed that we are not getting more 
specifics as to the topic of our hearing, and that is helping 
minority small businesses. I am somewhat surprised that there 
isn't a greater acknowledgement of the problems that are out 
there with the current programs and the challenges of the 
budget support to your agency.
    We are trying to work together to help minority businesses 
and it would be helpful if we had more specific direction from 
SBA as we try to improve the programs. It just points out, Mr. 
Chairman, the need for the special office within SBA to deal 
with minority businesses so that we have a focus on this issue.
    The one area--well, there is more than one, but the one 
area that you are specific about in your testimony, you say 
that for the fiscal year 2008 budget you are targeting a total 
of $85 billion in prime Federal contracting dollars to be 
awarded to small business.
    Mr. Jenkins. That is correct.
    Senator Cardin. How much of that will it be a goal to award 
to minority small businesses?
    Mr. Jenkins. Well, currently, the rules talk--the statute 
requires a 5-percent goal and what the SBA will do is continue 
to negotiate that with the various agencies. Over the past 5 
years, that goal has been exceeded, from anywhere from 6 
percent to as much as 7 percent.
    Senator Cardin. Do you think that is a reasonable 
percentage, considering that Senator Snowe pointed out one-
third of our population is now minority and approximately 50 
percent of the new small businesses are minority? Is that what 
you think is the right goal for this country?
    Mr. Jenkins. This is the statutory goal----
    Senator Cardin. I understand the statutory goal. I am 
asking your view. You are on the front lines. You are dealing 
with the businesses. Is that the right goal for this country?
    Mr. Jenkins. I can't answer that, Senator. The only thing I 
could----
    Senator Cardin. Who could answer it in the agency as to 
what needs are out there? You are the one who we rely upon to 
give us the information. I think it is not. I think we should 
be doing better than that. But it would be nice if we had your 
experienced view on that as to what we should be shooting for. 
Do you have a specific number as to--these are prime contracts 
we are talking about?
    Mr. Jenkins. These are prime contracts, prime contracts to 
small businesses.
    Senator Cardin. I must tell you, I get complaints all the 
time from small minority businesses in my State about the 
difficulty in getting prime contracts.
    Mr. Jenkins. In terms of the specific goals, certainly 
there is always room for improvement in terms of--and that is 
one of the things the SBA does. We negotiate individually with 
each of the Federal agencies. Some agencies will give us a 
higher goal and we will achieve higher than the 5 percent. 
Others will be at the 5 percent.
    Senator Cardin. Well, let me go to the 7(a) and the 504 
loan programs. The information that we have is that from fiscal 
year 2001 to fiscal year 2006, the share of loan dollars to 
African Americans has risen only 1 percent, from 3 percent to 4 
percent. For Hispanics, the share of the dollars have risen 
from 6 percent to 8 percent. Are you satisfied with those 
numbers?
    Mr. Jenkins. No. I don't think Administrator Preston is 
satisfied and he----
    Senator Cardin. What are you doing to increase those 
numbers?
    Mr. Jenkins. We are currently working with our Office of 
Capital Assistance to look at ways of increasing the program, 
looking at the specific programs we have. I mentioned the 
Community Express Program has been very successful in reaching 
these underserved communities?
    Senator Cardin. Are you going to have specific 
recommendations for how we can get those numbers up?
    Mr. Jenkins. I believe the agency is looking at ways of how 
to get these numbers up, yes.
    Senator Cardin. And do you have any thoughts as to what 
that number should be? Should it be--what percentage should be 
going to minority businesses?
    Mr. Jenkins. No, I cannot commit to a number.
    Senator Cardin. I didn't think so. And last, Mr. Chairman, 
I know my time is running out, on the 8(a) program, you talk in 
your testimony about the importance of the program for 
mentoring, procurement assistance, business counseling, 
training, financial assistance, technical assistance, and yet 
the budgets have been reduced in those areas. Does that mean 
that we are spending too much money on technical assistance 
within 8(a)?
    Mr. Jenkins. No. I believe we have the opportunity to 
leverage all of SBA's resources----
    Senator Cardin. Are you satisfied with the level of service 
presently being provided for technical assistance?
    Mr. Jenkins. No, and we are looking at ways to increase the 
technical assistance to all the firms that are in the program.
    Senator Cardin. Well, I hope so, because I must tell you, 
that is another area that I get tremendous concern from the 
minority small businesses in my community, that SBA is not 
doing enough to help these firms in moving forward with 
procurement opportunities. I understand we have a desire for 
success. They must be successful, be able to succeed on their 
own--but in order to get there, they need help and that is your 
responsibility.
    Mr. Jenkins. That is correct.
    Senator Cardin. And I would have hoped that you would have 
been a little bit more specific and forthcoming about what we 
can do to improve the 8(a) program, because we get complaints. 
I agree with the Chairman. The income levels are of concern to 
businesses in my community. They haven't been changed in many 
years. I would just hope we could work together to try to 
improve these programs so these percentages are more in keeping 
with the population of this country and with the new business 
starts in this country.
    Thank you, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Cardin.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and I want to 
thank you, Mr. Jenkins, for your testimony.
    I want to switch a little bit to Native Americans. I am 
looking at some charts here that show that the 7(a) loans, 
about 1 percent go to Native Americans, and evidently the 504 
is so small it doesn't register on the chart. The question I 
guess I have for a start is how do the requests equate with the 
amount given? In other words, when you are getting loan 
requests from Native American minorities, how do those requests 
stack up with the amount loaned?
    Mr. Jenkins. I don't have the number. Basically what 
happens is, as you are aware, the SBA guarantees loans. So the 
first contact is through our marketing effort through the 
district offices and then on channeling the businesses through 
the various banks in which SBA has a relationship with.
    Senator Tester. OK. So you have no way to monitor that----
    Mr. Jenkins. No.
    Senator Tester [continuing]. That ability? So do you have 
the ability to monitor success, then, of the loans that are 
guaranteed?
    Mr. Jenkins. Yes. We have the Loan Monitoring System at SBA 
in which we look at the performance of all of the loans within 
the 7(a)----
    Senator Tester. Can you tell me how the minority loans 
stack up against the other loans, and specifically could you 
tell me how the Native American loans, from a success rate 
standpoint, stack up?
    Mr. Jenkins. I don't have that with me, but I am sure we 
can get that----
    Senator Tester. I would like to get that from you.
    Is there anything you are doing in Indian Country to let 
people know what is out there as far as program availability 
and help educate them on how to access those programs that SBA 
offers?
    Mr. Jenkins. Yes. That is really the foundation of our 
district offices to make sure constituents in their particular 
geographic areas are aware of all of the SBA's programs to 
leverage any of our resource partners that may be there to also 
get the word out.
    Senator Tester. Is there a special effort being made to let 
people know, because, I mean, the amount of money that is being 
lent is almost, truthfully, almost nonexistent in areas of our 
State where under the best conditions there is 50 percent 
unemployment, and it rises up over three-quarters unemployment 
almost as a rule.
    Mr. Jenkins. Sure.
    Senator Tester. So is there any instruction given to those 
district offices to get out there and explain to the folks who 
are the entrepreneurs, the minority entrepreneurs, what is 
available?
    Mr. Jenkins. Yes, there is. Administrator Preston has an 
initiative to ensure that we reach the underserved markets, 
that we increase lending to all of the communities within the 
underserved market. And so, once again, leveraging our resource 
partners, because sometimes a firm may not get the loan and we 
need to know that in order to provide some business assistance 
to them.
    Senator Tester. I would ask a similar question as to what 
was previously asked as to if you think we are making an 
adequate amount of loans in Indian Country throughout the 
United States, but I know your answer would be no, and it 
should be if it is not. I think that there needs to be a 
concerted effort on the part of SBA across the board, 
particularly in Indian Country, to educate folks.
    I want to touch a little bit on banking, if I have got a 
minute. You guys guarantee these loans to the banks. Is there 
any oversight done to the banks, I mean, as far as if they are 
working the system?
    Mr. Jenkins. Yes. We have a very stringent oversight. We 
look at, as part of the Loan Monitoring System, not only do we 
look at the individual loans themselves, but we also look at 
the performance of the individual banks.
    Senator Tester. As far as the percentage that is paid and 
the percentage that you are guaranteeing?
    Mr. Jenkins. Oh, yes. Yes.
    Senator Tester. OK. The dollars that are lent--and there 
are several figures here--I don't know if they are individual 
or cumulative, but $6.7 billion in fiscal year 2006 to 
minorities is what I have from your testimony. Those dollars, 
are they all for startup, or do you know that, or are some of 
them for continuing, and what percentage each way, and do you 
have the ability to know that?
    Mr. Jenkins. Sure. I don't have the breakdown, but they are 
the total. They cover startups all the way to more mature 
businesses.
    Senator Tester. Just in closing real quick, and thank you, 
Mr. Chairman, Mr. Jenkins, I do appreciate your testimony. I 
hope that the SBA sees some sort of urgency--I do--as far as 
education and letting people know. There is a reason why there 
isn't the kind of investment in Indian Country that there ought 
to be, and we need to determine what that is so that we can 
move forward. I mean, there are people with good ideas all over 
and I would hope that you would make it a priority.
    Mr. Jenkins. Sure.
    Senator Tester. Thank you. Thanks, Mr. Chairman.
    Chairman Kerry. Thank you, Senator Tester.
    Mr. Jenkins, can you stay for the testimony of the folks 
following?
    Mr. Jenkins. Sure.
    Chairman Kerry. I think it would be important for you to 
hear what they have to say. Too often, we have panels arranged 
that way and I am going to try to see if we can change that as 
we go forward.
    But I think you can tell from the Members of the Committee, 
Mr. Jenkins, there is a real anxiety here on the committee 
about the implementation of this program. You just look at this 
chart up here and you see the distribution and it is very, very 
disturbing when you measure it, particularly--look at the 
microloans. You have got 22 percent. Look at what is going to 
African Americans in terms of microloans versus the larger 
loans of either the 7(a) or the 504. The 504 is, what, 2 
percent. I mean, it is just crazy on its face. It is almost 
insulting and it is unacceptable.
    I am going to, I think, ask Senator Snowe if she would join 
with me and with other Members of the Committee in writing a 
very specific letter to the Chairman asking for a more detailed 
and precise set of expectations of what we can look for as we 
go forward here, because we all hear this. We go out, anywhere 
we go in the country, we talk to people, the people that we are 
supposed to be helping, that this program has been set up to 
serve, and this isn't to serve us. This isn't to help the folks 
who are in the program administering it. This is for the people 
out there who need it.
    It does a disservice to everybody if there isn't a kind of 
energy, a lift, a push to try to say, hey, let us do better. 
Let us expand this. That reverberates throughout the community. 
People feel it and they know it when they see that kind of 
activity. But it just frankly seems like nothing is happening.
    And when you look at the lending level differential there, 
you know, they are up, but they are smaller. The technical 
assistance is less. It is just not accomplishing what it ought 
to be, and you yourself have acknowledged there is a race-based 
need for this because there are problems out there.
    So we ask you to think about that. We are going to leave 
the record open for a couple weeks to submit some questions in 
writing from colleagues and staff at the end of this. And I am 
glad you can stay because I want you to hear what our next 
panel has to say. Thank you.
    I would invite the next panel, if they would, to come 
forward, Dr. Jon Wainwright, vice president of National 
Economic Research Associates; Mr. Tony Robinson, president of 
the Minority Business Enterprise Legal Defense and Education 
Fund; Bill Miera, the CEO of Fiore Industries; and finally, Mr. 
Fernando Galaviz, chairman of the Small Business Association 
for Technology. Thank you all for taking time to be here.
    Again, if I could ask each of you to summarize your 
testimonies in the 5 minutes, and we will proceed. Why don't 
you lead off, Dr. Wainwright.

STATEMENT OF JON WAINWRIGHT, VICE PRESIDENT, NATIONAL ECONOMIC 
            RESEARCH ASSOCIATES, INC., AUSTIN, TEXAS

    Dr. Wainwright. Thank you, Chairman Kerry, Ranking Member 
Snowe, Members of the Committee. Thank you for allowing me to 
appear here today. My name is Jon Wainwright. I hold a Ph.D. in 
economics from the University of Texas at Austin and currently 
am a vice president with NERA Economic Consulting. I would like 
to ask the Committee's permission to supplement my testimony 
with additional written materials, if needed.
    Chairman Kerry. Without objection, so done.
    [The supplementary material referred to by Dr. Wainwright 
may be accessed on the Committee's Web site at http://
sbc.senate.gov/20070522.cfm.]
    Dr. Wainwright. For almost 20 years, I have devoted the 
greater part of my professional life to studying race and sex 
discrimination and its impact on business enterprise in the 
United States. Since 2000, I have served as the policy director 
and principal investigator for 22 studies of business 
discrimination. I have authored a book on the subject and have 
provided expert testimony in Federal and State courts on these 
matters.
    The primary bulwark against business discrimination in the 
United States has been the use of public sector purchasing 
power to support the endeavors of Minority-Owned Business 
Enterprises, or MBEs, and to promote fair and full access to 
Government contracting opportunities. Programs such as 8(a) and 
8(d) and 7(a) of the SBA and the DBE program of the U.S. DOT 
are key examples of such policies at the Federal level.
    I would like to address myself today to the current state 
of MBEs in the United States and discuss statistics from some 
key publicly available data sources. The first is the 2002 
Survey of Business Owners. We have already heard some 
statistics from that today. Large disparities are observed in 
this survey between minority share of the business population 
and the corresponding share of business sales and receipts.
    For example, although African Americans comprised 5.3 
percent of all U.S. businesses in 2002, they earned only 1 
percent of sales and receipts. Hispanics and Latinos, 7 percent 
of the businesses, but only 2.5 percent of receipts. Asians and 
Pacific Islanders, 5 percent of businesses, but only 3.8 
percent of receipts. Native Americans, 0.9 percent of 
businesses, but only 0.3 percent of receipts. As you mentioned, 
Chairman Kerry, 18 percent, roughly, minority business share in 
the United States, but only 7.5 percent, roughly, of the sales 
and receipts for the business population.
    Not only are these disparities very large, they are also 
statistically significant, meaning they are unlikely to have 
arisen due to chance. Similar results are observed in all 50 
States and the District of Columbia and in all major industry 
sectors.
    Now, it is a fair question to ask whether these disparities 
arise primarily from discrimination or whether they are due to 
other potentially non-discriminatory factors. The evidence 
strongly suggests they result from discrimination. I have 
tested this hypothesis using microdata from the 2000 and the 
1990 Decennial Censuses. The advantage of Census data is that 
it allows us to compare business owners while holding a variety 
of other potentially non-discriminatory factors constant. Even 
when this is done, however, disparities facing MBEs remain 
large and statistically significant.
    Lack of access to capital and credit is among the most 
frequently cited obstacles to success among MBEs. 
Discrimination in the credit market can obviously have an 
important effect on the likelihood of success in business. The 
Survey of Small Business Finances Data allows us to test for 
business discrimination in credit markets. These data contain 
complete balance sheet and credit history information for each 
business interviewed, the same information that would be 
available to a loan officer in deciding whether or not to grant 
credit. These data show that minority-owned firms are 
substantially and statistically significantly more likely to be 
denied credit than are white-owned firms with similar balance 
sheets and similar credit histories. We also find that when 
minority-owned firms do receive loans, they are obligated to 
pay higher interest rates than comparable white-owned firms.
    In addition to statistical evidence, we have conducted 
thousands of surveys and hundreds of personal interviews with 
MBEs and non-MBEs alike. The results are strikingly similar 
across the country. In general, minorities report that they 
still encounter significant barriers to doing business in the 
public and private sector marketplaces as both prime 
contractors and subcontractors, including stereotypical 
attitudes about their qualifications, double standards in 
performance, bonding and credit discrimination, and supplier 
price discrimination.
    There is also general agreement among MBEs that without the 
use of affirmative remedies such as subcontracting goals, these 
firms would receive few, if any, opportunities on Government 
contracts, as is the case on projects without such goals. Thus, 
the continued operation and effective operation of programs 
such as 8(a), 8(d), and 7(a) were deemed essential to MBE 
survival.
    In conclusion, it is fairly easy to specify in a general 
way the economic consequences of these programs. They have 
improved economic opportunities for minorities and women in 
business and, therefore, improved the competitiveness and 
efficiency of the American economy. I am optimistic that the 
statistical and anecdotal evidence will one day show that 
programs such as 8(a), 8(d), and 7(a) are no longer necessary 
because MBEs have achieved parity, competitive parity, with 
their majority-owned counterparts. However, my own research 
shows that this day has not yet arrived.
    Thank you, and I will be pleased to answer any questions.
    [The prepared statement of Dr. Wainwright follows:]

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    Chairman Kerry. Thank you very much, Dr. Wainwright. We 
appreciate it very much.
    Mr. Robinson.

STATEMENT OF ANTHONY W. ROBINSON, PRESIDENT, MINORITY BUSINESS 
 ENTERPRISE LEGAL DEFENSE AND EDUCATIONAL FUND, LARGO, MARYLAND

    Mr. Robinson. Good morning, Mr. Chairman, Senator Snowe, 
Senator Cardin, and Senator Tester. Thank you for the 
opportunity to come before you today. My name is Anthony 
Robinson and I am president of the Minority Business Enterprise 
Legal----
    Chairman Kerry. Your voice carries well, but why don't you 
just pull the microphone over so that the record can handle it. 
There you go.
    Mr. Robinson. My name is Anthony Robinson. I am with the 
Minority Business Enterprise Legal Defense and Educational 
Fund, affectionately referred to as MBELDEF. MBELDEF was 
founded in 1980 by former Congressman Parren J. Mitchell as a 
national advocate for the minority business community. We work 
with businesses in every sector of the economy and every corner 
of the country. We appreciate the Committee for providing us 
this opportunity.
    Since the Federal Government's first efforts to level the 
contracting playing field in the 1970s, there has been 
substantial progress for minority businesses. The growth of 
MBEs has been dramatic. In fact, in some measure, MBEs have 
outpaced the growth among all firms. However, minority firms 
continue to account for a disproportionately smaller share of 
overall business than do non-minority firms, and they make less 
money.
    As the Chairman has already noted, minority groups 
represent 32 percent of the population, but only 18 percent of 
the Nation's businesses. But it is even more important to note 
that minority businesses receive only 6 percent of total 
business receipts and employ only 3 percent of the Nation's 
civilian labor force.
    The plight of the minority entrepreneur is brought into 
stark relief when he is faced with having to survive without 
minority contracting programs like the 8(a) and the SDB 
Programs. After the Supreme Court decisions in Croson v. city 
of Richmond in 1989 and Adarand v. Pena in 1995, many State and 
local governments eliminated programs designed to provide 
opportunities to MBEs. In the wake of these decisions to 
curtail and eliminate programs, studies have shown that 
minority firms have fared markedly worse where there are no 
goal programs in place.
    What are the reasons for these disparities in contracting? 
Why are minority firms at such a disadvantage in our economy? 
One study concluded that the gap that exists has not in any way 
been caused by a lack of effort on the part of the minority 
entrepreneur. The same study went on to note that 
discriminatory conditions that previously existed and continue 
to exist were deep and pervasive and have not been fully 
reversed.
    I am here to relate the experiences of real business owners 
who have confronted discrimination. I hope the Committee will 
seek to understand how very difficult it is for these business 
people to come forward and share their stories. By coming 
forward, they are putting their businesses in jeopardy of being 
frozen out of future business opportunities with larger 
companies that dominate their market or industry. In the 
interest of time, I can only provide a short synopsis of the 
difficulties they have experienced. I would ask further 
permission to submit a number of supporting documents for the 
record after this hearing.
    Chairman Kerry. We would welcome that.
    Mr. Robinson. Thank you. The first example is of Mr. 
Maurice Coates, an African American mechanical contractor who 
solicited a quote for HVAC equipment from his supplier and then 
relied on that quote. The supplier, a majority company, 
mistakenly faxed to Mr. Coates a lower quote supplied to 
Coates' majority competitor. When Mr. Coates called the 
supplier and asked for the same price quote provided his 
competitor, the supplier replied that they reserved the right 
to provide better pricing to their better customers.
    Mr. John McDonald, an African American expert in 
institutional real estate, had a contract with Domino's Pizza 
to acquire and build several stores. After being the only 
African American to attend a Domino's convention, he received a 
call asking him to agree to unreasonable amendments to his 
contract with Domino's. When he refused, the Domino's 
representative told him, ``I don't like doing business with you 
people anyway,'' and threatened to ruin his business, which 
they did.
    Mr. Soo San Choi, an Asian American nuclear chemist, was 
the victim of an attempt by a majority company to use him as a 
straw man in order to obtain an 8(a) contract. Over the course 
of the ploy, the 5-foot-tall, 82-year-old Mr. Choi was 
subjected to intimidation, coercion, and ultimately financial 
ruin.
    The C. Earl Peek, who is with us at this hearing, is a 
young African American entrepreneur and exactly the type of 
young businessman who should be leading the growth of minority 
businesses. Instead, Mr. Peek is embroiled in a race 
discrimination lawsuit against SBA where between 2000 and 2004, 
95 percent of SSBIC's investment dollars went to white-owned 
and managed firms. The SBA's own IG found that Mr. Peek's firm 
was subjected to ill treatment and bias.
    Mr. Fernando Galaviz, who sits with me on this panel, an 
Hispanic business owner, teamed with an Asian-owned company, 
both with excellent performance evaluations as subcontractors 
to Northrop-Grumman. As a result, Centech, Mr. Galaviz's firm, 
experienced, assisted Northrop-Grumman in winning the contract. 
As a result, the prime awarded 52 of 130 slots to Centech for 
their contribution in obtaining the award. After the first year 
on a 5-year contract, the prime removed both minority firms. A 
similar experience with a Mr. Paul Curtis in Southern Florida.
    I see my time has ended. I end by saying these few examples 
are only the tip of the iceberg. Many, many more firms 
experienced similar discrimination, and many others hoped that 
I would tell their stories here today despite the risks to 
their businesses. I just don't have the time to tell them all. 
We must work together to ensure these businesses and others 
like them get the support that they need.
    Thank you for this opportunity, and I will be happy to 
entertain any questions that you have.
    [The prepared statement of Mr. Robinson follows:]

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    Chairman Kerry. Mr. Robinson, thank you, and as I said, 
your full testimony is placed in the record. Obviously, during 
the questions and answers, we look forward to any other 
examples that you would like to put before the Committee. We 
thank you for it. It is very important testimony and we 
understand how some of those folks are reluctant to come 
forward, so it makes it very difficult.
    Mr. Miera.

  STATEMENT OF BILL M. MIERA, CHIEF EXECUTIVE OFFICER, FIORE 
           INDUSTRIES, INC., ALBUQUERQUE, NEW MEXICO

    Mr. Miera. Chairman Kerry, Ranking Member Snowe, and 
Members of the Committee, thank you for the opportunity to 
speak before you today on the importance of preserving and 
strengthening small and disadvantaged businesses. My name is 
Bill Miera and I own a technology company in New Mexico. I 
serve on the board of the U.S. Hispanic Chamber of Commerce 
Board of Directors, where I chair the Federal Procurement 
Committee. I also serve on the board of the New Mexico 8(a) and 
Minority Business Association, the largest 8(a) association in 
the Nation, where I chair the High-Tech Committee. In addition, 
I serve on the board of the Professional Aerospace Contractors 
Association, where I serve as the small business 
representative. I also serve on the Greater Albuquerque Chamber 
of Commerce and I was on the board on the Rio Grande Minority 
Purchasing Council, among others.
    Seventeen years ago, I started Fiore Industries, a graduate 
8(a) company specializing in high-technology products and 
services for the Federal Government. While we have enjoyed 
success over the years, we are probably about one-third the 
size we would be if not for several obstacles.
    One major obstacle we faced was contract bundling. We 
previously won two consecutive contracts as a prime with the 
Air Force Research Laboratory for Directed Energy Systems 
Development. Based on our performance, the contract grew to 
$2.5 million per year. Unfortunately, high-level decisionmakers 
within the agency decided to bundle our contract. In order for 
us to continue on the project, we were forced to team with 
another prime, a large business, and we had to be the 
subcontractor. Our team won the contract, but the new large 
prime eliminated our subcontract by adding a surcharge of 
nearly 40 percent to our work.
    This is one of the problems with bundling. Primes bring you 
in, but rarely intend to give you work. In this case, all they 
really wanted was to eliminate my company as a competitor with 
no repercussions. Half of our work was contracted out to other 
contractors who were non-competitors to the prime and about 
half was taken in-house by the prime. The contract cost 
taxpayers $475,000 a year in increased expenses in order to 
save approximately $50,000 in administrative costs. This is a 
false economy that also fails to account for decreases in 
performance by the prime due to the only competitor being 
eliminated and decreases in innovation. Most patents, as you 
know, come from small businesses, not large.
    Another obstacle we encountered was reduction in support 
from our local SBA office. We received outstanding help and 
support from the SBA when we started. Nevertheless, budget cuts 
and personnel transfers to Washington have decimated the number 
of staff at the local office, resulting in a drastic reduction 
of support the local office provides to the small business 
community.
    This is not limited to New Mexico alone. A fellow Hispanic 
business owner and board member at the U.S. SEC, Mr. Massey 
Villareal, was told by his local Business Opportunity 
Specialist in Texas after he received his 8(a) certification 
that, ``After you receive your certification, don't call me 
because I am too busy to help you.'' This is not the type of 
encouragement that SDBs expect from the SBA.
    Currently, my company needs infrastructure upgrades. I 
hesitate approaching the SBA for help in the form of loan 
guarantees because the local office does not have sufficient 
staff. While the current office has dedicated workers, they do 
not have sufficient resources to accomplish their mission.
    For these reasons, I believe it is critical that SBA 
funding be adequately restored and sufficient personnel be 
assigned to the field offices. To a new entrepreneur who hasn't 
learned the system, there was just absolutely nothing like a 
real person to talk to in a local SBA office.
    Another obstacle for SDBs is the failure of Federal 
agencies to meet their small business contracting goals and a 
lack of increase in the total small business goal of 23 
percent. Additionally, new small business categories only 
redistribute dollars from one deserving group of small 
businesses to another. This has resulted in much fewer 8(a) 
contracts available for competition.
    On the positive side, Fiore is an example of why the 8(a) 
program is so critical. Eight years ago, we won a $12 million 
competitive 8(a) contract with the Department of Energy. Our 
performance gave us the qualification to bid on similar 
contracts with the national laboratories. More importantly, it 
gave us the resources to create our own laboratory. This 
allowed us to win a full and open competition with the 
Department of Justice to develop a new technology for stopping 
vehicles in high-speed chases using smart pulse-shaped 
microwaves. Absent our new laboratory, we would not have won 
the contract nor developed this unique technology.
    If I could quickly, with my remaining time, I disagree 
respectfully with the SBA on previous testimony and I want to 
quickly turn to just a small part of my written testimony, 
especially around the net worth issue. I want to point out that 
in 1988, the average price for a gallon of gasoline was 91 
cents. Now it is more than $3. The price of an average home was 
$91,000. Today, it is $251,000. A typical truck for a 
contractor is a Ford F-150. In 1988, it was $13,000 and today 
it runs $30,000.
    In addition, the limit on staying in the program means that 
the strong ties that personal wealth has to business loans, 
that we are not allowing the businesses to grow fast enough.
    Mr. Chairman, I thank you and Ranking Member Snowe for 
inviting me to testify and I look forward to any questions. 
Thank you.
    [The prepared statement of Mr. Miera follows with 
attachments:]

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    Chairman Kerry. Thank you very much, Mr. Miera. Very 
helpful testimony.
    Mr. Galaviz, thank you, sir, for being here.

    STATEMENT OF FERNANDO GALAVIZ, CHAIRMAN, SMALL BUSINESS 
        ASSOCIATION FOR TECHNOLOGY, ALEXANDRIA, VIRGINIA

    Mr. Galaviz. Thank you, sir. Chairman Kerry and Ranking 
Member Snowe and Members of the Committee, it is important--I 
would like to focus my testimony, opening testimony on 
solutions.
    It is important that we all keep in mind that Federal 
program managers are responsible, and you make them 
responsible, to assure that they have qualified companies to 
perform the work. The marketplace has changed dramatically in 
the last 30 years within the minority and the small business 
community, where there is significant competition, and 
therefore program managers at the Federal Government level have 
a wide range of options on firms to select.
    The challenges of a startup firm, you are talking about the 
8(a) program, you are talking about the disadvantaged program, 
these are developing programs, and you asked the question, how 
can a firm build a capability in order to be responsible in 
meeting the requirements of the Federal client? And also keep 
in mind there is a myth that even though you have in the 
legislation that there is an 8(a) sole source program, that 
really is not true because for the most part, on all 8(a) 
contracts under $3 million that can be awarded sole source 
legally, what happens is there is competition because you are 
competing with a wide range of firms to present your 
credentials. So seldom really is the 8(a) program given a sole 
source contract.
    Now, how these firms develop capability, particularly, for 
example, that really you keep talking about disadvantaged goals 
or minority goals, but in reality, there is no disadvantaged 
direct contracting because that was eliminated because of the 
Adarand decision. So the only thing you have left really is the 
8(a) program on direct contracting and you have the small 
business program.
    So what really is left to develop capability is the 
subcontracting program, and everyone in this room knows that 
that program is basically, unfortunately, a farce or a lie. All 
of us, regardless of what your religion believes or what your 
moral, we are all participants, Federal Government people, 
elected officials, small business community, we all participate 
in a big lie and know that the subcontracting program, it is 
not a true program.
    So therefore what we recommend is that we eliminate the so-
called need for corporations to have subcontracting plans 
because really they are not enforceable. Major corporations 
have shared many times that they don't care about how much you 
penalize them, because even if you penalize them on a piece of 
work, even if they don't get their profits, they are happy just 
to get the G&A and overhead that comes from that work that 
maybe should go to a small business.
    So what we recommend is that we totally overhaul the 
program to be market-driven, to be market-driven where on 
contracts over $2 million, instead of companies having to 
submit subcontracting plans, they submit a plan for 
subcontracting strategy which is evaluated as part of the 
proposal. And the major corporations, when they select a 
company to be a partner, will provide them a subcontracting 
team agreement right away that is only executable at the time 
of the contract award if the major corporation wins the 
contract.
    That way, there is a legal linkage right at the beginning, 
because right now what they do is they sign team agreements and 
team agreements are useless. And keep in mind that small 
business cannot get into legal battles with major corporations. 
They cannot get involved because politically, they cannot get 
involved because you would be blackballed. Plus, corporations 
have bigger pockets.
    So what we recommend, Mr. Chairman and Committee, is for 
there to be a look at how we can streamline the subcontracting 
program to be really market-driven and eliminate the taxpayer 
having to pay for all this monitoring, which is useless. And 
with all due respect to our friends at SBA, whenever we come--
SBA 20 years ago did try to bring the private sector in to show 
them to be cooperative. It might be more legislation if they 
don't pay attention.
    As far as bundling, OK, the Air Force put a program on to 
allow a group of small firms to come in an informal joint 
venture in order to bid on large jobs. The program was in 
place. It was a proactive program. Then SBA comes around and 
tells the Air Force, no, we agree in principle, but because you 
didn't sign the Memorandum of Understanding, that program, you 
cannot use it. So I recommend that if you look at the Air 
Force's informal joint venture program and institute it and get 
SBA to work with all Federal agencies to institutionalize that 
program across the Federal sector, I think you will see an 
improvement on the bundling issue.
    [The prepared statement of Mr. Galaviz follows:]

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    Chairman Kerry. Thank you, Mr. Galaviz.
    Let me just say to all of you, your testimony has been 
really important and very, very informative. Mr. Jenkins, I am 
glad you were able to stay here and listen to this because I 
think it is like night and day, to be honest with you. I mean, 
there are just two different worlds here that we are hearing 
about.
    I need to go over for that 11:30 a.m. meeting that I 
mentioned. Senator Cardin is going to Chair in my absence. I am 
going to get back here. I want to follow up and I didn't want 
to shortchange anybody here. So I appreciate your indulgence in 
letting me do that.
    But I really do want to follow up on a number of things 
that have been said. I think it is very important testimony. It 
is a very important challenge to this Committee. It is an 
important challenge to the SBA, because clearly the bundling/
subcontracting is not working and it is ripping off a lot of 
companies. I mean, it is just an unfair practice. So we need to 
dig into it. I know my colleagues will do that in my absence. I 
will try not to be repetitive when I get back, but I thank you 
for your indulgence and I will come back. Senator Cardin, 
thanks for chairing in my absence.
    Senator Snowe, do you want to take over?
    Senator Snowe. Thank you, Mr. Chairman.
    Thank you all very much for your testimony. I think it has 
been very useful to hone in on some of the key flaws and 
weaknesses with the existing programs and also for your 
recommendations on what we can do to act upon some of these 
failures. Regrettably, these flaws and weaknesses have been 
ongoing for so long and repeatedly and that has had an impact 
on the minority community. The question is now where do we 
start to address some of these issues, and certainly through 
the Small Business Administration or through the Congress or 
totally revamping these programs.
    I think, Mr. Miera, you mentioned several things that were 
certainly very disturbing, examples of why these programs are 
simply not working to their potential and ultimately affecting 
the potential of the minority community. We have heard these 
examples across the board in many forms. But you mentioned that 
the Government is actually back-sliding on Federal contracting 
with Minority Business Enterprises and 8(a) firms. So obviously 
we are moving in the wrong direction.
    You also recommend that the Office of Federal Procurement 
Policy oversee the implementation and the compliance with these 
programs rather than the Small Business Administration. Can you 
comment on that, because I think that is an interesting point. 
I would like to know why you think SBA might not be up to it. I 
mean, the SBA obviously hasn't demonstrated its oversight 
capability thus far, so I understand your skepticism, but could 
you expound further on that?
    Mr. Miera. One of the reasons that I think it is critical 
is that even if the SBA steps up and really advocates strongly, 
for instance, in the case of unbundling a contract or something 
like that, the problem is that they have to go to the agency 
itself and that is their limit of who they can go to. So once 
they go to the agency, if the agency has no interest and there 
is no repercussions to them, there is no reason for them to 
reverse their decision. And so it has to be outside of an 
agency, and I think that is the logical place, so that if the 
SBA doesn't have any success there, that once they can go 
somewhere else, there is a larger club that they can wield. I 
mean, obviously, there has been a lot of back-sliding, and if 
there is no motivation, if there is no repercussion, then it is 
just not going to happen.
    Senator Snowe. Well, it is interesting to your point that 
even the GAO has indicated that the SBA has never raised the 
issue of the threat of penalties----
    Mr. Miera. Right.
    Senator Snowe [continuing]. You know, the penalty 
provisions that now exist under the law. I am not so sure that 
the SBA has ever exercised those penalties for large 
contractors who use small businesses as fronts. Does anybody 
know of any examples with respect to SBA and how they have 
addressed these issues?
    Mr. Miera. I don't personally, but one thing that I will 
tell you is that I worked about 9 years in a very large 
business and I can tell you that it is the problem with 
subcontracting. While there are good people in those companies 
that will do the right thing, in general, large businesses and 
large entities are driven by--a large business is driven by the 
stockholders and there is absolutely no motivation if it 
doesn't hit the bottom line. And if there are no repercussions, 
if there are no penalties, there will be no action. I can 
guarantee that. I have seen that and that is one of the big 
problems.
    Senator Snowe. Mr. Galaviz, do you have any examples of 
where the SBA has aggressively enforced or pursued some of 
these issues to enforce compliance?
    Mr. Galaviz. About 20 years ago, it did make an effort to 
have a couple--trade associations to work with SBA and to 
encourage them. That did not quite work, and then there was 
liquidation damages added a few years later. If you look at the 
whole history of what has happened in the last 10 years, I 
don't think there are more than three or four times in the 
whole Federal Government where liquidation damages have been 
used.
    Madam Chair, the sad part about it that really--there is in 
the legislation now the authority for contracting officers to 
make major corporations accountable, but the fact is that the 
management of the agencies, and that happens whether it is 
Democratic or Republican, the leadership, they are not forceful 
enough to have their contracting officers to manage the element 
of the subcontracting requirements.
    As far as the other side of the story is that contract 
personnel, they say they have so many things to deal with in 
managing and executing a contract that this is just another 
thing that they have to deal with and is not a priority to 
them.
    The SBA itself in the last decade has not really been 
effective, and when we have gone and talked to them, we get a 
lot of bureaucratic responses and nobody really wants to take 
on the effort. The suggestion that I have made to the Committee 
is a suggestion I have been making now for 6 years to different 
people, and it is really a simple solution. It is so simple 
that it is too complicated because they feel, you know, it 
cannot be that simple, but it is a simple solution that we 
propose.
    Senator Snowe. Mr. Robinson.
    Mr. Robinson. I am unaware of any situation in which SBA 
has vigorously enforced relative to subcontracting and 
bundling. One of the things I think the Committee needs to take 
into consideration were the changes that happened in 
procurement with FARA and FASA. When those streamlining reforms 
came into the procurement process, a lot of the socio-economic 
issues that were normally key to how a contracting officer 
operated were eliminated.
    And so the regulatory constraints, if you will, that a 
contracting officer had to take into consideration relative to 
subcontracting, 8(a), those kinds of things, with FARA and 
FASA, they were totally eliminated and thus that took the 
restraints off of contracting officers, the sensitivity, if you 
will, at a minimum, off of contracting officers. So I think the 
Committee needs to look at that issue if you are going to look 
at this from a systemic standpoint and how you bring more 
enforcement into that process.
    Senator Snowe. Do you think SBA is capable of enforcing 
compliance?
    Mr. Robinson. No. Institutionally, no. Even where they have 
institutional power, let us say with the 8(a) program, I mean, 
technically with the 8(a) program under 95-507, SBA is the 
prime contractor. But they have delegated much of that 
responsibility away and at least instances that I am aware of--
we just had a situation with an 8(a) contractor, F&L 
Construction Company here in the District, and appeals to SBA 
to address that issue, the complaints that this company was 
having--exemplary performance at Walter Reed Hospital, and yet 
the appeals to SBA to come in and carry out their role, their 
institutional role, went unheard.
    Senator Snowe. So this company went to SBA----
    Mr. Robinson. Yes.
    Senator Snowe [continuing]. And there was no response?
    Mr. Robinson. There was----
    Senator Snowe. Was this recent?
    Mr. Robinson. This is recent, yes. This has been within the 
last year.
    Senator Snowe. OK.
    Mr. Robinson. It was within the last year.
    Senator Snowe. At Walter Reed----
    Mr. Robinson. At Walter Reed Hospital, that is correct.
    Senator Snowe. Have you heard of anybody getting any 
response from SBA on these particular questions, and certainly 
the egregious examples of discrimination that you raised in 
your testimony, have you ever heard of an instance where SBA 
has responded appropriately?
    Mr. Robinson. Not appropriately, no. I gave the case of Mr. 
Soo Choi up in Pittsburgh. That was an 8(a) contract. The prime 
contractor just literally took the contract and acted as a 
prime, and this was an 8(a) contract, once again. And his 
appeals to SBA, to the Corps of Engineers, went unheeded.
    Senator Snowe. Well, it is clear they have to do something 
fundamentally different. I think that is undeniable.
    Mr. Wainwright, you have obviously indicated in your 
testimony statistics that buttress and reinforce the 
disparities and the discrimination that continue to exist with 
these 8(a) programs and is illustrated by these graphs. How 
would you recommend from what you know on how we should 
proceed? I mean, the real question is whether or not you can 
change the culture in an agency to do what it is required to 
do. We have systematically had these reports. We are dealing 
with contract bundling and fronting by large companies 
fronting. The examples are replete, unfortunately.
    Dr. Wainwright. Certainly, changing the culture is 
important. I think that takes top-down leadership. I just would 
add a slightly different take on some of this from a completely 
different perspective. Just to be fair to SBA and the other 
State and local governments around the country that are trying 
to enforce and protect these affirmative remedies, you have to 
keep in mind the legal landscape in the last 20 years for such 
remedies has become quite perilous ever since the Croson 
decision. It has really chilled out a lot of State and local 
governments, who are many of my clients.
    From the moment they enforce, take a contract away from a 
low bidder for not meeting the subcontracting goals, not 
meeting the good faith efforts, they are slapped with a lawsuit 
that threatens to take the entire program away. So 
consequently, you see oftentimes very tepid approaches to 
enforcement in the interest of keeping the program from going 
away entirely.
    So some of the--to be fair to the public sector entities, 
they are in a real bind as far as having had a lot of the teeth 
taken out of their ability to aggressively enforce things. Does 
that excuse some of the stories we have heard here today? 
Absolutely not, but I just wanted to put that in as a 
recommendation, or as an observation.
    Senator Cardin, you mentioned earlier, what should the goal 
be, when you were questioning Deputy Administrator Jenkins. 
Certainly not 5 percent. We heard in the statistics 18 percent 
of the businesses in the country are minority-owned. That 
doesn't even include women. Now, I believe the SDB designation 
does include women--I could be wrong about that--but a 5-
percent goal is clearly, at best, locking in the status quo 
ante from discrimination in this country. So the goal certainly 
could go higher and I think that would go a long way toward 
helping these communities.
    Obviously, a high goal in an environment where the agencies 
can't even get the 5 percent goal right is still problematic. 
So I think there are many, many things that have to happen 
simultaneously in order to really, as you said, Senator Snowe, 
allow these programs to live up to their potential. But 
certainly they are very, very important programs.
    The other thing to keep in mind is that there are hardly 
any programs like this in the private sector. While some major 
corporations have developed really good supplier diversity 
programs, I think those still remain the exception rather than 
the rule, and we have to keep in mind that the private sector 
represents 90 percent of the activity in this country. So for 
the burden to be on the public sector to do all this by 
themselves is difficult and somewhat reminiscent of the boy 
with his finger in the dike trying to keep this problem from 
bursting forth.
    Senator Snowe. Thank you and thank you all for your very 
illuminating testimony.
    Thank you, Mr. Chairman.
    Senator Cardin. [Presiding.] Thank you, Senator Snowe.
    I want to join in thanking you all for being here. We hear 
the numbers, the statistics. You put a face onto it. You give 
us some of the specific examples, which I know are difficult to 
come by because of the concern that business people have about 
being able to continue with their businesses and retribution. 
But I very much appreciate the way that all of you have added 
to the record here because I think it is going to be helpful in 
our work.
    I want to go back to procurement for one moment with the 
subs and primes. Of course, it would be a lot easier if we had 
higher numbers of prime contractors. Then we wouldn't have to 
worry about whether there is a sincere effort to deal with the 
sub issue.
    I had a meeting with small business people in my community 
about compliance with these requirements and they brought up 
the budget issues, not just the budget issues in SBA, but the 
budget issues in agencies, that a lot of the agencies don't 
have the technical capacity to do what is required under law or 
to, in fact, carry out a good faith effort to make sure that 
these goals are met and that efforts are made to be more 
inclusive.
    I am just interested in your observations, whether we have 
an attitude issue among various Federal agencies that is 
reflective in some of the examples, Mr. Robinson, that you 
cited, or whether this is just a fact that people are busy. 
Agencies are busy. They don't have enough resources to handle 
their work, so they look for an easy way out and don't do what 
they should be doing as far as making sure our laws are not 
only complied with in number, but in spirit. Who wants to take 
a jab?
    Mr. Galaviz. Our experience has been that it all depends on 
the leadership. If a cabinet secretary, let us say, like at the 
Department of Transportation demonstrates that it is important 
to the secretary for them to do business with minority firms, 
8(a) and small businesses, and they are consistent with our 
policy statements, then you see it that all of a sudden the 
whole system works. Where there is no leadership on top, they 
just move on. NASA is a good example of where they really 
worked the program. So it depends who is the coach and who is 
the leader.
    Mr. Miera. My experience has been primarily with DOD, and 
while there is no question that there is a requirement for some 
contract bundling, there just are issues that can't be dealt 
with any other way.
    My experience has been that there is an attitude problem, 
and what I have seen in the past is that some contracting 
officers and, in fact, the technical program managers, just to 
take the burden off of their plate, have just bundled contracts 
when it wasn't really necessary, that they just didn't want to 
have as much work as they used to have.
    And the problem is that, as I said before, unless people's 
behavior in this area is really forced to change and until 
there is an institution that is built and that will maintain 
itself, unless people are forced to change, they will go back 
to what they feel comfortable doing and these folks have not 
supported minority business programs. They feel that it has 
been shoved down their throat and if there is any opportunity 
to eliminate those kind of activities, they are going to do it.
    And I have seen them use bundling as an excuse. Oh, we just 
don't have the money to pay for additional contracting 
officers. As I showed in my example, it is a false economy. I 
mean, the government has ended up actually paying more money to 
eliminate a couple of contracting officers.
    Senator Cardin. Mr. Robinson.
    Mr. Robinson. I think it is an attitude problem, yes. I 
think it is also a personnel problem in that you have fewer 
people in the procurement process. Somebody made mention of 
PCRs, and we have seen just a dramatic decline in the number of 
PCRs that are involved in the process. And so long as, from a 
systemic standpoint, so long as you have the problems that were 
created by FARA and FASA, you know, bundling is going to be 
here and the only way to ameliorate that is to create a set-
aside for small businesses and minority businesses that becomes 
an institutional part of the procurement process. But with the 
advent of FARA and FASA, you know, systemically, you are going 
to have a problem with bundling. Bundling is going to be a 
mainstay in the procurement process.
    Senator Cardin. Dr. Wainwright.
    Dr. Wainwright. I would just say a lot of my experience has 
been at the State and local level. We just completed a study 
for the State of Maryland last year where we worked with all 
the major State agencies and I expect a lot of the things that 
we have observed at the State and local level are true in the 
Federal level as well. As has been mentioned, people are spread 
thin. Certainly, the people that are responsible for 
implementing compliance with minority business programs are 
often, at the State and local level, one-person shops with way 
too much on their plate to effectively do their jobs.
    The other thing we have noticed, and I suspect this is true 
in the Federal agencies, as well, is the people that are 
responsible for implementing and ensuring compliance with the 
SDB goal programs hierarchically within the organization don't 
have authority over the contract administrators. They are at a 
lower level where their observations and recommendations really 
carry no weight with the people who are administering the 
contracts and the major procurements.
    So they are set up in the organizational framework without 
the necessary tools they need to effectively, even if they 
don't have the attitude problems, if they are sincerely 
dedicated to doing their jobs and seeing these programs work, 
they can't really trump a veto by a contract administrator.
    Mr. Galaviz. If you take the Air Force, to use an example, 
the Air Force in the last 10 years has taken a significant 
number of programs that are worth, on a particular direct 
contract, a $100 million award at Colorado Springs, the C-4 
contract, that went small business set-aside. The Vandenberg 
Range, which is the most sophisticated range in the world, 
after being for many years run by major corporations, the Air 
Force moved that to the small business community, and that was 
a $474 million award. The Nextance contract, which is a 
contract vehicle which is used internationally by the Air Force 
and other DOD, they created a segment of small business which 
half of the small businesses were minority firms.
    So there is, for example, with the Air Force a role model 
that this Committee can use, and the SBA--I have gone, I have 
even gone to the White House to have included in some 
Presidential speeches what the Air Force has been doing and no 
one ever used it. Even SBA, in order to get credit for their 
own programs, even though they did not do the work for the Air 
Force, they should use that as an example.
    So it is a situation of leadership and attitude, and what 
the Air Force has shown, and so has the Department of Energy, 
that the small business community, including minority 
communities, there is enough capability for them to deal with 
this large bundling contracts. And also, it is good business 
for the taxpayer, quite frankly, for there to be this bundling 
contracts.
    So the real answer, instead of fighting the system, is for 
the leadership of this Committee to propose that, let us say 
that 20 percent of the bundling contracts should be set aside 
for small businesses. And I can assure you, Mr. Chairman, there 
is enough capability in this United States of the small 
business community to be able to be competitive. It has been 
demonstrated by the Air Force many times and also by other DOD 
agencies.
    Senator Cardin. Well, I agree with the thrust that 
leadership is the principal driving force. If an agency head 
wants to make it work, not only will it work, but the people 
that work in the agency will know that that has got to be done. 
There is never enough money in a budget to do everything an 
agency wants to do, and they make their own priority judgments, 
but also, I think, budget support is important. So we need to 
make sure the agencies have adequate budgets.
    Let me just move on to the area of finance and deal with 
the 7(a) program and the 504 program. Those numbers are just 
not acceptable. What changes are needed in the programs in 
order to make it easier for minority small businesses to 
participate in the major funding programs?
    Mr. Robinson. One of the principal things that can be done, 
of course, is opening up the distribution chain so that 
minorities are more involved in the chain that actually 
interfaces with minority businesses. As noted in the peak 
example, you have very few minority firms in the SSBIC Program, 
which is your venture capital program. And so opening that up 
so that you have more minority firms, we have some very capable 
firms that operate in the venture capital community, yet they 
find it extremely difficult to be involved in the SSBIC Program 
of SBA. So getting more minorities involved in what I call the 
distribution chain for access to capital would go a long way to 
opening up more opportunities--more finance for minority firms.
    Senator Cardin. If you have other suggestions in regards to 
how we can improve this program, please let us know. This 
Committee is very interested in trying to improve the SBA laws 
as relate to minority opportunities. I know in talking with the 
Chairman, his legislation that he has introduced plus other 
efforts are being made to strengthen the tools that are 
available, understanding, of course, that we need to work on 
leadership and attitude as part of what we are doing, not only 
in the governmental sector, but in the private sector, as well, 
in order to make better progress on expanding opportunity in 
America.
    Dr. Wainwright.
    Dr. Wainwright. I would just circle back, since it is 
almost apropos to your comment, to the net worth issue. I don't 
know if that binds in the 7(a) program or not. I believe it 
probably does. We did--you know, the $750,000 figure, nobody 
seems to really know where that came from. Senator Kerry 
suggested it was at least 10 years old. We have some anecdotal 
evidence it is more like 30 years old, that it was pulled out 
in the 1970s when some of these programs were initially put 
forward.
    We did some simple inflation indexing, assuming that it was 
only 10 years old, and it puts the number, and certainly 
Administrator Jenkins is right that the threshold does not 
include equity in your business or in your primary residence, 
but regardless, that $750,000 number, even if it were 10 years 
old, ought to be around $1 million. And quite frankly, it is 
probably a lot older than that and, consequently, the 
indexing--I don't know what a gallon of milk was in 1970, but 
it was probably quite a bit--or a gallon of gas was probably 30 
cents a gallon, or 35 cents a gallon.
    So that would go a long way, I think, toward enhancing 
fairness in the program while maintaining the purpose of the 
net worth cap in the first place which is to make sure that the 
benefits of the program are going to the firms that really need 
them.
    Mr. Robinson. In that regard, we did some adjusting for 
inflation on that number and the number is more like $1.3 
million, I think, if it is 10 years old. If it is 30 years old, 
then that number is much greater than that.
    We have identified this issue of access to capital as a 
fundamental impediment to building capacity. As you have noted 
in your statistics, the number of minority firms has grown 
exponentially. It has been the fact that the firms lack 
capacity, and in operating in a global market, you need 
capacity in order to operate that, and we have found this issue 
of personal net worth to be one of several impediments to 
building capacity in firms.
    The number--I recall the hearing very vividly where the 
$750,000 number came into play and that was about 1989, which 
was soon after the Wedtech scandal had hit the 8(a) program and 
there was all this concern about minority millionaires being 
involved in the program. And I recall specifically, I think it 
was Senator Nunn at the time who was Chairman of the Small 
Business Committee, and the issue was, why $750,000? There is 
no adjustment for industry or anything of that nature. And the 
answer was, it was less than a million.
    Mr. Galaviz. If I may give, because I am the oldest person 
in this room--[off microphone]--the concept was that basically 
this was just a business--and it was also the concept that--let 
us focus on the firms that need developing, the younger firms, 
because the whole concept was that it does not count the value 
of your home, OK. It does not count the value of your business. 
So the idea was to make those businesses stronger, because a 
lot of firms after being in the 8(a) program do not continue 
being in business. They fail. Let us force these entrepreneurs 
to put their resources into their business. So if they want to 
take advantage of these Federal programs, let them then commit 
that they can have the $5 million home that they want, OK, but 
instead of buying that $50,000 car, let us put it into the 
business, and that was the basic concept.
    Senator Cardin. Well, clearly we can do better under these 
programs. The fact that there has been no adjustment in law for 
over 10 years is certainly something we need to look at, 
because the pool of applicants are smaller than otherwise, 
which would give you a broader pool if we change that. It gives 
you the opportunity to bring in more minority businesses. So it 
is something we need to clearly consider.
    Let me again, on behalf of our Committee, thank each of you 
for your testimony here today. As the Chairman indicated, the 
record will stay open and additional questions may be asked. 
Again, thank you all.
    I have one more question to ask, I have been told, because 
Senator Kerry is on his way back, so that gives me a chance to 
ask one more question on these issues.
    Let me go to technical assistance, which is an area that I 
hear about frequently, on ways in which the SBA has not been as 
effective. For a company to be able to deal with the 
procurement issues, they need help in dealing with Government 
procurement. I understand the rules of Section 8(a) that 
require a company to have shown some degree of strength. Are 
you satisfied with the current services being provided by SBA, 
the budget support for helping minority businesses prepare for 
Government procurement work?
    Mr. Miera. Well, I can answer that as a small business 
owner and the answer is absolutely not. I mean, it was in part 
of my testimony, but it has been devastating to most, 
especially young, new starting businesses the lack of resources 
in the local SBA office, I mean, and the technical support that 
they receive when they are there. It is just critical for a 
brand new company, somebody that is just getting started and 
doesn't really understand Washington or how to get contracts, 
to be able to walk into the office and have somebody there that 
is not only going to give them the technical assistance, but 
also you were asking about the loan assistance. There needs to 
be somebody there.
    And while I understand the temptation in an agency when 
their budgets are being cut to increase efficiencies by moving 
people to Washington, it just doesn't help the people that need 
the help. They need to be out in the field. It is critical.
    Senator Cardin. Does anyone else wish to comment?
    Mr. Galaviz. Mr. Chairman, one of the things that SBA did a 
few years ago that helped a lot, and that is to have firms that 
apply for the 8(a) program to go through a seminar ahead of 
time, before they would turn in the application, and I don't 
know whether that is happening now. But that was a very 
important help to the firms because it gave a reality check to 
the firms. Do you really want to get into this business? Do you 
realize there is a big difference between dealing with the 
Federal Government and dealing with the private sector and that 
it takes a significant amount of more resources to do business 
in the Federal sector?
    The basic concept and reality is that technical assistance 
is best given by the private sector, people who are in business 
that know about business, OK. And with all due respect to a lot 
of folks at SBA, they are very fine, committed people, but none 
of them have run a business. None of them have ever been 
responsible in making a business be profitable.
    So basically when you talk about this technical assistance, 
as long as the SBA management and this Committee realizes that 
the development of the firms in the first 4 years of being in 
business, it is important there is significant assistance to 
them regarding what it takes in order to succeed, because a 
major failure that we find is that people also have an attitude 
sometimes when they enter into the 8(a) program as if the 
Government or SBA is going to put their contracts on their lap.
    And what we now tell our members in our association, think 
of SBA only as a person to certify you in the 8(a) program and 
think of the 8(a) program only as another contract vehicle, but 
do not any longer expect for the SBA to give you the technical 
assistance, and for sure do not expect for SBA to really go and 
find contracts for you.
    Back 20 or 30 years ago, SBA did a much better job of 
working with agencies in making sure that there were 8(a) 
contract opportunities. Today, if the Administrator of SBA 
spent more time at home talking to cabinet officers and asking 
the cabinet officers to definitely have 8(a) contract awards 
instead of politicking all over the country, that would make a 
big difference, because we have learned in the past that when a 
cabinet officer--it doesn't matter what kind of administration 
it is, but when they know that the SBA's leadership is dealing 
on a personal basis with a cabinet officer, then things do 
happen in that agency.
    Senator Cardin. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Kerry. [Presiding.] Thank you, Senator Cardin. 
Thanks a lot for carrying on here. I really appreciate that 
enormously. I gather you have covered quite a bit of territory 
and I appreciate that very, very much. Thank you for doing so.
    Can I just follow up? Mr. Galaviz, what you just said is 
very important because under the Clinton administration, I 
think Erskine Bowles and others, they sat at the cabinet table, 
but this Administration specifically chose to downgrade the 
SBA, not just in budgeting, but in its presence, and I think 
that has had an impact. I think that when people know that 
nobody is there sort of pushing and there is no advocacy and 
there is no flag, it is not on the agenda.
    Mr. Galaviz. Mr. Chairman, regardless of what 
administration, no question as an individual, in my view of 
being involved in this thing for 40 years, there is no question 
that Mr. Bowles, Administrator Bowles, was to me the most 
effective administrator in the history of the Small Business 
Administration, and because why? He was a bottom-line 
businessman. He worked on problems in a very simple and very 
honest way and he also did his homework. I wish we could find 
more--with all due respect to the present Administrator----
    Chairman Kerry. Yes.
    Mr. Galaviz. [continuing]. I wish we could find more Mr. 
Bowles.
    Chairman Kerry. Well, I appreciate your saying that. 
Personally, let me just say that I think that Administrator 
Preston has worked effectively with the Committee. I think he 
has started out in an earnest way to try to grapple with some 
problems that he has inherited and I still am hopeful that he 
is going to step up on some of these things. And I think that 
he has a lot to get a handle on in a short period of time, but 
we are anxious to work with him and hopefully he can change a 
lot of this as quickly as possible.
    Some of it is tough because OMB and the Administration are 
squeezing on the budget. I am confident he asked for more than 
he got, and he has to struggle to some degree with what he has. 
But administratively, notwithstanding the budget constraints, a 
lot could be done and you all have articulated that.
    I don't want to go over areas that already been discussed. 
I have a pretty good summary here of some of the things you 
have been asked, but let me just ask you quickly, and if this 
was asked, just tell me and we will stay with the record. But 
on the subcontracting, Mr. Miera, how do we best get at that? I 
mean, this is something we have heard for a long time. In some 
cases, primes will use people to get the contract and then they 
dump them afterwards and different things happen. That is sort 
of what you have described. You get squeezed out or they 
eliminate competition. What is the most effective way for us to 
deal with this--is there something statutorily we can do or is 
this simply a matter of administrative oversight and 
enforcement?
    Mr. Miera. Well, I think it is both. I think the SBA has to 
come on stronger on enforcing the subcontracting plans. There 
is no question they need to do a better job at that. But also, 
one of the things that I have seen in non-Federal entities, if 
you will, is that until a behavior becomes institutionalized, 
it has to have some kind of motivation, and what I have seen in 
other institutions is that they have awarded contracts where 
part of the award fee was dependent on how well they executed 
their subcontracting plan. That is absolutely the only thing 
that I have ever seen work.
    There are other ideas that have been tried, for instance it 
comes into play when you are giving an award and it is taken 
into account in the evaluation and maybe in past performance. 
Those things are so far apart from the direct bottom line that 
an organization looks at, that they do not work. But the annual 
or semi-annual award fee, when there is actually an effect on 
the bottom line to the company, that is all I have ever seen 
work. So there has to be some teeth put into the executing on 
the subcontracting plans or, in my opinion, it just never 
happens.
    And I think that should be across the board. It is not just 
with the large prime contractors. We need to be careful as more 
contracts are bundled, they end up being larger contracts even 
with small businesses, because while there has been an increase 
in the number of dollars that have gone to minority businesses, 
if you look at the actual number of contracts, and, the number 
of businesses, that has not done as well. So we want to make 
sure----
    Chairman Kerry. Because of the bundling?
    Mr. Miera. Exactly. So you get a couple of small 
businesses----
    Chairman Kerry. What is the fundamental reason they are 
bundling? Are they bundling to avoid the administrative 
overhead of doing more of the contracts? Are they bundling 
because it is a simpler way of getting the money out the door? 
Or is it a way to take care of people that you want to take 
care of?
    Mr. Miera. Absolutely all of the above. What I have seen is 
that there is a real requirement. There is no way around it. 
There have been lots of cuts in the administrative ranks and 
there are not enough contracting officers and there are some 
efficiencies, not all, but there are some efficiencies to 
bundling.
    But what I have also seen is that contracting officers and 
program managers have used it as an excuse. They never 
supported minority business programs. They never supported the 
8(a) program. And if there is any method that they can use to 
not have to go to contractors like that, they will use it.
    So I have seen it just as an excuse, where they say, oh, 
well, we don't have enough contracting officers. But as I 
showed in my example, it is false economy. In actually, many 
times where there are subcontracting requirements, it has cost 
the Government and the taxpayers more money to bundle a 
contract where there is subcontracting involved than if they 
would have just hired another contracting officer to administer 
the contract.
    Mr. Galaviz. Mr. Chairman, with all due respect, think of 
you building a home and deciding not to have a general 
contractor, and for the electrician to do this and the plumber 
to do that. Basically, the fact is that it makes sense many 
times to bundle in order for that Government official to have 
one point of contact, one point of accountability, and then 
have the work be done.
    So I think it is realistic to say that bundling is here to 
stay. Bundling is not going to go away. And it is difficult to 
manage. Even President Bush's Executive order that he put in 2 
years after he took office, although it was a good faith 
effort, but that Executive order is not working.
    The fact is that while you were away, we stated that 
several agencies have demonstrated, like the Air Force, where 
there is significant capability in the small business community 
and the minority community to handle major contracts. As I 
stated, the Air Force has demonstrated on providing direct 
awards, competitive awards of $800 million or $474 million. The 
civilian agencies like the Department of Energy have set aside 
an important contract that was awarded to a small business on a 
competitive basis that was almost a half-a-billion-dollar 
contract. And there was a lot of competition for those 
contracts.
    So basically, bundling is here to stay and the best 
solution is to have a set-aside to say, of all the bundling 
contracts, 20 or 25 percent will be set-aside on a competitive 
basis for the small business community, and then if you let SBA 
and the Air Force complete their negotiations to have the 
informal joint venture so that a lot of small business can 
gather to meet the 51 percent, the 50 percent rule as a prime 
contractor for small business set-asides, then between that and 
having the set-asides for bundling, that will be really the 
long-term solution, the only solution.
    On the subcontracting, with all due respect, it is best to 
get the Government out of monitoring. Get SBA out of the 
subcontracting business. But have this Committee--have the 
leadership of this Committee to design a program that is 
private-sector-driven and where it gets the parties, the 
subcontractor and the prime contractor, in the legal 
subcontractor arrangement and that that arrangement is 
submitted with that proposal so the Government can evaluate.
    Today, Mr. Chairman, if a major prime wants a $200-million 
contract and they say in their subcontracting plan that they 
are going to give 20 percent, that is $40 million. But what 
really happens is when the contract starts, only $8 million is 
really distributed within the subcontract to small business. 
The other $32 million is later on to be determined who is going 
to do the work over the 5 or 10 years of the contract.
    So what happens is a good portion of that $32 million never 
gets to the subcontractors. It goes to the prime because that 
means more money to their pockets, which really means that the 
evaluators of that proposal, the Federal evaluators, only were 
able to get to know at the beginning what 80 percent of the 
work was going to be done by what companies. Now, would anyone 
in this room buy a house without looking at the master bedroom 
and the kitchen? And the way the thing works, that is exactly 
what we are doing. We let this corporation submit their plans. 
They don't award the contracts at the beginning, when the 
contract starts, and no one knows who later on--small business 
will not get the subcontract contracts.
    Chairman Kerry. Well, we are going to take a look at that.
    Dr. Wainwright. Mr. Chairman----
    Chairman Kerry. Yes, sir.
    Dr. Wainwright. I would just add, I think I agree with both 
these gentlemen in that you have to tie the subcontracting plan 
to the profits of the contractor, not just their ability to get 
the award, but once--because, you know, once the award is won, 
they can blow off the subcontractor----
    Chairman Kerry. And then the game gets played and the money 
gets distributed and there is no back-up on that. Is there not 
sufficient oversight or follow-up on that now? No?
    Dr. Wainwright. [Shaking head.]
    Chairman Kerry. OK. Well, we have to take a look at that. 
Obviously, it is not working right and that is a very good 
point of accountability, so we ought to be taking a look at 
that.
    One quick question before we wrap up here. On the venture 
capital dollars, SBA's shrinking venture capital dollars, I 
wrote the Administrator last year and he wrote back to say they 
were making a lot of effort to reverse those things with 
aggressive outreach efforts and that a number of minority-led 
firms are in the process of applying for SSBIC licenses. That 
was a year ago. Do we have a sense of how we are doing on that 
in your judgment, any of you? Mr. Robinson?
    Mr. Robinson. At best I can tell, very poorly. I don't see 
anything that I am aware of that would suggest that the SBA has 
moved forward aggressively to include more minorities as 
Special Small Business Investment Companies. So I have seen no 
real movement on that.
    Chairman Kerry. Mr. Miera
    Mr. Miera. What I have seen in my experience is that the 
few folks that are left in the field are barely keeping their 
heads above water, much less putting anything new in line.
    Chairman Kerry. Well, let me wrap up by saying to 
everybody, Senator Snowe knows these issues as well as anybody 
in the Congress and I have been on this Committee for a fair 
amount of time or I wouldn't be sitting in this Chair. I have 
never seen the SBA at loggerheads with the community it is 
supposed to serve to as great a degree as it is today, and it 
is baffling to a lot of us on this Committee on both sides of 
the aisle. It is very frustrating.
    And I hope, Mr. Jenkins, you kind of go back there, and I 
think it is time for us to think about when we get the 
Administrator back. I have been trying to give him a fair 
amount of time to kind of get a handle on things and be able to 
get his feet under him over there, but we have to figure out 
how we are going to turn this relationship around, because we 
are hearing from too many of the clients in the community that 
it is not working for them correctly.
    And we always expect a wrinkle here or there and there are 
always things that you can adjust a little and there are tweaks 
and so forth, but this is bigger than tweaking and adjusting. 
This is some sort of fundamental breakdown, and part of it goes 
to the budget issue which we have been screaming about here 
also on a bipartisan basis for a couple of years.
    This notion, you know, Hector Barreto used to come in here 
and say, well, we are doing more with less. I mean, that was 
great rhetoric, but it just isn't happening. There is less 
happening with less and it is not happening as well as it used 
to be.
    So it baffles me, because the SBA has the ability to have 
its own budget paid many times over by the companies that 
expand the tax base of this country. And when you look at it, 
you can take some of the icons of the effort over the years, 
ranging from the FedExes to the Intels to the Callaway Golfs 
and run down a long list of them. But you can take less 
prominent ones and find a sufficient return to the Federal 
Treasury to have paid this budget many times over. So, I mean, 
this nickel-and-diming just doesn't make sense. I don't know 
whose ideological juices are getting pumped by it, but it is 
really counterproductive.
    So on that note, folks, we are going to try to pursue this, 
and I will spend some time with the Ranking Member, and we will 
talk together about how we can do this in a bipartisan and 
thoughtful way.
    We appreciate your testimony here very much. Thank you all.
    We stand adjourned.
    [Whereupon, at 12:17 p.m., the Committee was adjourned.]
        























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