Small businesses hate government regulations. No one tapped their rage better than Newt Gingrich, who made regulatory accountability a plank of the GOP's Contract with America.

The message wasn't lost on that political chameleon, Bill Clinton, who threw his support behind the Small Business Regulatory Enforcement Fairness Act, which became law in 1996. Now thanks to "RegFair," federal agencies must draft their laws with an eye on the burdens they heap on small companies. The law also created an ombudsman's office to appraise agencies' responsiveness to the little guy.

Alas for good intentions. Three years later, the ombudsman's office has issued its second report on the government's effort to unshackle small business (www.sba.gov/regfair/report98.html). What does it show? The office's efforts to cut regulators' red tape have been stymied by the very bureaucratic buck-passing RegFair hoped to eliminate. Despite its name, the ombudsman can't force the agencies to do anything. Aggrieved small-business owners have to take it upon themselves to sue agencies that don't follow the law.

For the record, the ombudsman's office gives RegFair a big thumbs-up: "Based on feedback from small businesses, RegFair has become a facilitator between small businesses wanting to raise issues with their government, and government officials able to independently address and answer small-business concerns."

LIMITED EFFECT. Those charged with enforcing it -- namely the ombudsman office itself and 10 regional fairness boards comprising small-business owners, who field complaints and rate the agencies' compliance -- also get raves: "They have accomplished a great deal in their quest to implement a national program," says the ombudsman's office.

Have they? Let's look at that. One measure is the number of business owners actually complaining through the ombudsman. Just 158 written complaints were reviewed by the RegFair board during 1998, and only 84 of those were deemed to fall under RegFair. That's out of 23 million small businesses in the U.S.

Which brings up the cost of responding to those complaints: Spread across the office's $500,000 budget, that's $5,952.38 per official written complaint. To be fair, the office gets the bulk of its feedback from the 10 public meetings -- where some 150 small-business owners shared their woes last year. Add their number to the 84, and the per-complaint cost drops to $2,136.

That might easily be justified if the complaints really did ease the burden of onerous and unnecessary rules. Unfortunately, it's hard to tell exactly what happens to complaints once they're pushed into the ombudsman's office. Much paper and many forms, of course, are routed between the small-business owner and the offending agency. And the ombudsman can help nudge a particular complaint through the bureaucracy, but without the authority to force an agency to do something, the impact is rather muted. "Our only authority is the power of the bully pulpit to hold hearings and issue reports," acknowledges ombudsman Peter Barca.

WAITING FOR RESULTS. Even those who bothered to testify about problematic rules at the town meetings say they've seen precious little in the way of results. Since it was passed, the ombudsman process appears to have produced only one major rule change: A suspension of capital requirements for small companies doing business with the Health Care Financing Administration.

"There needs to be a continuing relationship with the people giving testimony," says Dan Stockton, CEO of Great Oaks Water Company, a tiny outfit in San Jose, Calif. He filed a complaint about burdensome postal regulations and appeared before a fairness panel last April. He says he "hasn't heard anything since then."

Barca admits that his office won't work miracles for every small business with a complaint. But he says the program is succeeding on a loftier level than mere troubleshooting. "We're sensitizing agencies to the needs of small business," he says. Nearly all federal agencies now have a point person for handling RegFair. "They view it much more seriously," he adds.

That may be true. But turning such a view into action remains a far stiffer challenge, particularly for agencies that small business considers its antagonists -- the Internal Revenue Service, notably. The report's own disclosures aren't particularly encouraging. In one case, for example, the "IRS did not indicate in its response what changes, if any, it planned to improve the audit process...for similarly situated businesses." And, in another incident, where a small business complained of IRS harassment, the tax service "did not address what steps [it] has taken, or will take, to reduce the occurrence of such threats."

RegFair is a nice idea, but with more bureaucrats on the case -- writing reports, planning meetings, and "creating dialogue," entrepreneurs calling with complaints shouldn't be surprised if they end up on hold.

By Dennis Berman in New York
dennis_berman@businessweek.com

To: LAW