What Comes Around Goes Around: Is This The Beginning of the End for Alaska Native Corporations?
If you are a small business Federal contractor and have ever lost a contract to an Alaska Native Corporation (ANC), you probably had a smile of satisfaction on your face last week as you were reading the Washington Post. In an expose and series of follow-up articles, the Post focused its investigative wrath on these shadowy contracting vehicles that for the most part, have been Teflon against oversight. A combination of Alaskan Senator Ted Stevens' legal problems in 2008 and resulting diminishment of the political clout of the Alaskan congressional delegation, the change in Administration and Democratic majorities on the Hill, as well as significant Pentagon budget cuts creating a zero-sum game for contracting dollars has created a perfect storm that has left ANCs exposed and weakened. I wanted to bring some of these recent developments to your attention, events that will have a tremendous effect on the Federal contracting landscape in the coming months.
I. What are ANCs?
As chronicled in a July, 15, 2009 Senate Subcommittee Report prepared by the staff of Senator Claire McCaskill (D-Mo.) (http://mccaskill.senate.gov/pdf/071509/ANC.pdf) and in the Post's September 30, 2010 front page expose (http://www.washingtonpost.com/wp-dyn/content/article/2010/09/29/AR2010092907801.html), in 1971 Congress enacted the Alaska Native Claims Settlement Act (ANCSA) of 1971. The law, passed in response to claims brought by native landowners after oil was discovered on the Alaska's North Slope, attempted to help Alaska natives build businesses but at the same time maintain their autonomy and culture.
Instead of creating reservations on set-aside land, the ANSCA provided for the establishment of 13 regional ANCs and what is now over 200 village, urban and group corporations. These regional and local corporations were given the responsibility of dividing land (44 million acres), resources and money (approximately $1 billion) among their shareholders, the Alaska natives. Unfortunately, the arrangement was a financial fiasco, and the ANCs, due to incompetence, mismanagement and fraud, lost hundreds of millions of dollars.
Senator Stevens, one of the key drafters of the ANSCA, stepped in again. In the late 1980s and early 1990s, he was able to convince his colleagues to pass legislation to make ANCs uniquely eligible for Federal contracting opportunities under the U.S. Small Business Administration's (SBA) 8(a) program. More specifically:
--ANCs are allowed to automatically participate in the 8(a) program, through which the Federal Government offers contracting "set-asides" for small disadvantaged and minority businesses, by deeming ANCs socially and economically disadvantaged;
--Unlike other 8(a) participants that cannot obtain sole-source (no competition) contracts if the contracts exceed $3.5M for services or $5.5M for goods, ANCs can receive sole-source contracts of unlimited value;
--ANCs are not subject to the $100M limit on the total amount that they can make;
--ANCs are exempted from Federal regulations requiring that disadvantaged businesses be run by executives from the disadvantaged groups and in essence can be run by anyone working anywhere.
--While other 8(a)-certified firms are limited to one-time eligibility for 8(a) participation, cannot own more than 10-20% interest in another 8(a) firm and cannot participate in the program for longer than 9 years, ANCs can own a majority interest in an unlimited number of 8(a) subsidiaries at any one time so long as no more than one 8(a) firm operates in the same primary area of work, effectively allowing ANCs to participate in the 8(a) program indefinitely.
Two other preferences for ANCs were subsequently created. First, as long as money is appropriated, all contractors can be paid up to a 5% bonus for subcontracting to an ANC. Second, the Department of Defense is permitted to outsource jobs without following OMB A-76 procedures if the contract is awarded to an ANC.
II. Contracting to ANCs Explodes After 9/11, but Natives Don't See the Benefits
Clinton-era cuts in the Federal contracting workforce, combined with the Bush Administration's drive to quickly spend and outsource after the 9/11 attacks, created a climate ripe for the growth of ANCs. In the past decade, ANCs received over $29 billion in Federal contracts, including $5.5 billion in 2009.
Problematically, most of ANC work is performed outside of Alaska, usually by established consulting firms located in the Washington DC area. From 2000-2008, only 21% of all contract dollars awarded to ANCs was performed in Alaska. Even more disturbing has been the fact that little of the money earned by ANCs has been distributed to Alaska natives. According to congressional data, dividends, scholarships and charitable contributions flowing from Federal contracts averaged little more than $615 a year for shareholders of ANCs between 2000 and 2008. And, as a result of these program distortions, Alaska natives have not seen any improvement in their plight. The percentage of Alaska natives living below the poverty line is twice the national average, the unemployment rate among Alaska natives is five times the national average, and median household income for this group has been been stagnant for many years.
III. Abuse of the Program was Inevitable
As noted by the Post, abuse of the system was a foregone conclusion. Those who created these contracting advantages for ANCs failed (or turned a blind eye) to the obvious question--How could small, inexperienced native companies handle giant government contracts? Well, by hiring nonnative executives and workers and partner with big well-known firms. The work was won by ANCs but passed on to these non-natives and big companies.
Reports by the Washington Post and LA Times in 2004, and a comprehensive 2006 audit by the Government Accountability Office (GAO) concluded that open competition rules were being circumvented by ANCs, but Senator Stevens, at one time the powerful chair of the Senate Appropriations Committee, was able to fight off attempts to restrict the ANC program.
It wasn't until the change in power in 2009 that many could sense the tide turning against ANCs. Stevens was no longer a factor following his Federal indictment and trial, and Democrats saw the political opportunity to help other groups more favorable to their cause to obtain dwindling contracting dollars. In June 2009, the SBA's Inspector General (IG) issued a report that the agency had failed in its oversight of ANCs and recommended that Congress review whether ANCs had a "substantial unfair competitive advantage" over other small businesses. The IG report led to a Congressional hearing chaired by Senator McCaskill, where Senators heard testimony that ANCs were prone to waste and fraud, with exorbitant pay going to nonnative executives.
Several weeks after the hearing, three ANCs decided to adopt a damage-control strategy and took the unprecedented step of publicly calling for fundamental changes to the program (www.washingtonpost.com/wp-dyn/content/article/2010/09/30/AR2010093007207.html). And in August of this year, the three companies submitted a formal proposal of reforms to the SBA. The group called for better tracking and reporting of benefits to shareholders and their communities. They also expressed their support for limits on the size of contracts awarded without competition, as well as new limits on the operation of ANC subsidiaries. The SBA followed with an announcement that it is formulating regulations to require companies to be more open about how Federal contracts with benefit native shareholders and impose limits on work performed by ANC/nonnative joint ventures.
Even Senator Murkowski (R-Alaska), a long-time defender of ANCs, has recently echoed these calls for more transparency and accountability.
IV. The Post Goes on the Offensive and Targets ANCs
Last week, on September 30, the Post ran a front-page story entitled "In Alaska, a promise unmet." With compelling anecdotes and a disturbing recitation of statistics, the Post described a process where good intentions had gone horribly astray. Their review of thousands of records and dozens of interviews with the relevant players revealed the following:
-- The Washington DC region, not Alaska, is home to the highest concentration of Federal contracting operations.
--Untold millions have been paid to nonnative executives and consultants who benefitted from the inexperience of native officials and lack of Government oversight.
--Federal officials and most members of Congress have ignored audits, investigations and other media reports that have warned about higher costs and the risk that ANCs would be used to simply pass on lucrative work to big established contractors.
--Federal rules allow ANCs to operate free from the scrutiny of the SEC and other regulatory bodies.
Maybe even more frightening was a related article in the same edition, "Bethesda consultant made millions with Alaska firm" (www.washingtonpost.com/wp-dyn/content/article/2010/09/29/AR2010092906325.html). There, the Post focused on the plight of one ANC, Sitnasuak Native Corp., its shareholders who each made a paltry $305 each in direct payments in 2009, and the Bethesda-based manager of its largest subsidiary who earned $6.4 million in that same year.
The next day, the Post did not let up. In an October 1 article entitled "In deals between Alaska corporation and D.C. area contractor, a disconnect" (www.washingtonpost.com/wp-dyn/content/article/2010/09/30/AR2010093007348.html?sub=AR), the paper describes the cozy and questionable relationship between an ANC, Eyak Corp., and Virginia-based contracting powerhouse GTSI Corp. The Post, in great detail, alleges that the two entities created a joint venture as an end-around Federal contracting rules, with Alaska native shareholders being the only ones not benefitting from the arrangement. For the Post, this relationship was the poster-child for abuse of the system, and the need for reform and Government action.
V. The Fall-Out
In a big surprise to many in the Federal contracting world, the Post's stories generated an immediate response from a Federal agency. After the GTSI story broke, later that day the SBA announced that it was temporarily suspending GTSI from performing new work for the Federal Government, a rare penalty that is often the first step to a permanent ban and ultimately, financial ruin for a contractor. According to the SBA, its decision was the culmination of an SBA investigation of GTSI's relationship with two ANCs that relied, in part, on the documents cited by the Post in their reports. One of these damning documents was an internal GTSI email in which a company VP states that one of its small business partners was "very open to the concept of GTSI doing all the work" on a contract (illegal), and another called for GTSI to receive 99.5% of the revenue from a contract, even though it was serving as the subcontractor (also, illegal) (http://www.washingtonpost.com/wp-dyn/content/article/2010/10/01/AR2010100107288.html). On the Monday following the suspension, GTSI's share price plunged 40% (http://www.washingtonpost.com/wp-dyn/content/article/2010/10/04/AR2010100407050.html). Ouch.
VI. What Does This All Mean?
The ANC program has been able to weather attacks and calls for reform for decades. However, the political and economic stars may finally be aligned in the direction of change. But even assuming that everything bad being said about the program is true, those with the power to do something about it must proceed cautiously. Lost in all the scandal and anecdotes of fraud, waste and abuse is the ultimate fate of Alaska natives if the ANC approach is eradicated. If elimination of ANCs is the choice, there must be a feasible alternative ready to quickly step in and do what should have been done from the very start--put the interests of the Alaska natives first.