Alaska Native Corporations: Increased Use of Special 8(a)
Provisions Calls for Tailored Oversight (19-SEP-07,
GAO-07-1251T).
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 receive sole-source contracts for
any dollar amount and to own multiple subsidiaries in the 8(a)
program. We were asked to testify on an earlier report where we
identified (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.
GAO made recommendations aimed at improving SBA's oversight of
8(a) ANC contracting activity and ensuring that procuring
agencies properly oversee 8(a) contracts they award to ANC firms.
SBA has either taken action or plans to take action on the
recommendations. The procuring agencies generally agreed with our
recommendation to them. We believe implementation of our
recommendations will provide better oversight of 8(a) ANC
contracting activity and provide decision makers with information
to know whether the program is operating as intended.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-1251T
ACCNO: A76492
TITLE: Alaska Native Corporations: Increased Use of Special 8(a)
Provisions Calls for Tailored Oversight
DATE: 09/19/2007
SUBJECT: Competition
Contract administration
Native American businesses
Native Americans
Program evaluation
Program management
Small business assistance
Small business contractors
Small business contracts
Sole source procurement
Alaska
SBA 8(a) Program
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GAO-07-1251T
* [1]ANC Trends in and Use of 8(a) Contracting
* [2]Contract Execution Shortfalls
* [3]SBA Lacks Oversight of 8(a) ANC Activity
* [4]Previous Conclusions, Recommendations, and Agency Responses
* [5]Contacts and Staff Acknowledgements
* [6]GAO's Mission
* [7]Obtaining Copies of GAO Reports and Testimony
* [8]Order by Mail or Phone
* [9]To Report Fraud, Waste, and Abuse in Federal Programs
* [10]Congressional Relations
* [11]Public Affairs
Testimony
Before the Committee on Natural Resources, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, September 19, 2007
ALASKA NATIVE CORPORATIONS
Increased Use of Special 8(a) Provisions Calls for Tailored Oversight
Statement of Katherine V. Schinasi, Managing Director
Acquisition and Sourcing Management
GAO-07-1251T
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss our April 2006 report on Alaska
Native Corporation (ANC) 8(a) firms.^1 In December 1971, Congress enacted
the Alaska Native Claims Settlement Act to resolve long-standing
aboriginal land claims and to foster economic development for Alaska
Natives. This legislation created ANCs, which would become the vehicle for
distributing land and monetary benefits to Alaska Natives in lieu of a
reservation system. As of December 2005, there were 13 regional ANCs and
182 village, urban, and group corporations.
In 1986, legislation was enacted that allowed ANC-owned firms 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. Since then,
Congress has extended special procurement advantages to ANC firms. For
example, ANC firms are permitted to receive noncompetitive contracts for
any amount, whereas other 8(a) companies are subject to competitive
thresholds of $5 million for manufacturing contracts or $3 million for all
other contracts. ANCs can also own multiple subsidiaries participating in
the 8(a) program,^2 unlike other 8(a) firms that may own only one in a
lifetime and no more than 20 percent of another 8(a) firm.
Our 2006 report on 8(a) ANC contracting identified (1) trends in
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. We
also evaluated SBA's oversight of 8(a) ANC firms. We made a number of
recommendations to SBA and also recommended that the agencies in our
review work with SBA to develop training for their contracting personnel.
Today I will discuss the highlights of our report and provide an update on
actions SBA and the other agencies have taken to address our
recommendations.
^1GAO, Contract Management: Increased Use of Alaska Native Corporations'
Special 8(a) Provisions Calls for Tailored Oversight, [12]GAO-06-399 ,
(Washington, D.C.: Apr. 27, 2006).
^2Each 8(a) ANC firm must be in a different primary industry.
To address the objectives of our 2006 report, we obtained data on federal
8(a) contracting with ANCs. It is important to note that there is no
readily available central source of information on ANC 8(a) contracting
activity. We obtained each ANC firm's Data Universal Numbering System
(DUNS) number and used this information to obtain data from the Federal
Procurement Data System (FPDS) and agencies. To assess the reliability of
the procurement data, we (1) compared FPDS and agency data to verify its
accuracy, (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 also analyzed 16 large, sole-source
8(a) contracts awarded to ANC firms from the departments of Defense,
Energy, the Interior, State, Transportation, and Homeland Security and the
National Aeronautics and Space Administration (NASA). We selected the
contracts based on high ultimate award values and high dollar obligations
that represented a variety of contractors and services. We traveled to
Alaska and met with executives of 13 regional ANCs and 17 village or urban
corporations. The report on which this testimony is based was prepared in
accordance with generally accepted government auditing standards.
Our work did not include within its scope an objective or analyses that
either support or challenge special ANC advantages within the 8(a)
program. The program has been established in law and any changes are up to
the Congress.
ANC Trends in and Use of 8(a) Contracting
8(a) ANC contracting represents a small amount of total federal
procurement spending. However, dollars obligated to ANC firms through the
8(a) program grew from $265 million in fiscal year 2000 to $1.1 billion in
2004. 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.
During this period, six federal agencies--the departments of Defense,
Energy, the Interior, State, and Transportation and NASA--accounted for
almost 85 percent of total 8(a) ANC obligations. Obligations for 8(a)
sole- source contracts by these agencies to ANC firms increased from about
$180 million in fiscal year 2000 to about $876 million in fiscal year
2004.
ANCs use the 8(a) program as one of many tools to generate revenue with
the goal of benefiting their shareholders. 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,^3
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. Figure 1 shows the recent growth in ANCs'
8(a) subsidiaries.
Figure 1: Number of ANC Parent Corporations and Subsidiaries Active in the
8(a) Program, 1988 to 2005
ANCs use their ability to own multiple businesses in the 8(a) program, as
allowed by law, in different ways. For example, some ANCs
o create a second subsidiary in anticipation of winning follow-on
work from one of their graduating subsidiaries;^4
o wholly own their 8(a) subsidiaries, while others invest in
partially-owned subsidiaries; and
o diversify their subsidiaries' capabilities to increase
opportunities to win government contracts in various industries.
^3In this testimony, "ANC" refers to the parent corporation. The term "ANC
firm" denotes a business owned by an ANC. We use the term "ANC firm" and
"subsidiary" interchangeably.
^4There is a 9-year limit to participation in the 8(a) program; firms
could graduate earlier if they outgrow their primary industry size
standards.
Contract Execution Shortfalls
Our review of 16 large sole-source contracts awarded by 7 agencies found
that agency officials view contracting with 8(a) ANC firms as a quick,
easy, and legal way to award contracts while at the same time helping
their agencies meet small business goals.^5
Memoranda of Understanding (partnership agreements) between SBA and
agencies delegate the contract execution function to federal agencies,
although SBA remains responsible for implementing the 8(a) program. We
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 the 8(a) firms versus their subcontractors. For example:
o Federal regulation requires that when 8(a) firms subcontract
under an 8(a) service contract, they incur at least 50 percent of
the personnel costs with their own employees.^6 The purpose of
this provision, which limits the amount of work that can be
performed by the subcontractor, is to ensure that small businesses
do not pass along the benefits of their contracts to their
subcontractors. For the 16 files we reviewed, we found almost no
evidence that the agencies are effectively monitoring compliance
with this requirement. In general, the contracting officers we
spoke with were confused about whose responsibility it is.
o Agencies are also required to notify SBA of all 8(a) contract
awards, modifications, and exercised options where the contract
execution function has been delegated to the agencies in the
partnership agreements. We found that not all contracting officers
were doing so. In one case, the Department of Energy contracting
officer had broadened the scope of a contract a year after award,
adding 10 additional lines of business that almost tripled the
value of the contract. These changes were not coordinated with
SBA.
^5ANC firms in the 8(a) program are deemed by law as socially and
economically disadvantaged. Awards to these firms are credited to
agencies' small business goals.
^6For general construction, the 8(a) firm is required to incur at least 15
percent of the personnel costs.
SBA Lacks Oversight of 8(a) ANC Activity
We reported in 2006 that SBA had not tailored its policies and practices
to account for ANCs' unique status and growth in the 8(a) program, even
though officials recognize that ANC firms 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 the Alaska Native Claims Settlement Act
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.
SBA's oversight fell short in that it did not:
o track the primary business industries in which ANC subsidiaries
had 8(a) contracts to ensure that more than one subsidiary of the
same ANC was not generating the majority of its revenue under the
same primary industry code;
o consistently determine whether other small businesses were
losing contracting opportunities when large sole-source contracts
were awarded to 8(a) ANC firms;
o adhere to a statutory and regulatory requirement to ascertain
whether 8(a) ANC firms, when entering the 8(a) program or for each
contract award, had, or were likely to obtain, a substantial
unfair competitive advantage within an industry; ^7
o ensure that partnerships between 8(a) ANC firms and large firms
were 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 had reported to headquarters
that the makeup of their 8(a) portfolio was challenging and required 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.
^7 This requirement is set forth in the Small Business Act (15 U.S.C. S
636(j)(10)(J)(ii)(II)).
Previous Conclusions, Recommendations, and Agency Responses
In 2006, we reported that ANCs were increasingly using the contracting
advantages Congress has provided them. Our work showed that procuring
agencies' contracting officers are in need of guidance on how to use these
contracts while exercising diligence to ensure that taxpayer dollars are
spent effectively. Equally important, we stated, significant improvements
were needed in SBA's oversight of the program. Without stronger oversight,
we noted the potential for abuse and unintended consequences.
In our April 2006 report, we made 10 recommendations to SBA on actions
that can be taken to revise its regulations and policies and to improve
practices pertaining to its oversight of ANC 8(a) procurements. Our
recommendations and SBA's June 2007 response are as follows.
We recommended that the Administrator of SBA:
1. 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.
SBA response: SBA is exploring possible regulatory changes that
would address the issue of better controlling the award of
sole-source 8(a) contracts over the competitive threshold dollar
limitation to joint ventures between tribally and ANC-owned 8(a)
firms and other business concerns.
2. 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.
SBA response: SBA is building a Business Development Management
Information System to electronically manage all aspects of the
8(a) program. According to SBA, this system, scheduled to be
completed in fiscal year 2008, will monitor program participants'
continuing eligibility in the 8(a) program and could include an
ANC element in the electronic annual review that would monitor the
ownership of ANC holding companies that manage 8(a) operations and
ensure that any changes in ownership are reported to SBA.
3. 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.
SBA response: The planned electronic annual review can collect
information on ANCs' multiple subsidiaries to ensure that they are
not generating the majority of their revenues from the same
primary industry. Further, to ensure that an ANC-owned firm does
not enter the 8(a) program with the same North American Industry
Classification System (NAICS) code^8 as another current or former
8(a) firm owned by that ANC, the ANC-owned applicant must certify
that it operates in a distinct primary industry and must
demonstrate that fact through revenues generated. SBA notes that
the planned annual electronic reviews can validate this
information.
4. 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. Once notification criteria are determined,
provide guidance to the agencies on when to notify SBA of contract
modifications and scope changes.
SBA response: SBA stated that its revisions to its partnership
agreements with federal agencies address this recommendation.
However, we note that the revised agreement does not establish
thresholds or include new criteria for when agencies should send
SBA contract modifications or award documentation. The agreement
states that agencies "shall provide a copy of any
contract...including basic contracts, orders, modifications, and
purchase orders" to SBA.
^8 SBA 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.
5. Consistently determine whether other small businesses are
losing contracting opportunities when awarding contracts through
the 8(a) program to ANC firms.
SBA response: SBA stated that it plans to require the contracting
agencies to include impact statements in their contract offer
letters to SBA.
6. Standardize approval letters for each 8(a) procurement to
clearly assign accountability for monitoring of subcontracting and
for notifying SBA of contract modifications.
SBA response: SBA agreed with the recommendation but did not
indicate an action taken or planned.
7. Tailor wording in approval letters to explain the basis for
adverse impact determinations.
SBA response: SBA agreed with the recommendation but did not
indicate an action taken or planned.
8. Clarify memorandums of understanding (known as partnership
agreements) with procuring agencies to state that it is the agency
contracting officer's responsibility to monitor compliance with
the limitation on subcontracting clause.
SBA response: SBA has implemented this recommendation by revising
the partnership agreements with the procuring agencies. It added
several provisions that delineate the agencies' responsibilities
for oversight, monitoring, and compliance with procurement laws
and regulations governing 8(a) contracts, including the limitation
on subcontracting clause.
9. 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.
SBA response: SBA stated that the planned Business Development
Management Information System should help the Alaska district
office more effectively oversee ANC participation in the 8(a)
program. It stated that it is providing training to the Alaska
district office. However, no plans were in place to evaluate
staffing levels at the office.
10. Provide more training to agencies on the 8(a) program,
specifically including a component on ANC 8(a) participation.
SBA response: SBA has provided training to agencies on the revised
8(a) partnership agreements; however, our review of the slides SBA
used for the training found no reference to ANC 8(a) firms
specifically. According to an SBA official, SBA will include a
component on ANC 8(a) participants in future training sessions.
We also recommended that procuring agencies provide guidance to
contracting officers to ensure proper oversight of ANC contracts. The
procuring agencies generally agreed with the recommendation. Some agencies
are waiting for SBA to implement our recommendations before they take
their own actions, but others have taken steps to tighten their oversight
of contracts with 8(a) ANC firms. The Department of Homeland Security, for
example, recently issued an "acquisition alert" requiring that its heads
of contracting activities provide guidance and training on the use of 8(a)
firms owned by ANCs. The alert provides that use of the authority to award
sole-source 8(a) contracts to ANCs must be judicious with appropriate
safeguards to ensure that the cost/price is fair and reasonable, that the
ANC has the technical ability to perform the work, that the ANC will be
performing the required percentage of the work and that the award is in
the best interests of the government. The Department of Energy revised its
acquisition guidance regarding small business programs to remind
contracting officers to use care in awarding and administering ANC
contracts, to include notifying SBA of contract modifications and
monitoring the limits on subcontracting. The Department also provided
training on the 8(a) program, to include contracting with ANC firms. By
providing contracting officers with appropriate training on these issues,
the government is taking steps to ensure that the ANC firms are operating
in the program as intended, thereby mitigating the risk of unintended
consequences or abuse of some of the privileges provided to these firms.
This concludes my testimony. I would be happy to answer any questions you
may have.
Contacts and Staff Acknowledgements
For further information regarding this testimony, please contact Katherine
V. Schinasi at (202) 512-4841 or [13][email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Key contributors were Michele Mackin,
Sylvia Schatz, and Tatiana Winger.
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Highlights of [21]GAO-07-1251T , a testimony before the Committee on
Natural Resources, House of Representatives
September 19, 2007
ALASKA NATIVE CORPORATIONS
Increased Use of 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
receive sole-source contracts for any dollar amount and to own multiple
subsidiaries in the 8(a) program. We were asked to testify on an earlier
report where we identified (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.
GAO made recommendations aimed at improving SBA's oversight of 8(a) ANC
contracting activity and ensuring that procuring agencies properly oversee
8(a) contracts they award to ANC firms. SBA has either taken action or
plans to take action on the recommendations. The procuring agencies
generally agreed with our recommendation to them.
We believe implementation of our recommendations will provide better
oversight of 8(a) ANC contracting activity and provide decision makers
with information to know whether the program is operating as intended.
While representing a small amount of total federal procurement spending,
obligations for 8(a) contracts to ANC firms increased from $265 million in
fiscal year 2000 to $1.1 billion in 2004. Over the 5-year period, agencies
obligated $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent,
went through the 8(a) program. During this period, six federal
agencies--the departments of Defense, Energy, the Interior, State, and
Transportation and the National Aeronautics and Space
Administration--accounted for over 85 percent of 8(a) contracting
activity. Obligations for 8(a) sole source contracts by these agencies to
ANC firms increased from about $180 million in fiscal year 2000 to about
$876 million in fiscal year 2004.
ANCs use the 8(a) program as one of many tools to generate revenue with
the goal of providing benefits to their shareholders. 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.
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 percentage of work that is subcontracted.
SBA, which is primarily responsible for implementing the 8(a) program, had
not tailored its policies and practices to account for ANCs' unique status
and growth in the 8(a) program, even though SBA officials recognized that
ANCs enter into more complex business relationships than other 8(a)
participants. Areas where SBA's oversight fell short included determining
whether more than one subsidiary of the same ANC was generating a majority
of its revenue in the same primary industry, consistently determining
whether awards to 8(a) ANC firms had resulted in other small businesses
losing contract opportunities, and ensuring that the partnerships between
8(a) ANC firms and large firms were functioning in the way they were
intended.
References
Visible links
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13. mailto:[email protected]
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15. http://www.gao.gov/
16. http://www.gao.gov/fraudnet/fraudnet.htm
17. mailto:[email protected]
18. mailto:[email protected]
19. mailto:[email protected]
20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1251T
21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1251T
*** End of document. ***