IG: Alaska native firms winning a disproportionate share of 8(a) contracts

Alaska native corporations might be crowding out other firms in the Small Business Administration's 8(a) Business Development program, according to a new report by the SBA inspector general.

The audit, released late last week in anticipation of a Senate Homeland Security and Governmental Affairs Subcommittee on Contracting Oversight hearing on Thursday, found that ANCs receive a disproportionate share of contracts awarded through the 8(a) program. The hearing will examine the contracting preferences afforded the Alaska firms and whether legislative changes are needed to level the playing field.

"The access that certain ANC participants have to their parent corporations' resources places other 8(a) firms at a disadvantage for awards," the report stated. "Consequently, non-ANC 8(a) firms may be losing 8(a) contract opportunities to large ANC companies. This appears to be inconsistent with the original intent of the 8(a) program, which is to benefit small businesses."

In fiscal 2008, contract obligations to ANCs represented 26 percent of total 8(a) dollars -- double the percentage in fiscal 2004, the report said. ANCs, however, represent just 2 percent of all 8(a) companies.

Nearly two-thirds of all ANCs in the 8(a) program won a contract obligation in fiscal 2007, compared to 44 percent of other program participants. Moreover, the IG found that 50 percent of 8(a) obligations to ANCs in fiscal 2007 went to 11 firms when more than 200 ANCs participate in the 8(a) program. And those 11 corporations received 82 percent of their obligations noncompetitively.

Between fiscal 2007 and 2009, the 11 firms had reached annual revenues in excess of $32.5 million. Seven had workforces of more than 1,500, classifying them as large companies under typical SBA size standards. But unlike other 8(a) participants, ANCs have no caps on annual revenue or the size of their sole-source contracts.

"ANC-owned firms had access to capital, lines of credit, bonding capability and administrative resources as well as the management expertise of their parent companies," the report said.

But Sheri Buretta, chairwoman of the Chugach Alaska Corporation, said the data only proves companies that started earlier in the 8(a) program are now the most successful. Other firms, she said, are moving up the ladder and seeing their contracting business begin to evolve. Chugach is one of the 11 ANCs that collectively received half of fiscal 2007 contract obligations.

ANCs also suggest that the sole-source figures can be misleading. Data provided to Government Executive by Chugach shows that the value of sole-source contracts awarded to ANCs decreased from $896 million in fiscal 2005 to $633 million in fiscal 2008.

"This is not a government handout," Buretta said. "This is an opportunity for our people to be self-sufficient."

Chugach is one of several Native American corporations and businesses that united this week to form Native8aWorks, a coalition that has taken out ads in a pair of Capitol Hill newspapers in advance of Thursday's hearing, aiming to "educate Congress" on the successes of the ANC program.

"I think [ANCs] are being singled out [by the subcommittee] and I don't think that's a good thing," Chugach President Barney Uhart said.

According to the IG report, 8(a) obligations to ANC firms have ballooned in recent years, growing from $1.1 billion in fiscal 2004 to $3.9 billion in fiscal 2008. The auditors' figures generally line up with those reported earlier this year by Government Executive.

ANCs also can have multiple affiliate businesses in the 8(a) program. The IG found that not only do ANCs typically have dozens of subsidiaries, but those smaller companies often have their own subsidiaries. The system is legal as long as the companies operate in different sectors.

But, much like a 2006 report by the Government Accountability Office, the inspector general found SBA rarely investigates if ANCs are complying with federal rules. The report also criticized the agency for failing to monitor the joint venture partnerships between ANCs and large firms.

The IG said SBA officials were "nonresponsive" to the report. Agency officials generally dismissed the findings as a repeat of the GAO report, which they considered subjective.

"Like the previous GAO report, the tone of the report is unsettling," SBA officials wrote in their response. "The ANCs are utilizing the statutes to bring resources back to improve their native Alaskan communities."

A spokeswoman said SBA had no additional comments.

ANCs argue that their contracting advantages are essential not only to their own survival but for that of the broader native population. A percentage of profits from ANCs are divided among tribal or native shareholders. Other funding is invested in the community in the form of cultural programs, job assistance and scholarships.

But shareholders are not benefitting equally from the success of ANCs. For example, of the $2.2 billion in 8(a) contract obligations awarded to ANCs in fiscal 2007, $600 million went to only four firms, accounting for less than 4 percent of the nearly 110,000 total Alaska native shareholders, the IG found. p>

Chugach's Buretta said there are "checks and balances throughout" the program and that shareholders will hold corporation leadership accountable.

The IG suggested Congress consider whether ANCs should continue to be exempt from the sole-source caps and said lawmakers could weigh other changes to the Small Business Act to give other 8(a) companies a fair chance at contracts.