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SR-428A

Mr. Joushua A. Etemadi

Sales Manager, Construction Bonds, Inc.

NATIONAL ASSOCATION OF SURETY BOND PRODUCERS

Testimony of Joshua Etemadi

On behalf of NASBP

Before the U.S. Senate Committee on Small Business & Entrepreneurship

On

Creating Jobs and Growing the Economy: Legislative Proposals to Strengthen the

Entrepreneurial Ecosystem

November 29, 2012

1140 19th Street, NW, Suite 800

Washington, DC 20036

Phone: 202-686-3700; Fax: 202-686-3656

Website: www.nasbp.org

The National Association of Surety Bond Producers (NASBP) is a national trade

organization of professional surety bond producers, whose membership includes firms

employing licensed surety bond producers placing bid, performance, and payment bonds

throughout the United States and its territories.

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Joshua Etemadi

Sales Manager, Construction Bonds, Inc., A Division of Murray Securus

Chair, Small & Emerging Business Committee

National Association of Surety Bond Producers (NASBP)

Introductory Remarks

NASBP wishes to extend its appreciation to Chairman Landrieu and Ranking Member

Snowe and to the members of the Committee for the opportunity to provide written and

oral testimony on issues of importance concerning the U.S. Small Business

Administration’s (SBA) Surety Bond Guarantee Program (Program).

My name is Joshua Etemadi, and I am a licensed bond producer with the firm of

Construction Bonds, Inc., a Division of Murray Securus. I am Chair of the NASBP Small

and Emerging Business Committee, which was created to advocate for resources to and

educational programs for small and emerging businesses, so they may be positioned to

qualify for surety credit. My career has been dedicated to helping small construction

firms obtain and increase their bonding capacity and grow and mature their businesses,

with the goal of moving them from the non-standard surety market (SBA program) into

the standard surety market (corporate surety programs).

As examples, my firm assisted a local contractor to obtain its first bond through the SBA

Surety Bond Guarantee Program in 2008 for $150,000.00. Within three years, that

contractor had grown, obtaining nearly $13 million in surety credit. The use of the

Program also was vital in helping another local small construction firm acquire its first

bond of $400,000.00 in 2008. Four years later, that construction firm is in the standard

surety market with an aggregate bond line of $6 million. These are dramatic success

stories, and not all contractors using the program necessarily will equal such successes,

but these examples give resounding testament to the fact that the Program does achieve

its objectives and is important to the business wellbeing and maturity of small, and

particularly emerging, construction firms.

My testimony this morning will focus on S.3442, the “SUCCESS Act,” specifically Title

V—Access to Government Contracting, Subtitle A—Bonds, Section 511, which amends

Section 411(a)(1) and (e)(2) of the Small Business Investment Act of 1958. We support

the intent of these changes, which is to increase the reach of the U.S. SBA Surety Bond

Guarantee Program to assist more small businesses by increasing the contract limit of the

Program. NASBP also believes that additional enhancements are needed.

Assist Small Businesses: Enhance the Program

The Program was created to ensure that certain small contractors, which, for various

reasons, do not qualify in the standard surety market, have a means by which to gain

access to surety credit. The Program provides guarantees, ranging from 70 to 90 percent,

to participating surety companies as an inducement for them to extend surety credit to

these construction firms. The construction firm and the surety company pay fees to access

the Program.

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The Program has been serving small construction businesses for decades and continues to

be a necessary and needed federal program. In recent years, under the direction of its

Director, Frank Lalumiere, the SBA Surety Bond Guarantee Program has undertaken

important efforts to improve its functioning, for example, by streamlining its application

processes, implementing a “fast track” application for bonds under $250,000, quickly

responding to claims, and expanding the Program’s reach to include design-build

contracts. Furthermore, SBA has engaged in enhanced marketing and outreach efforts to

surety companies, which has increased surety company participation.

NASBP applauds the SBA for taking these critical steps. In the opinion of NASBP,

however, more can and needs to be done so the Program can fully realize its potential to

assist small businesses. The amendments contained in the SUCCESS Act at Section 511

are important changes that Congress can make to assist the Program to realize its full

potential. NASBP also believes additional changes are warranted.

Reforms to the Program included in ARRA

NASBP supported provisions included in the 2009 American Recovery and Reinvestment

Act (ARRA), which increased the contract size guaranteed by the SBA from $2 million

to $5 million, and up to $10 million if a federal agency’s contracting officer certifies that

the guarantee is necessary, and vested discretion with the SBA Administrator to

determine the Program’s liabilities. NASBP supported these provisions; however, they

expired on September 30, 2010. The current contract guarantee limit is $2 million.

Those provisions, now expired, permitted the Program to enhance its reach. Beginning

with the passage of ARRA on February 17, 2009 until the provisions expired on

September 30, 2010, the SBA guaranteed 166 ARRA bid bonds valued at $518 million

and 52 final bonds valued at $145.4 million with only one contractor default1. While

some may argue that increasing the contract size may place the federal government in

greater risk regarding contractor default, this did not occur based upon the statistics

compiled by the SBA. Based on these statistics, SBA continues to manage the risks

undertaken in the Program very prudently.

Since the passage of ARRA, NASBP has modified its position to support an increase in

the guarantee limit from $5 million to $6.5 million to align the Program with the

simplified acquisition threshold and with the needs of other small business contracting

programs, such as the 8a Minority Small Business and Capital Ownership Development

Program. Raising the guarantee limit provided by the SBA to $6.5 million will allow

small contractors to obtain assistance at higher bond amounts. As a result, increasing the

Program’s limit would increase opportunities for small businesses to compete for more

federal contracts, especially those from contracting authorities, such as the Department of

Defense (DoD), where the average size of construction contracts awarded to small

businesses for fiscal year 2010 exceeded $5.9 million – nearly triple the size for which

1 Robert Jay Dilger, SBA Surety Bond Guarantee Program. Congressional Research Service, 7-5700,

R42037, pg. 20 (Oct. 6, 2011)

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SBA can provide bonding support2. Subsequently, the increased contract limit to $6.5

million will allow the Program to better serve the needs of the DoD and other federal

contracting authorities as well as small federal contractors.

NASBP believes that it is imperative that the SBA Administrator be provided with

statutory discretion to determine liabilities assumed by the Program, so that a denial of a

guarantee to a surety company can be partial, reflecting only the amount of the prejudice

suffered by the government, and not a complete denial of the entire guarantee. This,

again, was an important change temporarily made under ARRA. Restoring this change

will act as an additional inducement to attract greater participation by surety companies,

which will understand that the value of bond guarantees are solid and not provided on an

“all or nothing” basis. Congress needs to ensure inclusion of such a change in its statutory

enhancements of the Program.

Additional Reforms to Enhance the Program

Given the current economic climate, NASBP believes that Congress can and should do

more to support the U.S. SBA Surety Bond Guarantee Program. These suggestions for

additional enhancements, made below, are for the purpose of improving access by small

construction firms and increasing participation by surety companies.

Construction firms, particularly those that are small and emerging, still face an

exceedingly difficult construction market for the foreseeable future. The construction

industry as a whole has been especially hard hit, exhibiting some of the highest

unemployment figures of any industry. Congressional consideration should be given to

reducing the fees paid by contractors to access the Program. Such a reduction in fees

could be taken on a limited time basis to help small construction firms weather the

current, difficult economic environment.

Other Congressional considerations should be focused on increasing surety company

participation in the Program. The Program currently offers a range of guarantee

percentages to participating surety companies, depending on the way the company

interfaces with the Program. Recent SBA efforts have improved surety company

participation, but NASBP believes that greater surety company participation could be

realized by offering a uniform and higher guarantee percentage, such as a guarantee of 90

percent. Such a guarantee would permit more sureties to make the internal business case

for underwriting emerging firms through the Program.

Finally, Congress needs to evidence support and funding for an internal SBA effort to

coordinate the SBA Bond Guarantee Program and other SBA small business programs,

such as those relating to loan guarantees and business assistance. NASBP believes that

SBA should facilitate the services needed by a small business through an internal,

coordinated effort among the various SBA programs and services. This would involve a

“case approach” by SBA to a small business contacting one of its existing programs. For

example, when a small business applies to any of the SBA programs in any of the SBA

2 Challenges to Doing Business with the Department of Defense: Findings of the Panel on Business

Challenges in the Defense Industry, House Committee on Armed Services, March 19, 2012, pg. 21.

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offices, a case file should be opened and communications should be opened between all

SBA programs that can provide assistance to the contractor. The needs of a small

business should be reviewed so that it can be connected to the proper SBA program, i.e.

loan, bond or other programs administered by the SBA. This should not delay any SBA

program from providing the small business the specific assistance sought. If the business

is a small and emerging contractor, for example, the SBA Surety Bond Guarantee

Program should proceed to provide a bond guarantee while other SBA programs review

the contractor for capital needs or other business assistance. It is our understanding that

SBA is, in fact, working toward this approach. Such an effort likely will require

additional resources and certainly deserves Congressional support.

NASBP believes that the above, delineated enhancements to the Program as well as

adopting the provisions included in Section 511 of the “SUCCESS Act,” albeit at a

higher dollar contract limit of $6.5 million, would create significant opportunities for

small and emerging construction businesses and additional incentives for more sureties to

assist small firms, which otherwise do not qualify for surety credit in the standard market,

to obtain their first bonds, placing them on the right road to business success and eventual

entry into the standard surety market.

NASBP appreciates the opportunity to address the Senate Committee on Small Business

& Entrepreneurship to raise awareness about important issues and enhancements to the

SBA Surety Bond Guarantee Program. NASBP hopes its testimony proves beneficial to

the deliberations of the Committee regarding S.3442 and welcomes any inquiries

concerning the matters raised in this testimony or on other matters pertinent to small

businesses and surety bonding.