STRATEGY

Can This Man Turn Around the SBA?

Never heard of Steve Preston? Few had, until he was nominated to run the Small Business Administration.
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On March 28, President George W. Bush appointed a new White House chief of staff and empowered him to clean house. Four weeks later, Hector V. Barreto announced that he was resigning as head of the Small Business Administration to run a Washington, D.C.-based advocacy group called the Latino Coalition.

Barreto's departure comes at a time when there is a widespread belief, both in and out of government, that the SBA's mission deserves serious reexamination. Should the government be in the business of backing loans? What companies should qualify for special treatment when it comes to government contracting? And do the SBA's programs focus too much on mom-and-pop businesses and not enough on emerging growth companies?

A few hours after Barreto's resignation and with no fanfare, the White House released the name of the man who, if confirmed by the Senate, will be in charge of finding answers to these questions: Steven C. Preston.

Who is he? That's what a lot of people were asking after the announcement. As it turns out, Preston has been an executive vice president at ServiceMaster, a multibillion-dollar public company in Downers Grove, Illinois. Founded in 1929 as a mothproofing business, ServiceMaster is today a roll-up of businesses that deliver services such as housekeeping, lawn care, and pest control. Preston joined the company as chief financial officer in 1997, having previously worked at First Data and Lehman Brothers. (A White House spokesperson said Preston would probably not grant interviews until after his confirmation.)

The fact that Preston has never started a business, and that he has worked for large public companies since getting his M.B.A. in 1985, has raised eyebrows among some observers. In a statement, Representative Nydia Velázquez of New York, the ranking Democrat on the House Small Business Committee, lamented that Preston was coming to the SBA "from a Fortune 500 company whose issues are nothing like those faced by the average small-business owner." The National Black Chamber of Commerce claimed that ServiceMaster had lobbied Congress to cap set-asides for small companies in the lawn care business. "Our lobbying efforts have helped small business," a ServiceMaster spokesperson says. Meanwhile, Lloyd Chapman of the American Small Business League worried that the choice "indicates that the Bush administration has no intention to clean up the problems at the agency." Of course, what would constitute "cleaning up" the SBA is a matter worthy of discussion.

The Case for Abolition

The SBA's many critics can be divided into three camps: Let's call them the traditionalists, the technocrats, and the abolitionists. The traditionalists believe that the SBA's programs are generally sound, but that Barreto mismanaged the agency and the administration further crippled it by cutting its budget by nearly 40 percent since 2001. The proposed budget for 2007 is $624 million.

The technocrats believe that the government should support small-business programs because entrepreneurs constitute a vital and underserved sector of the economy. The problem, they say, is that the SBA's programs are outdated and its paperwork is debilitating. This group would like to see the agency be as innovative in the policy world as entrepreneurial companies are in the marketplace.

The last group--the abolitionists--is probably the smallest. Its members think the SBA is an unworkable federal bureaucracy that is utterly divorced from the local activity it claims to govern. It's a fairly radical point of view, but thanks to a recent white paper, the abolitionists have momentum. In the paper, published 12 days before Barreto's resignation, Veronique de Rugy of the American Enterprise Institute called for the SBA to shut down its signature 7(a) loan guarantee program on the grounds that there "seems to be no failure of the private sector to allocate loans efficiently….Absent such a clearly identified problem, the SBA's activities are simply wasteful."

Budget hawks reveled in De Rugy's takedown of the SBA, as it presented them with yet another opportunity to criticize soaring budget deficits. "She provided the intellectual fodder for this debate," says a former government official who worked closely with the SBA. "That was not a crackpot paper."

De Rugy's broadside came at a time when the SBA was already reeling over charges that it mishandled disaster-recovery loans after September 11th and Hurricane Katrina. Senator Olympia J. Snowe, the Republican from Maine who chairs the Senate committee that oversees the SBA, archly remarked at one hearing that "the SBA's disaster loan program is aptly named." (See Snowe's plan to fix the SBA.)

There have been other problems. In 2003, the SBA failed to ask Congress to approve routine stopgap funding for the 7(a) program, which prompted an abrupt suspension of loan processing in early 2004--to the horror of the segment of the banking industry that relies on those guarantees. And federal contracts earmarked for small businesses have been another sore spot. For years, an embarrassing number of them have actually gone to large corporations.

In an interview with Inc. last February, Barreto defended his agency's performance, asserting that the SBA had broken its own records for guaranteeing loans and driving federal contracts to small companies. "We've also dedicated a tremendous amount of focus to promoting the President's small-business agenda," he said. "We do that by making sure that small businesses aren't overregulated, overtaxed, and overlitigated, and also that they have access to new opportunities, especially in international trade."

Unlikely Defenders and Illegal Lobbying

How Preston will address the SBA's problems will depend on a lot of factors, including what kind of support he gets from the White House, the outcome of the midterm elections, and the severity of the summer hurricane season. It also remains to be seen whether the traditionalist, technocratic, or--especially unlikely--abolitionist points of view will inform his.

Still, if confirmed, Preston may find himself devoting a lot of time to the task of rebuilding political support for the 53-year-old agency. A hint of the battles to come was evident recently when De Rugy was called to testify about her views before a Senate subcommittee chaired by Tom Coburn, a Republican from Oklahoma who is an ardent (some would say cranky) critic of government spending.

The hearing--scheduled just prior to National Small Business Week, the SBA's largest annual event--caused an uproar. Traditionalists like the ASBL's Chapman and Barbara Kasoff of Women Impacting Public Policy--who routinely criticized Barreto's SBA--suddenly found themselves defending the agency against what they saw as an attempt to undercut any role for government in the realm of small business. "I have no problem with calling a hearing since the SBA has its problems," says Kasoff. "But you can't invite only people who believe the SBA shouldn't exist."

Stung by criticism, Coburn accused unnamed officials at the SBA of coordinating the advocacy groups to lobby on the SBA's behalf, which would constitute illegal lobbying. In the end, the subcommittee heard from both SBA critics like De Rugy and supporters, including Republican Representative Sue Kelly of New York, who spoke about the key role the SBA played in funding small businesses in her district, which spans the Hudson Valley, after large companies closed facilities there. Still, it seemed unfortunate that an occasion to debate the effectiveness of small-business programs had turned rancorous. It's into this poisoned environment that Preston steps.

With reporting by Darren Dahl and Robb Mandelbaum.

Last updated: Jun 1, 2006




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