Alaska Native Corporations enjoy unfair advantages over other firms in federal contracting, leading to an explosion in agency contracting with the firms since 2000, a new federal audit shows.

Federal spending on ANC contracts increased an incredible 1,386 percent between 2000 and 2008, according to the audit by the Small Business Administration inspector general.

ANCs are permitted to receive sole-source contracts of any value under privileges Congress authorized through the Small Business Administration's 8(a) Business Development program in 1986. Other small businesses can't receive awards in excess of $3.5 million without competition.

The sole-source awards take less time for short-staffed contracting shops to award and manage than competitive awards, the report said. In 2007 alone, the top 11 ANCs received 82 percent of their government contracts without competition.

"The ability of ANC firms to obtain unlimited sole-source awards, which is arguably one of the most powerful contracting advantages that ANC firms enjoy, has contributed to the increase in such awards to ANC participants," a July 10 IG report said.

The IG report was released in advance of a hearing scheduled Thursday before the Senate Homeland Security and Governmental Affairs subcommittee on contracting oversight. That hearing will examine whether agencies abuse the privileges Congress granted to ANCs in the 1980s.

Last month, the committee released the first part of its report on ANCs. The second part is due out this week. The first report shows that ANCs receive a disproportional amount of awards through the 8(a) program. The new IG report confirms those findings.

Although ANCs make up just 2 percent of participants in the 8(a) program in 2008, awards to the firms accounted for 26 percent of the total dollars spent through the program that year, the IG reported.

The IG concluded that the sole-source privilege coupled with other privileges gives ANCs an unfair advantage over other firms. In addition to sole-source award privileges, ANCs are allowed to own an unlimited number of subsidiaries, as long as they're in different industries. This means that ANCs can obtain small-business awards even though they don't meet the size requirements applied to other firms. As a result legitimately small firms are competing against contracting giants with thousands of employees and billions of dollars in their coffers, the report said.

"ANC-owned firms had access to capital, lines of credit, bonding capability and administrative resources, as well as the management expertise of their [large] parent companies," the report said. "This may explain why 63 percent of the ANC participants received obligations in [fiscal] 2007, while only 44 percent of the non-ANC firms received obligations that year."

SBA has not evaluated the effects these privileges have on other participants in the program, the report said.

The report suggests Congress consider limits in both of these areas. It also recommended Congress grant SBA the authority to determine whether ANCs have an unfair advantage in a certain sector before exempting them from size standards that limit the participation of others in the 8(a) program.

In addition to the dominance of ANCs in the 8(a) program, the report also found SBA failed to oversee partnerships ANCs forged with large businesses. Although contracting rules allow small businesses to partner with larger firms provided the small firms do 51 percent of the work, previous Government Accountability Office and inspector general investigations have shown that large businesses form partnerships with ANCs to take advantage of their sole-source privileges to earn pass-through contracts.

Despite the previous findings, SBA has not monitored the partnerships between ANCs and other large firms to ensure they're following the rules. SBA did not even know the number of joint ventures that existed, the IG said.