-------------------------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
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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 [email protected]. 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 [email protected]
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.
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