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Field Hearing October 29, 2007:
Access to Federal Contracts:  How to Level the Playing Field

Hosted by U.S. Senator Benjamin Cardin (D-Maryland)

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Web Posted November 21, 2007

Testimony submitted by Tim Fay,
Fay Communications, Inc.

INTRODUCTION: To answer the question posed in the title of this hearing, the best way to level the playing field in federal contracting is to obtain the best value for the taxpayers' government contract dollars by seeking out firms with the best ability to produce the best product or service at the best price regardless of the race, gender, or ethnicity of the contractor.

          Fay Communications, Inc. fully supports programs which assist truly small businesses compete for government contracts as long as that assistance is completely neutral regarding the race, gender or ethnicity of the contractor. As I will graphically illustrate later in my testimony, so-called race-sensitive assistance efforts in this regard have had a devastating impact upon my business and, by definition, upon many other small businesses which happen to be owned by non-preferred groups such as white males. Such programs are racially exclusionary by definition: a benefit or preference offered exclusively to one racial group necessarily excludes another, non-included racial group from that benefit.

STRICT SCRUTINY and DISPARITY STUDIES:  Under applicable case law federal contracting preferences based in any part upon race or gender are legally suspect. Upon close examination all such programs fail one or more of the three prongs of "strict scrutiny" laid out by the U.S. Supreme Court in a series of rulings on this issue. And, according to expert testimony before the U.S. Commission on Civil Rights, virtually none of the "disparity studies" which are used to justify these race-based programs are based upon a statistically valid, independently reproducible finding of systemic discrimination. (See: U.S. Commission on Civil Rights May 2007 Briefing Report "Disparity Studies as Evidence of Discrimination in Federal Contracting", particularly the testimony of Roger Clegg and George LaNoue.)

          To be sure, the federal government; the State of Maryland; Montgomery County, Maryland; and Prince Georges County, Maryland all have so-called disparity studies which they use to justify their use of race, gender and ethnicity in contract awards. At their best, these studies offer a smorgasbord of anecdotal reports and very simple statistics which merely show that some minority groups are "underrepresented" in federal, state and local contracting. The type of "evidence" presented in these disparity studies proves neither (1) that racial discrimination is the reason for this underrepresentation; nor (2) that race based measures to correct the underrepresentation constitute a narrowly tailored remedy which passes all three prongs of strict scrutiny.

WHITE MALES NEED NOT APPLY:   The federal government administers a number of race, gender and ethnicity-based preference programs for contractors including the 8(a) program as well as the SDB (Small Disdadvantaged Business) and WBE (Woman-Owned Business Enterprise) programs. I note in passing that in 1997 the federal government set aside $21.8 billion dollars for contracts to businesses not owned by white males. By FY2005 the total of all 8(a), SDB and WBE contract set asides had ballooned to $32.3 billion. (See SBA's FY2005 "Small Business Goaling Report" at page 1.)

          I should also note that the U.S. SBA has nominally, and purely symbolically, begun to allow white males to avail themselves of the 8(a) set aside program. This is truly an empty gesture because, according to the SBA's own official report, less than 1/2 of 1 per cent of 8(a) businesses are owned by white males. (See "SBA Report to Congress: Office of Business Development, Minority Small Business and Capital Ownership Development" FY 2005, "Table IV: Ethnic Heritage of 8(a) Business Development Participants".)

          Furthermore, the 8(a) certification process for white males is inherently racially biased against them. The application places an extraordinary burden of proof upon white male applicants which it does not impose upon selected minority applicants. A white male applicant must provide copious documentation (against extremely vague, ill-defined criteria) proving that he has experienced historic disadvantage. Black applicants and selected other minorities are allowed to completely skip that section of the 8(a) application.

FayComm Experiences with
Racial Set Asides and Preferences

          My business, Fay Communications, Inc., had been quite successful as a federal contractor. But for the past 20 years -- beginning in 1987 and continuing through today -- we have been repeatedly and explicitly told by federal agencies, as well as by state and local agencies, that because of my race and gender my firm is not allowed to bid on government business for which we are extremely well qualified.

FEMA and FAYCOMM:  In the summer of 1987, for example, my company had been performing contract work for FEMA during the previous three years. FEMA was quite happy with our work.

          During the week of July 6, 1987 our FEMA program officers met with me and told me that Fay Communications would no longer be allowed to bid on the FEMA contracts because FEMA, with strong encouragement from the SBA, had elected to give -- without competition -- future contracts to a supposedly "historically disadvantaged" firm owned by an Asian American. The "historically disadvantaged" firm was Technical Resources, Inc. (TRI).

          Somewhat apologetically, the FEMA program officers explained to me that federal set aside rules gave them a huge incentive to sole source the contract to TRI without competition. By doing so FEMA was able to bypass the tedious, labor intensive and lengthy process of soliciting and evaluating competitive bids. This was a big incentive for government agencies to set aside contracts for non-whites in 1987 and it remains so in 2007.

          During my ensuing lawsuit (and what civic minded American wouldn't sue over such blatant racism?) the following facts surfaced during pretrial discovery:

  • The "disadvantaged" firm (TRI) had 100 employees vs. my "privileged" firm's 4 employees.
  • The "disadvantaged" firm (TRI) had $10 million in annual revenue ALL of which was from non-competed 8(a) set asides. My "privileged" firm had a measly $640,000 in annual revenue none of which was from the 8(a) program nor from any other set aside or preference program.

Which firm was truly disadvantaged?

          Following my lawsuit (which I predictably lost) Fay Communications' federal revenue rapidly declined to zero. We did continue to receive enthusiastic phone calls from government agencies requesting our services (we had an excellent reputation within the federal government), but ALL of these phone calls ended abruptly when the federal agencies learned that Fay Communications was not a minority owned firm.

          For the next ten years -- from 1987 to 1997 -- I continued making a very modest living by contracting with those few, remaining private companies and organizations which had not yet implemented racially preferential supplier diversity programs in their contracting operations. Since 1987 I have not been allowed to bid as a prime contractor for any federal contract.

U.S. DOT and FAYCOMM:   However, ten years later, in October 1997, I did come tantalizingly close to winning a lucrative federal contract worth almost 1/2 million dollars for which I was eminently well-qualified. A program officer from the U.S. Department of Transportation telephoned me at that time about a contracting opportunity.

          I had made an interactive instructional CD-ROM for a trucking association (which industry is regulated by DOT). DOT had independently obtained a copy of my interactive CD and they loved it.

          In our October 1997 phone conversation, DOT enthusiastically praised my work and indicated they were anxious to get my firm on board to perform similar work for them. Was I available? Yes. Was I interested? You bet.

          Then the nice DOT program officer lady asked the fateful question: "Are you a minority-owned firm?" Damn! The DOT contract had been set aside for a minority owned firm. I was devastated. End of conversation.

          But, being a businessman, I called the DOT back and said "Hey, I work with a guy who is black and who is certified, so let's have a meeting."

          Within six weeks of our meeting with DOT the black business owner received the initial contract, and subsequent related contracts, totaling $490,600. There was no competitive bidding. White owned firms were not even considered for this work. This was a sole source award to an 8(a) firm.

          The deal with the devil that I was forced to strike on these DOT contracts was this: I had to give away 51% of the contract to my new "partner" (the black owned business) because the 8(a) program prohibits white subcontractors from earning more than 49% of an 8(a) contract. But I actually earned far less -- only 14.9% of the total contract awards -- when my black partner, the 8(a) firm, terminated its relationship with me in order to retain more of the contract funds.

          Final score: white guy (FayComm) $73,183; black guy $417,417.

          This in spite of the fact that it was my qualifications and experience which DOT had initially sought out. My 8(a) "partner" firm had no prior experience in the production of interactive, instructional CD-ROMs.  (See particularly Adversity.Net Case 24 for additional details and contracting specifics.)

WSSC, MONTGOMERY COUNTY, and FAYCOMM:  Even though the topic of this hearing is federal contracting, since Senator Cardin represents the State of Maryland, I think it is relevant to briefly discuss the racially preferential contracting programs being operated in Montgomery County, Maryland where both I and my business are located.

          For example, I am registered with the Washington Suburban Sanitary Commission (WSSC) under their contractor program "Small, Local Business Enterprise" (SLBE). While this program allegedly benefits all small vendors regardless of race, unfortunately for people like me, the SLBE program is actually administered by WSSC's SLMBE (Small, Local, and Minority Business Enterprise) office. And WSSC's SLMBE program is virtually indistinguishable from their MBE (Minority Business Enterprise) program. In both appearance and in practice WSSC's emphasis on "small businesses" is clearly superseded by their interest in "minority owned" firms.

          This month (October 2007) I received a request for proposal from WSSC to submit a bid on A/V work at their headquarters. Included in the WSSC request for proposals is the following requirement: Non-minority bidders (such as Fay Communications) are required to certify to WSSC that at least 28% of the total amount of the contract will be spent on subcontract and supply business from minority-owned businesses -- even if we don't need the subcontractors. In other words, this is race-based "make work". Besides being openly discriminatory, WSSC's requirement is a bad deal for their rate payers who have to pay the additional cost of this wasteful and inefficient practice.

          Also this month I received a request for proposal from Montgomery County's Public Information Office to produce a pedestrian safety video. When I called the Montgomery County PIO to inquire about the evaluation criteria I was informed that there is a committee which will evaluate all of the submitted proposals for the race, gender, and ethnicity of the bidders as well as the race, gender, and ethnicity of the bidders' subcontractors.

RACIAL SET ASIDES and PREFERENCES DON'T WORK:  In any objective sense the reader must conclude that these programs represent nothing short of systemic, structural discrimination against businesses owned by whites in general and by white males in particular. And, far from helping minority-owned firms gain experience to compete for business, these racially preferential programs are a failure at many levels.

          First, they are a failure because, according to SBA's own published figures, almost 50% of the 8(a) firms which survive to the end of their maximum nine year term in the program simply disappear after the end of the program. And a large percentage of 8(a) firms don't survive long enough to reach their nine year maximum in the program.

          Between FY 2003 and FY 2005 the SBA reported that 629 of their 8(a) firms exited the program. Of that 629 only 1 firm actually completed its full 9 year term (which SBA calls "graduating"). 370 firms (58.8%) were terminated from the program by SBA for cause (for failing to meet various requirements); 258 (41.0%) withdrew from the program on their own; and NO firm which left the program did so because of "early graduation", i.e., not one firm out of the 629 that exited the program during this period did so because it was financially successful enough to exceed the size and revenue caps required to be a participant in the 8(a) program. (See SBA's "Report to Congress; Office of Business Development, Minority Small Business and Capital Ownership Development", FY 2005, Table III.)

          Second, they are a failure because the SBA's Business Opportunity Specialists (BOS's) who are supposed to manage and nurture 8(a) participants primarily teach them only two things: (1) How to identify and obtain as many non-competitive 8(a) set aside contracts as possible; and (2) How to identify competitive, non-8(a) contracts and then how to get the SBA to "encourage" the contracting agency to set that contract aside for the 8(a) company. According to memoranda obtained during our pretrial discovery, the latter is precisely how TRI arranged to have the FEMA contracts designated as 8(a) set asides to TRI. SBA refers to this malodorous practice as "marketing your 8(a) firm to other government agencies."

          Third, these programs are a failure because they enrich a few, very large minority-owned business opportunists which did not need the assistance in the first place.

          By way of specific example, the 8(a) business with whom I was forced to partner on the DOT project was not economically disadvantaged by any rational measure. Prior to becoming certified as an 8(a) he had been in business for as many years as my firm. He told me that he decided to become certified as an 8(a) firm so he could take advantage of the set aside gravy train. Furthermore, he is a wealthy land owner who lives on over 40 acres of prime real estate in suburban Washington DC.

Disadvantaged Firm's Prime Land
The "disadvantaged" firm owns many acres of prime real estate near Washington, DC
(Image courtesy of Google Earth)

          By way of further example, the U.S. GAO reported that, in one year alone, of the 5,400 minority and women-owned firms participating in these programs, only 209 of these firms (3.9%) sucked up 50% of the set aside contract dollars. The total set aside pie that year was $21 billion for minority and women owned businesses. Therefore each of the 209 largest minority/women owned firms earned an average of $50.2 million in set aside contract revenue, while the remaining 5,191 minority/women owned firms earned an average of a mere $2 million. This obviously begs the question: "How disadvantaged can one be if one is earning between $2 million and $50 million per year?" I would give my right arm for an opportunity like that, even at the low end of the scale! But I cannot have that opportunity -- even if I donate my right arm -- because I have the wrong plumbing and pigmentation.

          In another report issued in 2000, the GAO found that the SBA 8(a) program does not collect information which would allow them to "...assess whether its efforts have an impact on the ultimate performance goal of creating commercially viable and stable firms." In other words, by design or by neglect, SBA is not able to evaluate whether the 8(a) program actually produces viable businesses. (GAO "Report to the Chairman, Committee on Small Business, U.S. Senate", July 2000, GAO/RCED-00-197.)

FEDERAL SMALL BUSINESS SET ASIDE PROGRAM:  Having said all of that, I wish to address a supposedly race-neutral federal contracting reserve or set aside program which is exclusively for Small Business. For those of us who are excluded from the lucrative 8(a), SDB and MBE programs, the Small Business set aside program does not in any way compensate for the racial bias and exclusionary nature of those other programs nor does it necessarily represent a great business opportunity for truly small firms. There are several reasons why this is true:

          First, it is true that firms owned by all races may bid on these contracts, including firms belonging to the 8(a), MBE, SDB and WBE programs. White male owned firms are, of course, still excluded from the $30 billion plus in contracts reserved for various race-based programs.

          Second, the number of firms competing for the Small Business set asides is orders of magnitude larger than the pool of 8(a), SDB and MBE participants in the limited-competition race-based programs. For the truly small firm this arrangement is not much better than simply going up against all of the mega-contractors in the total federal contract pool.

          Third, the firms competing for Small Business set asides are neither small nor disadvantaged in any meaningful sense. Depending upon the industry category, the Small Business set aside program allows participants to have annual revenues of as much as $32.5 million and as many as 1,500 employees. This hardly represents a level playing field for truly small firms such as Fay Communications.

CONCLUSION:  In conclusion, there can be no level playing field in federal contracting (nor in state or local government contracting) as long as the government continues its divisive, counterproductive, noncompetitive, and discriminatory emphasis on the bidders' pigmentation, country of origin, or personal plumbing. After almost 40 years of racial set aside programs and racial preference programs, minority-owned businesses are still not proportionally represented in federal contracting. One must conclude that the set aside program, and its racially preferential progeny, have not worked. These programs have failed to achieve the legally, constitutionally and economically dubious goal of proportional representation for selected races AND these programs have demonstrably failed to produce viable businesses.

          The government should get back to the contracting basics: obtain the best value for the taxpayers' government contract dollars by seeking out firms with the best ability to produce the best product or service at the best price regardless of the race, gender, or ethnicity of the contractor.

Respectfully Submitted by:
Tim Fay
Fay Communications, Inc.

cc: Members of the Senate Small Business Committee


NOTES:

          No live comments from the public were allowed at this field hearing.  Instead a panel of nine hand-picked diversiphiles read pre-submitted statements extolling the virtues of race-based setasides for minority-owned businesses.  See below for their actual "testimony".

          Significantly, the setting for this faux panel was at an historically black college, Bowie State University, which is located in the majority-black Prince Georges County, Maryland.

LIST OF PANELISTS AND THEIR TESTIMONY:

Panel I

Mr. Calvin Jenkins (testimony)
Deputy Associate Administrator,
Office of Government Contracting and Business Development,
U.S. Small Business Administration

Mr. Anthony Martoccia (testimony)
Director of Small Business Programs,
Office of the Secretary of Defense,
U.S. Department of Defense

Mr. Michael J. Rigas (testimony)
Deputy Associate Administrator,
Office of Small Business Utilization,
General Services Administration

Panel II

Mr. Wayne Frazier (testimony)
President,
MD. Washington Minority Contractors Association, Inc.

Mr. Hubert "Petey" Green (testimony)
President,
Prince George's County Black Chamber of Commerce

Mr. Ricardo Martinez (testimony)
President,
Maryland Hispanic Chamber of Commerce Chief Executive Officer,
Project Enhancement Corporation

Panel III

Mr. Melvin Forbes (testimony)
President and Chief Executive Officer,
Wilkerson Sports Enterprise Forbes Consulting & Associates

Mr. Timothy Adams (testimony)
President and Chief Executive Officer,
Systems Application & Technologies, Inc.

Ms. Carmen Ortiz Larsen (testimony)
Chief Executive Officer,
Aquas, Incorporated

 


END Tim Fay testimony

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