[Federal Register Volume 60, Number 14 (Monday, January 23, 1995)]
[Proposed Rules]
[Pages 4389-4391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-1505]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards; Ostensible Subcontractor Rule and
the Affiliation of Business Concerns Under Joint Venture Arrangements
AGENCY: Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The Small Business Administration (SBA) is proposing a
revision to its ``ostensible subcontractor'' rule as set forth in its
affiliation regulation to permit small businesses to enter into
subcontracts with certain public utilities for the lease and use of
distribution facilities (telecommunication circuits, petroleum and
natural gas pipelines, and electric transmission lines) without being
considered affiliated with the public utility where the small business
prime contractor adds meaningful value to the contract. This revision
is being considered to take into account new business arrangements
which have emerged as a result of deregulation of several public
utility industries.
DATES: Comments must be submitted on or before March 24, 1995.
ADDRESSES: Send comments to: Gary M. Jackson, Assistant Administrator
for Size Standards, 409 3rd Street, SW., Mail Code 6880, Washington, DC
20416.
FOR FURTHER INFORMATION CONTACT:
Gary M. Jackson, Assistant Administrator for Size Standards, (202) 205-
6618.
SUPPLEMENTARY INFORMATION: The SBA is proposing to revise its
``ostensible subcontractor'' rule as set forth in 13 Code of Federal
Regulations (CFR) part 121.401(1)(4) with regard to affiliation arising
from certain continuing arrangements. Under this regulation,
affiliation is generally found to exist when one firm acting as a prime
contractor enters into a subcontracting arrangement with another firm
who, in turn, performs the ``primary or vital requirements'' of a
contract. Under this arrangement, if the prime contractor is reliant
upon the subcontractor to perform the contract to the extent that the
subcontractor assumes a controlling role on the contract, then the
relationship will be regarded by SBA as a joint venture with the two
firms deemed affiliated under the ``ostensible subcontractor'' rule.
The size of a joint venture is based on the combined revenues or number
of employees, depending on the applicable size standard, of both firms.
For a joint venture to be considered a small business, its size cannot
exceed the applicable size standard.
The SBA is considering a modification to this ``ostensible
subcontractor'' rule by expressly excluding from its coverage
subcontracting agreements for the lease and use of distribution
facilities of public utilities for telecommunication circuits,
petroleum and natural gas pipelines, and electrical transmission lines
where the prime contractor lessee contributes meaningful value to the
contract. This modification would allow small businesses to enter into
certain arrangements with other businesses in the provision of public
utility services to the government without being considered joint
venturers and affiliates. The SBA is concerned, however, that such a
modification could have the unintended effect of allowing a small
business to act as a mere broker or intermediary on the behalf of a
large business. This possible consequence, addressed in greater detail
below, is an issue that the SBA will be examining carefully before
making a final decision on this proposal. It should be noted that this
proposed rule would specifically exempt a finding of affiliation based
solely on subcontracting agreements between firms that lease and use
the public utility's distribution facilities and the public utility who
owns and maintains the facilities, but other relationships between the
firms could still bring about a finding of affiliation.
The impact of several recent size appeal decisions issued by SBA's
Office of Hearings and Appeals has led several small businesses to
request that SBA reassess its regulations on joint ventures as applied
to firms that lease telecommunications circuits. These decisions found
resellers of long distance telecommunications services affiliated with
the owner of the telephone circuits, on the basis that the provider of
the lines would perform the ``primary and vital requirements'' on a
government contract by providing, maintaining and repairing
telecommunications circuits, and that, therefore, the relationship
between the reseller and long distance provider should be regarded as a
joint venture arrangement and the firms should be considered affiliated
under the ``ostensible subcontractor'' rule. As a result of the
existing regulation and these decisions, federal contracting
opportunities have been placed in jeopardy for both small businesses
and small disadvantaged businesses operating through lease arrangements
for telecommunication lines and circuits. SBA believes that its size
regulations should be re-evaluated in [[Page 4390]] order to assess
whether the ``ostensible subcontractor'' rule continues to be
appropriate in the context of the telecommunications industry as well
as the other public utility services industries identified above, which
appear to have similar industry characteristics.
Over the past decade, deregulation of the public utility industries
identified above has resulted in the open access of certain
distribution facilities of public utilities by other firms. This
development has encouraged the entrance of new firms in these markets
to provide specialized services. For example, in the long distance
telephone market a firm (reseller) can purchase bulk access to
telecommunication circuits and resell telecommunication services to
smaller volume customers. The economic savings from a volume purchase
of these circuits by resellers are offered to certain customers who,
given their relatively small volume of business or need, could not
obtain similar savings by directly obtaining telephone access through
the long distance providers. The other two public utility industries
under consideration in this proposed rule are also experiencing the
emergence of similar business arrangements where other firms utilize
the public utility's distribution facilities. In the natural gas
industry, open access of interstate pipelines has resulted in a
significant change in the marketing of natural gas. Prior to
deregulation, 95 percent of natural gas transported through pipelines
was owned by the pipeline companies. Today, over 95 percent of natural
gas flowing through interstate pipelines is owned by non-pipeline
companies. Additionally, open access on a limited basis is now allowed
for the provision of electric power, and further modifications to
legislative restrictions on the retail sale of electric services are
under consideration.
SBA's preliminary assessment of the public utility industries
described in this proposed rule is that there may be a legitimate basis
to permit resellers of telecommunication services, and other firms that
provide public utility services through the lease and use of
distribution facilities, to offer their services in the Federal market
as they do in the commercial market without running afoul of the
affiliation rules. In many instances, these firms may add value to the
contract involved and be sound, operating businesses engaged generally
in the provision of telecommunications and other public utility
services. Moreover, the extensive capital investment necessary to build
the distribution facilities associated with providing one of these
public utility services essentially precludes a firm, other than the
existing public utility firms, from making such an investment in order
to perform a specific Federal procurement or in order to serve small
volume commercial customers. In addition, remaining regulatory
requirements continue to prohibit or constrain the development of
capital facilities by new entrants. As indicated above, deregulation
occurring in these public utility industries has made available to
other firms the use of distribution facilities of the public utilities
on a sub-contractual basis. Unlike other industries, the provision of
public utility services is limited to one or a few public utility
providers, and new firms that are now able to enter the market do so by
leasing the distribution facilities of existing public utilities. Firms
in other service industries usually do not depend on the exclusive
access to a significant amount of capital facilities of one or a few
firms within an industry to provide their services.
As indicated above, SBA is concerned that the effect of the present
regulations causing affiliation between a prime contractor and an
``ostensible subcontractor,'' based simply on the leasing of
distribution facilities, may now be inappropriate with respect to these
specific public utility industries. For example, even though the
greatest component of value in government contracts providing
telecommunications services may be the utility distribution facilities,
it nevertheless may not be appropriate to regard the subcontractor or
supplier contributing that component as performing a controlling role
on the contract where its responsibilities are limited to the provision
and maintenance of those facilities and the prime contractor provides
other valuable services. The SBA recognizes that firms that lease and
use the distribution facilities of these public utilities generally
perform an important and legitimate economic role in the provision of
utility services to commercial markets, and the ``ostensible
subcontractor'' rule may unnecessarily constrain opportunities for
small business in obtaining Federal contracts for these public utility
services. On the other hand, SBA does not wish to create by this
exception a situation in which small business prime contractors qualify
for small business preferences when they merely are brokers. Thus, the
exception would apply only if the prime contractor also contributes
meaningful value to the contract. With respect to the concept of
meaningful value, SBA has not attempted to quantify what would
constitute meaningful value for purposes of this rule.
The SBA is particularly concerned that the effect of the proposed
modification might lead to abuses in the small business preference
programs if the modification allows small businesses to act as mere
brokers or intermediaries on the behalf of large businesses. To explain
further, a small firm acting as a reseller of long distance telephone
services might perform several functions, such as consultative
services, identification and connection of circuits, problem
resolution, and billing services, in providing long distance
communication services to its customers. However, these activities may
be of such limited significance to the contract as a whole when
compared to the services provided by the long distance telephone
carrier that the carrier should indeed be properly regarded as a joint
venturer of the small firm. One of the primary purposes of the
``ostensible subcontractor'' rule is to ensure that the benefits
intended for small business in obtaining a government contract are
enjoyed by that small business and not simply passed through to a large
business subcontractor. It is not the SBA's intention to depart from
this long-held policy as a result of a modification of the ``ostensible
subcontractor'' rule. Comments addressing this aspect of the proposed
rule would be especially beneficial to SBA's deliberations of this
issue.
The SBA seeks public comments on this proposal to modify the
``ostensible subcontractor'' rule. The SBA is particularly interested
in obtaining comments which address the following points: (1) The
nature of the business relationship between a public utility firm and a
firm that leases the public utility's distribution facilities for
purposes of reselling public utility services; (2) whether the proposed
rule could have an unintended adverse effect on SBA's small business
programs by allowing the brokering of services provided by large
business; (3) whether a requirement that the prime contractor provide
meaningful value to the contract adequately protects against abuse, and
if so, how meaningful value should be determined, whether
quantitatively or otherwise; (4) whether any modification to the
``ostensible subcontractor'' rule should be applied to public utility
industries in addition to those which have been identified in the
proposed rule; and, (5) alternative approaches to this proposed rule
that address the issues discussed above. [[Page 4391]]
Compliance With Regulatory Flexibility Act; Executive Orders 12612,
12778, and 12866; and the Paperwork Reduction Act.
This rule has been reviewed under Executive Order 12866. SBA
certifies that this proposed rule, if adopted, would not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act, 15 U.S.C., et
seq. The SBA has made this determination based on the fact that a
limited number of Federal contracts would likely be awarded to small
businesses as a direct result of this action. Thus, even though this
proposed rule, if adopted as final, would make eligible previously
ineligible firms for SBA procurement preference programs, SBA does not
expect the number of affected firms to be significant.
For purposes of Executive Order 12612, SBA certifies that this proposed
rule would not have Federalism implications warranting the preparation
of a Federalism assessment. For purposes of Executive Order 12778, SBA
certifies that this proposed rule is drafted, to the extent
practicable, in accordance with the standards set forth in section 2 of
that Order. For purposes of the Regulatory Flexibility Act, the SBA
certifies that this proposed rule would not have a significant economic
effect on a substantial number of small entities for the same reason
indicated above. For purposes of the Paperwork Reduction Act, the SBA
certifies that this proposed rule would not impose any new reporting or
recordkeeping requirements.
List of Subjects in 13 CFR Part 121
Government procurement, Government property, Grant programs--
business, Loan programs--business, Small businesses.
Accordingly, part 121 of 13 CFR is amended as follows:
PART 121--[AMENDED]
1. The authority citation of part 121 continues to read as follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), and 644(c); and
Pub. L. 102-486, 106 Stat. 2776, 3133.
2. Sec. 121.401(1)(4) is revised to read as follows:
Sec. 121.401 Affiliation.
* * * * *
(l) * * *
(4) An ostensible subcontractor which performs or is to perform
primary or vital requirements of a contract may have such a
controlling role that it must be considered a joint venturer
affiliated on the contract with the prime contractor. In determining
whether subcontracting rises to the level of affiliation as a joint
venture, SBA considers whether the prime contractor has unusual
reliance on the subcontractor. This provision does not apply to
subcontracts entered into with public utility concerns providing
open access to distribution facilities if such subcontracts are
limited to the lease and use of telecommunication circuits,
petroleum pipelines, natural gas pipelines, or electric transmission
lines, and if the prime contractor contributes meaningful value to
the contract.
* * * * *
Dated: December 2, 1994.
Philip Lader,
Administrator.
[FR Doc. 95-1505 Filed 1-20-95; 8:45 am]
BILLING CODE 8025-01-M