How to Improve Federal Programs for Minority Businesses

Since 1968, the Federal and State agencies have operated programs that were designed to provide preferential treatment to minority and disadvantaged business owners. The rationale is to create a more level playing field by providing a remedy for past practices of discrimination.

The programs go by a number of acronyms, including SDB (Small Disadvantaged Business Program), WOSB (Women Owned Small Business Program), EDWOSB (Economically Disadvantaged Women-Owned Small Business Program), DBE (Disadvantaged Business Enterprise Program) and the 8(a) Business Development Program.

The programs provide bidding and contracting opportunities tailored towards disadvantaged minority group members. However, they must do so in a manner that complies with legal and constitutional requirements. In the language of the courts, this means that their prescription must be “narrowly tailored.”

One way these programs have been narrowly tailor is by restricting their participation to individuals who have a net worth (total assets minus total debt) that does not exceed a particular threshold. For more than a decade, the ceiling was set at $750,000.

Recently, the federal government made adjustments to the personal net worth (PNW) threshold. This was because its real inflation adjusted value had declined to $500,000.  Therefore, PNW was adjusted  to account for inflation and to make sure that the level did not prevent minority businesses from building sufficient capacity.

If PNW (Personal Net Worth threshold) is set too low, numerous problems can arise such as the following:

  1. Minority firms cannot secure large bonds because bonding capacity is tied to PNW.
  2. Lower PNW means smaller loans and capital injections.
  3. Lower PNW means smaller bonds and smaller government contracting capacity.
  4. Firms with lower capacity hire fewer workers
  5. Firms that graduate out of government programs often lack the scale to be successful, because the PNW threshold has constrained their growth while in the program.

 Recently the government made adjustments to the PMW threshold. However, the criteria were not changed for all programs.  Furthermore, the changes that were made were not consistent across programs. As a result, the outcome is more confusing than before (see the table below), many fundamental problems have not been solved and new problems have been created. Which include the following:

  1. Minority firms are eligible for some programs but not others
  2. Minority firms cannot move seamlessly between programs
  3. The different criteria are confusing; yet the new regulations require firms to self-certify
  4. There is a greater paperwork and cost burden involved in certifying with  multiple programs
  5. There is a greater potential for firms to miss-represent their certification status because of the confusion
  6. There is a greater cost burden on government agencies that must validate certification

The Solution: Create Uniform Criteria for Economic Disadvantage (see the table below which has information on criteria for different federal programs)

The table describes the inconsistent and confusing criteria associated with various Federal minority business programs.