HUBZone Preferences Harm U.S. Food Aid Programs
Higher Costs;
Fewer Persons Fed;
Jobs Traded, Not Created
The North American Millers' Association represents both large and small company suppliers of highly nutritious food to the US foreign humanitarian food assistance programs. NAMA is very concerned about the damage and potential damage to the programs' effectiveness through the application of the HUBZone Preferences on food procurements. Price preferences for HUBZone benefited firms increase costs to the program, take food from poor aid recipients, trade jobs from one firm or community to another and provide artificial incentives for new, permanent capital investments into industries that already face overcapacity. We advocate a legislative waiver of the HUBZone provisions to international humanitarian food aid purchases to avoid harm to the US economy and needy recipients overseas.
The HUBZone Program and Food Assistance Program Purchases:
The HUBZone Empowerment Contracting Program was authorized as part of the Small Business Reauthorization Act of 1997 (15 U.S.C.657a[b][3]) and is administered by the Small Business Administration. The program is intended to create jobs by providing federal contracting opportunities to qualified small businesses that are located in certain distressed areas, known as Historically Underutilized Business Zones – HUBZones.
Each year the United States Department of Agriculture procures food products for tens of millions of people through the food aid programs abroad. Under the HUBZone program, USDA must apply price preferences to bids submitted by qualified HUBZone vendors for programs such as: PL 480 Title II, Food for Progress and Global Food For Education (international school lunch).
Price evaluation preferences (PEP's) are applied to purchases where both large businesses and qualified HUBZone businesses submit bids. Through the use of PEP's, HUBZone businesses gain a competitive advantage over non-HUBZone vendors, including other small businesses and other businesses located in HUBZones, but employing too many people to be eligible for the PEP. Significantly, the price preference applies not only to the commodity cost, but also applies to the cost of bags, packing labor and rail freight (delivered port price). In contrast, other vendors – large and small -- have no mark up on these pass-through costs. The only cost variable for non-HUBZone companies is the very small mark up on the commodity itself. In a business where margins are extremely low on the commodity side, applying these large price preferences to commodity, packing labor, and rail freight tilts competitive advantages to HUBZone vendors.
No Limit to the Benefits
Amazingly, there is no limit to the amount of business these “small business” beneficiaries can capture. PEP's are applied to HUBZone vendors' bids as follows:
- 25 percent of the total volume of each commodity within an invitation to bid (invitation) will be subject to a PEP of 10 percent on the delivered port price.
- 15 percent of the total volume of each commodity within the invitation will be subject to a PEP of 5 percent on the delivered port price.
- Volume over 40 percent for each commodity within an invitation will not be subject to a PEP.
Until December 2002, USDA limited an award of 40 percent of the invitation to HUBZone vendors when they utilized the PEP. Now, the new interpretation allows a HUBZone vendor to capture up to 100 percent under the invitation and use their PEP on 40% of the volume, which only serves to exacerbate the impact on both the food assistance programs and the non-HUBZone vendors.
Higher Costs: Therefore, with skillful bidding, a HUBZone vendor may capture the first 60 percent of the contract in open competition and use their enormous PEP advantage to secure the balance of the invitation. This allows the HUBZone vendor to underbid non-HUBZone vendors on 60 percent not subject to the PEP, then charge higher prices under the PEP, thereby obtaining the entire commodity contract award. As a result, overall costs to the food assistance programs are increased unnecessarily. Notably, USDA is obligated by its own regulations to purchase commodities for food assistance programs at the lowest cost. The application of HUBZone price preferences is in direct conflict with this otherwise desirous outcome.
Fewer Persons Fed: Food assistance programs are not entitlement programs where the program outlays expand to meet the need. Instead, USAID and USDA food aid programs rely upon an annual appropriation from Congress. When the cost to the programs is increased by the application of the PEP's, the natural result is that less food can be purchased. Consequently, fewer malnourished persons are being fed.
Jobs Traded, Not Created: Competition is the cornerstone of the United States' efforts to provide food assistance to the world's neediest people. It is important to encourage competition by keeping multiple vendors actively bidding in our food assistance programs for three critical reasons. First, competition is enhanced with the presence of multiple vendors; lower prices result. We must encourage the lowest costs possible for these programs to preserve the scarce resources needed to feed people whose lives depend on it.
Secondly, many of the products used in the foreign food assistance programs are not commercially available in the U.S. or foreign markets. We are at risk of failing to meet emergency needs during a humanitarian crisis. In particular, Corn Soy Milk and Corn Soy Blend are commodities used exclusively in the foreign aid programs. Currently, vendors include a mix of large and small businesses, and small HUBZone businesses. If HUBZone vendors effectively are allowed to shut out the participation of the non-HUBZone vendors, both large and small, these vendors are likely to drop out of the program. If this situation comes to pass, the remaining small HUBZone vendors may not be able to meet program needs in times of crises – such as a famine in Africa or a situation similar to the current one in Iraq.
Finally, jobs are at risk. The HUBZone program was established to create jobs. As applied to the procurement of agricultural commodities, the program has the practical effect of trading jobs. It is not uncommon for agricultural enterprises – large or small – to locate in HUBZones. Food aid programs are not an expanding area of the budget, so carving out smaller and smaller pieces of the same pie only serves to hurt the programs and trade jobs from one area to another. Thus, the program has the unintended effect of favoring jobs in HUBZones that are operated by small businesses to the detriment of those who happen to work for larger enterprises. When a large plant is shuttered, there is a much larger impact to a community than jobs that may be gained by taxpayer support of a HUBZone vendor.
Uneconomic
Investment and
Potential for Deception
USDA procurements for export food aid run the risk of being completely dominated by firms who were attracted to make investments solely to obtain the price preferences and unable to survive without either the government procurements or the preference benefits. There is also the potential for firms to locate in a HUBZone area as merely “conveyors” or brokers of products manufactured by others. There have been many attempts by firms to either make minor alterations to a food product or merely broker the sale of another firm's products at a mark up to the government to capture the preference benefit. While the program managers have rejected most of these deceitful practices, it is likely that some of these schemes will be constructed to fit within the program's guidelines. The entire humanitarian effort of the US government is put in jeopardy, if we actually provide the attraction to such manipulation and scams.
Legislative Relief Requested: NAMA believes that open competition is the only way for the US government to serve the humanitarian needs of hungry people overseas, without picking economic winners and losers on an artificial basis. Even without the HUBZone preferences, small businesses are entitled to a set aside for all food aid procurements and that advantage should be sufficient to offset any perceived advantage to larger competitors. Precious resources intended to feed needy people abroad should not be used to provide competitive advantages to any type of business or attract new investments into industries that are already overcapacity. Therefore, we ask that purchases made by the Secretary of Agriculture for foreign food assistance programs be exempt from the price evaluation preferences of the HUBZone program.
Back to Top