Few small businesses receive federal money
By Yasmin Anwar
Advertiser Staff Writer
Tens of millions of federal dollars that flow through a government program intended to give a boost to minority- and women-owned small businesses have mostly benefited a handful of well-heeled Hawai'i entrepreneurs.
A U.S. Small Business Administration program known as 8(a) for socially and economically disadvantaged U.S. citizens has helped hundreds of modest Hawai'i firms gain a foothold in lucrative federal contracts through set-asides and pricing advantages.
However, figures from last year alone indicate that the bulk of federal contracting 8(a) dollars have been concentrated among a few aggressive firms who classify as disadvantaged under the most generous terms, raising questions about whether the federally sponsored enterprise is spreading the wealth among small businesses, or creating a minority business elite.
"There's a handful of contractors who are soaking up all the work, and it's hard to compete with them," said Vince Perez, owner of Pride Building & Development in 'Ewa Beach, who joined the program in 1997 and received his first contract this year to renovate four federal courtrooms.
But the biggest small businesses in Hawai'i's 8(a) program say they need help competing with mainstream companies like Hawaiian Dredging Construction Co. that threaten to monopolize the industry.
"Economically, we're at a disadvantage against the larger companies," said Jack Ho, owner of Primatech Construction Co., which won a $7.2 million contract for construction at the Navy's Pacific Missile Range Facility on West Kaua'i.
Hawai'i's top 8(a) contract-getter in the 2000 fiscal year was Honolulu general contractor Patrick Shin, who netted more than $18 million worth of contracts, mostly from the Army and Navy, for his firm, Nan Inc./Ocean House Builders.
The program was so profitable for Shin that his firm's revenues surpassed the administration's limit of a three-year running average of $27.5 million for general building and highway-heavy construction. He was asked to graduate in January, four years ahead of schedule. His company reported $50 million in revenues last year, ranking it No. 147 among the top 250 Hawai'i businesses.
"I became too big and successful," said the 37-year-old South Korea native, who lives in a $3 million Diamond Head mansion and has a Lamborghini and Dodge Viper in his car collection.
When Shin started in the program in 1995, he says, he definitely qualified as disadvantaged with just three employees and $4,000. But he said hard work, sacrifice and marketing savvy got him the work.
"You've got to get one job and do really well," he said. "If you do well, and you give a good price, they remember you and they ask for you again."
Last year, the program's Hawai'i office amassed $154 million in federal contracts. But half that money went to only a dozen of the 108 firms on the program's roster, including a subsidiary of a land-rich Alaska Native regional corporation.
While 71 firms landed jobs with the Army, Navy, Air Force and other federal government agencies, 37 firms on the program's roster came up empty-handed.
SBA officials contend that the success of an 8(a) firm cannot be determined by one year, and that business opportunity specialists work hard to help new firms in the program develop business plans and gain access to the economic mainstream. Those who fail, they say, often have misplaced expectations about the program.
"It's not a handout. It's an opportunity," said Andrew Poepoe, director of the Small Business Administration's Hawai'i-Guam district.
A former executive with Dole Foods, Poepoe was appointed to run the Hawai'i SBA in 1991. At that time, he recalls, the program was getting $11 million a year in federal contracts and had 34 firms in its portfolio. Today, there are 155 firms, and the average annual contracts amount to about $150 million.
"Hawai'i is doing real well in moving dollars to small business," said Poepoe, who oversees 22 employees in Honolulu and 14 in Guam.
Indeed, dozens of small businesses from construction and janitorial firms to providers of information technology rave about the benefits of the program that President Richard Nixon started in 1969 as part of his platform to promote "black capitalism" as an alternative to government handouts.
One popular feature is a mentoring program that matches small firms with large companies for joint ventures.
But critics of the program say it is riddled with loopholes and contradictions that foster a business climate in which the rich get richer. In some cases in the past, minorities have been used as fronts for wealthy male Caucasian-run businesses, as have wives who have little or nothing to do with their spouse's business.
The most common charge is that it's too easy for millionaires to profit from the program. A 1995 SBA Inspector General audit of the program found that loopholes allow the biggest companies in the program to retain their disadvantaged status despite evidence that their owners lived in lavish homes and drew large salaries.
And the General Accounting Office concluded that "While 8(a) contract dollars continue to be concentrated in a relatively few firms, many economically disadvantaged firms do not receive any 8(a) contracts."
To qualify for the program, firms must be small and predominantly owned by a "socially disadvantaged" person. That includes women, Asian Americans, African Americans, Native Americans and Hispanics, as well as Portuguese Americans.
An applicant must prove a personal net worth of no more than $250,000, and that excludes the worth of their home and business. To continue in the program, personal net worth cannot exceed $750,000.
The 1969 congressional act that created the program does not stop federal agencies from using the same contractor repeatedly. Nor does it bar 8(a) contractors from subcontracting to firms that are not certified in the program.
Some say 8(a) contractors should be required to subcontract to others in the program. However, Poepoe said that is not mandated in the federal act and would be too restrictive.
Peter Gaddy, a deputy property manager with the General Services Administration, said the government's concern about cost and quality prompts federal contracting officers to keep requesting companies that have proven themselves.
"Everybody loves a good performer," he said. "That's just human nature."
Besides, Gaddy said, there's no danger of a monopoly lasting too long, because contractors cannot stay in the program longer than nine years.
"Even if we have a favorite, we have to spread the wealth," Gaddy said.
Still, with the federal government moving steadily in the direction of bigger or "bundled" contracts, many small-business people say they can't compete because they don't have the necessary bonding or capital to get the jobs.
Bonding is a form of insurance that guarantees the satisfactory completion of a construction project. Without a bond, a small business can't bid on a lot of jobs. And without a lot of jobs, it can't increase its bonding.
Small-business people also complain of the morass of paperwork that government jobs require. An estimated 70 percent of applications to the program get rejected.
Honolulu-born general contractor Tom Tokunaga got into the program in 1999, and he still is waiting for his first contract.
"They're supposed to help people like me, but I never get any help," said Tokunaga, 59, who complained about his experience to top SBA officials and members of Hawai'i's congressional delegation.
He claims Mike O'Neill, the business opportunity specialist assigned to his case, said he was not "sophisticated enough," and threw obstacles in his way.
SBA officials who investigated Tokunaga's complaint have concluded that O'Neill acted properly in Tokunaga's case.
"The allegation that we discouraged him from applying and that we cost him a contract is totally unfounded," said O'Neill, who has since transferred to Virginia.
But even Poepoe acknowledges the irony that Tokunaga is, perhaps, too small for the Small Business Administration, and that helping him win a contract has been a challenge.
"Mr. Tokunaga has a small firm, and in federal contracting you need bonding," said Poepoe. "You must have cash flow to handle all the federal requirements."
Randall Lau, owner of Designer Built Systems, which netted $13.7 million worth of 8(a) contracts last year, said, "It's a Catch 22. You have to be small, but you have got to be ready to run when your first opportunity comes. It's all performance based. One bad job can really cripple you from getting future work."
One company that benefitted last year from the Hawai'i program was Ahtna Government Services Inc, a subsidiary of Ahtna Inc., which was established by Congress in 1971 under the Alaska Native Claims Settlement Act and owns 1.7 million acres in the Copper River Basin.
Ahtna Government Services Inc. set up headquarters in Honolulu in 1999 and netted more than $8 million worth of federal contracts through the 8(a) program, which allows federally recognized natives to get contracts of any amount without going through the competitive bidding process. Under the program's rules, contracts of $3 million or more must go to competitive bidding.
Poepoe says if Native Hawaiians receive federal recognition via a bill that is making its way through Congress, they, too, would be eligible for unlimited-dollar sole source federal contracts.
In that event, he says, non-Hawaiian 8(a) contractors might think about selling or giving 51 percent of their businesses to Native Hawaiian groups so that they can all benefit from the program.
One company that stands to benefit from federal recognition is the woman- and Hawaiian-owned Dawson Group, owned by Christopher Dawson and his mother, Beadie Kanahele Dawson, the former attorney for the association of Kamehameha Schools parents, alumni and students. Dawson and her husband own a Nu'uanu home with a swimming pool assessed at close to $1 million.
The firm offers environmental, construction and information technology services, and landed a $2,999,999 sole-source contract from the General Services Administration last year.
Asked if they are disadvantaged, Beadie Dawson said, "Absolutely. Both my son and myself have had huge hurdles to overcome. Assumptions are made about minorities, and you feel them acutely, and it is very real."
Correction: Randall Lau's name was misspelled and Christopher Dawson was misidentified in a previous version of this story.
