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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Include owners' equity in their
companies and homes, or their
spouses' wealth, according to fed-
eral auditors.

Loopholes and flaws allowed
businesses to stay in the program
long after owners got rich, contra-
ry to the program's Intent the au-
ditors complained.

Federal auditors point to
Navcom Systems, Inc., a northern
Virginia engineering and telecom-
munications firm as an example
of a company that shouldn't be in
the program anymore. The SBA
said Navcom has received $47 mil-
lion In U.S contracts since 1987.

In a report last year, auditors
said the company's owner earned
$&3 million from two companies
over two years and had a net
worth of $11 million. While the re-
port did not name Navcom, sourc-
es said it referred to that compa-
ny. The owner's personal financial
statement listed a Mercedes-Benz,
a Corvette, a Jeep Wrangler, a van
and a boat.

Navcom's owner, Elijah Jack-
son, did not return several tele-
phone colls. His attorney. Pari
White, said her client "disagrees
vehemently" with the auditors'
estimation of his worth and sala-
ry. "We contest the finding . . .
that we are no longer socially and
economically disadvantaged." she
said.



57



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60



STATEMENT OF JAN MEYERS, CHAIR

HEARING BEFORE THE

COMMITTEE ON SMALL BUSINESS

"ABUSES IN THE SBA 8(A) PROGRAM"

U.S. HOUSE OF REPRESENTATIVES

DECEMBER 13, 1995



The Committee will come to order.

Today, the Committee on Small Business will conduct an
oversight hearing into the Small Business Administration's
Minority Enterprise Development, or 8(a) program, to which it is
commonly referred. For my colleagues on the Committee, and
those present with an interest in this program, it will come as no
surprise that I have had grave concerns about 8(a). This
Committee, for years has heard from entities like the U.S. General
Accounting Office about abuses and fraud in the 8(a) program.
These reports have been punctuated by the occasional scandal,
some of them resulting in convictions and jail time. In particular,
the "Wedtech" scandal prompted a legislative overhaul of this
program in 1988.



61

Once more, this Committee is assembled to hear the same
sad GAO and SBA Inspector General reports about how 8(a)
firms, the SBA, and contracting agencies have conspired to "game
the system." The 8(a) program began as a way of helping to
develop small businesses owned by socially and economically
disadvantaged individuals. The rationale, which I do not quarrel
with, is that someone who is socially and economically
disadvantaged will have a harder time than the average small
business owner in obtaining access to capital and credit, and in
competing with the average business in the same field owned by a
non-disadvantaged individual. However, the 8(a) program, as it is
operated today, bears almost no resemblance to its vision. It has
become "corporate welfare" in the worst sense of the term.

In reading the SBA I.G's testimony submitted for today's
hearing, its clear that 8(a) doesn't just help "socially and
economically" disadvantaged individuals get on an equal footing
with the average non-disadvantaged small business. It allows
millionaires with big companies (sometimes with as many as 1500



62

employees) to obtain sole source contracts under expedited
procedures. The SBA I.G. looked at 50 larger sized firms in the
8(a) program and found that 35 of the 50 participant owners were
millionaires, but remained classified as economically
disadvantaged. The I.G. also found that these firms were doing
far better than the average firm in similar lines of business, in
terms of business assets, revenue, gross profit, working capital,
and net worth. However, these firms continue to stay in the
program, pulling down multi-million dollar sole source contracts.

Even more galling to me is that the SBA allows these
companies to continue in the program, turning a blind eye to
regulatory violations and abuses. Then, when a situation really
gets bad and the SBA decides to get tough, it makes a referral to
the Justice Department, only to be turned down because the SBA
has acted as an accomplice, allowing the situation to occur.



63

Congressional efforts to fix the program in 1988 have failed,
and I believe for two main reasons. (1) The legislation was flawed
in some respects, creating perverse incentives for SBA employees
to encourage abuse of the program, and (2) A mindset seems to
exist at the SBA and among contracting agencies that their
mission is to find "loopholes" in the law, violating the spirit, if not
the letter of the law governing this program. The SBA has the
tools to graduate firms early from the program, when it's clear
they have gotten their "leg up" and are doing well. But they
rarely do it, and when the SBA does notify a firm of its intent to
graduate them early from the program, it takes at least a year to
get it done, and the firm loads its plate with huge sole source
contracts.

Given all of these abuses surrounding the sole source
authority in this program, I am going to take this opportunity to
call upon Administrator Lader, who unfortunately is not here
today, to place an immediate moratorium on all sole source
contracting through the 8(a) program. These abuses must be



64

stopped. He has the authority to do this under current law. I
hope he has the will to do what is right.

I realize my views on this may be harshly criticized by some
of my colleagues on this Committee. But I ask them to think for a
moment about the hundreds and perhaps thousands of socially
and economically disadvantaged firms that have gotten nothing
from this program, because of the greed of a few.

At this point, I recognize the Ranking Minority Member, Mr.
LaFalce, for an opening statement.



65



STATEMENT OF THE HONORABLE KWEISI MFUME

ON THE SMALL BUSINESS ADMINISTRATION 8(a) PROGRAM

December 13, 1995

Madame Chair, while we do not always agree on each issue that
comes before this committee, I do, as a general rule, appreciate
the hearings that you hold and the topics that you address.
Unfortunately, this hearing is not an instance in which I can
support your efforts.

The declared subject of today's hearing is "abuses in the
Small Business Administration's Section 8(a) procurement program."
While I am as opposed as any American to misuse of American funds,
I am more outraged that this committee would use a GAO report,
which has focused on a few isolated incidents, as a basis for
attempting to dismantle an entire program that has helped employ
hundreds of thousands of socially and economically disadvantaged
people.

Earlier this year we heard from the SBA that 135,000 people
were employed by 5,350 firms that participated in the 8(a) program
in 1994. Of these 5,350 firms, the GAO has found problems with
two. I believe that in a more reasonable time this committee may
have taken these facts, along with all of the positive results that
can be attributed to the 8(a) program, and looked for ways to
eliminate the problems, improve the program, and therefore increase
its overall benefits.

Yet in today's political climate, I am reading stories that
this committee is leaning towards the elimination of the 8(a)
program as well as several others that are intended to help
minorities.

If it is the agenda of this Congress to repeal programs that
help women or minorities, then I would hope that we could have an
open and straightforward debate on the merits of these programs.

I am confident that the merits of these programs will be
evident. Just two days ago the Census Bureau reported that while
the number of black-owned businesses nation-wide had grown, there
was little growth in their share of the revenues. Furthermore,
only 6% of all federal procurement currently goes to minority-owned
businesses; that number is likely to decrease as legislation such
as FASA and H.R. 1670 make it harder for small and minority-owned
businesses to compete in the federal marketplace.

I would urge you not to use a few isolated problems as an
excuse for eliminating an entire program. Just as we did not
dismantle the Pentagon when it was discovered we paid hundreds of
dollars for a hammer, neither should we eliminate the SBA 8(a)
program, simply because of a few isolated cases.



66



TESTIMONY

of

N. R. INNERBICHLER

PRESIDENT

TECHNICAL AND MANAGEMENT SERVICES CORPORATION

before

THE UNITED STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON SMALL BUSINESS

Wednesday, December 13, 1995



67



Thank you. Chairman Meyers and members of the Committee on Small Business, for the
invitation to appear before you today. Technical and Management Services Corporation
(TAMSCO) appreciates the opportunity to provide the Committee with a full and factual
record with regard to the particulars presented by the General Accounting Office (GAO)
in its September 1995 report, GAO/OSI-95-15 (GAO report), "8(a) Vulnerability to
Program and Contractor Abuse." As regards TAMSCO, the GAO report is grounded on
less than a full presentation of the facts, is fraught with misrepresentations and is
prejudicial to and exploitative of TAMSCO and its employees.

The GAO report is premised on the notion that if minority individuals and their
companies are successful under the Small Business Administration's (SBA) 8(a)
Program, illegal and improper means were used. What the GAO report and 8(a) Program
detractors refuse to acknowledge is that the success of TAMSCO (and the success of
other 8(a) firms that TAMSCO knows) is rooted in the hard work of 8(a) business owners
and their employees, in entrepreneurial spirit and fortitude and in demonstrated capability
to provide quality products and services to Government customers on time and on a cost-
effective basis. Nothing nefarious or abusive should be implied in such success: the
development and success of such minority small businesses is the core mission of the 8(a)
Program.

TAMSCO's remarks address the issues raised by GAO's report. In brief, GAO has not
been fair or accurate in its suggestion that SBA failed to properly address 8(a) program
eligibility issues as regards TAMSCO. TAMSCO scrupulously abided by all 8(a)
requirements in the application process and throughout the company's program term.
Moreover, with regard to the sole source contract awarded to TAMSCO by the Coast
Guard, GAO's report misleads the Committee by failing even to mention that, almost two
and a half years ago, the Coast Guard extensively reviewed the charges described in
GAO's report and found those charges without any merit. As GAO well should have
known, the facts do not even remotely support or justify concern that rules concerning
competition were violated in award of the contract to TAMSCO.



I. INTRODUCTION TO TAMSCO AND BACKGROUND



As background, I was bom in New Mexico of parents of Hispanic origin. I formed
TAMSCO with William Bilawa, my colleague and friend of long standing, in late 1982. I
had, by that time, approximately 20 years of experience in the defense aerospace industry,
working my way from entry level positions to mid-management. My professional
background included experience in quality assurance engineering, manufacturing
management, production control, engineering and configuration and data management. I
knew that my lack of college degree and ethnic background would limit my professional
advancement within the defense aerospace establishment beyond middle management.



68



My career path overlapped with Bill Bilawa's at times and diverged from his at other times.
At Lockheed Corporation, our employer immediately prior to starting TAMSCO, Bill
Bilawa and I both held the position of Senior Quality Assurance Engineer, albeit in different
business units of that company. When I formed TAMSCO, I anticipated applying for
admission in the 8(a) Program in the event that we were able to establish the business as a
viable entity. Accordingly, from the outset, TAMSCO paid careful attention to SBA rules
and regulations. In fact, the company was expressly structured to ensure that, although Bill
Bilawa would participate in ownership and management, at all times I owned 5 1 percent of
the outstanding stock and remained in complete control of the company.

My fond hope, in forming and guiding TAMSCO's growth, was that, with enough effort,
TAMSCO could provide Government customers with services and products in complex
information management and systems integration contracts that equal or better those of
large well-known companies. That is where we set our sights and that is what we are proud
to have achieved. I also knew that it was possible to establish and operate a company where
the inequities and unfairness that I experienced first-hand would not occur.

What have we achieved at TAMSCO? TAMSCO is a company positioned in and making
a contribution to the mainstream of the American economy. We currently employ 557
individuals, of which 48% are minorities, in all aspects of systems integration from
manufacturing to complex software development. TAMSCO's employees contribute
substantially to Federal and state tax bases through income and benefit withholding taxes
($6,867,466) on a salary base in excess of $21,000,000 annually. TAMSCO's contracts
with subcontractors and vendors are approximately $12,000,000 annually. Prior to and
since our graduation from the 8(a) Program in September 1993, TAMSCO has remained
an active participant and major financial contributor in minority business coalitions in the
advocacy for minority business rights and equality. Our contributions back to the
minority business community also include active mentoring of 8(a) start-up firms through
developmental assistance and subcontracts, support of minority universities and through
TAMSCO's scholarship program.



II. GAO REPORT INACCURACIES

The GAO report is seriously inaccurate in its facts and irresponsible in its suggestion that
TAMSCO abused 8(a) Program rules or regulations. Accordingly, we take this opportunity
to provide the Committee with accurate information.

A. The GAO report states that TAMSCO's program participation ran from May 14,
1984, until September 18, 1993. In fact, TAMSCO's program participation term began
on September 18, 1984, the date of award of TAMSCO's first 8(a) contract. The
commencement of TAMSCO's participation term was in compliance and accordance
with SBA's then existing regulations that commenced the program participation term



69



with the date of award of the participant's first 8(a) contract, not from date of acceptance
into the 8(a) Program.

B. The GAO report indicates that, during review of TAMSCO for entry into the 8(a)
Program, the SBA raised issues of negative control by TAMSCO's nondisadvantaged
owner due to (1) the Board of Directors' structure, (2) the owners' prior relationship, (3)
the owners' compensation, and (4) that the firm was located in the nondisadvantaged
owner's residence. The thrust of the GAO report on the subject of TAMSCO's
ownership and control was that, in the GAO's opinion, the SBA did not provide adequate
explanation or justification for allowing TAMSCO to enter the 8(a) Program in 1984. In
addition, the GAO report implies that SBA twice recommended that the firm's
application be denied.

Insofar as TAMSCO knows, each of SBA's issues or concerns were adequately
considered and properly resolved prior to the decision to admit TAMSCO into the 8(a)
Program.

TAMSCO Board of Directors' Structure . During the 8(a) application process. I reviewed
with as many SBA personnel as would meet with TAMSCO the provisions already
established in our basic corporate documents to ensure that I remained in control of
TAMSCO. For example. I reviewed with SBA our By-law provisions (which were part of
TAMSCO's application). I believe now, as I believed then, that such provisions were fully
consistent with SBA regulations.

Our By-laws provided that "[a]t all meetings of stockholders, every stockholder entitled to
vote thereat shall have one (1) vote for each share of stock outstanding in his name on the
books of the corporation on the date for the determination of stockholders entitled to vote at
such meetings." Because I have at all times in the life of the corporation held majority
ownership of outstanding shares of stock, this provision affords me complete control of the
corporation.

Our By-laws also expressly described the powers and duties of the President, my position,
as "[t]he President shall be the chief executive officer of the Corporation and shall have
charge and control of all its business affairs and properties."

I also reviewed with SBA the additional protections established in a Special Meeting of
TAMSCO's Board of Directors held on 23 June 1983, where the following resolutions were
adopted and established:

That the President Nicholas R. Innerbichler of Technical and Management
Services Corporation is the only corporation official empowered to sign
checks in behalf of the corporation.



70



That the President Nicholas R. Innerbichler has total control of the day-to
day operation of Technical and Management Services Corporation, and has
final approval on all matters concerning the operation of the corporation.

(A copy of this resolution also was contained in TAMSCO's 8(a) application package.)

As any manager and employee of TAMSCO or as my peers in the industry can attest, I
always have maintained control of its operation and retain, in all matters, final approval
relative to operations.

Owners' Prior Relationship and Compensation . TAMSCO's owners' prior working
relationship was fully reported in its application for acceptance into the 8(a) Program.
When TAMSCO applied for admission into the 8(a) Program in July 1983, we were
scrupulously accurate in describing matters related to our relationship to SBA. We fully
disclosed that there were times in our professional relationship when I formally reported to
Bill Bilawa.

We also informed SBA that prior to commencing work for TAMSCO, Bill Bilawa earned a
higher salary at Lockheed than I did for the same job (Bilawa at $56,000/yr., InnerbichJer at
$48,000/yr.). Although this was apparently significant enough to deserve mention in
GAO's report, it is unremarkable given the societal practice of compensating individuals of
minority groups less than their Caucasian counterparts, and the fact that Bill Bilawa had
several years more experience in the industry than I. Indeed, it is practices just like
unequal pay for equal work that SBA deemed essential in 1983 and still does today as
part of the "Statement of Personal History" to substantiate claims of social and economic
disadvantage. Insofar as TAMSCO knows, SBA found our explanations adequate and
reasonable, as they should have. Frankly, we have trouble understanding why (absent a
prejudice that they ought be careful not to admit) GAO questions whether I could function
in a superior position to someone who had previously been paid a higher salary and to
whom, at one time, I reported.

Location of TAMSCO's Initial Office . The facts behind the GAO report reference to
TAMSCO being located at the Bill Bilawa's residence are unremarkable. TAMSCO had
its initial makeshift office for a few months of operation in Bill Bilawa's kitchen. This
was not because Bill Bilawa controlled the company in an improper, undisclosed manner;
the company at that time simply could not afford to lease office space at going market
rates. Upon the award of a Configuration Management contract from the Department of
the Army (SATCOM), TAMSCO leased office space on Hertzel Place in Beltsville,
Maryland, beginning on August 1, 1984, six weeks prior to the beginning of its
participation term in the 8(a) Program.

8(a) Application Approval . The GAO report suggests the SBA twice recommended that
TAMSCO's application to the 8(a) Program be denied. It further suggests that SBA



71



officials concluded that the firm should be rejected because of negative control. These
suggestions are misleading and erroneous.

Contrary to the GAO report, SBA never denied TAMSCO entry into the 8(a) Program. In
the context of the lengthy and detailed certification process that included Regional, District
and National Office review, two of the many SBA officials in the review cycle did not favor
admitting TAMSCO. We were aware of this back in February 1984 because we made
persistent inquiries of SBA about the status of our application. We were told that SBA had
concerns about the financial viability of TAMSCO and about the issue of negative control,
specifically the possibility that Bill Bilawa might be in a position to exercise control of the
company. Because of the importance of these concerns to my fledgling business, I well
remember these matters, even though more than ten years have passed.

As you might expect, when I learned of SBA's concerns, I set about to address them in a
satisfactory manner. To address the financial viability issues, I provided SBA with even
more updated information about contracts that we had competed for and won, our banking
and savings balances and I advised them of a commitment from our bank for an asset-based
line of credit. These materials were contained within and a part of TAMSCO's 8(a)
application package. I also provided briefings for several SBA National Office personnel to
ensure that the final decision makers at SBA understood the structure of our company and
all the steps taken to ensure that I would control TAMSCO. I believe that our efforts
convinced SBA National Office personnel that TAMSCO should be admitted into the
Program.

C. The GAO identified as a principal concern with regard to TAMSCO a determination
that U.S. Coast Guard officials directed a sole source contract to TAMSCO, avoiding
federal competition requirements. This criticism is based on misleading and not well
founded suggestions relating to: (1) the contract type; (2) the minimum value of the
contract; (3) the SIC Code of the contract; and. (4) that the contract was a "graduation
present" to TAMSCO. As GAO should know, the facts do not even remotely support or
justify concern that rules for competition were violated in award of the subject contract to
TAMSCO. 1



The contract in question involved Coast Guard requirements to provide the
capability for communication and interaction between the supply and the maintenance
systems established to support Coast Guard aircraft. TAMSCO is exceedingly familiar with
these systems. TAMSCO engineers designed and developed the maintenance system,
which provides for tracking and scheduling of a wide variety of maintenance information,
in late 1 986, and has since operated and improved the system for the Coast Guard from our
Beltsville, Maryland office. TAMSCO has also performed various tasks for the Coast
Guard related to development of the supply system modules.


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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 7 of 20)