    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-399

    TITLE:     Contract Management: Increased Use of Alaska Native
    Corporations' Special 8(a) Provisions Calls for Tailored Oversight

    DATE:   04/27/2006

    -----------------------------------------------------------------

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    GAO-06-399

         * Results in Brief
         * Background
         * Increase in 8(a) Federal Contracting with ANC Firms
              * Dollars to ANC Firms Governmentwide Have Increased
              * Increasing Percentage of Total 8(a) Dollars Obligated to ANC
              * Sole-Source Contracts Represent Majority of 8(a) ANC Obligat
         * Federal Agencies Contract with ANC Firms for a Variety of Se
         * Agency Officials View Contracting with ANC Firms as Quick an
              * Sole-Source 8(a) Contracts to ANC Firms Viewed as Expedient
              * ANC 8(a) Awards Help Agencies Meet Small Business Goals
              * Required Notifications of Contract Modifications Not Always
              * Contracting Officials Not Consistently Monitoring Subcontrac
         * ANCs Use the 8(a) Program to Increase Revenue and Provide Be
              * 8(a) Program among Revenue Sources for ANCs to Provide Benef
              * Key Practice Is Creation of Multiple 8(a) Subsidiaries
              * ANCs Pursue Other 8(a) Business Strategies
                   * Relying on Outside Expertise
                   * Creating Partnership Arrangements
                   * Forming Holding Companies
         * Improvements Needed in Oversight of ANCs in the 8(a) Program
              * SBA Oversight of ANCs in the 8(a) Program Is Not Adequate
                   * Not Tracking Secondary Lines of Business across Multiple 8(a
                   * Not Consistently Determining Whether Other Small Businesses
                   * Failing to Determine Substantial Unfair Competitive Advantag
                   * Not Ensuring That Partnerships between ANCs and Large Firms
                   * Not Collecting Information on ANC Participation
         * Conclusion
         * Recommendations for Executive Action
         * Agency Comments and Our Evaluation
              * Regional Corporations (12)
                   * Village Corporations (33)
                   * Urban Corporations (4)
                   * Group Corporations (0)
                   * Other Direct Benefits:
                   * Indirect Benefits:
         * GAO Contact
         * Staff Acknowledgments
         * GAO's Mission
         * Obtaining Copies of GAO Reports and Testimony
              * Order by Mail or Phone
         * To Report Fraud, Waste, and Abuse in Federal Programs
         * Congressional Relations
         * Public Affairs

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    April 2006

    CONTRACT MANAGEMENT

    Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls
    for Tailored Oversight

    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations Alaska Native Corporations Alaska Native
    Corporations Alaska Native Corporations Alaska Native Corporations Alaska
    Native Corporations Alaska Native Corporations Alaska Native Corporations
    Alaska Native Corporations

    GAO-06-399

    Contents

    Letter 1

    Results in Brief 6
    Background 9
    Increase in 8(a) Federal Contracting with ANC Firms 11
    Federal Agencies Contract with ANC Firms for a Variety of Services
    Worldwide 14
    Agency Officials View Contracting with ANC Firms as Quick and Easy, but
    Rules Not Always Followed 16
    ANCs Use the 8(a) Program to Increase Revenue and Provide Benefits 23
    Improvements Needed in Oversight of ANCs in the 8(a) Program 33
    Conclusion 39
    Recommendations for Executive Action 40
    Agency Comments and Our Evaluation 41
    Appendix I Scope and Methodology 48
    Appendix II Comments from the Small Business Administration 53
    Appendix III Comments from the Department of Homeland Security 55
    Appendix IV Comments from the Department of the Interior 57
    Appendix V Comments from the National Aeronautics and Space Administration
    59
    Appendix VI Comments from the Department of State 60
    Appendix VII Comments from the Department of Energy 65
    Appendix VIII Comments from the Native American Contractors Association 67
    Appendix IX Alaska Native Corporations with Subsidiaries Participating in
    the 8(a) Program 78
    Appendix X Benefits That Alaska Native Corporations Provide to Their
    Shareholders 80
    Appendix XI Example of an Alaska Native Corporation Owning Subsidiaries
    That Market Their Capabilities under Overlapping NAICS Codes 85
    Appendix XII GAO Contact and Staff Acknowledgments 86

    Tables

    Table 1: Differences in Requirements for Other 8(a) Businesses and 8(a)
    ANC Firms 3
    Table 2: Overview of Number of Shareholders and Net Incomes for the
    Corporations We Reviewed (Fiscal Year 2004 Data) 10
    Table 3. Location and Services for Selected 8(a) ANC Sole-Source Contracts
    15
    Table 4: Practices Pertaining to Owning Multiple Subsidiaries 28
    Table 5: ANCs with Subsidiaries Participating in the 8(a) Program (26) 50
    Table 6: ANCs That Do Not Have Subsidiaries Participating in the 8(a)
    Program (4) 51
    Table 7: Villages Visited 51

    Figures

    Figure 1: ANCSA Regions and Sites We Visited 5
    Figure 2: 8(a) and Non-8(a) Obligations to ANC Firms Governmentwide for
    Fiscal Years 2000 to 2004 (in Millions) 12
    Figure 3: Obligations to 8(a) Firms Overall and to 8(a) ANC Firms,
    Governmentwide, for Fiscal Years 2000 to 2004 (in Millions) 13
    Figure 4: Sole-Source Obligations to 8(a) ANC Firms for Fiscal Years 2000
    to 2004 for Selected Agencies (in Millions) 14
    Figure 5: Revenue Sources for a Sample ANC 24
    Figure 6: Number of ANC Parent Corporations and Subsidiaries Active in
    8(a) Program, 1988 to 2005 26
    Figure 7: Sample ANC with Holding Company 31

    Abbreviations

    ANC Alaska Native corporations ANCSA Alaska Native Claims Settlement Act
    CIFA Counter Intelligence Field Activity DOD Department of Defense DUNS
    Data Universal Numbering System FPDS Federal Procurement Data System MOU
    memorandums of understanding NAICS North American Industry Classification
    System NASA National Aeronautics and Space Administration SBA Small
    Business Administration

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office

    Washington, DC 20548

    April 27, 2006

    Congressional Requesters:

    In December 1971, Congress enacted the Alaska Native Claims Settlement Act
    (ANCSA)1 to resolve long-standing aboriginal land claims and to foster
    economic development for Alaska Natives. This legislation created Alaska
    Native corporations (ANC), which would become the vehicle for distributing
    land and monetary benefits to Alaska Natives in lieu of a reservation
    system.2 ANSCA permitted the conveyance of about 44 million acres of land
    to the ANCs, along with cash payments of almost $1 billion in exchange for
    extinguishing the aboriginal land claims in Alaska. Regional corporations
    were required to be formed as profit-making entities, while village,
    urban, and group corporations could decide whether to be profit or
    nonprofit entities. As of December 2005, there were 13 regional
    corporations and 182 village, urban, and group corporations. ANCSA does
    not set any requirements on how ANCs are to use the profits they generate.

    In 1986, legislation passed that allowed ANC-owned businesses to
    participate in the Small Business Administration's (SBA) 8(a) program-one
    of the federal government's primary means for developing small businesses
    owned by socially and economically disadvantaged individuals. This program
    allows the government to award contracts to participating small businesses
    without competition below certain dollar thresholds. Congress has
    repeatedly emphasized in legislation the business development aspects of
    the 8(a) program. Each 8(a) firm, including those owned by ANCs, must
    qualify as small under an industry size standard as measured by number of
    employees or average revenues from the previous 3 years, and must be
    majority-owned by a disadvantaged individual or a qualified entity, such
    as an ANC. Firms approved as 8(a) participants can receive business
    development assistance from SBA and are eligible to receive contracts that
    agencies offer to SBA for the 8(a) program. In 1998, SBA started
    negotiating memorandums of understanding (MOU) that allowed federal
    agencies to contract directly with 8(a) firms. The MOUs (also called
    partnership agreements), delegate contract execution responsibility to the
    agencies and require them to monitor certain requirements of the contract.

    1Pub.L. 92-203 (codified as amended in 43 U.S.C. 1601, et seq.).

    2 Aside from monetary benefits, ANCs also provide other benefits to their
    shareholders, such as scholarships, internships, burial assistance, and
    benefits for elder shareholders. The benefits ANCs provide are discussed
    in detail in appendix X.

    Since 1986, Congress has extended special procurement advantages to ANC
    firms beyond those afforded to other 8(a) businesses.3 Table 1 shows the
    advantages. 4

    3In this report, the term "ANC" refers to the parent corporation, usually
    located in Alaska. The term "ANC firm" denotes a business owned by an ANC.
    This has the same meaning as "ANC-owned concern" which is the term used in
    SBA's small business regulation. We use the term "subsidiary," as used in
    ANSCA, to refer to direct and indirect ANC subsidiaries.

    4We found the legislative history leading to the procurement advantages to
    be sparse and to contain some confusing language. For example, legislative
    language suggests that 8(a) businesses owned by Indian tribes (defined to
    include ANCs) were exempt from sole-source dollar thresholds because such
    businesses are located on reservations and account for the major
    employment of the workforce. ANCs, however, do not have reservations.

    Table 1: Differences in Requirements for Other 8(a) Businesses and 8(a)
    ANC Firms

    Requirement        Other 8(a) businesses        8(a) ANC firms
    Number of firms an Only one in a lifetime and   No limit as long as each
    8(a) participant   no more than 20 percent of   business is in a different
    may own            another 8(a) firm            primary industry
    Size determination For-profit, nonprofit,       Other affiliated companies
    for eligibility in domestic, and foreign        not considered in size
    8(a) program       affiliates considered in     determination; however,
                          size determination           SBA may find the existence
                                                       of affiliation if, for
                                                       example, it determines
                                                       that the 8(a) ANC firm or
                                                       firms have a substantial
                                                       unfair competitive
                                                       advantage within an
                                                       industry.
    Competitive        Can receive sole-source      No threshold Procurements
    threshold          contracts for up to $5       need not be competed
                          million for manufacturing or before being accepted on a
                          $3 million for all other     sole-source basis.
                          contracts. Procurements must
                          be competed whenever
                          possible before being
                          accepted on a sole-source
                          basis.
    Demonstration of   Must (1) be a member of a    Deemed in legislation as
    social and         group deemed as socially     socially and economically
    economic           disadvantaged or prove       disadvantaged
    disadvantage       social disadvantage by
                          meeting certain standards
                          and (2) must prove economic
                          disadvantage
    Management         President/chief executive    President/chief executive
    background         officer must be a            officer need not be a
                          disadvantaged individual     disadvantaged individual
    Potential for      Must be in business in       Must be in business in
    success            primary industry             primary industry
                          classification for at least  classification for at
                          2 years before 8(a)          least 2 years before 8(a)
                          application date SBA can     application date or
                          waive the requirement if     demonstrate to SBA
                          certain conditions are met,  potential for success
                          such as substantial business (i.e., technical and
                          experience, adequate         management experience;
                          capital, and past success on financial capability; past
                          contracts.                   experience).

    Source: GAO analysis.

    Note: Other groups, such as Indian tribes, Native Hawaiian Organizations,
    and Community Development Corporations, have some advantages in the 8(a)
    program similar to those afforded ANCs. Further, Congress has provided
    preferences to businesses owned by Indian tribes (defined to include
    ANCs), under the Office of Management and Budget's A-76 program in several
    prior Defense Appropriation Acts, including the Defense Appropriations Act
    for fiscal year 2006. Department of Defense Appropriations Act, 2006, Pub.
    L. 109-148 S: 8014(b)(1)(C).

    Recently, a number of high-dollar, sole-source 8(a) contracts awarded to
    ANC firms have attracted the attention of Congress and the media. This
    report identifies (1) trends in the government's 8(a) contracting with
    ANCs from fiscal years 2000 to 2004; (2) the reasons agencies have awarded
    8(a) sole-source contracts to ANC firms and the facts and circumstances
    behind some of these contracts; and (3) how ANCs are using the 8(a)
    program. In addition, we evaluated SBA's oversight of 8(a) ANC firms,
    given these companies' unique procurement advantages.

    To gather data on federal 8(a) contracting with ANCs, we identified each
    ANC firm's Data Universal Numbering System (DUNS) number5 and used this
    information to obtain data from the Federal Procurement Data System (FPDS)
    for fiscal years 2000 through 2004. We tested the FPDS data for
    reliability by comparing this information with procurement data submitted
    by six agencies that accounted for almost 85 percent of total 8(a) ANC
    obligations over the 5-year period: the departments of Defense, Energy,
    the Interior, State, and Transportation and the National Aeronautics and
    Space Administration (NASA). We planned to include the Department of
    Homeland Security's data in our trend analysis but did not do so for two
    reasons. First, because the department became operational in March 2003,
    FPDS data would reflect only part of fiscal year 2003 and beyond. Second,
    we found that the data from Homeland Security were inconsistent, and
    therefore questioned the reliability of the data overall.

    We analyzed documents provided by SBA's headquarters and Alaska district
    office and interviewed officials from those offices. We reviewed 16 large,
    sole-source 8(a) contracts awarded to ANC firms by the six agencies cited
    above as well as by the Department of Homeland Security and interviewed
    appropriate contracting officials. We traveled to Alaska and met with
    executives representing 30 ANCs, including each of the 13 regional ANCs
    and 17 village or urban corporations. Of the 30 corporations, 26 were
    participating in the 8(a) program and 4 were not at the time of our
    review. We also spoke with Alaska Native shareholders and reviewed the
    companies' annual reports and other relevant documentation. Figure 1
    depicts the sites we visited in Alaska.

    5A DUNS number is a 9-digit identification number assigned by Dun &
    Bradstreet, Inc., to identify unique business entities.

    Figure 1: ANCSA Regions and Sites We Visited

    Note: Stars identify villages and urban areas where we conducted our work.
    See appendix I for the names of the villages and corporations.

    We also spoke with representatives from small businesses, an 8(a)
    association, and the Native American Contractors Association. Our work
    included a detailed review of the laws, regulations, and legislative
    history that afforded ANCs their special 8(a) provisions. Appendix I
    contains more details on our scope and methodology. We conducted our
    review from April 2005 to March 2006 in accordance with generally accepted
    government auditing standards.

                                    Results in Brief

    While representing a small amount of total federal procurement spending,
    dollars obligated to ANC firms through the 8(a) program grew from $265
    million in fiscal year 2000 to $1.1 billion in 2004, with a noticeable
    increase in 2003. Overall during the 5-year period, the government
    obligated $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent,
    went through the 8(a) program. About 13 percent of total 8(a) dollars were
    obligated to ANC firms in fiscal year 2004. For the six agencies included
    in our trend analysis, sole-source 8(a) obligations to ANC firms rose from
    about $180 million in fiscal year 2000 to $876 million in fiscal year
    2004, representing about 77 percent of these agencies' total obligations
    to 8(a) ANC firms over the 5-year period. As illustrated in our contract
    file sample, these sole-source contracts can represent a broad range of
    services, such as contracts for construction in Brazil, training of
    security guards in Iraq, and information technology services in
    Washington, D.C.

    Agency officials told us they have turned to 8(a) ANC firms as a quick,
    easy, and legal method of awarding contracts for any value. At the same
    time, the officials noted that these contracts help them meet small
    business goals. In our review of selected large dollar value, sole-source
    contracts, we found that contracting officials had not always complied
    with requirements to notify SBA when modifying the contracts to increase
    the scope or dollar value and to monitor the percentage of work performed
    by the ANC firms versus their subcontractors. One contracting officer was
    under the impression that the scope of work could be expanded to include
    any additional lines of business not in the original contract because it
    was a sole-source 8(a) ANC contract.

    ANCs use the 8(a) program as one of many tools to generate revenue with
    the goal of benefiting their shareholders. Appendix X contains detailed
    information on benefits the corporations are providing. Some ANCs are
    heavily reliant on the 8(a) program for revenues, while others approach
    the program as one of many revenue-generating opportunities, such as
    investments in stocks or real estate. ANCs are using the congressionally
    authorized advantages afforded to them, such as ownership of multiple 8(a)
    subsidiaries, sometimes in diversified lines of business. From fiscal year
    1988 to 2005, numbers increased from one 8(a) subsidiary owned by one ANC
    to 154 subsidiaries owned by 49 ANCs, with the largest growth occurring in
    recent years. ANCs sometimes leverage expertise and management by sharing
    staff and expertise among subsidiaries to win new contracts and create a
    subsidiary to win a follow-on contract when the original subsidiary
    outgrows its designation as "small." Another practice is partial ownership
    of subsidiaries, which in some cases means that subsidiary executives
    retain a portion of the profit they generate-up to 44 percent in one case
    we found. Other ANCs have purposely limited their 8(a) involvement to a
    targeted industry with the goal of becoming independently sustainable-a
    strategy that, in their view, is consistent with the business development
    intent of the 8(a) program. ANCs have also formed partnerships with other
    ANCs or other firms to increase opportunities to obtain federal contracts.
    Finally, some ANCs have created holding companies to increase efficiency
    across multiple subsidiaries.

    SBA has not tailored its policies and practices to account for ANCs'
    unique status in the 8(a) program and their growth in federal contracting,
    even though SBA officials recognize that ANC firms enter into more complex
    business relationships than other 8(a) participants. The officials agreed
    that improvements are needed and told us they are planning to revise their
    regulations and policies. Examples where SBA's oversight has fallen short
    include not

               o  determining whether more than one subsidiary of the same ANC is
               generating the majority of revenue under the same primary
               industry;6
               o  consistently determining whether other small businesses are
               losing contracting opportunities when large, sole-source 8(a)
               contracts are awarded to ANC firms;
               o  adhering to a legislative and regulatory requirement to
               ascertain whether 8(a) ANC firms have, or are likely to obtain, a
               substantial unfair competitive advantage within an industry;
               o  ensuring that the partnerships between ANC firms and large
               firms are functioning in the way they were intended under the 8(a)
               program; and
               o  maintaining information on ANCs' 8(a) activity.

    SBA officials told us that they have faced a challenge in overseeing the
    activity of the 8(a) ANC firms because ANCs' charter under ANCSA is not
    always consistent with the business development intent of the 8(a)
    program. They noted that the goal of ANCs-economic development for Alaska
    Natives from a community standpoint-can be in conflict with the primary
    purpose of the 8(a) program, which is business development for individual
    small, disadvantaged businesses.

    6The primary industry is the primary line of work that the 8(a) firm
    performs. 8(a) concerns may also seek opportunities through secondary
    business activities, as long as they qualify as small for the size
    standards pertaining to each line of work.

    We make recommendations in this report to SBA on actions that can be taken
    in revising its regulations and policies as well as ways to improve
    practices pertaining to its oversight of ANC 8(a) procurements. We also
    recommend that the procuring agencies involved in our review work with SBA
    to develop guidance for their contracting officers on how to comply with
    the requirements of the 8(a) program to help address some problems we
    found with the 8(a) sole-source contracts we reviewed.

    Six of the procuring agencies involved in our review agreed with the
    recommendation we made to them. The Department of Energy did not comment
    on the recommendation. In some cases, the agencies provided technical
    comments or clarifications, which we incorporated as appropriate. We also
    received written comments from the Native American Contractors
    Association. The association believes that we should more fully
    acknowledge the legal and policy basis of 8(a) program rules for native
    entities and that we should provide a broader perspective on issues that
    impact the entire federal procurement system. We believe we have
    adequately addressed the legal and policy basis for the ANCs' 8(a)
    provisions. While we have reported in the past on the broader issues
    raised by the association,7 these matters were outside the scope of this
    particular audit. In separate technical comments, the association
    suggested we add, for context, total federal government spending. We have
    added this information as a note to figure 3.

    In written comments on a draft of this report, SBA took issue with several
    aspects of the report, stating that the concerns we raised were
    "subjective" and based on isolated individual anecdotes. We strongly
    disagree with SBA's characterization of our report. Our findings are
    supported by the facts we gathered during our audit and the analyses we
    conducted, and these findings directly support the recommendations we
    make. It is an undisputed fact that 8(a) ANC activity has increased in
    recent years. Clearly, 6 of the 7 procuring agencies involved in our
    review-which account for most of the government's 8(a) dollars to ANC
    firms-agree that they need to partner with SBA to ensure that contracting
    officers understand the tailored provisions Congress has provided these
    firms. SBA stated that it has taken a number of steps to improve oversight
    of the 8(a) program, including taking into consideration special
    provisions afforded to ANC concerns. Despite our requests throughout our
    review for specific information on actions SBA was taking, the agency did
    not provide us with any evidence that would support its statement. SBA's
    comment letter did not indicate whether it plans to implement our
    recommendations, but in a subsequent e-mail SBA expressed disagreement
    with several of them. A detailed discussion of the comments begins in the
    "Agency Comments" section of this report.

    7 For example: GAO, Federal Procurement: Spending and Workforce Trends,
    GAO-03-443 (Washington, D.C.: April 30, 2003); GAO, Contract Management:
    Impact of Strategy to Mitigate Effects of Contract Bundling on Small
    Business is Uncertain, GAO-04-454 (Washington, D.C.: May 27, 2004); GAO,
    Small Business Contracting: Concerns About the Administration's Plan to
    Address Contract Bundling Issues, GAO-03-559T (Washington, D.C.: March 18,
    2003); GAO, Reporting of Small Business Contract Awards Does Not Reflect
    Current Business Size, GAO-03-776R (Washington, D.C.: May 7, 2003); and
    GAO, Interagency Contracting: Problems with DOD's and Interior's Orders to
    Support Military Operations, GAO-05-201 (Washington, D.C.: April 29,
    2005).

    The written comments we received are included in their entirety in
    appendixes II through VIII.

                                       Background

    ANSCA created 12 regional ANCs, each representing a region of Alaska, and
    a 13th corporation for Alaska Natives living outside Alaska. There are
    also 182 village, urban, and group corporations located within the 12
    regions.8 In most cases, the regional corporations received a mixture of
    surface and subsurface rights to land while the village, urban, or group
    corporations received only surface rights. Some village corporations opted
    out of the ANCSA settlement to receive surface and subsurface rights to
    their former reservation lands and relinquished all ANSCA benefits,
    including claims to additional land, monetary payments, or shares of stock
    in a regional corporation. Additionally, in some cases, village
    corporations merged with each other or with the regional corporation.

    The legislative history of ANSCA is focused on economic development for
    the benefit of Alaska Natives. Each eligible Alaska Native is generally
    entitled to membership both in the corporation established for his or her
    village and in the regional corporation in which the village is located.
    As shareholders, Alaska Natives are entitled to a voice in the management
    of and a share in the lands, assets, and income as decided by the board of
    directors of the corporations, which own and manage the land and money.
    ANCSA implemented restrictions that generally allow original shareholders
    to transfer shares only under certain circumstances, such as divorce or
    through a gift or a will.9 Additionally, four of the 30 corporations we
    reviewed have chosen to issue new stock to descendants of the original
    shareholders or those who did not have the opportunity to enroll as a
    shareholder originally.

    8ANCSA created village corporations for communities of 25 or more Alaska
    Natives, group corporations for associations of fewer than 25 Alaska
    Natives, and urban corporations for urban communities of Alaska Natives.

    ANCs vary widely in number of shareholders and profitability. Table 2
    illustrates some examples.

    Table 2: Overview of Number of Shareholders and Net Incomes for the
    Corporations We Reviewed (Fiscal Year 2004 Data)

                                                                             ANCs
                                                                             with
                                 Most       Fewest ANCs with net income over  net
                         shareholders shareholders               $10 million loss
    Regional                17,242        1,137                         4    3
    corporations
    Village and urban        3,238          137                         2    5
    corporations

    Source: GAO analysis of data provided by ANCs.

    For ANC firms in the 8(a) program, SBA has specific oversight
    responsibility for

               o  accepting the firm into the 8(a) program, which includes
               ensuring that the ANC does not have more than one 8(a) firm in the
               same primary line of business, defined by a North American
               Industry Classification System (NAICS) code;10
               o  verifying each firm's size status to ensure that it qualifies
               as small under the NAICS code assigned to the procurement; and
               o  annually reviewing 8(a) firms to track their progress in the
               8(a) program.

    943 U.S.C. 1606(g)(2) and (h)(1)(C). Although the ANCs have ownership and
    control over their lands, the act provided that Alaska Natives could not
    sell their shares of corporation stock to the public for 20 years after
    December 18, 1971 (Pub.L. 92-203 S: 7(h)). In 1988, Congress extended this
    provision, but gave the individual Natives the option to sell the stock
    publicly if a majority of the shareholders approved. (Pub.L. 100-241 S: 8
    codified at 43 U.S.C. 1629c).

    10SBA has designated a small business size standard for every NAICS code.
    8(a) applicants must qualify as small under their primary NAICS code at
    the time of application and SBA's certification date. SBA regulation
    requires that at least 2 years lapse after an ANC firm exits the 8(a)
    program before another firm owned by the same parent ANC can enter the
    program with the prior firm's primary NAICS code. However, once accepted
    into the program, 8(a) firms may pursue contracts in any line of work,
    called secondary NAICS codes.

    There is a 9-year limit to participation in the 8(a) program, and
    firms-including ANC firms-are required to obtain a certain percentage of
    non-8(a) revenue during the last five years to demonstrate their progress
    in developing a viable business that is not reliant on the 8(a) program.
    SBA's district offices are responsible for tracking the business mix of
    8(a) and non-8(a) revenue on an annual basis. If a firm does not meet its
    required business mix during one of the last five years, SBA invokes a
    plan of remedial action for the next year, in which the firm reports to
    SBA its progress toward compliance with the required business mix. Until
    the required mix is demonstrated, the firm will not be eligible for
    sole-source 8(a) contracts. Currently there are over 9,400 firms in the
    8(a) program.

                  Increase in 8(a) Federal Contracting with ANC Firms

    From fiscal year 2000 to 2004, the federal government obligated a total of
    about $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent,
    went through the 8(a) program. About 13 percent of total 8(a) dollars were
    obligated to ANC firms in fiscal year 2004. Further, from fiscal year 2000
    to 2004, sole-source awards accounted for 77 percent of ANC 8(a) contracts
    for the six agencies in our trend analysis. The sole-source 8(a) contracts
    that we reviewed demonstrate the wide diversity of services provided by
    ANC firms worldwide.

    Dollars to ANC Firms Governmentwide Have Increased

    Our analysis, based on FPDS data, shows that federal dollars obligated to
    ANC firms through the 8(a) program grew from $265 million in fiscal year
    2000 to $1.1 billion in 2004, with a noticeable increase in 2003. Over the
    5-year period, about 63 percent of the government's obligations to ANC
    firms went through the 8(a) program. Figure 2 shows the breakdown between
    8(a) and non-8(a) dollars obligated to ANC firms.

    Figure 2: 8(a) and Non-8(a) Obligations to ANC Firms Governmentwide for
    Fiscal Years 2000 to 2004 (in Millions)

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

    We also analyzed the percentage of total 8(a) dollars obligated to ANC
    firms from fiscal years 2000 to 2004. Total obligations to all 8(a) firms
    grew from about $5.8 billion in fiscal year 2000 to about $8.4 billion in
    fiscal year 2004. The percentage obligated to 8(a) ANC firms grew from
    about 5 percent to about 13 percent during this time period. Whereas
    obligations to 8(a) ANC firms decreased only slightly between fiscal years
    2003 and 2004, dollars obligated to other 8(a) firms decreased by almost
    $2 billion during that same time frame. SBA officials could not explain
    the decrease. Figure 3 depicts this trend.

    Figure 3: Obligations to 8(a) Firms Overall and to 8(a) ANC Firms,
    Governmentwide, for Fiscal Years 2000 to 2004 (in Millions)

    Notes: Excluding dollars obligated to 8(a) ANC firms does not change the
    overall trend of total 8(a) dollars (top line of graph). For context,
    total federal government procurement spending in fiscal year 2004 was more
    than $341 billion, according to FPDS data.

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

    For the six agencies included in our 8(a) trend analysis, sole-source
    obligations to ANC firms increased from about $180 million in fiscal year
    2000 to almost $876 million in fiscal year 2004. Over the five-year
    period, sole-source obligations represented about 77 percent of these
    agencies' total obligations to 8(a) ANC firms.

    Figure 4 depicts the trend in 8(a) sole-source obligations to ANC firms
    for the six agencies.

    Figure 4: Sole-Source Obligations to 8(a) ANC Firms for Fiscal Years 2000
    to 2004 for Selected Agencies (in Millions)

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

    In recent years, ANC firms have performed a wide variety of services for
    the federal government, spanning 18 broad industries, across the United
    States and overseas. The services included facilities support services;
    construction; professional, scientific, and technical services;
    information technology services; and manufacturing. Our review of selected
    large sole-source 8(a) contracts further demonstrates the wide diversity
    of services provided by ANC firms, as shown in table 3.

    Table 3. Location and Services for Selected 8(a) ANC Sole-Source Contracts

                                                      Approximate
                                                         contract
                                                        value (in
    Agency         Location   Contractor             millions) Services
    Defense        Florida    Chugach Management          $593 Facilities
                                 Services, Inc.                   support
                                                                  services
    Defense        Alabama    Chugach Management           230 Facilities
                                 Services, Inc.                   support
                                                                  services
    Defense        Nationwide Bowhead                       33 Distribution of
                                 Manufacturing                    water and fuel
                                 Company, LLC                     tanks to U.S.
                                                                  storages sites
                                                                  in support of
                                                                  the Iraq War
    Defense        Iraq       ASRC Airfield &               50 Train and equip
                                 Range Services, Inc.             security guards
    Energy         Former     Ahtna Government              80 Design,
                      Soviet     Services Corporation             construction,
                      Union and                                   and
                      other                                       installation of
                      unsecured                                   radiation
                      countries                                   portals and
                                                                  communication
                                                                  equipment
    Energy         New Mexico Sage Systems                  25 Analysis and
                                 Technologies, LLC                assessment of
                                                                  organizational
                                                                  effectiveness
    Homeland       New York   Ahtna Technical               20 Detention
    Security                  Services, Inc.                   facility
                                                                  operations
                                                                  support
    Homeland       Florida    Ahtna Technical               11 Detention
    Security                  Services, Inc.                   facility
                                                                  operations
                                                                  support
    Interior       New York   Field Support                 65 Facilities
    (contract                 Services, Inc.                   operation and
    awarded on                                                 maintenance
    behalf of
    Homeland
    Security)
    Interior       Virginia   TKC Communications,          100 Leasing and
    (contract                 LLC                              management of
    awarded on                                                 commercial
    behalf of                                                  property and
    Defense)                                                   construction
                                                                  oversight
    NASA           Virginia   ASRC Aerospace                32 Scientific and
                      and        Corporation                      technical
                      Maryland                                    information
                                                                  content
                                                                  acquisition and
                                                                  management and
                                                                  information
                                                                  technology
                                                                  support
    NASA           Ohio       Akima Corporation             60 Technical and
                                                                  fabrication
                                                                  support
                                                                  services
    State          Worldwide  KUK/KBRS Global, a           145 Compound
                                 joint venture                    security
                                 between Kuk                      upgrades at
                                 Construction LLC and             multiple
                                 Kellogg Brown & Root             facilities
                                 Services, Inc.
    State          Sao Paolo, Alutiiq Fluor                 55 Renovation of
                      Brazil     Constructors, LLC, a             existing office
                                 joint venture                    buildings
                                 between Alutiiq
                                 Management Services,
                                 LLC and Fluor
                                 Federal Services
    Transportation Washington Bowhead Information         $200 Consolidated
                      D.C.       Technology Services,             information
                                 Inc.                             technology
                                                                  services
    Transportation Washington Bowhead Support               20 Information
                      D.C.       Services, a division             technology
                                 of Bowhead                       support
                                 Transportation                   services
                                 Company, Inc.

    Source: Agency contract files and discussions with contracting officials.

    Notes: Some of the contracts included in our review were indefinite
    quantity contracts. For these, the approximate contract value reflects the
    base year plus all potential option years. The Homeland Security contracts
    were awarded by the former Immigration and Naturalization Service prior to
    the department's creation. Homeland Security's Immigration and Customs
    Enforcement organization now has responsibility for the contracts in our
    sample.

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

    In general, acquisition officials at the agencies we reviewed told us that
    the option of using ANC firms under the 8(a) program allows them to
    quickly, easily, and legally award contracts for any value. They also
    pointed out that awarding 8(a) contracts to ANC firms helps agencies meet
    their small business goals. Our review of 16 large sole-source contracts
    found that contracting officials had not always complied with requirements
    to notify SBA when modifying contracts, such as increasing the scope of
    work or the dollar value, and to monitor the percentage of the work
    performed by 8(a) firms versus their subcontractors.

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

    Agency officials told us that awarding sole-source contracts to 8(a) ANC
    firms is an easy and expedient method of meeting time-sensitive
    requirements. Some examples follow.

               o  An Army contracting official told us that his agency's limited
               contracting staff was the primary reason his office awarded an
               8(a) sole-source contract to an ANC firm for base operations
               support. The official added that this contract had been
               competitively awarded three times previously to large businesses,
               but in 1999 his office decided it did not have the staff to
               administer another full and open competition.
               o  Another Army official commented that she had to fill an urgent
               requirement for water and fuel tanks in support of the war in
               Iraq. Rather than directly award to a large manufacturer, which
               would require a justification and approval process for a
               sole-source award, the contract went sole source to an 8(a) ANC
               firm as a quicker acquisition strategy given the time-sensitive
               nature of the requirement.
               o  An e-mail in the contract file from a NASA official remarked
               that a sole-source award to an ANC firm would save much time as
               opposed to having to work through a competitive process, since the
               office was running short on available staff. Another NASA official
               stated that the additional resources needed to run a competitive
               procurement would likely negate any monetary savings that might be
               gained through competition.
               o  Another contracting official told us that it was the
               "unofficial" policy in his organization that for urgent
               requirements over the competitive limits for other 8(a) firms, an
               ANC firm is sought out. He described contracting with ANC firms as
               an "open checkbook" since sole-source awards can be made for any
               dollar amount.

    We found one example, however, where the process of awarding to an 8(a)
    ANC firm was not particularly expedient. An ANC firm proposed a price for
    a State Department construction contract that was almost twice as much as
    the government's original cost estimate. The State Department negotiated
    extensively for over a month, requesting four different price proposals
    from the contractor. At one point, the contracting office considered
    terminating the solicitation and awarding competitively to a prequalified
    firm, but due to time constraints the department decided to accept the ANC
    firm's final proposal, which was still slightly over the government's
    estimate.

    In another example from our file review, the Interior Department's
    GovWorks11 awarded a sole-source 8(a) contract on behalf of the Department
    of Defense's (DOD) Counter Intelligence Field Activity (CIFA) to an ANC
    firm. The contract was primarily to consolidate and co-locate the space
    available for contractor personnel, but also included some work to oversee
    construction and facilities program management. This contractor, which
    specialized in information technology services, told us it had been
    approached by CIFA for this project because it had successfully obtained
    space for another government agency. When awarding the contract, GovWorks
    did not consider any alternatives other than sole-source contracting with
    the ANC firm because CIFA had requested that firm. Contractor officials
    told us that the cost of the office space was incidental to a larger
    project for CIFA, yet we found that over 80 percent of the contract price
    was for the space. Furthermore, although SBA's Alaska district office had
    accepted the contract under the 8(a) program, a subsequent size
    determination found that at the time of award, the contractor did not
    qualify as small under the size standard for the contract.12

    11GovWorks is a franchise fund within the Department of the Interior.
    Franchise funds are government-run, self-supporting businesslike
    enterprises managed by federal employees. They provide a variety of common
    administrative services, such as payroll processing and contracting
    support, to government agencies. We recently reported on franchise funds
    and placed management of interagency contracting on our high risk list.
    GAO, Interagency Contracting: Franchise Funds Provide Convenience, but
    Value to DOD is Not Demonstrated, GAO-05-456 , (Washington, D.C.: July 29,
    2005) and GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
    Jan. 2005).

    We also found an example where an agency could have competed the contract
    had there been adequate acquisition planning, but chose to award
    sole-source to an ANC firm because it was easier method. The Immigration
    and Naturalization Service13 awarded a facilities operation and
    maintenance contract for a federal detention facility. A contracting
    official who reviewed the presolicitation and pre-award packages told us
    that this was a recurring requirement and the contracting officer should
    have known well in advance that the existing contract was expiring. With
    sufficient acquisition planning the agency could have awarded an 8(a)
    competitive contract, according to this official. However, he was advised
    by the contracting officer that awarding to an ANC firm was the quickest
    and easiest method and avoided competition. We reviewed the contract file
    and did not find a formal acquisition plan that addressed the strategy
    used. We reported in 2003 that the lack of adequate advanced planning by
    the Immigration and Naturalization Service for several detention center
    contracts limited opportunities for competition.14

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

    The Small Business Reauthorization Act of 1997 directed the President to
    establish a goal of not less than 23 percent of the federal government's
    prime contracting dollars to be awarded to small businesses each fiscal
    year.15 As part of this goal, Congress has directed that 5 percent of
    prime contract dollars be directed to small, disadvantaged businesses. SBA
    is charged with working with federal agencies to ensure that agency goals,
    in the aggregate, meet or exceed these goals.16

    12According to an SBA official, a calculation error was made in
    determining the ANC firm's average revenues over the past 3 years, which
    resulted in the SBA's Alaska district office approving the ANC firm for
    the contract.

    13The Immigration and Naturalization Service was absorbed into the
    Department of Homeland Security in March 2003.

    14GAO, Contract Management: INS Contracting Weaknesses Need Attention from
    the Department of Homeland Security, GAO-03-799 (Washington, D.C.: July
    25, 2003).

    1515 U.S.C. 644(g)(1).

    Several contracting officers told us that they had turned to 8(a) ANC
    contracts as a way to help their agencies meet small business goals. ANC
    firms in the 8(a) program are deemed in legislation as socially and
    economically disadvantaged. Because contract awards can be categorized by
    agencies to allow them to take credit in more than one small business
    category, awards to 8(a) ANC firms can be applied to the agencies' overall
    small business goal as well as to their small, disadvantaged business
    goal. One Energy contracting official told us that there is tremendous
    pressure to award contracts to small businesses, so she turns to 8(a) ANC
    firms whenever possible. A NASA official told us that his contracting
    office had been aggressive in promoting socioeconomic development with
    small disadvantaged businesses and had particularly wanted to award a
    contract to benefit the Native American community. Although several small
    businesses expressed interest in NASA's requirement for technical and
    fabrication support services, rather than compete the procurement, NASA
    opted for a sole-source award with an 8(a) ANC firm.

    Required Notifications of Contract Modifications Not Always Done

    SBA regulation requires that, where the contract execution function is
    delegated to the agencies, they must report to SBA all 8(a) contract
    awards, modifications, and options. Further, the MOUs between SBA and the
    agencies require the agencies to provide SBA with copies of all 8(a)
    contracts, including modifications, within 15 days of the date of award.
    However, we found that contracting officers were not consistently
    following this requirement. While some had notified SBA when incorporating
    additional services into the contract or when modifying the contract
    ceiling amount, others had not.

    One contracting official told us that SBA has "stepped aside" when it
    comes to overseeing 8(a) contracts and that it would not occur to her to
    coordinate a contract modification, such as a scope change, with SBA. We
    also found the following example where the contracting officer was under
    the impression that the scope of work could be expanded to include any
    additional lines of business not in the original contract because it was a
    sole-source 8(a) ANC contract.

    16On June 3, 2005, a rule was proposed to amend the Federal Acquisition
    Regulation to allow, among other things, large businesses to count
    subcontracts to ANC firms toward their small business subcontracting
    goals, even if the firms are not small businesses, certified small
    disadvantaged businesses, or certified 8(a) firms under SBA's regulations.
    This rule proposes to amend the Federal Acquisition Regulation to
    implement S: 702 of Pub.L. 107-117, as amended by S: 3003 of Pub.L.
    107-206.

               o  The Department of Energy awarded an $8.5 million sole-source
               contract to an ANC firm for administrative and general management
               consulting services, but one year later broadened the scope of
               work to include 10 additional lines of business related to
               facilities management support and engineering services. The
               additional work almost tripled the cost of the contract, raising
               it to $25 million. None of these changes were coordinated with
               SBA, despite the fact that SBA's letter to the Department of
               Energy approving the procurement clearly stated that if the
               statement of work was changed, SBA would have to re-determine the
               appropriateness of the NAICS code and the acceptability of the
               offer under the 8(a) program. The contracting official
               acknowledged that the scope change should have been coordinated
               with SBA, but her understanding was that because it was an ANC
               firm, anything could be added to the contract regardless of the
               dollar amount. By adding additional lines of business to the
               contract, the contracting officer was potentially improperly
               expanding beyond the scope of the contract. Moreover, by not
               notifying SBA, the agency had no assurance that this ANC firm
               qualified as small under the contract's additional lines of
               business.

    We found that SBA's letters to the agencies approving 8(a) procurements
    did not always reiterate the notification requirement. Of the 16 contract
    files we reviewed, we found only five cases where the letter requested
    that all contract modifications be coordinated with SBA. Four of these
    specifically requested the agency to forward a copy of any scope changes.
    SBA officials could not explain why the acceptance letters were
    inconsistent. SBA officials in Alaska recently revised their approval
    letter template, which now requests copies of contract modifications if
    additional work is being added to the original contract or an option year
    is being exercised.

    Contracting Officials Not Consistently Monitoring Subcontracting

    The "limitations on subcontracting" clause in the Federal Acquisition
    Regulation requires that, for 8(a) service contracts with subcontracting
    activity, the 8(a) firm must incur at least 50 percent of the personnel
    costs with its own employees (for general construction contracts, the firm
    must incur at least 15 percent of the personnel costs).17 The purpose of
    this provision, which limits the amount of work that can be performed by
    the subcontractor, is to insure that small businesses do not pass along
    the benefits of their contracts to their subcontractors.18 For the 16
    files we reviewed, we found almost no evidence that the agencies are
    effectively monitoring compliance with this requirement, particularly
    where 8(a) ANC firms have partnered with large firms. As a result, there
    is an increased risk that an inappropriate degree of the work is being
    done by large businesses rather than by the ANC firms.

    The procuring agency and the 8(a) firm both play a role in ensuring
    compliance with the limitations on subcontracting clause. The MOUs between
    SBA and the procuring agencies state that the agencies are responsible for
    the monitoring. SBA's regulation requires the 8(a) firms to certify in
    their offers to the appropriate SBA district office that they will meet
    the applicable percentage of work requirement for each contract when
    subcontracting.

    In general, the contracting officers we spoke with were confused about
    whose responsibility it is to monitor compliance with the subcontracting
    limitations. Some thought it was SBA's responsibility; one asserted that
    the contractor was responsible for self-monitoring; and others
    acknowledged that it was their responsibility but were not monitoring it
    formally. For the contracts in our file review, SBA's letters to agencies
    approving the 8(a) procurements were not consistent in reminding
    contracting officers to include the limitations on subcontracting clause
    in the contract. Six of the letters did not include this language. We
    brought this discrepancy to the attention of SBA officials, who stated
    that all approval letters should contain this requirement as standard
    language. In addition, we found that two of the awarded contracts did not
    contain the limitation on subcontracting clause, as required. The
    responsible contracting officials told us the clause should have been
    included and was omitted as a result of an oversight.

    17FAR 52.219-14, "Limitations on Subcontracting." FAR 19.811-3(e). In the
    case of a contract for supplies (other than procurement from a
    non-manufacturer in such supplies), the concern will perform at least 50
    percent of the cost of manufacturing the supplies, not including the cost
    of materials.

    18See United States Court of Federal Claims, Transatlantic Lines LLC vs.
    United States of America and Strong Vessel Operators LLC. No. 05-866C
    filed September 30, 2005.

    We also found that contracting officers were unclear about how to monitor
    the subcontracting requirements under indefinite quantity contracts, under
    which agencies place task or delivery orders.19 SBA's 8(a) regulation
    states that for indefinite quantity service or supply contracts, the
    participant must demonstrate semi-annually whether it has performed 50
    percent of personnel costs with its own employees for the combined total
    of all task or delivery orders at the end of each 6-month period. This
    does not mean that the 50-percent minimum requirement applies to work
    performed under each individual task order or that a contractor must meet
    the requirement cumulatively for all work performed under all task orders
    at any given point in time. We found contracting officers who
    misinterpreted the regulation to mean that the contractor must perform the
    required percentage over the life of the entire contract. As a result, one
    contracting officer decided it was too difficult and thus did not monitor
    the subcontracting effort.

    In one example from our file review, the Energy Department awarded a
    sole-source indefinite quantity contract for a construction project to an
    8(a) ANC firm primarily because this firm had a previous business
    relationship with the large incumbent contractor and planned to use the
    incumbent as a subcontractor for the new contract. The contracting officer
    believed that the limitations on subcontracting must be demonstrated by
    the end of the entire contract period. We reviewed an invoice that showed
    that cumulatively for all tasks to date, the subcontract labor costs made
    up 90 percent of the total labor, which would indicate the need for
    attention to be paid to the 6-month task order review requirement.20

    An agency contracting official told us that it is not uncommon for large
    businesses to approach him wanting to know how to "partner" with an ANC
    firm. Furthermore, representatives from one ANC firm told us that an
    agency had awarded it a "pass-through" contract, or one where the
    subcontractor performs most of the work, to take advantage of the 8(a) ANC
    firm's ability to obtain sole-source contracts. The agency wanted to
    contract with a particular business, but could not award a sole-source
    contract directly to that business. The agency awarded the contract to the
    ANC firm and required it, through a directed subcontracting plan, to
    subcontract with the desired business.

    19This type of contract provides for an indefinite quantity, within stated
    limits, of supplies or services during a fixed period. The government
    places orders for individual requirements. Quantity limits may be stated
    as number of units or as dollar values.

    20SBA regulation states that for indefinite quantity contracts for general
    construction, the participant must demonstrate semi-annually that it has
    incurred 15 percent minimum of the personnel cost for all orders issued.

    When asked what recourse contracting officers would take if they found an
    8(a) firm to be out of compliance with the limitations on subcontracting,
    some agency officials responded that they had no plan in place. In fact,
    one contracting officer commented that he would be "laughed out of the
    office" if he brought up the compliance issue as a reason for terminating
    the contract. Several contracting officials told us that they review the
    cost proposals to assess how much work was planned to be subcontracted
    out, but they do not follow up during contract performance to ensure that
    the prime contractor complies with the plan. In one case, we found that an
    8(a) ANC firm's technical proposal to the Department of Transportation for
    an information technology consolidation project included an intention to
    subcontract with a large firm, yet did not clearly delineate the breakout
    of work between the firms. From reviewing the agency's evaluation of the
    proposal, we did not find any evidence that contracting officials
    questioned the relationship or the division of labor prior to contract
    award. Later, however, the contracting officer modified the contract to
    require the 8(a) firm to provide semi-annual subcontracting reports that
    would detail the subcontracting percentage for the previous 6 months.

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

    ANCs use the 8(a) program as one of many tools to generate revenue with
    the goal of providing benefits to their shareholders. ANCs participating
    in the 8(a) program have various business strategies to maximize revenue.
    For example, some own multiple 8(a) subsidiaries, either in niche markets
    or diversified industries. Others recruit outside expertise to manage
    their 8(a) operations. Additionally, many form partnerships-with other
    ANCs or other businesses-and holding companies for increased efficiencies.

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

    Federal contracts awarded through the 8(a) program are one of a number of
    sources of revenue, such as timber, tourism, real estate, or market
    investments, for ANCs participating in the 8(a) program. Corporations
    consolidate their income to fund operations at the parent level, to invest
    in subsidiary operations, and to provide benefits to shareholders. Figure
    5 shows a sample ANC's revenue sources.

    Figure 5: Revenue Sources for a Sample ANC

    Some corporations rely on federal contracting with 8(a) subsidiaries as a
    primary revenue source, while others do not. For example, of the five
    corporations whose subsidiaries comprised 76 percent of the government's
    8(a) ANC dollars from fiscal years 2000 to 2004, three depend almost
    exclusively on current, exited, or planned participants in the 8(a)
    program for their revenues. However, for the other two corporations, 8(a)
    subsidiaries are only one investment in a diversified portfolio that
    includes energy services, telecommunications, and oil-field and mining
    support. We also interviewed four corporations that do not participate in
    the 8(a) program, relying instead on telecommunications, real estate,
    tourism, natural resources, and other investments.

    The ANCs we reviewed do not track the benefits provided to their
    shareholders specifically generated from 8(a) activity. Thus, an explicit
    link between the revenues generated from the 8(a) program and benefits
    provided to shareholders is not documented. However, ANCs do track
    benefits generated from their consolidated revenue sources. Benefits vary
    among corporations, but include dividend payments, scholarships,
    internships, burial assistance, land gifting or leasing, shareholder hire,
    cultural programs, and support of the subsistence lifestyle. For more
    information on benefits, see appendix X.

    We found that sizable 8(a) revenues do not guarantee a higher level of
    shareholder benefits, as two of the five ANCs that account for most of the
    8(a) ANC dollars obligated from fiscal years 2000 to 2004 demonstrate.

               o  One corporation, which provides sizable benefits, credits the
               8(a) program with its continued existence, its return to
               profitability after declaring bankruptcy, and its ability to
               provide monetary benefits. In the early 1990s, the corporation was
               required to pay off its debts before paying any dividends.21 Its
               board and management attribute its return to profitability to its
               heavy participation in the 8(a) program. By 2004, the ANC paid out
               dividend amounts that were among the highest of all regional
               corporations. An original shareholder owning 100 shares, for
               example, received $3,500 in dividends in 2004. The ANC also
               provided a number of other benefits to its shareholders, their
               spouses and descendants, such as scholarships and a business
               assistance program.
               o  In contrast, another ANC with a high level of activity in the
               8(a) program is currently unable to provide a comparable level of
               monetary benefits. This corporation encountered a few years of
               heavy losses due to lawsuits and management malfeasance. Since
               being in financial recovery for the past 5 years, it has not been
               allowed to issue dividends to shareholders.22 However, it provides
               other benefits, such as scholarships and protection of land and
               subsistence rights for its shareholders.

    We also found that a high level of benefits can exist even if an ANC is
    not participating in the 8(a) program at all. For example, at the time of
    our review, one regional corporation received all of its revenues from its
    diverse non-8(a) investments, including real estate, natural resources,
    telecommunications, tourism, golf resorts, casino gaming, construction,
    and oil-field services. From 2000 to 2004, this corporation provided
    dividend payments that were substantially higher than any others we
    reviewed and also provided a number of additional types of benefits to its
    shareholders.

    Key Practice Is Creation of Multiple 8(a) Subsidiaries

    To generate revenue, many ANCs own multiple businesses in the 8(a)
    program, taking advantage of their special ability to do so. Many of the
    subsidiaries have offices that are located outside of Alaska, which is not
    prohibited by statute or regulation. As Figure 6 demonstrates, the number
    of 8(a) ANC subsidiaries has increased markedly.

    21Alaska Corporations Code, S: 10.06.358(a)(1); 10.06.360;
    10.06.960(h)(1).

    22Id.

    Figure 6: Number of ANC Parent Corporations and Subsidiaries Active in
    8(a) Program, 1988 to 2005

    As of December 2005, 49 ANCs owned a total of 154 8(a) firms and 30 ANCs
    owned more than one 8(a) firm. See appendix IX for a listing of these 49
    ANCs. The corporation owning the most subsidiaries had a total of 14
    active or graduated 8(a) subsidiaries. The five corporations that
    represented the largest volume of 8(a) ANC dollars from 2000 to 2004 owned
    a total of 45 active and exited 8(a) subsidiaries, or 24 percent of the
    total. Regional corporations have been more active than the village and
    urban corporations in forming multiple subsidiaries.23

    SBA's 8(a) regulation requires that the subsidiaries of each ANC be
    certified in the 8(a) program under a different primary NAICS code,
    representing different lines of business. However, the 8(a) businesses can
    pursue work in an unlimited number of secondary NAICS codes, regardless of
    their primary line of work declared at the time they apply to the 8(a)
    program. This means that an 8(a) subsidiary of an ANC may pursue
    government contracts under any of its primary or secondary NAICS codes,
    including those that overlap with the secondary NAICS code of another 8(a)
    subsidiary owned by the same parent corporation.

    23None of the group corporations participated in the 8(a) program at the
    time of this report.

    ANCs use their ability to own multiple businesses in the 8(a) program, as
    allowed by law, in different ways. The following table summarizes some of
    the practices we identified in our interviews with ANCs and our review of
    their documentation.

    Table 4: Practices Pertaining to Owning Multiple Subsidiaries

    Practices ANCs are using        Our observations
    Own multiple subsidiaries with  Six of seven 8(a) subsidiaries of one
    overlapping NAICS codes, either corporation marketed their ability to
    as a primary or secondary line  perform work under the same NAICS code for
    of business.                    facilities support services, either as the
                                       primary or secondary NAICS code for each
                                       subsidiary. Appendix XI provides an
                                       example.
    Leverage the expertise and      One corporation shared staff and
    management from existing        management between its older and newer
    subsidiaries to aid with the    8(a) subsidiaries. Additionally, the two
    development of the newer        subsidiaries market themselves together on
    subsidiaries.                   one website.

                                       Officials from one ANC told us it had an
                                       8(a) ANC firm with only 2 employees.
                                       Nevertheless, the firm had leveraged the
                                       expertise and management of other
                                       subsidiaries owned by the ANC to be in a
                                       position to enter negotiations with NASA
                                       for a $30 million sole-source contract.
    Create a second subsidiary to   One corporation created a second
    win follow-on work from a       subsidiary in anticipation of its first
    graduating subsidiary.          one's graduation from the 8(a) program.
                                       The newer firm successfully obtained a
                                       sole-source follow-on contract that the
                                       original subsidiary had performed.

                                       In another example, an ANC subsidiary had
                                       an 8(a) contract that was expiring, yet
                                       the subsidiary was graduating from the
                                       8(a) program. Based on its experience with
                                       this ANC firm, the government agency
                                       awarded a $21 million follow-on contract
                                       to a different subsidiary of the same ANC.
    Some ANCs wholly own their 8(a) Of the 26 ANCs we reviewed that were
    subsidiaries, while others      active in the 8(a) program, 13
    invest in partially-owned       wholly-owned all of their 8(a)
    subsidiaries.a                  subsidiaries and 13 partially-owned at
                                       least one 8(a) subsidiary.

                                       Some ANCs shared ownership of 8(a)
                                       subsidiaries with other ANCs. Other
                                       corporations shared ownership with
                                       subsidiary executives. For example, one
                                       corporation owns 56 percent of its 8(a)
                                       subsidiary, and the subsidiary executives,
                                       who were not Alaska Natives, retain 44
                                       percent of profits.
    Some ANCs own subsidiaries that Two corporations we interviewed said they
    specialize in a niche market    take this specialized approach, rather
    with the goal of developing an  than creating individual subsidiaries with
    independently sustainable       multiple capabilities. Both corporations
    business.                       noted that the intent of the 8(a) program
                                       is business development.

                                       One corporation's subsidiaries specialize
                                       in aircraft maintenance and niche
                                       manufacturing, with the intent of reducing
                                       future competition and increasing the
                                       potential for long-term success past
                                       graduation from the 8(a) program.
    Other ANCs diversify their      One subsidiary marketed its abilities to
    subsidiaries' capabilities to   perform work in construction, landscaping,
    increase opportunities to win   manufacturing, computer and software
    government contracts in various wholesaling, engineering, management
    industries.                     consulting, research and development, and
                                       administrative services.

                                       Some corporations stated that they
                                       diversified their subsidiaries'
                                       capabilities in response to requests from
                                       agencies to perform work that was outside
                                       the companies' original focus.

    Source: GAO analysis of ANC data.

    a To be eligible for the special provisions for ANCs in the 8(a) program,
    an ANC must be the majority owner of the business. The minority owners
    receive a percentage of the profits the subsidiary generates based on
    ownership arrangements.

    According to SBA data, 36 ANC firms exited the 8(a) program from 1998
    through 2005. Eleven subsidiaries exited because they completed their
    9-year term in the program. The remaining 25 subsidiaries exited the
    program before completing the full 9-year term. Of these, seven graduated
    early from the program after exceeding SBA's size standards for revenue or
    number of employees. Though no longer 8(a) participants, these
    subsidiaries are obligated to continue to perform work on previously
    awarded 8(a) contracts, including any priced options that may be
    exercised. Another subsidiary lost its 8(a) status after failing to file
    paperwork with SBA. Other subsidiaries dissolved, became inactive, or were
    sold to other businesses.

    ANCs Pursue Other 8(a) Business Strategies

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

      Relying on Outside Expertise

    Although all of the ANCs that we reviewed retained a board composed
    entirely of Alaska Natives, several have recruited outside executives who
    are not Alaska Natives to manage the parent corporation or their 8(a)
    operations. Some corporations recruited these executives for their
    specific experience in the 8(a) program, which they gained working on
    other government contracts or in operations at other 8(a) ANC
    subsidiaries. Some corporation executives stated that this managerial
    expertise was a key factor to success in the 8(a) program. For example,
    representatives from one corporation told us that its 8(a) subsidiary
    suffered after its executive left to work at another ANC. Some of these
    managers command salaries significantly higher than those of the
    executives at the parent corporation. For example, in 2004, a corporation
    paid one of its chief executive officers for 8(a) operations almost $1
    million - more than three times as much as the highest-paid executive of
    the parent corporation.

    Additionally, a few ANCs hire outside marketing firms to assist them with
    securing contracts. One such firm provides services such as locating
    potential contracts for its ANC client, interviewing potential partners on
    the project, meeting with contracting agencies, and following up with the
    contracting officer after award.

      Creating Partnership Arrangements

    Another business strategy is to create partnerships with individuals or
    other businesses to gain access to capital, experience, or expertise. For
    example, one corporation entered into a partnership by sharing subsidiary
    ownership with another ANC when it did not have the necessary capital to
    create a new subsidiary. The other corporation benefited from the
    partnership because it was new to the 8(a) program and needed the other
    corporation's experience.

    In addition to ownership arrangements, many ANCs pursue other types of
    partnerships, such as joint ventures and mentor-protege relationships, as
    a business strategy to better position themselves for federal contract
    opportunities through the 8(a) program.

    Joint venture agreements. A "joint venture" is an agreement between an
    8(a) participant and one or more businesses to work together on a specific
    8(a) contract.24 With SBA's approval, an 8(a) subsidiary may enter into an
    unlimited number of joint venture agreements. Of the 26 corporations we
    interviewed that were participating in the 8(a) program, 22 owned
    subsidiaries that participated in a total of 57 joint venture agreements.
    In 2001, a joint venture between two ANCs was awarded a $2.1 billion
    contract by the National Imagery and Mapping Agency.

    Mentor-protege agreements. SBA established the mentor-protege program to
    encourage relationships between 8(a) businesses and other firms that act
    as mentors to provide technical, financial, and other assistance to their
    proteges.25 An 8(a) subsidiary may be a protege to only one mentor at a
    time.26 Of the ANCs that we interviewed that were participating in the
    8(a) program, 19 owned a total of 24 subsidiaries participating in
    mentor-protege agreements.

      Forming Holding Companies

    ANCs create holding companies - non-8(a) subsidiaries that provide shared
    administrative services to other subsidiaries, for a fee - which also aid
    their participation in the 8(a) program. Of the 30 corporations we
    interviewed, 11 had formed holding companies. Two corporations had
    established three separate holding companies.

    Figure 7 shows a sample ANC with a holding company for subsidiaries in and
    outside of the 8(a) program.

    24SBA's regulations allow two or more businesses to joint venture on no
    more than three business ventures over 2 years.

    25Individual agencies, including Defense, Energy, Homeland Security,
    State, Transportation, and NASA, have their own mentor-protege programs
    with slightly different guidelines.

    26However, a firm may mentor more than one 8(a) business at a time as long
    as the protege firms are not competitors and the mentor firm is capable of
    handling multiple proteges. The SBA regulations note that generally, a
    mentor will have no more than one protege at a time.

    Figure 7: Sample ANC with Holding Company

    SBA requests that ANCs seek approval before forming a holding company,
    which must be wholly-owned by the parent ANC for the subsidiaries to be
    eligible for the 8(a) program. During the course of our review, we found
    one holding company that was 80-percent owned by the parent ANC and
    20-percent owned by two holding company executives. SBA's records,
    however, showed the company as 100-percent owned by the parent ANC. A
    representative of the holding company told us that the ownership
    arrangement was changed after SBA's initial approval of the holding
    company. The company did not notify SBA of the change because the holding
    company is not itself a participant in the 8(a) program and it wholly owns
    all of its subsidiaries, thereby maintaining compliance with the minimum
    51-percent ownership requirement. SBA points to the statute and its
    regulations, which show that ANC 8(a) participants must be majority-owned
    by an ANC or a wholly-owned entity of an ANC. Therefore, subsidiaries
    under a partially-owned holding company are no longer eligible to
    participate in the 8(a) program. Since this situation came to light, the
    ANC and the holding company executives rescinded the 20-percent ownership
    arrangement to maintain compliance with SBA requirements. Further, the SBA
    Alaska district office revised its template letter approving a change in
    ownership to clarify the restrictions on ownership of a holding company.

    ANC executives told us the benefits of holding companies included:

    Greater efficiencies. The holding companies can provide accounting, human
    resources, legal, marketing, or other services, allowing the ANC to
    operate more efficiently. Since subsidiaries underneath the holding
    company do not need to perform these functions, they may employ fewer
    administrative staff and instead employ only technical staff. A lean staff
    is especially important since subsidiaries can become ineligible for the
    8(a) program when they exceed a certain number of employees.

    Consistent policies and procedures. Some corporations established holding
    companies to facilitate consistent policies, procedures, and corporate
    governance across the subsidiaries.

    Easier administration. Corporation officials cited several administrative
    benefits to establishing holding companies, including the following
    examples:

               o  The holding company's smaller board allowed for faster
               decisions than assembling the parent corporation's entire board.
               o  Only one entity-the holding company-would be audited by the
               Defense Contract Audit Agency as opposed to each of the individual
               subsidiaries.
               o  The holding company saved time on security clearances. For
               example, for a contract involving classified work, the holding
               company management and board of directors already had security
               clearances, saving the time of performing background checks on the
               corporation-level management and board of directors.

    Coordination among subsidiaries. One corporation official told us that the
    holding company helps prevent competition among its subsidiaries for the
    same contracting opportunities.

    Legal protection. Representatives from two corporations stated that the
    holding company separates the parent company from most liability that a
    subsidiary may incur. For example, if the subsidiary went bankrupt, the
    parent corporation generally could not be held legally or financially
    responsible.

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

    SBA has not tailored its policies and practices to account for ANCs'
    unique status in the 8(a) program and growth in federal contracting, even
    though officials recognize that ANCs enter into more complex business
    relationships than other 8(a) participants. SBA officials told us that
    they have faced a challenge in overseeing the activity of the 8(a) ANC
    firms because ANCs' charter under ANCSA is not always consistent with the
    business development intent of the 8(a) program. The officials noted that
    the goal of ANCs-economic development for Alaska Natives from a community
    standpoint-can be in conflict with the primary purpose of the 8(a)
    program, which is business development for individual small, disadvantaged
    businesses.

    However, the officials agreed that improvements are needed in their
    oversight and said they are considering various actions in this regard.
    They told us that they are planning to revise their regulations and
    policies to address ANCs' unique status in the 8(a) program. Moreover,
    they are now in the process of implementing a new, automated data
    collection tool to more readily collect information on 8(a) firms. It is
    expected to be operational during fiscal year 2007.

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

    SBA's oversight has fallen short in that it does not

               o  track the business industries in which ANC subsidiaries have
               8(a) contracts to ensure that more than one subsidiary of the same
               ANC is not generating the majority of its revenue under the same
               primary NAICS code;
               o  consistently determine whether other small businesses are
               losing contracting opportunities when large, sole-source contracts
               are awarded to 8(a) ANC firms;
               o  adhere to a legislative and regulatory requirement to ascertain
               whether 8(a) ANC firms, when entering the 8(a) program or for each
               contract award, have, or are likely to have, a substantial unfair
               competitive advantage within an industry;
               o  ensure that partnerships between 8(a) ANC firms and large firms
               are functioning in the way they were intended under the 8(a)
               program; and
               o  maintain information on ANC 8(a) activity.

    SBA officials from the Alaska district office reported to headquarters in
    the most recent quality service review that the make-up of their 8(a)
    portfolio is challenging and requires more contracting knowledge and
    business savvy than usual because the majority of the firms they oversee
    are owned by ANCs and tribal entities. The officials commented that these
    firms tend to pursue complex business relationships and tend to be awarded
    large and often complex contracts. We found that the district office
    officials were having difficulty managing their large volume and the
    unique type of work in their 8(a) portfolio. When we began our review, SBA
    headquarters officials responsible for overseeing the 8(a) program did not
    seem aware of the growth in the ANC 8(a) portfolio and had not taken steps
    to address the increased volume of work in their Alaska office.

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

    As discussed above, ANCs can create multiple 8(a) subsidiaries that can be
    based across the United States. SBA's Alaska district office, which is
    responsible for overseeing most 8(a) ANC contracting activity, does not
    track the business industries in which the subsidiaries win 8(a) contracts
    under secondary NAICS codes. Thus, SBA is not ensuring that a firm's
    secondary NAICS codes do not, in effect, become the primary business line
    by generating the majority of revenue. This situation could allow an ANC
    to have more than one 8(a) subsidiary perform most of its work under the
    same primary NAICS code, which SBA regulation does not allow. Appendix XI
    shows an example of an ANC with subsidiaries marketing their ability to
    perform work in a number of different industries.

    Headquarters officials told us that they do not monitor the industries
    from which 8(a) participants receive revenue because they do not want to
    stifle the growth of the company. However, the officials acknowledged that
    they would be concerned if a subsidiary's primary industry revenue source
    changed without SBA being notified. They have not developed a plan to
    increase monitoring of ANCs' secondary NAICS codes, even though many of
    these firms take advantage of their ability to obtain contracts under
    secondary lines of business.

      Not Consistently Determining Whether Other Small Businesses Are Losing
      Contract Opportunities

    We found cases where SBA did not take action when incumbent small
    businesses lost contract opportunities when an 8(a) ANC firm was awarded a
    large sole-source contract. For example:

               o  The Department of Transportation awarded an information
               technology contract to an 8(a) ANC firm in an effort to support
               transition to a single integrated infrastructure. According to the
               department's acquisition plan, the goal is to create a more
               mission-effective, secure, and cost-effective computing
               environment that will provide common services. Previously, this
               service was being provided under separate contracts with eight
               small businesses. The consolidation project will likely
               discontinue the work performed by these small businesses and
               replace it with the single infrastructure managed by the 8(a) ANC
               firm. One of the incumbent small businesses protested the award to
               our agency. In its submission to our bid protest office, SBA
               acknowledged that it had not conducted the required adverse impact
               analysis, but asserted that it had viewed the requirement as "new"
               and therefore had incorrectly concluded it was not required to
               perform the analysis. SBA also noted that the 8(a) regulation
               provides that, even where there is a presumption of adverse
               impact, SBA "may"-rather than "shall"-determine whether adverse
               impact exists. SBA interprets this to mean that it has the
               discretion to accept a contract into the 8(a) program even where
               one of the contractors meets the presumption of adverse impact.27
               o  The scope of an Air Force base contract with an ANC firm has
               been expanded as additional base civil engineering services,
               previously provided by small businesses, have been absorbed into
               the contract. Since the initial contract award, the estimated
               contract value has increased by $46 million to nearly $600
               million. The contracting official coordinated these changes with
               SBA via e-mail. Rather than disapproving the request or evaluating
               the impact on other small businesses, SBA only expressed concern
               that the contracting officers were absorbing work into the
               contract that was well within the capability of other 8(a)
               contractors, indicating that it was "troubled" over the loss of a
               prime contracting opportunity for other small businesses. The
               contracting officer told us that the Air Force has now decided to
               stop adding services to the contract and will maintain the other
               existing small business contracts.

    When a procuring agency is interested in offering a requirement to a
    specific participant in the 8(a) program for a sole-source contract, the
    agency is required to send SBA an offering letter with information on the
    description of the work, the NAICS code, anticipated dollar value of the
    requirement, and the names and addresses of any small business contractors
    that have performed on the requirement during the previous 24 months,
    among other things. At the time that SBA accepts a procurement for award
    into the 8(a) program, it is required to consider whether individual small
    businesses, a group of small businesses in a geographical area, or other
    business programs will be adversely impacted.28 Adverse impact is
    determined to be present where, among other things, a small business has
    been performing the requirement outside the 8(a) program and this work
    represents 25 percent or more of its revenue.29

    27GAO ultimately denied the protest on the basis that GAO is required to
    give deference to an agency's reasonable interpretation of its regulations
    and SBA's analysis showed that the small business protestor would appear
    not to have met the requirements for presuming adverse impact. Catapult
    Technology, Ltd., B-294936, B-294936.2, January 13, 2005.

    In almost all cases for the 16 large sole-source contract we reviewed,
    SBA's letters to the agencies approving the procurements contained
    boilerplate language: "a determination has been made that acceptance of
    this procurement will cause no adverse impact on another small business
    concern." The language in the acceptance letters suggests that SBA
    conducted a formal adverse impact study, yet this was not the case for any
    of the contracts we reviewed. The letters do not clarify whether the
    determination was made based on a formal adverse impact study or whether
    no determination was required because the requirement was new or
    previously had been performed by a large business. SBA officials told us
    that the language is intended to encompass all situations where there is
    no adverse impact.

    SBA officials stated that it is difficult for them to ensure that other
    small businesses are not negatively affected because they are relying on
    the procuring agency to provide the procurement history, and, in their
    view, procuring agencies are not always forthcoming. During our review,
    the Alaska district office revised its standard letter to agencies to
    state that the adverse impact determination was made based on the
    procurement history the agency provided to SBA in its letter offering the
    procurement to the 8(a) program. The letter also now states that the
    determination that acceptance of the procurement will cause no adverse
    impact on another small business was made on the basis of the agency's
    identifying the requirement as new or not identifying an incumbent
    contractor.

    28If the requirement was already being performed under an 8(a) contract or
    is considered a new requirement, SBA is not required to perform the
    adverse impact study. SBA is required, under certain circumstances, to
    consider that adverse impact may exist if the requirement is a
    consolidation of work previously performed by small businesses.

    29The other requirements are that the small business concern must have
    performed the requirement for at least 24 months and is currently
    performing the requirement or finished performing within 30 days of the
    offering into the 8(a) program.

      Failing to Determine Substantial Unfair Competitive Advantage

    The Small Business Act states the following

    In determining the size of a small business concern owned by a socially
    and economically disadvantaged Indian tribe30 (or wholly owned business
    entity of such tribe) each firm's size shall be independently determined
    without regard to its affiliation with the tribe, any entity of the tribal
    government, or any other business enterprise owned by the tribe, unless
    the Administrator determines that one or more such tribally owned business
    concerns have obtained, or are likely to obtain, a substantial unfair
    competitive advantage within an industry category.31

    SBA has incorporated this language into its 8(a) regulation, but is not
    making the determinations that these business concerns have obtained, or
    are likely to obtain, a substantial unfair competitive advantage. In fact,
    the agency has no procedure in place to make these determinations.
    Officials told us that the language in the statute is confusing and that
    they are not sure how to implement it. They had not taken steps to obtain
    clarification and make any needed revisions to the 8(a) regulation or
    their standard operating procedures. SBA officials noted that the amount
    of participation by ANCs in the federal contracting market is so minimal
    when compared to all other businesses that they do not expect an ANC would
    have a substantial unfair competitive advantage in one industry.

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

    SBA is required to approve partnerships between 8(a) and other firms, such
    as mentor-protege and joint venture arrangements, to ensure the agreements
    are fair and equitable and will be of substantial benefit to the 8(a)
    concern. Where SBA concludes that an 8(a) concern brings very little to
    the joint venture relationship in terms of resources and expertise other
    than its 8(a) status, SBA regulations state that SBA will not approve the
    joint venture agreement. SBA officials told us that they work closely with
    the partnership firms to ensure that the 8(a) company has control in the
    joint venture and will be gaining from the relationship. Further, SBA's
    regulations state that SBA will not approve a mentor-protege relationship
    that it determines is merely a vehicle to enable a non-8(a) participant to
    receive 8(a) contracts.

    30Indian tribe in this case is defined to include ANCs.

    3115 U.S.C. S: 636(j)(10)(J)(ii)(II).

    We found indications that oversight of these partnership relationships,
    particularly in the context of ANCs' unique provisions and large
    businesses that want to take advantage of those provisions, may not be
    adequate. For example, representatives from an ANC firm told us that its
    mentor firm exploited it for its 8(a) status. In pursuit of a particular
    contract, the Alaska-based subsidiary invested in an office and staff in
    Arkansas at the advice of its mentor. When the contract was not won, the
    mentor deserted the protege, and the subsidiary was left to search for
    federal work on its own in Arkansas.

    ANC firms in the 8(a) program provide information to SBA on their
    partnership arrangements as part of the annual review process, and SBA is
    reliant on this information to assess the partnerships' success.
    Therefore, SBA may not obtain all necessary information to determine if
    the partnership is working as intended, even though SBA has primary
    responsibility to monitor these arrangements.32

    We found examples where the procuring agency had concerns about a
    partnership situation, but did not report its concerns to SBA, nor did SBA
    ever inquire whether the partnership was working as intended.

               o  A State Department program official told us that his office had
               good intentions when it identified a joint venture between an 8(a)
               ANC firm and a large firm for a sole-source 8(a) award of an
               international construction services contract. In line with the
               business development aspect of SBA's mentor protege program, the
               State Department official had envisioned that the ANC firm would
               gain construction experience from the globally recognized larger
               partner and then compete on its own for other construction work at
               the State Department. However, the official, who was also the
               contracting officer representative, expressed concern that all the
               actual construction work was being subcontracted out and the joint
               venture was only doing construction management, which was not the
               intent when the requirement was offered to the 8(a) program.
               Moreover, in an e-mail to the contracting officer, this official
               suggested that the contractor had some performance problems and
               may have been circumventing the prices negotiated in the contract
               by using subcontracts for all the work. The program official never
               made these concerns known to SBA, nor did SBA ever inquire whether
               the partnership was working as intended. According to State
               Department officials, the contracting officer looked into the
               matter and found the concerns were unfounded.

               o  In another example at the State Department, officials had some
               concerns that the 8(a) ANC firm was a front company for the large
               business in a joint venture for another construction project. In
               response to the concerns, representatives from the joint venture
               presented information to State officials on the role of the ANC
               firm, stating that it was involved with management from top to
               bottom and that the large firm would provide construction
               expertise where needed. We found no evidence that State officials
               contacted SBA about this issue at the time.

    32SBA can request additional information from the participant as it deems
    necessary as part of its annual review.

    SBA recognizes that the mentor-protege aspect of the 8(a) program can be
    an important component of the overall business development of small
    businesses. However, officials believe that joint ventures between mentors
    and their proteges may be inappropriate for 8(a) sole-source contracts
    above competitive thresholds set for other 8(a) firms. SBA cites
    complaints that non-8(a) firms have received substantial benefits through
    the performance of large sole-source 8(a) contracts as joint venture
    partners with tribally-owned and 8(a) ANC firms. Further, where the joint
    venture involves a large business mentor, SBA recognizes a perception that
    large businesses may be unduly benefiting from the 8(a) program.

      Not Collecting Information on ANC Participation

    SBA lacks adequate data regarding the 8(a) program in general and does not
    collect any information on ANCs' 8(a) activity. SBA could not provide us
    with reliable data for ANC revenues in the 8(a) program, even though all
    program participants are required to report this information annually. An
    SBA official explained that the district offices stopped using the
    database that collects this information and therefore the agency had no
    recent data on 8(a) participants' revenues. Overall, data on ANC 8(a)
    contracting activity were not readily available. There is no mechanism in
    place for agencies to code 8(a) awards to ANCs in FPDS, for example.

                                       Conclusion

    The complex nature of some ANCs' 8(a) business practices, combined with
    the competing ANCSA and 8(a) program goals of economic development for
    Alaska Natives versus development of individual small businesses, create
    the need for SBA to tailor its regulations and policies as well as to
    provide greater oversight in practice. Furthermore, since agencies can
    contract directly with ANC firms, they too have responsibility to ensure
    that these firms are operating in the program as intended. Without this
    level of oversight, there is clearly the potential for unintended
    consequences or abuse.

                          Recommendations for Executive Action

    We recommend that the Administrator of SBA take the following five actions
    when revising relevant regulations and policies:

               o  Ascertain and then clearly articulate in regulation how SBA
               will comply with existing law to determine whether and when one or
               more ANC firms are obtaining, or are likely to obtain, a
               substantial unfair competitive advantage in an industry.
               o  In regulation, specifically address SBA's role in monitoring
               ownership of ANC holding companies that manage 8(a) operations to
               ensure that the companies are wholly owned by the ANC and that any
               changes in ownership are reported to SBA.
               o  Collect information on ANCs' 8(a) participation as part of
               required overall 8(a) monitoring, to include tracking the primary
               revenue generators for 8(a) ANC firms to ensure that multiple
               subsidiaries under one ANC are not generating their revenue in the
               same primary industry.
               o  Revisit regulation that requires agencies to notify SBA of all
               contract modifications and consider establishing thresholds for
               notification, such as when new NAICS codes are added to the
               contract or there is a certain percentage increase in the dollar
               value of the contract.

                            o  Once notification criteria are determined, provide
                            guidance to the agencies on when to notify SBA of
                            contract modifications and scope changes.

               o  Consistently determine whether other small businesses are
               losing contracting opportunities when awarding contracts through
               the 8(a) program to ANC firms.

    We also recommend that the Administrator of SBA take the following five
    actions to improve practices pertaining to SBA's oversight.

               o  Standardize approval letters for each 8(a) procurement to
               clearly assign accountability for monitoring of subcontracting and
               for notifying SBA of contract modifications.
               o  Tailor wording in approval letters to explain the basis for
               adverse impact determinations.
               o  Clarify MOUs with procuring agencies to state that it is the
               agency contracting officer's responsibility to monitor compliance
               with the limitation on subcontracting clause.
               o  Evaluate staffing levels and training needed to effectively
               oversee ANC participation in the 8(a) program and take steps to
               allocate appropriate resources to the Alaska district office.
               o  Provide more training to agencies on the 8(a) program,
               specifically including a component on ANC 8(a) participants.

    To ensure that agencies are properly overseeing ANC 8(a) contracts, we
    recommend that the Secretaries of the Departments of Defense, Energy,
    Homeland Security, the Interior, State, and Transportation and the
    Administrator of NASA take the following action:

               o  Work with SBA to develop guidance to agency contracting
               officers on how to comply with requirements of the 8(a) program
               such as limitations on subcontracting and notifying SBA of
               contract modifications, particularly when contracting with 8(a)
               ANC firms.

                           Agency Comments and Our Evaluation

    We provided a draft of this report to the departments of Defense, Energy,
    Homeland Security, Interior, State, and Transportation and to NASA and
    SBA. We received written comments from SBA, Homeland Security, the
    Interior, NASA, State, and Energy. We received official oral comments from
    Defense and Transportation. We also received written comments from the
    Native American Contractors Association. The written comments we received
    are included as appendixes II through VIII.

    In its written comments, SBA took issue with several aspects of the
    report. Its letter did not indicate whether or not it plans to implement
    the recommendations we made, but in a subsequent email the agency
    expressed disagreement with several of them. SBA's comments and our views
    on them follow.

               o  The agency referred to the concerns we raise as "subjective"
               and stated that our analysis relies "far too heavily on isolated
               individual anecdotes" to support findings and recommendations
               pertaining to 8(a) ANC activity. We strongly disagree with this
               characterization. Our findings are supported by the facts we
               gathered and our analysis of regulations, policies, contract
               files, ANC annual reports, FPDS and agency data, and other
               relevant documentation, as well as interviews with agency
               contracting officers and acquisition officials, SBA officials in
               headquarters and the Alaska district office, and representatives
               of 30 ANCs. The findings we developed and the shortcomings in
               oversight we found directly support the 10 recommendations we make
               to SBA. Further, it is an undisputed fact that there has been
               significant growth in federal dollars awarded to 8(a) ANC firms in
               recent years, as recognized by SBA in its comment letter. Clearly,
               6 of the 7 procuring agencies in our review--which account for
               most of the government's 8(a) dollars to ANC firms--agree that
               there is a need for them to work with SBA to develop guidance for
               contracting officers in light of the unique procurement advantages
               Congress has provided 8(a) ANC firms.
               o  SBA believes that our report should cite federal dollars to
               women-owned and other small business categories and the
               government's achievement of small business goals in general. That
               information is not relevant to this report. Our review focused
               specifically on ANC activity in the 8(a) program, as set forth in
               appendix I, which outlines our scope and methodology.
               o  SBA states that it has recently taken a number of steps to
               improve oversight of the 8(a) program, including taking into
               consideration special provisions afforded to 8(a) ANC firms,
               Native Hawaiian Organizations, and Indian tribes. It is unclear
               what steps SBA is referring to. While we note in our report that
               SBA officials told us they were planning to revise regulations and
               policies, we were not provided with any evidence that this or any
               other planned action had been taken, despite our requests for the
               information.
               o  SBA states that it is "conjecture" to make recommendations
               pertaining to data on 8(a) ANC activity until the lack of data
               explaining 8(a) participants' economic activities, including ANC
               firms, is resolved. Our recommendation on data collection is
               intended to address this very gap. It is directed at SBA because
               that agency is responsible for managing the 8(a) program. We found
               that SBA lacked adequate data on the 8(a) program in general and
               was not collecting any information on ANC firms' activity
               specifically.
               o  SBA pointed out that the statutory language refers to
               "substantial" unfair competitive advantage, a change we have made
               to the report. SBA found our focus on this issue unreasonable,
               stating that all 8(a) participants have been accorded a
               competitive advantage. During our review, it was clear that SBA
               had in place no policy or procedure to make unfair competitive
               advantage determinations. We do not understand how SBA can ignore
               the fact that Congress has directed it to make these
               determinations specifically for ANC firms in the 8(a) program.
               o  SBA refers to the tone of our report as "unsettling" and
               suggests that it could lead readers to conclude that we have
               concerns with the fact that agencies can count 8(a) ANC contracts
               toward their federal small business goals. We express no concerns
               of the kind. Rather, our concerns, as reflected in the
               recommendations to SBA, pertain to the level of oversight it is
               exercising over 8(a) ANC activity.
               o  In an e-mail sent after the comment letter, SBA expressed
               disagreement with several of the recommendations but did not
               address the others. It stated that its annual reviews track
               ownership changes and the business mix of all 8(a) participants
               and that its regulations require contracting officers to report
               contract modifications. These comments are not responsive to our
               recommendations. Our recommendations specifically discuss
               monitoring ownership of ANC holding companies, tracking primary
               revenue generators across 8(a) ANC subsidiaries, and establishing
               thresholds for notification of 8(a) contract modifications. SBA
               disagreed with the recommendation on determining whether other
               small businesses are losing contracting opportunities, stating
               that it already does so for all 8(a) sole-source offerings. As
               illustrated by the examples in our report, this is not the case.

    SBA's written comments are included as appendix II.

    The Department of Homeland Security agreed with the recommendation
    affecting it and indicated it would partner with SBA to ensure that the
    department's contracting officers have a thorough understanding of all
    contracting regulations on awarding contracts under SBA's 8(a) program.
    Homeland Security requested that we reflect that the department has only
    been in existence since 2003 and that FPDS data would not be available for
    the 5-year period. We agreed and added this point to our explanation of
    why we did not include the department in our trend analysis. In addition,
    the department stated that, in providing us a list of contracts awarded to
    firms with the DUNS numbers we provided, officials did not indicate that
    it included all contracts awarded to ANC firms. Homeland Security
    attempted to reconcile the identified missing contracts from the list of
    contracts awarded to ANCs; however, we still determined that the agency's
    data were inadequate to include in our trend analysis. Homeland Security's
    written comments are included as appendix III.

    The Department of the Interior agreed with the recommendation affecting it
    and proposed that an interagency work group be established and headed by
    the SBA to develop guidance for contracting officers. The department also
    provided specific comments on the contract awarded to an ANC firm on
    behalf of DOD's Counter Intelligence Field Activity (CIFA). The Interior
    Department said that the referenced contract was not awarded to the ANC
    firm "because CIFA...had requested that firm." The evidence we gathered
    from the contract file, as well as interviews with the contracting officer
    and the ANC firm, support the facts as we have stated them. CIFA, through
    a preauthorization letter, had arranged with the ANC firm to provide a
    variety of urgently needed services and requested that GovWorks award the
    contract to that firm. Interior's written comments are included as
    appendix IV.

    NASA agreed with the recommendation affecting it and indicated that it
    will work with the SBA to develop guidance and to provide whatever
    assistance SBA may need to address the recommendations directed to it.
    NASA's written comments are included as appendix V.

    The State Department agreed with the recommendation affecting it, stating
    that it will work with the SBA to develop standardized guidance to
    contracting officers on monitoring limitations on subcontracting and SBA
    notification of contract modifications. The State Department noted that
    the contract negotiations involving an 8(a) ANC joint venture took place
    in a compressed acquisition cycle and that SBA was in direct contact with
    the venturing parties at the time they were negotiating the contract.
    State concludes that because of SBA's "simultaneous interaction" with the
    venturing parties and with State's contracting officer, a formal request
    for SBA intervention would have been superfluous. However, our discussion
    focuses on the concerns about the extent of work being performed by the
    8(a) ANC firm versus that of its joint venturing partner. These issues
    were raised within the State Department several months after the contract
    was awarded, and SBA was not notified at that time. The department also
    suggested some technical changes, which we incorporated as appropriate.
    The department's written comments are included as appendix VI.

    The Department of Energy did not comment on the recommendation. It stated
    that our report gives the impression that agencies rely "significantly" on
    the ANC program to achieve small business goals. Our report does not state
    or imply that. Rather, we note that contracting officers have turned to
    8(a) ANC firms as a way to help them meet their goals. The department also
    pointed to a perceived inconsistency in the report dealing with the
    "limitations on subcontracting" clause as it pertains to construction
    contracts. We disagree; the section in the report on this matter clearly
    establishes that the limitation for construction contracts is different
    than for other services. Energy's written response is included as appendix
    VII.

    In official oral comments, DOD agreed with the recommendation, stating
    that the development of additional guidance by the department to ensure
    the effective oversight of 8(a) ANC contracts is necessary and that the
    department will work closely with SBA to develop this guidance. DOD added
    that, prior to commencement of these efforts, it is imperative that SBA
    undertake the actions we recommended for revising its relevant regulations
    and policies and improving its oversight practices concerning 8(a) ANC
    contracts, as these changes will form the basis of the new or expanded
    DOD-specific guidance.

    In official oral comments, the Department of Transportation agreed with
    the recommendation. Transportation also provided some technical comments
    that we incorporated as appropriate.

    We also received written comments from the Native American Contractors
    Association. The association believes that we should more fully
    acknowledge the legal and policy basis of 8(a) program rules for Native
    Entities. We believe the report thoroughly explains the legislative basis
    for 8(a) ANC firms' procurement provisions and that it sets forth the
    rules for ANC firms as compared to those for other 8(a) firms. The
    association also raised several broader issues that impact the entire
    federal procurement system that it believes we should have included, such
    as in the areas of contract bundling, acquisition workforce, improper
    counting toward small business goals, and modifications to contract scope.
    While these are areas that we have reported on in the past, the focus of
    this audit was on 8(a) ANC contracting. Contrary to the association's
    assertion, we do place certain findings-particularly with regard to the
    limitations on subcontracting and notification to SBA of contract
    modifications-in the context of the 8(a) program in general. For example,
    our recommendations to SBA on these issues are not limited solely to 8(a)
    ANC contracting activity. In technical comments provided separately, the
    association suggested that, for context, we include reference to total
    federal procurement spending on goods and services. We have added this
    information as a note to figure 3. The association's comments are included
    as appendix VIII.

    We are sending copies of this report to the Secretaries of Defense,
    Energy, Homeland Security, the Interior, State, and Transportation; the
    Administrators of SBA and NASA; the Director, Office of Management and
    Budget; the Native American Contractors Association; and other interested
    congressional committees. We will make copies available to others upon
    request. In addition, this report will be available at no charge on GAO's
    Web site at http://www.gao.gov .

    If you or your staff have questions about this report, please call me at
    (202) 512-4841 or schinasik@gao.gov. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. See appendix XII for a list of major contributors to this
    report.

    Katherine V. Schinasi Managing Director Acquisition and Sourcing
    Management

    LIST OF REQUESTERS

    The Honorable Donald Manzullo Chairman The Honorable Nydia M. Velazquez
    Ranking Minority Member Committee on Small Business House of
    Representatives

    The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
    Minority Member Committee on Government Reform House of Representatives

    The Honorable Don Young House of Representatives

    The Honorable Peter T. King Chairman The Honorable Bennie G. Thompson
    Ranking Minority Member Committee on Homeland Security House of
    Representatives

    The Honorable Olympia J. Snowe Chair The Honorable John F. Kerry Ranking
    Minority Member Committee on Small Business and Entrepreneurship U.S.
    Senate

    Appendix I: Scope and Methodology Appendix I: Scope and Methodology

    We conducted our work at the Small Business Administration (SBA),
    including its national headquarters and district office in Anchorage,
    Alaska; the Departments of Defense, Energy, Homeland Security, the
    Interior; State, and Transportation, and the National Aeronautics and
    Space Administration (NASA). We traveled to Alaska and met with
    representatives of 30 Alaska Native corporations (ANC). We also met with
    representatives of the Native American Contractors Association in
    Washington, D.C. and interviewed officials from a number of small
    businesses as well as representatives from an 8(a) association. We
    reviewed relevant legislation, including the Alaska Native Claims
    Settlement Act (ANSCA) for background on the ANC corporate structure and
    the Small Business Act and other relevant legislation to understand the
    pertinent procurement advantages that ANC firms receive in the 8(a)
    program.

    To identify overall trends in the government's contracting with ANCs, we
    obtained data from the Federal Data Procurement System (FPDS) for fiscal
    years 2000 through 2004. To gather data on federal 8(a) contracting with
    ANCs, we identified each ANC firm's Data Universal Numbering System (DUNS)
    number and used this information to obtain data from FPDS and agencies. To
    assess the reliability of the procurement data used in our 5-year trend
    analysis, we (1) compared FPDS and agency data to verify the accuracy of
    the data; (2) reviewed related documentation, including contract files;
    and (3) worked closely with agency officials to identify and resolve any
    data problems. When we found discrepancies, we brought them to the
    agency's attention and worked with them to correct the discrepancies
    before conducting our analyses. We determined that the data were
    sufficiently reliable for the purposes of our report. We had planned to
    include Homeland Security in our trend analysis, but did not do so for two
    reasons. First, since FPDS only includes Homeland Security contract data
    for part of fiscal year 2003 and beyond, we were unable to confirm the
    reliability of the data for the purposes of our 5-year trend analysis.
    Second, we found that the data from Homeland Security were inconsistent
    and therefore questioned the reliability of the data overall. For example,
    the data provided did not include contracts awarded by Immigration and
    Customs Enforcement and contained other data errors, such as contracts
    recorded with either an incorrect dollar value or as sole source when
    awarded competitively.

    To assess the trends in government 8(a) sole-source contracting with ANCs
    from fiscal years 2000 to 2004, we reviewed data from the six federal
    agencies that, according to FPDS, comprise about 85 percent of total
    federal dollars obligated to ANCs via the 8(a) program. These agencies
    were the departments of Defense, Energy, the Interior, State, and
    Transportation and NASA, which obligated about $2.5 billion in sole-
    source contracts to ANCs for fiscal years 2000 through 2004. To understand
    the facts and circumstances surrounding specific contract awards, we
    reviewed contract files, interviewed agency contracting officers, and
    reviewed any relevant bid protests for 16 large dollar value, sole-source
    8(a) contracts at seven agencies. Whereas we included six agencies in our
    8(a) sole source trend analysis, we added the Department of Homeland
    Security to our contract file review. To identify two sole-source
    contracts awarded by Homeland Security, we began reviewing the contracts
    with the largest dollar awards from the data provided, but had to exclude
    a number of the largest contracts from our file review due to errors in
    the data. We brought significant data errors to the attention of Homeland
    Security officials and the department stated that it has initiated
    corrective action. For the seven agencies, we selected contracts based on
    high ultimate award values and high dollars obligated to date that
    represented a variety of contractors and services. We made the initial
    contract selections based on the available data at that time.

    To assess how ANCs use the 8(a) program, we reviewed documentation and
    spoke with representatives from 30 Alaska Native corporations-all 13
    regional and 17 selected village or urban corporations-and some of their
    8(a) subsidiaries. In selecting corporations to interview, we considered
    diversity in geography, financial strategy and profitability, and
    participation in the 8(a) program. Tables 5 and 6 show the corporations
    included in our review.

    Table 5: ANCs with Subsidiaries Participating in the 8(a) Program (26)

    Regional corporations (12)
    Ahtna, Incorporated
    Arctic Slope Regional Corporation
    Bering Straits Native Corporation
    Bristol Bay Native Corporation
    Calista Corporation
    Chugach Alaska Corporation
    Doyon, Limited
    Koniag, Incorporated
    NANA Regional Corporation
    Sealaska Corporation
    The Aleut Corporation
    The 13th Regional Corporation
    Village and urban corporations
    (14)
    Corporation                        Village(s) or urban area   Region
    Afognak Native Corporation         Afognak, Port Lions        Koniag
    Baan o yeel kon Corporation        Rampart                    Doyon
    Bethel Native Corporation          Bethel                     Calista
    Chenega Corporation                Chenega                    Chugach
    Choggiung, Limited                 Dillingham                 Bristol Bay
    Goldbelt, Incorporated             Juneau                     Sealaska
    Kikiktagruk Inupiat Corporation    Kotzebue                   NANA
    K'oyitl'ots'ina, Limited           Allakaket, Alatna, Hughes, Doyon
                                          Huslia
    MTNT, Limited                      McGrath, Telida, Nikolai,  Doyon
                                          Takotna
    Olgoonik Corporation               Wainwright                 Arctic Slope
    Tanadgusix Corporation             Saint Paul                 Aleut
    The Eyak Corporation               Cordova, Eyak              Chugach
    Tyonek Native Corporation          Tyonek                     Cook Inlet
    Ukpeagvik Inupiat Corporation      Barrow                     Arctic Slope

    Source: Documentation provided by the ANCs.

    Table 6: ANCs That Do Not Have Subsidiaries Participating in the 8(a)
    Program (4)

    Regional (1)
    Cook Inlet Region, Incorporated
    Village (3)
    Corporation                     Village(s) or urban area Region
    Huna Totem Corporation          Hoonah                   Sealaska
    Kuukpik Corporation             Nuisqut                  Arctic Slope
    Yak-Tat Kwaan, Incorporated     Yakutat                  Sealaska

    Source: Documentation provided by the ANCs.

    Additionally, we visited seven villages with populations that had a high
    percentage of Alaska Natives to understand the lifestyle and livelihood of
    the Alaska Native people. We selected these villages based on diversity in
    geography, population, average per capita income, and shareholder culture
    and history. We also attended a shareholders' annual meeting at one of
    these villages to observe communication and relations between shareholders
    and corporate management. Table 7 shows the villages we visited.

    Table 7: Villages Visited

                                                                                        Average
               Associated                                                                   per Percentage
               village      Corporationparticipating                                     capita     Alaska
    Village    corporation  in 8(a) program?         Region   Estimatedpopulation(2004)  income    Nativea
    Bethel     Bethel       Yes                      Calista                      5,888 $20,267        68%
               Native
               Corporation
    Chenega    Chenega      Yes                      Chugach                         81 $13,381        78%
    Bay        Corporation
    Dillingham Choggiung,   Yes                      Bristol                      2,422 $21,537        61%
               Limited                               Bay
    McGrath    MTNT,        Yes                      Doyon                          367 $21,553        55%
               Limited
    Napaskiak  Napaskiak,   No                       Calista                        436  $8,162        98%
               Incorporated
    Nikolai    MTNT,        Yes                      Doyon                          121 $11,029        81%
               Limited
    Yakutat    Yak-Tat      No                       Sealaska                       680 $22,579        47%
               Kwaan,
               Incorporated

    Source: State of Alaska, Department of Commerce.

    a Defined as percent of population reporting race as Alaska Native alone
    or in combination with one or more races

    To understand the structure, shareholder population, and involvement in
    the 8(a) program of each corporation, we examined annual reports and other
    documentation from our selected 30 corporations and spoke with Alaska
    Native shareholders. We also interviewed ANC executives on corporate
    governance, strategies for participation in the 8(a) program, and benefits
    provided to shareholders. Additionally, we met with executives at selected
    subsidiaries participating in the 8(a) program to understand their
    structure, business strategies, and relationship to their parent
    corporations.

    To establish whether SBA's oversight over ANCs in the 8(a) program is
    adequate, we reviewed relevant regulations and operating procedures to
    understand the requirements for oversight of the 8(a) program and of ANC
    8(a) activity. We interviewed SBA officials at the Alaska district office
    and reviewed relevant files to understand that staff's oversight role and
    workload priorities. Finally, we analyzed documents from and spoke with
    SBA headquarters officials in the Washington, D.C. office to understand
    their oversight of district offices and the 8(a) program and whether the
    officials have assessed and addressed the impact of increased ANC activity
    on the 8(a) program.

    Appendix II: Comments from the Small Business Administration Appendix II:
    Comments from the Small Business Administration

    Appendix III: Comments from the Department of Homeland Security Appendix
    III: Comments from the Department of Homeland Security

    Note: Page numbers in the draft report may differ from those in this
    report.

    Appendix IV: Comments from the Department of the Interior Appendix IV:
    Comments from the Department of the Interior

    Note: Page numbers in the draft report may differ from those in this
    report.

    Appendix V: Comments from the National Aeronautics and Space
    Administration Appendix V: Comments from the National Aeronautics and
    Space Administration

    Appendix VI: Comments from the Department of State Appendix VI: Comments
    from the Department of State

    Appendix VII: Comments from the Department of Energy Appendix VII:
    Comments from the Department of Energy

    Note: Page numbers in the draft report may differ from those in this
    report.

    Appendix VIII: Comments from the Native American Contractors Association
    Appendix VIII: Comments from the Native American Contractors Association

    Note: Page numbers in the draft report may differ from those in this
    report.

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

    Below is a list of Alaska Native corporations that own subsidiaries
    participating in the 8(a) program as of December 2005:

      Regional Corporations (12)

    Ahtna, Incorporated Arctic Slope Regional Corporation Bering Straits
    Native Corporation Bristol Bay Native Corporation Calista Corporation
    Chugach Alaska Corporation Doyon, Limited Koniag, Incorporated NANA
    Regional Corporation Sealaska Corporation The Aleut Corporation The 13th
    Regional Corporation

      Village Corporations (33)

    Afognak Native Corporation Alaska Peninsula Corporation Baan o yeel kon
    Corporation Becharof Corporation Bethel Native Corporation Cape Fox
    Corporation Chenega Corporation Choggiung, Limited Cully Corporation
    Deloycheet, Incorporated Dinyea Corporation Gana-a'Yoo, Limited Kaktovik
    Inupiat Corporation Kikiktagruk Inupiat Corporation Klukwan, Incorporated
    K'oyitl'ots'ina, Limited MTNT Limited Ninilchik Native Association,
    Incorporated Old Harbor Native Corporation Olgoonik Corporation Ouzinkie
    Native Corporation Paug-Vik, Limited Port Graham Corporation Sea Lion
    Corporation Sitnasauk Native Corporation St. George Tanaq Corporation

      Urban Corporations (4)

    Tanadgusix Corporation The Eyak Corporation The Kuskokwim Corporation The
    Tatitlek Corporation Tikigaq Corporation Tyonek Native Corporation
    Ukpeagvik Inupiat Corporation Goldbelt, Incorporated Natives of Kodiak,
    Incorporated Kenai Natives Associtation, Incorporated Shee Atika,
    Incorporated

      Group Corporations (0)

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

    Through our review of documentation provided by the 13 regional and 17
    village or urban Alaska Native corporations (ANC) included in our review,
    as well as interviews with corporation representatives and shareholders,
    we gained an understanding of how the corporations communicate with and
    obtain input from their shareholders and of the benefits they provide.

    The ANCs communicated with their shareholders through surveys, Web sites,
    newsletters, annual reports, local media, shareholder committees, and
    annual and other periodic meetings. Some had "open door" policies, which
    gave shareholders the opportunity to voice their opinions to management at
    any time. Additionally, corporations took steps to reach out to
    shareholders both out of state and in the villages. For example, one
    corporation's officials conducted the annual meeting via Web cast and
    noted that Internet attendance was beginning to outpace in-person
    attendance. Another corporation rotated its annual meeting among
    Anchorage, Seattle, and its regional hub. Additionally, several of the
    regional corporations regularly traveled to their villages to seek input.
    Steps taken by one to facilitate village outreach included moving the
    location of its annual meeting from the regional hub to the villages;
    holding the meeting in the native language; and investing in a boat to
    facilitate transport to the region's villages.

    Shareholder preferences for benefits differed among corporations. For
    example, one corporation stated that its shareholders prioritized
    protection of their land and the subsistence lifestyle.1 Shareholders of
    other corporations placed a greater value on dividends, scholarships,
    training, and job opportunities.

    Corporations reported targeting benefits towards the needs of their
    shareholders. Such projects included

               o  investing in low-cost Internet service as a tool to reduce the
               isolation of a particularly remote village;
               o  issuing death benefits in the form of food vouchers because the
               cultural tradition among its shareholders is to host and feed
               visitors from the time of death through burial services;
               o  investing in an insurance company when other insurance
               companies were reluctant to insure shareholders' homes; and
               o  subsidizing heating oil for residents of a small, remote
               community north of the Arctic Circle, absorbing a loss of
               $2.75-$3.00 per gallon.

    1 The subsistence lifestyle depends on wild resources for basic needs such
    as food, clothing, and fuel as well as for trade, arts, and ceremony.

    Some regional corporations stated that they required sizable revenues to
    provide benefits to a large shareholder base. Of the corporations we
    reviewed, the 13 regional corporations had approximately 102,000
    shareholders, and the 17 village and urban corporations had about 17,000
    shareholders.2 Overall, the corporations we reviewed saw a 31 percent
    increase in their number of shareholders since incorporation.3 The number
    of shareholders at two regional corporations more than doubled since
    incorporation.

    The 30 ANCs included in our review reported providing three categories of
    benefits

               o  dividends,
               o  other direct benefits, and
               o  indirect benefits

    Dividends: In 2004, the 30 corporations paid a total of $121.6 million in
    dividends. Eleven corporations issued no dividends. Of the corporations
    that issued dividends, payments ranged from $1.71 per share to $171.00 per
    share. In a given year, a shareholder may have received a dividend from
    his or her village corporation and an additional dividend from his or her
    regional corporation.

    Corporate officials noted that dividend payments, no matter how small,
    meant much to their shareholders in many rural villages where basic
    necessities were expensive-for example, milk cost $12 per gallon and fuel
    cost $5 per gallon.

    Original shareholders received 100 shares upon incorporation. One village
    corporation's 137 shareholders owned as few as one and up to 200 shares,
    with an average of about 50 shares.

    2Each eligible Alaska Native is generally entitled to membership both in
    the corporation established for his or her village and in the regional
    corporation in which the village is located.

    3 One corporation was unable to provide us with its original enrollment
    data.

    A third of the ANCs created permanent funds to build up a reserve for
    future dividends. Two corporations told us that these funds allowed them
    to issue dividends even in years when they were unprofitable.

    Half of the ANCs established policies specifying an amount or percentage
    of net income to be distributed as shareholder dividends. For example, one
    corporation's board required an increase in its annual dividend amount by
    10 percent over the previous year. Another corporation annually
    distributed 66 percent of its average net income for the prior 5 years to
    shareholders. The result of this policy coupled with some unprofitable
    years was that in 2004, this ANC paid 100 percent of its income in
    dividends to shareholders.

      Other Direct Benefits:

               o  Shareholder hiring preference and job opportunities. All of the
               corporations we interviewed reported a hiring preference for
               shareholders. Some corporations extended this preference to
               shareholders' families, other Alaska Natives, and/or other Native
               Americans.
               o  Other employment assistance programs. In addition to offering a
               shareholder hire preference, corporations made efforts to
               encourage other shareholder employment. Nine of the 30
               corporations offered a management training program. Some
               corporations had agreements with partner companies encouraging
               shareholder hire. One corporation had a preference to conduct
               business with shareholder-owned businesses. Another corporation's
               employment assistance programs included mentoring; one-on-one
               counseling; business and career fairs; survey of shareholders over
               18 seeking employment; and tracking shareholder employment status
               and interests in a database.
               o  Benefits for elder shareholders. Twelve of the 30 corporations
               we interviewed reported issuing benefits for elder shareholders.
               Some corporations paid additional regular dividends to elders,
               while others made one-time financial payments. Two corporations
               made in-kind benefits for elders, such as a lunch program or a bus
               service.
               o  Scholarships. Almost all corporations offered scholarships for
               shareholders.
               o  Internships and other youth programs. Many corporations
               provided internships or other youth programs for shareholders at
               parent and subsidiary companies. Two Washington, D.C.-based
               subsidiaries provided housing and other relocation assistance to
               their interns. Additionally, one corporation instituted the Young
               Adult Advisory Mentor program, which allows its youth to
               participate in the corporation. Corporate officials told us that
               they instituted mentoring and internship programs to lead to
               future involvement of shareholders in management and leadership
               roles.
               o  Burial assistance. Twenty-two of the 30 corporations reported
               providing some kind of assistance to the family of a deceased
               shareholder. Forms of burial assistance include cash, life
               insurance payments, or in-kind donations.
               o  Land leasing, gifting or other use. Most of the village and
               urban corporations we interviewed leased, gifted, or made other
               use of the land given to the village corporation in the Alaska
               Native Claims Settlement Act4 settlement for shareholders. For
               example, one corporation gifted five acres to any shareholder who
               requested it.

               o  Community infrastructure. Several corporations invested in the
               infrastructure of their villages. For example, after the
               Department of the Interior's Bureau of Indian Affairs ceased barge
               service to its remote village, one corporation established a
               transportation company that became the only mechanism to bring
               goods to the community. Other projects included remodeling the
               community washateria5 and administering and subsidizing a
               village's cable and Internet utilities.

      Indirect Benefits:

               o  Support of the subsistence lifestyle. Corporations took steps
               to protect and maintain the subsistence lifestyle of their
               shareholders. One corporation built in subsistence leave into its
               personnel policy. Another corporation leased its land for "fish
               camps," or plots along a river for shareholders to catch and smoke
               fish in the summertime.
               o  Cultural preservation. Twenty-four of the 30 corporations we
               interviewed invested in cultural and heritage programs, which
               included museums, culture camps, or native language preservation.
               o  Establishment and support of affiliated foundations or
               nonprofit organizations. Twenty-one of the 30 corporations
               established affiliated foundations or nonprofit organizations.
               o  Donations to other nonprofit organizations. Almost all of the
               corporations donated to various nonprofit organizations. For
               example, one corporation donated to organizations that advocate
               for Alaska Natives, such as the Alaska Federation of Natives,
               Alaska Native Arts Foundation, Alaska Native Justice Center, and
               Get Out the Native Vote.
               o  Support to other corporations. Some regional corporations
               provided various kinds of assistance to the village corporations
               in their regions. For example, one regional corporation is trying
               to develop 8(a) partnerships with its village corporations to help
               them enter the 8(a) program with lower start-up and administrative
               costs. Other regional corporations provided recordkeeping, natural
               resources, and regulatory and community planning services for
               their village corporations.

    4 Pub.L.92-203 (codified as amended in 43 U.S.C. 1601, et seq.).

    5A washateria is a community laundry and shower facility found in villages
    without running water.

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

    One Alaska Native corporation that we reviewed owned seven subsidiaries
    participating in the 8(a) program, with six of them marketing their
    abilities to perform work in the same line of business.

    Subsidiary   NAICS Codes
                         443120 Computer and software stores
    Subsidiary A      511210 Software publishers
                         541512 Computer systems design services
                         561210 Facilities support services
                         221112 Fossil fuel electric power generation
    Subsidiary B      531130 Lessors of miniwarehouses and self-storage units
                         561210 Facilities support services
                         562111 Solid waste collection
                         335312 Motor and generator manufacturing
                         335313 Switchgear and switchboard apparatus
                                manufacturing
    Subsidiary C      336611 Ship building and repairing
                         561210 Facilities support services
                         561612 Security guards and patrol services
                         611430 Professional and management development training
                         443120 Computer and software stores
    Subsidiary D      511210 Software publishers
                         517310 Telecommunications resellers
                         561210 Facilities support services
                         238210 Electrical contractors
    Subsidiary E      541511 Custom computer programming services
                         561210 Facilities support servicesa
                         562111 Solid waste collection
                         541618 Management consulting services
    Subsidiary F      541930 Translation and interpretation services
                         561210 Facilities support services
                         611420 Computer training

    Source: GAO analysis of ANC data.

    a Subsidiary E marketed 561210 (Facilities Support Services) as its
    primary NAICS code.

    Appendix XII: A Appendix XII: GAO Contact and Staff Acknowledgments

    GAO Contact

    Katherine Schinasi (202) 512-4841 or schinasik@gao.gov

    Staff Acknowledgments

    In addition to the individual named above, Michele Mackin, Assistant
    Director; Theresa Chen; David E. Cooper; Barry DeWeese; Art James, Jr.;
    Julia Kennon; Jeff Malcolm; Meaghan Marshall; Sylvia Schatz; Robert
    Tagorda; and Tatiana Winger made key contributions to this report.

    (120437)

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    www.gao.gov/cgi-bin/getrpt? GAO-06-399 .

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    Highlights of GAO-06-399 , a report to congressional requesters

    April 2006

    CONTRACT MANAGEMENT

    Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls
    for Tailored Oversight

    Alaska Native corporations (ANC) were created to settle land claims with
    Alaska Natives and foster economic development. In 1986, legislation
    passed that allowed ANCs to participate in the Small Business
    Administration's (SBA) 8(a) program. Since then, Congress has extended
    special procurement advantages to 8(a) ANC firms, such as the ability to
    win sole-source contracts for any dollar amount. This report identifies
    (1) trends in the government's 8(a) contracting with ANC firms, (2) the
    reasons agencies have awarded 8(a) sole-source contracts to ANC firms and
    the facts and circumstances behind some of these contracts, and (3) how
    ANCs are using the 8(a) program. GAO also evaluated SBA's oversight of
    8(a) ANC firms.

    What GAO Recommends

    GAO recommends that SBA take actions to improve oversight of ANC 8(a)
    activity and recommends that the seven procuring agencies in this review
    provide guidance to contracting officers. GAO received comments on the
    draft report from all 8 agencies in the review and the Native American
    Contractors Association. The procuring agencies agreed with the
    recommendation, except for the Department of Energy which did not address
    it. SBA expressed concern with aspects of the report and, in a subsequent
    e-mail, disagreed with several of our recommendations. GAO disagrees with
    SBA's comments and believes its recommendations need to be implemented.

    While representing a small amount of total federal procurement
    spending,8(a) obligations to firms owned by ANCs increased from $265
    million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year 2004,
    obligations to ANC firms represented 13 percent of total 8(a) dollars.
    Sole-source awards represented about 77 percent of 8(a) ANC obligations
    for the six procuring agencies that accounted for the vast majority of
    total ANC obligations over the 5-year period. These sole-source contracts
    can represent a broad range of services, as illustrated in GAO's contract
    file sample, which included contracts for construction in Brazil, training
    of security guards in Iraq, and information technology services in
    Washington, D.C.

    In general, acquisition officials at the agencies reviewed told GAO that
    the option of using ANC firms under the 8(a) program allows them to
    quickly, easily, and legally award contracts for any value. They also
    noted that these contracts help them meet small business goals. In
    reviewing selected large, sole-source 8(a) contracts awarded to ANC firms,
    GAO found that contracting officials had not always complied with certain
    requirements, such as notifying SBA of contract modifications and
    monitoring the percent of work that is subcontracted.

    ANCs use the 8(a) program to generate revenue with the goal of providing
    benefits to their shareholders. These benefits take many forms, including
    dividend payments, scholarships, internships, and support for elder
    shareholders. A detailed discussion of the benefits provided by the ANCs
    is included as appendix X of the report. Some ANCs are heavily reliant on
    the 8(a) program for revenues, while others approach the program as one of
    many revenue-generating opportunities. GAO found that some ANCs have
    increasingly made use of the congressionally authorized advantages
    afforded to them. One of the key practices is the creation of multiple
    8(a) subsidiaries, sometimes in highly diversified lines of business. From
    fiscal year 1988 to 2005, ANC 8(a) subsidiaries increased from one
    subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs.

    SBA, which is responsible for implementing the 8(a) program, has not
    tailored its policies and practices to account for ANCs' unique status and
    growth in the 8(a) program, even though SBA officials recognize that ANCs
    enter into more complex business relationships than other 8(a)
    participants. Areas where SBA's oversight has fallen short include:
    determining whether more than one subsidiary of the same ANC is generating
    a majority of its revenue in the same primary industry, consistently
    determining whether awards to 8(a) ANC firms have resulted in other small
    businesses losing contract opportunities, and ensuring that the
    partnerships between 8(a) ANC firms and large firms are functioning in the
    way they were intended. During our review, SBA officials agreed that
    improvements are needed and said they are planning to revise their
    regulations and policies.
    *** End of document. ***