Major Problems with SBA's Section 8(a) Program for Disadvantaged Small Businesses

FACTORS IMPEDING

PROGRAM'S EFFECTIVENESS

GAO believes that several interrelated factors have limited the program's effectiveness. The major factor is the President's yearly 8(a) contract goal imposed on SBA, which has become the dominant force behind the program and has clouded its intended goal of developing competitive disadvantaged firms. Other factors handicapping the program's effectiveness include

--vague program graduation criteria,

--missing business plan and financial statement data, and

--limited staff resources.

The limited staff was discouraged from
graduating competitive firms since
these very firms made it easier to meet
the yearly 8(a) contract goals. Without
adequate data and graduation criteria,
the staff could not even begin assessing
the status of many firms. In GAO's
opinion, SBA has functioned as a contract
broker between Federal buying agencies and
the participating firms. Because of these
factors, it is doubtful whether the expanded
business development envisioned when legis-
lation was passed will become a reality.
(See pp. 24 to 33.)

HARD CHOICES AHEAD

The program's problems have been known for years. Criticism, mostly justified, has come from many sources, yet meaningful corrective action has not been taken. Decisions about the future of the 8(a) program must be made. The merits of a properly administered and structured program to aid disadvantaged businesses in gaining a toehold in the competitive marketplace cannot be emphasized enough. However, the program should be structured so that it is accepted by both the disadvantaged and nondisadvantaged small business communities. This acceptance will occur if SBA can demonstrate that 8(a) firms will not remain in the program indefinitely.

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Recent legislation made some changes to the 8(a) program and now requires that a graduation date must be negotiated with existing firms and with firms newly accepted into the program. The legislation establishes a mutually agreed upon period of time for SBA to help a firm. The time period can be revised if conditions warrant. This is a step in the right direction. However, GAO believes problems will continue so long as the criteria for graduation remains vague. Too many factors hinder SBA's ability to assess a firm's status. SBA will be faced with the dilemma of constantly negotiating new dates for most 8(a) firms judged as not yet competitive.

GAO thinks that a two-tier program combining 8(a) participation with a disadvantaged small business set-aside program or a separate disadvantaged small business set-aside program appear to have some potential for changing the program's direction and improving its effectiveness.

MATTERS FOR CONSIDERATION BY
THE SENATE SELECT AND HOUSE
COMMITTEES ON SMALL BUSINESS

Should the committees decide to change the program, GAO proposes several alternatives:

--Continue the present 8(a) program, which assumes that its effectiveness can be improved if corrective actions are taken.

--Reduce the size of the present 8(a)

program, which would free up limited staff to provide better services to a smaller number of firms who want and need business development.

--Establish a two-tier program that would
set a fixed limitation for firms to
participate in the 8(a) program before
moving to a second-tier program. During
the second stage, firms would compete
with other disadvantaged businesses
under a disadvantaged small business
set-aside program.

--Replace the 8(a) program because of the
many problems discussed in this report.
SBA would no longer act as prime con-
tractor. Instead, contracts to disadvan-
taged firms would be awarded through a
separate disadvantaged small business
set-aside program.

RECOMMENDATIONS TO

THE SBA ADMINISTRATOR

The SBA Administrator should take several actions to immediately strengthen the management of the program and protect the interests of both disadvantaged and nondisadvantaged small businesses. These recommendations, if implemented, should minimize some of the problems noted by GAO and others and provide adequate safeguards for other small businesses. (See pp. 38 and 53.)

SBA COMMENTS AND

GAO's EVALUATION

SBA generally agreed with GAO's recommendations to the Administrator for improving the 8(a) program. However, SBA did not think that the last three of GAO's alternatives for changing the program's direction were appropriate.

GAO continues to believe that the three alternatives represent valid ways to redirect the 8(a) program's emphasis. (See pp. 38 to 40.)