Maximizing Our Infrastructure Investment: A National Emphasis on Community-Based Business Ecosystems
Vasco L. Bridges III, CEO, JANO Technologies, Inc., NLC Chicago
Most political pundits agree that despite the hyper-partisan political divide, Congress is poised to pass a large-scale infrastructure investment in the coming months. From politicians on Capitol Hill to the business leaders moving Wall Street markets, everyone is expecting as much as $1 trillion invested into infrastructure projects over the coming years. Progressive policy makers must not only pursue policies that will advance the nation’s infrastructure, but do it in a way that can also be an “entrepreneurial stimulus” to business leaders in disadvantaged communities. As progressives, we must ensure all businesses are engaged in this effort by supporting and expanding our community-based business programs — an effort that, if done correctly, could have multi-generational impacts.
Setting the Stage
While everyone agrees that infrastructure reform will happen, there is no agreement as to how. Conservatives want to repair ports, roads and bridges; progressives want more renewable energy, public transportation, smart grids and expanded broadband access. Some think it should come from Federal grants or direct investment; others prefer tax credits and public-private partnerships (P3). And ask any regular traveler, they’ll simply say, “Can someone please just fix LAX, JFK, LaGuardia and O’Hare?!” It’s expected that an infrastructure plan will include all of these and more.
But regardless of approach, an infrastructure boom will result in “boots on the ground” — businesses and workers that will do the hard work of building the future of our country. And it will be a profitable boon to the business community that will participate. The big business leaders are already licking their lips: “The day after Donald Trump’s shocking presidential victory, William Sandbrook, the chief executive of US Concrete [which gets 15% of its revenue from infrastructure projects], woke up to see his company’s shares rocket more than 12% in the first three minutes of frenzied trading.”[i]. Everyone is ready. Global financiers, national telecom providers, regional construction contractors, local caterers — businesses of all types are readying to take advantage of this burgeoning opportunity.
As progressives, instead of simply shuddering at the idea of feeding the “fat cats on Wall Street” we must not miss the opportunity to use this business growth to also impact how our communities grow. In addition to asking “where is the infrastructure money being spent?”, we must also ask “which businesses are we spending it with?” And, specifically, we must enact policies to ensure that infrastructure investment is effectively shared to the underrepresented, community-based businesses that deserve it.
There are several ways that this infusion of infrastructure capital can make its way to our community businesses.
In this paper, we refer to “community businesses” by specifically using the Small Business Administration’s notion — a clear set of designations that offer businesses from communities that are frequently disadvantaged in a contracting process more opportunities at government and large-scale private sector contracts:
· SBE — Small Business Enterprises
· MBE — Minority Business Enterprises
· WBE — Women Business Enterprises
· DBE — Disadvantaged Business Enterprises
· VOSB — Veteran Owned Small Businesses
· SDVOSB — Service Disabled Veteran Owned Small Business
· WOSB — Women Owned Small Business
· SBA 8(a) — to firms that are owned and controlled at least 51% by socially and economically disadvantaged individuals [ii]
· HUBZone Program — small companies that operate and employ people in Historically Underutilized Business (HUB) Zones
There is little argument that these businesses are important to our economy. In comparison to big businesses, these community businesses are smaller, more connected to local neighborhoods, and have a stronger potential to grow our economy beyond just the development of new roads and bridges. These businesses are more likely than their larger counterparts to “deliver community character and economic advantages to the town they are positioned in, but also strengthen partnerships among neighbors, residents, other small business owners, community leaders and even schools by offering social and economic relationships. Many also support local causes, creating even more good within a community” [iii].
Moreover, these businesses are models that spur community growth. Successful community businesses can have follow-on effects, building collectives of entrepreneurs that can impact the health of a given community. As LinkedIn founder and venture capitalist Reid Hoffman says: “It only takes a few success stories…to set the whole process in motion” of growing an ecosystem of entrepreneurship[iv].
Finally, it’s important to realize these businesses are not an irrelevant part of our economy. According to the U.S. Small Business Administration, MBEs alone account for more than 4.1 million firms, and nearly $700 billion in revenues and “Small Firms” more generally represent 99.7% of all employer firms, employ just over half of all private sector employees, pay 44% of total U.S. private payroll, and have generated 64% of net new jobs.[v]
However, we’ve tried this before. In 2009, President Obama signed the American Recovery Act. And while it saved our economy from a depression, the $831 billion in stimulus did not have the impact on community businesses like it could have had. As we learn from that 2009 stimulus, and think ahead, what can progressive politicians do to focus the impact of the infrastructure spend to the “businesses that matter”?
There will be wrangling in the coming months around infrastructure — how and where we spend it. However, policymakers throughout all levels of government (Local, State, Federal) can consider the implications of infrastructure opportunity on the community businesses in their individual jurisdiction. There are 5 specific policy opportunities that progressive policy makers should consider when evaluating proposals to expand infrastructure spending.
Policy Opportunity 1: Push for more direct investment; be wary of Public Private Partnerships (P3)
Simply put, the more layers and levels between the government’s promise to invest in infrastructure, and the execution of that promise, the higher likelihood that profits are directed towards the financing of the project, and not its execution. Through tax credits or other unique financing tools, if the government subcontracts its managerial role as primary executor of a proposal to a large bank or financial institution, a less-progressive model of infrastructure spending will take place. Not only are “profitable” projects (e.g. toll roads) more likely to get proposed and approved, but these intermediaries/financiers are less likely to enforce strict community business standards than local government agencies are.
P3s have been viewed as innovative and can definitely be important levers to support infrastructure investment. But they should not be the only method to invest in infrastructure. Wherever possible, policymakers must utilize a model of direct investment, where government entities have more direct control over the implementation of a project, and therefore are more likely to deliver on the promise and expectations of the investment for community businesses.
However, beyond P3s, policymakers should look skeptically at the financing gymnastics that are masqueraded as infrastructure spending. If the government isn’t giving money directly to industries, it isn’t helping those community businesses. As Ronald Klein has said on many components of President Trump’s stated infrastructure proposal: “It’s a tax-cut plan for utility-industry and construction-sector investors, and a massive corporate welfare plan for contractors…Because the plan subsidizes investors, not projects; because it funds tax breaks, not bridges; because there’s no requirement that the projects be otherwise unfunded, there is simply no guarantee that the plan will produce any net new hiring.”[vi]
Policy Opportunity 2: Ensure Fairness in Competition for contracts
Targeting infrastructure spending on community-based businesses is hardly a new idea. In 1983, Congress enacted the first Disadvantaged Business Enterprise (DBE) statutory provision for the Department of Transportation. At that time, it was used to allocate at least 10% of any funds authorized for the building of highways to be spent with DBEs, but managed through local agencies.[vii] Other government institutions have similar statutes. While this notion of “fairness” has been considered broadly, policy makers must ensure it is implemented specifically.
First, legislation and infrastructure spending targets must include established goals and requirements for community businesses. These metrics should be spelled out in the legislation specifically, and should set expectations for all participating organizations. But in the absence of specific legislative mandates on spending, many agencies at all levels of government have already set targets for this spending, and if they don’t, they should be pressured to set these standards. If these standards do exist, they should be increased. Our goal, as progressives, should be that nationally, 50% of all infrastructure spending should be spent with community businesses. And these standards should reflect the local economic reality using local disparity studies.
But it’s not enough to simply set goals and mandates legislatively. Processes must be put in place to ensure compliance. The standards for community business spending must apply not only for prime contracts but (and even more importantly) to the subcontractors that often execute the work. Especially in P3s, there are frequently several layers between the initial investment and the execution, and the standards enforcement for community businesses can be lost in the layers. Legislators should not only set goals, but ensure transparency and compliance — make sure that all contractors and agencies are reporting accurately and transparently to the public how they are supporting community-based businesses and that the system is not being gamed. And while many agencies/businesses should recoil at the additional scrutiny and reporting requirements, investments must simultaneously be made to advance and streamline this reporting.
Finally, we must look to the private sector for guidance — many large companies have more robust supplier diversity programs than the federal government. Companies that make investments in strong supplier diversity pipelines, both alone and through programs like Chicago Anchors for a Strong Economy (CASE), should be viewed as models by government entities. These businesses should continue to be publicly recognized, not only for adding jobs to the economy through hiring, but also for their commitment to building community-based businesses in the communities which they serve.
Policy Opportunity 3: Ease the Certification Process
“It’s too hard to become a certified!” — this is a refrain spoken by too many community business owners aiming to become certified. Many of these business owners find the process of achieving certification onerous and often confusing. But many authorizing agencies rightfully fear that removing boundaries to certification will let unqualified business through, and choose to keep the certification processes rigorous.
The current process can be cumbersome. Imagine a small Chicago-based firm that has the capability to do work for multiple government entities. The way the system is now, that business may have four separate, equally rigorous certifications to file: City of Chicago, Cook County, State of Illinois and also US Federal Government. And each of these institutions may have separate requirements and processes to achieve certification! With this maze of requirements, many business owners often walk away from the certification process.
Without diluting the local certification requirements, the federal government should invest in an easy-to-use, technology-enabled, universal certification process that simplifies this process for the business owner. Allowing any certifying agency access to this system, a central processing certification hub can simplify this process for the business owner and increase the number of certified businesses available to participate in infrastructure projects. Imagine a new centralized system that allows entry of all information once, and multiple state/local agencies can use to expedite their certification decision.
In the absence of a centralized hub, local policymakers should encourage information sharing and certification recognition between agencies. If a business is certified as a WBE for the State of California, that business certification could also be recognized by cities, counties and townships within the State but also by neighboring states with similar requirements. Another alternative is for local policymakers to recognize 3rd party certifications. Many outside organizations are doing centralized screening and certification of community businesses, taking the onus off government agencies. One example of this is the National Veteran-Owned Business Association, which is creating a new VBE certification program for agencies to use.
Policy Opportunity 4: Improve Capital Access for Community Businesses
Access to capital is an important part of community business survival. Some blame Dodd-Frank restrictions for limited capital liquidity; others recognize the predatory nature of the consumer lending industry impacts small business management. But the fact remains that Small Businesses remain an under-capitalized part of the economy. Unless endowed with personal wealth most community businesses operate check-to-check, just above solvency. Meanwhile, the fastest growing methods for delivering capital to these businesses are via online-driven FinTech startups. These venture capital-supported businesses have been hailed as “innovative” but have interest rates and collection practices described as “higher than average” at best or even “predatory” at worse.
When it comes to infrastructure, most of these community businesses not only lack the capital to finance new projects (the money to acquire materials and human capital for the work), but also the surety bonding to execute the projects.
Access to effective capital is a key area where progressive policymakers can improve upon the American Recovery Act signed by President Obama in 2009. Back then, most of the money earmarked to community businesses was directed through the Small Business Administration, who subsequently supported the investment via guarantees with large, traditional banks that were slow to distribute to the businesses that needed it. Here again, the impact on these community businesses was lost by adding layers to the distribution of infrastructure dollars, and money was not released effectively to the businesses that needed it.
In 2017, to maximize infrastructure investment, lending to community businesses should again be supported. This time however, local and regional policymakers should partner more directly with local, non-profit lenders, community development financial institutions and should use the traditional big banks only when necessary. Get the money more quickly from the central offices to those small business lenders on the ground that are best equipped to get capital to community businesses that need it the most.
Finally, policymakers must acknowledge the link between personal finance and business finance. Most loans disbursed to community-based entrepreneurs, require strong personal credit, so supporting any efforts on general financial literacy will have follow-on impacts for community entrepreneurs.
Policy Opportunity 5: Support Businesses with Technical Assistance to Build Capacity
Policymakers often talk about skills training for the new workforce, but we rarely invest in skills training for entrepreneurs. The result: when it comes to investing in community businesses for infrastructure projects, the refrain becomes familiar: “We can’t find businesses that have the skills/experience we need to execute these projects!” In addition to simply opening opportunities for community businesses to contribute, policymakers must support these businesses to succeed. Here are two suggested methods:
1) Create incentives for new businesses to be formed around the infrastructure boom. Policymakers must find a way to incentivize infrastructure projects to go to promising newer businesses that have not yet had traction in the marketplace. Like any investment, we must make a bet on our collective future by developing future community business leaders. This could be through incentives or by simply reducing the barriers to entry on a project for entrepreneurs. Innovation efforts should be focused on getting more people from targeted/disadvantaged communities to start and build the businesses that will help rebuild our infrastructure.
2) Give entrepreneurs managerial capacity to grow their businesses. Policymakers must continue to invest in the mechanisms that support the managerial capacity of the entrepreneurs. The Small Business Administration has many programs to support this effort already, but most of them are underutilized by the communities they serve. Nationally, the SBA should increase funding for local Small Business Development Centers (many have gone out of business due to state/local budget cuts and the required matching funding) as well as other community-based capacity building programs. Additionally, the SBA can make other development programs (e.g. SCORE) more focused and productive and should do a better job of marketing business curriculum to potential entrepreneurs to improve participation. The government can expand support of successful 3rd party organizations who are building the next generation of community-based entrepreneurs. Programs like the Goldman Sachs 10,000 Small Businesses Program have proven their impact and can be expanded with government support.
One area that has received a lot of interest: mentorship relationships for these business owners. The SBA has a Mentor/Protégé Program for 8(a) businesses that can enhance competitiveness of these businesses and help them remain competitive, achieve entrepreneurial success, and contribute to the strength and vigor of our economy. The SBA pairs recent 8(a) program graduates with current 8(a) program participants to help them with technical and management assistance, contracting and access to capital.[viii] Local agencies have implemented their own mentor system that encourages prime contractors to work more closely with community-based businesses. Illinois Tollway gives “credits” for Prime Contractors that also serve as mentors to assist the development of veteran-owned small businesses and service-disabled, veteran-owned small businesses (VOSBs), as well as disadvantaged business enterprise (DBEs) firms.[ix] Programs like these can be scaled to incentivize investment in community businesses.
Conclusion: The Multi-Generational Effect
The 2017 ASCE infrastructure report card gave American infrastructure a D+ grade and identified infrastructure costs in the trillions.[x] The best infrastructure policies will not only improve this grade, but will also combine progressive ideals (e.g. fairness to opportunity) with business realities (e.g. access to capital and technical assistance) to align the need for improved infrastructure with the need for improved communities.
Local communities need self-sustaining ecosystems, and it’s these ecosystems that can make the difference between successful and struggling communities. In the podcast Masters of Scale, Reid Hoffman and Linda Rottenberg discuss this idea — that in order to build an “entrepreneurial ecosystem” that grows organically, the business leaders of the community must be empowered. “Four or five [successful entrepreneurs] can inspire, mentor and invest in practically the entire ecosystem.”[xi] Community businesses, and their entrepreneurial leaders, are the engine that can build this economic lifeline.
Identifying, encouraging and empowering community entrepreneurs (MBEs, WBEs, VBEs, 8(a) businesses, etc) can be a strong policy-driven approach to supporting local communities. With as much as $1 Trillion of infrastructure spending at stake, progressive policy makers need to look for opportunities to simultaneously make investments in the community businesses while investing in our infrastructure. Our progressive goal, 50% of all infrastructure spending with community businesses, can be game-changing. Imagine the economic impact if $500 Billion nationally went not only to building the future of our country’s infrastructure, but also investing in the community-based business ecosystems that need it!
The businesses that will be built from the pending infrastructure expansion can “…be the core of an exponentially larger network…more and more companies [will] grow up around them and now you have a much denser network of successful companies, resources, and talent pools. This builds a diversity of companies to create a whole ecosystem.” [xii] By using the right policy tools, we can rebuild America’s infrastructure while building and supporting the key businesses that will in turn support and rebuild our communities.
[i] Wigglesworth, Robin. 2016. “Stock markets look forward to Trump infrastructure boost.” Financial Times, December 5: 1.
[iii] Leinbach-Reyhle, Nicole. 2014. “Why You Need to Support Small Businesses.” Forbes, September 2.
[iv] Hoffman, Reid. 2017. Masters of Scale Podcasat: “The Next Silicon Valley Is…”. July 11.
[v] US Chamber of Commerce. 2010. “Small Business Access to Capital: Critical for Economic Recovery.” US Chamber of Commerce. July. Accessed May 29, 2017. https://www.uschamber.com/sites/default/files/legacy/reports/1007_sb_accesstocapital.pdf.
[vi] Klein, Ronald. 2016. “Trump’s big infrastructure plan? It’s a trap.” Washington Post, November 18.
[vii] US Department of Transportation. 2016. History of the DOT DBE Program. January 5. https://www.transportation.gov/civil-rights/disadvantaged-business-enterprise/history-dot-dbe-program.
[ix] Illinois Tollway. 2015. “Illinois Tollway Announces Mentor/Protege Program Update.” Illinois Tollway. July 2. Accessed May 25, 2017. https://www.illinoistollway.com/documents/20184/238593/20150702+-+Illinois+Tollway+Announces+Mentor+Protege+Program+Update.pdf.
[xi] Hoffman, Reid. 2017. Masters of Scale Podcasat: “The Next Silicon Valley Is…”. July 11.
[xii] Hoffman, Reid. 2017. Masters of Scale Podcasat: “The Next Silicon Valley Is…”. July 11