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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Mr. Wheeler. No, what they elected to do is announce it
through a press release.

Ms. Clayton. So, in fact, they did not see this being of sufficient
value to have a hearing, and discussion on it, but Senator Nunn
issued a statement?

Mr. Wheeler. Mrs. Clayton, I don't know the reasons why they
elected not to have a hearing. There was a great deal of discussion
in terms of doing so, but ultimately Senator Nunn decided not to,
but I can't tell you why Senator Nunn decided not to hold hearings.

Chair Meyers. Well Senator Nunn could not call a hearing. He
is in the minority, and I don't know why the majority did not call
the hearing.

Ms. Clayton. Well one of the reasons I'm sure was that the ad-
ministration had asked that this hearing was not timely. That
given that there was a review of all of the affirmative action oppor-
tunity for entrepreneurs, that giving them due time to make their
investigation of all programs, the Justice Department is currently
reviewing them, that a more timely opportunity would be in Janu-
ary rather than at this point, when we are anticipating the admin-
istration to make recommendation. I would assume


Chair Meyers. Well, I anticipate that we would have further
hearings in January also, Ms. Clayton.

Ms. Clayton. Well that being the case Madame Chair, in all due
deference, I think that to have had this hearing on a very limited
number of entities, not called by this Committee, called by a Com-
mittee in the other house, and understand this position — I'm ques-
tioning, Madame Chair, the validity of having had this hearing for
getting substance and information that we can use if indeed we
plan to

Chair Meyers. The GAO investigation can be called by either

Ms. Clayton. But you didn't request

Chair Meyers. But certainly with the GAO report in front of us,
I think it's appropriate that this Committee hold a hearing.

We sole source about $4 billion worth of contracts every year,
and if that isn't sufficient reason to investigate the possibility of
mismanagement or fraud, or whatever you wish to call it, then I
don't know what is.

Ms. Clayton. You're claiming my time. Now I would say Ma-
dame Chair that certainly you have a right to call for a GAO audit
and you indeed have. In fact this is the second hearing I have been
a part of where there has been a GAO audit this year, so there
have been in a lot of years.

This was not called by this Committee. This was called by the
Senate Committee, and apparently you looked at the trouble pro-
grams, you didn't really look at — you were looking for trouble pro-
grams is what you were looking for, right?

Mr. Wheeler. In this particular instance, we looked at the top
25 firms for 1992. We examined files for the 25, and focused on the
two companies, based on the strength of indicators of problems.

Ms. Clayton. If there was some problems, then you went fur-

Mr. Wheeler. Yes.

Ms. Clayton. My concern is, again, let me just speak to the
value of the SBA. My concern is that we do need to reform SBA.
I think that those of us who are protectors of SBA should not indi-
cate that there are not problems and you're looking at this in terms
of where you're reforming, it not something to suggest it is irrepute
and should be done, making the leap of faith is though. Taking two
and making the leap and applying it to the universe, as if
everybody's a crook or potentially committing fraud, I think is
stretching the validity of an objective Agency.

Looking at this as to how it can be instructive to us as we protect
and reform the bill, is a legitimate use of investigation rinding
thing, but you have not done that, you didn't stop there. You said
that this is indeed example of the fraud and, you didn't use the
word abuse, but you said fraud, but you did say abuse. Yet in re-
sponse to members of this panel, you can't find any rules or regula-
tions that they actually abused. So, there's an inconsistency of your
generalization than your treatment of your individual case. Cer-
tainly in TAMSCO you said there's no violation that you know of.

Mr. Wheeler. No. I have no information that — —


Ms. Clayton. Well how do you come to your conclusion that's a
part of your findings that there is abuse? Is it abuse on the part
of the — it could be, is mismanagement a part of the Coast Guard?

Mr. Wheeler. It was abuse on the part of the Coast Guard in-
volving the manner in which it awarded the contract.

Ms. Clayton. Is there some specific regulations that they did
abuse that you want to cite for us?

Mr. Wheeler. Mrs. Clayton, I think that if we found that they
had such a regulation and determined that they had actually vio-
lated it, we would have said so. I think that the definition for
abuse is something that is considered contrary to accepted business
practices and that kind of thing.

Ms. Clayton. Give me examples of that.

Mr. Wheeler. Well I think in this particular instance, the issue
is the Coast Guard's intention to award this contract to TAMSCO,
the actions it took to change the SIC Code so that it was one for
which TAMSCO would qualify, and the rest of the activities

Ms. Clayton. Could they not have quantified under a SIC Code?
The fact that they made a change, was that a change that was not
appropriate, did they not have the qualification to meet?

Mr. Wheeler. No, as our report says, the Coast Guard changed
the SIC code to one that TAMSCO was qualified to work under.
However, its reason for doing that was part of its effort to ensure
that TAMSCO got the contract.

Ms. Clayton. I'm not trying to defend TAMSCO, because I have
no basis for doing that, but I am also a defendant of people being
set up to be scape goats because that violates every principle of De-
mocracy and fair play. It seems to me that it's as a part of the GAO
you have seen where the familiarial contracting with the same con-
tractor is standard practice here. We do that with the defense con-
tractors all the time. Look at — you want to talk about concentra-
tion, you concentrate who has the defense contracts, I mean big
contractors. Why then do we find it to offend general practices
when we're talking about small businesses and in particular minor-
ity small business.

I just think that what is required is an even handed, same stand-
ard. If we're going to — if we want to — I want to protect the pro-
gram, my bias is up front. I'm not one to protect the program by
pretending there aren't problems and aren't needs for reform. The
best way to protect the program is to make it stronger, but you
don't do that by flagging two programs that you know that there's
program and then after, and make generalization, and under scru-
tiny you have to back away from using them as the example of the
generalization. I mean, I think you do yourself a disservice in try-
ing to have a general inspection of the program itself.

Madame Chair, I'm not calling for a further investigation, be-
cause I think in some ways we have had too many, but I am calling
for us to have an objective deliberation as how we reform the pro-
gram to meet the general standards and to make sure that mis-
management by any Agency is not there.

Chair Meyers. Mr. Chrysler would like to ask a question at this
time. He did not utilize his time, but let me just say first that to
correct a false impression, the Justice Department's review is to de-
termine the constitutionality of all minority business programs in-


eluding 8(a) under the Adarand decision. That has no bearing on
the management of the 8(a) Program and therefore, the Justice De-
partment is not looking at these particular cases involving eligi-
bility or size standards or anything else. Mr. Chrysler.

Ms. Clayton. Madame Chair, could I ask to the base of your
question. Does your question suggest that the minority eligibility
is not a part of this discussion and that it should be a question of
management rather than the eligibility?

Chair Meyers. No. What you said was that you, I think, maybe
I misunderstood you Ms. Clayton, was that this was not timely be-
cause the Justice Department was looking at it. The Justice De-
partment is not looking at this, they are looking at the Adarand
decision and the overall constitutionality of all minority preference

Ms. Clayton. Well Madame Chairman, that's why I wanted to
get that further. I am under the impression they are now looking
at the legality Madame Chair, they are also looking at the effec-
tiveness. Those programs are not

Chair Meyers. But, they are not looking at how you get into the
program, or how you stay in the program or any of that. What they
are looking at is whether the program itself is constitutional.

Ms. Clayton. Now I would disagree, but that's a point for an-
other discussion. I would say that they are also looking at what
works and what doesn't work, and if it doesn't work then we ought
to not have it and it's a better way to work in. I thought they were
looking beyond just the legal question. I thought they, the Presi-
dent said he would have a review by which program needed to be
reformed and reform comes, speaks to management as well.

Chair Meyers. I hope he is also looking at which programs
which need to be eliminated as well as reformed. Mr. Chrysler.

Mr. Chrysler. Thank you Madame Chairman. Mr. Flake eluded
a few minutes ago to the fact that as long as we have programs
like this where we have the Government in the business of picking
the winners and losers, we are going to have these kinds of prob-
lems. To equate these programs to the same as in the defense in-
dustry, well defense is an absolute necessary evil and these pro-
grams are not, that's the biggest difference.

Mr. Jenkins, is it standard procedure to have Federal agencies
consulting with the SBA in order to determine size and classifica-
tion standards so that a contract can be targeted to a specific com-

Mr. Jenkins. No, it's not. Basically when a contracting officer de-
fines what the requirements are, they also should define what SIC
code industrial classification code should apply. If this is something
that the contracting officer would like SBA assistance and con-
sultation in determining, certainly we do provide that assistance.

Mr. Chrysler. Mr. Wheeler, do you perceive that that's what
happened in your investigation?

Mr. Wheeler. I think that's part of what happened. I think the
evidence that we developed indicates that the decision was made
up front, that TAMSCO would get the award of this contract and
that the Coast Guard would go about determining how to ensure
that that would happen.


I think with respect to the SIC code, the contracting officer ap-
propriately determined an initial SIC code. I think that in meetings
that took place, it was determined that TAMSCO was no longer eli-
gible for that particular SIC code. They shared information that re-
sulted ultimately in the statement of work that was used. They
then reached out to SBA — and I understand the claim has been
made that it was actually SBA that determined the ultimate SIC
code, not the contracting officer at the Coast Guard. I believe that
claim has been made.

So, I think in this particular instance, there were a number of
events that occurred over the period of time that resulted in this
contract being awarded the way it was.

Mr. Chrysler. Do you have any suggestions from your vast ex-
perience on how to prevent that in the future.

Mr. Wheeler. Mr. Chrysler, we did not make recommendations,
as you know, with this report. We endeavored to report the facts
so that, as Mrs. Clayton indicated it would, to meet the needs of
the Committee and to inform it in terms of the kinds of activities
that could occur.

One thing that I do want to note is that there was a change in
the regulations, I believe earlier this year, with respect to the
award of IDIQ contracts, which would make this more difficult to
achieve, at least under the IDIQ contracting option.

Mr. Chrysler. Thank you.

Chair Meyers. Thank you, Mr. Chrysler. Mr. Hilliard.

Mr. Hilliard. Thank you very much Madame Chairman. Mr.
Wheeler, I'm not going to ask you a question, but I would like for
you to see a copy of my report.

I believe it has been made a part of the record already, but I do
want to read something to you. It says — and the sentence I'm
reading pertains to your Agency — it says, for an Agency commis-
sioned to provide objective information to the American Govern-
ment, this is tantamount to a betrayal of basic responsibility. From
what I see, the conclusion that is in this report, 8(a) is Vulnerable
to Program and Contractor Abuse, and when I saw your testimony,
I realized that your testimony was slanted. I realized that the con-
clusion, this statement as the conclusion, was slanted. I also real-
ized that there was no use of a scientific method employed in your
study, that you just grabbed two companies that you wanted, or
someone in charge wanted, to discuss.

But let me tell you this. I don't know how long I will be in Con-
gress, but I want you to know that every time from here out I see
a report from your Agency, it will be suspect. It is a shame that
you would come and give testimony, as you have given, and as it
is written, based on insufficient data, based on very limited cir-
cumstances that are totally inadequate and that would draw a con-
clusion that to me is just outright; borderline, if not in fact, preju-
diced against the program or against whatever.

But I just want you to read my statement and you don't need to
answer anything.

[Mr. Hilliard's statement may be found in the appendix.]

Mr. Hilliard. Let me say this: we've got a long way to go in this
country trying to create diversity and to make up and correct for
years of problems that still linger from past segregation and cur-


rent and past discrimination. There are so many things that we
need to do to correct that for this country to really be a true democ-
racy. For someone in the capacity that you occupy or someone in
charge of such an Agency, to bring a report like this, or to submit
a report to someone in a Senatorial position, is a disservice.

But, regardless of the companies that were involved, regardless
of the program that's in the Agency, it is a graver disservice to
your Agency's integrity, and it will always question in my mind
your Agency and especially anything that comes through under
your charge, your integrity. Never again will anything from your
Agency be taken for face value.

I will question, and my staff will question forever, any report
that you submit. That's how strongly I feel about it, and I spent
some time writing this up because I wanted to be a part of the
record, because I would hate for someone a hundred years from
now to come and see your testimony, and to see this, and draw
anything like a conclusion without having read this. It's a shame
and it's a blow to democracy.

Chair Meyers. Thank you Mr. Hilliard. I think we have to be
very clear here. I don't think that the GAO is biased and
prejudicedor any of those things. I think they were told to do a cou-
ple of things, investigate some firms in depth and that's what they
did. Nothing illegal occurred here because this program, 8(a), ex-
empts firms from the very legalities that are mandated under the
Procurement Integrity Act and other laws. If statements of work
went back and forth between the Agency and the contractor any-
where else, it would be a violation of law. In this program, it's OK

The Coast Guard abrogated its authority and relied on the SBA
in relation to the size standard. I think this certainly indicates that
there is something wrong either with the program or in both of
those agencies.

I would recognize Mr. Bentsen.

Mr. Bentsen. Thank you Madame Chair. I apologize for having
to leave and come back. Let me, I have a few questions, let me just
start though by saying that going through some of the data here,
I think the statistics are startling when you look at the number of
minority owner businesses from 1969 to 1993 going from 380,000
to 1.5 million, but then when you compare that with the fact that
minorities comprise 20 percent of the population, yet they own less
than 9 percent of American businesses, count for less than 4 per-
cent of the gross business receipts and generate less than 3 percent
of employment.

Those are startling statistics and it clearly shows a problem that
exists, that we are not generating enough economic activity in all
sectors of the economy, and I think that is something I think we
all suffer for. I think we need to take that into context when we're
talking about the 8(a) Program and talking about all disadvan-
taged business programs and what our goal is, and where we're
trying to go. I think it's very important because I think we all ben-
efit with a broader amount of economic activity.

Mr. Wheeler, let me ask you a couple of questions about your re-
port. Let me start out by asking, you're in the investigations de-
partment I guess, or area. Have you done other reports regarding


Federal contracting, not necessarily SBA, but other types of Fed-
eral contracting?

Mr. Wheeler. Yes. Over the years, we have done a number of
investigations, and we have done reports relating to contracting ac-

Mr. Bentsen. So, that's your specialty in part or you have some
expertise in that area?

Mr. Wheeler. Within the General Accounting Office, the Office
of Special Investigations focuses on investigating very specific mat-
ters and allegations of wrong-doing.

Mr. Bentsen. OK

Mr. Wheeler. That was very consistent with what we were re-
quested to do here.

Mr. Bentsen. Let me ask a couple of questions. Is this situation
with these two companies, is this an exclusive type situation? Is
this 8(a) problem an exclusive type situation?

It seems to me a year ago I remember reading about a large cor-
poration, General Electric I think that was, and if I'm wrong I
would want the record to correct that, but it was fined for contract-
ing and isn't it true that we find this problem exists, or similar
type problems that exist throughout the Government? Is this mutu-
ally exclusive to the 8(a) Program or do we still have a major con-
tracting problem with the Federal Government as a whole?

Mr. Wheeler. I would agree with you, Mr. Bentsen, that this
kind of conduct doesn't apply just to those in the 8(a) Program and
is the kind of activity that can be found in the larger Federal con-
tracting community.

Mr. Bentsen. Just in general, whether it's competitive or sole
source or whatever?

Mr. Wheeler. Issues of competition and avoiding competition re-
quirements have come up in a number of instances, and certainly
not just in the 8(a) Program.

Mr. Bentsen. Pricing problems and capitalization problems as

Mr. Wheeler. I can't respond to that specifically here in terms
of issues of pricing. I know that, for example, in defense contracts,
cost mischarging and those kinds of activities are common kind of
activities that come up in the course of investigation of such con-

Mr. Bentsen. Across the board, not just in this one sector of de-
fense contracting, and this makes up just a small percentage of de-
fense contracting, I think.

Mr. Wheeler. I

Mr. Bentsen. 5 percent, 10 percent, I don't even think it's 10

Mr. Wheeler. Yes, I really don't know.

Mr. Bentsen. These are the two, out of the 25 top that you used
as your batch, these were the 2 that you found with problems that
were worth pursuing further in your study, is that right?

Mr. Wheeler. We found indicators in others that we looked at,
but given the reality, this kind of work is very time and resource
intensive, and given that, these were the two that we were able to
complete our work on. It was in the course of our discussions with


the Committee that it was agreed that we would limit our inves-
tigation to several companies, yes.

Mr. Bentsen. You didn't look beyond the top 25, you just used
that as your batch?

Mr. Wheeler. Yes, that's true.

Mr. Bentsen. So, do you think this is indicative beyond the top
25 or-

Mr. Wheeler. Mr. Bentsen, it's very difficult. Our findings per-
tain really to these two matters that we looked at. I'm really not
in a position to project further in terms of the universe of 8(a) par-
ticipants or even beyond that.

Mr. Bentsen. Let me ask about the report, and I've just read the
report today, but looking at it on page four where you talk about
the SBA award and eligibility data for fiscal year 1992. Fiscal year
1992 was the period of time that you used right, for your report,
for your study?

Mr. Wheeler. Yes, Mr. Bentsen. This work actually built on ear-
lier work done by GAO with respect to administration and manage-
ment of the program and one of the issues that it addressed was
the issue of concentration, that there are very large amounts of
contract dollars

Mr. Bentsen. I've read that report and I'm familiar with that,
and I think that's a concern.

So, this related to the top 25 firms that were in place in fiscal
year 1992, this is the previous administration, under the Bush ad-
ministration and a different SBA. You said as of May 1995, 18 of
these firms had exited the program, yet at least 17 are still per-
forming contracts awarded while they were in the program. Were
these contracts that were awarded going back to fiscal 1992 or sub-
sequent to fiscal '92? Were these 1 year contracts, multiyear con-

Mr. Wheeler. I can't tell you off the top of my head Mr. Bent-
sen, I do know that there were contracts that these 17 companies
had that carried through after they exited the program.

Mr. Bentsen. You also say on page 11, under SBA allowed I-
NET to remain in the 8(a) Program after it exceeded size limits,
that I-NET had grown too large for continued program participa-
tion. SBA allowed the company to remain enrolled for almost 2 ad-
ditional years. In fact, 6 days prior to I— NET'S initially being rec-
ommended for early graduation in September 1992, it was awarded
a $134 million contract. The SBA official who approved the contract
award was also responsible for initially recommending I-NET's
early graduation. Let me ask you this, and I know my time is up,
but I'd encourage the others if they could answer this. First of all
this appeared to be happening in calendar years 1991 and 1992
and in the change of administration and in the change of the lead-
ership of the SBA and the fact that you say that a number of these
firms have been graduated from the program. Are we now seeing
that some of this stuff is being cleaned up, where there's been a
problem? Do you see improvement? Granted, you had to pick a
time and place to do your study, but based upon what you say here,
it looks like some of this is being dealt with, is that correct?

Mr. Wheeler. I would have to defer to both Ms. Lee and Mr.
Jenkins with respect to the current period.


Mr. Jenkins. From the standpoint of the program office, we
have. In the past 18 months, removed over 334 companies from the
program. We are working aggressively with our Office of Inspector
General, to look at ways of addressing any potential abuse of the

Mr. Bentsen. So, it would appear that you've identified some of
these problems, that you're trying to bring some efficiencies and
correct these problems that may exist as you go forward, but still
protect the integrity of the program and the goals of the program.

Mr. Jenkins. That's correct. We have also been working with the
Department of Justice. The Justice Department is specifically look-
ing at the 8(a) Program and looking at a lot of issues that could
result in some changes to the program which would address some
of these issues, but at this point there are a number of issues out

Mr. Bentsen. I know my time is up, Madame Chair, and if I
could just ask for the record, could you provide for the record if
there is any data or case study which would show the statistical
impact between the 8(a) Program and the number of minority busi-
nesses, and if it's possible to make the assumption, what it would
be without that?

Mr. Jenkins. Yes.

Mr. Bentsen. Over a 5 or 10 year period, or since inception?

Mr. Jenkins. Yes. Certainly we've looked at that very issue over
the past few years and currently minority businesses account for
about 6.2 percent of Federal procurement. Without the 8(a) Pro-
gram, that number drops down to 3 percent.

Mr. Bentsen. Thank you. I thank you Madame Chair.

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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 5 of 20)