9. FEDERAL PROCUREMENT POLICIES & PRACTICES
This Part summarizes the Review Team's examination of affirmative
procurement efforts administered by the Department of Defense,
the Department of Transportation, and the Small Business Administration,
including implementation at those agencies of government-wide
efforts to contract with Small Disadvantaged Businesses. These
agencies were surveyed because they administer programs accounting
for a large percentage of government contracting.
9.1 Overview and Background
Throughout the federal government, several programs seek to increase
procurement and contracting with minority- and women-owned businesses.
The largest of these efforts are government-wide programs overseen
by the SBA; this overall effort is supplemented in some cases
by agency-specific initiatives. Under these programs taken as
a whole, some procurement contracts are set aside for sole-source
or sheltered competition contracting, eligibility for which is
targeted to minority-owned businesses (and in some cases non-minority
women-owned businesses), but by statute available more broadly
to "socially and economically disadvantaged" individuals.
There is also a broad, race-neutral, sheltered competition or
setaside for small businesses generally. This operates separately
and has a lower priority than the more targeted efforts; still,
over 93 percent of procurements are with non-minority firms.
We conclude that flexible goals for procurement from minority-
and women-owned businesses make sense, remain important, and are
not in themselves unfair. They have successfully fostered minority
and women entrepreneurship, and can be a necessary counterweight
to continuing discrimination faced by those businesses. However,
to ensure against unintended consequences and abuses, certain
additional safeguards are needed.
9.1.2 History and Background
MBE programs were enacted as a response to specific executive
and congressional findings that widespread discrimination, especially
in access to financial credit, has been an impediment to the ability
of minority owned businesses to have an equal chance at developing
in our economy. (56) This congressional
cognizance was recognized by
the Court in Fullilove v. Klutznick, when it upheld a set-aside
program established by Congress at the Department of Transportation.
In Fullilove, Chief Justice Burger reviewed the legislative
history of the Public Works Employment Act of 1977 and its documentation
of the extensive history of discrimination against minorities
in contracting and especially federal procurement. The Chief Justice
quoted from the 1977 Report of the House Committee on Small business,
which explored discrimination in contracting in the construction
industry and found: "The very basic problem disclosed by
the testimony is that, over the years, there has developed a business
system which has traditionally excluded measurable minority participation."
The report concluded that " [minorities, until recently,
have not participated to any measurable extent, in our total business
system generally, or in the construction industry, in particular."
The Chief Justice summarized the congressional findings regarding
the difficulties confronting minority businesses as "deficiencies
in working capital, inability to meet bonding requirements, disabilities
caused by an inadequate 'track record,' lack of awareness of bidding
opportunities, unfamiliarity with bidding procedures, preselection
before the formal advertising process, and the exercise of discretion
by government procurement officers to disfavor minority businesses."
Because of these difficulties, in fiscal year 1976 less than 1
percent of all federal procurement was concluded with minority
business enterprises." (61)
During the 1980's, Congress repeatedly examined racial discrimination
in federal contracting and consistently found that it persisted.
In 1987, evidence compiled by Congress showed that little progress
had been made in overcoming discriminatory barriers to minority
business success: "[o]nly six percent of all firms are owned
by minorities; less than two percent of minorities own businesses
while the comparable percentage for nonminorities is over six
percent; and the average of receipts per minority firm are less
than 10 percent the average receipts for all businesses."
The data regarding federal procurement revealed a similar picture.
In 1986, "total prime contracts approached $185 billion,
yet minority business received only $5 billion in prime contracts,
or about 2.7 percent of the prime contract dollar."
Such discrimination -- and the impact of prior discrimination
-- continues today. The U.S. Commission on Minority Business Development
reported in 1992:
In 1990, African Americans accounted for 12.1 percent of the population
but they owned only 3.1 percent of the total business and 1.0
percent of receipts of all U.S. firms. That same year, Hispanic
Americans accounted for 9 percent of the population, but only
3.1 percent of U.S. businesses and 1.2 percent of all receipts.
The typical minority firm has annual receipts that are less than
half that of white-owned firms. And while in 1987 the average
payroll among white-owned firms with employees was $85,786, for
minority-owned firms the average payroll was $38,318.
[S]tereotypical images of minority owned firms limit their access
to the factors of production . . . Our nation's history has created
a 'cycle of negativity' that reinforces prejudice through its
very practice; restraints on capital availability lead to failures,
in turn, reinforce a prejudicial perception of minority firms
as inherently high-risks, thereby reducing access to even more
capital and further increasing the risk of failure."
These disparities have been linked to past and present discriminatory
practices, especially in the provision of capital:
The exclusion from entrepreneurial opportunities demonstrated
by these statistics is not limited to any single business sector.
As the United States Commission on Minority Business Development
- Traditional sources of financial capital, such as commercial banks,
have frequently been unavailable to minority business owners.
A recently released report by the Federal Reserve Bank of Chicago
provides the most recent evidence of unequal access to credit.
- The effects of current and past discrimination in the labor market
creates a glass ceiling on minority earning potential and limits
inherited income, resulting in compounded difficulties for minorities
in generating initial equity investments.
- Scarcity of financial capital has forced the overwhelming majority
of minority owned businesses to concentrate in fields that do
not require large amounts of capital (very small service businesses
with few employees). (68)
Discrimination against women has hampered the development of women-owned
businesses and limited their ability to compete once formed. Until
enactment of the Equal Credit Opportunity Act of 1974, women suffered
disabling discrimination in lending which prevented the accumulation
of capital: single women were frequently found unworthy of credit,
married women were impeded in their efforts to establish a credit
history because financial records were in their husbands' names,
and alimony and child support were excluded from income. As a
result of the barriers confronted by women, "[w]omen owned
businesses averaged just $19,876 per year in annual receipts in
1990, which is 45 percent of the overall average."
The Commission has compared the statistics by major industry category
and has found a pattern of disparity across all lines of business
endeavor that we believe is correlated to the ethnicity of the
business owner. In 1987, the typical minority owned firm's total
annual receipts were only 11 percent of all United States firms.
In Agriculture/Mining that difference was 51 percent; in Construction
45 percent, in Manufacturing 25 percent; Transportation 37 percent;
Finance/ Insurance-Real Estate 36 percent; and in the services
industry-- where the greatest numerical share of all businesses
are located-- the typical minority firm had receipts of 43 percent
of the average service firm in the country.
The share of federal procurement dollars going to women-owned
businesses has been limited. In 1985, for example, only 0.6 percent
of all Department of Defense prime contract awards went to women-owned
businesses. While that percentage has climbed steadily, it has
climbed slowly, reaching only 1.7 percent for 1994.
9.2 Policies & Practices
9.2.1 Government-Wide Efforts
Goals: Federal law establishes several overall,
national goals to encourage broader participation in federal procurement:
20 percent for small businesses; 5 percent for small disadvantaged
businesses (SDBs); and 5 percent for women-owned businesses.
The SBA consults with each agency to set annual agency-level goals
to ensure progress toward the overall goal. (For contracts and
firms above certain thresholds, the law requires subcontracting
plans in furtherance of these goals.) The goals are themselves
flexible, and hence relatively non-controversial. The government-wide
SDB goal was met for the first time in 1993.
Sole-source contracting: Under the §8(a)
program, which is statutorily mandated, small SDBs can secure
smaller contracts (usually less than $3 million) without open
competition. This "sole sourcing" is accomplished when
an agency contracts with SBA, which in turn subcontracts with
For a company to participate in the §8(a) program, SBA must
certify that the firm is controlled and operated by socially
and economically disadvantaged persons.
persons from certain racial and ethnic groups -- but not women
-- are presumed to be socially disadvantaged; persons are considered
economically disadvantaged if they face "diminished capital
and credit opportunities" -- measured by asset and net-worth
In FY 1994, the §8(a) program accounted for about 2.7 percent
of all government procurement -- about $4.9 billion. The number
of certified §8(a) firms grew from 3,673 in 1990 to 5,833
in 1994, of which 47 percent received contract actions.
Once a firm is certified and brought into the §8(a) program,
the 1987 amendments to the statute establish both a "graduation"
period of nine years and a requirement that, over time, firms
achieve an increasing mix of business from outside the §8(a)
program and outside federal contracting.
Under the prior Administration,
the SBA did not aggressively implement these 1987 statutory changes,
but it has now done so. Moreover, in recent years there has been
increasing emphasis on using competition among §8(a) and
SDB firms rather than sole-source procurements.
Bid price preferences: Procurement reforms enacted
by Congress last year authorize government-wide use of the 10
percent bid preference for SDBs which previously was a tool available
primarily at DOD (the so-called "§1207 program"
-- see below). Implementing regulations are scheduled to be finalized
this summer. These regulations could have a significant
effect on procurement by SDBs in those agencies that do not use
an effective set-aside scheme such as DOD's "rule of two,"
9.2.2. Agency-Specific Efforts
Department of Defense: In addition to participating
in the goal-setting and §8(a) efforts, DOD has two additional
efforts, which are significant because DOD executes roughly two-thirds
by amount of all federal prime contracts. These additional programs
are part of DOD's effort to meet its share of the government-wide
goals mentioned above.
- SDB shelters or rule-of-two set-asides: Contracting officers
are authorized to limit bidding on a particular contract to small
disadvantaged businesses (SDBs) if two or more such firms are
potential bidders and the officer determines the prevailing bid
will likely be within 10 percent of the fair market price.
- SDB 10 percent bid preferences: Whenever there is full
and open competition and procurement is based on price factors
alone, contracting officers nationally add 10 percent to the price
of non-SDB bidders, and then award the contract on the
basis of the revised bids. (This is the "§1207"
program. Although the applicable statute merely makes this tool
available to DOD as a means of achieving its contracting
goals, the Department's procurement regulations mandate its use.)
- Comparative usefulness of tools: Over 60 percent of DOD's
contracting with SDBs occurs through either this "rule of
two" set-aside or through the §8(a) program; the 10
percent bid price preference has been little-used in recent years
because regulations require that the "rule-of-two" be
used whenever possible, as it generally is. (See the accompanying
Department of Transportation: In addition to participating
in the goal-setting and §8(a) efforts, DOT manages an effort
to encourage business with minority- and women-owned firms
through its grants to state and local entities.
- Subcontracting preferences: In addition to setting goals
for subcontracting with women- and minority-owned firms, DOT requires
that grant recipients (usually state or local authorities) provide
an additional payment to contractors who attain certain levels
of contracting with women- or minority-owned subcontractors and
who provide certain technical assistance to those subcontractors.
The payment is designed to compensate the prime contractor for
additional costs for assisting the subcontractors. This compensation
incentive is up to 1.5 to 2.0 percent of the total contract.
Graduation from sheltered competition:
Unlike the §8(a) program, the DOD and DOT programs do not
require that firms graduate from preferences, or that firms have
a mix of federal procurement and other business. There is, of
course, the "natural" graduation which occurs if a firm
becomes bigger than the "small" business size standard
established by the Small Business Act, or the owner's wealth rises
above the applicable threshold. (77)
Certification of eligibility in these programs differs
from SBA's certification for participation in the government-wide
§8(a) program. In the DOD programs, the firms self-certify
that they are qualified; in the DOT program, the state/local grant
recipient is responsible for certifying the subcontractor's status.
9.2.3 Complementary Programs: Technical & Other Assistance
A number of agencies have other programs to assist women- and
minority-owned firms seeking procurement opportunities. These
9.3 Performance & Effects
- SBA maintains several programs that serve small businesses generally,
by providing technical assistance, loan guarantees, and equity
capital through Small Business Investment Companies (SBICs).
- The Minority Business Development Administration (MBDA)
at Commerce provides technical assistance and support for women-
and minority-owned firms.
- Several agencies maintain "Mentor-Protegé"
programs which encourage majority firms to advise and nurture
new and growing minority-owned firms by providing managerial and
- SBA's Surety Bond Program provides up to a 90 percent
guarantee for bonds required of contractors and subcontractors
on many public and private construction contracts, thereby lowering
the small firm's cost of doing business. In FY 1994, SBA approved
more than 22,000 bid bond guarantees, resulting in 6,591 final
bonds, for a total bond guarantee amount of $1.08 billion. Although
this program is not specifically targeted, 24 percent of bonds
went to minority firms; nearly half of these were African-American,
and one-quarter were Hispanic.
In the face of continuing barriers to full minority participation
in economic life, most of these efforts have been very successful
in expanding federal procurement from women- and minority-owned
firms. (79) Agencies
first achieved the 5 percent SDB goal in
1993 and, government-wide, prime contracts for minority-owned businesses
were 6.4 percent of the total dollar volume. This approaches the
proportion of minority-owned businesses among all U.S. firms,
but is considerably below the 10.4 percent minority representation
among adults with college degrees. ( See the illustration.)
9.4 Evaluations & Proposed Reforms
- In 1994, 32 of the largest 100 African-American owned firms and
17 of the top 100 Hispanic-owned firms were or had been in the
- Between 1982 and 1991, the dollar volume of all federal procurement
contracts over $25,000 increased by 24 percent. At the same time,
contracts awarded to women-owned firms increased by more than
200 percent; contracts awarded to minority-owned firms increased
by more than 125 percent.
- Agency-level data show similar trends: for example, between 1985
and 1994, contracting with small, disadvantaged businesses grew
from 2.1 percent of DOD procurement to 5.5 percent--an increase
of more than $3 billion.
- Discussions with GSA contracting experts revealed that subcontracting
with minority- and women-owned firms on large federal construction
projects would likely not occur but for federal pressure in order
to meet overall goals. This is also the strongly held view of
SBA officials and of leadership in the SDB community.
- While the overall goals and levels of these programs are relatively
small nationwide (less than 10 percent), there appears to be a
tendency for agencies to concentrate their minority contracting
in certain fields -- such as construction -- where there are a
significant number of existing minority firms.
this makes operational sense, it also means that, in practice, effective
goals, set-asides, and preferences in some fields can exceed the
overall goal. Indeed, reports indicate that in a few regions and
fields, set-asides account for more than half of all procurements.
(It bears emphasis, however, that there are many offsetting situations
in which there is little or no SDB contracting done at a particular
site or in a particular subindustry.) The government contractor
community has pointed out that these types of unintended effects
have caused resentment.
- Some proponents of these procurement initiatives argue that they
are valuable not only because they combat discrimination and the
lingering effects of discrimination facing minority and women
entrepreneurs, but also because they indirectly promote employment
of socially disadvantaged workers and development of economically
distressed areas. The very limited evidence on these hypotheses
suggests that there is, indeed, a meaningful correlation between
minority ownership and minority workforce,
but the anecdotal evidence
is that the relationship varies considerably across sectors. There
has not been adequate study of the broader economic development
- The data regarding the effect on business formation and subsequent
success of these programs is limited, but somewhat encouraging:
SBA statistics for FY 1993 indicate that of the 710 firms that
were graduates in that or previous years, 56 percent were still
fully operational, 6 percent had curtailed operations, 3 percent
had been acquired by other companies, and 35 percent had ceased
operations. Comparisons with census data suggest that the failure
rates of graduated §8(a) firms are no worse than, and in
fact may be better than, those seen in small businesses generally.
These programs have been the object of a number of studies, including
a Congressionally mandated study during the prior Administration
which recommended maintaining and strengthening the federal effort
to ensure minority- and women-owned business participation in
federal procurement. (83)
SBA, this past August, proposed a comprehensive
reform of the §8(a) program in testimony before Congress.
That proposal is responsive to the great majority of common criticisms.
Generally, critics and commentators reviewing these programs have
made the following points:
Reorganization: Some observers emphasize the need to rationalize
and coordinate the web of federal programs serving minority- and
women-owned firms. For example, in 1992 the U.S. Commission on
Minority Business recommended the creation within the Commerce
Department of an Administration for the Development of Historically
Underutilized Businesses which would assume SBA's §8(a) responsibilities.
Graduation: The §8(a) program now requires "graduation"
after nine years, and has phased requirements of non-8(a) and
non-federal business mix designed to wean firms from sheltered
competition and dependency on federal contracting. In February
1995, of the 1,038 firms in the fifth through ninth year of §8(a)
participation, nearly two-thirds met or exceeded the minimum non-8(a)
business levels. Some observers have emphasized the need for analogous
graduation and business-mix requirements in the DOD and DOT programs.
Regional/Sectoral Concentration: Our analysis found SDB
contracts and limited competition concentrated in certain industries
and regions, which is undesirable for minority and non-minority
firms alike. For example, while DOD's overall goal for SDBs was
only 5 percent, more than 35 percent of all DOD construction awards
went to SDBs, and more than two-thirds of these were awarded under
sheltered competition. Moreover, in ten States, more than 40 percent
of all construction contracts awarded to small business were awarded
to SDBs. This concentration occurs at particular sites as well,
where in rare instances virtually all small business contracting
is with SDBs. On the other hand, some degree of sectoral concentration
in SDB procurements is inevitable to "balance" the many
sites and subindustries with virtually no SDB participation, and
huge procurements for weapons systems and the like, for which
no SDBs are available as prime contractors, and still too few
as major subcontractors. Additional efforts are clearly needed
to expand SDB opportunities more broadly.
Self-Certification: Because DOD's program is based on self-certification
by SDBs, it may be prone to abuse, particularly through "front
companies." For example:
- DOD's IG investigated Tyco Manufacturing and referred the case
to the US Attorney. The company's owner pled guilty to charges
that he falsely represented his firm as Hispanic-owned and controlled.
- Top officials of Automated Data Management, Inc. were convicted
of conspiracy to defraud the government for concealing the firm's
ownership structure to participate in the §8(a) program.
Self-certification has obvious advantages in terms of reduced
administrative expense and regulatory intrusion. Nevertheless,
this must be balanced with the importance of ensuring that affirmative
action measures are fair, which means as free of abuses as can
reasonably be achieved.
Subcontracting: In FY 1993, the most recent data available,
small businesses received about $63 billion of federal contract
dollars, out of roughly $180 billion in total. About one-third
of that amount was from subcontracting. SDBs, on the other hand,
received a little over $13 billion in federal contract dollars,
but only one-sixth of that was through subcontracting.
These figures are consistent with the widely held view that SDBs
face greater obstacles to subcontracting participation than do
other small firms. The SBA and other agencies believe that expanding
the use of SDBs in subcontracting is both feasible and desirable
as a strategy for creating more SDB opportunities.
Other Program Changes: Several earlier analyses by the
GAO, the SBA Inspector General and commentators have raised criticisms
of the §8(a) program, several of which SBA is moving to address
by aggressively implementing recent statutory amendments which
had languished under the prior Administration. These are reviewed
more specifically immediately below.
Past criticisms are that too many §8(a) contracts were awarded
on a sole-source basis, i.e., without competition of any kind.
This criticism has largely been addressed by recent and pending
reforms. The 1988 law reforming the §8(a) program requires
that companies in the program compete among themselves for contracts
valued at $3 million or more. (There is a higher competition threshold
of $5 million for manufactured goods.) Currently, however, many
of the larger §8(a) contracts are open-ended agreements that
started out as small contracts and grew well beyond the competition
threshold when a contracting officer renewed the order. To increase
the number of contracts available for competition, SBA has proposed
regulations to change this procedure so that an estimated value
will be set on these open-ended contracts, which probably will
be higher than the initial value. This means more §8(a) contracts
will be subject to competitive bidding among participating firms.
Relatedly, the 1988 statute, which will be in full effect at the
beginning of 1996, requires §8(a) companies to maintain a
specified percentage of private sector business while participating
in the program so that these firms are not totally dependent on
government contracts. As a result, §8(a) companies will have
to compete in both the private and public sectors. This should
improve the survival rate of firms graduating out of the sheltered
environment of the §8(a) program. It also makes moot an earlier
criticism that §8(a) firms were often permanently dependent
on a sheltered federal market.
In applying the test of economic disadvantage, the Small Business
Act requires exclusion of the §8(a) participant's equity
in his/her primary residence, business, and, except in community
property states, the spouse's share of the family's wealth.
audits of the §8(a) program revealed problematic practices
by some firms. These include underreporting of net worth, high
salaries and bonuses (more than $1 million per year) for several
business owners, and efforts to "shelter" resources
in spousal assets and residences. Defenders of the programs correctly
point out that the number of such abuses is small and declining.
SBA staff has been receiving training in order to better determine
an applicant's net worth. Nevertheless, several of these problems
are traceable not to staff expertise, but to provisions in the
statute. SBA has already proposed certain amendments to remedy
this problem. (86)
On another matter, pending SBA regulatory changes will help reduce
the extent to which §8(a) contracts are concentrated among
too few companies. When the requirement that §8(a) companies
maintain a specified mix of government and private sector business
is fully implemented, there will be a limit on the dollar value
of the §8(a) business one company can control. In addition,
the proposed regulation limiting open-ended contracts will mean
some of the larger §8(a) contracts will be open to competition
and will change hands more regularly. Another proposed change
will eliminate the distinction between a "local buy"
and a "national buy" system, thereby allowing firms
to market to the government without geographic restrictions (except
for construction contracts).
SBA's Office of Government Contracting also has negotiated a Memorandum
of Understanding with DOD to use §8(a) participants who have
never received a contract. SBA is negotiating similar agreements
with other federal agencies.
Minority Employment Effects
Research has shown that minority-owned businesses have a tendency
to hire more minority employees than other firms.
(87) SBA believes
that in industries such as military base maintenance and construction,
a significant number of the employees of §8(a) firms are
minorities. In high-technology industries such as computer systems
integration and radar development, however, the number of minority
employees of §8(a) firms reflects the representation of minorities
within the relevant scientific disciplines. Currently, the primary
goal of the §8(a) program is business development. SBA thinks
that the inclusion of a minority hiring requirement would be an
uneconomic burden for some companies, and in tension with the
program's long-standing focus on entrepreneurship opportunities.
This suggests the need for a separate program focused specifically
and directly on creating jobs and economic development in economically
9.5. Conclusions and Recommendations
Do the federal affirmative action programs relating to contracting
meet the President's tests: Do they work? Are they fair?
Does it work?
The several programs discussed in this section have clearly been
effective at increasing the amount of Federal contracting with
minority- and women-owned businesses. This comes against a backdrop
of continuing underrepresentation of minorities and women in the
ranks of entrepreneurs. Agency officials believe that a substantial
portion of this underrepresentation is the consequence of current
and past practices of exclusion and illegal discrimination; Adarand
now requires careful documentation of this factual predicate of
discrimination and its effects.
Moreover, experience suggests that contracting opportunities for
underrepresented groups would decline sharply in the absence of
some form of targeted procurement. After the Supreme Court's
1989 Croson decision involving the minority contracting
program in Richmond, Virginia, the share of city contracting dollars
won by minority firms plummeted from over 38.5 percent to only
2.2 percent. (Entrepreneurs also reported a sharp drop in private
sector work, which they attributed to the "signaling"
effect of the public sector retrenchment.) After a new program
was designed and implemented, meeting the constitutional test
of strict scrutiny, the figures recovered to slightly above the
goal of 16 percent. (88)
In summary, then, the continuing justifications for these programs
These preliminary findings and conclusions must be reconsidered
in greater detail as part of the post-Adarand review being
conducted by the Attorney General and the various agencies. That
review must ascertain whether race-based programs are narrowly
tailored to achieve a compelling governmental interest, so as
to satisfy the strict scrutiny standard of constitutional review.
- Remedying discrimination. The Federal programs are
a remedial counterweight to the exclusion and discrimination that
minority and women entrepreneurs continue to face -- a counterweight
that not only opens up opportunity to do business in the federal
contracting sector, but ideally helps small disadvantaged businesses
develop the resources to penetrate private markets.
- Mainstream inclusion. Apart from securing individual
fairness, these programs reflect a need to build a stronger economy
by tapping the entrepreneurial talents and drive of all segments
of the population--that means affirmative efforts to open mainstream
opportunities to underrepresented groups.
- Economic development. These programs are often supported
because they are presumed to contribute to job creation and economic
development in distressed communities. The evidence is positive,
at least regarding employment, though not fully conclusive.
- Practicality. If, for the above reasons, it is appropriate
for government to use procurement activity to promote minority
and women entrepreneurship, then the final key concern is that
the measures adopted be effective, not empty aspirations.
We must be mindful of the practical realities of the marketplace,
and of agency administrative routines.
Is it fair?
The above quite legitimate objectives do not imply that every
detail of any conceivable procurement preference would be justified.
There are important constraints of fairness, most of which are
given substantial effect in the operation of the current contracting
(1) Not quotas.
The contracting programs are not quotas because the statutes and
regulations establish flexible goals rather than numerical straightjackets:
they reflect an aspiration that 5 percent of contracting be with
minority firms, not a guarantee that it will happen. Indeed, for
many years it did not happen. On the other hand, it is also clear
that the governing statutes and regulations enable contracting
officers to use the entrepreneur's race and economic disadvantage,
in combination, as a condition of eligibility for participation
in various forms of sheltered competition. Individual contracts
are set aside for §8(a) firms or SDBs only. As a practical
matter, non-minorities find it difficult to establish "social
disadvantage" under the terms of the law, so the programs
are in effect targeted on members of traditionally discriminated-against
groups. Nevertheless, over 18 of every 20 contracting opportunities
(by dollar) continue to go to non-minority, male-owned firms.
(2) Race-Neutral Options
The review team examined, insofar as was possible, the consideration
given by agencies and the Congress to various race- and gender-neutral
approaches to expanding entrepreneurial opportunities for minorities
and women. Unfortunately, it is difficult at present to evaluate
the effectiveness of such alternatives. There is no readily available
data, for example, on the extent to which non-minority entrepreneurs,
who already benefit from the long-standing preference for all
small businesses, would benefit from a new preference targeted
only on economic disadvantage, i.e., on entrepreneurs below
a certain threshold of personal assets. We believe, however, that
moving from social and economic disadvantage to focus on
economic disadvantage only would seriously undermine efforts
to create entrepreneurship opportunities for minorities and women,
given continuing patterns of exclusion and discrimination.
Another approach would be to provide preferences to firms that
will perform contracts in economically distressed areas, thereby
stimulating employment and economic development. These are worthy
goals, paralleling those of the Administration's Empowerment Zones
initiative. They are, however, only indirectly related to the
specific goal of combatting business-related discrimination and
opening entrepreneurship to underrepresented groups.
These two approaches are not good substitutes for one another;
each has valuable objectives; geographic targeting does not create
new problems of racial exclusion, but may do little to address
the old problems of gender- and race-based entrepreneurial
exclusion and would help create jobs and economic development
in distresses areas.
(3) Flexible and minimally intrusive.
As a practical matter, some degree of explicit targeting is the
only effective way to ensure that entrepreneurial opportunities
are increasingly open to minorities and women. The question remains
how best to minimize abuse of the program .
As a threshold matter, it is important to bear in mind that, largely
because of race-neutral preferences for all small businesses,
non-minority small businesses win roughly three times
as much in procurement dollars as minority firms. In that sense,
the procurement structure as a whole benefits non-minorities
far more than minorities, and is not as intrusive or exclusionary
as would be a procurement system in which the only significant
preferences were exclusively for minorities.
Nevertheless, because of the special scrutiny focused on distinctions
based on race, we have examined some alternatives.
- Tighten eligibility. Eligibility for sheltered competition
could be more sharply limited in duration or to a subgroup of
those now eligible -- by, for example, using a much more restrictive
asset test. While a certain measure of this is warranted to address
perceived abuses of SDB programs, a very short graduation period
would result in a very high business failure rate, essentially
slamming shut the door to opportunity. Similarly, too tight an
asset test would be unrealistic; owners of businesses capable
of providing essential services and goods to the government will
very rarely be economically struggling in an absolute sense, since
potential to take advantage of entrepreneurial opportunity depends
significantly on such factors as education, experience and personal
- Expand eligibility to women. The system could be made
less race-focused by making all women eligible. This is currently
the case only in SDB programs at Transportation and a few other
- Expand eligibility to economic disadvantage generally.
The current eligibility test, requiring both social disadvantage
and economic disadvantage, could be broadened to "social
disadvantage or economic disadvantage." (Social disadvantage,
as explained above, effectively means membership in a discriminated-against
group.) Practically speaking, such a preference program would
simply key to the assets or net worth of the entrepreneur. Therefore,
it would not be an effective tool in areas where discrimination
locks minorities and women out of opportunity.
Our conclusion is that the expansion of eligibility would marginally
expand opportunities for non-minorities, but that doing so would
risk significant dilution of efforts to expand entrepreneurial
opportunity to individuals who have traditionally been excluded
by virtue of their membership in discriminated-against groups.
Programs should be transitional in two senses. First, an individual
beneficiary should be provided with an entryway to entrepreneurial
opportunity rather than a guarantee of business success.
Second, the program as a whole should have an agreed measure of
success, so that once equal opportunity has been achieved, and
the field of competition is level, the program can sunset
and we can rely exclusively on antidiscrimination and less intrusive
measures, such as outreach.
With respect to entryway, only the §8(a) program has
a specific graduation limit of nine years, while all SDB programs
have implicit graduation based on firm size and assets of the
entrepreneur. Still, some form of limit, measured in years or
perhaps cumulative contract dollars, seems highly desirable because
otherwise the notion of using sheltered competition to provide
an opportunity to succeed at business would instead become
an effort to guarantee such success.
With respect to sunset, these procurement programs have
been subject to a relatively intense level of continuing review
by the agencies and by Congress. Annual procurement data are used
to set and track goals, and several Members of Congress have long
taken a strong interest in the details of how the programs are
administered. Nevertheless, additional research and analysis is
needed to formulate a set of measures for when a given procurement
program will have accomplished enough to be declared "successful,"
so that it can fairly be terminated.
Finally, we return to the observation that these programs cause
only a minor diminution in opportunity for nonminority firms.
In that respect, current programs are balanced and equitable in
The Review identified some minor, localized difficulties, however.
In a few situations, the operation of the set asides leads to
very large concentrations of SDB contract awards at certain government
sites, and/or in certain subindustries. This "crowding"
or concentration is driven by the appropriate desire of contracting
officials to achieve their goals by taking advantage of the fact
that a critical mass of SDB firms happen to exist in that region
or field. Current rules give agency heads discretion to adjust
set asides to prevent such concentrated impacts on non-SDB firms,
but such adjustments are not always made. The problem of subindustry,
or sectoral concentration of SDB firms is more complex, but also
needs attention. Not only is there some risk of unbalanced impact
on certain non-SDB entrepreneurs, there is also the danger of
effectively isolating SDB's in particular lines of business. The
goal of these programs is to open up opportunity broadly, creating
and expanding beach heads in the mainstream economy, not erecting
entrepreneurial ghettoes. These difficulties can be addressed
by proper exercise of agency discretion.
The efforts of Congress and the Executive branch to provide equal
opportunity for minority and women entrepreneurs has succeeded
in fostering successful businesses, but that success is neither
complete nor unalloyed. In most respects, the use of race and
gender by these programs is fair. Significant possibilities exist,
however, to address the remaining concerns without risking the
gains in opportunity for minorities and women. At a minimum, these
possibilities deserve serious consideration by agency heads and
by the Congress.
These programs providing sheltered competition for eligible firms
should be structured with greater practical flexibility, so
that they promote opportunity as broadly as possible, consistent
with effectiveness in accomplishing the important goal of opening
doors to those who have been historically excluded from business
opportunities as a result of group-based discrimination and exclusion.
Therefore, we recommend that the President instruct agencies,
under the leadership of the National Economic Council as follows:
- Reforms: The Administrator of the Small Business
Administration, the Deputy Director for Management of OMB, and
White House staff will lead formulation of detailed government-wide
proposals to address abuses in the current operation of the procurement
programs focused on opportunity for minority and women entrepreneurs.
Specifically, the proposals should:
1. Tighten the economic disadvantage test. So that business
owners cannot hide assets under a spouse's name so as to qualify
for a set-aside, reform the asset test to count the value of the
personal residence and to consider the spouse's assets (now excluded)
in a manner analogous to treatment of a 49 percent owner of the
2. Tighten requirements for graduation. Apply §8(a)'s
9 year graduation limit to all SDB programs, but then direct the
agencies, with White House coordination, to establish more sophisticated
objective industry-specific criteria for determining when any
individual firm "develops" beyond the need for sheltered
competition. Agencies should consider, for example, establishing
caps on the dollar value of contracts, plus a cap on total dollars
a single firm can win through sheltered competition, varying by
industry if appropriate. These measures will also reduce the concentration
of §8(a) awards among a limited number of successful firms.
3. Enforce stringent safeguards against fronts and pass-throughs.
Create a uniform, certification process for all SDBs. (Where feasible,
specially licensed private firms should conduct the certifications,
by analogy with the role of independent certified public accountants.)
Require certification audits at time of first contract and periodically
thereafter to verify continuing eligibility and to monitor for
"fronts" and "pass-through" companies. Increase
4. Establish measures to reduce regional/industry concentrations.
Direct the agencies, with White House coordination, to exercise
oversight to prevent excessive use of sheltered competition in
particular regions or industries. Direct the agencies, with appropriate
interagency coordination, to determine industries/areas where
sheltered competition programs may be phased out based upon successful
- Adarand compliance: In accord with
the Directive issued by the President, the agencies will examine
the extent of continuing patterns of discrimination and exclusion
in the industries and regions with which they do business. Agencies
should use those findings to develop guidelines for measuring
when minority and women entrepreneurs have achieved a full measure
of equal opportunity to participate in the economic mainstream,
making sunset of the programs appropriate. (The Attorney General
has the leadership role as regards the legal aspects of this task,
and the White House staff will provide any necessary interagency
coordination of policy considerations.)
- Empowerment contracting: Under the leadership of
the Community Empowerment Board chaired by the Vice President,
agencies should develop an "empowerment contracting"
program to target procurement dollars on small firms located in
communities suffering persistent, severe economic distress, or
employing a substantial number of workers from those communities.
Looking beyond the issue of fair and effective responses to discrimination,
we must recognize that there are communities and regions in our
country where the free enterprise system is not working to provide
jobs and opportunity. Although the Administration has taken several
steps to help poor communities directly -- including, for example,
Empowerment Zones, Community Development Banks, the reinvention
of HUD, and more effective enforcement of the Community Reinvestment
Act -- more is needed. This initiative would help bring jobs and
economic development to areas in great need.