Minority Business: Is the Glass Half Full or Half Empty?

One of the federal government's greatest small business success stories over the past 30 years has been the growth of minority- and women-owned businesses. Yet, it's also been one of its biggest failures.

How is this possible? It's a classic case of a glass that's either half full or half empty. It all depends on how you shade the statistics. In the bizarro world inhabited by government bureaucrats, it's an easy thing to do. There is no right; there is no wrong; it just a matter of your point of view.

Nowhere was that more evident than at recent Capitol Hill hearing. The portrait of the government’s 30-plus year effort to promote the growth of minority- and women-owned businesses was both uplifting and depressing.

The Small Business Administration, which is largely charged with overseeing the effort, boasts of an impressive record in assisting these firms. The number of SBA loans to minorities has almost tripled in the past five years and risen in dollar value from $3.5 billion to more than $6.7 billion, according to testimony. The track record for women-owned firms is roughly the same. The number of loans has almost tripled and dollar value has risen to $3.4 billion from $2 billion.

Yet the sad fact remains that minorities are still woefully under-represented in business. Although they make up 32 percent of the population, they only make up 18 percent of business owners, according to the SBA's Office of Advocacy. While the number of minority owned firms has grown by 35 percent in the past five years, their average gross receipts actually fell by 16 percent. Minority firms on average had gross receipts of $162,000 compared with $448,000 for non-minority firms.

What's more, advocates like Anthony W. Robinson, president of the Minority Business Legal Defense and Education Fund, believe that racism is still firmly ingrained in the business world. As bad as the situation is, it would be much worse without government programs. But over the past several years even they have become endangered by the Bush Administration.

Ironically, back in the 1970s, President Nixon, a Republican, pioneered government efforts to encourage minority business growth. Conservative groups have urged the government to abolish the programs ever since, They managed to survive through a spirit of bipartisanship in Washington. But the current Bush administration is anything but bipartisan. It has come closest to carrying out conservative wishes through crippling cuts in SBA funding every year since it took office. While the president has been unable to kill the SBA outright, the cuts have yielded stifling bureaucratic indolence.

The federal government provides its biggest boost to small businesses through SBA administered contract set-asides. Under current law, SMBs are supposed to receive at least 23 percent of the $417 billion Uncle Sam spends each year on goods and services. As it turns out, however, government contracting has been nothing more than a high-stakes shell game during the Bush years.

Fernando V. Galaviz, chairman of the Small Business Association for Technology, a group that represents small government contractors, told lawmakers that the SBA's contracting programs, at best, were "ineffective." Over the past five years, he noted, total government contracting had increased by 60 percent, yet the number of small business contracts had decreased by 55 percent.

How is this possible? Through a process known as “contract bundling,” says Galaviz. It allows government agencies to package a lot of small contracts and award them to large companies. The big companies are supposed to assist small businesses by hiring them as subcontractors. But the government’s subcontracting regulations are easily gamed because the SBA is so lax in enforcing regulations.

In fact, the SBA's Office of Inspector General concluded in a 2005 study that the agency, during a two-year period, failed to review 87 percent of the bundled contracts to make sure they complied with regulations, even though it's required by law to do so. According to the SBA's Office of Advocacy, for every $100 awarded on a bundled contract, small business contract awards declined by $33.

The finding is unsurprising. In 2002, the Bush administration ordered the Office of Management and Budget to come up with a plan to unbundle federal contracts. The OMB, in turn, ordered the SBA to come up with a "best practices" guide to maximize small business awards. But the SBA has never bothered to publish it.

Meanwhile, lax oversight and non-existent enforcement have allowed all manner of abuses. In one case, according to testimony, a minority firm was hired as a subcontractor and then received only a fraction of the work they were supposed to get. In another case, the prime contractor leveled hefty surcharges that amounted to 40 percent of the subcontract, causing the small firm to lose money.

Congress, of course, can always consider new laws to curb abuses. In reality, though, enough laws are already on the books. The government just needs to enforce them. Unfortunately, the Bush Administration behaves like a crooked cop on this beat. It simply chooses to look the other way.