Plan to Boost Firms Owned by Minorities Is Assailed : Affirmative action: While some make millions with no-competition U.S. contracts, few poor areas benefit.
Kavelle Bajaj, not surprisingly, speaks well of the federal government’s oldest affirmative action program, which steers contracts worth $4.3 billion a year to “small disadvantaged minority enterprises.”
A native of New Delhi, she came to this country in 1974 to marry a fellow Indian, a brilliant computer engineer who was rising in the ranks of Ross Perot’s Electronic Data Systems Corp.
Not content with being a housewife, she started a business in her Bethesda, Md., home. Her first ventures, including a stint as an Avon lady, were none too successful, she says.
But in 1986, Kavelle’s new computer services business was certified as a disadvantaged minority enterprise by the Small Business Administration, and that allowed her to win no-competition government contracts of up to $5 million.
With her husband and other top-flight computer engineers working as her employees--he made too much at EDS to be certified on his own--her business boomed. Last year, her firm, I-Net, captured $235 million in contracts for computer networking in half a dozen federal agencies.
“I think it’s a great program,” she said of the SBA’s set-aside program for minority firms. “It gave me an opportunity, and I certainly used it well.”
These days, the phenomenal success of “disadvantaged” entrepreneurs such as Bajaj--rather than testifying to the effectiveness of one brand of affirmative action--is fueling demands that the minority preference programs be reformed or repealed.
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Begun in 1969 under President Richard Nixon with the intent of inspiring “black capitalism” in the nation’s depressed inner cities, the program’s big winners instead have been high-tech firms that occupy the glass office towers along Washington’s Beltway, according to government auditors.
Enriched by no-competition contracts, several dozen highly successful firms have made millionaires of their owners, the auditors say. However, the minority enterprise program has done almost nothing to spur business development in the predominantly poor and black neighborhoods of the nation’s largest cities, they add.
In other years, the controversy over the SBA’s “8a” program would have been confined to the relatively small community of contractors who closely track federal procurement. But this year, it has come into the public spotlight as Washington begins to rethink the many programs that fall under the rubric of “affirmative action.”
Last month, Senate Majority Leader Bob Dole (R-Kan.), once a supporter, took to the Senate floor to proclaim that the minority enterprise program “should be repealed outright.”
“There are other, more equitable ways to expand opportunity, without resorting to policies that grant preferences to individuals simply because they happen to be members of certain groups,” Dole said.
At Dole’s urging, the Senate Small Business Committee will hold hearings on the program beginning Tuesday.
The Supreme Court also is reviewing the program to see whether it is constitutional. The Small Business Act says that at least 5% of all federal contracts should go to firms owned by “social and economically disadvantaged individuals.” The agency defines disadvantaged persons as those who are “black Americans, Native Americans, Hispanic Americans, Asian Pacific Americans and subcontinent Asian Americans.”
However, a white road builder from Colorado, who submitted the low bid but lost a contract to do guard-rail work along a federal highway, contends this racial and ethnic preference violates his rights to the equal protection of the laws.
President Clinton also has ordered a White House review of the government’s programs that give funding preferences based on race or ethnicity.
The SBA’s program is both the oldest and largest effort to steer business to minority firms. At Dole’s request, the Congressional Research Service found 168 examples of “racial and ethnic preferences” written into federal laws and regulations, but only two of the efforts have a broad impact. The employment rules governing federal contractors have forced thousands of businesses to adopt “goals and timetables” for hiring minorities. The other is SBA’s minority enterprise program.
Although it has operated in virtual obscurity, the SBA program has been sharply criticized by the General Accounting Office and the SBA’s own inspector general.
The main criticisms include the following:
* Too much money is awarded without competition. The program says it seeks to develop minority firms and foster their “competitive viability,” but 81.5% of the money awarded last year went to no-competition contracts, the GAO says.
* Too many wealthy people are labeled disadvantaged. Last year, SBA auditors checked 50 of the minority firms and found 35 people with “a net worth in excess of $1 million.”
* Too much money is concentrated among too few firms. Last month, GAO auditors told a House committee that 50 of the 5,293 firms certified as minority enterprises received more than one-fourth of the contract dollars awarded last year. At the same time, 56% of the firms did not win any contracts.
* A large percentage of contracts go to firms circling the Washington area, even though the program was intended to develop small minority companies in major U.S. cities. In an audit of 1990 awards, the GAO found that more than a third of the $3.8 billion in contracts went to 8a firms in Maryland, Virginia and the District of Columbia. Meanwhile, minority firms in New York, Pennsylvania and Michigan received less than 1% of the total. Thanks to the defense industry, California-based firms placed first that year, but the state’s $775-million total stood well behind the amount awarded to Washington-area companies.
* Minority workers do not always benefit. The SBA regulations do not require that a minority-owned firm employ minority workers.
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While the SBA program is likely to face sharp attacks this year on Capitol Hill, GOP leaders cannot label the program as another failed initiative of liberal Democrats. The minority enterprise program has a distinctly Republican pedigree.
Stung by the urban riots in Watts, Detroit, Newark, N.J., and other cities, the Nixon Administration sought a Republican response in early 1969.
“We wanted to create business opportunities,” said Walter Sorg, a Chicago businessman who joined the Nixon Administration and helped develop the program. “We wanted to broaden the base of the free enterprise system and get everyone involved. We uncovered this 8a provision and that got us started.”
He referred to Section 8a of the Small Business Act of 1953, a previously unused provision that allowed the agency to bypass the usual government regulations and purchase supplies directly from small businesses. Some said this clause was enacted to allow the government to respond to a national emergency or a natural disaster. Others said it was tacked onto the law to allow the Pentagon to bail out failing defense contractors at the end of Korean War.
Either way, SBA officials under Nixon converted the 8a provision into the Minority Business Development Program. Once certified as a minority enterprise, a firm’s owner could seek government business directly from agencies and without facing competition.
Nearly a decade later, Congress ratified the effort in law. Since then, legislators have created other programs that steer government to minority or female-owned firms.
Last year, the Clinton Administration projected the government would purchase goods and services totaling $160 billion. Of this, $9.7 billion would be spent through contracts to ethnic minority-owned firms, while another $3.1 billion would be spent through female-owned businesses.
According to the SBA’s analysis of the minority enterprise program, 36% of the contract dollars were awarded last year to firms owned by blacks, 29% to firms owned by Latinos, 25% to Asian-owned firms and 9% to firms owned by Native Americans.
Minority entrepreneurs say the program is needed as a matter of simple justice. Without it, they say, large white-owned firms will get virtually all government contracts.
“We are getting the crumbs,” said Fernando Galaviz, vice chairman of the National Federation of 8a Companies in Arlington, Va. “If Dole abolishes the program, it will eventually eliminate probably 60% of the minority businesses that do government work.”
Lloyd J. Parker, whose firm has a $6.8-million-a-year contract to do custodial and maintenance work at Ft. Riley, Kan., says 8a “remains the most successful program that has included minorities in the multimillion-dollar federal procurement arena. It levels the playing field for minorities,” he said.
But the program is not popular among white owners of small businesses, who find themselves shut out from many contracts.
“I get tired of hearing this crap about a level playing field. We’re not even allowed in the stadium,” said Arnold O’Donnell, who owns a small road-repair business in northeast Washington.
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Both Galaviz and Parker supported the program in House testimony last month, but they recommended limited reforms.
Galaviz suggested the net worth of disadvantaged entrepreneurs “may not exceed $1.7 million.” The current regulations set a figure of $750,000, but this limit excludes the person’s home and business and the assets of a spouse.
Parker complained that the program is tilted in favor of firms near Washington that know the government system best. “The mom-and-pop businesses can’t compete with them,” he said in an interview.
O’Donnell said the program should be abolished. “I don’t understand how somebody can emigrate from India in the 1970s, and he get can get a sole-source contract, and I can’t even submit a bid,” he said.
In the Washington area, the fastest growing minority businesses are Asian-owned firms that have tapped the computer market, says Bob Deller, whose Vienna, Va., firm tracks government contractors.
“The Indian- and Pakistani-owned businesses have done remarkably well,” he said. “I question whether they need the special protection” from competition.
Kavelle Bajaj’s firm I-Net was so successful that it was “graduated” from the program in September, the first company to be pushed out before the nine-year limit set by Congress in 1988.
