Open Letter to the SBA regarding the Proposed Rule Change for the 8(a) Program

November 25, 2009

REF: Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Proposed Rules

Joseph Loddo | Associate Administrator

Office of Business Development | Small Business Administration

409 Third Street, SW | Washington, DC 20416

Dear Mr. Loddo:

Subject: Comments regarding the 13 CFR Parts 121 and 124, Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations; proposed rule change

My name is Rudy Sutherland. I am Managing Director of ALJUCAR, LLC; a REGULAR 8(a) Certified Firm since August 2006. As an interested party, I am compelled to write this letter and comment on the proposed rule change because it is my belief that REGULAR 8(a) firms may be losing 8(a) contract opportunities to large ANC companies; which appears to be inconsistent with the original intent of the 8(a) program – to benefit small disadvantaged businesses.

SUMMARY

Tribal and Alaska Native Corporations (ANC)-owned firms have been granted special contracting opportunities under the FAR for government contracts in general and for DOD contracts in particular. These include unique 8(a) rights, expedited A-76 authority, and bonuses for DOD contractors that subcontract with Native American-owned firms.

The argument to date has been that to fully put these rights to work and in order to aggressively attack the extreme poverty that exists on Indian reservations and in Alaska Native Villages, the tribal and ANC-owned firms often need mentoring from large established government contracting firms that can help guide them through the intricacies of DOD contracting and provide technical support while the firms are building their in-house capability. Essentially, working with tribal and ANC firms to put these unique rights to work provides the DOD contractor with an opportunity to help reduce some of the worst poverty in this country, to meet its SDB goals, to make money, and help further legislative initiatives.

However, if we examine the matter in greater detail, this framework is taking place at the expense of REGULAR 8(a) firms.

BACKGROUND

Tribes and ANCs are included in the 8(a) and the SDB programs as a result of their unique government to-government relationship with the United States, not because of race or national origin factors. This in turn goes back to the U. S. Supreme Court’s 1975 ruling in Morton v. Mancari, in which the Court ruled that Indian preference is not a racial classification but a political one based on the “government-to-government” relationship. Fundamentally, as participants in the 8(a) program, Tribes and ANCs have been bestowed the title of SUPER 8(a)

So, what is the definition of “SUPER 8(a) Status”?

Super 8(a) status hinges primarily on three fundamental “super powers”: (1) is Absence of Sole Source Dollar Threshold – 13 CFR 124.506 (b), (2) Special Rights under the A-76 Program, and (3) Perpetuity in the 8(a) Program. None of these rights are available to REGULAR 8(a) firms.

The following are the core super powers enjoyed by Tribes and ANCs:

(1)    Absence of a Sole Source Dollar Threshold – 13 C.F.R. 124.506(b): SBA may award a sole source 8(a) contract to a Participant concern owned and controlled by an Indian tribe or an ANC where the anticipated value of the procurement exceeds the applicable competitive threshold if SBA has not accepted the requirement into the 8(a) BD program as a competitive procurement. There is no requirement that a procurement must be competed whenever possible before it can be accepted on a sole source basis for a tribally-owned or ANC- owned concern, but a procurement may not be removed from competition to award it to a tribally-owned or ANC-owned concern on a sole source basis.

(2)    Special Rights Under the A-76 Program: The A-76 program (“A-76″ refers to the number of the implementing Office of Management and Budget (OMB) Circular) imposes a long and cumbersome procedure for any government facility that wishes to contract out (i.e., outsource) an activity that employs ten or more civilian government employees. (Average A-76 study takes 23 months.) One of the few options open to a DOD command, service or agency that wants to contract out a function but avoid the cumbersome A-76 process is to award the contract to a tribal or ANC 8(a) firm.

(3)    ANCs use their ability to own multiple businesses in the 8(a) program, as allowed by law, in different ways to maintain perpetuity in the 8(a) program. For example, some ANCs:

  • have created a second subsidiary to win follow-on work from a graduating subsidiary
  • wholly own their 8(a) subsidiaries, while others invest in partially-owned subsidiaries; and
  • diversify their subsidiaries’ capabilities to increase opportunities to win government contracts in various industries.

PRIMER ON THE ALASKA NATIVE CORPORATION (ANC) 8(A) FIRM

Before we go too far down this road, let’s better understand the origin of the Alaska Native Corporation (ANC) 8(a) firm.

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.

*** It is important to note this juncture in time; and the original purpose of the SBA 8(a) program.

Since then, Congress has extended special procurement advantages to ANC firms; the super powers highlighted earlier. For example:

  • ANC firms are permitted to receive noncompetitive contracts for any amount, whereas other 8(a) companies are subject to competitive thresholds of $3 million or $5 million for manufacturing contracts.
  • ANCs can also own multiple subsidiaries participating in the 8(a) program, 1 unlike other 8(a) firms that may own only one and no more than 20 percent of another 8(a) firm.

Now, let’s shift gears to a report issued to Joseph G. Jordan, SBA Associate Administrator, Government Contracting and Business Development by the U.S. Small Business Administration Office Inspector General on July 10, 2009: “Participation in the 8(a) Program by Firms Owned by Alaska Native Corporations, Report No. 9-15”.

Here is where the irony becomes even more apparent:

Since 1986, Congress has authorized ANC-owned businesses to participate in the 8(a) program. ANCs were created by ANCSA as the mechanism for distributing land and monetary benefits to Alaska Natives.

Under ANCSA, an ANC is considered to be owned and controlled by Alaska Natives and to be a minority and economically disadvantaged business enterprise as long as the stock that is held by Natives and their descendants represents a majority of both the total equity of the corporation and the total voting power of the corporation for electing directors. If similar standards are met, subsidiary corporations, joint ventures and partnerships of ANCs are also considered to be native-owned, minority, and economically disadvantaged businesses. Contract awards to these entities may be credited towards Federal goals for small and small-disadvantaged business procurement.

However, by statute and/or SBA regulation, ANC participants enjoy special procurement advantages beyond those afforded to most other 8(a) businesses. These advantages include EXEMPTIONS from:

  • Limits on the number of firms that ANCs can own as long as each business is in a different primary industry.
  • The $5.5 million and $3.5 million competitive thresholds on the value of individual sole-source contracts an 8(a) firm can receive, which allows ANC participants to receive sole-source awards of any value.
  • The cap on sole-source awards for each 8(a) contractor that has received a combined total of Federal 8(a) competitive and sole-source contracts in excess of $100 million, and
  • THE REQUIREMENT THAT 8(A) FIRMS BE MANAGED BY SOCIALLY AND ECONOMICALLY DISADVANTAGED OWNERS

HERE’S WHERE THE PROBLEMS START

As of 2008, based on data reported in FPDS, Federal 8(a) obligations to current and former ANC participants have grown by 1,386 percent since FY 2000, and have more than tripled in recent years, from $1.1 billion in FY 2004 to $3.9 billion in FY 2008. In FY 2008, obligations to ANC participants represented 26 percent of total 8(a) dollars—an increase from about 13 percent in FY 2004—although ANC participants constituted just 2 percent of companies in the 8(a) program and program graduates completing previously awarded 8(a) contracts. Approximately 84 percent of the $3.9 billion in FY 2008 obligations went to current ANC participants, and 16 percent went to ANC firms that had graduated from the program.

Although the percentage of 8(a) obligations made to ANC firms has increased, the majority of those obligations went to just a few ANC participants, primarily through sole source awards. For example, 50 percent of Federal 8(a) obligations made to current ANC participants in FY 2007 went to just 11 (or 6 percent) of the ANC firms reported by SBA to Congress that year. Further, the ability of ANC firms to obtain unlimited sole-source awards, which is arguably one of the most powerful contracting advantages that ANC firms enjoy, has contributed to the increase in such awards to ANC participants. The top 11 firms received 82 percent of their 8(a) obligations non-competitively.

Even if these ANC contracts had been awarded competitively, rather than on a sole-source basis, it is questionable whether REGULAR 8(a) firms could have successfully competed for them as the top 11 ANC participants had access to the resources of their large parent companies, which gave them a competitive advantage over other 8(a) firms. For example, the ANC-owned firms had access to capital, lines of credit, bonding capability, and administrative resources, as well as the management expertise of their parent companies. Further, this helps explain why 63 percent of the ANC participants received obligations in FY 2007, while only 44 percent of the “Regular” firms received obligations that year.

Moreover, as reported by the GAO and the SBA OIG, federal agencies favor sole-sourcing awards to ANC participants because it is a quick, easy, and legal method of meeting their small business goals. In essence, with 2 or 3 contracts, they can meet there SDB goal through the surrogate ANC SDB vs. the 50 contracts they would have to award, and manage, to REGULAR 8(a)/SDBs. The report also recognizes poignantly that the ANC awards may not result in the best value for the government and that the playing field is not level for all 8(a) participants. The report recognizes that increases in 8(a) awards to ANC firms may have resulted in diminished opportunities for other 8(a) participants.

The OIG Report postulates that Congress may:

  • Want to consider whether ANC-owned firms should continue to be exempt from competitive threshold limits on sole-source awards and whether such awards should be capped.
  • Want to consider: legislatively clarifying that SBA must determine whether ANC-owned firms have a substantial unfair competitive advantage before exempting them from the size affiliation rules; requiring that ANC 8(a) firms report to SBA on how 8(a) revenues are benefiting Alaska Natives; and revising Federal agencies’ small-disadvantaged business procurements goals.

Finally, the report recommended that the SBA should conduct a program review to evaluate the extent to which the growth in ANC 8(a) participation has or will adversely impact other REGULAR 8(a) firms and the overall effectiveness of the 8(a) program, and whether firms owned by ANCs and Indian tribes should continue to be exempt from the cap on total sole-source awards. SBA should also centrally track 8(a) awards to joint ventures involving ANC participants and awards that are sole sourced to ANC-owned firms.

BUT, I WANT TO TAKE THIS A STEP FURTHER AND ASK THE QUESTION: “WHY ARE ANCS AND OTHER INDIAN TRIBES AND NATIVE HAWAIIAN ORGANIZATIONS IN THE 8(A) PROGRAM IN THE FIRST PLACE?”

Remember, the 8(a) program was originally intended to help small-disadvantaged businesses compete in the economy by providing them with business development assistance and Federal contracting preferences. Extending those same preferences to ANC-owned firms, while exempting them from certain 8(a) eligibility and contracting requirements, has provided ANC participants with substantial advantages over other 8(a) firms. Essentially it has created a loophole through which corporate entities that would not otherwise qualify for small business assistance can, without competition, access contracts of unlimited value that have been set aside for small businesses.

Generally, businesses must be small and owned and controlled by one or more socially and economically disadvantaged individuals to be admitted to the 8(a) program. To be considered economically disadvantaged, the owner’s ability to compete in the free enterprise system must be impaired due to diminished capital and credit opportunities when compared with others in the same or similar lines of business that are not socially disadvantaged. However, ANC-owned firms do not have to prove that they are “economically disadvantaged” because ANCSA conveys this status on them.

Essentially, the ANCSA serves as a surrogate parent to creating a synthetic Small Disadvantaged Business. I once had one of my White-male colleagues state in jest (I won’t mention his name for obvious reasons) how does a White-Man become a minority? By being re-born through an ANC.

SIZE STANDARD ADVANTAGE OF THE ANCS

SBA’s size eligibility rules provide ANC participants with a significant advantage over other 8(a) firms. When determining whether a company is “small,” under SBA’s size standards, the Agency typically considers the combined number of employees or revenues of the business concern and any other affiliated firms.

However, the Small Business Act and SBA regulations contain an exemption for ANC participants, providing that a firm will not be considered to be affiliated with its parent ANC, or other business concerns owned by the ANC, unless the Administrator determines that the business concern has obtained, or is likely to obtain, a substantial unfair competitive advantage in an industry. Therefore, because the revenue and employees of the parent and affiliate companies are not included in the ANC participant’s size determination10, ANC-owned firms that are large through affiliation are allowed to compete for 8(a) contracts against smaller firms.

When the OIG visited with the parent companies of the 11 ANC participants who received the most 8(a) obligations in FY 2007, they disclosed that they were predominantly large businesses with significant resources at their disposal. For example, between 2007 and 2009, all 11 ANCs had reached annual revenues of over $32.5 million, and 7 of the 11 had workforces of over 1,500, which would generally qualify them as large under SBA’s size standards. In fact, 6 of the 7 ANCs had revenues in excess of $500 million. Interviews with the parent corporations confirmed that the ANC participants also had access to the resources of their parents.

In addition, several of the parent companies said that they had provided their 8(a) firms with:

  • Financial assistance, such as access to capital, lines of credit, and bonding capability;
  • Administrative and financial reporting services, which were provided either directly by the parent company or through holding companies that had been established to oversee the ANC participants; and
  • Management expertise.

This may sound familiar to SBA Small Business Specialists around the country; these are the very resources REGULAR 8(a) firms complain to the SBA that they need assistance with on a regular basis. The access that certain ANC participants have to their parent corporations’ resources places Regular 8(a) firms at a disadvantage for awards because they must essentially compete against the resources of the large parent corporations.

Consequently, it is my belief that Regular 8(a) firms may be losing 8(a) contract opportunities to large ANC companies; and, this appears to be inconsistent with the original intent of the 8(a) program, which is to benefit small businesses. These disadvantages, along with the growing number of awards to ANC-owned firms, which count towards procuring agencies’ small business contracting goals, raise questions about the extent to which the program is achieving its intended purpose of helping small, disadvantaged businesses.

8(A) FIRMS HAVE BEEN COMPLAINING ABOUT THIS PROBLEM FOR A LONG TIME

For more than a decade, small disadvantaged businesses have complained to the SBA and to Congress that contracting advantages for ANC participants have curtailed their ability to compete for Federal contracts. Despite these complaints, SBA has not evaluated how ANC contracting trends have impacted other 8(a) firms, the overall effectiveness of the program, or the achievement of agency small-disadvantaged business procurement goals.

For example, annually, SBA negotiates with Federal agencies concerning their prime contracting goals for small and disadvantaged businesses to ensure that small businesses have the maximum practicable opportunity for Federal contracts. In reporting goal achievement, however, awards made to 8(a) firms owned by ANCs are counted, even though these firms are technically large through affiliation with their parent companies.

Given the growth in ANC 8(a) activity, procuring agencies may be achieving their small-disadvantaged business goals largely through sole-source awards to ANC firms. However, SBA has not assessed the manner in which the goals are being met to ensure that other 8(a) companies are provided maximum opportunity to obtain 8(a) contracts.

Additionally, the growing share of 8(a) obligations going to ANC participants, particularly in certain industry categories raises questions about how such growth has impacted other participants and the overall effectiveness of the 8(a) program. For example, in FY 2008, ANC participants received 66 percent of 8(a) obligations made under the “facilities support services” NAICS code, which was the second largest industry code for 8(a) purchasing in 2008. Despite these trends and other concerns, SBA has not conducted a study to determine whether the increase in ANC contracting activity has harmed other 8(a) firms and overall program performance.


In Summary, I support the OIGs recommendation that Congress review and consider whether:

  1. Tribal and ANC-owned firms should be in the 8(a) program designed for small and disadvantaged firms
  1. ANC-owned firms should continue to be exempt from the competitive threshold limits on the amount of individual sole-source awards, or whether there should be a statutory cap on the total amount of sole-source awards they may receive.
  1. The Small Business Act should be clarified to require SBA to determine that ANC-owned firms do not have a substantial unfair competitive advantage within an industry category before exempting ANC participants from size affiliation rules, or whether other limits should be placed on the affiliation rules applicable to ANC participants.
  1. ANCs should be required to submit regular reports to SBA identifying the percentage of its profits that are derived from 8(a) contracts, describing how the 8(a) share of its profits are being distributed in dividends or other support for Alaska Natives, and explaining how the distributed benefits assisted the Natives.
  1. The Small Business Act should be amended to either establish larger small-disadvantaged business contracting goals for procuring agencies that account for the growth in ANC 8(a) awards and; or establish a separate goal for awards to tribally-owned companies to ensure that other 8(a) companies are provided maximum opportunity to obtain 8(a) contracts.

I urge that the above stated be added to the public record for discussion in regards to the 13 CFR Parts 121 and 124, Small Business Size Regulations; 8(a) Business Development/Small Disadvantaged Business Status Determinations; proposed rule change.

Respectfully yours,

Rudy Sutherland, CMC, M.B.A.

Managing Director & Principal Consultant

ALJUCAR & Co., a Subsidiary of ALJUCAR, LLC

cc: Karen Mills, Administrator – U.S. Small Business Administration

Joseph Jordan, Associate Administrator – U.S. Small Business Administration

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1 comment
  1. Rudy,

    You wrote an amazing and incredibly instructive letter. As I began reading it, I was thinking at first why is he debasing another minority group? Why isn’t he trying to expand the pie rather than reduce the eaters? But as you educated me through your research and volume of facts, I began changing my views about ANCs and realizing that your statements were true.

    For us, the year 2009 has been incredibly difficult. We’ve had to do several rounds of layoffs and reduce salaries. Recently, I’ve become more and more aware that my company needs help. That for us to survive the serious economic downturn that we are experiencing, I need to express what is happening to us to our politicians.

    Thus, I wrote a letter to my congressman to investigate why Federal solicitations and awards have slowed down. And making him aware that if nothing is done to improve procurement conditions in our industry that more and more SDBs will go out of business and further damage the employment in the country.

    Then, one of my partners had the idea of why don’t we ask that the 8(a) program be extended another five years to allow SDBs such as ourselves to recover from the most difficult recession since the Great Depression. The more I thought about it, the more I realized that she was right. That we needed to start the bandwagon petitioning Congress to extend the 8(a) program another five years for the purposes that I have stated. For us, this issue is very important because we graduate from the 8(a) program in 2012. And frankly, we are far from ready to compete outside the 8(a) program.

    Thus, I started to formulate a plan in my mind and thought if I can spread the word and have 8(a) firms petition Congress for relief maybe, just maybe, we may able to extend the program. Why not?

    If it’s true that small businesses are the growth engine of the economy with respect to jobs, then it seems to me the Federal government should put its money where its mouth is and grant us relief. After all, they have given billions of dollars to large firms who caused the economic debacle that we are currently suffering. And the repayment from those firms has been to give its management team millions in bonuses.

    So I was looking for a medium to begin a campaign to petition Congress and thought of the 8-PAC group that you created, I then ran into your well-worded letter to Joseph Loddo. I congratulate you on your vision and ideas regarding ANCs. I agree with you wholeheartedly. Let me know how I can help to persuade the powers-that-be of your worthwhile effort to rein in the competetive advantage of ANCs over 8(a) firms.

    Let me know what you think of the idea of extending the 8(a) program as a measure to provide some relief to SDBs who are struggling and are about to graduate from the program. Thanks.

    Sincerely,

    Rene

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