STATEMENT
of the
The Honorable Nydia Velazquez, Chairwoman
House Committee on Small Business
Full Committee Hearing on Contracting 
Thursday, July 17, 2008

The economy is still mired in a recession. In addition to six straight months of job losses, we are now facing considerable drop-offs in consumer spending and exports. Meanwhile, inflation continues to climb and, it seems, no financial sector has been left untouched. Just this week, news of the crumbling Freddie Mac and Fannie Mae proved that the housing crisis is far from over.

Amidst this otherwise weak economy, one bright spot continues to shine. The federal marketplace is booming. Last year alone, this industry grew by more than 9%. But while it should hold great potential for entrepreneurs, small firms are still fighting to break into the government sector. During the past 8 years, the Bush administration has missed every single one of its small business goals. In 2005 alone, entrepreneurs lost $4.5 billion in contracting opportunities.

A broad array of programs exist to help small firms enter the federal marketplace. These programs seek to give opportunities to the most important sector of our economy-- Small businesses. Entrepreneurs not only create greater economic diversity and competition, but they also offer the best value for the tax payer’s dollar. Today, we are going to look at one such program which, while having very laudable goals, has ultimately failed our entrepreneurs and our tax payers.  

HUBZones were originally designed to help small businesses in low income communities. Today, the program has fallen short of that mission. As a result of insufficient controls by the SBA and inherent flaws in the underlying program, we now have widespread fraud.

This committee has long been concerned about the potential for HUBZone fraud. After a preliminary investigation confirmed these fears, we asked the GAO to conduct an investigation. The results were nothing short of appalling.

In their review, investigators found that the majority of HUBZone businesses failed to meet program criteria. And yet these firms still managed to collect over $100 million in federal contracts. Twenty-four million of those dollars came directly out of HUBZone funds-- funds that should have gone to low-income communities.

These numbers are high, but they are not surprising. As noted in prior reports, SBA is notorious for failing to vet its programs. In fact, it conducts annual examinations on a mere 5% of certified HUBZones.

When it comes to the businesses themselves, only 36% of applicants are asked to show any form of documentation.  It is so easy to break into the HUBZone program that investigators--using fake addresses and forged credentials--were able to do so in a matter of weeks. The entire process was easier than getting a library card.

Perhaps not surprisingly, con artists have had little trouble gaming SBA’s broken system. Countless unqualified corporations have applied for-- and been awarded—millions of dollars in government contracts. Meanwhile, entrepreneurs looking for an honest break have been pushed to the margin.    

Earlier this year, the House passed several important provisions in attempts to stem this fraud. But the administration opposed these steps, including requirements for on-site inspections. President Bush went so far as to argue that “this provision would create a large burden on the Small Business Administration.” It seems the president prefers burdens of the multi-million dollar fraud variety. The kind of burden we unfortunately face today.

Small Business contract programs are important, and we need them. But if not adequately funded and properly managed, they turn into what we have today. Rather than lifting up underprivileged firms, HUBZones are lining the pockets of big corporations and otherwise fraudulent businesses. And they are doing so on the tax payers’ dime.

Today’s hearing will be an important part of understanding the fraud and figuring out the next steps toward overhauling the SBA. It will not be an easy process, but we owe this review to our tax payers, and we owe it to our small businesses.

I thank today’s witnesses in advance for their testimony. This morning’s hearing certainly promises to be an interesting one. With that, I now yield to Ranking Member Chabot for his opening statement.