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GOVERNMENT

10.2.98  
Is There Any Advantage for the Disadvantaged?
New SBA rules make more people eligible for help winning federal contracts

Calling disadvantaged entrepreneurs. The government wants to give you a better crack at winning federal contracts. Just don't expect to feel the playing field level under your feet.

The Small Business Administration has come up with new, constitutionally correct guidelines to help more small, disadvantaged businesses win federal contracts in the wake of a 1995 Supreme Court decision limiting use of racial preferences. The old SBA guidelines expressly targeted minority-owned companies.

The new rules -- which are still expected to benefit mainly minority-owned businesses -- are hardly less controversial. And their tortured eligibility criteria would do Lewis Carroll proud. What's the point? Says Richard Hayes, the SBA official who oversees the qualification process: "This is constitutionally defensible. This minimizes the adverse impact on nonminorities."

There's real money at stake. Hayes estimates that 30,000 companies -- mainly minority owned -- will eventually qualify for the "small, disadvantaged business" label. In practice, this means their bids on federal contracts are evaluated as if they're priced 10% lower than they are, giving them an edge over ordinary competitors. Last year, with all the assists available, disadvantaged businesses bit off a $5.7 billion chunk out of the $200-billion-a-year federal contract market.

WHO QUALIFIES? Under the new guidelines -- as under the old ones -- blacks, Hispanics, Native Americans, and Asian Americans automatically meet the "disadvantaged" standard. Now the standard has been broadened to include, say, a white businesswoman who claims she's been denied loans based on gender or even someone trying to make a go of it in a poor part of the country: "Long-term residence in an environment isolated from the mainstream of American society" is one qualifier, according to the SBA guidelines.

All you need to do is demonstrate, based on a "preponderance of the evidence," consistent and repeated discrimination based on both social and economic circumstances.

Meeting the economic standard for disadvantage is the easy part. In fact, it's so easy that even millionaires could qualify. An applicant's net worth must be less than $750,000, but it excludes home equity and the amount invested in the applying company. That seems surprisingly generous, but the SBA insists that someone who seems wealthy in one part of the country may not be in other areas. "When Congress was deciding on thresholds, they were looking at places like Washington, D.C., or New York City," says agency spokesman D.J. Caulfield. "If they're successful there, even moderately, their personal assets could approach that dollar value."

Qualifying as "socially disadvantaged" gets a bit thicker. In fact, nonminorities must actually write a narrative detailing their social disadvantage. SBA officials insist that a simple sob story won't get you in the door. It takes a well-documented account of the discrimination, based whenever possible on legal cases, loan denials, and job denials. "We will accept anyone who can make the case, but it has to be a factual case," says the SBA's Hayes.

The classification of nonminorities, admits Hayes, will largely depend on "how well they write their application." That sort of process opens up a Pandora's box of subjective factors. Once personal preferences come into play, "it's a judgment call," says Jane E. McGinnis, director for the Procurement Technical Assistance Center in Merced, Calif., a locally and federally funded center that helps small companies get government work.

HEADACHES. Another key difference between the old guidelines and the new ones is verification. Previously, a company would vouch for its own eligibility to be minority-owned. Now, minorities and nonminorities alike need third-party verification. As part of that, they fill out a 12-page application with wide-ranging personal and financial questions, much of it designed to show that the disadvantaged business owner isn't a figurehead for outside investors. "It will be a headache at first," says McGinnis.

The rub is that even if a business owner manages to show disadvantage, he or she might not get any preference. Under the new rules, the price breaks will go to only certain industries -- those the Commerce Dept. says don't use enough minority businesses.

That means oil exploration and communications companies, for example, qualify, but farms don't. Nevertheless, the SBA says disadvantaged businesses will be eligible for help in bidding for three-fourths of all federal contracts. That sounds great -- so long as the new, expanded definition of disadvantaged doesn't make just about anyone eligible to compete.

By Dennis Berman in New York
Dennis_Berman@Businessweek.com


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