HD53 - Minority-Owned Business Participation in State Contracts


Executive Summary:
The State's policies regarding minority-owned business activity in the public procurement process are largely governed by provisions of the Virginia Public Procurement Act. The Act emphasizes promoting competition and acquiring goods and services from the lowest responsible bidder. In addition, the Act prohibits discrimination and promotes the inclusion of minority-owned businesses in the State procurement process. However, the State has no set-asides, quotas, or firm goals for minority business participation. While agencies have been encouraged to set voluntary goals and solicit minority bids and proposals, there is little oversight in this area by agencies with responsibility for minority procurement policy.

House Joint Resolution (HJR) 554, passed by the 1995 General Assembly, directed the Joint Legislative Audit and Review Commission (JLARC) to study "minority-owned business participation in State contracts." As a result of the mandate, JLARC researched State laws and policies related to minority-owned business participation in the State procurement process, assessed the amount of agency purchases of goods and services from minority-owned businesses, and identified exemplary programs for promoting minority-owned business participation in State contracts.

Minority-owned firms received over one hundred million dollars from business transactions with the State in FY 1995. Based on JLARC's review of FY 1995 data, the Commonwealth paid 1,235 minority firms more than $108 million for goods and services. The $108 million in State expenditures to minority firms represents 3.9 percent of a FY 1995 expenditure base of $2.78 billion. JLARC's review of FY 1994 data showed $83 million in State expenditures to minority firms. The $83 million represents 3.5 percent of a FY 1994 base of $2.4 billion.

Multiple provisions of the Code of Virginia prohibit discrimination on the basis of race, religion, color, sex, or national origin. Further, the State procurement process is open and relatively accessible. Mechanisms are in place to enhance the establishment, preservation, and strengthening of minority-owned businesses. However, a lack of effective oversight, training, and coordination among State agencies may have limited minority- owned business participation in public procurement.

Statewide Expenditures for Procurement from Minority-Owned Businesses

HJR 554 noted that "it is unknown how many [State] contracts are with minority- owned businesses [or] how many minority-owned businesses are aware of such contracts." JLARC staff found that accurate and comprehensive data regarding State procurement activities with minority firms have not been available. To address this problem, JLARC conducted a systematic analysis of records maintained in the Department of Accounts' Commonwealth Accounting and Reporting System (CARS).

Recognizing the limits of existing databases, JLARC acquired databases of minority vendors from a number of public and private sources. These sources provided a total of 4,830 minority-owned firms which could be used in the analysis.

Federal identification numbers of the 4,830 firms on JLARC's database were matched with 1,920,456 agency vendor transactions for 140 object codes for FY 1995 payments. These payments to vendors totaled $2,783,537,829. Minority-owned businesses accounted for $108,256,490 of these expenditures, or 3.9 percent of the total. A similar process was followed for FY 1994.

Most (71 percent) FY 1995 minority expenditures fell into 10 "object codes" or categories of expenditures. The largest of these are in the computer area or in highway construction and repair. Moreover, five State agencies accounted for over one-half (52 percent) of State expenditures to minority-owned businesses. These data represent a substantial improvement in the accuracy of available information on minority procurement. A change in the State's process for reporting minority expenditures is necessary to provide accurate data in compliance with existing statutory requirements for information on minority participation.

The Need for an Improved Database and Methodology for Assessing Minority Procurement Activity

The Department of Minority Business Enterprise (DMBE) is responsible for developing and distributing the Commonwealth's official list of certified minority-owned businesses. State agencies are required by the Code to include in solicitations "businesses selected from a list made available by DMBE." Agencies are also required to report payments to minority firms to DMBE. However, State agencies have encountered problems in both the minority-owned business solicitation and reporting processes.

Thirty-seven of 126 State agencies surveyed by JLARC said they had difficulty identifying minority businesses. In theory, the most accurate source of minority businesses should be the certification records of DMBE. As of July 1, 1995, DMBE had certified 1,752 minority-owned businesses. This number substantially under-represents the number of minority-owned firms available to do business with the State.

Other State agencies also have established lists of minority-owned businesses. Some of these lists, such as the Virginia Department of Transportation's and the University of Virginia's, include over a thousand minority businesses. Consolidation of these and other lists would enhance the ability of State agencies to identify minority- owned businesses, particularly in regions where agencies reported difficulties. Automation of the databases would make the list easier to update and access, making the information more timely and useful to State agencies.

DMBE is authorized by statute to collect, evaluate, and report on data involving minority-owned business activity. State agencies are required by statute to systematically collect data on minority business participation and report to DMBE. Collection of such data by agencies is expensive and time consuming. Data reported by agencies to DMBE have been neither systematically reported nor accurate. The State could increase the accuracy and efficiency of the reporting process by altering existing statutes to permit the collection of the data from an annual CARS analysis, similar to the one used in this study.

Oversight of Minority Procurement Activity

Minority-owned businesses desiring to provide the State with goods and services are subject to the Virginia Public Procurement Act, as are all other businesses. The Commonwealth does not give minority firms preference over non-minority firms competing for business with the State. However, the State has established provisions to ensure that minority-owned businesses have opportunities to participate in the State's procurement activities. Minority-owned businesses rely on State agencies' implementation of these provisions when competing for State contracts.

While the responsibility for implementing minority procurement provisions rests with State agencies, most State agencies do not fully comply with existing statutory provisions. In a survey of State agencies, JLARC learned that only 22 of 126 agencies report compliance with all existing Code provisions related to minority business solicitation. Only 52 of 126 surveyed agencies had established written programs regarding minority business solicitation, as required by the Code of Virginia.

Procurement policies direct DGS and DMBE to provide oversight in the minority-owned business solicitation process. As part of its oversight responsibilities, DGS provides assistance and training to State agencies procuring goods and services and to vendors competing for State contracts. DGS does not, however, review agency compliance with the minority procurement requirements of either the Code or the Agency Procurement and Surplus Property Manual. Further, some of the provisions of the procurement manual are unclear. Additional oversight, coordination, and clarity of policy are needed in order to ensure compliance with existing provisions of the Code of Virginia and DGS agency and vendor guidelines.

Best Practices Among State Agencies

A number of State agencies are doing a good job of attempting to incorporate minority- owned businesses into the public procurement process. Four State agency programs were selected as exhibiting best practices in the area of minority business solicitation. The programs selected seek to increase minority business participation while adhering to the State's low bid procurement policy. Best practice programs selected were:

• The University of Virginia's Office of Minority Procurement Programs,

• The Department of General Services' Virginia Business Opportunities,

• The Virginia Department of Transportation's Disadvantaged Business Enterprise (DBE) Orientation Program, and

• The Department of Minority Business Enterprise's Second Annual Opportunities for DBEs Information Session.

These best practice programs provide State agencies with examples for use in improving minority-owned business participation in State procurement.

Recommendations

This report proposes a number of recommendations to enhance compliance with existing statutory provisions related to the participation of minority-owned businesses in the procurement process. The report's recommendations include the following:

• The General Assembly may wish to amend the Code of Virginia to remove the responsibility for preparation of minority participation reports from State departments and agencies and transfer the responsibility to the Department of Minority Business Enterprise and the Department of Accounts.

• An inter-agency task force should be convened by the Secretary of Administration to assist the Department of Minority Business Enterprise in the modification of the reporting process in the area of minority-owned business procurement. The task force should address issues of identifying and certifying minority businesses, the compilation and automation of lists, and other reporting issues.
The task force should identify mechanisms for increasing cooperation between agencies with minority procurement oversight, review, certification, and registration responsibilities.

• The task force should review methods to increase vendor training.

• The Department of General Services' Division of Purchases and Supply should incorporate agency minority business procurement activity into its procurement review process.

• The Department of General Services' Division of Purchases and Supply should clarify minority procurement policies in its Agency Procurement and Surplus Property Manual, and agency staff should emphasize compliance with the State's minority solicitation requirements in its training.