Contract Management
Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls for Tailored Oversight Gao ID: GAO-06-399 April 27, 2006Alaska Native corporations (ANC) were created to settle land claims with Alaska Natives and foster economic development. In 1986, legislation passed that allowed ANCs to participate in the Small Business Administration's (SBA) 8(a) program. Since then, Congress has extended special procurement advantages to 8(a) ANC firms, such as the ability to win sole-source contracts for any dollar amount. This report identifies (1) trends in the government's 8(a) contracting with ANC firms, (2) the reasons agencies have awarded 8(a) sole-source contracts to ANC firms and the facts and circumstances behind some of these contracts, and (3) how ANCs are using the 8(a) program. GAO also evaluated SBA's oversight of 8(a) ANC firms.
While representing a small amount of total federal procurement spending,8(a) obligations to firms owned by ANCs increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year 2004, obligations to ANC firms represented 13 percent of total 8(a) dollars. Sole-source awards represented about 77 percent of 8(a) ANC obligations for the six procuring agencies that accounted for the vast majority of total ANC obligations over the 5-year period. These sole-source contracts can represent a broad range of services, as illustrated in GAO's contract file sample, which included contracts for construction in Brazil, training of security guards in Iraq, and information technology services in Washington, D.C. In general, acquisition officials at the agencies reviewed told GAO that the option of using ANC firms under the 8(a) program allows them to quickly, easily, and legally award contracts for any value. They also noted that these contracts help them meet small business goals. In reviewing selected large, sole-source 8(a) contracts awarded to ANC firms, GAO found that contracting officials had not always complied with certain requirements, such as notifying SBA of contract modifications and monitoring the percent of work that is subcontracted. ANCs use the 8(a) program to generate revenue with the goal of providing benefits to their shareholders. These benefits take many forms, including dividend payments, scholarships, internships, and support for elder shareholders. A detailed discussion of the benefits provided by the ANCs is included as appendix X of the report. Some ANCs are heavily reliant on the 8(a) program for revenues, while others approach the program as one of many revenue-generating opportunities. GAO found that some ANCs have increasingly made use of the congressionally authorized advantages afforded to them. One of the key practices is the creation of multiple 8(a) subsidiaries, sometimes in highly diversified lines of business. From fiscal year 1988 to 2005, ANC 8(a) subsidiaries increased from one subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs. SBA, which is responsible for implementing the 8(a) program, has not tailored its policies and practices to account for ANCs' unique status and growth in the 8(a) program, even though SBA officials recognize that ANCs enter into more complex business relationships than other 8(a) participants. Areas where SBA's oversight has fallen short include: determining whether more than one subsidiary of the same ANC is generating a majority of its revenue in the same primary industry, consistently determining whether awards to 8(a) ANC firms have resulted in other small businesses losing contract opportunities, and ensuring that the partnerships between 8(a) ANC firms and large firms are functioning in the way they were intended. During our review, SBA officials agreed that improvements are needed and said they are planning to revise their regulations and policies.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-399, Contract Management: Increased Use of Alaska Native Corporations' Special 8(a) Provisions Calls for Tailored Oversight
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
April 2006:
Contract Management:
Increased Use of Alaska Native Corporations' Special 8(a) Provisions
Calls for Tailored Oversight:
GAO-06-399:
GAO Highlights:
Highlights of GAO-06-399, a report to congressional requesters.
Why GAO Did This Study:
Alaska Native corporations (ANC) were created to settle land claims
with Alaska Natives and foster economic development. In 1986,
legislation passed that allowed ANCs to participate in the Small
Business Administration‘s (SBA) 8(a) program. Since then, Congress has
extended special procurement advantages to 8(a) ANC firms, such as the
ability to win sole-source contracts for any dollar amount. This report
identifies (1) trends in the government‘s 8(a) contracting with ANC
firms, (2) the reasons agencies have awarded 8(a) sole-source contracts
to ANC firms and the facts and circumstances behind some of these
contracts, and (3) how ANCs are using the 8(a) program. GAO also
evaluated SBA‘s oversight of 8(a) ANC firms.
What GAO Found:
While representing a small amount of total federal procurement
spending, 8(a) obligations to firms owned by ANCs increased from $265
million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year
2004, obligations to ANC firms represented 13 percent of total 8(a)
dollars. Sole-source awards represented about 77 percent of 8(a) ANC
obligations for the six procuring agencies that accounted for the vast
majority of total ANC obligations over the 5-year period. These sole-
source contracts can represent a broad range of services, as
illustrated in GAO‘s contract file sample, which included contracts for
construction in Brazil, training of security guards in Iraq, and
information technology services in Washington, D.C.
In general, acquisition officials at the agencies reviewed told GAO
that the option of using ANC firms under the 8(a) program allows them
to quickly, easily, and legally award contracts for any value. They
also noted that these contracts help them meet small business goals. In
reviewing selected large, sole-source 8(a) contracts awarded to ANC
firms, GAO found that contracting officials had not always complied
with certain requirements, such as notifying SBA of contract
modifications and monitoring the percent of work that is subcontracted.
ANCs use the 8(a) program to generate revenue with the goal of
providing benefits to their shareholders. These benefits take many
forms, including dividend payments, scholarships, internships, and
support for elder shareholders. A detailed discussion of the benefits
provided by the ANCs is included as appendix X of the report. Some
ANCs are heavily reliant on the 8(a) program for revenues, while others
approach the program as one of many revenue-generating opportunities.
GAO found that some ANCs have increasingly made use of the
congressionally authorized advantages afforded to them. One of the key
practices is the creation of multiple 8(a) subsidiaries, sometimes in
highly diversified lines of business. From fiscal year 1988 to 2005,
ANC 8(a) subsidiaries increased from one subsidiary owned by one ANC to
154 subsidiaries owned by 49 ANCs.
SBA, which is responsible for implementing the 8(a) program, has not
tailored its policies and practices to account for ANCs‘ unique status
and growth in the 8(a) program, even though SBA officials recognize
that ANCs enter into more complex business relationships than other
8(a) participants. Areas where SBA‘s oversight has fallen short
include: determining whether more than one subsidiary of the same ANC
is generating a majority of its revenue in the same primary industry,
consistently determining whether awards to 8(a) ANC firms have resulted
in other small businesses losing contract opportunities, and ensuring
that the partnerships between 8(a) ANC firms and large firms are
functioning in the way they were intended. During our review, SBA
officials agreed that improvements are needed and said they are
planning to revise their regulations and policies.
What GAO Recommends:
GAO recommends that SBA take actions to improve oversight of ANC 8(a)
activity and recommends that the seven procuring agencies in this
review provide guidance to contracting officers. GAO received comments
on the draft report from all 8 agencies in the review and the Native
American Contractors Association. The procuring agencies agreed with
the recommendation, except for the Department of Energy which did not
address it. SBA expressed concern with aspects of the report and, in a
subsequent e-mail, disagreed with several of our recommendations. GAO
disagrees with SBA‘s comments and believes its recommendations need to
be implemented.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-399].
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Katherine Schinasi at (202) 512-4841 or
schinasik@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Increase in 8(a) Federal Contracting with ANC Firms:
Federal Agencies Contract with ANC Firms for a Variety of Services
Worldwide:
Agency Officials View Contracting with ANC Firms as Quick and Easy, but
Rules Not Always Followed:
ANCs Use the 8(a) Program to Increase Revenue and Provide Benefits:
Improvements Needed in Oversight of ANCs in the 8(a) Program:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Small Business Administration:
Appendix III: Comments from the Department of Homeland Security:
Appendix IV: Comments from the Department of the Interior:
Appendix V: Comments from the National Aeronautics and Space
Administration:
Appendix VI: Comments from the Department of State:
Appendix VII: Comments from the Department of Energy:
Appendix VIII: Comments from the Native American Contractors
Association:
Appendix IX: Alaska Native Corporations with Subsidiaries Participating
in the 8(a) Program:
Appendix X: Benefits That Alaska Native Corporations Provide to Their
Shareholders:
Appendix XI: Example of an Alaska Native Corporation Owning
Subsidiaries That Market Their Capabilities under Overlapping NAICS
Codes:
Appendix XII: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Differences in Requirements for Other 8(a) Businesses and 8(a)
ANC Firms:
Table 2: Overview of Number of Shareholders and Net Incomes for the
Corporations We Reviewed (Fiscal Year 2004 Data):
Table 3. Location and Services for Selected 8(a) ANC Sole-Source
Contracts:
Table 4: Practices Pertaining to Owning Multiple Subsidiaries:
Table 5: ANCs with Subsidiaries Participating in the 8(a) Program(26):
Table 6: ANCs That Do Not Have Subsidiaries Participating in the 8(a)
Program(4):
Table 7: Villages Visited:
Figures:
Figure 1: ANCSA Regions and Sites We Visited:
Figure 2: 8(a) and Non-8(a) Obligations to ANC Firms Governmentwide for
Fiscal Years 2000 to 2004 (in Millions):
Figure 3: Obligations to 8(a) Firms Overall and to 8(a) ANC Firms,
Governmentwide, for Fiscal Years 2000 to 2004 (in Millions):
Figure 4: Sole-Source Obligations to 8(a) ANC Firms for Fiscal Years
2000 to 2004 for Selected Agencies (in Millions):
Figure 5: Revenue Sources for a Sample ANC:
Figure 6: Number of ANC Parent Corporations and Subsidiaries Active in
8(a) Program, 1988 to 2005:
Figure 7: Sample ANC with Holding Company:
Abbreviations:
ANC: Alaska Native corporations:
ANCSA: Alaska Native Claims Settlement Act:
CIFA: Counter Intelligence Field Activity:
DOD: Department of Defense:
DUNS: Data Universal Numbering System:
FPDS: Federal Procurement Data System:
MOU: memorandums of understanding:
NAICS: North American Industry Classification System:
NASA: National Aeronautics and Space Administration:
SBA: Small Business Administration:
United States Government Accountability Office:
Washington, DC 20548:
April 27, 2006:
Congressional Requesters:
In December 1971, Congress enacted the Alaska Native Claims Settlement
Act (ANCSA)[Footnote 1] to resolve long-standing aboriginal land claims
and to foster economic development for Alaska Natives. This legislation
created Alaska Native corporations (ANC), which would become the
vehicle for distributing land and monetary benefits to Alaska Natives
in lieu of a reservation system.[Footnote 2] ANSCA permitted the
conveyance of about 44 million acres of land to the ANCs, along with
cash payments of almost $1 billion in exchange for extinguishing the
aboriginal land claims in Alaska. Regional corporations were required
to be formed as profit-making entities, while village, urban, and group
corporations could decide whether to be profit or nonprofit entities.
As of December 2005, there were 13 regional corporations and 182
village, urban, and group corporations. ANCSA does not set any
requirements on how ANCs are to use the profits they generate.
In 1986, legislation passed that allowed ANC-owned businesses to
participate in the Small Business Administration's (SBA) 8(a) program-
-one of the federal government's primary means for developing small
businesses owned by socially and economically disadvantaged
individuals. This program allows the government to award contracts to
participating small businesses without competition below certain dollar
thresholds. Congress has repeatedly emphasized in legislation the
business development aspects of the 8(a) program. Each 8(a) firm,
including those owned by ANCs, must qualify as small under an industry
size standard as measured by number of employees or average revenues
from the previous 3 years, and must be majority-owned by a
disadvantaged individual or a qualified entity, such as an ANC. Firms
approved as 8(a) participants can receive business development
assistance from SBA and are eligible to receive contracts that agencies
offer to SBA for the 8(a) program. In 1998, SBA started negotiating
memorandums of understanding (MOU) that allowed federal agencies to
contract directly with 8(a) firms. The MOUs (also called partnership
agreements), delegate contract execution responsibility to the agencies
and require them to monitor certain requirements of the contract.
Since 1986, Congress has extended special procurement advantages to ANC
firms beyond those afforded to other 8(a) businesses.[Footnote 3] Table
1 shows the advantages.[Footnote 4]
Table 1: Differences in Requirements for Other 8(a) Businesses and 8(a)
ANC Firms:
Requirement: Number of firms an 8(a) participant may own;
Other 8(a) businesses: Only one in a lifetime and no more than 20
percent of another 8(a) firm;
8(a) ANC firms: No limit as long as each business is in a different
primary industry.
Requirement: Size determination for eligibility in 8(a) program;
Other 8(a) businesses: For-profit, nonprofit, domestic, and foreign
affiliates considered in size determination;
8(a) ANC firms: Other affiliated companies not considered in size
determination; however, SBA may find the existence of affiliation if,
for example, it determines that the 8(a) ANC firm or firms have a
substantial unfair competitive advantage within an industry..
Requirement: Competitive threshold;
Other 8(a) businesses: Can receive sole-source contracts for up to $5
million for manufacturing or $3 million for all other contracts.
Procurements must be competed whenever possible before being accepted
on a sole-source basis;
8(a) ANC firms: No threshold. Procurements need not be competed before
being accepted on a sole-source basis..
Requirement: Demonstration of social and economic disadvantage;
Other 8(a) businesses: Must (1) be a member of a group deemed as
socially disadvantaged or prove social disadvantage by meeting certain
standards and (2) must prove economic disadvantage;
8(a) ANC firms: Deemed in legislation as socially and economically
disadvantaged.
Requirement: Management background;
Other 8(a) businesses: President/chief executive officer must be a
disadvantaged individual;
8(a) ANC firms: President/chief executive officer need not be a
disadvantaged individual.
Requirement: Potential for success;
Other 8(a) businesses: Must be in business in primary industry
classification for at least 2 years before 8(a) application date. SBA
can waive the requirement if certain conditions are met, such as
substantial business experience, adequate capital, and past success on
contracts;
8(a) ANC firms: Must be in business in primary industry classification
for at least 2 years before 8(a) application date or demonstrate to SBA
potential for success (i.e., technical and management experience;
financial capability; past experience).
Source: GAO analysis.
Note: Other groups, such as Indian tribes, Native Hawaiian
Organizations, and Community Development Corporations, have some
advantages in the 8(a) program similar to those afforded ANCs. Further,
Congress has provided preferences to businesses owned by Indian tribes
(defined to include ANCs), under the Office of Management and Budget's
A-76 program in several prior Defense Appropriation Acts, including the
Defense Appropriations Act for fiscal year 2006. Department of Defense
Appropriations Act, 2006, Pub. L. 109-148 § 8014(b)(1)(C).
[End of table]
Recently, a number of high-dollar, sole-source 8(a) contracts awarded
to ANC firms have attracted the attention of Congress and the media.
This report identifies (1) trends in the government's 8(a) contracting
with ANCs from fiscal years 2000 to 2004; (2) the reasons agencies have
awarded 8(a) sole-source contracts to ANC firms and the facts and
circumstances behind some of these contracts; and (3) how ANCs are
using the 8(a) program. In addition, we evaluated SBA's oversight of
8(a) ANC firms, given these companies' unique procurement advantages.
To gather data on federal 8(a) contracting with ANCs, we identified
each ANC firm's Data Universal Numbering System (DUNS) number[Footnote
5] and used this information to obtain data from the Federal
Procurement Data System (FPDS) for fiscal years 2000 through 2004. We
tested the FPDS data for reliability by comparing this information with
procurement data submitted by six agencies that accounted for almost 85
percent of total 8(a) ANC obligations over the 5-year period: the
departments of Defense, Energy, the Interior, State, and Transportation
and the National Aeronautics and Space Administration (NASA). We
planned to include the Department of Homeland Security's data in our
trend analysis but did not do so for two reasons. First, because the
department became operational in March 2003, FPDS data would reflect
only part of fiscal year 2003 and beyond. Second, we found that the
data from Homeland Security were inconsistent, and therefore questioned
the reliability of the data overall.
We analyzed documents provided by SBA's headquarters and Alaska
district office and interviewed officials from those offices. We
reviewed 16 large, sole-source 8(a) contracts awarded to ANC firms by
the six agencies cited above as well as by the Department of Homeland
Security and interviewed appropriate contracting officials. We traveled
to Alaska and met with executives representing 30 ANCs, including each
of the 13 regional ANCs and 17 village or urban corporations. Of the 30
corporations, 26 were participating in the 8(a) program and 4 were not
at the time of our review. We also spoke with Alaska Native
shareholders and reviewed the companies' annual reports and other
relevant documentation. Figure 1 depicts the sites we visited in
Alaska.
Figure 1: ANCSA Regions and Sites We Visited:
[See PDF for image]
Source: GAO analysis of Census Bureau information.
Note: Stars identify villages and urban areas where we conducted our
work. See appendix I for the names of the villages and corporations.
[End of figure]
We also spoke with representatives from small businesses, an 8(a)
association, and the Native American Contractors Association. Our work
included a detailed review of the laws, regulations, and legislative
history that afforded ANCs their special 8(a) provisions. Appendix I
contains more details on our scope and methodology. We conducted our
review from April 2005 to March 2006 in accordance with generally
accepted government auditing standards.
Results in Brief:
While representing a small amount of total federal procurement
spending, dollars obligated to ANC firms through the 8(a) program grew
from $265 million in fiscal year 2000 to $1.1 billion in 2004, with a
noticeable increase in 2003. Overall during the 5-year period, the
government obligated $4.6 billion to ANC firms, of which $2.9 billion,
or 63 percent, went through the 8(a) program. About 13 percent of total
8(a) dollars were obligated to ANC firms in fiscal year 2004. For the
six agencies included in our trend analysis, sole-source 8(a)
obligations to ANC firms rose from about $180 million in fiscal year
2000 to $876 million in fiscal year 2004, representing about 77 percent
of these agencies' total obligations to 8(a) ANC firms over the 5-year
period. As illustrated in our contract file sample, these sole-source
contracts can represent a broad range of services, such as contracts
for construction in Brazil, training of security guards in Iraq, and
information technology services in Washington, D.C.
Agency officials told us they have turned to 8(a) ANC firms as a quick,
easy, and legal method of awarding contracts for any value. At the same
time, the officials noted that these contracts help them meet small
business goals. In our review of selected large dollar value, sole-
source contracts, we found that contracting officials had not always
complied with requirements to notify SBA when modifying the contracts
to increase the scope or dollar value and to monitor the percentage of
work performed by the ANC firms versus their subcontractors. One
contracting officer was under the impression that the scope of work
could be expanded to include any additional lines of business not in
the original contract because it was a sole-source 8(a) ANC contract.
ANCs use the 8(a) program as one of many tools to generate revenue with
the goal of benefiting their shareholders. Appendix X contains detailed
information on benefits the corporations are providing. Some ANCs are
heavily reliant on the 8(a) program for revenues, while others approach
the program as one of many revenue-generating opportunities, such as
investments in stocks or real estate. ANCs are using the
congressionally authorized advantages afforded to them, such as
ownership of multiple 8(a) subsidiaries, sometimes in diversified lines
of business. From fiscal year 1988 to 2005, numbers increased from one
8(a) subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs,
with the largest growth occurring in recent years. ANCs sometimes
leverage expertise and management by sharing staff and expertise among
subsidiaries to win new contracts and create a subsidiary to win a
follow-on contract when the original subsidiary outgrows its
designation as "small." Another practice is partial ownership of
subsidiaries, which in some cases means that subsidiary executives
retain a portion of the profit they generate--up to 44 percent in one
case we found. Other ANCs have purposely limited their 8(a) involvement
to a targeted industry with the goal of becoming independently
sustainable--a strategy that, in their view, is consistent with the
business development intent of the 8(a) program. ANCs have also formed
partnerships with other ANCs or other firms to increase opportunities
to obtain federal contracts. Finally, some ANCs have created holding
companies to increase efficiency across multiple subsidiaries.
SBA has not tailored its policies and practices to account for ANCs'
unique status in the 8(a) program and their growth in federal
contracting, even though SBA officials recognize that ANC firms enter
into more complex business relationships than other 8(a) participants.
The officials agreed that improvements are needed and told us they are
planning to revise their regulations and policies. Examples where SBA's
oversight has fallen short include not;
* determining whether more than one subsidiary of the same ANC is
generating the majority of revenue under the same primary
industry;[Footnote 6]
* consistently determining whether other small businesses are losing
contracting opportunities when large, sole-source 8(a) contracts are
awarded to ANC firms;
* adhering to a legislative and regulatory requirement to ascertain
whether 8(a) ANC firms have, or are likely to obtain, a substantial
unfair competitive advantage within an industry;
* ensuring that the partnerships between ANC firms and large firms are
functioning in the way they were intended under the 8(a) program; and:
* maintaining information on ANCs' 8(a) activity.
SBA officials told us that they have faced a challenge in overseeing
the activity of the 8(a) ANC firms because ANCs' charter under ANCSA is
not always consistent with the business development intent of the 8(a)
program. They noted that the goal of ANCs--economic development for
Alaska Natives from a community standpoint--can be in conflict with the
primary purpose of the 8(a) program, which is business development for
individual small, disadvantaged businesses.
We make recommendations in this report to SBA on actions that can be
taken in revising its regulations and policies as well as ways to
improve practices pertaining to its oversight of ANC 8(a) procurements.
We also recommend that the procuring agencies involved in our review
work with SBA to develop guidance for their contracting officers on how
to comply with the requirements of the 8(a) program to help address
some problems we found with the 8(a) sole-source contracts we reviewed.
Six of the procuring agencies involved in our review agreed with the
recommendation we made to them. The Department of Energy did not
comment on the recommendation. In some cases, the agencies provided
technical comments or clarifications, which we incorporated as
appropriate. We also received written comments from the Native American
Contractors Association. The association believes that we should more
fully acknowledge the legal and policy basis of 8(a) program rules for
native entities and that we should provide a broader perspective on
issues that impact the entire federal procurement system. We believe we
have adequately addressed the legal and policy basis for the ANCs' 8(a)
provisions. While we have reported in the past on the broader issues
raised by the association,[Footnote 7] these matters were outside the
scope of this particular audit. In separate technical comments, the
association suggested we add, for context, total federal government
spending. We have added this information as a note to figure 3.
In written comments on a draft of this report, SBA took issue with
several aspects of the report, stating that the concerns we raised were
"subjective" and based on isolated individual anecdotes. We strongly
disagree with SBA's characterization of our report. Our findings are
supported by the facts we gathered during our audit and the analyses we
conducted, and these findings directly support the recommendations we
make. It is an undisputed fact that 8(a) ANC activity has increased in
recent years. Clearly, 6 of the 7 procuring agencies involved in our
review--which account for most of the government's 8(a) dollars to ANC
firms--agree that they need to partner with SBA to ensure that
contracting officers understand the tailored provisions Congress has
provided these firms. SBA stated that it has taken a number of steps to
improve oversight of the 8(a) program, including taking into
consideration special provisions afforded to ANC concerns. Despite our
requests throughout our review for specific information on actions SBA
was taking, the agency did not provide us with any evidence that would
support its statement. SBA's comment letter did not indicate whether it
plans to implement our recommendations, but in a subsequent e-mail SBA
expressed disagreement with several of them. A detailed discussion of
the comments begins in the "Agency Comments" section of this report.
The written comments we received are included in their entirety in
appendixes II through VIII.
Background:
ANSCA created 12 regional ANCs, each representing a region of Alaska,
and a 13th corporation for Alaska Natives living outside Alaska. There
are also 182 village, urban, and group corporations located within the
12 regions.[Footnote 8] In most cases, the regional corporations
received a mixture of surface and subsurface rights to land while the
village, urban, or group corporations received only surface rights.
Some village corporations opted out of the ANCSA settlement to receive
surface and subsurface rights to their former reservation lands and
relinquished all ANSCA benefits, including claims to additional land,
monetary payments, or shares of stock in a regional corporation.
Additionally, in some cases, village corporations merged with each
other or with the regional corporation.
The legislative history of ANSCA is focused on economic development for
the benefit of Alaska Natives. Each eligible Alaska Native is generally
entitled to membership both in the corporation established for his or
her village and in the regional corporation in which the village is
located. As shareholders, Alaska Natives are entitled to a voice in the
management of and a share in the lands, assets, and income as decided
by the board of directors of the corporations, which own and manage the
land and money. ANCSA implemented restrictions that generally allow
original shareholders to transfer shares only under certain
circumstances, such as divorce or through a gift or a will.[Footnote 9]
Additionally, four of the 30 corporations we reviewed have chosen to
issue new stock to descendants of the original shareholders or those
who did not have the opportunity to enroll as a shareholder originally.
ANCs vary widely in number of shareholders and profitability. Table 2
illustrates some examples.
Table 2: Overview of Number of Shareholders and Net Incomes for the
Corporations We Reviewed (Fiscal Year 2004 Data):
Regional corporations;
Most shareholders: 17,242;
Fewest shareholders: 1,137;
ANCs with net income over $10 million: 4;
ANCs with net loss: 3.
Village and urban corporations;
Most shareholders: 3,238;
Fewest shareholders: 137;
ANCs with net income over $10 million: 2;
ANCs with net loss: 5.
Source: GAO analysis of data provided by ANCs.
[End of table]
For ANC firms in the 8(a) program, SBA has specific oversight
responsibility for:
* accepting the firm into the 8(a) program, which includes ensuring
that the ANC does not have more than one 8(a) firm in the same primary
line of business, defined by a North American Industry Classification
System (NAICS) code;[Footnote 10]
* verifying each firm's size status to ensure that it qualifies as
small under the NAICS code assigned to the procurement; and:
* annually reviewing 8(a) firms to track their progress in the 8(a)
program.
There is a 9-year limit to participation in the 8(a) program, and
firms--including ANC firms--are required to obtain a certain percentage
of non-8(a) revenue during the last five years to demonstrate their
progress in developing a viable business that is not reliant on the
8(a) program. SBA's district offices are responsible for tracking the
business mix of 8(a) and non-8(a) revenue on an annual basis. If a firm
does not meet its required business mix during one of the last five
years, SBA invokes a plan of remedial action for the next year, in
which the firm reports to SBA its progress toward compliance with the
required business mix. Until the required mix is demonstrated, the firm
will not be eligible for sole-source 8(a) contracts. Currently there
are over 9,400 firms in the 8(a) program.
Increase in 8(a) Federal Contracting with ANC Firms:
From fiscal year 2000 to 2004, the federal government obligated a total
of about $4.6 billion to ANC firms, of which $2.9 billion, or 63
percent, went through the 8(a) program. About 13 percent of total 8(a)
dollars were obligated to ANC firms in fiscal year 2004. Further, from
fiscal year 2000 to 2004, sole-source awards accounted for 77 percent
of ANC 8(a) contracts for the six agencies in our trend analysis. The
sole-source 8(a) contracts that we reviewed demonstrate the wide
diversity of services provided by ANC firms worldwide.
Dollars to ANC Firms Governmentwide Have Increased:
Our analysis, based on FPDS data, shows that federal dollars obligated
to ANC firms through the 8(a) program grew from $265 million in fiscal
year 2000 to $1.1 billion in 2004, with a noticeable increase in 2003.
Over the 5-year period, about 63 percent of the government's
obligations to ANC firms went through the 8(a) program. Figure 2 shows
the breakdown between 8(a) and non-8(a) dollars obligated to ANC firms.
Figure 2: 8(a) and Non-8(a) Obligations to ANC Firms Governmentwide for
Fiscal Years 2000 to 2004 (in Millions):
[See PDF for image]
Source: GAO analysis based on information from the Federal Procurement
Data System.
[End of figure]
Increasing Percentage of Total 8(a) Dollars Obligated to ANC Firms:
We also analyzed the percentage of total 8(a) dollars obligated to ANC
firms from fiscal years 2000 to 2004. Total obligations to all 8(a)
firms grew from about $5.8 billion in fiscal year 2000 to about $8.4
billion in fiscal year 2004. The percentage obligated to 8(a) ANC firms
grew from about 5 percent to about 13 percent during this time period.
Whereas obligations to 8(a) ANC firms decreased only slightly between
fiscal years 2003 and 2004, dollars obligated to other 8(a) firms
decreased by almost $2 billion during that same time frame. SBA
officials could not explain the decrease. Figure 3 depicts this trend.
Figure 3: Obligations to 8(a) Firms Overall and to 8(a) ANC Firms,
Governmentwide, for Fiscal Years 2000 to 2004 (in Millions):
[See PDF for image]
Source: GAO analysis based on information from the Federal Procurement
Data System:
Notes: Excluding dollars obligated to 8(a) ANC firms does not change
the overall trend of total 8(a) dollars (top line of graph). For
context, total federal government procurement spending in fiscal year
2004 was more than $341 billion, according to FPDS data.
[End of figure]
Sole-Source Contracts Represent Majority of 8(a) ANC Obligations for
Selected Agencies:
For the six agencies included in our 8(a) trend analysis, sole-source
obligations to ANC firms increased from about $180 million in fiscal
year 2000 to almost $876 million in fiscal year 2004. Over the five-
year period, sole-source obligations represented about 77 percent of
these agencies' total obligations to 8(a) ANC firms.
Figure 4 depicts the trend in 8(a) sole-source obligations to ANC firms
for the six agencies.
Figure 4: Sole-Source Obligations to 8(a) ANC Firms for Fiscal Years
2000 to 2004 for Selected Agencies (in Millions):
[See PDF for image]
Source: GAO analysis of data provided by the departments of Defense,
Energy, the Interior, State, Transportation, and NASA:
[End of figure]
Federal Agencies Contract with ANC Firms for a Variety of Services
Worldwide:
In recent years, ANC firms have performed a wide variety of services
for the federal government, spanning 18 broad industries, across the
United States and overseas. The services included facilities support
services; construction; professional, scientific, and technical
services; information technology services; and manufacturing. Our
review of selected large sole-source 8(a) contracts further
demonstrates the wide diversity of services provided by ANC firms, as
shown in table 3.
Table 3: Location and Services for Selected 8(a) ANC Sole-Source
Contracts:
Agency: Defense;
Location: Florida;
Contractor: Chugach Management Services, Inc;
Approximate contract value (in millions): $593;
Services: Facilities support services.
Agency: Defense;
Location: Alabama;
Contractor: Chugach Management Services, Inc;
Approximate contract value (in millions): $230;
Services: Facilities support services.
Agency: Defense;
Location: Nationwide;
Contractor: Bowhead Manufacturing Company, LLC;
Approximate contract value (in millions): $33;
Services: Distribution of water and fuel tanks to U.S. storages
sites in support of the Iraq War.
Agency: Defense;
Location: Iraq;
Contractor: ASRC Airfield & Range Services, Inc;
Approximate contract value (in millions): $50;
Services: Train and equip security guards.
Agency: Energy;
Location: Former Soviet Union and other unsecured countries;
Contractor: Ahtna Government Services Corporation;
Approximate contract value (in millions): $80;
Services: Design, construction, and installation of radiation portals
and communication equipment.
Agency: Energy;
Location: New Mexico;
Contractor: Sage Systems Technologies, LLC;
Approximate contract value (in millions): $25;
Services: Analysis and assessment of organizational effectiveness.
Agency: Homeland Security;
Location: New York;
Contractor: Ahtna Technical Services, Inc;
Approximate contract value (in millions): $20;
Services: Detention facility operations support.
Agency: Homeland Security;
Location: Florida;
Contractor: Ahtna Technical Services, Inc;
Approximate contract value (in millions): $11;
Services: Detention facility operations support.
Agency: Interior (contract awarded on behalf of Homeland Security);
Location: New York;
Contractor: Field Support Services, Inc;
Approximate contract value (in millions): $65;
Services: Facilities operation and maintenance.
Agency: Interior (contract awarded on behalf of Defense);
Location: Virginia; Contractor: TKC Communications, LLC;
Approximate contract value (in millions): $100;
Services: Leasing and management of commercial property and
construction oversight.
Agency: NASA;
Location: Virginia and Maryland;
Contractor: ASRC Aerospace Corporation;
Approximate contract value (in millions): $32;
Services: Scientific and technical information content acquisition and
management and information technology support.
Agency: NASA;
Location: Ohio;
Contractor: Akima Corporation;
Approximate contract value (in millions): $60;
Services: Technical and fabrication support services.
Agency: State;
Location: Worldwide;
Contractor: KUK/KBRS Global, a joint venture between Kuk Construction
LLC and Kellogg Brown & Root Services, Inc;
Approximate contract value (in millions): $145;
Services: Compound security upgrades at multiple facilities.
Agency: State;
Location: Sao Paolo, Brazil;
Contractor: Alutiiq Fluor Constructors, LLC, a joint venture between
Alutiiq Management Services, LLC and Fluor Federal Services;
Approximate contract value (in millions): $55;
Services: Renovation of existing office buildings.
Agency: Transportation;
Location: Washington D.C;
Contractor: Bowhead Information Technology Services, Inc;
Approximate contract value (in millions): $200;
Services: Consolidated information technology services.
Agency: Transportation;
Location: Washington D.C;
Contractor: Bowhead Support Services, a division of Bowhead
Transportation Company, Inc;
Approximate contract value (in millions): $20;
Services: Information technology support services.
Source: Agency contract files and discussions with contracting
officials.
Notes: Some of the contracts included in our review were indefinite
quantity contracts. For these, the approximate contract value reflects
the base year plus all potential option years.
The Homeland Security contracts were awarded by the former Immigration
and Naturalization Service prior to the department's creation. Homeland
Security's Immigration and Customs Enforcement organization now has
responsibility for the contracts in our sample.
[End of table]
Agency Officials View Contracting with ANC Firms as Quick and Easy, but
Rules Not Always Followed:
In general, acquisition officials at the agencies we reviewed told us
that the option of using ANC firms under the 8(a) program allows them
to quickly, easily, and legally award contracts for any value. They
also pointed out that awarding 8(a) contracts to ANC firms helps
agencies meet their small business goals. Our review of 16 large sole-
source contracts found that contracting officials had not always
complied with requirements to notify SBA when modifying contracts, such
as increasing the scope of work or the dollar value, and to monitor the
percentage of the work performed by 8(a) firms versus their
subcontractors.
Sole-Source 8(a) Contracts to ANC Firms Viewed as Expedient:
Agency officials told us that awarding sole-source contracts to 8(a)
ANC firms is an easy and expedient method of meeting time-sensitive
requirements. Some examples follow.
* An Army contracting official told us that his agency's limited
contracting staff was the primary reason his office awarded an 8(a)
sole-source contract to an ANC firm for base operations support. The
official added that this contract had been competitively awarded three
times previously to large businesses, but in 1999 his office decided it
did not have the staff to administer another full and open competition.
* Another Army official commented that she had to fill an urgent
requirement for water and fuel tanks in support of the war in Iraq.
Rather than directly award to a large manufacturer, which would require
a justification and approval process for a sole-source award, the
contract went sole source to an 8(a) ANC firm as a quicker acquisition
strategy given the time-sensitive nature of the requirement.
* An e-mail in the contract file from a NASA official remarked that a
sole-source award to an ANC firm would save much time as opposed to
having to work through a competitive process, since the office was
running short on available staff. Another NASA official stated that the
additional resources needed to run a competitive procurement would
likely negate any monetary savings that might be gained through
competition.
* Another contracting official told us that it was the "unofficial"
policy in his organization that for urgent requirements over the
competitive limits for other 8(a) firms, an ANC firm is sought out. He
described contracting with ANC firms as an "open checkbook" since sole-
source awards can be made for any dollar amount.
We found one example, however, where the process of awarding to an 8(a)
ANC firm was not particularly expedient. An ANC firm proposed a price
for a State Department construction contract that was almost twice as
much as the government's original cost estimate. The State Department
negotiated extensively for over a month, requesting four different
price proposals from the contractor. At one point, the contracting
office considered terminating the solicitation and awarding
competitively to a prequalified firm, but due to time constraints the
department decided to accept the ANC firm's final proposal, which was
still slightly over the government's estimate.
In another example from our file review, the Interior Department's
GovWorks[Footnote 11] awarded a sole-source 8(a) contract on behalf of
the Department of Defense's (DOD) Counter Intelligence Field Activity
(CIFA) to an ANC firm. The contract was primarily to consolidate and
co-locate the space available for contractor personnel, but also
included some work to oversee construction and facilities program
management. This contractor, which specialized in information
technology services, told us it had been approached by CIFA for this
project because it had successfully obtained space for another
government agency. When awarding the contract, GovWorks did not
consider any alternatives other than sole-source contracting with the
ANC firm because CIFA had requested that firm. Contractor officials
told us that the cost of the office space was incidental to a larger
project for CIFA, yet we found that over 80 percent of the contract
price was for the space. Furthermore, although SBA's Alaska district
office had accepted the contract under the 8(a) program, a subsequent
size determination found that at the time of award, the contractor did
not qualify as small under the size standard for the contract.[Footnote
12]
We also found an example where an agency could have competed the
contract had there been adequate acquisition planning, but chose to
award sole-source to an ANC firm because it was easier method. The
Immigration and Naturalization Service[Footnote 13] awarded a
facilities operation and maintenance contract for a federal detention
facility. A contracting official who reviewed the presolicitation and
pre-award packages told us that this was a recurring requirement and
the contracting officer should have known well in advance that the
existing contract was expiring. With sufficient acquisition planning
the agency could have awarded an 8(a) competitive contract, according
to this official. However, he was advised by the contracting officer
that awarding to an ANC firm was the quickest and easiest method and
avoided competition. We reviewed the contract file and did not find a
formal acquisition plan that addressed the strategy used. We reported
in 2003 that the lack of adequate advanced planning by the Immigration
and Naturalization Service for several detention center contracts
limited opportunities for competition.[Footnote 14]
ANC 8(a) Awards Help Agencies Meet Small Business Goals:
The Small Business Reauthorization Act of 1997 directed the President
to establish a goal of not less than 23 percent of the federal
government's prime contracting dollars to be awarded to small
businesses each fiscal year.[Footnote 15] As part of this goal,
Congress has directed that 5 percent of prime contract dollars be
directed to small, disadvantaged businesses. SBA is charged with
working with federal agencies to ensure that agency goals, in the
aggregate, meet or exceed these goals.[Footnote 16]
Several contracting officers told us that they had turned to 8(a) ANC
contracts as a way to help their agencies meet small business goals.
ANC firms in the 8(a) program are deemed in legislation as socially and
economically disadvantaged. Because contract awards can be categorized
by agencies to allow them to take credit in more than one small
business category, awards to 8(a) ANC firms can be applied to the
agencies' overall small business goal as well as to their small,
disadvantaged business goal. One Energy contracting official told us
that there is tremendous pressure to award contracts to small
businesses, so she turns to 8(a) ANC firms whenever possible. A NASA
official told us that his contracting office had been aggressive in
promoting socioeconomic development with small disadvantaged
businesses and had particularly wanted to award a contract to benefit
the Native American community. Although several small businesses
expressed interest in NASA's requirement for technical and fabrication
support services, rather than compete the procurement, NASA opted for a
sole-source award with an 8(a) ANC firm.
Required Notifications of Contract Modifications Not Always Done:
SBA regulation requires that, where the contract execution function is
delegated to the agencies, they must report to SBA all 8(a) contract
awards, modifications, and options. Further, the MOUs between SBA and
the agencies require the agencies to provide SBA with copies of all
8(a) contracts, including modifications, within 15 days of the date of
award. However, we found that contracting officers were not
consistently following this requirement. While some had notified SBA
when incorporating additional services into the contract or when
modifying the contract ceiling amount, others had not.
One contracting official told us that SBA has "stepped aside" when it
comes to overseeing 8(a) contracts and that it would not occur to her
to coordinate a contract modification, such as a scope change, with
SBA. We also found the following example where the contracting officer
was under the impression that the scope of work could be expanded to
include any additional lines of business not in the original contract
because it was a sole-source 8(a) ANC contract.
* The Department of Energy awarded an $8.5 million sole-source contract
to an ANC firm for administrative and general management consulting
services, but one year later broadened the scope of work to include 10
additional lines of business related to facilities management support
and engineering services. The additional work almost tripled the cost
of the contract, raising it to $25 million. None of these changes were
coordinated with SBA, despite the fact that SBA's letter to the
Department of Energy approving the procurement clearly stated that if
the statement of work was changed, SBA would have to re-determine the
appropriateness of the NAICS code and the acceptability of the offer
under the 8(a) program. The contracting official acknowledged that the
scope change should have been coordinated with SBA, but her
understanding was that because it was an ANC firm, anything could be
added to the contract regardless of the dollar amount. By adding
additional lines of business to the contract, the contracting officer
was potentially improperly expanding beyond the scope of the contract.
Moreover, by not notifying SBA, the agency had no assurance that this
ANC firm qualified as small under the contract's additional lines of
business.
We found that SBA's letters to the agencies approving 8(a) procurements
did not always reiterate the notification requirement. Of the 16
contract files we reviewed, we found only five cases where the letter
requested that all contract modifications be coordinated with SBA. Four
of these specifically requested the agency to forward a copy of any
scope changes. SBA officials could not explain why the acceptance
letters were inconsistent. SBA officials in Alaska recently revised
their approval letter template, which now requests copies of contract
modifications if additional work is being added to the original
contract or an option year is being exercised.
Contracting Officials Not Consistently Monitoring Subcontracting:
The "limitations on subcontracting" clause in the Federal Acquisition
Regulation requires that, for 8(a) service contracts with
subcontracting activity, the 8(a) firm must incur at least 50 percent
of the personnel costs with its own employees (for general construction
contracts, the firm must incur at least 15 percent of the personnel
costs).[Footnote 17] The purpose of this provision, which limits the
amount of work that can be performed by the subcontractor, is to insure
that small businesses do not pass along the benefits of their contracts
to their subcontractors.[Footnote 18] For the 16 files we reviewed, we
found almost no evidence that the agencies are effectively monitoring
compliance with this requirement, particularly where 8(a) ANC firms
have partnered with large firms. As a result, there is an increased
risk that an inappropriate degree of the work is being done by large
businesses rather than by the ANC firms.
The procuring agency and the 8(a) firm both play a role in ensuring
compliance with the limitations on subcontracting clause. The MOUs
between SBA and the procuring agencies state that the agencies are
responsible for the monitoring. SBA's regulation requires the 8(a)
firms to certify in their offers to the appropriate SBA district office
that they will meet the applicable percentage of work requirement for
each contract when subcontracting.
In general, the contracting officers we spoke with were confused about
whose responsibility it is to monitor compliance with the
subcontracting limitations. Some thought it was SBA's responsibility;
one asserted that the contractor was responsible for self-monitoring;
and others acknowledged that it was their responsibility but were not
monitoring it formally. For the contracts in our file review, SBA's
letters to agencies approving the 8(a) procurements were not consistent
in reminding contracting officers to include the limitations on
subcontracting clause in the contract. Six of the letters did not
include this language. We brought this discrepancy to the attention of
SBA officials, who stated that all approval letters should contain this
requirement as standard language. In addition, we found that two of the
awarded contracts did not contain the limitation on subcontracting
clause, as required. The responsible contracting officials told us the
clause should have been included and was omitted as a result of an
oversight.
We also found that contracting officers were unclear about how to
monitor the subcontracting requirements under indefinite quantity
contracts, under which agencies place task or delivery orders.[Footnote
19] SBA's 8(a) regulation states that for indefinite quantity service
or supply contracts, the participant must demonstrate semi-annually
whether it has performed 50 percent of personnel costs with its own
employees for the combined total of all task or delivery orders at the
end of each 6-month period. This does not mean that the 50-percent
minimum requirement applies to work performed under each individual
task order or that a contractor must meet the requirement cumulatively
for all work performed under all task orders at any given point in
time. We found contracting officers who misinterpreted the regulation
to mean that the contractor must perform the required percentage over
the life of the entire contract. As a result, one contracting officer
decided it was too difficult and thus did not monitor the
subcontracting effort.
In one example from our file review, the Energy Department awarded a
sole-source indefinite quantity contract for a construction project to
an 8(a) ANC firm primarily because this firm had a previous business
relationship with the large incumbent contractor and planned to use the
incumbent as a subcontractor for the new contract. The contracting
officer believed that the limitations on subcontracting must be
demonstrated by the end of the entire contract period. We reviewed an
invoice that showed that cumulatively for all tasks to date, the
subcontract labor costs made up 90 percent of the total labor, which
would indicate the need for attention to be paid to the 6-month task
order review requirement.[Footnote 20]
An agency contracting official told us that it is not uncommon for
large businesses to approach him wanting to know how to "partner" with
an ANC firm. Furthermore, representatives from one ANC firm told us
that an agency had awarded it a "pass-through" contract, or one where
the subcontractor performs most of the work, to take advantage of the
8(a) ANC firm's ability to obtain sole-source contracts. The agency
wanted to contract with a particular business, but could not award a
sole-source contract directly to that business. The agency awarded the
contract to the ANC firm and required it, through a directed
subcontracting plan, to subcontract with the desired business.
When asked what recourse contracting officers would take if they found
an 8(a) firm to be out of compliance with the limitations on
subcontracting, some agency officials responded that they had no plan
in place. In fact, one contracting officer commented that he would be
"laughed out of the office" if he brought up the compliance issue as a
reason for terminating the contract. Several contracting officials told
us that they review the cost proposals to assess how much work was
planned to be subcontracted out, but they do not follow up during
contract performance to ensure that the prime contractor complies with
the plan. In one case, we found that an 8(a) ANC firm's technical
proposal to the Department of Transportation for an information
technology consolidation project included an intention to subcontract
with a large firm, yet did not clearly delineate the breakout of work
between the firms. From reviewing the agency's evaluation of the
proposal, we did not find any evidence that contracting officials
questioned the relationship or the division of labor prior to contract
award. Later, however, the contracting officer modified the contract to
require the 8(a) firm to provide semi-annual subcontracting reports
that would detail the subcontracting percentage for the previous 6
months.
ANCs Use the 8(a) Program to Increase Revenue and Provide Benefits:
ANCs use the 8(a) program as one of many tools to generate revenue with
the goal of providing benefits to their shareholders. ANCs
participating in the 8(a) program have various business strategies to
maximize revenue. For example, some own multiple 8(a) subsidiaries,
either in niche markets or diversified industries. Others recruit
outside expertise to manage their 8(a) operations. Additionally, many
form partnerships--with other ANCs or other businesses--and holding
companies for increased efficiencies.
8(a) Program among Revenue Sources for ANCs to Provide Benefits:
Federal contracts awarded through the 8(a) program are one of a number
of sources of revenue, such as timber, tourism, real estate, or market
investments, for ANCs participating in the 8(a) program. Corporations
consolidate their income to fund operations at the parent level, to
invest in subsidiary operations, and to provide benefits to
shareholders. Figure 5 shows a sample ANC's revenue sources.
Figure 5: Revenue Sources for a Sample ANC:
[See PDF for image]
Source: GAO analysis.
[End of figure]
Some corporations rely on federal contracting with 8(a) subsidiaries as
a primary revenue source, while others do not. For example, of the five
corporations whose subsidiaries comprised 76 percent of the
government's 8(a) ANC dollars from fiscal years 2000 to 2004, three
depend almost exclusively on current, exited, or planned participants
in the 8(a) program for their revenues. However, for the other two
corporations, 8(a) subsidiaries are only one investment in a
diversified portfolio that includes energy services,
telecommunications, and oil-field and mining support. We also
interviewed four corporations that do not participate in the 8(a)
program, relying instead on telecommunications, real estate, tourism,
natural resources, and other investments.
The ANCs we reviewed do not track the benefits provided to their
shareholders specifically generated from 8(a) activity. Thus, an
explicit link between the revenues generated from the 8(a) program and
benefits provided to shareholders is not documented. However, ANCs do
track benefits generated from their consolidated revenue sources.
Benefits vary among corporations, but include dividend payments,
scholarships, internships, burial assistance, land gifting or leasing,
shareholder hire, cultural programs, and support of the subsistence
lifestyle. For more information on benefits, see appendix X.
We found that sizable 8(a) revenues do not guarantee a higher level of
shareholder benefits, as two of the five ANCs that account for most of
the 8(a) ANC dollars obligated from fiscal years 2000 to 2004
demonstrate.
* One corporation, which provides sizable benefits, credits the 8(a)
program with its continued existence, its return to profitability after
declaring bankruptcy, and its ability to provide monetary benefits. In
the early 1990s, the corporation was required to pay off its debts
before paying any dividends.[Footnote 21] Its board and management
attribute its return to profitability to its heavy participation in the
8(a) program. By 2004, the ANC paid out dividend amounts that were
among the highest of all regional corporations. An original shareholder
owning 100 shares, for example, received $3,500 in dividends in 2004.
The ANC also provided a number of other benefits to its shareholders,
their spouses and descendants, such as scholarships and a business
assistance program.
* In contrast, another ANC with a high level of activity in the 8(a)
program is currently unable to provide a comparable level of monetary
benefits. This corporation encountered a few years of heavy losses due
to lawsuits and management malfeasance. Since being in financial
recovery for the past 5 years, it has not been allowed to issue
dividends to shareholders.[Footnote 22] However, it provides other
benefits, such as scholarships and protection of land and subsistence
rights for its shareholders.
We also found that a high level of benefits can exist even if an ANC is
not participating in the 8(a) program at all. For example, at the time
of our review, one regional corporation received all of its revenues
from its diverse non-8(a) investments, including real estate, natural
resources, telecommunications, tourism, golf resorts, casino gaming,
construction, and oil-field services. From 2000 to 2004, this
corporation provided dividend payments that were substantially higher
than any others we reviewed and also provided a number of additional
types of benefits to its shareholders.
Key Practice Is Creation of Multiple 8(a) Subsidiaries:
To generate revenue, many ANCs own multiple businesses in the 8(a)
program, taking advantage of their special ability to do so. Many of
the subsidiaries have offices that are located outside of Alaska, which
is not prohibited by statute or regulation. As Figure 6 demonstrates,
the number of 8(a) ANC subsidiaries has increased markedly.
Figure 6: Number of ANC Parent Corporations and Subsidiaries Active in
8(a) Program, 1988 to 2005:
[See PDF for image]
Source: GAO analysis of SBA data.
[End of figure]
As of December 2005, 49 ANCs owned a total of 154 8(a) firms and 30
ANCs owned more than one 8(a) firm. See appendix IX for a listing of
these 49 ANCs. The corporation owning the most subsidiaries had a total
of 14 active or graduated 8(a) subsidiaries. The five corporations that
represented the largest volume of 8(a) ANC dollars from 2000 to 2004
owned a total of 45 active and exited 8(a) subsidiaries, or 24 percent
of the total. Regional corporations have been more active than the
village and urban corporations in forming multiple
subsidiaries.[Footnote 23]
SBA's 8(a) regulation requires that the subsidiaries of each ANC be
certified in the 8(a) program under a different primary NAICS code,
representing different lines of business. However, the 8(a) businesses
can pursue work in an unlimited number of secondary NAICS codes,
regardless of their primary line of work declared at the time they
apply to the 8(a) program. This means that an 8(a) subsidiary of an ANC
may pursue government contracts under any of its primary or secondary
NAICS codes, including those that overlap with the secondary NAICS code
of another 8(a) subsidiary owned by the same parent corporation.
ANCs use their ability to own multiple businesses in the 8(a) program,
as allowed by law, in different ways. The following table summarizes
some of the practices we identified in our interviews with ANCs and our
review of their documentation.
Table 4: Practices Pertaining to Owning Multiple Subsidiaries:
Practices ANCs are using: Own multiple subsidiaries with overlapping
NAICS codes, either as a primary or secondary line of business;
Our observations: Six of seven 8(a) subsidiaries of one corporation
marketed their ability to perform work under the same NAICS code for
facilities support services, either as the primary or secondary NAICS
code for each subsidiary. Appendix XI provides an example..
Practices ANCs are using: Leverage the expertise and management from
existing subsidiaries to aid with the development of the newer
subsidiaries;
Our observations: One corporation shared staff and management between
its older and newer 8(a) subsidiaries. Additionally, the two
subsidiaries market themselves together on one website;
Officials from one ANC told us it had an 8(a) ANC firm with only 2
employees. Nevertheless, the firm had leveraged the expertise and
management of other subsidiaries owned by the ANC to be in a position
to enter negotiations with NASA for a $30 million sole-source
contract..
Practices ANCs are using: Create a second subsidiary to win follow-on
work from a graduating subsidiary;
Our observations: One corporation created a second subsidiary in
anticipation of its first one's graduation from the 8(a) program. The
newer firm successfully obtained a sole-source follow-on contract that
the original subsidiary had performed;
In another example, an ANC subsidiary had an 8(a) contract
that was expiring, yet the subsidiary was graduating from the 8(a)
program. Based on its experience with this ANC firm, the government
agency awarded a $21 million follow-on contract to a different
subsidiary of the same ANC..
Practices ANCs are using: Some ANCs wholly own their 8(a) subsidiaries,
while others invest in partially-owned subsidiaries.[A];
Our observations: Of the 26 ANCs we reviewed that were active in the
8(a) program, 13 wholly-owned all of their 8(a) subsidiaries and 13
partially-owned at least one 8(a) subsidiary;
Some ANCs shared ownership of 8(a) subsidiaries with other ANCs. Other
corporations shared ownership with subsidiary executives. For example,
one corporation owns 56 percent of its 8(a) subsidiary, and the
subsidiary executives, who were not Alaska Natives, retain 44 percent
of profits..
Practices ANCs are using: Some ANCs own subsidiaries that specialize in
a niche market with the goal of developing an independently sustainable
business;
Our observations: Two corporations we interviewed said they
take this specialized approach, rather than creating individual
subsidiaries with multiple capabilities. Both corporations noted that
the intent of the 8(a) program is business development;
One corporation's subsidiaries specialize in aircraft maintenance and
niche manufacturing, with the intent of reducing future competition and
increasing the potential for long-term success past graduation from the
8(a) program..
Practices ANCs are using: Other ANCs diversify their subsidiaries'
capabilities to increase opportunities to win government contracts in
various industries;
Our observations: One subsidiary marketed its abilities to perform work
in construction, landscaping, manufacturing, computer and software
wholesaling, engineering, management consulting, research and
development, and administrative services;
Some corporations stated that they diversified their subsidiaries'
capabilities in response to requests from agencies to perform work that
was outside the companies' original focus..
Source: GAO analysis of ANC data.
[A] To be eligible for the special provisions for ANCs in the 8(a)
program, an ANC must be the majority owner of the business. The
minority owners receive a percentage of the profits the subsidiary
generates based on ownership arrangements.
[End of table]
According to SBA data, 36 ANC firms exited the 8(a) program from 1998
through 2005. Eleven subsidiaries exited because they completed their
9-year term in the program. The remaining 25 subsidiaries exited the
program before completing the full 9-year term. Of these, seven
graduated early from the program after exceeding SBA's size standards
for revenue or number of employees. Though no longer 8(a) participants,
these subsidiaries are obligated to continue to perform work on
previously awarded 8(a) contracts, including any priced options that
may be exercised. Another subsidiary lost its 8(a) status after failing
to file paperwork with SBA. Other subsidiaries dissolved, became
inactive, or were sold to other businesses.
ANCs Pursue Other 8(a) Business Strategies:
We found a variety of other strategies that ANCs use to generate
revenue, as discussed below.
Relying on Outside Expertise:
Although all of the ANCs that we reviewed retained a board composed
entirely of Alaska Natives, several have recruited outside executives
who are not Alaska Natives to manage the parent corporation or their
8(a) operations. Some corporations recruited these executives for their
specific experience in the 8(a) program, which they gained working on
other government contracts or in operations at other 8(a) ANC
subsidiaries. Some corporation executives stated that this managerial
expertise was a key factor to success in the 8(a) program. For example,
representatives from one corporation told us that its 8(a) subsidiary
suffered after its executive left to work at another ANC. Some of these
managers command salaries significantly higher than those of the
executives at the parent corporation. For example, in 2004, a
corporation paid one of its chief executive officers for 8(a)
operations almost $1 million --more than three times as much as the
highest-paid executive of the parent corporation.
Additionally, a few ANCs hire outside marketing firms to assist them
with securing contracts. One such firm provides services such as
locating potential contracts for its ANC client, interviewing potential
partners on the project, meeting with contracting agencies, and
following up with the contracting officer after award.
Creating Partnership Arrangements:
Another business strategy is to create partnerships with individuals or
other businesses to gain access to capital, experience, or expertise.
For example, one corporation entered into a partnership by sharing
subsidiary ownership with another ANC when it did not have the
necessary capital to create a new subsidiary. The other corporation
benefited from the partnership because it was new to the 8(a) program
and needed the other corporation's experience.
In addition to ownership arrangements, many ANCs pursue other types of
partnerships, such as joint ventures and mentor-protégé relationships,
as a business strategy to better position themselves for federal
contract opportunities through the 8(a) program.
Joint venture agreements. A "joint venture" is an agreement between an
8(a) participant and one or more businesses to work together on a
specific 8(a) contract.[Footnote 24] With SBA's approval, an 8(a)
subsidiary may enter into an unlimited number of joint venture
agreements. Of the 26 corporations we interviewed that were
participating in the 8(a) program, 22 owned subsidiaries that
participated in a total of 57 joint venture agreements. In 2001, a
joint venture between two ANCs was awarded a $2.1 billion contract by
the National Imagery and Mapping Agency.
Mentor-protégé agreements. SBA established the mentor-protégé program
to encourage relationships between 8(a) businesses and other firms that
act as mentors to provide technical, financial, and other assistance to
their protégés.[Footnote 25] An 8(a) subsidiary may be a protégé to
only one mentor at a time.[Footnote 26] Of the ANCs that we interviewed
that were participating in the 8(a) program, 19 owned a total of 24
subsidiaries participating in mentor-protégé agreements.
Forming Holding Companies:
ANCs create holding companies - non-8(a) subsidiaries that provide
shared administrative services to other subsidiaries, for a fee - which
also aid their participation in the 8(a) program. Of the 30
corporations we interviewed, 11 had formed holding companies. Two
corporations had established three separate holding companies.
Figure 7 shows a sample ANC with a holding company for subsidiaries in
and outside of the 8(a) program.
Figure 7: Sample ANC with Holding Company:
[See PDF for image]
Source: GAO analysis.
[End of figure]
SBA requests that ANCs seek approval before forming a holding company,
which must be wholly-owned by the parent ANC for the subsidiaries to be
eligible for the 8(a) program. During the course of our review, we
found one holding company that was 80-percent owned by the parent ANC
and 20-percent owned by two holding company executives. SBA's records,
however, showed the company as 100-percent owned by the parent ANC. A
representative of the holding company told us that the ownership
arrangement was changed after SBA's initial approval of the holding
company. The company did not notify SBA of the change because the
holding company is not itself a participant in the 8(a) program and it
wholly owns all of its subsidiaries, thereby maintaining compliance
with the minimum 51-percent ownership requirement. SBA points to the
statute and its regulations, which show that ANC 8(a) participants must
be majority-owned by an ANC or a wholly-owned entity of an ANC.
Therefore, subsidiaries under a partially-owned holding company are no
longer eligible to participate in the 8(a) program. Since this
situation came to light, the ANC and the holding company executives
rescinded the 20-percent ownership arrangement to maintain compliance
with SBA requirements. Further, the SBA Alaska district office revised
its template letter approving a change in ownership to clarify the
restrictions on ownership of a holding company.
ANC executives told us the benefits of holding companies included:
Greater efficiencies. The holding companies can provide accounting,
human resources, legal, marketing, or other services, allowing the ANC
to operate more efficiently. Since subsidiaries underneath the holding
company do not need to perform these functions, they may employ fewer
administrative staff and instead employ only technical staff. A lean
staff is especially important since subsidiaries can become ineligible
for the 8(a) program when they exceed a certain number of employees.
Consistent policies and procedures. Some corporations established
holding companies to facilitate consistent policies, procedures, and
corporate governance across the subsidiaries.
Easier administration. Corporation officials cited several
administrative benefits to establishing holding companies, including
the following examples:
* The holding company's smaller board allowed for faster decisions than
assembling the parent corporation's entire board.
* Only one entity--the holding company--would be audited by the Defense
Contract Audit Agency as opposed to each of the individual
subsidiaries.
* The holding company saved time on security clearances. For example,
for a contract involving classified work, the holding company
management and board of directors already had security clearances,
saving the time of performing background checks on the corporation-
level management and board of directors.
Coordination among subsidiaries. One corporation official told us that
the holding company helps prevent competition among its subsidiaries
for the same contracting opportunities.
Legal protection. Representatives from two corporations stated that the
holding company separates the parent company from most liability that a
subsidiary may incur. For example, if the subsidiary went bankrupt, the
parent corporation generally could not be held legally or financially
responsible.
Improvements Needed in Oversight of ANCs in the 8(a) Program:
SBA has not tailored its policies and practices to account for ANCs'
unique status in the 8(a) program and growth in federal contracting,
even though officials recognize that ANCs enter into more complex
business relationships than other 8(a) participants. SBA officials told
us that they have faced a challenge in overseeing the activity of the
8(a) ANC firms because ANCs' charter under ANCSA is not always
consistent with the business development intent of the 8(a) program.
The officials noted that the goal of ANCs--economic development for
Alaska Natives from a community standpoint--can be in conflict with the
primary purpose of the 8(a) program, which is business development for
individual small, disadvantaged businesses.
However, the officials agreed that improvements are needed in their
oversight and said they are considering various actions in this regard.
They told us that they are planning to revise their regulations and
policies to address ANCs' unique status in the 8(a) program. Moreover,
they are now in the process of implementing a new, automated data
collection tool to more readily collect information on 8(a) firms. It
is expected to be operational during fiscal year 2007.
SBA Oversight of ANCs in the 8(a) Program Is Not Adequate:
SBA's oversight has fallen short in that it does not;
* track the business industries in which ANC subsidiaries have 8(a)
contracts to ensure that more than one subsidiary of the same ANC is
not generating the majority of its revenue under the same primary NAICS
code;
* consistently determine whether other small businesses are losing
contracting opportunities when large, sole-source contracts are awarded
to 8(a) ANC firms;
* adhere to a legislative and regulatory requirement to ascertain
whether 8(a) ANC firms, when entering the 8(a) program or for each
contract award, have, or are likely to have, a substantial unfair
competitive advantage within an industry;
* ensure that partnerships between 8(a) ANC firms and large firms are
functioning in the way they were intended under the 8(a) program; and:
* maintain information on ANC 8(a) activity.
SBA officials from the Alaska district office reported to headquarters
in the most recent quality service review that the make-up of their
8(a) portfolio is challenging and requires more contracting knowledge
and business savvy than usual because the majority of the firms they
oversee are owned by ANCs and tribal entities. The officials commented
that these firms tend to pursue complex business relationships and tend
to be awarded large and often complex contracts. We found that the
district office officials were having difficulty managing their large
volume and the unique type of work in their 8(a) portfolio. When we
began our review, SBA headquarters officials responsible for overseeing
the 8(a) program did not seem aware of the growth in the ANC 8(a)
portfolio and had not taken steps to address the increased volume of
work in their Alaska office.
Not Tracking Secondary Lines of Business across Multiple 8(a) Firms
Owned by One ANC:
As discussed above, ANCs can create multiple 8(a) subsidiaries that can
be based across the United States. SBA's Alaska district office, which
is responsible for overseeing most 8(a) ANC contracting activity, does
not track the business industries in which the subsidiaries win 8(a)
contracts under secondary NAICS codes. Thus, SBA is not ensuring that a
firm's secondary NAICS codes do not, in effect, become the primary
business line by generating the majority of revenue. This situation
could allow an ANC to have more than one 8(a) subsidiary perform most
of its work under the same primary NAICS code, which SBA regulation
does not allow. Appendix XI shows an example of an ANC with
subsidiaries marketing their ability to perform work in a number of
different industries.
Headquarters officials told us that they do not monitor the industries
from which 8(a) participants receive revenue because they do not want
to stifle the growth of the company. However, the officials
acknowledged that they would be concerned if a subsidiary's primary
industry revenue source changed without SBA being notified. They have
not developed a plan to increase monitoring of ANCs' secondary NAICS
codes, even though many of these firms take advantage of their ability
to obtain contracts under secondary lines of business.
Not Consistently Determining Whether Other Small Businesses Are Losing
Contract Opportunities:
We found cases where SBA did not take action when incumbent small
businesses lost contract opportunities when an 8(a) ANC firm was
awarded a large sole-source contract. For example:
* The Department of Transportation awarded an information technology
contract to an 8(a) ANC firm in an effort to support transition to a
single integrated infrastructure. According to the department's
acquisition plan, the goal is to create a more mission-effective,
secure, and cost-effective computing environment that will provide
common services. Previously, this service was being provided under
separate contracts with eight small businesses. The consolidation
project will likely discontinue the work performed by these small
businesses and replace it with the single infrastructure managed by the
8(a) ANC firm. One of the incumbent small businesses protested the
award to our agency. In its submission to our bid protest office, SBA
acknowledged that it had not conducted the required adverse impact
analysis, but asserted that it had viewed the requirement as "new" and
therefore had incorrectly concluded it was not required to perform the
analysis. SBA also noted that the 8(a) regulation provides that, even
where there is a presumption of adverse impact, SBA "may"--rather than
"shall"--determine whether adverse impact exists. SBA interprets this
to mean that it has the discretion to accept a contract into the 8(a)
program even where one of the contractors meets the presumption of
adverse impact.[Footnote 27]
* The scope of an Air Force base contract with an ANC firm has been
expanded as additional base civil engineering services, previously
provided by small businesses, have been absorbed into the contract.
Since the initial contract award, the estimated contract value has
increased by $46 million to nearly $600 million. The contracting
official coordinated these changes with SBA via e-mail. Rather than
disapproving the request or evaluating the impact on other small
businesses, SBA only expressed concern that the contracting officers
were absorbing work into the contract that was well within the
capability of other 8(a) contractors, indicating that it was "troubled"
over the loss of a prime contracting opportunity for other small
businesses. The contracting officer told us that the Air Force has now
decided to stop adding services to the contract and will maintain the
other existing small business contracts.
When a procuring agency is interested in offering a requirement to a
specific participant in the 8(a) program for a sole-source contract,
the agency is required to send SBA an offering letter with information
on the description of the work, the NAICS code, anticipated dollar
value of the requirement, and the names and addresses of any small
business contractors that have performed on the requirement during the
previous 24 months, among other things. At the time that SBA accepts a
procurement for award into the 8(a) program, it is required to consider
whether individual small businesses, a group of small businesses in a
geographical area, or other business programs will be adversely
impacted.[Footnote 28] Adverse impact is determined to be present
where, among other things, a small business has been performing the
requirement outside the 8(a) program and this work represents 25
percent or more of its revenue.[Footnote 29]
In almost all cases for the 16 large sole-source contract we reviewed,
SBA's letters to the agencies approving the procurements contained
boilerplate language: "a determination has been made that acceptance of
this procurement will cause no adverse impact on another small business
concern." The language in the acceptance letters suggests that SBA
conducted a formal adverse impact study, yet this was not the case for
any of the contracts we reviewed. The letters do not clarify whether
the determination was made based on a formal adverse impact study or
whether no determination was required because the requirement was new
or previously had been performed by a large business. SBA officials
told us that the language is intended to encompass all situations where
there is no adverse impact.
SBA officials stated that it is difficult for them to ensure that other
small businesses are not negatively affected because they are relying
on the procuring agency to provide the procurement history, and, in
their view, procuring agencies are not always forthcoming. During our
review, the Alaska district office revised its standard letter to
agencies to state that the adverse impact determination was made based
on the procurement history the agency provided to SBA in its letter
offering the procurement to the 8(a) program. The letter also now
states that the determination that acceptance of the procurement will
cause no adverse impact on another small business was made on the basis
of the agency's identifying the requirement as new or not identifying
an incumbent contractor.
Failing to Determine Substantial Unfair Competitive Advantage:
The Small Business Act states the following:
In determining the size of a small business concern owned by a socially
and economically disadvantaged Indian tribe[Footnote 30] (or wholly
owned business entity of such tribe) each firm's size shall be
independently determined without regard to its affiliation with the
tribe, any entity of the tribal government, or any other business
enterprise owned by the tribe, unless the Administrator determines that
one or more such tribally owned business concerns have obtained, or are
likely to obtain, a substantial unfair competitive advantage within an
industry category.[Footnote 31]
SBA has incorporated this language into its 8(a) regulation, but is not
making the determinations that these business concerns have obtained,
or are likely to obtain, a substantial unfair competitive advantage. In
fact, the agency has no procedure in place to make these
determinations. Officials told us that the language in the statute is
confusing and that they are not sure how to implement it. They had not
taken steps to obtain clarification and make any needed revisions to
the 8(a) regulation or their standard operating procedures. SBA
officials noted that the amount of participation by ANCs in the federal
contracting market is so minimal when compared to all other businesses
that they do not expect an ANC would have a substantial unfair
competitive advantage in one industry.
Not Ensuring That Partnerships between ANCs and Large Firms Operate As
Intended:
SBA is required to approve partnerships between 8(a) and other firms,
such as mentor-protégé and joint venture arrangements, to ensure the
agreements are fair and equitable and will be of substantial benefit to
the 8(a) concern. Where SBA concludes that an 8(a) concern brings very
little to the joint venture relationship in terms of resources and
expertise other than its 8(a) status, SBA regulations state that SBA
will not approve the joint venture agreement. SBA officials told us
that they work closely with the partnership firms to ensure that the
8(a) company has control in the joint venture and will be gaining from
the relationship. Further, SBA's regulations state that SBA will not
approve a mentor-protégé relationship that it determines is merely a
vehicle to enable a non-8(a) participant to receive 8(a) contracts.
We found indications that oversight of these partnership relationships,
particularly in the context of ANCs' unique provisions and large
businesses that want to take advantage of those provisions, may not be
adequate. For example, representatives from an ANC firm told us that
its mentor firm exploited it for its 8(a) status. In pursuit of a
particular contract, the Alaska-based subsidiary invested in an office
and staff in Arkansas at the advice of its mentor. When the contract
was not won, the mentor deserted the protégé, and the subsidiary was
left to search for federal work on its own in Arkansas.
ANC firms in the 8(a) program provide information to SBA on their
partnership arrangements as part of the annual review process, and SBA
is reliant on this information to assess the partnerships' success.
Therefore, SBA may not obtain all necessary information to determine if
the partnership is working as intended, even though SBA has primary
responsibility to monitor these arrangements.[Footnote 32]
We found examples where the procuring agency had concerns about a
partnership situation, but did not report its concerns to SBA, nor did
SBA ever inquire whether the partnership was working as intended.
* A State Department program official told us that his office had good
intentions when it identified a joint venture between an 8(a) ANC firm
and a large firm for a sole-source 8(a) award of an international
construction services contract. In line with the business development
aspect of SBA's mentor protégé program, the State Department official
had envisioned that the ANC firm would gain construction experience
from the globally recognized larger partner and then compete on its own
for other construction work at the State Department. However, the
official, who was also the contracting officer representative,
expressed concern that all the actual construction work was being
subcontracted out and the joint venture was only doing construction
management, which was not the intent when the requirement was offered
to the 8(a) program. Moreover, in an e-mail to the contracting officer,
this official suggested that the contractor had some performance
problems and may have been circumventing the prices negotiated in the
contract by using subcontracts for all the work. The program official
never made these concerns known to SBA, nor did SBA ever inquire
whether the partnership was working as intended. According to State
Department officials, the contracting officer looked into the matter
and found the concerns were unfounded.
* In another example at the State Department, officials had some
concerns that the 8(a) ANC firm was a front company for the large
business in a joint venture for another construction project. In
response to the concerns, representatives from the joint venture
presented information to State officials on the role of the ANC firm,
stating that it was involved with management from top to bottom and
that the large firm would provide construction expertise where needed.
We found no evidence that State officials contacted SBA about this
issue at the time.
SBA recognizes that the mentor-protégé aspect of the 8(a) program can
be an important component of the overall business development of small
businesses. However, officials believe that joint ventures between
mentors and their protégés may be inappropriate for 8(a) sole-source
contracts above competitive thresholds set for other 8(a) firms. SBA
cites complaints that non-8(a) firms have received substantial benefits
through the performance of large sole-source 8(a) contracts as joint
venture partners with tribally-owned and 8(a) ANC firms. Further, where
the joint venture involves a large business mentor, SBA recognizes a
perception that large businesses may be unduly benefiting from the 8(a)
program.
Not Collecting Information on ANC Participation:
SBA lacks adequate data regarding the 8(a) program in general and does
not collect any information on ANCs' 8(a) activity. SBA could not
provide us with reliable data for ANC revenues in the 8(a) program,
even though all program participants are required to report this
information annually. An SBA official explained that the district
offices stopped using the database that collects this information and
therefore the agency had no recent data on 8(a) participants' revenues.
Overall, data on ANC 8(a) contracting activity were not readily
available. There is no mechanism in place for agencies to code 8(a)
awards to ANCs in FPDS, for example.
Conclusion:
The complex nature of some ANCs' 8(a) business practices, combined with
the competing ANCSA and 8(a) program goals of economic development for
Alaska Natives versus development of individual small businesses,
create the need for SBA to tailor its regulations and policies as well
as to provide greater oversight in practice. Furthermore, since
agencies can contract directly with ANC firms, they too have
responsibility to ensure that these firms are operating in the program
as intended. Without this level of oversight, there is clearly the
potential for unintended consequences or abuse.
Recommendations for Executive Action:
We recommend that the Administrator of SBA take the following five
actions when revising relevant regulations and policies:
˛ Ascertain and then clearly articulate in regulation how SBA will
comply with existing law to determine whether and when one or more ANC
firms are obtaining, or are likely to obtain, a substantial unfair
competitive advantage in an industry.
˛ In regulation, specifically address SBA's role in monitoring
ownership of ANC holding companies that manage 8(a) operations to
ensure that the companies are wholly owned by the ANC and that any
changes in ownership are reported to SBA.
˛ Collect information on ANCs' 8(a) participation as part of required
overall 8(a) monitoring, to include tracking the primary revenue
generators for 8(a) ANC firms to ensure that multiple subsidiaries
under one ANC are not generating their revenue in the same primary
industry.
˛ Revisit regulation that requires agencies to notify SBA of all
contract modifications and consider establishing thresholds for
notification, such as when new NAICS codes are added to the contract or
there is a certain percentage increase in the dollar value of the
contract.
- Once notification criteria are determined, provide guidance to the
agencies on when to notify SBA of contract modifications and scope
changes.
˛ Consistently determine whether other small businesses are losing
contracting opportunities when awarding contracts through the 8(a)
program to ANC firms.
We also recommend that the Administrator of SBA take the following five
actions to improve practices pertaining to SBA's oversight.
* Standardize approval letters for each 8(a) procurement to clearly
assign accountability for monitoring of subcontracting and for
notifying SBA of contract modifications.
* Tailor wording in approval letters to explain the basis for adverse
impact determinations.
* Clarify MOUs with procuring agencies to state that it is the agency
contracting officer's responsibility to monitor compliance with the
limitation on subcontracting clause.
* Evaluate staffing levels and training needed to effectively oversee
ANC
participation in the 8(a) program and take steps to allocate
appropriate resources to the Alaska district office.
* Provide more training to agencies on the 8(a) program, specifically
including a component on ANC 8(a) participants.
To ensure that agencies are properly overseeing ANC 8(a) contracts, we
recommend that the Secretaries of the Departments of Defense, Energy,
Homeland Security, the Interior, State, and Transportation and the
Administrator of NASA take the following action:
* Work with SBA to develop guidance to agency contracting officers on
how
to comply with requirements of the 8(a) program such as limitations on
subcontracting and notifying SBA of contract modifications,
particularly when contracting with 8(a) ANC firms.
Agency Comments and Our Evaluation:
We provided a draft of this report to the departments of Defense,
Energy, Homeland Security, Interior, State, and Transportation and to
NASA and SBA. We received written comments from SBA, Homeland Security,
the Interior, NASA, State, and Energy. We received official oral
comments from Defense and Transportation. We also received written
comments from the Native American Contractors Association. The written
comments we received are included as appendixes II through VIII.
In its written comments, SBA took issue with several aspects of the
report. Its letter did not indicate whether or not it plans to
implement the recommendations we made, but in a subsequent email the
agency expressed disagreement with several of them. SBA's comments and
our views on them follow.
* The agency referred to the concerns we raise as "subjective" and
stated that our analysis relies "far too heavily on isolated individual
anecdotes" to support findings and recommendations pertaining to 8(a)
ANC activity. We strongly disagree with this characterization. Our
findings are supported by the facts we gathered and our analysis of
regulations, policies, contract files, ANC annual reports, FPDS and
agency data, and other relevant documentation, as well as interviews
with agency contracting officers and acquisition officials, SBA
officials in headquarters and the Alaska district office, and
representatives of 30 ANCs. The findings we developed and the
shortcomings in oversight we found directly support the 10
recommendations we make to SBA. Further, it is an undisputed fact that
there has been significant growth in federal dollars awarded to 8(a)
ANC firms in recent years, as recognized by SBA in its comment letter.
Clearly, 6 of the 7 procuring agencies in our review--which account for
most of the government's 8(a) dollars to ANC firms--agree that there is
a need for them to work with SBA to develop guidance for contracting
officers in light of the unique procurement advantages Congress has
provided 8(a) ANC firms.
* SBA believes that our report should cite federal dollars to women-
owned and other small business categories and the government's
achievement of small business goals in general. That information is not
relevant to this report. Our review focused specifically on ANC
activity in the 8(a) program, as set forth in appendix I, which
outlines our scope and methodology.
* SBA states that it has recently taken a number of steps to improve
oversight of the 8(a) program, including taking into consideration
special provisions afforded to 8(a) ANC firms, Native Hawaiian
Organizations, and Indian tribes. It is unclear what steps SBA is
referring to. While we note in our report that SBA officials told us
they were planning to revise regulations and policies, we were not
provided with any evidence that this or any other planned action had
been taken, despite our requests for the information.
* SBA states that it is "conjecture" to make recommendations pertaining
to data on 8(a) ANC activity until the lack of data explaining 8(a)
participants' economic activities, including ANC firms, is resolved.
Our recommendation on data collection is intended to address this very
gap. It is directed at SBA because that agency is responsible for
managing the 8(a) program. We found that SBA lacked adequate data on
the 8(a) program in general and was not collecting any information on
ANC firms' activity specifically.
* SBA pointed out that the statutory language refers to "substantial"
unfair competitive advantage, a change we have made to the report. SBA
found our focus on this issue unreasonable, stating that all 8(a)
participants have been accorded a competitive advantage. During our
review, it was clear that SBA had in place no policy or procedure to
make unfair competitive advantage determinations. We do not understand
how SBA can ignore the fact that Congress has directed it to make these
determinations specifically for ANC firms in the 8(a) program.
* SBA refers to the tone of our report as "unsettling" and suggests
that it could lead readers to conclude that we have concerns with the
fact that agencies can count 8(a) ANC contracts toward their federal
small business goals. We express no concerns of the kind. Rather, our
concerns, as reflected in the recommendations to SBA, pertain to the
level of oversight it is exercising over 8(a) ANC activity.
* In an e-mail sent after the comment letter, SBA expressed
disagreement with several of the recommendations but did not address
the others. It stated that its annual reviews track ownership changes
and the business mix of all 8(a) participants and that its regulations
require contracting officers to report contract modifications. These
comments are not responsive to our recommendations. Our recommendations
specifically discuss monitoring ownership of ANC holding companies,
tracking primary revenue generators across 8(a) ANC subsidiaries, and
establishing thresholds for notification of 8(a) contract
modifications. SBA disagreed with the recommendation on determining
whether other small businesses are losing contracting opportunities,
stating that it already does so for all 8(a) sole-source offerings. As
illustrated by the examples in our report, this is not the case.
SBA's written comments are included as appendix II.
The Department of Homeland Security agreed with the recommendation
affecting it and indicated it would partner with SBA to ensure that the
department's contracting officers have a thorough understanding of all
contracting regulations on awarding contracts under SBA's 8(a) program.
Homeland Security requested that we reflect that the department has
only been in existence since 2003 and that FPDS data would not be
available for the 5-year period. We agreed and added this point to our
explanation of why we did not include the department in our trend
analysis. In addition, the department stated that, in providing us a
list of contracts awarded to firms with the DUNS numbers we provided,
officials did not indicate that it included all contracts awarded to
ANC firms. Homeland Security attempted to reconcile the identified
missing contracts from the list of contracts awarded to ANCs; however,
we still determined that the agency's data were inadequate to include
in our trend analysis. Homeland Security's written comments are
included as appendix III.
The Department of the Interior agreed with the recommendation affecting
it and proposed that an interagency work group be established and
headed by the SBA to develop guidance for contracting officers. The
department also provided specific comments on the contract awarded to
an ANC firm on behalf of DOD's Counter Intelligence Field Activity
(CIFA). The Interior Department said that the referenced contract was
not awarded to the ANC firm "because CIFA—had requested that firm." The
evidence we gathered from the contract file, as well as interviews with
the contracting officer and the ANC firm, support the facts as we have
stated them. CIFA, through a preauthorization letter, had arranged with
the ANC firm to provide a variety of urgently needed services and
requested that GovWorks award the contract to that firm. Interior's
written comments are included as appendix IV.
NASA agreed with the recommendation affecting it and indicated that it
will work with the SBA to develop guidance and to provide whatever
assistance SBA may need to address the recommendations directed to it.
NASA's written comments are included as appendix V.
The State Department agreed with the recommendation affecting it,
stating that it will work with the SBA to develop standardized guidance
to contracting officers on monitoring limitations on subcontracting and
SBA notification of contract modifications. The State Department noted
that the contract negotiations involving an 8(a) ANC joint venture took
place in a compressed acquisition cycle and that SBA was in direct
contact with the venturing parties at the time they were negotiating
the contract. State concludes that because of SBA's "simultaneous
interaction" with the venturing parties and with State's contracting
officer, a formal request for SBA intervention would have been
superfluous. However, our discussion focuses on the concerns about the
extent of work being performed by the 8(a) ANC firm versus that of its
joint venturing partner. These issues were raised within the State
Department several months after the contract was awarded, and SBA was
not notified at that time. The department also suggested some technical
changes, which we incorporated as appropriate. The department's written
comments are included as appendix VI.
The Department of Energy did not comment on the recommendation. It
stated that our report gives the impression that agencies rely
"significantly" on the ANC program to achieve small business goals. Our
report does not state or imply that. Rather, we note that contracting
officers have turned to 8(a) ANC firms as a way to help them meet their
goals. The department also pointed to a perceived inconsistency in the
report dealing with the "limitations on subcontracting" clause as it
pertains to construction contracts. We disagree; the section in the
report on this matter clearly establishes that the limitation for
construction contracts is different than for other services. Energy's
written response is included as appendix VII.
In official oral comments, DOD agreed with the recommendation, stating
that the development of additional guidance by the department to ensure
the effective oversight of 8(a) ANC contracts is necessary and that the
department will work closely with SBA to develop this guidance. DOD
added that, prior to commencement of these efforts, it is imperative
that SBA undertake the actions we recommended for revising its relevant
regulations and policies and improving its oversight practices
concerning 8(a) ANC contracts, as these changes will form the basis of
the new or expanded DOD-specific guidance.
In official oral comments, the Department of Transportation agreed with
the recommendation. Transportation also provided some technical
comments that we incorporated as appropriate.
We also received written comments from the Native American Contractors
Association. The association believes that we should more fully
acknowledge the legal and policy basis of 8(a) program rules for Native
Entities. We believe the report thoroughly explains the legislative
basis for 8(a) ANC firms' procurement provisions and that it sets forth
the rules for ANC firms as compared to those for other 8(a) firms. The
association also raised several broader issues that impact the entire
federal procurement system that it believes we should have included,
such as in the areas of contract bundling, acquisition workforce,
improper counting toward small business goals, and modifications to
contract scope. While these are areas that we have reported on in the
past, the focus of this audit was on 8(a) ANC contracting. Contrary to
the association's assertion, we do place certain findings--particularly
with regard to the limitations on subcontracting and notification to
SBA of contract modifications--in the context of the 8(a) program in
general. For example, our recommendations to SBA on these issues are
not limited solely to 8(a) ANC contracting activity. In technical
comments provided separately, the association suggested that, for
context, we include reference to total federal procurement spending on
goods and services. We have added this information as a note to figure
3. The association's comments are included as appendix VIII.
We are sending copies of this report to the Secretaries of Defense,
Energy, Homeland Security, the Interior, State, and Transportation; the
Administrators of SBA and NASA; the Director, Office of Management and
Budget; the Native American Contractors Association; and other
interested congressional committees. We will make copies available to
others upon request. In addition, this report will be available at no
charge on GAO's Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have questions about this report, please call me
at (202) 512-4841 or schinasik@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. See appendix XII for a list of major contributors
to this report.
Signed By:
Katherine V. Schinasi:
Managing Director:
Acquisition and Sourcing Management:
LIST OF REQUESTERS:
The Honorable Donald Manzullo:
Chairman:
The Honorable Nydia M. Velazquez:
Ranking Minority Member:
Committee on Small Business:
House of Representatives:
The Honorable Tom Davis:
Chairman:
The Honorable Henry A. Waxman:
Ranking Minority Member:
Committee on Government Reform:
House of Representatives:
The Honorable Don Young:
House of Representatives:
The Honorable Peter T. King:
Chairman:
The Honorable Bennie G. Thompson:
Ranking Minority Member:
Committee on Homeland Security:
House of Representatives:
The Honorable Olympia J. Snowe:
Chair:
The Honorable John F. Kerry:
Ranking Minority Member:
Committee on Small Business and Entrepreneurship:
U.S. Senate:
[End of section]
Appendix I: Scope and Methodology:
We conducted our work at the Small Business Administration (SBA),
including its national headquarters and district office in Anchorage,
Alaska; the Departments of Defense, Energy, Homeland Security, the
Interior; State, and Transportation, and the National Aeronautics and
Space Administration (NASA). We traveled to Alaska and met with
representatives of 30 Alaska Native corporations (ANC). We also met
with representatives of the Native American Contractors Association in
Washington, D.C. and interviewed officials from a number of small
businesses as well as representatives from an 8(a) association. We
reviewed relevant legislation, including the Alaska Native Claims
Settlement Act (ANSCA) for background on the ANC corporate structure
and the Small Business Act and other relevant legislation to understand
the pertinent procurement advantages that ANC firms receive in the 8(a)
program.
To identify overall trends in the government's contracting with ANCs,
we obtained data from the Federal Data Procurement System (FPDS) for
fiscal years 2000 through 2004. To gather data on federal 8(a)
contracting with ANCs, we identified each ANC firm's Data Universal
Numbering System (DUNS) number and used this information to obtain data
from FPDS and agencies. To assess the reliability of the procurement
data used in our 5-year trend analysis, we (1) compared FPDS and agency
data to verify the accuracy of the data; (2) reviewed related
documentation, including contract files; and (3) worked closely with
agency officials to identify and resolve any data problems. When we
found discrepancies, we brought them to the agency's attention and
worked with them to correct the discrepancies before conducting our
analyses. We determined that the data were sufficiently reliable for
the purposes of our report. We had planned to include Homeland Security
in our trend analysis, but did not do so for two reasons. First, since
FPDS only includes Homeland Security contract data for part of fiscal
year 2003 and beyond, we were unable to confirm the reliability of the
data for the purposes of our 5-year trend analysis. Second, we found
that the data from Homeland Security were inconsistent and therefore
questioned the reliability of the data overall. For example, the data
provided did not include contracts awarded by Immigration and Customs
Enforcement and contained other data errors, such as contracts recorded
with either an incorrect dollar value or as sole source when awarded
competitively.
To assess the trends in government 8(a) sole-source contracting with
ANCs from fiscal years 2000 to 2004, we reviewed data from the six
federal agencies that, according to FPDS, comprise about 85 percent of
total federal dollars obligated to ANCs via the 8(a) program. These
agencies were the departments of Defense, Energy, the Interior, State,
and Transportation and NASA, which obligated about $2.5 billion in
sole-source contracts to ANCs for fiscal years 2000 through 2004. To
understand the facts and circumstances surrounding specific contract
awards, we reviewed contract files, interviewed agency contracting
officers, and reviewed any relevant bid protests for 16 large dollar
value, sole-source 8(a) contracts at seven agencies. Whereas we
included six agencies in our 8(a) sole source trend analysis, we added
the Department of Homeland Security to our contract file review. To
identify two sole-source contracts awarded by Homeland Security, we
began reviewing the contracts with the largest dollar awards from the
data provided, but had to exclude a number of the largest contracts
from our file review due to errors in the data. We brought significant
data errors to the attention of Homeland Security officials and the
department stated that it has initiated corrective action. For the
seven agencies, we selected contracts based on high ultimate award
values and high dollars obligated to date that represented a variety of
contractors and services. We made the initial contract selections based
on the available data at that time.
To assess how ANCs use the 8(a) program, we reviewed documentation and
spoke with representatives from 30 Alaska Native corporations--all 13
regional and 17 selected village or urban corporations--and some of
their 8(a) subsidiaries. In selecting corporations to interview, we
considered diversity in geography, financial strategy and
profitability, and participation in the 8(a) program. Tables 5 and 6
show the corporations included in our review.
Table 5: ANCs with Subsidiaries Participating in the 8(a) Program (26):
Regional corporations (12):
Ahtna, Incorporated;
Arctic Slope Regional Corporation;
Bering Straits Native Corporation;
Bristol Bay Native Corporation;
Calista Corporation;
Chugach Alaska Corporation;
Doyon, Limited;
Koniag, Incorporated;
NANA Regional Corporation;
Sealaska Corporation;
The Aleut Corporation;
The 13th Regional Corporation;
Village and urban corporations(14):
Village and urban corporations: Afognak Native Corporation;
Village(s) or urban area: Afognak, Port Lions;
Region: Koniag.
Village and urban corporations: Baan o yeel kon Corporation;
Village(s) or urban area: Rampart;
Region: Doyon.
Village and urban corporations: Bethel Native Corporation;
Village(s) or urban area: Bethel;
Region: Calista.
Village and urban corporations: Chenega Corporation;
Village(s) or urban area: Chenega;
Region: Chugach.
Village and urban corporations: Choggiung, Limited;
Village(s) or urban area: Dillingham;
Region: Bristol Bay.
Village and urban corporations: Goldbelt, Incorporated;
Village(s) or urban area: Juneau;
Region: Sealaska.
Village and urban corporations: Kikiktagruk Inupiat Corporation;
Village(s) or urban area: Kotzebue;
Region: NANA.
Village and urban corporations: K'oyitl'ots'ina, Limited;
Village(s) or urban area: Allakaket, Alatna, Hughes, Huslia;
Region: Doyon.
Village and urban corporations: MTNT, Limited;
Village(s) or urban area: McGrath, Telida, Nikolai, Takotna;
Region: Doyon.
Village and urban corporations: Olgoonik Corporation;
Village(s) or urban area: Wainwright;
Region: Arctic Slope.
Village and urban corporations: Tanadgusix Corporation;
Village(s) or urban area: Saint Paul;
Region: Aleut.
Village and urban corporations: The Eyak Corporation;
Village(s) or urban area: Cordova, Eyak;
Region: Chugach.
Village and urban corporations: Tyonek Native Corporation;
Village(s) or urban area: Tyonek;
Region: Cook Inlet.
Village and urban corporations: Ukpeagvik Inupiat Corporation;
Village(s) or urban area: Barrow;
Region: Arctic Slope.
Source: Documentation provided by the ANCs.
[End of table]
Table 6: ANCs That Do Not Have Subsidiaries Participating in the 8(a)
Program (4):
Regional (1):
Cook Inlet Region, Incorporated;
Village(3):
Corporation: Huna Totem Corporation;
Village(s) or urban area: Hoonah;
Region: Sealaska.
Corporation: Kuukpik Corporation;
Village(s) or urban area: Nuisqut;
Region: Arctic Slope.
Corporation: Yak-Tat Kwaan, Incorporated;
Village(s) or urban area: Yakutat;
Region: Sealaska.
Source: Documentation provided by the ANCs.
[End of table]
Additionally, we visited seven villages with populations that had a
high percentage of Alaska Natives to understand the lifestyle and
livelihood of the Alaska Native people. We selected these villages
based on diversity in geography, population, average per capita income,
and shareholder culture and history. We also attended a shareholders'
annual meeting at one of these villages to observe communication and
relations between shareholders and corporate management. Table 7 shows
the villages we visited.
Table 7: Villages Visited:
Village: Bethel;
Associated village corporation: Bethel Native Corporation;
Corporation participating in 8(a) program?: Yes;
Region: Calista;
Estimated population (2004): 5,888;
Average per capita income: $20,267;
Percentage Alaska Native[A]: 68%.
Village: Chenega Bay;
Associated village corporation: Chenega Corporation;
Corporation participating in 8(a) program?: Yes;
Region: Chugach;
Estimated population (2004): 81;
Average per capita income: $13,381;
Percentage Alaska Native[A]: 78%.
Village: Dillingham;
Associated village corporation: Choggiung, Limited;
Corporation participating in 8(a) program?: Yes;
Region: Bristol Bay;
Estimated population (2004): 2,422;
Average per capita income: $21,537;
Percentage Alaska Native[A]: 61%.
Village: McGrath;
Associated village corporation: MTNT, Limited;
Corporation participating in 8(a) program?: Yes;
Region: Doyon;
Estimated population (2004): 367;
Average per capita income: $21,553;
Percentage Alaska Native[A]: 55%.
Village: Napaskiak;
Associated village corporation: Napaskiak, Incorporated;
Corporation participating in 8(a) program?: No;
Region: Calista;
Estimated population (2004): 436;
Average per capita income: $8,162;
Percentage Alaska Native[A]: 98%.
Village: Nikolai;
Associated village corporation: MTNT, Limited;
Corporation participating in 8(a) program?: Yes;
Region: Doyon;
Estimated population (2004): 121;
Average per capita income: $11,029;
Percentage Alaska Native[A]: 81%.
Village: Yakutat;
Associated village corporation: Yak-Tat Kwaan, Incorporated;
Corporation participating in 8(a) program?: No;
Region: Sealaska;
Estimated population (2004): 680;
Average per capita income: $22,579;
Percentage Alaska Native[A]: 47%.
Source: State of Alaska, Department of Commerce.
[A] Defined as percent of population reporting race as Alaska Native
alone or in combination with one or more races:
[End of table]
To understand the structure, shareholder population, and involvement in
the 8(a) program of each corporation, we examined annual reports and
other documentation from our selected 30 corporations and spoke with
Alaska Native shareholders. We also interviewed ANC executives on
corporate governance, strategies for participation in the 8(a) program,
and benefits provided to shareholders. Additionally, we met with
executives at selected subsidiaries participating in the 8(a) program
to understand their structure, business strategies, and relationship to
their parent corporations.
To establish whether SBA's oversight over ANCs in the 8(a) program is
adequate, we reviewed relevant regulations and operating procedures to
understand the requirements for oversight of the 8(a) program and of
ANC 8(a) activity. We interviewed SBA officials at the Alaska district
office and reviewed relevant files to understand that staff's oversight
role and workload priorities. Finally, we analyzed documents from and
spoke with SBA headquarters officials in the Washington, D.C. office to
understand their oversight of district offices and the 8(a) program and
whether the officials have assessed and addressed the impact of
increased ANC activity on the 8(a) program.
[End of section]
Appendix II: Comments from the Small Business Administration:
Ms. Katherine V. Schinasi:
Managing Director:
Acquisition and Sourcing Management:
United States Goventment Accountability Office:
Washington, DC 20548:
Dear Ms. Schinasi:
Thank you for the opportunity to comment on the draft Government
Accountability Office (GAO) report entitled, "Contract Management:
Increased Use of Alaska Native Corporations' Special 8(a) Provisions
Calls for Tailored Oversight" (GAO-06-399).
The draft report clearly shows that the Alaska Native Corporations
(ANCs) have successfully utilized the Small Business Administration's
(SBA) 8(a) Business Development program (8(a)) to improve local
economic conditions and provide increased social services to Native
Alaskans.
This outcome was precisely what Congress intended when it passed
legislation in 1986 to allow concerns owned and controlled by ANCs to
participate in the 8(a) program. As the report notes, Federal contract
dollars obligated to firms owned by ANCs grew from $265 million in FY
2000 to $1.1 billion in FY 2004.
It needs to be emphasized that there is no indication within this
report of wrongdoing by any participant in this program. The subjective
concerns raised by the authors appear to come from activities that are
allowed within the program as Congress designed it.
The report fails to cite the significant increases in Federal contract
dollars during the same period of time going to women-owned small
businesses (reaching $9.1 billion in FY 2004), service disabled veteran
small businesses (81.2 billion), HUBZone firms ($4.8 billion), and
small business in general ($69.2 billion). It also neglects to report
that the Federal Government achieved its goal during FY 2003 and FY
2004 that 23 percent of its prune contracting dollars be awarded to
small businesses.
These successes have been achieved through the SBA's continuing
oversight of Federal procurement programs. Even before the premature
release of this report, the Agency had already taken a number of steps
to improve the oversight of the 8(a) program, including taking into
consideration special provisions afforded to 8(a) concerns owned and
controlled by ANCs, Native Hawaiian Organizations, and Indian tribes.
Additionally, the Agency is revising its Partnership Agreements with
the various procuring agencies to make clear theIr roles and
responsibilities for monitoring contract compliance of and performance
by 8(a) firms. A new management team responsible for the 8(a) program
has also recently been installed.
The SBA is concerned with the comments attributed to two isolated
contracting officers in the draft report as to their perception for
awarding contracts and proper contract administration for ANC 8(a)
firms. The reliance on these individuals as being representative of the
entire program greatly skews the presentation found in this draft
report.
The Agency also has several specific concerns with the draft report:
*This analysis relies far too heavily on isolated individual anecdotes
to suggest specific findings and recommendations about ANC
participation in the 8(a) program.
*The lack of data explaining the economic activities of firms within
the 8(a) program, including ANCs, needs to be resolved before
substantive program changes can be implemented. It is conjecture at
this time to make such recommendations until the current situation is
more fully understood.
*The GAO concerns discussed in the report apply to the entire 8(a)
program, not merely the participation of an individual group conducting
activities within the program. These concerns are subjective in nature.
Moreover, nothing in this report appears to be indicative of wrongdoing
by program participants.
*The SBA has concerns with GAO's focus on the alleged inability to
articulate when ANCs have an "unfair competitive advantage" within an
industry. The statute (as shown in the report) clearly designates a
higher threshold for regulatory action -a "substantial unfair
competitive advantage."
SBA also finds this focus unreasonable, as the statute clearly creates
a non-competitive, sole-source procurement system that is used widely
by all 8(a) participants. By design, the 8(a) program yields a
competitive advantage to all participating firms over other small
businesses.
* The tone of the report is unsettling. The ANCs are utilizing the
statute to bring resources back to improve their Native Alaskan
communities. Current law gives Federal contracting officers the ability
to count these set-asides toward meeting the Federal 23 percent goal.
The tone of the report could lead one to conclude that GAO has concerns
with this result.
We look forward to working with GAO to further strengthen our
administration of the 8(a) program. Thank you for taking our views into
consideration.
Sincerely,
Singed By:
Calvin Jenkins:
Deputy Associate Deputy Administrator for Government
Contracting and Business Development:
[End of section]
Appendix III: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security:
Washington, DC 20528:
Homeland Security:
April 12, 2006:
David Cooper:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Cooper,
RE: Draft Report GAO-06-399, Contract Management Increased Use of
Alaska Native Corporations' Special 8(a) Provisions Calls for Tailored
Oversight (GAO Job Code 120437):
The Department of Homeland Security appreciates the opportunity to
comment on the Government Accountability Office's (GAO) draft report.
We agree with the recommendations contained therein. However, pursuant
to discussion between DHS representatives and GAO representatives on
April 6, 2006, DHS recommends revising the statement "Due to incomplete
data maintained by the Department of Homeland Security, we could not
include that department in our overall trend analysis". Given the fact
that the GAO's trend analysis spanned a five year period and the
Department has only been in existence since 2003, it is unclear how DHS
could have been included in GAO's five year trend analysis for this
study. We respectfully suggest the following language be included in
lieu of the language contained on page 3 of the draft report, "We
planned to include the Department of Homeland Security's data in our
trend analysis; however, since DHS has only been in existence since
2003 DHS' Federal Procurement Data System data only includes contract
information from 2003 and beyond and could not be included in our five
year trend analysis."
In response to the statement "Further, we found that the data from
Homeland Security was inconsistent, and therefore questioned the
reliability of the data overall" which was included under Appendix I,
Scope and Methodology, page 41, GAO is reminded that in order to
provide a listing of DHS contracts awarded to ANCs, DHS conducted a
search based on the Data Universal Numbering System (DUNS) numbers
provided by GAO. This listing was limited to contracts awarded to firms
who possessed the DUNS numbers provided by GAO and had dollars
obligated. Our original response was based on GAO's requested DUNS
numbers. We did not indicate that the list we provided was an all
inclusive listing of DHS contracts awarded to ANC's. This was
previously noted in discussions with GAO.
As far as the statement indicating the DHS information "contained other
data errors, such as contracts recorded with either an incorrect dollar
value or as sole source when it was awarded competitively", which was
also included under Appendix 1, Scope and Methodology, page 41, we
thank the GAO for providing specific information on the six (6)
contracts which contained inaccurate system information. DHS has
initiated corrective action by contacting the responsible Procurement
Offices to instruct them to have the responsible Contracting Officer
correct each identified inaccuracy.
Although DHS currently has severe procurement staffing shortages
(reference GAO report 05-179), we realize the importance of maintaining
complete and accurate system data and will continue to emphasize this
importance to the DHS components responsible for this data.
We believe the GAO's recommendations are useful in recommending that
Small Business Administration (SBA) take a variety of actions,
including revisions to regulations, policies, and practices, to improve
oversight of ANC 8(a) activity and that procuring agencies provide
guidance to contracting officers. DHS recognizes the need of improved
oversight and better guidance and will partner with SBA to ensure DHS
contracting officers have a thorough understanding of all DHS
contracting regulations relative to awarding contracts under SBA's 8(a)
program.
Sincerely,
Signed By:
Steven J. Pecinovsky:
Director:
Departmental GAO/OIG Liaison Office:
[End of section]
Appendix IV: Comments from the Department of the Interior:
United States Department Of The Interior:
Office Of The Assistant Secretary:
Policy, Management And Budget:
Washington, Dc 20240:
Ms. Michele Mackin:
Assistant Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. Mackin:
"Thank you for providing us with the opportunity to review and comment
on the draft report entitled, "Contract Management: Increased Use of
Alaska Native Corporations' (ANC) Special 8(a) Provisions Calls for
More Oversight (GAO-06-399)."
The draft report provides comprehensive information on the unique and
rapidly growing field of ANC 8(a) contracting and ANC's in general. We
concur with the recommendation made to the Department of the Interior
and six other agencies to work with the U.S. Small Business
Administration (SBA) to "develop guidance to agency contracting
officers on how to comply with requirements of the 8(a) program such as
limitations on subcontracting and notifying SBA of contract
modifications, particularly when contracting with 8(a) ANC firms." To
address the recommendation, we propose that an inter-agency work group
be established and headed by the SBA to develop this important and much
needed guidance for our contracting and Small and Disadvantaged
Business Utilization and Development communities.
In addition, the following comments are provided to clarify the general
nature of, and special circumstances surrounding, the contract for
management support functions and the provision of contractor
collocation space referred to on pages 13, 15, and 16 of the draft
report:
The referenced contract was not awarded to the ANC firm "because CIFA
[the DoD Counterintelligence Field Office] had requested that firm."
The contract was awarded on the basis of representations made by the
Director of CIFA regarding the urgency of the requirement coupled with
the responsiveness of the proposal submitted by the ANC firm. The May
28, 2003 letter conveying those representations invoked the authority
of section 856 of the Homeland Security Act (Pub. L. 107-296) to
exercise streamlined procedures as set forth in 10 U.S.C. § 2304(c)(1),
(2), (6), and (7), which may be other than fully competitive.
The letter from the Director of CIFA also included a specific
representation that coordination had been effected with the Deputy
Director of the General Services Administration (GSA) Metropolitan
Service Center for the National Capital Region, and that GSA
regulations would not govern this contract. The letter also
included the concurrence of the Chief Counsel, U.S. Department of
Justice Foreign Terrorist Tracking Task Force.
Although the ANC firm did have experience in information technology,
they also were certified by the SBA for construction and facilities
management services. The ANC had previously preformed this same type of
support through contracts for other executive agencies. The contracting
officer considered the firm's past performance before pursuing a
contract of the same scope in behalf of CIFA. A full legal review from
the Department of the Interior's Office of the Solicitor was obtained
prior to contract award.
If you or your staff has any questions regarding our comments, please
contact Debra Sonderman, Director, Office of Acquisition and Property
Management and Senior Procurement Executive on 202-208-6352, or
Patricia Corrigan of her staff on 202-208-1906.
Sincerely,
Signed By:
R. Thomas Weimer:
Assistant Secretary:
[End of section]
Appendix V: Comments from the National Aeronautics and Space
Administration:
National Aeronautics and Space Administration:
Office of the Administrator:
Washington, DC 20546-0001:
APR 12 2006:
Ms. Katherine Schinasi:
Managing Director Acquisition and Sourcing Management:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Schinasi:
NASA has reviewed the draft GAO report, "Contract Management: Increased
Use of Alaska Native Corporations' Special 8(a) Provisions Calls for
Tailored Oversight" (GAO-06-399) and thanks you for the opportunity to
provide comments. The information gathered from your report should help
us improve NASA's participation with Alaska Native corporations (ANC).
In addition to the recommendations directed specifically to the
Administrator of the Small Business Administration (SBA), the report
contains one recommendation addressed to the Secretaries of the
Departments of Defense, Energy, Homeland Security, Interior, State,
Transportation, and the Administrator of NASA. Specifically, GAO
recommends that these agencies, "Work with SBA to develop guidance to
agency contracting officers on how to comply with requirements of the
8(a) program such as limitations on subcontracting and notifying SBA of
contract modifications, particularly when contracting with 8(a) ANC
firms."
NASA concurs with this recommendation. NASA's Acting Assistant
Administrator for the Office of Small and Disadvantaged Business
Utilization will work with the SBA to develop such guidance and to
provide whatever assistance SBA may need to address the recommendations
directed to them.
If you have any questions, or require additional information, please
contact Mr. Jim Balinskas (202) 358-0445.
Sincerely,
Signed By:
Shana Dale:
Deputy Administrator:
[End of section]
Appendix VI: Comments from the Department of State:
United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D.C. 20520:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
April 12 2006:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "CONTRACT
MANAGEMENT: Increased Use of Alaska Native Corporations' Special 8(a)
Provisions Calls for Tailored Oversight," GAO Job Code 120437.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Shapleigh Drisko, Senior Procurement Analyst, Bureau of Administration,
Office of Small and Disadvantaged Business Utilization, at (202) 647-
6078.
Sincerely,
Signed By:
Bradford R. Higgins:
cc: GAO - Michelle Mackin:
A - Frank Coulter (Acting):
State/OIG - Mark Duda:
Department of State Comments on GAO Draft Report:
Contract Management: Increased Use of Alaska Native Corporations'
Special 8(a) Provisions Calls for Tailored Oversight (GAO-06-399, GAO
Code 120437):
Thank you for the opportunity to respond to the report entitled
Contract Management: Increased Use of Alaska Native Corporations'
Special 8(a) Provisions Calls for Tailored Oversight. The report cites
instances where we did not notify the Small Business Administration
(SBA) of concerns that we had over the formulation of joint ventures
under the 8(a) mentor protégé program or other contract management
matters.
In your report, you stated:
"We found one example, however, where the process of awarding to an
8(a)
ANC firm was not particularly expedient. An ANC firm proposed a price
for a State Department construction contract that was almost twice as
much as the government's original cost estimate. The State Department
negotiated extensively for over a month, requesting four different
price proposals from the contractor. At one point, the contracting
office considered terminating the solicitation and awarding
competitively to a prequalified firm, but due to time constraints the
department decided to accept the ANC firm's final proposal, which was
still slightly over the government's estimate."
We continued to negotiate with the firm because they were a small
business and this was the first time they had offered a proposal on a
Departmental solicitation. As with any new firm doing business with the
Department, there is a learning curve where they begin to understand
our requirements and we reach an understanding of what perceptions they
had when putting their price proposal together. It is not an unusual
situation. Once communications improved, their understanding of the
needs of the Department resulted in their offered price becoming closer
to the Government estimate of what the project should cost. The price
went from twice as much to slightly above our estimate. The
negotiations came to a successful conclusion and we were able to
determine that the final price was fair and reasonable.
In the supporting documentation of the contract, the Price Negotiation
Memorandum states, "Based on the pricing analysis conducted on the
companies noted above (3 companies) in evaluating the Offeror's
submitted pricing, it has been determined that the Offeror's pricing
structure
does meet fair market value and is deemed to be fair and competitive.":
You also stated the following:
"A State Department contracting official told us that his office had
good intentions when it awarded a construction services contract to a
joint venture between an 8(a) ANC firm and a large firm. In line with
SBA's business development program, the State Department had envisioned
that the ANC firm would gain construction experience from the globally
recognized larger partner and then compete on its own for other
construction work. However, the official expressed concern that all the
actual construction work was being subcontracted out and the joint
venture was only doing construction management, which was not the
intent when the requirement was offered to the 8(a) program. Moreover,
the contracting officer representative, in an e-mail to the contracting
officer, suggested that the contractor had some performance problems
and may have been circumventing the prices negotiated in the contract
by using subcontracts for all the work. The official never made these
concerns known to SBA, nor did SBA ever inquire whether the partnership
was working as intended."
The individual interviewed and referred to in your paragraph was not
the contracting officer. While the individual is knowledgeable in his
area of expertise, he is not directly involved in all aspects of the
conduct of an acquisition. That is the responsibility of the
contracting officer and the acquisitions staff.
ANC firms have sporadically targeted the Department in their marketing
and outreach efforts. In our 1999 outreach visit to Anchorage, we
discovered that the ANC construction firms possessed skill sets in
project mobilization, logistics and reacting to significant variances
in operational site conditions that routinely are hundreds of miles
from their headquarters or bases of operations. This capability is
almost nonexistent in the small business construction firms that we had
previously known. We realized that there were significant similarities
between these firms and the large businesses who routinely were awarded
large overseas construction contracts.
We encouraged these Alaskan small businesses to consider the Department
of State as a potential market. We felt that through subcontracting to
our large business primes, these firms could gain the knowledge and
experience needed to hopefully bid on our construction requirements on
their own. When the SBA subsequently implemented their 8(a) mentor
protégé program, we felt that this new program was particularly helpful
in developing new competitors for our international construction
requirements. This contract was the second iteration of our use of the
SBA 8(a) mentor protégé program for ANC program participants venturing
into international construction.
Based on your comments, it appears that our main difficulty was not
fully articulating to the program office and COR the complete details
involved in the development of additional competition for the small
number of large businesses who regularly dominate the international
construction market. During the GAO review, we assumed that we had
clearly communicated these efforts to develop new competitors.
You additionally noted an email communication between the COR and
contracting officer that was not referred to the SBA. The contracting
officer did look into the COR's concerns and found that they were
unfounded. There is no instance of documented performance problems or
anything else to indicate that the contractor's performance has been
anything less than satisfactory. Specifically, the contracting officer
has found no evidence to substantiate the allegation that the venturing
parties were, or had done anything to circumvent the negotiated pricing
structure by using subcontractors.
Your final comments about our negotiations stated:
"In another example at the State Department, officials had some
concerns
that the 8(a) ANC firm was a front company for the large business in a
joint venture for another construction project. In response to the
concerns, representatives from the joint venture presented information
to State officials on the role of the ANC firm, stating that it was
involved with management from top to bottom and that the large firm
would provide construction expertise where needed. We found no evidence
that State officials contacted SBA about this issue at the time."
This contract was being negotiated in a compressed acquisition cycle.
The SBA was in direct contact with the venturing parties parallel to
the Department of State's negotiation of the terms and conditions of
the contract. The SBA was actively engaged in efforts to have the
venturing parties structure their joint venture so that it would comply
with the SBA regulations that prohibit any "front" relationship between
an 8(a) program participant and any joint venturing partner. Where
questions concerning the firm's relationship arose at the Department of
State, the venturing parties were required to explain their
relationship. They explained to the contracting officer's satisfaction
that the 8(a) venturor was actively and materially participating in the
management and control of contract performance. This was reinforced by
SBA's directed restructuring of the joint venture prior to obtain their
approval. Furthermore 8(a) firm was required to provide copies of the
SBA approved joint venture agreement as a prerequisite for contract
award. The simultaneous interaction of the SBA with the venturing
parties and the Department of State's contract officer's negotiations
appeared to make a formal request for SBA intervention superfluous at
the time.
Our response to the GAO's specific recommendation follows:
Recommendation 1: To ensure that agencies are properly overseeing ANC
8(a) contracts, we recommend that the Secretaries of the Departments of
Defense, Energy, Homeland Security, the Interior, State, and
Transportation and the Administrator of NASA take the following action:
Work with SBA to develop guidance to agency contracting officers on how
to comply with requirements of the 8(a) program such as limitations on
subcontracting and notifying SBA of contract modifications,
particularly when contracting with 8(a) ANC firms.
We concur with this recommendation, and will work with the SBA to
develop standardized guidance to contracting officers on monitoring
limitations on subcontracting and SBA notification of contract
modifications.
[End of section]
Appendix VII: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
April 19, 2006:
Katherine V. Schinasi:
Managing Director:
U.S. Government Accountability Office:
Acquisition and Sourcing Management:
441 G Street, NW:
Washington, D.C. 20548:
Dear Ms. Schinasi:
The Department of Energy (DOE) appreciates the opportunity to review
and comment on the draft' report entitled: "Contract Management,
Increased Use of Alaska Native Corporations' Special 8(a) Provisions
Calls for Tailored Oversight" (GAO-06-399). This letter provides DOE's
comments.
The Government Accountability Office (GAO) notes at page 17 that
several contracting officers, including one from DOE, used the 8(a)
Alaskan Native Corporation (ANC) program as a way to help their
agencies meet small business goals. As the draft report well
establishes, the ANC program, as authorized by statute and implementing
regulations, is an appropriate tool for agencies to use in meeting
their small business goals. However, the discussion suggests that
agencies, including DOE, rely significantly" on the ANC program, to
achieve their small business goals.
DOE contracting officers do not limit the award of small business
contracts to only ANCs. In Fact, the substantial number of DOE contract
awards to small business, including those of the National Nuclear
Security Administration (NNSA), go to small businesses other than ANC
firms. In Fiscal Year 2005, DOE's obligations to ANCs were only 69
percent of all DOE small business obligations.
Secondly, the draft report at page 20 discusses the limitation of
subcontracting clause that requires the prime contractor in service
contracts to perform 50 percent of the work associated with personnel
costs, citing the example of the DOE contract with AHTNA As the draft
report correctly notes, in footnote 18, the contract with AMA is a
construction contract and is, therefore, subject to a different
standard. Accordingly, there is as internal inconsistency between the
language on page 20 and footnote 18. The draft report should be
corrected prior to its final release.
If you have any further questions please feel free to contact Edward R.
Simpson, Director of the Office of Procurement and Assistance
Management
at (202) 287-1310.
Sincerely,
Signed By:
Ingrid Kolb:
Director:
Office of Management:
cc: Theresa Speake, ED-1;
David Boyd, NA-63;
Andrew S. Geary, MA-62:
[End of section]
Appendix VIII: Comments from the Native American Contractors
Association:
NACA Native American Contractors Association:
888 16" Street N.W., Suite 800:
Washington, D.C. 20006:
Ph: 202-349-9845:
Fax: 202-355-1399:
[Hyperlink, www.nativeamericancontractors.org]:
April 17, 2006:
Ms. Katherine Schinasi:
Managing Director:
Acquisition and Sourcing Management:
United States Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548:
Re: GAO Report on ANC 8(a) Procurement:
Dear Ms. Schinasi:
The Native American Contractors Association ("NACA") submits the
following comments to the Government Accountability Office's ("GAO")
report on procurement from ANCs in the Small Business Administration's
("SBA") Section 8(a) Business Development program (the "8(a)
Program")[1]. NACA was formed to increase the awareness of the benefits
of using firms owned by Indian Tribes and Alaska Native Corporations
("ANCs") (collectively "Native Entities' to provide goods and services
to the federal government. The mission of NACA is to enhance self-
determination through preservation of government contracting
participation based on the government-to-government relationship
between Native Americans and the federal government.
I. Introduction:
NACA believes the GAO report shows the success of the federal policy of
promoting Native American government-to-government participation in
the federal marketplace. Federal contracting promotes economic self-
sufficiency and provides economic and employment benefits for Native
Americans, who are among the poorest communities in the nation. It is
important to note that the GAO did not find evidence of abuse by ANC
8(a) companies. Rather, the GAO found that some government agencies do
not always follow the rules, and absent improved oversight, there might
be potential for abuse. In reviewing the report, NACA recognizes that
GAO found government acquisition processes to be flawed in some
respects. NACA will work with government officials to improve these
processes and urges lawmakers to focus on improving oversight and not
to make substantial changes to the Native provisions of the 8(a)
program.
The report correctly notes that some ANCs have achieved success by
participating in the 8(a) Program. NACA also notes that most Native
Entities are just beginning to enter the federal marketplace as a way
to generate long-terns revenue streams, create jobs for their members
and in the communities in which they work, and provide cultural and
social benefits to member communities. Participation in the 8(a)
Program has also enabled Native Entities to develop the experience,
skill, and expertise necessary to succeed in the competitive federal
marketplace. NACA believes that the GAO should more fully acknowledge
the legal and policy basis of 8(a) Program rules for Native Entities
and should provide a broader perspective on issues that impact the
entire federal procurement system. For instance, the potential for
abuse of sole-source contracting does not stop and start with 8(a)
contracts.
The GAO report identifies a number of areas in which the SBA and other
agencies can improve oversight of ANCs in the 8(a) Program. NACA is not
commenting on matters in the Report that relate solely to government
procurement processes and oversight. However, we note that the
recommendations could involve the development of policies that could
significantly impact shareholders of ANCs and Indian tribes in the 8(a)
program. Executive Order 13175 calls for consultation and collaboration
with tribal officials in the formulation of federal policies that have
"tribal implications" .[2] Should the SBA take any action to implement
GAO's recommendations, the agency is legally obligated to consult with
Native Americans and, where appropriate, to use consensual mechanisms
including negotiated rulemaking. Since NACA represents Native Entities
that would be directly impacted by any changes to existing federal
policy, we encourage the SBA and other agencies to consult with NACA
when considering regulatory recommendations in this report.
II. Indian Law and Policy: Why Native Entities Have Special Contracting
Rights:
SBA 8(a) Program Regulations:
The GAO report recognizes that Congress provided unique contracting
provisions in the 8(a) Program to help spur economic development for
Native Americans. These provisions include:
* Program eligibility rules for Native Entities that allow parent
companies to own multiple 8(a) firms without violating limitations on
affiliation.
* Exclusion from the competitive thresholds limiting the size of sole-
source contracts in order to help these firms develop a sustainable
revenue base-rather than mandating their employment practices or
limiting their activities to a single geographical area.
The 8(a) Program rules applicable to a Native Entity purposely differ
from the rules governing 8(a) firms owned by individuals.[3] Unlike an
8(a) firm owned by an individual, a Native Entity has an organizational
obligation to provide for the significant social and economic needs of
all of its community members-who can number anywhere from hundreds to
tens of thousands. Native Entities share a moral imperative to create
permanent, self-sustained business operations to provide for current
and future generations of their community members.
Federal Trust Responsibility to Foster Economic Development:
Since the federal Indian policy of producing sustained benefits for
Native Americans is embodied in the 8(a) Program, it is important to
understand the legal, policy, and social context for these provisions.
We discuss below how the 8(a) Program is working for Native Americans.
The federal government's unique relationship with Native Americans
derives from the U.S. Constitution's grant of power to Congress "to
regulate Commerce... with the Indian Tribes."[4] This Constitutional
provision, and its interpretation in landmark Supreme Court decisions,
gave rise to the federal government's special political relationship
and trust responsibilities to Native Americans. As the Court stated,
"the relation of the Indians to the United States is marked by peculiar
and cardinal distinctions which exist nowhere else...."[5]No other
group of U.S. citizens has a comparable relationship with the federal
government.
Congress was even more specific when articulating, in the Alaska Native
Claims Settlement Act ("ANSCA"), the federal government's relationship
with Alaska Natives. [6]This law required compensation to settle land
claims and Congress mandated that for-profit corporations be used to
implement the settlement. In ANSCA, Congress declared:
(a) there is an immediate need for a fair and just settlement of all
claims... based on aboriginal land claims; and (b) the settlement
should be accomplished rapidly, with certainty, in conformity with the
real economic and social needs of Natives, without litigation, with
maximum participation by Natives in decisions affecting their rights
and property...[7]:
ANSCA represented a new and experimental approach to fulfilling federal
obligations to Native Americans: providing Alaska Natives with village
and regional corporate structures, rather than a reservation system (as
was done in the lower 48 States). Under ANSCA, shareholders may not
sell their shares to non-Natives. In fact, Congress explicitly intended
the use of corporate structures to give Alaska Natives greater control
of their economic destiny-to achieve self-sufficiency as well as self-
governance. Congress has repeatedly emphasized that the most effective
way to promote economic self-sufficiency and to minimize the dependence
of Alaska Natives on federal assistance is through ANCs.[8]
As part of the federal government's constitutional trust
responsibility, Congress has enacted many laws to foster self-
sufficiency and economic development in Native communities. Among the
most successful of these laws are the special provisions implementing
Section 8(a) of the Small Business Act. These rules have helped Native
Entities overcome economic barriers, create and expand competitive
businesses in the private and federal markets, create new business
opportunities in remote rural areas far removed from major markets, and
return profits to their communities.
Native Entities represent a separate type of contracting that makes
sense when one considers they have a responsibility to provide benefits
to entire communities. All 8(a) firms, including Native Entities, have
a maximum 9-year participation term in the 8(a) Program. Likewise, all
8(a) firms, including Native Entities, must be small to receive an 8(a)
contract. When an ANC 8(a) firm grows out of its applicable size
standard, it graduates out of the program, just like other 8(a) firms.
Native Entities are permitted to form new 8(a) firms in different
industries because of their responsibility to improve the livelihood of
hundreds or thousands of community members. Accordingly, Native
Entities can operate multiple 8(a) firms and do not have a limit on the
size of contract that can be awarded to them on a sole source basis.
These provisions were intended to prepare Native Entities to compete
with others in their industry, particularly large contractors who have
established relationships with government customers and possess capital
and proposal capability sufficient to dominate the federal procurement
market.
Fostering the development of successful small business contractors
advances the government's interests by broadening and diversifying its
industrial base of service providers and suppliers. More competition
can result by combating the consolidation of the government contracting
industry into a few dominant large businesses. By providing different
contracting provisions to qualified Native Entities, Congress increased
the likelihood of sustaining business opportunities, ownership, and
revenues for Native Americans. These provisions are fulfilling the
federal government's special legal obligations to Native Americans.
III. Government Contracting-a Vehicle for Economic Activity:
Core Mission:
The core mission of companies owned by Native Entities is much broader
than typical companies because Native Entities must generate community-
wide benefits and meet social and cultural needs. We appreciate that
GAO noted the public policy goals of the 8(a) Program: developing
business expertise, management capabilities, and sustaining economic
development. Government contracting has been an effective tool for
Native Entities to achieve their social, educational, and economic
goals. Many Native Entities have leveraged their success in the 8(a)
Program into other lines of business, learned to control their
resources effectively, created new business opportunities, and reduced
federal dependence. Procurement activities are especially important to
Native communities located in remote rural areas that are far away from
commercial markets.
As GAO points out, earning contracting revenues is only part of the
mission of ANCs and other Native Entities. They also provide many other
benefits including scholarships, training, and cultural programs. Seen
in this broader context, statistics about the progress of ANCs in
government contracting are impressive:
* Beginning with only one 8(a) participant in 1988, about 150 ANC 8(a)
firms are operating today.
* 15 ANCs paid shareholder dividends (attributable to federal
contracts) of $18 million in 2003 and $27 million in 2004.
* From 1999 to 2004, ANC 8(a) firms awarded shareholder scholarships of
$14.2 million.
* In 2004 alone, ANCs made $4.8 million in additional donations to
benefit Alaska Natives.
* In 2004, ANCs employed 2,116 shareholders in jobs related to
Government contracts.
* ANCs provided jobs to 7,747 Alaskans, with a total payroll in Alaska
attributable to federal contracts of $141 million. [9]
These numbers prove how seriously ANCs consider their mission of
advancing economic and social needs of their shareholders, and prove
that 8(a) Program provisions for Native Entities are working as
Congress intended. While the benefits of government contracting may not
currently be distributed evenly among Native companies, a growing
number of tribally-and ANC-owned companies are making gains in the
government market. More tribes and ANCs are forming government
contracting companies and applying for 8(a) certification.
The GAO report refers to statements by government officials who
criticize the partnerships between ANCs and large companies. Working
with a more established company can help an ANC acquire necessary
technical and financing capabilities and transfer skills and knowledge.
Not only are ANC joint ventures permissible, they are in the public
interest because ANCs assume a proportionate risk, develop technical
and human resource capabilities, and benefit from the expertise,
experience, and financing capabilities of others. Also, as discussed
below, government officials are awarding larger contracts and in order
for small businesses to compete for them, it is sometimes necessary to
partner with another company. These benefits help fulfill the
longstanding Congressional policy of promoting ANC and tribal self-
determination. As they build their capabilities, Tribes and ANCs can
diversify their economies, create more jobs with higher skill and
income levels, and generate more revenues for their communities-both at
home and where they work.
In sum, the 8(a) provisions for Native Entities help the federal
government fulfill its responsibility to promote Native self-
determination and self-sufficiency. Just as Congress intended, this
effective federal program helps spur economic development, taps into
the existing federal marketplace, and provides contracting agencies
with cost-effective and flexible procurement options.
Strategic Planning:
Casual observers must be mindful not to make unjustified assumptions
based on limited or superficial data on ANCs' business structures,
executive compensation, or strategic decisions. Like any other
business, ANCs utilize sophisticated strategic planning tools to
balance these risks and benefits, with an eye on the bottom line and
ongoing economic development. Moreover, ANCs must carefully balance
between distributing profits to shareholders through dividends, and
reinvesting profits to expand their revenue streams. Each ANC Board of
Directors determines the proper balance between current cash
distributions to its Native shareholders and investment back into the
corporation to generate future benefits.
The GAO report includes a table that lists various business strategies
used by ANCs. It must be noted that each organizational strategy is
fully consistent with the law. In fact, federal statutes and
regulations encourage the use of intermediate holding companies, as
some ANCs operate. It is also important to note that decisions about
corporate structure are but one of many strategic choices made by all
firms, whether small or large. Corporate structure should be analyzed
only within the context of overall business strategies, such as
organizational design, business development, sales, and marketing;
product and services delivery, customer service, and human resource
development.
The 8(a) Program is Working:
The 8(a) Program is working by enabling ANCs to acquire critical
business skills and experience, leverage these to build self-sustaining
businesses, diversify their economies, and directly and indirectly fund
social, economic, and cultural benefits for Alaska Natives.
Table 1:
Signs of Success: ANCs are Becoming:
More Competitive Within the 8(a) Program;
Competitive 8(a) Revenue;
2000: $60,000,000;
2004: $250,000,000;
Percent Change: 317%.
More Competitive in the Overall Procurement Arena:
Non-8(a) Revenue;
2000: $130,000,000;
2004: $550,000,000;
Percent Change323%.
No More Reliant on 8(a) Contracting:
Non-8(a) Revenue Relative to Government Contracting Revenue;
2000: 34%;
2004: 34%;
Percent Change: 0%.
No More Reliant on Sole Source Contracting:
Competitive Revenue Relative to All 8(a) Revenue;
2000: 24%;
2004: 24%;
Percent Change: 0%.
Source: Figures 2 & 4 of the GAO's Report.
[End of table]
As Table 1 show, ANCs have increased the level of non-8(a) federal
contracting by over 300% in the 5-year period analyzed by the GAO. This
dramatic increase in ANCs' ability to win revenue outside the 8(a)
Program demonstrates the economic development resulting from 8(a)
Program rules for Native Entities. Similarly, the amount of competitive
business won by ANCs also increased over 300% between 2000 and 2004. A
lot of attention has been devoted to the dramatic rise in 8(a)
contracting among ANCs, however, GAO data shows that during the study
period, ANCs have not become more reliant on 8(a) contracting in
general, or on sole-source contracting in particular. Although 8(a)
contracting represents the same percentage of ANC business in 2004 as
in 2000, ANCs have earned a far larger dollar volume of competitive and
private-sector revenues.
Further, this data does not account for companies that have "graduated"
from the 8(a) Program (and have thus disappeared from the GAO's data
set). Accounting for this data would likely show that ANC reliance on
8(a) contracting, both competitive and sole-source, has fallen. A
number of additional facts cited by the GAO provide evidence of the
importance of the 8(a) Program for ANC shareholders:
* ANCs are using 8(a) revenues to create management-training programs
and to build sustainable businesses and Native economies. As GAO notes,
one-third of the 30 firms surveyed have instituted management-training
programs.
* ANCs pay market rates to bring in high-level executive talent to
contribute their expertise, train native managers, and pursue benefits
for shareholders.
* ANC holding companies are hiring experienced talent from partners and
subcontractors and leveraging human capital to win competitive
contracts. [10]
* ANCs are using the 8(a) Program to diversify their economic base
across disparate businesses. [11]
* ANCs actively engage in Mentor-Protege relationships to transfer
skills and knowledge from experienced partners into the ANCs themselves
and from ANC Mentors to tribally owned Proteges.
While the GAO report appears to attribute lack of oversight of ANC
participation in the 8(a) Program to unclear regulations, we
respectfully urge caution against regulatory changes which would
undermine the success of ANCs. The 8(a) Program, as applied to Native
Entities, is an exceedingly rare example of federal Indian policy
successfully promoting economic diversification and self-
sustainability of Native Americans, without large direct federal
appropriations.
Against all odds and predictions of extinction, Native Americans have
continued to evolve in the worst conditions and climates. We are proud
that our businesses are adapting to circumstances beyond our control,
and succeeding in spite of historic challenges. The 8(a) Program has
proven to be an invaluable tool in achieving economic self-sufficiency.
ANCS have a long-term interest in providing give good value for fair
prices, with honesty and integrity, contrary to anecdotal invective.
IV. Government-wide Procurement Challenges:
The percentage of all government contracts held by ANCs is small
relative to all federal procurement dollars. In 2004, about 13 percent
($1.1 billion) of all 8(a) contract dollars were awarded to Alaska
Native Corporations that represent 100,000 Alaska Native shareholders.
The remaining 87 percent ($7.3 billion) of the 8(a) contract dollars
were awarded to roughly 9000 8(a) companies owned by individuals.
Many of the principal criticisms presented in the GAO report are not
specific to ANC contracting, but rather are common to the entire
procurement system. Still other issues address concerns that involve
all small businesses, not just ANCs. While GAO's scope was limited to a
review of the ANC portion of the 8(a) Program, a fair treatment cannot
be obtained by isolating ANCs from overarching procurement problems
that GAO has diagnosed in other reports. By presenting these issues
only in the context of the 8(a) Program, the GAO report obscures the
wider public policy issues and minimizes their significance.
ANCs are not at the root of small businesses' contracting problems:
Contract bundling and consolidation are a systemic concern for
policymakers, procurement officers, SBA officials, and small
businesses. ANC 8(a) firms play a minimal role, yet the GAO report
implies that ANCs antagonize small businesses. Contracts are bundled
because "increased demands to make the acquisition process quicker and
less complex coupled with reductions in the overall acquisition
workforce have driven acquisition managers to bundle requirements."
[12] The Office of Federal Procurement policy has found that
substantially fewer small businesses are receiving federal contracts
and the federal government is suffering from a reduced supplier base.
[13] It is not ANCs that inhibit the ability of small firms to win such
awards, but rather the large number of tasks required by bundled
contracts, their increasing dollar size, and often broad geographic
scope.
A report prepared for the SBA's Office of Advocacy found that, for
every 100 "bundled" contracts, 106 contracts are no longer available to
small businesses. Similarly, for every $100 awarded on a "bundled"
contract, there is a $33 decrease in contracts awarded to small
businesses. [14],[15]Since bundled contracts typically run for a longer
period of time and are broader in scope, the total number of new
contract awards has declined. Consequently, although overall small
business contracting dollars remained relatively constant, there has
been a sharp decline in the number of new contract awards. The Office
of Federal Procurement Policy found that significantly fewer small
businesses received federal contract awards: from a high of 26,506 in
fiscal year 1991, to a low of 11,651 in fiscal year 2000. [16]
If these contracts were not awarded to ANC 8(a) firms, the requirements
would nonetheless be bundled and likely available only for large
business performance. Moreover, there is no guarantee these contracts
would be awarded competitively in the absence of rules for ANCs. A far
more prevalent trend is the use of large Indefinite Delivery Indefinite
Quantity (IDIQ) contracts to avoid competition and protests from
disappointed bidders, as GAO's own Administrator, David Walker,
recently pointed out to the Acquisition Advisory Panel. [17]
The decline of small business contracting has also been exacerbated by
the acquisition reforms of the 1990'x. GAO found that the acquisition
workforce was reduced approximately 22 percent from 1990 to 1998.[18]
The GAO reported that, according to agency officials, contracting
officials sought ways to streamline procurement practices partly as a
result of workforce reductions. These practices include contracting
vehicles such as blanket purchase agreements, IDIQ contracts, and GSA
Federal Supply Schedules.[19] Pressure on agencies to do more with less
results in the award of larger contracts, for which all small firms
have difficulty competing. As a result, the list of the top 100 large
federal contractors has changed very little despite reform efforts. [20]
In addition to skirting the broader problem of contract bundling, the
GAO report makes no mention of another factor which has a negative
impact on all small businesses: agencies improperly counting awards to
large businesses toward their small business goals.[21] As a result,
it is clear that agencies have not met their statutory obligation to
award 23% or more of their contract dollars to small business. GAO and
other government investigators have thoroughly explored these issues
and have conclusively demonstrated that they are cardinal problems
facing all small businesses.
Despite these well-documented systemic problems with the procurement
system, a small but vocal few in the small business community have
targeted ANCs as a convenient scapegoat. Unfortunately, the GAO's
report may exacerbate such mistaken assumptions. In reality, federal
prime contracting has ballooned to over $300 billion in recent years.
No group of small businesses has actually "lost" volume; the only
change is to the perception that others might have gained a
proportionally greater share. The unfortunate truth is that, as a
whole, all lawful participants in SBA's contracting programs have seen
their total share diminish well short of statutory goals (which, are a
floor-not a ceiling). Congress should respond to the advice GAO by
urging the SBA and other contracting agencies to honor and enforce
existing small business procurement goals and provide enough oversight
to make these goals stick.
Non-competitive practices pervade the procurement system:
To suggest that ANCs are the root of the Federal Government's
anticompetitive practices belies the facts. During fiscal years 1998
through 2003, the Department of Defense awarded $362 billion in
contracts without full and open competition, more than one-third of the
department's procurement budget. The top five contractors alone
received $145 billion in sole-source contracts from the Department of
Defense. [22]
SBA and Agency failure to track and enforce rules on subcontracting
limitations applies to all small business contracting:
ANCs have taken very seriously the limitations on subcontracting and
will work with SBA and the agencies to develop a system to gather data
to demonstrate their compliance. That said, the limitations on
subcontracting apply not only to ANC 8(a) contracts, but to all small
business contracting programs.[23] The failure of SBA and other
agencies to enforce these provisions is not limited to ANCs and cannot
be properly viewed in isolation. In fact, in 2005 the U.S. Court of
Federal Claims published a decision involving the subcontracting
limitation regulations and the offender in that reported decision was
not an ANC [24] The GAO's report does not acknowledge that this is an
SBA-wide requirement and a government-wide shortcoming.
The GAO report has not acknowledged the fact that performance of work
requirements provide a compelling advantage to small businesses and
taxpayers. As recently noted with respect to post-Katrina contracting,
large prime contractors commonly use multiple layers of subcontracting
to procure the goods and services needed for reconstruction efforts.
[25] At each level, primes and higher-tier subcontractors add
administrative markups that, cumulatively, result in prices several
times larger than the true cost of such goods and services. In small
business contracting, the markup problem diminishes because small
business prime contractors are required to self-perform large portions
of their contracted work. The GAO report does not mention this
important benefit of small business contracting.
Modifications Beyond Scope:
Among other systemic deficiencies in federal procurement is the lack of
regulatory guidance and meaningful enforcement of rules concerning
contract modification. Specifically, the rules are not clear on when a
modification is within the scope of an existing contract, and when
modifications should be considered new contracting action. GAO has
addressed this issue in previous reports about the procurement system
.[26] One of the most notorious illustrations of this problem is the
well-chronicled use of Department of Interior contracts by DOD to
obtain interrogation services in Iraq. To confine reference to this
issue only to ANC 8(a) contracts is patently unfair to ANCs, their
communities, and taxpayers. Moreover, it ignores a broader problem
acknowledged by the entire procurement community. Although NACA
welcomes the call for better guidance on changes in contract scope, it
is concerned that the limited scope of the GAO report gives the false
impression that its recommendations will ameliorate broader systemic
problems.
SBA and Agency procurement staffs must be increased:
NACA supports any effort that brings relief to the long-suffering SBA
workforce, especially the Alaska District Office. In addition, NACA
welcomes efforts to increase agencies' acquisition workforces and other
resources. We regret that GAO has not tied this report to the body of
research about the critical decline of the procurement
workforce. [27] This shortage is at the root of each issue in the GAO
report on ANCs: failure to track and meet small business goals,
avoidance of competitive processes whenever possible, failure to track
and enforce small business performance of work requirements, and
improper expansion of contract scope to avoid new contracting actions.
V. Conclusion:
We appreciate that GAO recognized NACA as a representative of Indian
tribes and Alaska Native Corporations. Our members are grateful for the
opportunity to provide these comments and information during the GAO's
research. In closing, we echo the GAO's finding that the 8(a) Program
helps Native Entities to overcome economic barriers, create and expand
businesses, participate in the federal marketplace, and provide
cultural and social benefits to their communities. We look forward to
the chance to assist the federal government in continuing to fulfill
its special obligations to Native Americans.
Sincerely,
Signed By:
Chris McNeil, Jr.:
Chairman:
Footnotes:
[1]On March 28, 2006, representatives of NACA were briefed by the GAO
on the draft ANC report. However, NACA was not permitted to keep a copy
of the draft report. Accordingly, these comments reflect our views on
the broad parameters of the report and not all the details contained
therein.
[2] Memorandum for the Heads of Executive Departments and Agencies,
Government-to-Government Relationship with Tribal Governments (Sept.
23, 2004); Executive Order 13175, Consultation and Coordination with
Indian Tribal Governments (Nov. 6, 2000).
[3] Including Small Businesses, Small Disadvantaged Businesses, Women-
Owned Businesses, IIUB Zone firms or Service-Disabled Veteran-Owned
concerns, as defined by the Small Business Act.
[4] See Article 1, § 8, 3.
[5] See Cherokee Nation v. Georgia, 30 U.S. l , 15 (1831); see also
Worcester v. Georgia. 31 U.S. 515, 519 (1832) (recognizing "[t]he
Indian nations had always been considered as distinct, independent
political communities... and the settled doctrine of the law of nations
is, that a weaker power does not surrender its independence-its right
to self government, by associating with a stronger, and taking its
protection."):
[6] See 43 U.S.C §1601, et seq.
[7] See Id at § 1601.
[8] See Alaska Native Commission Final Report, Vol. 1. (1994).
[9] These figures are based on self-disclosures by the 13 ANCSA
regional corporations and two village corporations. The focus of the
GAO report was on ANCs, so comparable data on firms owned by tribes was
not gathered.
[10] See Table 1 above and GAO reference to hiring by ANCs of former
partner and subcontractor employees.
[11]See GAO Appendix, describing ANCs operation in multiple NAICS
codes. It should be noted that while the GAO report states that 2 of
the 5 largest ANC participants in the 8(a) program utilize 8(a) as
"only one investment in a diversified portfolio" (at p. 22), the GAO's
own example demonstrates that even ANCs focused exclusively on 8(a) can
achieve diversification of their economic portfolios - through
contracting in a wide variety of businesses and by building 8(a)
companies that have graduated to become viable (and in some cases
saleable) businesses in their own right (at p. 22).
[12] Contract Bundling: A Strategy for Increasing Federal Contracting
Opportunities for Small Business, Office of Federal Procurement Policy,
(October 2002).
[13] Id.
[14] The Impact of Contract Bundling on Small Business: FY 1992-FY
1999, Eagle Eye Publishing for the SBA Office of Advocacy, (September
2000).
[15] We note that there has been some disagreement on how to interpret
the statutory definition of contract bundling. For example, GAO in the
past has questioned the value of the Eagle Eye data in an earlier
report on contract bundling because the definition used for [continued]
bundling was different than the statutory definition. Nevertheless the
OFPP report relied on the Eagle Eye data cited above as anecdotal
evidence of contract bundling.
[16] Fn. 11.
[17] Testimony of David Walker, March 29, 2006, before the Acquisition
Advisory Panel, as reported in BNA's Federal Contracts Report, Vol. 85,
No. 13, p. 357 (April 4, 2006).
[18] GAO-01-119, Trends in Federal Procurement in the 1990s.
[19] See Major Clark 111, J.D. and Chad Moutray, Ph.D, The Future of
Small Businesses in the US. Federal Government Marketplace, SBA Office
of Advocacy (2004).
[20] The Future of Small Businesses in the US Federal Government
Marketplace, p. 14.
[21] See GAO: Reporting of Small Business Contract Awards Does Not
Reflect Current Business Size, GAO-03-704T (May 7,2003); Report
Prepared for SBA: Analysis of Type of Business Coding for the Top 1,000
Contractors Receiving Small Business Awards in 2002, Eagle Eye
Publishing, (December 2004).
[22] Outsourcing the Pentagon, Center for Public Integrity, (November,
2004).
[23] Limitations on subcontracting define the percentage of work a
prime contractors must perform in-house. See 13 C.F.R. § 125.6.
[24] See e.g. Transatlantic Lines v. United States 68 Fed.Cl. 48,
(September 30, 2005).
[25] See e.g. Multiple Layers of Contractors Drive Up Cost of Katrina
Cleanup, Washington Post, p. Al, (March 20, 2006).
[26] See GAO: Interagency Contracting: Problems with DOD's and
Interior's Orders to Support Military Operations, GAO-05-201 (April
2005).
[27] See GAO High-Risk Series -An Update, GAO-05-207 (January 2005).
[End of section]
Appendix IX: Alaska Native Corporations with Subsidiaries Participating
in the 8(a) Program:
Below is a list of Alaska Native corporations that own subsidiaries
participating in the 8(a) program as of December 2005:
Regional Corporations (12):
Ahtna, Incorporated;
Arctic Slope Regional Corporation;
Bering Straits Native Corporation;
Bristol Bay Native Corporation;
Calista Corporation;
Chugach Alaska Corporation;
Doyon, Limited;
Koniag, Incorporated;
NANA Regional Corporation;
Sealaska Corporation;
The Aleut Corporation;
The 13th Regional Corporation:
Village Corporations (33):
Afognak Native Corporation;
Alaska Peninsula Corporation;
Baan o yeel kon Corporation;
Becharof Corporation;
Bethel Native Corporation;
Cape Fox Corporation;
Chenega Corporation;
Choggiung, Limited;
Cully Corporation;
Deloycheet, Incorporated;
Dinyea Corporation;
Gana-a'Yoo, Limited;
Kaktovik Inupiat Corporation;
Kikiktagruk Inupiat Corporation;
Klukwan, Incorporated;
K'oyitl'ots'ina, Limited;
MTNT Limited;
Ninilchik Native Association, Incorporated;
Old Harbor Native Corporation;
Olgoonik Corporation;
Ouzinkie Native Corporation;
Paug-Vik, Limited;
Port Graham Corporation;
Sea Lion Corporation;
Sitnasauk Native Corporation;
St.George Tanaq Corporation:
Tanadgusix Corporation;
The Eyak Corporation;
The Kuskokwim Corporation;
The Tatitlek Corporation;
Tikigaq Corporation;
Tyonek Native Corporation;
Ukpeagvik Inupiat Corporation:
Urban Corporations (4):
Goldbelt, Incorporated;
Natives of Kodiak, Incorporated;
Kenai Natives Associtation, Incorporated;
Shee Atika, Incorporated:
Group Corporations (0):
[End of section]
Appendix X: Benefits That Alaska Native Corporations Provide to Their
Shareholders:
Through our review of documentation provided by the 13 regional and 17
village or urban Alaska Native corporations (ANC) included in our
review, as well as interviews with corporation representatives and
shareholders, we gained an understanding of how the corporations
communicate with and obtain input from their shareholders and of the
benefits they provide.
The ANCs communicated with their shareholders through surveys, Web
sites, newsletters, annual reports, local media, shareholder
committees, and annual and other periodic meetings. Some had "open
door" policies, which gave shareholders the opportunity to voice their
opinions to management at any time. Additionally, corporations took
steps to reach out to shareholders both out of state and in the
villages. For example, one corporation's officials conducted the annual
meeting via Web cast and noted that Internet attendance was beginning
to outpace in-person attendance. Another corporation rotated its annual
meeting among Anchorage, Seattle, and its regional hub. Additionally,
several of the regional corporations regularly traveled to their
villages to seek input. Steps taken by one to facilitate village
outreach included moving the location of its annual meeting from the
regional hub to the villages; holding the meeting in the native
language; and investing in a boat to facilitate transport to the
region's villages.
Shareholder preferences for benefits differed among corporations. For
example, one corporation stated that its shareholders prioritized
protection of their land and the subsistence lifestyle.[Footnote 33]
Shareholders of other corporations placed a greater value on dividends,
scholarships, training, and job opportunities.
Corporations reported targeting benefits towards the needs of their
shareholders. Such projects included:
* investing in low-cost Internet service as a tool to reduce the
isolation of a particularly remote village;
* issuing death benefits in the form of food vouchers because the
cultural tradition among its shareholders is to host and feed visitors
from the time of death through burial services;
* investing in an insurance company when other insurance companies were
reluctant to insure shareholders' homes; and:
* subsidizing heating oil for residents of a small, remote community
north of the Arctic Circle, absorbing a loss of $2.75-$3.00 per gallon.
Some regional corporations stated that they required sizable revenues
to provide benefits to a large shareholder base. Of the corporations we
reviewed, the 13 regional corporations had approximately 102,000
shareholders, and the 17 village and urban corporations had about
17,000 shareholders.[Footnote 34] Overall, the corporations we reviewed
saw a 31 percent increase in their number of shareholders since
incorporation.[Footnote 35] The number of shareholders at two regional
corporations more than doubled since incorporation.
The 30 ANCs included in our review reported providing three categories
of benefits:
* dividends,
* other direct benefits, and:
* indirect benefits:
Dividends: In 2004, the 30 corporations paid a total of $121.6 million
in dividends. Eleven corporations issued no dividends. Of the
corporations that issued dividends, payments ranged from $1.71 per
share to $171.00 per share. In a given year, a shareholder may have
received a dividend from his or her village corporation and an
additional dividend from his or her regional corporation.
Corporate officials noted that dividend payments, no matter how small,
meant much to their shareholders in many rural villages where basic
necessities were expensive--for example, milk cost $12 per gallon and
fuel cost $5 per gallon.
Original shareholders received 100 shares upon incorporation. One
village corporation's 137 shareholders owned as few as one and up to
200 shares, with an average of about 50 shares.
A third of the ANCs created permanent funds to build up a reserve for
future dividends. Two corporations told us that these funds allowed
them to issue dividends even in years when they were unprofitable.
Half of the ANCs established policies specifying an amount or
percentage of net income to be distributed as shareholder dividends.
For example, one corporation's board required an increase in its annual
dividend amount by 10 percent over the previous year. Another
corporation annually distributed 66 percent of its average net income
for the prior 5 years to shareholders. The result of this policy
coupled with some unprofitable years was that in 2004, this ANC paid
100 percent of its income in dividends to shareholders.
Other Direct Benefits:
* Shareholder hiring preference and job opportunities. All of the
corporations we interviewed reported a hiring preference for
shareholders. Some corporations extended this preference to
shareholders' families, other Alaska Natives, and/or other Native
Americans.
* Other employment assistance programs. In addition to offering a
shareholder hire preference, corporations made efforts to encourage
other shareholder employment. Nine of the 30 corporations offered a
management training program. Some corporations had agreements with
partner companies encouraging shareholder hire. One corporation had a
preference to conduct business with shareholder-owned businesses.
Another corporation's employment assistance programs included
mentoring; one-on-one counseling; business and career fairs; survey of
shareholders over 18 seeking employment; and tracking shareholder
employment status and interests in a database.
* Benefits for elder shareholders. Twelve of the 30 corporations we
interviewed reported issuing benefits for elder shareholders. Some
corporations paid additional regular dividends to elders, while others
made one-time financial payments. Two corporations made in-kind
benefits for elders, such as a lunch program or a bus service.
* Scholarships. Almost all corporations offered scholarships for
shareholders.
* Internships and other youth programs. Many corporations provided
internships or other youth programs for shareholders at parent and
subsidiary companies. Two Washington, D.C.-based subsidiaries provided
housing and other relocation assistance to their interns. Additionally,
one corporation instituted the Young Adult Advisory Mentor program,
which allows its youth to participate in the corporation. Corporate
officials told us that they instituted mentoring and internship
programs to lead to future involvement of shareholders in management
and leadership roles.
* Burial assistance. Twenty-two of the 30 corporations reported
providing some kind of assistance to the family of a deceased
shareholder. Forms of burial assistance include cash, life insurance
payments, or in-kind donations.
* Land leasing, gifting or other use. Most of the village and urban
corporations we interviewed leased, gifted, or made other use of the
land given to the village corporation in the Alaska Native Claims
Settlement Act[Footnote 36] settlement for shareholders. For example,
one corporation gifted five acres to any shareholder who requested it.
* Community infrastructure. Several corporations invested in the
infrastructure of their villages. For example, after the Department of
the Interior's Bureau of Indian Affairs ceased barge service to its
remote village, one corporation established a transportation company
that became the only mechanism to bring goods to the community. Other
projects included remodeling the community washateria[Footnote 37] and
administering and subsidizing a village's cable and Internet utilities.
Indirect Benefits:
* Support of the subsistence lifestyle. Corporations took steps to
protect and maintain the subsistence lifestyle of their shareholders.
One corporation built in subsistence leave into its personnel policy.
Another corporation leased its land for "fish camps," or plots along a
river for shareholders to catch and smoke fish in the summertime.
* Cultural preservation. Twenty-four of the 30 corporations we
interviewed invested in cultural and heritage programs, which included
museums, culture camps, or native language preservation.
* Establishment and support of affiliated foundations or nonprofit
organizations. Twenty-one of the 30 corporations established affiliated
foundations or nonprofit organizations.
* Donations to other nonprofit organizations. Almost all of the
corporations donated to various nonprofit organizations. For example,
one corporation donated to organizations that advocate for Alaska
Natives, such as the Alaska Federation of Natives, Alaska Native Arts
Foundation, Alaska Native Justice Center, and Get Out the Native Vote.
* Support to other corporations. Some regional corporations provided
various kinds of assistance to the village corporations in their
regions. For example, one regional corporation is trying to develop
8(a) partnerships with its village corporations to help them enter the
8(a) program with lower start-up and administrative costs. Other
regional corporations provided recordkeeping, natural resources, and
regulatory and community planning services for their village
corporations.
[End of section]
Appendix XI: Example of an Alaska Native Corporation Owning
Subsidiaries That Market Their Capabilities under Overlapping NAICS
Codes:
One Alaska Native corporation that we reviewed owned seven subsidiaries
participating in the 8(a) program, with six of them marketing their
abilities to perform work in the same line of business.
Subsidiary: Subsidiary A;
NAICS Codes: 443120; Computer and software stores;
NAICS Codes: 511210; Software publishers;
NAICS Codes: 541512; Computer systems design services;
NAICS Codes: 561210; Facilities support services.
Subsidiary: Subsidiary B;
NAICS Codes: 221112; Fossil fuel electric power generation;
NAICS Codes: 531130; Lessors of miniwarehouses and self-storage units;
NAICS Codes: 561210; Facilities support services;
NAICS Codes: 562111; Solid waste collection.
Subsidiary: Subsidiary C;
NAICS Codes: 335312; Motor and generator manufacturing;
NAICS Codes: 335313; Switchgear and switchboard apparatus manufacturing;
NAICS Codes: 336611; Ship building and repairing;
NAICS Codes: 561210; Facilities support services;
NAICS Codes: 561612; Security guards and patrol services;
NAICS Codes: 611430; Professional and management development training.
Subsidiary: Subsidiary D;
NAICS Codes: 443120; Computer and software stores;
NAICS Codes: 511210; Software publishers;
NAICS Codes: 517310; Telecommunications resellers;
NAICS Codes: 561210; Facilities support services.
Subsidiary: Subsidiary E;
NAICS Codes: 238210; Electrical contractors;
NAICS Codes: 541511; Custom computer programming services;
NAICS Codes: 561210; Facilities support services[A];
NAICS Codes: 562111; Solid waste collection.
Subsidiary: Subsidiary F;
NAICS Codes: 541618; Management consulting services;
NAICS Codes: 541930; Translation and interpretation services;
NAICS Codes: 561210; Facilities support services;
NAICS Codes: 611420; Computer training.
Source: GAO analysis of ANC data.
[A] Subsidiary E marketed 561210 (Facilities Support Services) as its
primary NAICS code.
[End of table]
[End of section]
Appendix XII: GAO Contact and Staff Acknowledgments:
GAO Contact:
Katherine Schinasi (202) 512-4841 or schinasik@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Michele Mackin, Assistant
Director; Theresa Chen; David E. Cooper; Barry DeWeese; Art James, Jr;
Julia Kennon; Jeff Malcolm; Meaghan Marshall; Sylvia Schatz; Robert
Tagorda; and Tatiana Winger made key contributions to this report.
(120437):
FOOTNOTES
[1] Pub.L. 92-203 (codified as amended in 43 U.S.C. 1601, et seq.).
[2] Aside from monetary benefits, ANCs also provide other benefits to
their shareholders, such as scholarships, internships, burial
assistance, and benefits for elder shareholders. The benefits ANCs
provide are discussed in detail in appendix X.
[3] In this report, the term "ANC" refers to the parent corporation,
usually located in Alaska. The term "ANC firm" denotes a business owned
by an ANC. This has the same meaning as "ANC-owned concern" which is
the term used in SBA's small business regulation. We use the term
"subsidiary," as used in ANSCA, to refer to direct and indirect ANC
subsidiaries.
[4] We found the legislative history leading to the procurement
advantages to be sparse and to contain some confusing language. For
example, legislative language suggests that 8(a) businesses owned by
Indian tribes (defined to include ANCs) were exempt from sole-source
dollar thresholds because such businesses are located on reservations
and account for the major employment of the workforce. ANCs, however,
do not have reservations.
[5] A DUNS number is a 9-digit identification number assigned by Dun &
Bradstreet, Inc., to identify unique business entities.
[6] The primary industry is the primary line of work that the 8(a) firm
performs. 8(a) concerns may also seek opportunities through secondary
business activities, as long as they qualify as small for the size
standards pertaining to each line of work.
[7] For example: GAO, Federal Procurement: Spending and Workforce
Trends, GAO-03-443 (Washington, D.C.: April 30, 2003); GAO, Contract
Management: Impact of Strategy to Mitigate Effects of Contract Bundling
on Small Business is Uncertain, GAO-04-454 (Washington, D.C.: May 27,
2004); GAO, Small Business Contracting: Concerns About the
Administration's Plan to Address Contract Bundling Issues, GAO-03-559T
(Washington, D.C.: March 18, 2003); GAO, Reporting of Small Business
Contract Awards Does Not Reflect Current Business Size, GAO-03-776R
(Washington, D.C.: May 7, 2003); and GAO, Interagency Contracting:
Problems with DOD's and Interior's Orders to Support Military
Operations, GAO-05-201 (Washington, D.C.: April 29, 2005).
[8] ANCSA created village corporations for communities of 25 or more
Alaska Natives, group corporations for associations of fewer than 25
Alaska Natives, and urban corporations for urban communities of Alaska
Natives.
[9] 43 U.S.C. 1606(g)(2) and (h)(1)(C). Although the ANCs have
ownership and control over their lands, the act provided that Alaska
Natives could not sell their shares of corporation stock to the public
for 20 years after December 18, 1971 (Pub.L. 92-203 § 7(h)). In 1988,
Congress extended this provision, but gave the individual Natives the
option to sell the stock publicly if a majority of the shareholders
approved. (Pub.L. 100-241 § 8 codified at 43 U.S.C. 1629c).
[10] SBA has designated a small business size standard for every NAICS
code. 8(a) applicants must qualify as small under their primary NAICS
code at the time of application and SBA's certification date. SBA
regulation requires that at least 2 years lapse after an ANC firm exits
the 8(a) program before another firm owned by the same parent ANC can
enter the program with the prior firm's primary NAICS code. However,
once accepted into the program, 8(a) firms may pursue contracts in any
line of work, called secondary NAICS codes.
[11] GovWorks is a franchise fund within the Department of the
Interior. Franchise funds are government-run, self-supporting
businesslike enterprises managed by federal employees. They provide a
variety of common administrative services, such as payroll processing
and contracting support, to government agencies. We recently reported
on franchise funds and placed management of interagency contracting on
our high risk list. GAO, Interagency Contracting: Franchise Funds
Provide Convenience, but Value to DOD is Not Demonstrated, GAO-05-456,
(Washington, D.C.: July 29, 2005) and GAO, High-Risk Series: An Update,
GAO-05-207 (Washington, D.C.: Jan. 2005).
[12] According to an SBA official, a calculation error was made in
determining the ANC firm's average revenues over the past 3 years,
which resulted in the SBA's Alaska district office approving the ANC
firm for the contract.
[13] The Immigration and Naturalization Service was absorbed into the
Department of Homeland Security in March 2003.
[14] GAO, Contract Management: INS Contracting Weaknesses Need
Attention from the Department of Homeland Security, GAO-03-799
(Washington, D.C.: July 25, 2003).
[15] 15 U.S.C. 644(g)(1).
[16] On June 3, 2005, a rule was proposed to amend the Federal
Acquisition Regulation to allow, among other things, large businesses
to count subcontracts to ANC firms toward their small business
subcontracting goals, even if the firms are not small businesses,
certified small disadvantaged businesses, or certified 8(a) firms under
SBA's regulations. This rule proposes to amend the Federal Acquisition
Regulation to implement § 702 of Pub.L. 107-117, as amended by § 3003
of Pub.L. 107-206.
[17] FAR 52.219-14, "Limitations on Subcontracting." FAR 19.811-3(e).
In the case of a contract for supplies (other than procurement from a
non-manufacturer in such supplies), the concern will perform at least
50 percent of the cost of manufacturing the supplies, not including the
cost of materials.
[18] See United States Court of Federal Claims, Transatlantic Lines LLC
vs. United States of America and Strong Vessel Operators LLC. No. 05-
866C filed September 30, 2005.
[19] This type of contract provides for an indefinite quantity, within
stated limits, of supplies or services during a fixed period. The
government places orders for individual requirements. Quantity limits
may be stated as number of units or as dollar values.
[20] SBA regulation states that for indefinite quantity contracts for
general construction, the participant must demonstrate semi-annually
that it has incurred 15 percent minimum of the personnel cost for all
orders issued.
[21] Alaska Corporations Code, § 10.06.358(a)(1); 10.06.360;
10.06.960(h)(1).
[22] Id.
[23] None of the group corporations participated in the 8(a) program at
the time of this report.
[24] SBA's regulations allow two or more businesses to joint venture on
no more than three business ventures over 2 years.
[25] Individual agencies, including Defense, Energy, Homeland Security,
State, Transportation, and NASA, have their own mentor-protégé programs
with slightly different guidelines.
[26] However, a firm may mentor more than one 8(a) business at a time
as long as the protégé firms are not competitors and the mentor firm is
capable of handling multiple protégés. The SBA regulations note that
generally, a mentor will have no more than one protégé at a time.
[27] GAO ultimately denied the protest on the basis that GAO is
required to give deference to an agency's reasonable interpretation of
its regulations and SBA's analysis showed that the small business
protestor would appear not to have met the requirements for presuming
adverse impact. Catapult Technology, Ltd., B-294936, B-294936.2,
January 13, 2005.
[28] If the requirement was already being performed under an 8(a)
contract or is considered a new requirement, SBA is not required to
perform the adverse impact study. SBA is required, under certain
circumstances, to consider that adverse impact may exist if the
requirement is a consolidation of work previously performed by small
businesses.
[29] The other requirements are that the small business concern must
have performed the requirement for at least 24 months and is currently
performing the requirement or finished performing within 30 days of the
offering into the 8(a) program.
[30] Indian tribe in this case is defined to include ANCs.
[31] 15 U.S.C. § 636(j)(10)(J)(ii)(II).
[32] SBA can request additional information from the participant as it
deems necessary as part of its annual review.
[33] The subsistence lifestyle depends on wild resources for basic
needs such as food, clothing, and fuel as well as for trade, arts, and
ceremony.
[34] Each eligible Alaska Native is generally entitled to membership
both in the corporation established for his or her village and in the
regional corporation in which the village is located.
[35] One corporation was unable to provide us with its original
enrollment data.
[36] Pub.L.92-203 (codified as amended in 43 U.S.C. 1601, et seq.).
[37] A washateria is a community laundry and shower facility found in
villages without running water.
[End of Section]
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