High-Tech Set-Asides on the Ropes

Minority-owned firms may be especially vulnerable to a change in the law if they cannot point to past discrimination, say observers

Heartened by the Republican shift and a critical case now being heard in the Supreme Court, opponents of minority business set-asides may succeed in unraveling a web of federal programs that spun in the last decade.

The programs are worth $12 billion annually to minority-owned businesses, many of which supply high-tech goods and services. Now they are under attack from a series of converging developments.

"Right now, with the Republican Congress, everyone is concerned about it," said a vice president of a minority-owned high-tech firm who did not want to be identified. The challenge "is the most serious it has been since the program began."

The most significant threat: A Supreme Court appeal heard Jan. 17. That appeal argued that incentive bonuses given to prime contractors for hiring minority-owned subcontractors to complete road construction are unconstitutional discrimination against white-owned firms. Since the last similar case in 1989, the court has lost four judges who supported set-asides, raising fears among minority-owned firms that the court could ban or restrict set-asides when it releases its judgment by July.

Meanwhile, the ascendance of the Republicans has made minority set-asides a ripe political target. The House Committee on Small Business, chaired by Kansas Rep. Jan Meyers, will schedule hearings to discuss the 8(a) and small disadvantaged business programs, most likely in February, according to Craig Orfield, a spokesman for Meyers.

The Senate Committee on Small Business, chaired by Missouri Sen. Christopher Bond will review all aspects of the Small Business Administration programs, according to Bond's spokeswoman, Catherine Kaliniak. One proposal under study calls for elimination of the 8(a) program, to be replaced with governmentwide mandates contained in last year's massive procurement reform act, said a staff member.

The political changes also have activated intense lobbying. The Washington-based Institute for Justice is trying to win congressional sponsorship for language that would ban spending money to enforce race-based preferences. It also wants a law that would ban federal race preferences in "anything and everything," said Clint Bolick, the institute's point man on the issue.

The lobbying effort was strengthened by a recent poll conducted by NBC News and The Wall Street Journal, which concluded that 61 percent of adults favor an end to affirmative action, while 32 percent oppose a ban on it. Finally, opponents are pushing for a California ballot referendum on the issue. If passed in 1996,California's state government could not consider race or gender preferences in contracting.

The effect of all these converging trends could be momentous. The 8(a) program is managed by the Small Business Administration, which spends $4 billion per year on 5,300 firms officially certified as owned by people suffering from economic or social disadvantage, such as blacks, Asians and Aleuts, said agency spokesman D.J. Caulfield. At least 450 of the 8(a) firms are involved in technology business, he said.

Under the SDB program, government agencies spend 5 percent of their funds, equivalent to almost $8 billion a year, on contracts with companies that certify themselves as under the day-to-day control and ownership of a minority. The SBA does not know how many firms have certified themselves as SDB firms, but federal spending on these companies has grown consistently.

That is true also of the 8(a) program, which in a decade has grown from 3 percent of the $30 billion infotech market to nearly 10 percent, according to the market research firm Federal Sources.

Minorities benefit in other ways. For instance, the Federal Communications Commission gives minority entrepreneurs a 25 percent price break in industrywide bidding for new telecommunications licenses -- franchises potentially worth hundreds of millions of dollars. Understandably, minority-owned firms and their trade associations are busy preparing their defense in what could be a long and protracted political and legal battle. At a Jan. 16 demonstration on the steps of the Supreme Court organized by 13 of the associations, as many as 4,000 people urged continuation of affirmative action and the set-aside programs.

"This is not some kind of intellectual exercise for us. We are talking about the economic survival of our communities," said Anthony Robinson, president of the Washington-based Minority Business Enterprise Legal Defense Fund. "No doubt about it. The white business community, absent a legal mandate, has demonstrated time and time again that they will not do business with minorities," he said.

The programs "provide resources to underutilized segments of society.... They have got to survive," said Hector Andres Negroni, president of the Washington-based Latin-American Management Association. The programs foster growth of small businesses, some owned by whites, which are "the energy that drives the nation," he said.

Still, particularly in the area of high-tech, there may be compelling legal arguments against continuing set-asides. The programs were intended to reverse a history of past discrimination. But that is not easily documented in new technology businesses, such as cellular phones, according to Charles Fried, a law professor at Harvard and critic of the programs.

High-tech set-asides are "particularly weak [to new legal challenges]. The more you can point to a history of racial discrimination, the more justification" for set-asides, he said.

High-tech companies "would have a more difficult time proving [discrimination]," said Harriet Michel, president of the New York-based National Minority Suppliers Development Council, because those business have little or no history. But the programs are needed because they foster minority-owned firms that bring businesses and jobs to minority communities, she said.

In the meantime, supporters of the programs are split over the need for concessions. "There might be some concessions -- don't ask me which ones yet -- that we might be willing to make" to save the program, said Michel. Robinson said Congress should not weaken the program, but should toughen enforcement and create new a set-aside category for white women. Robinson and Negroni also called for revival of a bill sponsored last year by Baltimore's Democratic Rep. Kweisi Mfume and Massachusetts Democratic Sen. John Kerry that would have expanded the 8(a) program to help companies graduate.

But momentum and political sentiment seem to be on the side of set-aside opponents, who are growing more confident by the day. "The general issue of race preferences will be almost certainly one of the major issues in the next election," said Bolick. Should President Clinton use his veto power, he will only fuel the controversy, he said.


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