Set back for set-asides.

WHEN MEMBERS OF THE REPUBLICAN PARTY began to plan their assault on affirmative action earlier this year, they needed a symbol in the tradition of Willie Horton and "welfare queens."

Enter Frank Washington and Intermedia Partners, whose bid to buy Viacom cable system became the victim of poor judgment in the face of prevailing political winds. Washington's deal would become a rallying point for critics of the Federal Communications Commission's Minority Tax Provision, which provides a capital-gains tax deferment to companies that sell media properties to minorities. In turn, Washington and Viacom have become symbols of everything conservatives say is wrong with minority set-asides: that, as a policy, it is economically ineffective, administratively inefficient and ultimately unfair.

Of course, it all depends on the symbols you use. Many African-American entrepreneurs argue that they have used programs like the FCC's tax certificate program to make economic inroads and generate jobs. "I like to characterize our firm as a poster child for this program," says W. Don Cornwell, CEO of Granite Broadcasting Corp., a New York-based owner of network television affiliates. (See "Solid As A Rock," BE Company of The Year, this issue.)

Cornwell and others argue that such programs have made possible minority company deals that would not have occurred otherwise. Today, Granite Broadcasting, in its seventh year in business, is now a $63 million, publicly traded company with seven network affiliates and more than 500 employees. "We have done things that have added diversity to the airwaves, which is what the program is supposed to be about," says Cornwell.

Nevertheless, in April, President Bill Clinton signed legislation to eliminate the minority tax provision, surrendering the first battle in a major legislative fight to repeal set-asides and affirmative action laws in the United States.

The elimination of the tax break designed to encourage the sale of broadcast outlets to minorities is just the latest action in a major thrust by a GOP-led Congress to reverse 25 years of affirmative action efforts. Targeted most avidly are government-funded minority set-aside contracts, such as those of the FCC's Minority Tax Certificate Program and those in the U.S. Small Business Administration's 8(a) program, which serve as a catalyst for business development for the socially and economically disadvantaged.

This challenge could have a domino effect, threatening to dismantle affirmative action efforts across the board, including labor, education and employment initiatives, from the federal level down the line to state and local municipalities.

Although the programs were originally created during Republican administrations, Republicans like Texas Rep. Bill Archer and House Majority Leader Newt Gingrich are now leading the charge against them. Their rationalization is that race- and gender-based preference programs discriminate against others--read: white males. But their goal is to make affirmative action such a major issue in the 1996 election campaign that it drives a wedge, splitting the Democratic Party.

At stake for black entrepreneurs in this is the very existence of their businesses. According to a 1994 survey of 70 BLACK ENTERPRISE INDUSTRIAL/SERVICE 100 companies, more than 58% noted that at least half of their business was in the public sector. Only 21 firms, about 30%, reported that the public sector comprised 25% or less of their business. And one-third of companies surveyed are current or past participants in 8(a).

Obviously, for many of these firms, a rollback will put a significant dent in their business. Among those competing for contracts in the private sector, it is questionable how the government's threat to dismantle affirmative action will impact minority procurement efforts.

To find out where the nation's largest black businesses stand on the issue of minority business development initiatives, we talked with BE 100s CEOs across the spectrum, from heads of 8(a) companies and graduates to leaders of companies that were never in the program. While there is disagreement over the particulars, all agree that the need for affirmative action procurement initiatives persists. They believe that for most black-owned companies to move into the competitive mainstream, there must be formal, measurable efforts to level the playing field and eliminate barriers to access.

* Small disadvantaged businesses can't compete with major companies for a share of contracts without having access to the same resources.

"Without direct mechanisms to ensure inclusion, African-American businesses will decline precipitously," argues Harriet Michel, president of the National Minority Supplier Development Council headquartered in New York. Michel points to corporate downsizing in terms not only of workers but also fo supplier bases, as companies switch to larger, full-service businesses.

BE 100s CEO J. Fred Dual of Dual Inc., a high-tech engineering and avionics firm in Arlington, Va., says large businesses have no interest in helping small companies become competitive. "The 8(a) program as designed was an incubator to give you time to build up a company without being in full and open competition. In 1989, they destroyed the incubator element of the program," says Dual. "They also increased competition by bringing more companies into the program."

Dual spent nine of the 12 years his firm has been in business in 8(a). All of Dual's business came from government contracts before he graduated from the program in September. Of that business, three-quarters came from set-aside contracts; the rest was won on straight bids.

"The 8(a) gave us an opportunity to level the playing field," says John E. Brown, chairman and CEO of Am-Pro Protective Agency Inc., a security services company based in Columbia, S.C. "It allows you to grow on the front-end, but on the back-end you may take a loss."

"A rollback of affirmative action policies will reduce our total market share and minimize our ability to market to Fortune 500 companies," says Pedro Alfonso, CEO of Dynamic Concepts, a Washington telecommunications firm. "We will be put in a position of competing with firms with different resources than ours, for instance, technical competency, equipment, capital and ability to attract customers. In the technology field, we must compete with the Baby Bells and high-tech talents. If our market share is reduced we will have to refocus."

* The elimination of set-aside programs will adversely impact minority companies' access to capital.

Historically, black businesses have had difficulty gaining access to capital markets. "I'm not afraid of competition," says Ralph Williams, CEO of R.O.W. Sciences, a biomedical and health services firm based in Rockville, Md. "But, in business, to be a successful competitor, you must have flexibility to raise capital."

But, for companies in the 8(a) program raising expansion capital presents unique challenges. "At this stage of growth, a company my size would build partnerships to raise capital, but I can't according to the rules of 8(a)," says Williams. "I could not have gotten to where I am without the program, but I wish the people making the rules had considered the success of companies like mine."

Joshua I. Smith, chairman and CEO of The Maxima Corp., a Lanham Md. systems engineering business, says it is these kinds of restrictions that prevent 8(a) companies from being successful. "You can survive, but is that the measure of business success?" he wonders.

"It's unfortunate that people think the set-asides for minorities are the only ones," says Smith, whose company graduated from 8(a) nearly a decade ago. He also served as chairman of President George Bush's Commission on Minority Business Development. "We're looking at tens of billions of dollars going to universities, farm subsidies, aerospace and other small businesses."

* Private companies will have little incentive to offer procurement opportunities to minority-owned companies.

The degree to which government is committed to doing business with minorities is also critical to creating interest in that practice in the private sector. "Public policy drives private behavior," NMSDC's Michel argues.

"We've always looked at other products," says Earl Thomas, general partner of Houston-based Gold Line Refining Ltd. "We sell oil to other companies, such as Conoco, Phillips Petroleum and Exxon. But, we've chosen to sell to the government," explains Thomas, whose company was never an 8(a) participant.

He says his competitors are the major multinational firms. "They don't have to buy their fuel, like I do; they produce it." Thomas says people need to look at the other programs and breaks big companies take advantage of, such as oil leases, the Defense Department's Fuel Supply program or the Department of the Interior's small refinery program targeted to firms producing under 75,000 barrels per day. This last program allows small companies to buy at a more competitive rate. But until he "just happened to hear about the Denver area auction in the fall," he was paying extra for his 16,000 barrels a day to make aircraft fuel. "If I was able to participate at that size and to have the corporate advantages they do, I'd be able to compete the way they do," says Thomas.

Construction entrepreneur Dominick Ozanne, president of Ozanne Construction Co. in Cleveland, agrees and says that "the non-race-specific programs should be placed alongside 8(a). If you pair them side by side, people would see that minorities only get 5% and non-minorities get 95%." Ozanne says American companies doing business overseas get all kinds of "incentives."

"I'm a Republican, but I'm disappointed with the party and what's going on," he adds. "I don't see anyone in the construction business complaining about this. The only people complaining are those that aren't successful or have an ax to grind."

* Cuts in economic development programs targeted to African-Americans threaten the ability of black-owned businesses to generate jobs and opportunities.

When Joshua Smith testified in a hearing before the Senate Small Business Committee in early April, he tried to convey the economic impact of eliminating minority business development programs. "We must understand that minority businesses are vital to the American economy because minority businesspeople [usually] locate their businesses within their neighborhoods, revitalize communities, create jobs, train other minorities and serve as role models," said Smith. "As an entrepreneur and a Republican, I am in favor of reducing government bureaucracy and red tape; however, you do not throw the baby out with the bathwater when all it may need is a change of its diaper."

* Make adjustments, make changes, but don't get rid of effective programs.

Supporters and critics alike believe that there should be some adjustments made in affirmative action programs such as 8(a) or the FCC's tax certificate. Some, including Smith, argue that the criteria and rules of the programs must further their primary goal: to create access to the economic mainstream for "underutilized" businesses, which, in turn, will exert a wider social impact. For companies like R.O.W. Sciences, removing restrictions on the methods of raising capital would be a welcome relief.

Others, such as Fred Dual, say the need for set-asides is as great or greater today than ever before. "American systems have failed to bring African-Americans and Native Americans into the mainstream of American business," Dual asserts. "That need is as strong today as when 8(a) was started."

John Brown of Am-Pro says that 8(a) gave his then-fledgling security company a chance to establish its viability in the industry. "We had a vision and we used 8(a) as a stepping-stone. It allowed us to build resources and understand the competitive structure of business, which helped to make us competitive."

It must have: The 1,200-employee company has eight offices and two major foreign contracts. "The basis of any good company is to build resources. When we got too big to bid on 8(a), we competed effectively and bid on the jobs we wanted." Am-Pro posted revenues of $35 million last year and expects to earn $40 million in 1995.

Despite all the brouhaha over programs like 8(a), the SBA proudly points to an overall dissolution rate of 36% among 8(a) companies from 1990 to 1993 versus 71% for all firms. More importantly, 56% were still in business after spending an average of seven years in 8(a). And many of those companies are still on the BE 100s--not only surviving, but thriving.