United States. Congress. House. Committee on Small.

The abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 online

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sents, even under the 8(a) Program. We self marketed, we aggres-
sively worked for and earned each contract. We have always been
straightforward and honest in dealing with Government customers.
We have scrupulously abided by all procurement laws and regula-
tions. We strictly adhered to all eligibility requirements of SBA's
8(a) Program.

We are mystified by GAO's suggestion that TAMSCO in any way
abused the 8(a) Program. We are confident that SBA files relating
to our program participation and Coast Guard's formal review
record will substantiate TAMSCO's assertions. We are extremely
disappointed with GAO's report and cooperated fully with the GAO.
They asked for an hour of my time, an hour of Mr. Bilawa's time.
When the investigators made their exit, they assured me that they
had found absolutely no indication that TAMSCO did anything
other than follow the established rules and regulations.

I am not at all relieved. Our valued reputation and the hard-
working employees of TAMSCO have suffered unfairly from public-
ity spawned by GAO's poor work and its lack of integrity.

In closing, members of the Committee, I would Tike to ask you
a rhetorical question. What was the Congress's goal in enacting the
8(a) Program? If that goal was to allow minority men and women



16

the opportunity to establish successful businesses, to stand on an
even par in the American free enterprise system, and to make vital
contributions to the American economy, then you have succeeded
with TAMSCO and many others. If you came here with open
minds, then my words will have made a difference today. But if you
came here closed-minded, then like the wind at sea, or the falling
tree in the forest with no one around, you will not have heard my
words. Thank you.

[Mr. Innerbichler's statement may be found in the appendix.!

Chair Meyers. Thank you Mr. Innerbichler.

I have some questions and I'm sure that a number of our Mem-
bers do, and so I'll try to be brief. We're going to start the lights
and I'd like people not to make 5-minute speeches and then ask a
series of 10 questions. So, that I'd like you to ask your question and
try to get a response within a reasonable amount of time only be-
cause there are quite a few Members here.

Mr. Jenkins, business opportunity specialists are reviewed in
part based on their success at getting 8(a) contracts for their client
8(a) firms aren't they?

Mr. Jenkins. Yes, they are.

Chair Meyers. I think that was probably one of our mistakes in
1988. So, wouldn't you consider having an opportunity specialist
deciding on a SIC code designation to be a conflict of interest?

Mr. Jenkins. Yes, and it is not our policy to provide the Coast
Guard or any other Agency an SIC code. That is a contracting offi-
cer's responsibility.

Chair Meyers. Business opportunity specialists don't receive any
special training in contracting, so why would a contracting profes-
sional defer to their judgment?

Mr. Jenkins. As I mentioned, they would not. I am not aware
that happened, that is not our policy to provide a SIC code. Cer-
tainly we are offered an SIC code for our review. In concurrence
we do not make the initial determination on what a particular re-
quirement should have — what the SIC code should be on a particu-
lar requirement.

Chair Meyers. I'm going to read just briefly from Mr. Wheeler's
report. He said they awarded the contract, this is TAMSCO, with
the potential maximum value of $14 million 1 day before
TAMSCO's term in the 8(a) Program expired in 1993. The notes of
one Coast Guard contracting official referred to this contract, the
notes of a Coast Guard official as a graduation present to
TAMSCO. Coast Guard officials told us that the Coast Guard
viewed competition of contracts as a hindrance to its mission and
that it was always their intention to award the contract to
TAMSCO. Thus, Coast Guard officials changed the contract's origi-
nal standard industrial classification code, or SIC code, which
TAMSCO had outgrown to one for which TAMSCO qualified, and
two, lowered the contract's original labor hours by 46 percent to
avoid the $3 million threshold required for competitive IDIQ con-
tracts.

Now, I would like — yes, that's in the GAO report. I guess I am
not terribly surprised that the three units that were involved in
this, SBA, the Coast Guard, all spent all of that time looking at it
and none of the three of them found anything wrong with it, but



17

when someone from the outside looked at it, it seems very wrong
and they said so.

Ms. Lee, in hearing your and Mr. Wheeler's testimony with re-
gard to eligibility questions raised about the principals of I-NET
and TAMSCO, when they were making application to the 8(a) Pro-
gram, it sounds to me as if they kept tinkering with their structure
until it was acceptable to the SB/l Isn't this a bit suspect? Don't
these changes amount to rather cosmetic changes just to gain ac-
cess to the program?

Ms. Lee. We have some concerns about that. We have never done
any auditing work on TAMSCO, so I cannot address that company.
We are concerned that it is possible for an applicant, if they do not
strictly meet the criteria for entry into the program at the time of
application, to go back and, with the stroke of a pen so to speak,
change the controlling ownership, divest themselves of assets to
come under the eligibility threshold, and take various other actions
to make themselves eligible.

One way of addressing that would be to build some presumptions
into the law that if you have made certain kinds of changes within
some period of time before you apply, there is a presumption that
those changes were made for the sole purpose of meeting the eligi-
bility requirements and, therefore, will be disregarded.

Chair Meyers. The SBA district and regional offices, not just one
but both, offices recommended that Kavelle Bajaj of I-NET not be
certified in the 8(a) Program. However, this decision was over-
turned by the central office, why is that?

Ms. Lee. Are you addressing that question to me?

Chair Meyers. Yes, did you discover why that was?

Ms. Lee. Based on the audit work that we did, it appeared that
the primary reason for overturning the lower level recommenda-
tions and allowing the company in was additional documentation
that indicated the owner had taken some courses in Computer
Sciences. The Regional Counsel believed these courses gave her at
least minimally adequate expertise to run the company because she
was now more knowledgeable about the work. That is why they ul-
timately made the decision to allow them in the program.

Chair Meyers. Mr. Wheeler, finally, I would ask you to react to
the fact that it's been indicated; "'Well gosh this is just two compa-
nies out of all those thousands that are in the wrong." Can you
elaborate on how many firms you looked at and maybe Ms. Lee,
could you also react to that? Mr. Wheeler.

Mr. Wheeler. Madame Chair, basically we looked at two firms
— I-NET and AMSCO — and 8(a) activities concerning those firms
and, in the case of TAMSCO, the Coast Guard. Our findings per-
tain to only those two firms.

The firms were identified from those in the top 25 in terms of
contract dollars awarded in 1992. This work built on earlier work
that GAO had done concerning problems in the management and
administration of the program, particularly as it related to con-
centration of contract dollars and contracts among 8(a) partici-
pants.

Chair Meyers. Thank you. So, you looked at the top 25 and se-
lected these two from that top 25.

Mr. Wheeler. Yes, Madame Chair.



18

Ms. Lee. Yes. We did a major audit in which we looked at 50 of
the largest companies. We have not, however, done any audits in
which we selected a purely random sample from which one could
legitimately make suggestions as to the universe.

While it is true that we identified some problems with companies
that we did audit, from those audits we could not legitimately
make projections and say "X" percent of the 5,700 companies in the
program have these kinds of problems.

Chair Meyers. Well, of the 5,700 who are certified — now that's
certified is it not?

Ms. Lee. As eligible, yes.

Chair Meyers. Yes. Half of them had no contracts at all, is that
right?

Ms. Lee. Yes.

Chair Meyers. And

Ms. Lee. At least as December 1995.

Chair Meyers. I will yield at this time to Mr. LaFalce.

Mr. LaFalce. Thank you very much Madame Chair. I think your
questions have been helpful. Mr. Wheeler you've looked at two
firms in this report, that's it, correct?

Mr. Wheeler. That's true, Mr. LaFalce.

Mr. LaFalce. Alright.

Mr. Wheeler. Yes.

Mr. LaFalce. Both of these firms were certified as eligible about
a dozen years or so ago, 10 or 11.

Mr. Wheeler. In approximately 1984.

Mr. LaFalce. 1984, Now let me not refer to I-NET because I-
NET is not here at the witness table, but TAMSCO is, and let me
have a jointure of issue. Did you in your report find anything that
you think is criminally wrong with any governmental or private
sector action with respect to TAMSCO?

Mr. Wheeler. Not at all, Mr. LaFalce. In fact we have no infor-
mation that TAMSCO misrepresented anything to the SBA and our
view with respect to the awarding of the IDIQ contract is that the
drive to award the contract to TAMSCO came from within the
Coast Guard.

Mr. LaFalce. Well we're here in large part because of your re-
port and we have 50 percent of your report present. Did you find
any civil wrong-doing on the part of TAMSCO.

Mr. Wheeler. No, we found no violations of laws, rules, or regu-
lations on the part of TAMSCO and we did not conclude that there
were any.

Mr. LaFalce. Well now, what are the problems then that you
found with respect to TAMSCO that you think should lead us to
make certain improvements in the program?

Now that weVe established that there's no civil or criminal
wrong doing. I'm sure Mr. Innerbichler appreciates that statement.
What did you find that troubled you, that leads you to conclude
that we can and should indeed make some improvements in the
program?

Mr. Wheeler. The primary issue relating to TAMSCO by itself
is the issue of eligibility



Mr. LaFalce. So, let's focus in on the issue of eligibility-
Mr. Wheeler. And



19

Mr. LaFalce. What changes should we make that are illustrated
by the TAMSCO experience?

Mr. Wheeler. Let me speak to what we found. Basically, the
problem with the issue of eligibility for TAMSCO is an SBA prob-
lem. In that particular instance there were issues, fairly serious is-
sues

Mr. LaFalce. What were those issues?

Mr. Wheeler. Relating to control. In this particular instance
there were concerns with respect to control

Mr. LaFalce. Well what were your concerns?

Mr. Wheller. The concerns were that Mr. Innerbichler would
not be able to exercise complete control over the firm as required
in SBA regulations.

Mr. LaFalce. Do the regulations require complete control or ma-
jority control?

Mr. Wheeler. I think what the regulations require is that he be
able to control the day-to-day operations of the firm and

Mr. LaFalce. Can we be a bit more precise as to what the regu-
lations call for, and of course Mr. Innerbichler is here and I do not
know his qualifications, but he certainly makes quite an excellent
presentation. He creates the appearance, at least during the testi-
mony, that he's in control, knowledgeable. What's your problem?

Mr. Wheeler. Mr. LaFalce, it's not my problem. I believe it's
SBA's problem.

Mr. LaFalce. Well what's their problem?

Mr. Wheeler. In that context

Mr. LaFalce. I didn't mean it as your problem.

Chair Meyers. Kindly let him finish.

Mr. LaFalce. I'd like to.

Mr. Wheeler. We found concerns raised at two levels within the
SBA itself relative to issues of control of the firm; the issues were
twofold. One related to Mr. Innerbichler's inability to control the
operations of the firm. Second, was the issue of whether or not the
nondisadvantaged owner would benefit improperly from the pro-
gram. In that particular instance, what SBA was concerned about,
is that the articles of incorporation provided equal voting power for
the two members of the board of directors.

The other materials that were submitted to SBA included the by-
laws. The bylaws indicated that there would be three directors, but
that conflicted with the articles of incorporation that indicated two.
There were also other concerns.

Mr. LaFalce. Alright. May I ask Mr. Innerbichler, how were
those issues dealt with, some 11 years ago and since then?

Mr. Innerbichler. We became aware, Congressman, that the
SBA region and district had concerns with respect to the eligibility
and control, I think in the area of control, and the resumes that
we submitted. Bill and I had worked together where I had been
subordinate to Bill in the past. I think there was concern about
that. I can't be positive. I never had any dialogue with the regional
or the district office. The central office is where we had the dia-
logue and what we showed them there was just basically the stuff
that was on our application. We didn't change anything; we didn't
provide the SBA with new data; we didn't red line our application;
we just relied on the data that was on our application.



20

The only new information we gave the central office was with re-
spect to the financial liability, and that we had been awarded a
competitive contract at Fort Monmouth. We had our own office now
in the Beltsville area and that we had a commitment letter from
Nations Bank which was Suburban Bank at the time in our appli-
cation that said they were going to give us a line of — asset-based
line of credit at the time we were entered into the 8(a) Program.

Mr. LaFalce. What about the specific difficulties that Mr.
Wheeler articulated with respect to the bylaws, the articles of in-
corporation, the 50/50 control et cetera, any kind of

Mr. Innerbichler. As far as I know, Congressman, I have
looked at that just recently. We've never changed them from day
one. It requires that I own 51 percent of the stock, that I have day-
to-day control.

Mr. LaFalce. 51. Not 50?

Mr. Innerbichler. No, 51 percent. In fact, I believe that it says,
and this is a quote of Federal regulations, if I may read it.

Mr. LaFalce. Yes.

Mr. Innerbichler. "The socially and economically disadvantaged
individual upon whom eligibility is based shall control the board of
directors of an applicant or 8(a) concern either in actual numbers
of voting directors or through weighted voting, e.g., in a concern
having a two person board of directors or one individual on the
board is disadvantaged and one is not, the disadvantaged vote,
must be weighted, worth more than one vote, in order for the con-
cerned to be eligible for 8(a) Program participation."

Mr. LaFalce. How many members were on the board of direc-
tors, and are on the board of directors this year?

Mr. Innerbichler. There have only been two members on the
board since day one.

Mr. LaFalce. You have weighted control?

Mr. Innerbichler. Yes, I do.

Mr. LaFalce. I see. Thank you very much.

Chair Meyers. Mr. Talent, I think we will have time for you to
ask questions if you'd like to do it now, or would you rather

Mr. Talent. One brief one. As often happens here, I have an-
other hearing going on at the same time, Madame Chairman, so if
I could ask a real brief question

Chair Meyers. Yes. In fact you don't have to 1 think we will

have your full 5 minutes before we have to go vote.

Mr. Talent. Well I don't know, perhaps maybe Mr. Jenkins,
maybe Mr. Innerbichler may want to comment on this because
problems in getting certified is something I've had a lot of people
complaining to me about in my district, and on both ends of it.

I mean, people feeling like well somebody else got certified who
shouldn't have, and also saying I didn't get certified and I should
have and they complain about contradictory kinds of Catch-22 reg-
ulations. In other words, if you don't have any financial backing,
or enough financial backing well you're not competent enough to be
certified. On the other hand if you do, then you're too wealthy to
be certified. I mean I've had conversations like this with people.
Maybe you could just, first of all Mr. Jenkins, comment in a gen-
eral sense about whether you think that there is a need to try and
make these rules for being certified more clear. I mean, clearly



21

what we have here is some questions that were raised, and Mr.
Innerbichler feels like they were unjust on the part of the SBA, and
he does sound like a very credible witness but, is the problem
vague or maybe contradictory standards for being certified?

The other thing, and I want you to comment, and Mr.
Innerbichler having been on both ends of this program, you've
graduated now, right?

Mr. Innerbichler. Yes, sir.

Mr. Talent. Seems to me there's a tension that the Congress has
built into this that we all ought to openly acknowledge.

We want the agencies to utilize this program to contract with mi-
nority contractors. They develop a working relationship with some-
body, they have confidence in them, this is an established firm, and
then they start hitting the ceiling for graduation, and so now they
need to get out and the agencies want to keep them in because
they have a record of dealing with them. I mean, clearly that seems
to be what happened here.

So, is this a tension that we need to just face down here as a
Committee and as a Congress and resolve about whether we want
to maybe lift these gaps in graduation or not and just try and force
the Government to confront this issue better than we have? Be-
cause I can imagine the Coast Guard was very pleased to be able
to get you, you don't have to comment on this, a contract the day
before you graduated. They probably have great confidence in your
firm. This is contracting with a minority firm which we want them
to do and yet now for the most of the performance you're going to
be out.

So, if you could comment, really anybody who feels they have a
comment, on those two issues. First, do we have a problem realisti-
cally with vague and contradictory rules for getting certified, and
second, how should we resolve that tension when firms get to the
point that they're about ready to graduate? I mean should we just
struggle with it as it is now, or is there something we can do?

Mr. Jenkins. Certainly, on that first point that you made — there
have been a lot of concerns by companies that, on one hand the 8(a)
Program, the rules and regulations are too stringent in terms of
getting in.

One of the things we look at is the ability of a company to suc-
ceed in terms of being in business for 2 years, and experience in
terms of contracting. We use the 2-year rule in order to ensure that
companies applying for the program, possess the ability to succeed
on Government contracts. So, we look to assist companies that go
through the 9 year program, to come out a much stronger company.

Mr. Talent. Doesn't it present, I mean, when you've got those
kinds of, isn't it a recipe though for some level of arbitrariness on
the part of your Agency? Because really, whoever's doing it can
often come out, if they have a reason for wanting to come out one
way or another, they can justify it coming out one way or another
based on your regs?

Mr. Jenkins. Well one of the things SBA has done is structured
it's 8(a) Program, Minority Enterprise Development Program, to
provide for a central processing. Where as in the past all 69 dis-
tricts processed 8(a) applications, applications are now processed



22

under one processing unit, so there is consistency in the determina-
tion.

Mr. Talent. One brief follow-up on that by the way. Do you rely
on, if there's a local government certification body with a similar
program, a local government or a State program, do you rely on de-
cisions they may have made to either certify or not certify some-
body in considering, or is your process entirely separate?

Mr. Jenkins. Our process is entirely separate. In fact, what hap-
pens in many cases, a lot of local and State government agencies
rely on the SBA certification as proof positive.

Mr. Talent. OK.

Chair Meyers. Don't even really pay a lot of attention to your
local and district offices obviously.

Mr. Jenkins. Well once again, what happens in the 8(a) process,
the decision to allow a firm into a program or decline a firm from
the program rests by statute upon the Associate Administrator.
The field offices makes recommendations, those recommendations
are then reviewed by a headquarter's staff to determine if, in fact,
those recommendations are consistent with our regulations and
policies.

Mr. Innerbichler. Mr. Talent, Congressman Talent, excuse me.
As far as the vagueness of the way the rules are laid out. The prob-
lem it causes is that it allows for subjectivity. That's number one.
Number two is the experience level of the people who are actually
reviewing the application process.

We were going into the high tech arena. There are very few busi-
ness opportunity specialists that really had the entire high tech
range to understand what you have to be, in order to be successful.
I mean subjectivity came in with the fact that our resumes were
in there, and I admitted to the fact that I had worked for Mr.
Bilawa in the past. Mr. Bilawa was a little bit older than I was,
he started in Aerospace before I did and he was also white. He also
received supervision a little bit earlier.

With regards to the time in the program, I think the Minority
Commission on Minority Business that was empaneled the last
time the 8(a) law was reformed — it's a significant document, it was
a bipartisan panel. They interviewed thousands and thousands of
companies and individuals and it had some recommendations in
there.

I don't think there's ever been a study done by the Congress, by
the SBA to really look what is the timeframe that a company
should be in the 8(a) Program. At one time it was 4 years, the
chance of getting additional 3 years, now it's 9. What's the magic
number? I don't think there's a magic number. I think you have to
look at the individual companies, whether theyVe high tech, or
whether their low tech, and each company takes different time.

Mr. Talent. I don't want to make it more complicated than it is,
but I don't see why we couldn't have bonus periods in the program
if these companies do a good job in minority hiring themselves. I
mean, one of the concerns that I've always had about the program
is how much are we actually getting minority hiring, although most
of these firms do a pretty good job of it.

We're going to have to go, I guess, Madame Chairman. But
would you agree that clearly we do need to look at this? Because



23

this keeps coming up over and over again. I don't think there's a
member of this Committee who hasn't had some kind of case work
in his district on this and that we ought to take a look at the whole
graduation concept and see that we couldn't make it work better?

Mr. Innerbichler. What I would do, if I was you, if I was the
Committee, I would empanel someone from Harvard or Yale to
study the problem and find out how long the time should be and
make it then, make it very simple.

Mr. Talent. That's the one thing you've said so far, Mr.
Innerbichler, I'm not sure I agree with. I mean, Harvard or Yale?
You were a good witness.

Mr. Innerbichler. How about the University of New Mexico?

Mr. Talent. There you go, University of Missouri is not bad ei-
ther.

Mr. Innerbichler. OK.

Mr. Talent. Thank you Madame Chair.

Chair Meyers. For the Committee's information, Mrs. Bajaj of I-
NET was invited to testify but declined that invitation through her
attorneys, and we will return in just a moment.

[Recess.]

Chair Meyers. The meeting will come to order, and I think be-
fore we resume with questioning, I would like to recognize Mr.
Wheeler because I'm not sure that he got a full opportunity to re-
spond to an earlier question by Mr. LaFalce, and I kind of cut him
off and went on to the next question and would you finish your re-
sponse Mr. Wheeler?

Mr. Wheeler. Madame Chair, I think as to Mr. LaFalce's point,
the most important information is that SBA itself, at two different
levels, had very serious concerns about issues. First, was negative
control involving the TAMSCO application. Second, it also had seri-
ous concerns as to whether the nondisadvantaged owner would
benefit improperly from participation in the program.

We found nothing in the record to indicate that those areas of


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Online LibraryUnited States. Congress. House. Committee on SmallThe abuses in the SBA's 8(a) Procurement Program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, December 13, 1995 → online text (page 3 of 20)