Small Business, Rising Giant: Policies and Costs of Section 8(a) Contracting Preferences for Alaska Native Corporations

• Jurisdiction: United States,Federal
• Publication year: 2006
• Citation: Vol. 23

§ 23 Alaska L. Rev. 315. SMALL BUSINESS, RISING GIANT: POLICIES AND COSTS OF SECTION 8(A) CONTRACTING PREFERENCES FOR ALASKA NATIVE CORPORATIONS

Alaska Law Review
Volume 23
Cited: 23 Alaska L. Rev. 315

SMALL BUSINESS, RISING GIANT: POLICIES AND COSTS OF SECTION 8(A) CONTRACTING PREFERENCES FOR ALASKA NATIVE CORPORATIONS

JENNY J. YANG

I. INTRODUCTION

II. BACKGROUND ON ANCS

III. THE ANC "EDGE" ^[30]

A. The 8(a) Business Development Program

B. Legal Substance of Preferences for ANCs

C. Limitations on Constitutional and Procedural Protections

IV. 8(A) ADVANTAGES IN PRACTICE

V. ANSWERS FROM THE HILL

VI. POLICIES, COSTS, BENEFITS, AND SOLUTIONS

A. Consistency with the Policy of the Act and the 8(a) Program

B. Costs and Benefits

C. Solutions and Alternatives

VII. CONCLUSION

FOOTNOTES

Under the Small Business Act, Alaska Native corporations (ANCs) not only have special contracting status under the Section 8(a) Business Development Program but also enjoy additional advantages over other small businesses. In recent years this legal treatment has come under scrutiny and criticism due to instances in which work under contracts awarded to ANCs without competitive bidding has been subcontracted out to large companies ineligible for 8(a) benefits. Two congressmen initiated an investigation into these no-bid contracts awarded to ANCs resulting in a report from the Government Accountability Office as well as a Congressional hearing focusing on the issue. Both appear to confirm much of the media's criticisms. This Note examines the laws granting special contracting advantages to ANCs, the costs and benefits of these advantages, as well as some possibilities for legislative and other reforms.

I. INTRODUCTION

Alaska Native corporations (ANCs) were established by the Alaska Native Claims Settlement Act of 1971 (ANCSA) to administer land settlements in Alaska. ^[1] Under the Small Business Act, ^[2] ANCs not only have special contracting status under the Section 8(a) Business Development Program but also enjoy unique privileges over and above other 8(a) small businesses. Most importantly, ANCs are exempt from the dollar limitation on contracts that can be received outside of the competitive bidding [*pg 316] process that is applicable to other 8(a) businesses. ^[3] In the past two years, this legal treatment has drawn intense, mostly negative media attention. In addition, a congressional investigation was spurred by the grant to ANCs, without competition, of large-value defense contracts that were then subcontracted to companies ineligible for 8(a) benefits. ^[4]

This Note will describe the legal edge that ANCs enjoy in receiving valuable government contracts and will discuss instances of alleged abuse. The Note will also show that while significant potential exists for this edge to improve the economic status of Alaska Natives, the unique access of ANCs to government contracts undermines the policy of competitive access, imposes high costs on taxpayers, and excludes other small and minority businesses' access to federal procurement dollars, while fostering a dependency by ANCs that obstructs true business development and independence and renders balanced reform difficult. Part II provides a brief background on the history of the legal establishment and economic performance of ANCs; Part III explains the legal substance of the contracting advantages for ANCs in the 8(a) Program; Part IV examines how these advantages are used in practice, focusing on the subcontracting practices which have drawn media scrutiny and a congressional investigation; Part V describes the results of the investigation; and Part VI analyzes the benefits and costs of the ANC preferences, some possible remedies to address the problems associated with the costs, and the potential difficulty of finding a balanced solution.

II. BACKGROUND ON ANCS

Any discussion of ANCs and their economic status today necessitates a brief overview of their legal creation under ANCSA. At a time when the legal validity of aboriginal rights and claims to lands within the state was unclear, ANCSA was drafted partly in response to rising pressures to settle these claims so that development and transportation of the state's oil resources could proceed in legal safety. ^[5] ANCSA extinguished all claims based on [*pg 317] aboriginal rights to land in Alaska by Alaska Natives against the federal and state governments, ^[6] and, in turn, it distributed forty million acres of the land to Alaska Natives. ^[7] A "Native" was defined as a United States citizen who is "one-fourth degree or more Alaska Indian . . . Eskimo, or Aleut blood, or combination thereof." ^[8] Broadly speaking, ANCSA mandated that the Secretary of the Interior divide lands in Alaska into twelve regions, each including Alaska Natives with "a common heritage and sharing common interests." ^[9] Twelve "regional corporations" and over two hundred "village corporations" were created to select lands for use within the twelve regions, as well as to administer their share of the monetary grant. ^[10] A thirteenth regional corporation was created for nonresident natives, and it received money but no land. ^[11] The village corporations were to first select twenty-two million acres from the thirty-eight million granted under the law, and the regional corporations were to select the remaining sixteen million acres. ^[12] These sixteen million acres were required to be redistributed to the villages. ^[13] Under the law, all resident Alaska Natives received one hundred shares of stock in one of the twelve regional corporations and also became shareholders in the village corporations that were organized for their respective villages. ^[14] ANCSA also distributed $462.5 million of congressional appropriations funds and $500 million in oil royalties ^[15] to the thirteen regional corporations, which were in turn required to [*pg 318] distribute the funds to the village corporations and to their shareholders who had no ownership in any village corporation. ^[16]

The economic performance of ANCs during the two decades after their creation was "surprisingly poor" with collective losses of $380 million by 1993. ^[17] Far from fulfilling their "impressive task of improving the social and economic status of Alaska Natives," ^[18] most of the ANCs generally teetered on the edge of insolvency until the early 1990s due to the inflation in the 1970s, ^[19] the costs of compliance with ANCSA, and the costly litigation over its ambiguous provisions. ^[20] As a result, mergers between village corporations as well as between regional and village corporations became a "tactic for survival." ^[21] Moreover, it became apparent that the regional corporations experienced widely varying degrees of success despite receiving the same grants of cash and land under ANCSA. ^[22] With wide ranges in dividend payouts and annual returns, some "provided hundreds of high-wage jobs for their Native shareholders, while others provided none." ^[23] For instance, as of 1983, Cook Inlet Native Association and NANA, Inc. were generally successful, and Sealaska Corp. came in at 745th on Fortune's list of the largest corporations in America, while Koniag, Inc. was having difficulty covering its bills. ^[24] Notably, while ANCs like Bering Strait Native Corp. entered bankruptcy by 1988 after a series of bad local investments and Calista Corp. employed under ten persons by 1991, Cook Inlet Region, Inc. made national broadcasting acquisitions with partners "who were able to take advantage of the Natives' minority status to get prefenences from" the Federal Communications Commission and earned more than [*pg 319] "the combined cumulative income of the other eleven regional corporations." ^[25]

This fledgling state gradually changed, however, when Congress took notice. Michael Brown, a chief executive for one of Arctic Slope Regional Corporation's subsidiaries, lobbied Congress in the 1980s, urging officials to examine the poverty and unemployment prevalent in rural Alaska villages. ^[26] He found Senator Ted Stevens, who at the time headed the Senate Appropriations Committee, to be particularly receptive. ^[27] In the 1990s, the ANCs "dramatically improved their financial performance," moving from red to black in terms of cumulative earnings between 1991 and 1998. ^[28] A professor of economics at the University of Alaska in Anchorage pinpointed their seizure of "opportunities to provide professional and support services under contract to federal agencies" as one of four factors that led to this climb. ^[29]

III. THE ANC "EDGE"

[30]

A. The 8(a) Business Development Program

The federal government's policy of encouraging the participation of small businesses in government contracts was first announced during the Second World War amidst a heightened need to increase the industrial production base. ^[31] Then, in 1953 the Small Business Administration (SBA) was created to contract with government procurement agencies to provide services and supplies, to subcontract with small businesses, and to encourage subcontracting by prime contractors with small businesses. ^[32] This institution was made permanent by the Small Business Act of 1958 ("Act"), which governed all types of procurement not just those [*pg 320] related to civil defense. ^[33] Under the Act, a "small-business concern" was defined as a business "independently owned and...