How infrastructure spending can close Philly's racial wealth gap
Jun. ten, 2021
Last week, in Tulsa, Oklahoma, the Biden Administration announced a raft of steps they will take to close our country's widening racial wealth gap. Central to the administration's wealth-edifice calendar are twin executive branch actions to reduce discrimination in dwelling appraisals and to increase the targets for direct federal procurement from small and disadvantaged businesses (DBEs) by l pct, or $100 billion, over five years. These are laudable, assuming and necessary moves.
To have the needed touch on, especially given the imminent federal investments through the American Jobs Plan, nosotros see reforming the fashion that that government—at all levels —contracts for building infrastructure every bit a necessary and urgent chore. If washed right it will exist truly transformative. However, it will non happen by itself and now is the moment to human action.
The electric current organization needs an overhaul. This can but be accomplished through institutional reform, legislative focus and directed funding.
Nosotros take been working with the Irvine Foundation and the Philadelphia Disinterestedness Alliance, with back up from McKinsey, for the by six months to understand the current state of procurement practices in Los Angeles and Philadelphia. Our conclusion is that the current system needs an overhaul. This can only exist accomplished through institutional reform, legislative focus and directed funding.
Just put: Procurement reform is non just a affair of increasing spending targets. It requires wholesale institutional change.
Nosotros applaud the Biden Administration's announcement of new targets as a step to overhaul fundamental and highly leveragable tools of the federal regime that are long overdue for reform. In this spirit, we provide some key reforms Congress can take to make even more substantial, complimentary, progress.
Why Infrastructure?
Federal infrastructure spending offers a unique platform for growing Black- and chocolate-brown-endemic businesses and building wealth in disadvantaged communities. It has a unique combination of symbolic importance and market-making potential that brand it i of the highest impact interventions. Infrastructure policy has a legacy of destroying Black and brown wealth in America—infamously through the construction of highways in the proper noun of "urban renewal" in the 1950s—and must be part of the solution for rebuilding that wealth.
Federally funded infrastructure is market-making on all levels. On the macro-level it represents a public bet on what places, industries, and activities will shape the time to come. On the micro-level, it represents a huge demand-heave for private sector firms, since the government volition not build the infrastructure itself. Infrastructure agencies volition buy a plethora of goods and services to deliver federal investments. Architecture and engineering firms will design projects. Construction firms will build them. Other firms volition maintain them, once built.
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This volition create not only jobs but will as well build wealth for the firms that are contracted to build infrastructure. Failing to reform federal procurement at this moment represents a missed opportunity of generational proportions to close the nation's wealth gap.
Federal infrastructure spending is already underway, and more is probable to come presently. The American Rescue Program Human activity (ARPA) has already appropriated $126 billion for investments in elementary and secondary schools, which can be used for substantial renovations of schoolhouse facilities (such every bit HVAC system replacement) to enable rubber reopening in the face of the Covid-nineteen pandemic.
The proposed American Jobs Program goes further, recommending unprecedented investments in a broad array of infrastructure, including: transportation (e.g., roads and bridges, public transit, passenger and freight railways, airports, waterways and ports); buildings and utilities (e.m., affordable housing, high speed broadband, electric grid, h2o/sewer, public schools); and disaster resilience. Significantly, some of the proposed funding is explicitly intended to repair the damage of prior infrastructure investments that divided cities and segregated minority communities through the destructive building of highways. Equally the American Jobs Programme moves through congress, it provides an important and logical vehicle to advance reforms that aid the Assistants close the racial wealth gap.
The moment is now: a powerful tool overdue for reform
The federal focus on equitable procurement has been in identify for decades, but its impact has fallen dramatically short of aspirations. In 1983, Congress enacted its offset disadvantaged business organisation enterprise (DBE) provision, ensuring that infrastructure projects receiving US Department of Transportation (USDOT) funding allocate ten percent of their spending to certified DBEs. This most-often occurs through a sub-contracting relationship—where DBEs practice 1, oftentimes low-turn a profit, chemical element of a projection, while the prime contractor keeps the bulk of the contract.
The program, designed decades ago for family-sized businesses, just has not kept pace with the changing small business mural. Other than a change to include women in the definition of DBE, the program has not significantly inverse in the nearly forty years since it was established. It leaves DBE subcontracting as a box to bank check and ensures that Blackness and brown-owned businesses stay modest and attached to the program.
The use of federal procurement as a tool to close the racial wealth gap seems to have flown under the radar for legislators. All the same, the barriers that take hindered substantial procurement reform in the past take changed in the past twelvemonth. In anticipation of the largest infrastructure bill in a generation and in the wake of the largest mass movement for racial justice in the nation'southward history, it is fourth dimension to revisit the power and potential of equitable procurement in infrastructure.
Five Fundamental Challenges to Address
Pocket-size business procurement is overdue for an overhaul. Largely out of benign fail, the current programs accept fix up financial and institutional structures that go along disadvantaged firms at a disadvantage from kickoff-to-end of the federal contracting process. These issues are peculiarly pronounced in infrastructure because of the large contracts and institutional complexity of contracting.
In the recent past, reforms have nibbled around the edges with unified certification in MAP-21, limited personal net worth and gross receipts changes, and SBA-conformance in the FAA reauthorization; however, reformers have done piffling to address the systemic challenges facing minority-owned businesses. This has created v foundational challenges that any reform to supplier diversity must address.
Challenge 1: DBE firms are at a disadvantage when accessing the flexible capital they demand
DBEs do non have access to the same financial arrangement majority-owned firms do. Federal programs have been limited in the telescopic of the problem they've addressed. Whether it's raising a first circular of upper-case letter, building long-term majuscule reserves, or raising capital to rapidly staff-up and mobilize for a project, raising funds is more than difficult as a DBE. Federally-backed programs statutorily provide DBEs with financial products less sophisticated and less supportive than those accessed past majority-owned firms. Even if a minority-owned business organisation has the relationships, track record, and remainder canvas to admission capital, that capital is frequently provided via inflexible debt products.
Billions of dollars are at pale for historically underutilized businesses to help close our country'southward racial wealth gap, but volition we human action?
The U.S. Department of Transportation's Short Term Lending Program exemplifies this issue. Information technology offers debt capital but puts severe limitations on its use. This puts the very businesses this money aims to help at a structural disadvantage compared to majority-owned firms that can enhance more flexible funds. The Trump Administration discontinued the program, meaning it'due south due for a refresh under the Biden Assistants; we would encourage boosted flexibility. If DBEs are going to thrive, nosotros must remove barriers similar this and develop new financial products that accost the fiscal disadvantages faced past the firms rather than reproducing them.
Challenge 2: Current procurement and contracting incentives inhibit growth
Procurement is where the condom meets the road in supplier diversity. USDOT'southward existing 10 percent federal prepare aside for DBEs has inadvertently created an incentive organisation for minority-owned businesses to "get certified and stay certified" rather than "get certified and grow." Businesses with gross receipts that surpass $26.3 meg seeking contracts through the DBE plan are stuck betwixt a rock and a hard identify: they are too small to compete with larger firms and too big for federal set-asides. (In infrastructure projects that often run into the billions, total revenue of $26.3 million is a rounding error. It may sound similar a lot, but when considering gross revenues, it is not.)
As currently constructed, the 10 per centum set-asides largely confine DBEs to subcontracting roles, pregnant less project piece of work, narrower operational margins, and less experience to anytime exit the program competitively. In addition to this, the personal net worth cap for entrepreneurs participating in DBE programs has non been inflation and does not account for geographical variance (despite the wide variation in toll of living across this country).
If nosotros care about closing the racial wealth gap, then nosotros demand to update how we contract for infrastructure projects, starting with addressing the incentives that inhibit growth in DBE fix-aside programs.
Challenge three: The Fragmentation of public entities causes excessive administrative burdens
Federal infrastructure spending volition catamenia to a balkanized set of special, often contained, public entities including school districts, urban center agencies and public government who will in turn procure specific contracts from firms. To-be-released McKinsey research in Philadelphia reveals that these entities have different definitions of DBEs (likewise every bit differing lists of DBEs), use separate processes for procuring goods and services and engage (or fail to appoint) with different stakeholders in the ecosystem, including entrepreneurial back up organizations and fiscal institutions.
In that location is no unified approach to supplier diverseness, meaning that the whole is less than the sum of the parts. In improver to the institutional problems this creates, information technology also leaves DBE firms filling out excessive — often duplicative — paperwork to qualify for similar contracts with dissimilar agencies.
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Challenge four: Certification has High Transaction Costs
The process of getting and staying certified as a qualified DBE or Minority Owned Businesses (MBEs) is overly burdensome for many historically-underutilized firms. Despite recent improvements that streamline the certification procedure and increase reciprocity across state-lines, certification is often cited past disadvantaged businesses as one of the highest hurdles to participation in public contracting. This is both because of the authoritative brunt and lack of technical assistance to meet cumbersome, redundant, and sometimes alien certification and compliance requirements—especially because that certifications often vary by agency and by land.
Frequently, the staff time or outside professional services support needed to complete certification paperwork rivals the corporeality of effort required past the largest prime number contractors, which have greater resources—past many orders of magnitude—to afford backend operations. Many of these burdens stalk from well-intentioned efforts to back up historically underutilized businesses and are now perversely limiting their access to contracts. Fortunately, the direly-needed reforms to certification are high-touch and tin can exist achieved with relatively-low attempt by agency leadership.
Claiming v: Lackluster transparency in enforcing DBE targets sets upward conflicts of interest and erodes trust
The electric current federal process for meeting DBE goals relies on a system that lacks transparency and suffers from poor enforcement. This erodes trust, creates bad information, and is self-defeating. There are ii areas where this problem is near pronounced.
Offset, for each project funded by the federal government, prime number contractors must undergo a "Good Faith Effort" to find a DBE that can meet the projection's DBE goals. These efforts mean, in essence, that the prime number contractor has tried their best to solicit bids from DBE firms. Often, prime contractors study that there are no pocket-sized and minority-owned firms that can do the piece of work. This claim is frequently incorrect, but no countervailing construction exists to validate prime number contractor reports. If no suitable DBE can be plant through a skilful religion outreach effort, the prime number is granted a waiver to self-perform the piece of work in the contract. The lack of transparency in good-organized religion efforts often erodes DBE trust in the "good faith" of the efforts.
Second, firms selected as DBE sub-contractors are often recipients of support programs such equally mentor-protege, which are focused on growing business acumen. These programs are fix so the prime contractor "mentors" the subcontractor on operational tasks like setting billable rates—which the sub-contractor then uses to bill the prime number contractor—and business planning to abound into vibrant firms that compete against the prime contractor.
The problem here: there is a deep conflict of interest at the centre of these programs, which require primes to negotiate against their ain bottom line. On top of this, there is limited transparency into the handling and outcomes of subcontracted partnerships for Black- and chocolate-brown-owned firms that partner with larger majority owned suppliers, contributing to an erosion of trust in the DBE plan'south commitment to wealth edifice.
V Federal Reforms for Closing the Racial Wealth Gap Through Procurement
The challenges facing DBEs and Historically Underutilized Businesses (HUBs) are structural. They crave structural fixes to federal procedures, practices, and programs. Beneath nosotros outline five height-priority federal reforms—iii are legislative, i is executive, and ane is a joint effort—that begin to address the challenges highlighted above.
Reforms to Increase Access to Capital for DBE firms
Federal Reform i (legislative & executive): Allow federal intermediaries to offer flexible disinterestedness financing and forgivable loans
We have one uppercase market for majority firms who can access a variety of financial products, and a separate, smaller and more rigid, market place for DBE firms. We just suggest to level the playing field. Congress should piece of work with the administration to change statutes then that federal intermediaries such as Small Business organization Transportation Resources Centers (SBTRCs) can offer a mix of equity and debt products through their participating lenders.
We should also take lessons learned from the Payroll Protection Program program, and offering forgivable loan products for project mobilization. States can likewise deploy supportive funding to support innovative and flexible capital products for this aim through the State Small-scale Business concern Credit Initiative. Access to these types of financing products also back up minority-owned businesses to accept a bond-ready residue sheet, and make long-term investments in their businesses, and our land's, future.
Our country will come upwardly short if, after all is said and done, the Department of Health and Human Services buys l pct more newspaper clips from Black-owned firms, but little has inverse in who is receiving prime contracts for building major infrastructure projects.
Federal Reform 2 (legislative): Update prompt payment statutes to "pay before paid" to ensure small businesses have enough working upper-case letter
Prompt payment for completed work is an industry-wide challenge. This hurting is felt well-nigh acutely by small-scale and minority-owned businesses. Existing statutes crave prime number contractors to pay their subcontractors, often including minority-owned businesses, 30 days later on they are paid. Many local agencies have a shorter time frame of effectually vii days.
Congress should movement forrard by irresolute existing federal statutes to a seven-twenty-four hour period window to pay when paid or move to a "pay earlier paid" model where subcontractors will be paid before prime contractorss are, i.e., the well-capitalized primes will front the money to the subcontractors. Legislators should also explore models that allow contracts to exist awarded with 15- to xxx- day payment advances to amend the working capital for pocket-sized business organisation owners—a practise often used in the private sector to support cash flow.
Reforms that remove perverse incentives for DBEs in procurement and contracting
Federal Reform 3 (legislative): Unbundle Projects and Enable Direct Contracting
Unbundling projects and enabling directly contracting will incentivize small and minority-endemic businesses to not stay minor but to "get certified and grow." It will do so by providing: (one) access to prime number contracting opportunities; and (two) a long-enough rail for firms that grow beyond gross receipts of $26.3 million to exit sheltered bidding programs and thrive in an open bidding environment. Direct contracting sets aside certain sizes of projects for pocket-sized and medium sized businesses, facilitating prime contracting opportunities for these firms.
By unbundling projects, the federal government will let minor firms to bid, increasing the competitiveness of bids ultimately at a lower cost to the agency. There is early motion effectually these bug on the Hill, with Senator Alex Padilla discussing the challenges of making the small- to medium-size business concern bound at the contempo subcommittee hearing, Equity in Transportation Infrastructure: Connecting Communities, Removing Barriers, and Repairing Networks Across America.
Federal Reform 4 (legislative): Conform the Personal Net Worth cap for inflation
The Personal Internet Worth (PNW) cap, a requirement to qualify equally a DBE, has not been raised in over a decade and directly inhibits efforts to shut the racial wealth gap by punishing successful entrepreneurs of color. Congress and the administration should heighten the PNW cap from $1.32 million to where it would take been if information technology had been aggrandizement adjusted ($i.52 million) and tie information technology to inflation moving forward. Congress should also change statutes and so the DBE program follows the same PNW calculations as SBA programs, excluding long-term retirement accounts from consideration. Currently the system is set up to disincentivize retirement savings for successful DBEs seeking to maintain competitive behest status.
Reforms that increase the administrative effectiveness and equitable outcomes of DBE procurement
Federal Reform 5 (executive): Focus an Interagency Task Forcefulness on Developing A Unified Supplier Diversity Unit
The federal authorities currently has several local and regional intermediaries (the SBA's Small Business Development Centers, the Department of Commerce's Minority Business organization Development Agency, and the USDOT'southward Small-scale Business Transportation Resource Centers, amongst others) to help DBEs access contracts and abound. However, these intermediaries are frequently underfunded and poorly coordinated with each other—allow alone across the federalist mural of state, local and county agencies they must work with to truly bulldoze business equity in contracting.
Oft this results in a procedure that is onerous for business concern-owners and which has express impact in endmost the racial wealth gap through procurement. Every bit part of their increased DBE procurement targets, the Biden administration appear that "agencies will assess every available tool to lower barriers to entry and increase opportunities for minor businesses and traditionally-underserved entrepreneurs to compete for federal contracts."
We encourage the administration to ensure that agencies focus on procedural barriers to equitable contracting. They could exercise this by building on their already appear first-of-its-kind interagency job force on home appraisal by calculation a twin mission of establishing uniformity in the federal contracting process for DBEs. The Administration should require all agency heads participating in the task strength to complete 2 tasks:
- All participating agency heads should begin, or accelerate, the streamlining of certification and compliance processes and portals, prioritizing user interface for disadvantaged businesses as well as eliminating unnecessary steps such as in-person notarization, when other legally appropriate options are bachelor. These are already well-documented barriers with simple solutions that make sense to implement.
- All participating agency heads should report dorsum on findings on agency-specific and cross-agency barriers to equitable contracting and recommend solutions within xc days.
Nosotros envision this second task resulting in the creation of a unified supplier diversity unit situated inside the White Business firm Office of Management and Budget. This unit would coordinate and centralize the advisory, matchmaking, reporting, and financing functions of existing supplier diverseness intermediaries through a single platform.
For the country to truly Build Back Better, America must non only eliminate the continuation of bad practices and remove old physical urban scars; we must also affirmatively contribute to the wealth building efforts of Black and brown America.
Such a platform could exist modeled off local efforts like that emerging in Philadelphia where we are recommending a new Supply Philly Initiative, designed to steer a substantial volume of federal infrastructure dollars to support, strengthen and abound local Black- and brown-owned businesses. The Initiative would create a new Supplier Diversity Hub to work with a broad assortment of infrastructure agencies in Philadelphia to alter procurement practices in the service of business equity.
The new Hub would as well work in close concert with a new Supplier Variety Consortium to ensure that potential vendors get the business coaching and quality upper-case letter they demand to come across procurement demand. The Hub would finally drive the creation of a Supplier Diversity Marketplace, to bring transparency in goal setting and reporting beyond multiple infrastructure agencies.
Meeting the Moment: Closing the Racial Wealth Gap through Infrastructure
In previous decades, the transportation sector has exacerbated inequality, destroyed Blackness and brown wealth, and damaged Black and brown communities in the United states of america.
For the state to truly Build Back Better, America must not only eliminate the continuation of bad practices and remove old physical urban scars; nosotros must also affirmatively contribute to the wealth building efforts of Black and brownish America.
The coming American Jobs Plan is both a symbolically and materially impactful manner of achieving the administration'south goals of closing the racial wealth gap through federal procurement. The inverse is too true: an infrastructure package that does non consider Black and dark-brown structure procurement is blinded to the long shadow of transportation policy in this land, besides as the enormous opportunities that lie alee.
Our country will come up curt if, subsequently all is said and done, the Department of Health and Human being Services buys 50 percent more newspaper clips from Blackness-endemic firms, but fiddling has changed in who is receiving prime number contracts for building major infrastructure projects.
Billions of dollars are at stake for historically underutilized businesses to aid close our country's racial wealth gap, but volition we act?
The Denizen is i of 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city's button towards economical justice. Follow the project on Twitter @BrokeInPhilly .
Bruce Katz is the founding managing director of the Nowak Metro Finance Lab at Drexel Academy. Keith Bethel is president of the Philadelphia Equity Alliance. Jamarah Hayner is president of JKH Consulting. Rick Jacobs is principal of RDJ Advisors. Colin Higgins is a senior research young man at the Nowak Metro Finance Lab. Andrew Petrisin is an associate consultant at WSP.
Header photo by Elevated Angles / Visit Philadelphia 
Source: https://thephiladelphiacitizen.org/infrastructure-spending-philly-racial-wealth-gap/
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