STATEMENT OF HON. RICHARD J. DALEY, MAYOR, CITY OF CHICAGO, ILL.

Mr. Chairman and gentlemen, we are particularly pleased to welcome the Subcommittee on Small Business Problems and its distinguished chairman. In previous hearings, which this committee of Congress has held in Chicago, it has always identified major problems of current interest in the field of urban economic development and has created substantial momentum to solve these problems. In the summer of 1968 the major subject of these hearings was the redevelopment of Chicago's stockyards and packing town square mile as a major industrial park. I am pleased to report that what was then a vision of the future has now become a reality with thousands of new jobs created in the old stockyard area. Equally important, at the time of the last hearings, a proposal was put before the Economic Development Administration to designate the Midwest impact area as a redevelopment area which would give it substantial stimulus for economic development. Because of constraints in the law, such request had to be denied. However, on the initiative of the Congress, subsequent to these hearings the law was amended in December 1969 with the result that serious negotiations are now underway to provide this area on Chicago's West Side with economic help. I compliment you, Mr. Chairman, and the distinguished members of this committee on your foresight. These are the kinds of programs we need if we are to move forward with the rebuilding of our cities and our Nation in a vital way.

The subject which we address today and tomorrow is fully as important and current as that which you considered 2 years ago. It embodies the very nature of the principles on which we must base the future of our country. That is “law and order with justice." These hearings are devoted to broadening opportunity for minority groups in relationship to the development of business opportunities. At the same time, there is recognition that a major problem facing our society today in the conduct of business and in the other avenues of life, is an increasing threat of crime. In order to function all of the processes of this society require a commitment to order and "the rule of law," we must, all of us, devote ourselves to maintainenance of a system where grievances are redressed through orderly processes and violence is abandoned. It is vital to the businessman who would provide services in communities thoughout this and other cities to feel secure in the pursuit of such business. Similarly, we remain committed to the principle that those who live in neighborhoods should receive not only encouragement but aid in developing their own businesses and opportunity to receive the fruits of success in the society.

Today and tomorrow we expect that the technicians, businessmen, and citizens who give testimony before this committee which will not only describe the problems they face but help to develop those solutions which are needed to meet the problem. Chicago has a tradition of innovation, of creativity and of commitment which it can employ and will employ. The industrial communities of this city have themselves created industrial councils working in conjunction with the residential community. Many of these industrial councils have already begun to address the problems of providing better security for themselves and their workers. The mayor's committee for economic and cultural development is working closely with these industrial councils to plan for a better and safer environment. We recognize that these are only beginnings, but it is necessary to begin now. Plans for superblock industrial areas have been proposed. They would provide not only better opportunities to control and improve traffic, make industry more efficient, but also sufficiently improve the security in industrial areas so that insurance companies can find acceptable risks.

I feel assured, Mr. Chairman, that these hearings will lead to creative, constructive, and positive solutions to these problems which face us today. I pledge that the offices of the city of Chicago will continue to dedicate themselves to meeting these challenges with the citizens of our community and invite the Federal Government, private businesses, and institutions to join us. We extend our wormest welcome to the committee and its staff and ask your help in sponsoring this partnership for action.

STATEMENT OF PAUL N. ZIMMERER

Mr. Chairman and distinguished Members of Congress of this committee, we are here today to discuss an important and complex problem which is of major importance to the city of Chicago, its citizens, and its businesses. It is my hope

and that of the city administration that these hearings lead not only to articulation of the problem but to the development of solutions. In order to find answers to the problems which we and others will describe here this mornnig, we will require the cooperation and participation of the State and Federal Governments, of the insurance and banking industries and of the Congress itself.

I should like to try to capsulize quickly the problem before us, to examine its ramifications, and to propose some machinery which I believe can provide remedies. In the last several years, the city and Federal Government have jointly provided assistance and funding to meet many of the goals set before this city and others. These programs have been directed toward building additional housing, and toward improving existing deteriorating housing throughout this city.

Similarly, in the public domain we have joined in programs to provide more and better educational facilities, to stimulate economic development, to improve the transportation system, and to pursue a host of other public objectives. In the creating these necessary public improvements and public works, we in the public sector have frequently relied upon the expertise and experience of those in the private sector to perform actual project construction. More recently, we have all recognized the importance of opening up opportunities to small and minority contractors. This second purpose of public works activities would enable indigenous businessmen to enjoy the fruits of the free enterprise system. To a great extent, given the tools now available, these two purposes enter into direct conflict.

Indigenous or minority contractors have not had the opportunity to perform “jobs" of major scale. Many of them are new to the business. Consequently, there is great risk that projects performed by them may in some regard be inadequate. The job of bidding on public contracts is itself difficult and complex and falls even in large firms to the most experienced personnel. Contracting work requires understanding and experience with "real-time frames." Delays in scheduling and failure to meet time objectives can result in enormous additional expenses to the contractor. Shortages or inabilities to obtain finances necessary to meet schedules are almost certain, therefore, to impose real burdens on small or minority subcontractors. The consequences of concentrated efforts to heavily utilize such contractors without adequate technical assistance or financing will surely result in a substantial diminished quality of work as regards the construction objective. To insure that the construction objective is met, it is, therefore, to require performance bonds for these contractors. It is, of course, obvious that the insurance industry has great reluctance to insure performance of contactors faced with problems of inexperience and financing. The result has been that performance bonds are nearly impossible to obtain. The contractor may establish sufficient credibility and experience to secure a small performance bond, let us say $50,000, but will not be able to obtain the sufficiently large bond to bid on major work without gradually satisfying insurers requirements that there is capability to perform the work.

Let us look for a moment at the problem of residential rehabilitation and the experience of Chicago's Department of Urban Renewal. In an August 1968 memorandum, the department of urban renewal establishes the objectives of the program as follows: "In addition to the main purpose of rehabilitation, an important secondary purpose is to encourage small contractors to establish viable businesses through their participation." Even at this early date, Chicago's Department of Urban Renewal recognized that the joining of these two objectives would engender problems.

Quoting from this same memorandum, the department said: "A multitude of small contractors are involved. Most are new businesses with no established credit rating, and no bonding ability. Many are short of working capital and are unable to carry their jobs for the 4- to 8-week lapse time between certification of an interim payment and receipt of proceeds.”

Similarly, in November 1967, the department of urban renewal, the responsible local public agency, instituted a policy which made it necessary for contractors working on all urban renewal rehabilitation jobs to obtain a performance bond. The logic of this requirement was clear. It was directed toward insuring the satisfactory completion of work in exercise of a fiduciary relationship to residents. However, in February 1968, a letter was received from the HUD regional office instructing that the policy be abandoned. HUD indicated that such policies would "constitute additional financial burdens to a homeowner." HUD also suggested "that such a policy could inhibit the development of new employment opportunities which, as you know, is one of the recently adopted national goals."

The department of urban renewal acting on behalf of the program attempted to resolve this dichotomy by persistent efforts to involve the banking and insurance industries. Their goal was to create mechanisms to meet the financing problems of small contractors and to create access for these contractors to performance bonding. In a series of meetings with financial institutions regarding their potential participation with contractors, it became clear that these institutions could not provide service unless there were governmental guarantees of such loans as were made.

In an August 1968 memorandum to the director of the neighborhood conservation program, the meetings were characterized as follows: "They want the assurance that the city would assume any loss obligation they might suffer if they would provide financing for recommended contractors."

This example extends itself to other areas of public contract construction. Attempts by the board of education and other public institutions to similarly employ minority contractors without adequate support systems has engendered many difficulties. As we shall see in more detail later in these hearings, one successful black prime contractor lost the ability to obtain adequate performance bonds because of attempts to fully utilize minority subcontractors in performance of a school construction project.

Our own office has devoted itself to attempting to supply support and assistance to small businesses and contractors in support of economic development objectives. Continuing lack of access to financial resources, to performance bonding, and to adequate technical resources is certain to affect the achievements of not only construction objectives but growth of small contractors. It is absolutely essential if we are to continue to stimulate minoriy economic development in this fashion that mechanisms be provided to fill these gaps.

This is a problem which faces not only us in Chicago but the Nation generally. In a September 1970 publication of the Economic Development Administration of the U.S. Department of Commerce, an article appears under the title “EDA. Urban Coalition, Ford Foundation Unite To Aid Minority Contractors."

A program will be conducted by the Minority Contractor Assistance Project, Inc., of Washington, D.C. The article says: "Initially the project will concentrate on the development of associations in Atlanta, Ga.; Detroit, Mich.; Los Angeles, Calif.; and New Orleans, La. *** Urban coalition officials report that a revolving working capital fund will be established with $2 million being made available by major insurance companies. The Ford Foundation agreed to guarantee 75 percent of the revolving fund.

"MCAP also will help the local associations establish and increase funds to assist minority contractors in obtaining surety bonds."

It is quite clear to me that this program must be made accessible to Chicago contractors if we are to meet Federal guidelines and our own priorities. Short of that, it will be necessary that a parallel program be created for the city of Chicago along this prototype. To do this, we will need the cooperation of the insurance industry, the banking community, the Small Business Administration, the Economic Development Administration, the Chicago Economic Development Corp., and the participation of contractors themselves.

There is also a bill before the Senate Select Committee on Small Business that I understand would provide machinery for the Small Business Administration to guarantee surety bonds. This alternative certainly deserves study because it would provide national machinery to meet this problem wherever it exists. In any case, with Mayor Daley's support, we intend to explore and develop solutions for Chicago. Perhaps a revolving working capital fund could be established here. guaranteed by the Small Business Administration or by foundations. Clearly, it is essential if we are going to succeed in this effort to provide minority contractors with adequate access to technical assistance so that they can successfully bid and perform on construction jobs.

These hearings will provide a catalyst to convene the relevant parties so that a format to deal with these problems can be designed in Chicago. If we cannot convince MCAP to include Chicago in its test program, we will quickly construct local solutions if we can be assured of adequate support by the relevant Federal agencies.

Mr. ZIMMERER. Mr. Chairman and distinguished Members of Congress of this committee, we are here today to discuss an important and complex problem which is of major importance to the city of Chicago,

its citizens, and its businesses. It is my hope and that of the city administration that these hearings lead not only to articulation of the problem but to the development of solutions. In order to find answers to the problems which we and others will describe here this morning, we will require the cooperation and participation of the State and Federal Governments, of the insurance and banking industries, and of the Congress itself.

I should like to try to capsulize quickly the problem before us, to examine its ramifications, and to propose some machinery which I believe can provide remedies. In the last several years, the city and Federal Government have jointly provided assistance and funding to meet many of the goals set before this city and others. These programs have been directed toward building additional housing, and toward improving existing deteriorating housing throughout this city.

Similarly, in the public domain we have joined in programs to provide more and better educational facilities, to stimulate economic development, to improve the transportation system, and to pursue a host of other public objectives. In creating these necessary public improvements and public works, we in the public sector have frequently relied upon the expertise and experience of those in the private sector to perform actual project construction. More recently, we have all recognized the importance of opening up opportunities to small and minority contractors. This second purpose of public works activities would enable indigenous businessmen to enjoy the fruits of the free enterprise system. To a great extent, given the tools now available, these two purposes enter into direct conflict.

Indigenous or minority contractors have not had the opportunity to perform jobs of major scale. Many of them are new to the business. Consequently, there is great risk that projects performed by them may in some regard be inadequate. The job of bidding on public contracts is itself difficult and complex and falls even in large firms to the most experienced personnel. Contracting work requires understanding and experience with "real-time frames." Delays in scheduling and failure to meet time objectives can result in enormous additional expenses to the contractor. Shortages or inabilities to obtain finances necessary to meet schedules are almost certain, therefore, to impose real burdens on small or minority subcontractors. The consequences of concentrated efforts to heavily utilize such contractors without adequate technical assistance or financing will surely result in a substantial diminished quality of work as regards the construction objective. To insure that the construction objective is met, it is therefore necessary to require performance bonds for these contractors. It is, of course, obvious that the insurance industry has great reluctance to insure performance of contractors faced with problems of inexperience and financing. The result has been that performance bonds are nearly impossible to obtain. The contractor may establish sufficient credibility and experience to secure a small performance bond, let us say, $50,000, but will not be able to obtain the sufficiently large bond to bid on major work without gradually satisfying insurers' requirements that there is capability to perform the work.

Let us look for a moment at the problem of residential rehabilitation and the experience of Chicago's Department of Urban Renewal.

In an August 1968 memorandum, the department of urban renewal establishes the objectives of the program as follows:

In addition to the main purpose of rehabilitation, an important secondary purpose is to encourage small contractors to establish viable businesses through their participation.

Even at this early date, Chicago's Department of Urban Renewal recognized that the joining of these two objectives would engender problems.

Quoting from this same memorandum, the department said:

A multitude of small contractors are involved. Most are new businesses with no established credit rating, and no bonding ability. Many are short of working capital and are unable to carry their jobs for the 4-to-week lapse time between certification of an interim payment and receipt of proceeds.

Similarly, in November of 1967, the department of urban renewal, the responsible local public agency instituted a policy which made it necessary for contractors working on all urban renewal rehabilitation jobs to obtain a performance bond. The logic of this requirement was clear. It was directed toward insuring the satisfactory completion of work in exercise of a fiduciary relationship to residents. However, in February 1968, a letter was received from the HUD regional office instructing that this policy be abandoned. HUD indicated that such policies would "constitute additional financial burdens to a homeowner." HUD also suggested "that such a policy could inhibit the development of new employment opportunities which, as you know, is one of the recently adopted national goals."

The department of urban renewal acting on behalf of the program, attempted to resolve this dichotomy by persistent efforts to involve the banking and insurance industries. Their goal was to create mechanisms to meet the financing problems of small contractors and to create access for these contractors to performance bonding. In a series of meetings with financial institutions regarding their potential participation with contractors, it became clear that these institutions could not provide service unless there were governmental guarantees of such loans as were made.

In an August 1968 memorandum to the director of the neighborhood conservation program, the meetings were characterized as follows:

They want the assurance that the city would assume any loss obligation they might suffer if they would provide financing for recommended contractors.

This example extends itself to other areas of public contract construction. Attempts by the board of education and other public institutions to similarly employ minority contractors without adequate support systems has engendered many difficulties. As we shall see in more detail later in these hearings, one successful black prime contractor lost the ability to obtain adequate performance bonds because of attempts to fully utilize minority subcontractors in performance of a school construction project.

Our own office has devoted itself to attempting to supply support and assistance to small businesses and contractors in support of economic development objectives. Continuing lack of access to financial resources, to performance bonding, and to adequate technical resources is certain to affect the achievements of not only construction objectives