A Virginia program to help small, women and minority firms win state business is largely ineffective at awarding contracts to companies with minority owners.

A key reason: The small-business definition is so broad that 99 percent of businesses in the state qualify.

“When you’re looking at minority business and small business, that’s two different issues on two different fronts,” said Darryl Samuels, executive vice president of the National Association of Minority Contractors. “The minority issue gets diluted.”

In a 2006 executive order, then-Gov. Timothy M. Kaine set a goal that 40 percent of state contracts should go to small, women and minority businesses, known as SWaMs. So far this year, small businesses have gotten 28 percent of the state’s spending, minority businesses 6.25 percent and white women businesses 5 percent.

The intent of the goal was to foster diversity among suppliers. But not everyone thinks it does.

“It is a program from hell,” said A. Hugo Bowers, president of the 48-member Black Business Alliance of Virginia, formed to press for public and private sector diversity. “[State agencies] can meet their SWaM goals and never hire a minority.”

To be considered small in Virginia, under a 2006 law, a business must be independently owned and operated with 250 or fewer employees, or have gross receipts of $10 million or less averaged over three years.

The “or” in the definition is a problem, said Stacy Burrs, former head of minority business enterprise offices for the city of Richmond and Virginia. “You could do $150 million in business as long as you don’t have 250 employees.”

An example: The top vendor awarded contracts under Kaine’s program in 2009 was Maryland-based Scheer Partners Management, which earned $37.02 million from Virginia while a year earlier it formed a $100 million equity investment group with another company. Scheer was classified as a small business and was still able to bid as a SWaM vendor through November.

Also, under reciprocal agreements, firms from other states are eligible to bid for state work, including one that was certified as small despite $9 billion in revenue. The state is barred from releasing the firm’s name because of privacy restrictions.

Of the top 10 SWaM vendors paid in 2009, one was minority — information technology firm KST Data Inc. in Ashburn, which has maintenance and hardware contracts with the Virginia Information Technologies Agency. KST received $15.76 million from the state last year.

The Virginia Department of Minority Business Enterprise certifies SWaM businesses. Of the 18,500 certified vendors, minority businesses make up 31 percent, according to director of operations Angela Chiang.

Despite those numbers, they win far fewer contracts.

“The good old boy network has already taken over the job. Nothing’s left for African-Americans, Asians and Hispanics,” said Tinh D. Phan, chairman of the Virginia Asian Chamber of Commerce and spokesman for the Minority Business Consortium.

Flooding the eligible pool with a large group of small, white businesses results in shallow returns for minority firms that lose out in the numbers game. “We’ve been fighting this thing day in and day out,” Phan said.

“The problem with the commonwealth of Virginia is, small is not really that small,” said Hilloah Reagh Driskill, an American Indian and owner of Brave Electrical Contracting in Norfolk who recently won a contract at Old Dominion University.

“I will never be that big,” she said.

. . .

Why should the state encourage its agencies to do business with small, women and minority firms?

“A lot of times, government work is the first work that [a business can] get,” said attorney Albert W. Thweatt II, who counsels small-business owners and teaches entrepreneurship at Virginia State University.

“If you don’t have access to the government work, you don’t have those things to be more successful in the private sector.”

In his executive order, Kaine wrote: “For Virginia to remain competitive, we must assure that all businesses and owners have an equal opportunity to share in state procurement.”

Diversity programs force governments and corporations to branch out from their normal stable of vendors and can help newer firms get projects, which may lead to better pricing from suppliers. That translates into more money and projects to grow a business, Samuels said.

Once work is flowing, businesses have better chances of getting financing and earning money rather than merely surviving.

It’s one reason supporters say diversity programs are important.

Another factor: the economy.

“Minority-owned businesses are . . . the fastest growing component of all small businesses and are likely to continue to be so into the future,” said Thomas “Danny” Boston, an economics professor at Georgia Tech. “The economic vitality of the nation will become more closely tied to the performance of these businesses.”

Minority businesses are slowly getting a piece of the state action. In 2007, they got 2.6 percent of the state’s total expenditure on contracts. In 2008, they got 5.44 percent and last year, they got 5.41 percent.

“It’s incremental movement,” said Samuel Hayes III, the state’s director of Minority Business Enterprise. “Under the program we have, it’s the best we can do.

“This is a not a gimme program. It is a raceand gender-neutral program.”

It’s not enough, Burrs said. “We have devised solutions that either weren’t going to be effective or were struck down because they were going to be in violation of the Constitution.”

A 1989 U.S. Supreme Court ruling based on a Richmond case bars localities and states from creating minority and gender set-aside programs unless they are narrowly tailored and discrimination has been proven.

Claire Guthrie Gastañaga, who serves on the Virginia Small Business Advisory Board, said one definition for small business covering all industries is not the way to go. She prefers the federal method, which uses industry-specific definitions.

The board is pushing the state to study the composition of small business in Virginia so it can be better defined.

. . .

Sixteen other states have set minority or women-owned business spending goals in line with the Supreme Court ruling.

The goals range from 4 percent of contract spending in Washington state to Maryland’s 25 percent, the highest in the nation, according to a database from the California-based Insight Center for Community Economic Development.

Maryland also separates small-business spending goals from minorityand women-owned firm spending, said Luwanda Jenkins, special secretary in the Governor’s Office of Minority Affairs.

The Supreme Court ruling does not bar a state or local government from creating minorityor gender-based programs, but it does place a heavy burden on justification for the program.

To justify the spending goals, governments use disparity or utilization studies.

Maryland’s current 25 percent goal is based on a 2006 study; minority spending programs have been in place since 1978.

Kaine, who declined to comment for this story, used a 2004 study as justification for his program.

The first part of another study was conducted in 2009 and released in January. It shows firms owned by African-Americans, Hispanics, Asians, Native Americans and nonminority women were nearly universally underused in favor of white male firms.

Gov. Bob McDonnell’s administration is “dissecting” Kaine’s initiative and the 2009 study, said spokeswoman Stacey Johnson. The governor is considering an advisory committee to “come up with effective and legal ways to increase the number of minority-owned firms that do business with the commonwealth.”

The McDonnell administration has not authorized the second part of the 2009 disparity study — the key component in creating minorityor gender-based affirmative-action programs.

Without that, big gains are unlikely, said Burrs, now a management consultant.

The disparity will not be eliminated unless there is more race-conscious or gender-conscious programming, which needs the legal backing of a full study, he said.

Michel Zajur, president and CEO of the Virginia Hispanic Chamber of Commerce, said it’s important that state spending on contracts reflects Virginia’s racial, ethic and gender diversity.

“No one’s asking for handouts or anything,” he said. “These businesses are very well capable of producing. But the way that it’s set up, they need an opportunity to put in bids for contracts. So many times they’re bundled in such big packages.”

King Salim Khalfani, executive director of the Virginia State Conference of the NAACP, said his organization and the Black Business Alliance are seeking a meeting with McDonnell on the issue.

“Race neutral hasn’t worked, and I don’t think it was ever intended to work,” he said. If the McDonnell administration doesn’t fund the next phase of the study, “it does not send a great signal they’re serious about improving the numbers.”

Oliver R. Singleton, president and CEO of the 400-member Metropolitan Business League that promotes small and minority businesses, said a lawsuit may be the only way to prompt change.

Or, Singleton suggests, forget race and make state goals favor local businesses. No high court rulings bar that, and supporting local businesses is all encompassing.

“I don’t believe the rural legislators will ever get on board with any minority goals — not in my lifetime,” he said. “But I do believe the rural legislators will get on board with a local provision.”

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READ THE ORIGINAL DOCUMENTS
• Supreme Court opinion – City of Richmond v. J.A. Croson Co. 1989
• State procurement disparity studies: 2004 | 2010
• 2006 Executive Order establishing Virginia’s diversity supplier program
• Virginia’s Diversity Expenditure Portal

WHAT’S A SMALL BUSINESS?
In Virginia, “small business” means an independently owned and operated business which, together with affiliates, has: 250 or fewer employees, or $10 million or less in annual gross receipts averaged over the previous three years.

STATE-CONTRACT GOALS
Then: In a 2006 executive order, Gov. Timothy M. Kaine set a goal for 40 percent of state contracts to go to small-, womenand minority-owned businesses.

Now: Gov. Bob McDonnell is now “dissecting” that initiative and considering forming an advisory committee to come up with legal and effective ways to increase minority contracting with Virginia agencies.

– from the Richmond Times-Dispatch – 3/28/2010