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Congressional overseers questioned the effectiveness of the Small Business Administration's guaranteed loan program at a hearing Thursday, but panelists stopped short of proposing elimination of the agency, as advocacy groups had suggested they might.

Controversy over the Senate Homeland Security and Governmental Affairs Subcommittee on Federal Financial Management hearing erupted last week, with a small business advocacy group upset by the scheduled appearance of Veronique de Rugy, a resident fellow at the right-leaning American Enterprise Institute who has advocated for elimination of the SBA and small business set-asides. Sen. Tom Coburn, R-Okla., chairman of the subcommittee, in turn accused the group of circulating misleading information and SBA officials of inappropriately lobbying against the hearing.

In her oral testimony, however, De Rugy stopped short of recommending that SBA or its main lending program be scrapped, though she argued that the program is not helping small businesses and might be harming them. She cited statistics showing that only about 3 percent of small businesses obtain credit through the program, arguing that the success of the other 97 percent in meeting their credit needs in other ways shows that the federal program is unnecessary.

De Rugy's written testimony, submitted for the record, pursued this argument to conclude that the SBA loan guarantee programs should be terminated. Reached by phone, De Rugy said she had not completed formal research on whether the agency itself should be eliminated, but suspected that when she fully researched the question, she would arrive at that conclusion.

Coburn questioned whether entities other than small businesses benefit from the program. He asked David Bartram, chairman of the National Association of Government Guaranteed Lenders, how profitable the loans are for the private banks that finance them, and was told they are comparable to conventional loans. "It is important that SBA be about helping small businesses, not about helping the people who help small businesses," Coburn said.

He also questioned SBA Administrator Hector Barreto about small business set-asides in government contracting, noting that Northrop Grumman, Hewlett-Packard, General Dynamics and Oracle were among the large businesses that received millions in set-aside contracts in 2002.

Barreto said small companies often win contracts and then outgrow their size status or get purchased by large firms, and that he believed circumstances like those mostly explained the large companies on the record.

But Coburn criticized this arrangement, saying when a large company buys a small one, "they're buying an advantaged position in government contracting."

The American Small Business League, which kicked up a storm when it publicized the event as a hearing to abolish the SBA, noted that little discussion was devoted to solutions to fix problems at the agency. In a statement, the group lamented that there was not greater discussion of federal investigations that had found that "billions of dollars in small business contracts have been diverted to large companies."

COMMENTS

• SBA should be abolished. I work at a federal agency and I can tell you first hand of many examples of negative issues within the agency. Some are discrimination of other races, business owners who front a minority person to gain SBA status, persons who are untrained and only operate as brokers, contracting officers who no longer require proof and validate the required general contractor completion of work required percentage, SBA contractors who ride the system many times but with a different name, etc. All of this means that the monies received in a fiscal year don’t go as far as they should and the taxpayers get taken for a ride. In talking to small business owners they indicate they receive no actual help from SBA, which will allow them to manage or compete once they are removed from the system. On request, SBA should perform yearly evaluations or allow small owners to receive private evaluations, which can be deducted. These evaluations should be keyed toward assuring the SBA owner can graduate into the competitive workforce. SBA should also require competitiveness at lower job cost levels. I think it used to be no competition within SBA unless the job exceeded $300K. This would make them get used to the competition issues and better prepare themselves. GovExec.com reader Posted April 11, 2006 7:15 AM
• This is all a superficial subterfuge for large businesses to get small business set-asides. If you are a “big” firm, you finance a small or minority owned firm to bid on set asides. As the small or minority owned business gains government cash flow, the larger company either incorporates the results through a holding company structure or buys up the small firm and folds it into the larger firm. Best practice is to take your minority friends and have them form a minority-owned business to get minority contract. The SBA and the set-aside program are highly questionable in terms of the good they do to encourage or support small- and minority-owned businesses. If the business truly is small they do not have the resources necessary to bid on government contracts. Most of the small businesses have to become subcontractors for the large businesses. In many cases the large businesses bid and win contracts that require people they do not have and in many cases they either hire people from the small business or buy the small business to get the resources they need. Sometimes this happens with large businesses as well. How do you think that the defense weapons systems contractors got into the data processing arena? SBA wastes a lot of our money on administrative overhead that is unnecessary and of little value to the country. SBA should be discontinued. If you want a loan guarantee program for small businesses provide it through private lending institutions just as is done with mortgages and student loans. I do not suggest these guarantees either but they are a fact of life in the United States. Taxpayer Posted April 10, 2006 8:28 AM