$4 Billion Worth of Temptation

By WALTER SHAPIRO

In dollar terms, the largest civil rights effort run by the Federal Government is the set-aside programs for minority-owned businesses. In 1986 more than $4 billion in federal contracts was allotted to such firms, and enthusiastic support for the programs cuts across the ideological spectrum, from Ronald Reagan to liberals in Congress. The political appeal of this kind of compassionate capitalism is almost irresistible: fostering entrepreneurship among blacks, Hispanics and other minorities with dollars the Federal Government would have spent anyway.

Good intentions, however, are rarely enough, especially when billions of dollars in contracts are being awarded free from the pressures of competitive bidding. Corruption has dogged the two primary federal set-aside programs: a Government-wide $3 billion effort run by the Small Business Administration, and the requirement that 10% of all highway funds ($1.2 billion) go to minority contractors. The most frequent problems are false-front companies, which are purportedly controlled by minorities but actually owned by whites. A federally funded 1986 study of highway set-aside programs in nine states by Abt Associates, a consulting firm, estimates that about 20% of minority contractors engage in fraudulent activities. Now the SBA is mired in the worst scandal in the history of the set-aside programs: the tangle of bribery, theft and political favoritism surrounding the Wedtech Corp., a Bronx, N.Y., defense supplier once hailed as a model minority contractor.

Attorney General Edwin Meese and former White House Political Adviser Lyn Nofziger are under investigation by Independent Counsel James McKay, in part because of possible improper lobbying that helped Wedtech win an Army contract, eventually worth $32 million, under the SBA program in 1982. Last week Meese testified before a federal grand jury in Washington that is hearing evidence from McKay. Meese's lawyer revealed that the Attorney General had also secretly appeared before the grand jury in March. Not until a month later did Meese disqualify himself from the Justice Department's own Wedtech investigation.

But the biggest headlines were produced in New York City last week as another federal grand jury investigating Wedtech indicted seven men, including Bronx Democratic Congressman Mario Biaggi and his son, on a variety of extortion, racketeering and conspiracy charges. The 84-page indictment depicted Wedtech as a racketeering enterprise dependent on bribes to public officials to win no-bid minority contracts.

Prosecutors claim that Biaggi received $3.6 million in Wedtech stock after threatening to undermine the SBA's support for the company. Among those indicted was a former SBA regional administrator who is alleged to have approved a sham arrangement masking the fact that Wedtech no longer had majority Hispanic ownership. "If Wedtech was the proverbial American success story," said U.S. Attorney Rudolph Giuliani, "these charges raise serious questions about the way we practice politics and conduct business in the city, state and nation."

They do indeed. Given the political popularity of minority set-asides, however, few in Washington seem to have the heart to examine the actual operation of the programs too closely. The last serious attempt to question the effects of special treatment for minority contractors was a controversial 1986 draft report prepared for the U.S. Commission on Civil Rights that charged that "the growth of set-asides has primarily benefited wealthier minority-group members, arguably the ones least in need of Government assistance." The report, which also assailed corruption in the programs, attracted a gale of criticism, was disowned by the White House and was ultimately withdrawn by the commission. But Commission Chairman Clarence Pendleton remains adamant in his conviction that the "set-aside program is one of the biggest pork barrels in history."

Despite Wedtech, there are success stories. General Railroad Equipment and Services, Inc., a black-owned firm in East St. Louis, Ill., has doubled its sales and almost tripled its work force in four years in the SBA program. Dennis Yee, the son of Chinese immigrants who used federal funds to build Abacus Technology in Washington, hails the SBA for allowing him "to establish a top-quality, competitive consulting firm."

But critics note that minority firms have consistently had difficulties in weaning themselves from the set-aside programs and competing for traditional federal contracts. A recent survey of firms graduating from the SBA program, conducted by the Senate Committee on Small Business, found that nearly 30% had most likely gone out of business and an additional 22% said they were facing financial troubles. That suggests that fewer than half the firms had weathered the transition to a competitive environment.

The Wedtech scandal has prompted some congressional interest in reform legislation. Massachusetts Democrat Nicholas Mavroules, who chairs a House small-business subcommittee, is championing a bill that would bar any political appointee from helping select minority contractors or managing the program. A more controversial approach, favored by Massachusetts Republican Congressman Silvio Conte, would require minority contractors to participate in competitive bidding and eliminate the SBA's awkward role as the middleman between federal agencies and minority businesses.

But there are few apparent congressional qualms about the further expansion of minority set-asides. A Defense authorization act, which took effect this month, calls upon the Pentagon to strive toward awarding 5% of all contracts, as much as $7 billion a year, to minority-owned small businesses. A laudable goal but also, alas, another tempting target for corruption.

With reporting by Nancy Traver/Washington