A federal program created to boost small companies in disadvantaged areas has funneled hundreds of millions of dollars into some of Washington’s most affluent areas, where a handful of businesses have grown while reaping most of the program’s benefits.
The Historically Underutilized Business Zones program began in 1997 with a promise of stimulating distressed communities by using federal contracting incentives to reverse unemployment, reduce poverty and create jobs. Some businesses that have secured contracts have seen annual revenue triple or quadruple.
HUBZone was designed to offer firms a path to securing federal contracts based on geography — not veteran, gender or race-based qualifications used by some other programs. But the program appears to have inadvertently fostered a new divide. A Washington Post analysis of 20 years of HUBZone data shows that about $800 million earmarked for firms enrolled in the program was awarded to just 11 D.C. businesses.
Those 11 firms accounted for 70 percent of HUBZone dollars allocated in the District since the program’s debut. The money usually went to firms in wealthier areas of the city, such as Dupont Circle, Navy Yard and downtown Washington.
The Post sent its findings and methodology to the Small Business Administration’s HUBZone office, which did not dispute the Post’s findings and said the agency’s sole responsibility is to determine eligibility for small businesses.
“SBA does not control awards nor the distribution of awards among eligible firms or among qualified HUBZone areas,” the agency said in a statement. HUBZone officials said they are evaluating “factors that contribute to federal agencies reaching the HUBZone Program socioeconomic goal,” adding that the office would publish a report of its findings this year.
The Post’s findings did not surprise Bill Shear, director of financial markets and community investment at the U.S. Government Accountability Office.
Since at least 2005, Congress has asked Shear and his team to review aspects of the HUBZone program, including its diffusion of contracts. He describes the HUBZone program as a “blunt instrument.”
“The program can encourage investment, but it does not have a precision that could be associated with public contributions serving a specific geographic area,” he said.
Businesses in wealthier parts of the city have grown larger through securing HUBZone contracts, while those in the city’s poorest areas — locations the program was designed to help — have largely been left behind.
The HUBZone program was created as Congress sought to stimulate development in economically distressed areas nationwide by steering billions of dollars worth of federal contracts. There are more than 6,500 businesses in the program across the country.
A review of two decades worth of data shows mixed results.
A 2017 report by the nonprofit HUBZone Contractors National Council — which monitors public policy with the goal of supporting the program — stated that federal contracts awarded to HUBZone companies directly support 40,000 jobs nationwide. The report states that the objective of the program remains as relevant today as it was two decades ago.
But a lack of available data hampers federal officials’ abilities to track the program’s effectiveness and determine which areas are benefiting the most, according to the GAO.
HUBZone officials declined an interview with The Post to discuss the findings, but a spokeswoman with the HUBZone office said in an email that “the HubZone office doesn’t yet have access to a program that captures the geographic distribution of contracting metrics.”
The Post’s analysis found that, in 2018, more than $49 million was awarded to 40 D.C. businesses, with seven businesses receiving more than 70 percent of the money. Those seven companies have their main offices downtown or in wealthier neighborhoods where unemployment rates are lower and household incomes higher than much of the city.
Those areas first qualified as HUBZones between 2012 and 2015 because of poverty rates rising to at least 25 percent in those census tracts, according to HUBZone officials. Meanwhile, businesses east of the Anacostia River — where poverty rates are higher than 40 percent — secured only a sliver of the money.
The analysis confirms what critics and some members of Congress have feared — the program may be falling short of targeting areas of greatest economic distress. Then-Rep. Steve Knight (R-Calif.) said during a September 2016 meeting of the House Committee on Small Business that “the HUBZone Program has faced some challenges in the past.”
“We need to continue working to ensure the program operates at the highest level to help both our small businesses and our communities most in need,” he said.
The program, which operates in every state, was created to help small businesses in communities that have historically suffered from a lack of investment. There are thousands of HUBZones nationwide. At least 93 are scattered throughout the District, including large swaths of Southeast and Northeast.
Wards 1, 4, 5, 7 and 8 contain some of the most underserved communities in the nation’s capital, accounting for more than 80 percent of the city’s HUBZones. But those five wards have won less than 30 percent of the federal dollars awarded through HUBZone contracts in the past 20 years.
The other 70 percent of federal contracts were nabbed by firms in the city’s three most prosperous areas, which include downtown Washington, Capitol Hill and upper Northwest.
About 266 District-based companies were enrolled in the HUBZone program this month, according to the SBA’s database. The businesses offer services such as cyber security, computer repair, physical therapy, interior design, janitorial services, telecommunication and storage.
Each can compete for contracts with federal agencies such as the Army, Drug Enforcement Administration, Department of State, Department of Energy, Coast Guard, National Institutes of Health, National Park Service and Secret Service.
The federal government has an annual goal of awarding about 3 percent of all contracts to HUBZone firms. The goal has never been met in the program’s history.
Jonah Pryor is the vice president of a 400-employee firm that operates in downtown Washington.
He attributes some of Computer World Services’s success to the HUBZone program, which has helped the firm procure more than $100 million since 2015 from agencies that include U.S. Citizenship and Immigration Services, the Coast Guard and the Transportation Security Administration.
“The HUBZone program has significantly contributed to our growth into a company with comprehensive enterprise IT capabilities supporting over 20 distinct federal customers in 13 states and territories,” he said.
His company was started in the 1990s, but it landed its first HUBZone contract 11 years ago. Computer World Services earns about $16 million a year in revenue, according to a federal database of contractors. The company ranks third among District businesses in HUBZone dollars awarded since the program began in 1997.
“We wouldn’t have had this level of success without it,” Pryor said.
Ward 2, home of Pryor’s company and much of the city’s downtown, accounts for more than 48 percent of the money District businesses were awarded through the program in recent years.
The ward contains some of the most affluent parts of the city. It is also bolstered by several business improvement districts, which finance projects by a self-imposed tax on commercial property owners within a defined geography.
It’s a different story east of the Anacostia River. In Ward 8, the city’s poorest, businesses account for less than 4 percent of HUBZone dollars awarded in the city since 1997.
LaToya White quit her job in South Carolina four years ago to establish a consulting firm in the District. She planted her business about two miles south of the U.S. Capitol in Ward 8.
The chief executive of Sylver Rain Consulting wants to expand in the nation’s capital by securing federal contracts, but she’s still waiting to secure her first HUBZone one after registering with the program this past summer.
“In the past, often women, specifically African American women, are overlooked and are thought to be incapable of leading a business,” said White, who oversees annual revenue of about $1 million. “The HUBZone program levels the field a bit.”
White said she credits it with helping her business grow in Southeast Washington, even as she waits to land a HUBZone contract. She said she hopes other businesses in poorer areas are given opportunities to prosper.
“Even if agencies aren’t giving you contracts, you get an additional look,” she said. “The program allows you to make connections that you probably wouldn’t have otherwise.”
A small business in a HUBZone can enroll in the program if it meets certain requirements, including hiring at least 35 percent of its employees from HUBZone areas. HUBZone designations are updated at least twice a year based on whether areas meet criteria, such as a certain level of income as well as poverty and unemployment rates.
Once a zone ceases to meet HUBZone qualifications, businesses lose their eligibility. About 3,400 areas nationwide that were designated as HUBZones in 2012 had lost that designation in 2015.
Another roughly 2,500 HUBZones — generally census tracts in urban areas and counties in rural areas — are scheduled to lose their status by January 2020.
The disparity within the HUBZone program extends nationally. The Post analyzed data from several cities, with many having results similar to those in the District.
It has been an economic development boon for some smaller cities, such as Fredericksburg, Va., where businesses have received more than $65 million in federal HUBZone contracts since 2008.
But in San Diego, one company, Blue Tech, was awarded more than $229 million from HUBZone contracts since 2008. That’s more than 60 percent of HUBZone dollars awarded to companies in San Diego during that time. The remaining 40 percent was shared by 36 other firms.
In Chicago, Vistas Construction of Illinois was awarded $83 million during the past decade — more than 70 percent of federal HUBZone dollars in the city.
“When you stand on the edge of a dock to feed the fish, the bigger fish always seem to get the food,” said Darwin Hindman, a lawyer for D.C.-based Baker, Donelson, Bearman, Caldwell & Berkowitz, who leads the firm’s government contracts practice.
Hindman represents federal contractors ranging from large defense and aerospace firms to small businesses seeking government assistance and access to contracts. He said the District’s growth and gentrification in recent years could be a factor in the disparity.
“D.C. is really volatile at the moment, and you have to assume that it could be impacted by the program,” he said.
In many cases, businesses in the HUBZone program also benefit from other lucrative federal contracts. For example, Akira Technologies, near Union Station, has received $198 million from HUBZone contracts since 2012 — more than any other District business. It also received more than $180 million through other federal small business programs during the same time frame.
Shear said weaknesses in the HUBZone program make it slow to change and adapt.
GAO investigations spanning several years have found problems with the program, including inadequate vetting of firms that submitted falsified documents, misrepresenting the number of employees who lived in HUBZones. That led to numerous fraudulent contracts being awarded.
In 2001, the accountability office couldn’t tell if the program was meeting its goals because of flawed data and insufficient reporting. In 2005, the Office of Management and Budget recommended that the Small Business Administration develop benchmarks for the program to better evaluate results, but that never happened.
Three years later, the GAO identified vulnerabilities in the HUBZone application process nationwide that it said made it susceptible to fraud and abuse. Those vulnerabilities led to at least 10 cases of HUBZone firms in the District that misrepresented their eligibility, according to the GAO. The SBA removed those firms from the program.
In 2017, the GAO again noted that a lack of data hampered the agency’s ability to provide Congress with a full picture of the program’s effectiveness.
Shear testified at a congressional committee hearing in March 2017 that the SBA continues to face challenges with certification and reporting, keeping the program vulnerable to fraud and abuse. SBA officials say they will address problems later this year that have plagued the program.
The SBA has not made significant changes to the HUBZone program since its debut. Hindman said that inability to adapt may exacerbate the program’s flaws.
“The HUBZone program is not flexible and slow to keep up with the change,” he said. “Places like D.C. do not wait for that change to happen.”