United States. Congress. House. Committee on Small.

Review of the SBA procurement assistance programs : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, March 2, 1995 online

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V\V\ REVIEW OF THE SBA PROCUREMENT ASSISTANCE
^^ PROGRAMS



Y4,SM 1; 104-14

Revieu of the SBA Procurenent Assis. . .

HEARING



BEFORE THE



COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION



WASHINGTON, DC, MARCH 2, 1995



Printed for the use of the Committee on Small Business

Serial No. 104-14




U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047695-X



V\V\ REVIEW OF THE SBA PROCUREMENT ASSISTANCE
^^ PROGRAMS



Y4.SM 1; 104-14

Revieu of the SBft Procurenent Assis...

HEARING



BEFORE THE



COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION



WASHINGTON, DC, MARCH 2, 1995



Printed for the use of the Committee on Small Business

Serial No. 104-14




U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1995



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047695-X



COMMITTEE ON SMALL BUSINESS



JAN MEYERS, Kansas, Chair

JOHN J. LaFALCE, New York
RON WYDEN, Oregon
NORMAN SISISKY, Vii^nia
KWEISI MFUME, Maryland
FLOYD H. FLAKE. New York
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
WALTER R. TUCKER III, California
EARL F. MILLIARD, Alabama
DOUGLAS "PETE" PETERSON. Florida
BENNIE G. THOMPSON, Mississippi
CHAKA FATTAH, Pennsylvania
KEN BENTSEN, Texas
KAREN MCCARTHY, Missouri
WILLIAM P. LUTHER, Minnesota
PATRICK J. KENNEDY, Rhode Island



JOEL HEFLEY, Colorado

WILLIAM H. ZELIFF, JR., New Hampshire

JAMES M. TALENT, Missouri

DONALD A. MANZULLO, Illinois

PETER G. TORKILDSEN, Massachusetts

ROSCOE G. BARTLETT. Maryland

LINDA SMITH. Washington

FRANK A. LOBIONDO, New Jersey

ZACH WAMP, Tennessee

SUE W. KELLY, New York

DICK CHRYSLER. Michigan

JAMES B. LONGLEY. JR., Maine

WALTER B. JONES. JR., North Carolina

MATT SALMON, Arizona

VAN HILLEARY, Tennessee

MARK E. SOUDER, Indiana

SAM BROWNBACK, Kansas

STEVEN J. CHABOT, Ohio

SUE MYRICK, North Carolina

DAVID FUNDERBURK, North Carolina

JACK METCALF, Washington

Jenifer Loon, Staff Director
Jeanne M. RoslanOWICK, Minority staff Director



(II)



CONTENTS

Hearing held on March 2, 1995



WITNESSES
Wednesday, March 2, 1995

DeLuca, Anthony, Small and Disadvantaged Business OfTicer, Department

of the Air Force 26

Lader, Philip, Administrator of the Small Business Administration; accom-
panied by Mary Jean Ryan, Senior Finance Executive; Patricia Forbes,
Senior Finance Executive; Robert neal. Associate Deputy Administrator;
Robert Stillman, Associate Administrator for Investment; Marty Teckler,
Deputy General Counsel; Doris Freedman, Deputy General Counsel; Bemie
Kulik, Associate Administrator for Disaster Assistance; and Douglas

Criscitello, Deputy Administrator for Management and Administration 1

Lee, James, Southeastern Lumber Manufacturer's Association 34

Neal, Robert, Associate Deputy Administrator of the U.S. Small Business
Administration, accompanied by Debbie Libow, Robert J. Moflitt and Thom-
as Dumar, esq 19

Nelson, Colette, Small Business Legislative Council 31

O'Bannon, Dona, National Association of Women Business Owners 36

APPENDIX

Opening statements:

LaFalce, Hon. John J 45

Manzullo, Hon. Donald A 47

Meyers, Hon. Jan 49

Mfume, Hon. Kweisi 51

Prepared statements:

Deluca, Anthony 53

Lader, Philip 77

Lee, James 98

Libow, Debbie 110

Neal, Robert L, Jr 115

Charts 146

Nelson, Colette 150

O'Bannon, Dona 168

Zimmerman, Jan 177

Additional material:

Independent Forest Products Association 180



(III)



REVIEW OF THE SBA PROCUREMENT
ASSISTANCE PROGRAMS



THURSDAY, MARCH 2, 1995

House of Representatives,
Committee on Small Business,

Washington, DC.

The committee met, pursuant to notice, at 9:33 a.m., in room
2359-A, Raybum House Office Building, Hon. Jan Meyers (chair-
woman of the committee) presiding.

Chairwoman Meyers. The committee will come to order.

This morning, the Committee on Small Business will be hearing
testimony on the procurement assistance programs at the SBA.
First, however, we are going to hear from Philip Lader, the Admin-
istrator of the SBA.

As Members will recall, earlier this week the committee heard
from a number — well, from three former administrators of the
SBA on their historical views of the SBA's performance, mission
and responsibilities. Unfortunately, Mr. Lader was unable to at-
tend at that time. Therefore, at his request and because we want
to hear the administration's overview of today's SBA, we are hear-
ing his presentation now.

Afterwards, Mr. Lader will entertain questions from the Mem-
bers, and I hope he will be able to stay for at least some of the pro-
curement assistance hearing.

Chairwoman Meyers. Mr. Lader, we are glad to have you with
us.

TESTIMONY OF FKJLIP LADER, ADMINISTRATOR OF THE
SMALL BUSINESS ADMINISTRATION; ACCOMPANIED BY
MARY JEAN RYAN, SENIOR FINANCE EXECUTIVE; PATRICIA
FORBES, SENIOR FINANCE EXECUTIVE; ROBERT NEAL, AS-
SOCIATE DEPUTY ADMINISTRATOR; ROBERT STILLMAN, AS-
SOCIATE ADMINISTRATOR FOR INVESTMENT; MARTY
TECKLER, DEPUTY GENERAL COUNSEL; DORIS FREEDMAN,
DEPUTY CHIEF COUNSEL FOR ADVOCACY; BERKIE KULIK,
ASSOCIATE ADMINISTRATOR FOR DISASTER ASSISTANCE;
AND DOUGLAS CRISCITELLO, DEPUTY ADMINISTRATOR FOR
MANAGEMENT AND ADMINISTRATION

Mr. Lader. Madam Chair, thank you very, very much for this op-
portunity to come today and to add our thoughts to what my prede-
cessors provided to you.

Congressmen, counsel, to others who will be joining you, let me
introduce, if I might, my colleagues who are here who will be avail-
able to respond to particular questions.

(1)



You know quite well Mary Jean Ryan and Patty Forbes, two of
our senior finance executives who are such great help.

If I might ask my other colleagues to raise their hands as I iden-
tify them.

Robert Neal, who will be testifying before you today, Government
Contracting and Minority Enterprise Development; and Bob
Stillman, our Associate Administrator for Investment; Marty
Teckler, long-time Deputy General Counsel; Doris Freedman, our
Deputy Chief Counsel for Advocacy.

Berkie Kulik, who is affectionately known as the master of disas-
ter and celebrating a birthday; Doug Criscitello, who is helping us
on the budget front.

There will be others as we continue.

Let me ask, Madam Chair, if I might, if the testimony that has
been prepared might be submitted for the record.

Chairwoman Meyers. Yes, without objection.

Mr. Lader. Thank you.

I might turn then, if I can, to these charts and explain how, in
the context of what my predecessors pointed out to you the other
day, we have been moving increasingly at the SBA to what we
term a public-private partnership, I hope that the result of the
hearings you are having this month and the continued work we are
doing in the administration will be even more so.

The biggest challenge we are finding, though, is that oftentimes
— and you see this in testimony that you have been receiving —
people are referring to programs and facts that are no longer true
todaj^. Like the Oldsmobile ad, referring to your fathers Olds-
mobile, the point we have to keep making is this is not your fa-
ther's SBA Let's focus on where we are today. That is what I will
be focusing on in my remarks this morning.

Some of the key numbers about the SBA for the overview per-
spective — our current portfolio includes about 137,000 financings.
That comprises almost $23 billion. Yet, oftentimes, when we hear
someone say, well, SBA really doesn't help all small businesses.
There are 20 million small businesses, and only 137,000 of them
have had financial help currently from the SBA. I point out that
137,000 is a very significant number, and our business is not to
help all small businesses with financing. That is the role of banks
and the private sector.

But in terms of our technical training, education assistance, last
year more than 1 million small businesses received assistance from
SBA and our partners. That is a very considerable number nation-
wide.

As a taxpayer, the principal concern I have, out of this $23 bil-
lion loan portfolio, what is the taxpayer's exposure? I am pleased
to present to you today that our loss rate is about 1.3 percent. It
compares very favorably with private sector lending institutions.
Very important, 90 percent of our loan portfolio is current in their
payments -— in other words, within 30 days of the due date. It is
a very healthy portfolio.

If you look at what has happened with our education and train-
ing and financing efforts, more than 400,000 jobs were created or
retained last year through the work of the SBA and our partners.
As Berkie could explain better than I, our disaster work has



3

touched every single State in the Union, every State represented
in this committee. About 250,000 current loans are in our disaster
loan portfolio, and they comprise about $5.5 billion.

But if you look at the financing programs, the education, the
Government contracting program you will be discussing later this
morning, the total cost to the taxpayers of all of the SBA's oper-
ations is about $750 million, our budget request for next year. Yet
that $750 million, because we are a public-private partnership, will
this year generate about $15 billion of private capital invested in
or loaned to small businesses.

So as we look at the kind of astounding leverage, $750 million
of tfixpayer dollars generating $15 billion of private sector invest-
ment in small businesses — and that $750 milHon, as I have told
you before, is less than the taxes paid by just three companies
which got critical help from SEA in their early stage of growth —
Apple Computer; Intel, the chip maker; and Federal Express. Their
taxes are more than the whole budget of SBA.

But to provide an overview as to today's SBA, not your father's
SBA, I like to use this portfolio to make the case in which there
are four separate file folders or portfolios in which the broad array
of SBA programs can be categorized.

At every one of the State hearings we have been having leading
up to the White House Conference on Small Business in June, we
hear over and over, as you have been hearing in testimony, that
access to capital continues to be, even with an ease of the credit
crunch, a major need of small business.

Second, money alone isn't enough. Education and training is es-
sential.

Third, the SBA's role in advocacy and, as you will be focusing on
today, contract opportunities.

Then the fourth area of our work, as we categorize it in this way,
is what I call the SBA nobody knows. I will hold that out as a mys-
tery and get back to that in a few minutes.

If we look first at access to capital, what is of most interest to
me is the phenomena that has occurred in just these last 4 years.
Because, as you see the growth of financing made possible through
SBA, it has grown in 1992 from $7.5 billion to, last year, $11.5 bil-
lion. The number of businesses impacted by the SBA financing has
grown fi-om 32,000 to double that number, 67,000, just in these 4
years.

As I pointed out in the 7(a) hearing, we have been doing this by
trying to drive down the size of the average loan. So that, in 1992,
the average 7(a) loan was about $250,000. The average 7(a) loan
this year will be $139,000.

We believe in helping the smaller businesses, the most under-
served segment of the small business community. But this is what
is most telling, the cost to the taxpayers.

Even with this tremendous growth from $7.5 to $11.5 billion and
a doubling in the number of businesses getting financing through
the SBA, the cost to the taxpayers — I ask you to focus on this
with me — the cost to the taxpayers has gone down from $327 mil-
lion to $284 million through the changes in our 7(a) and other fi-
nancing programs. We believe they are more efficient today than



they were even in 1992, and certainly more efficient than when we
were involved in direct lending programs in the 1980's.

This is another way of looking at it. If you go back to the early
1980's — and you heard some testimony on this from my prede-
cessors the other day. In 1982, for example, the total amount of
SBA-related financing was $3 billion. That has grown from $3 bil-
lion to almost $12 billion today, a 400 percent increase as we have
moved out of the role of retailer to wholesaler, out of direct lending
into guaranteed lender.

In that period of time — and this is a case study for all Federal
agencies, I would hope — we have gone from 4,800 employees to
3,600 employees.

So in the same period of time that SBA financing has had a 400
percent increase in dollar value, our employees have had a 25 per-
cent decrease, a trend that I suspect you see in very few, if any
other, Federal agencies.

I explained — and I won't take the time today again — as we
talked about the 7(a) Program, the biggest misconception that we
face is individuals who think this is a Government handout or Gov-
ernment giveaway program. In fact, as you know, there are 7,000
private sector lenders, banks and nonbank lenders, who use their
own capital, and they do so because of the subsidy that Congress
appropriates.

Currently, the rate is 2.74 percent. What that means, as you well
know, is for every hundred dollars loaned, of private capital. Con-
gress appropriates a savings account of $2.74 for potential future
losses. So all of that, through the repayment to lenders, the second-
ary market, the loan losses which are covered by the subsidy, pro-
vides the liquidity for the 7(a) Program, which is really the founda-
tion of our financing program.

As I pointed out in the review of the 7(a) portfolio, currently we
are 90 percent current in our loan portfolio. The reason I repeated
that again today is because of some questions that came up with
my predecessors' testimony.

If you look back to 1982, the currency rate was 72 percent. So
today, as we see it rising to 90 percent of the loans being repaid
within 30 days of the due dates, I think you see a very significant
improvement from what some would say was our father's SBA.

As you look at the average loan size — I repeat from my testi-
mony to you a few weeks ago. As we have gone just from 1991 with
20,000 7(a) loans to three times that number, 56,000 this year, a
key factor is that one-third of the loans in 1991 were under
$100,000. This year, two-thirds of the loans will be under $100,000.
Again, the emphasis is on getting the SBA funding to America's
smallest businesses.

The second step in which you will be having further testimony
in a separate hearing, is the SBIC program. I simply want to pro-
vide this very brief overview.

Under today's SBIC Program, very imlike that of 20 years ago
or even of 2 years ago, the venture capitalist who wants to start
an SBIC raises private capital. But a critical difference today from
just a few years ago is we require, thanks to legislation you pro-
vided, that 30 percent of the capital must come from investors un-
related to the venture capitalist.



So not only does the venture capitalist look at the potential in-
vestments under his or her microscope and not only is the SBA and
the GAO and our IG looking over the venture capitalist's shoulder,
but the private investors are now unrelated. At least 30 percent of
the capital is unrelated. They are looking over the shoulders of the
venture capitalists.

Then the SBIC raises additional funds, 1, 2, or 3 to 1 leverage,
through a debenture or, as a result of recent action, a participating
security. That gets other private investors to look over the shoulder
of the venture capitalist, putting in additional private capital to the
SBIC, which is then made available to the most promising entre-
preneurial ideas and enterprises.

Now there had been a mismatch the way the program was orga-
nized up until just 2 years ago. Because the entrepreneur had to
be paying funds back to the SBIC, often before the business was
sufficiently mature to have the funds to be paying back, a mis-
match in timing.

Today, thanks to the participating security, the entrepreneur
doesn't have to be paying the funds Dack to the SBIC until divi-
dends can be paid, the company goes public or things go sour —
there is a liquidation. So, in that case, there is a better match in
the repayment of funds to be able to meet the SBA guarantee of
the debenture or the participating security.

If I can take this one snapshot, not just of your father's SBA but
of SBA's SBIC Program 2 years ago, there are some critical dif-
ferences often misunderstood by journalists.

If you look at the financing of companies by SBIC's in 1992, it
amounted to $400 million. Last year, double that amount, almost
a billion dollars of financing of small companies, through the SBIC
Program, a very significant growth.

Of the new private capital of new licensed SBIC's, in 1992, this
program attracted only $24 million of private capital. Last year, we
went from $24 to $520 million of new capital, a 20-fold increase in
the private investment in the program.

This is perhaps the most telling issue. The average capital of a
new licensee in 1992 was $2.5 million. The average capital of a new
licensee last year was not $2 million but $15 million. What that
says is that you can afford more sophisticated and experienced
management of the SBIC. You can have a broader portfolio of com-
panies, greater diversification. Obviously, there is much improved
capitalization of the SBIC today than there was even up to 2 years
ago.

What is the cost to the taxpayer? $12 million generating a half
a billion dollars in 1992; $34 million generating almost a billion
dollars last year.

So you see again the very significant leverage involved in this
program. That has been possible because previously we had only
the debt instrument. With this participating security now, very dif-
ferent from the way the program was organized 2 years ago, there
is now an equity instrument that allows a better match of the re-
payment of funds to the SBIC.

I am ofi:en asked, if you talk about the financing done through
SBA, why do you have so many different programs? Why isn't the
7(a) Program sufficient in and of itself?



Well, the SBIC's, of course, provide something the 7(a) Program
can't, long-term, patient capital, through subordinated debt or
through equity investment. Similarly, the 504 Program provides
another filler for a major gap in capital needs in small businesses.

Let me give this example. A small business is improving, is grow-
ing, but it wants to improve its capital. Or, I should say, add on
more physical space to its physical plant or to get more capital
equipment. It can't afford, through its cash flow, to sacrifice cash
flow for that, for short-term financing. It needs longer-term, fixed-
term financing for the capital expenditures.

So what this business will do is use 10 percent of its own capital
through the 504 Program to expand its physical plant. Then,
through an SBA-guaranteed debenture, it will get other private in-
vestors, through a certified development company that is commu-
nity-based, to provide 40 percent of the expansion of its plant and
get a commercial bank or a nonbank lender, traditionally a com-
mercial bank, to provide 50 percent.

So it is, again, a public-private partnership — 10 percent of the
business's own capital, 40 percent of other investor through a CDC
and 50 percent through a private lender.

But I want to point out in this program this enables the already
successful small company to expand in a way that doesn't use up
its immediate capital but allows a longer-term fixed-term financ-
ing. It has an astoundingly successful subsidy rate — 0.57 percent.
What that means is for every hundred dollars guaranteed by SBA
the cost to the taxpayers is 57 cents, attracting 50 percent of the
financing from a private lender and encouraging 10 percent of the
investor, the business putting in its own funds.

If we look at the growth of the 504 Program, which you will be
addressing in more specifics, look at the growth from 1991 to 1994.
We have gone from a total of 1.2 billion in the 504 Program to $3.5
billion. But what is most telling to me is the private capital has
gone from $800 million to $2.2 billion.

You see, again, the public-private partnership genius of this,
where the guaranteed portion encourages much greater private sec-
tor investment in a program that is addressing not the startup
companies but the growing companies that need capital for their
own plant expansion or new capital equipment.

I come back to this. Money alone for small businesses is not suffi-
cient. Equally important is education and training. The small com-
panies cannot afford some of the high-priced management consult-
ants and accounting firms that provide large American corpora-
tions that type of assistance.

If you look at the number of businesses which have received edu-
cation and training through SBA Programs, this is very clearly not
your father's SBA. Growing firom 1980 to here, you see, 1994, about
a million small businesses receiving education and training assist-
ance through our SBA resource partners.

But the genius here, too, is public-private. Because it is not just
SBA doing it. Let me point out our partners in providing this edu-
cation and training, some of whom are represented here todav —
I am especially proud of SCORE, retired executives in 383 chap-
ters, about 13,000 individuals who volunteer their time to counsel



small businesses, bringing the wealth of their experience in man-
agement to small businesses around the country.

Generationally, just as we deal with some of our senior citizens
generationally, it is interesting to look at SBA on line. I am told
that our SBA on-line computer program serves as — is accessed by
as many as or more than frankly, any of the other Grovernment
programs that we have on line today.

The Small Business Development Centers are currently at 900
locations around the country. As you know, for every dollar of Fed-
eral money in those, there must be at least $1 of a State match.

At the 900 locations — 35 percent of them are located in rural
areas. So, oftentimes, the accusation that SBA is focusing just on
urban growth is just not accurate. In fact, if you look at tne num-
ber of businesses SBDC's counseled last year, 45 percent of them
were rural-based businesses — many of whom, urban as well as
rural, are women- and minority-owned businesses.

We look at exports. I find it astounding how little media coverage
there is of this phenomena. Sixty-three percent of all of export dol-
lars generated in America come from small businesses, 63 percent.
That is why, amongst our many export programs, we are expand-
ing the 15 USEAC, the export assistance centers, done with the
Department of Commerce and the Export-Import Bank to help
small businesses with export assistance.

One of the programs I am most proud of in this public-private
partnership, the Business Information Centers, the BIC's. Cur-
rently, we have 15. By the end of the year, we will expand to 40
public-private BIC's.

Most recently, I was proud to participate in Baltimore with the
opening of a storefront BIC with NationsBank and Bell Atlantic as
our partners. The small businessperson going into that will find
not only all the business periodicals that the small businessperson
can't afford to subscribe to but the latest in computer equipment
being provided by these private sector partners, software to help
them develop business plans, as well as the SBA staff to help them
with counseling.

Something else very different. I have there in front of me a stack
of SBA brochures. In the past, we printed all these brochures and
made them available free. We have been criticized, but we think
it is appropriate.

This year, they are for sale, and we are testing the market. If
there is a market for those kinds of publications, people are buying
them, we will continue printing them, publishing them. If there
isn't the market, we will discontinue that. It is a test of the mar-
ketplace.

Well, that is a summary of our education and training.

But the third area of our focus is advocacy and contract opportu-
nities.

The first, advocacy. We are not just cheerleaders. It is an impor-


1 3 4 5 6 7 8 9 10 11 12 13 14 15

Online LibraryUnited States. Congress. House. Committee on SmallReview of the SBA procurement assistance programs : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, March 2, 1995 → online text (page 1 of 15)