The Wealthy and Well-Connected Benefit Most from Racial Set-Asides – October 1996

A New Visions Commentary paper published October 1996 by The National Center for Public Policy Research, 20 F Street NW, Suite 700 , Washington, D.C. 20001, (202) 507-6398, Fax (301) 498-1301, E-Mail [email protected]

In a high-profile speech last year, President Bill Clinton vowed to “mend” federal affirmative action programs that no longer work. His administration, however, has missed — dare I say skipped — the biggest target on the preferential policy map: the Small Business Administration’s (SBA) racial set-asides program popularly known as “8(a).” The task of fulfilling Clinton’s promise has fallen into the lap of Rep. Jan Meyers (R-KS), the chairwoman of the Committee on Small Business. She recently introduced legislation to abolish this $6 billion slush fund.

While 8(a) is supposed to benefit and train “disadvantaged” firms, it actually channels contracts to just a handful of well-positioned companies. Last year, more than $1 billion worth of contracts went to the 25 firms that received the most 8(a) support. Nearly half of this $1 billion flowed to businesses headquartered inside the Washington beltway. In fact, the top 5 recipients all operate out of the Washington, D.C.-metro area. For the last 15 years, more than half of all 8(a) participants have received no 8(a) contracts in a given year. Worse yet, a study by the General Accounting Office (GAO) found that less than nine percent of the 8(a) contracts were awarded competitively in 1994. Under 8(a)’s insipid rules, only contracts over $3 million even need to be open to competitive bidding, though that requirement for higher-end contracts is routinely ignored.

SBA claims that noncompetitive set-asides are crucial for fostering the development of small businesses. This begs the question: how does a firm learn about competing in the marketplace if it never competitively bids for a contract? Could it be the real lesson taught by 8(a) is the value of a slick lobbyist and a strategic connection? Meyers’ proposal would abolish the practice of noncompetitive contracts entirely, and instead replace 8(a) with a program to advise and counsel small, truly economically disadvantaged businesses, regardless of the skin color of the people running them.

A perfect example of the need for abolishing noncompetitive contracts is found in the contract history of Digicon Corporation, of Bethesda, MD, a computer systems company.

Enrolled in 8(a) starting in 1985, Digicon’s revenues have risen from $300,000 in FY 1987 (July through June ’87) to approximately $100 million in FY 1996, according to a Digicon employee who wishes to remain anonymous. This growth is impressive, but it was dependent upon the luck of their CEO to be born in the right country. Their ability to wiggle into 8(a) apparently rests on the birthplace of their CEO, John Jeong-Ming Wu. By virtue of his Taiwanese native homeland and Asian ancestry, he qualifies, in the eyes of the SBA, as a “socially disadvantaged” individual.

Digicon’s participation in 8(a) set-asides played a significant role in its growth Of its FY 1996 revenue, a large chunk comes from a 5-year, $97.3 million, noncompetitive 8(a) contract awarded last December. Like so many others, this contract, worth up to $20 million per year, was awarded without competition, despite Congress’ insistence that any contract over $3 million be awarded competitively.

Ironically, at this time of the $97 million set-aside, Digicon was already scheduled to graduate by at least this April, since it was pushing up against the nine-year time limit for 8(a) participation, meaning Digicon’s owners were no longer “disadvantaged.” By receiving the $97 million contract, however, Digicon will be cashing in on 8(a) set-asides for the next five years. Digicon is not to blame for their legal behavior; the SBA has contorted 8(a) into a goody bag filled with million dollar handouts for people with favored skin colors.

This is apparently not uncommon. In 1994, GAO found several flagrant examples of what many SBA officials privately dub a “graduation present.” This is a practice in which a “disadvantaged” firm receives a long-term, open-ended contract shortly before “graduation,” keeping that company’s hands firmly planted in the 8(a) cookie jar for years to come.

Digicon is but one example that 8(a) is a tremendously costly and ineffective program that benefits politically well-connected companies that are anything but “disadvantaged.” Rep. Meyers’ proposed bill would wisely overhaul the entire program so that small businesses owned by people of all races may actually profit from advice and counsel. Because of a disastrous record of corruption and fraud, color-conscious and noncompetitive contracts must be eliminated.

by Joel Mowbray, a free-lance writer specializing in questions of race, ethnicity, and immigration.


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