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.
2
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.
3
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)
4
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.
5
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.