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U.S. House of Representatives,
Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Kanjorski, Lucas, Hooley, S. Jones of Ohio, Capuano, Waters, and LaFalce (ex officio).

    Chairman BAKER. Good morning. I would like to call this meeting of the Capital Markets Subcommittee to order and welcome our witnesses here this morning.

    This is an important hearing for the purpose of the subcommittee's better understanding of two important initiatives, the Administration's New Markets Initiative, which is an aggressive agenda to bring economic development to those communities and areas of our country which have yet to benefit from the broad based economic expansion that is ongoing in our country, as well as the Majority's American Community Renewal Act, which incorporates most of the provisions of the President's plan, as well as other additions.

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    I know that there has been considerable interest and attention given by the President to this subject, most recently having concluded his second multi-day tour through the Nation to receive comments from affected potential community recipients.

    I certainly want to compliment Mr. Kanjorski on his participation in those activities, and his express outspoken interest in this subject. Both Mr. Kanjorski and I have made modest attempts in the modernization efforts of the Federal Home Loan Bank to provide sources of capital for rural and inner city improvements, and have expanded dramatically with the adoption of that legislation access for many individuals to the Home Loan Bank, specifically for the purposes of economic development.

    So I find that both these proposals are very similar. They are headed in a very appropriate direction and I think would be significant to us and both of our interests in seeing rural and those economically deprived areas receive benefits of what is an astounding economic performance over the last several years.

    With that, I welcome the witnesses and would recognize Mr. Kanjorski for his opening remarks.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman. I want to thank you very much for, in these late moments of this session, taking the time to organize this hearing.

    I am still optimistic that over the next several days it would be possible to bring the Republican side and the Democratic side of the aisle in the House together to resolve some of the little differences that still exist on the newer initiative or the community investment program.
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    I think the hearts of both sides have now resolved that with this rich economy, and most prosperous time in the Nation's history, we have the time to take a moment and study the Nation's distressed areas and distressed populations and recognize and realize that we here in Washington do not have all the answers, nor can we craft a program that will solve these very unique problems in different areas.

    I have had the occasion twice to travel now with the President across the country. The differences in the Delta, Mississippi and the Indian tribes of South Dakota are so significantly different from the areas of Hazard, Kentucky, or Watts, California, and what this legislation, in my estimation, is all about, what the Administration is putting forth and to some degree what the other side is putting forth, that I think we can come to common ground on, is a recognition that the role of Government now is to help be a partner in the financing and in the empowerment of local areas to analyze and comprehensively come forth with a plan of how their area can be removed and raised from distress to meet the average opportunity that exists in the rest of the Nation.

    1999 and the year 2000 are just the time to do it and the 106th Congress is just the Congress to do it. I would urge my colleagues on both sides of the aisle to put aside their partisanship for the months ahead, to authorize the necessary legislation, and do it as quickly as possible and hopefully even in these waning hours of the first session, that if we have another four or five or six days that we bring our colleagues into a room and analyze what is acceptable to both sides and authorize and enact it. And what can't be agreed upon in the next week should be immediately taken up in January, without any delay, resolved and sent to the President for his signature and for his implementation.
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    It is something that now is the time. Any delay is not criminal, but it is certainly disappointing to the legislative process of this Nation; that with the highest priority and the highest prosperity of the Nation that will be celebrated in February, still a good 20 percent of this Nation geographically and in population have not partaken in this prosperity. So it is our job to do it.

    Mr. Chairman, congratulations for making a first step in having this hearing on APIC today.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Mr. Lucas.

    Mr. LUCAS. Nothing, Mr. Chairman.

    Chairman BAKER. We also welcome to our hearing this morning the Ranking Member, Mr. LaFalce. Welcome, sir.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I appreciate the opportunity to make an opening statement at this hearing. Although I am not a Member of your subcommittee, I am an ex officio Member of all of them and I can't attend too many subcommittee hearings, but I considered this to be of such import that I wanted to come at least for the purpose of the opening.

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    We have had seven years of very strong economic growth and job creation and yet the sad truth is that many urban areas, many mid-sized cities, many rural areas, many small cities, are simply not participating fully, sometimes not at all, it would seem, in that economic prosperity.

    Despite strong income and wage growth for many Americans, millions of Americans still don't have access to jobs that pay decent wages. The fact we are having this hearing in the backdrop of last week's joint announcement of President Clinton and House Speaker Hastert indicates a growing bipartisan consensus, both that a problem exists and that we can come to agreement on solutions.

    The New Markets Initiative represents a recognition amongst Democrats that a massive Federal public works spending initiative is not the answer. H.R. 815, the Talent-Watts plan, represents a recognition amongst Republicans that laissez-faire capitalism with no role for Government is not the answer.

    It is my hope that we can act early next year on both of these initiatives. While Democrats may not agree with everything in H.R. 815, we are committed to exploring how specific provisions may work in tandem with existing economic development programs and with Democratic proposals. I also believe that Republicans are equally committed to keeping an open mind about the New Markets approach.

    Earlier this year, I introduced H.R. 2764, the America's Private Investment Companies Act, familiarly known as APIC. APIC is the component of the Administration's New Markets Initiative that is under the jurisdiction of our Banking Committee.
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    The other components of this initiative are the New Markets tax credit and the small business provisions designed to expand small business development in underserved communities.

    HUD is testifying today, so I will not take time to describe the proposal in detail, but I would like to point out that H.R. 2764 is co-sponsored by a number of prominent Members on this subcommittee and in the House.

    I would also like to point out something very important. Funding for APIC for Fiscal Year 2000 has already been approved as part of the VA-HUD appropriations bill which was recently enacted into law. That bill provided $20 million in credit subsidies for APIC, which permits over $500 million in guaranteed loans and over $800 million in leveraged investments in the first year, but that funding was made specifically contingent on the APIC program being authorized.

    If Congress does not enact such authorizing legislation by June 30 of next year, the APIC funding approval will be lost. Therefore, I believe it imperative that the APIC proposal be taken up by the Banking Committee in a timely fashion next year; that we have an opportunity to vote on this in the full House; the Senate has time to act, so that we can get it to the President before we lose that funding.

    Given the Senate's sometimes reluctance to act on legislation, I also think the earlier we act, the better.

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    Finally, I would like to address how APIC would fit in with existing economic development programs. This is important. In the past, for example, with Empowerment Zones and enterprise communities, our approach to economic development in underserved areas has focused considerably on tax breaks for businesses operating in those areas, and the Talent-Watts bill seems to take a similar approach.

    However, tax breaks do not directly access a major impediment to economic development in these areas, a lack of capital. This is precisely what the APIC proposal seeks to address, and this is the job of this particular subcommittee. It is the Subcommittee on Capital Markets. APIC provides loan guarantees to investment companies which are required under the legislation to leverage those guarantees with additional private capital and to make investments with such funds only in underserved communities.

    Specifically, these for-profit investment companies must have a primary mission, a primary mission of making investments in low-income communities for the primary benefit of low-income persons. These investment companies must also have a statement of public purpose with goals that at least include making such investments, creating jobs that pay decent wages to residents in those communities and involving community-based organizations and residents.

    At the same time, it is important to point out that investment decisions will be made by these private for-profit investment companies and not the Federal Government. Through leveraging requirements for every dollar of Federal credit subsidy, we will be creating over $40 of leveraged investments. This is an effective way to target scarce Federal resources for maximum economic impact.

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    Finally, the APIC capital formation provisions are designed to work hand in glove with the New Markets tax credit, which provides tax incentives for equity investments in these newly formed APIC investment companies, as well as other targeted investment funds, community development corporations and small business investment corporations that make investments in low- and moderate-income communities.

    The larger investments arising from these tax incentives and guaranteed debt are also designed to work in tandem with the small business provisions in the New Markets Initiative so that there will be a range of different types of investments and economic activity in underserved areas.

    In closing, I again want to commend the Chairman for holding this hearing. I think it is very important, and I look forward to the earliest appropriate action on this initiative. I thank the Chair very, very much, for allowing me so much time.

    Chairman BAKER. Thank you, Mr. LaFalce, for your interest and attendance here this morning.

    Given the schedule constraints we have faced in trying to put our hearing together, naturally we would find on the day in which we schedule it that the full committee markup will continue on important legislation this morning in this room commencing at 11:30.

    I am told that staff will meet ten to fifteen minutes or so to prepare for the beginning of that hearing. So given that constraint, it gives us about an hour to move through our subject and have the subcommittee ask questions that they find of interest.
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    So given that, I apologize for the constraints, but certainly welcome both of you. Saul Ramirez, Deputy Secretary, Department of Housing and Urban Development, as well as Xavier de Souza Briggs, Deputy Assistant Secretary, Office of Policy Development and Research, Department of Housing and Urban Development. Welcome, gentlemen. Please proceed as you like. Your written statement will be made a part of the record.


    Mr. RAMIREZ. Thank you, Mr. Chairman. Let me first start by thanking you, Chairman Baker, for the opportunity, as well as Ranking Member Kanjorski, to be able to speak on this subject. Your leadership and your willingness to work in a bipartisan fashion to do what is right for the Nation's communities is highly noteworthy and I would like to also thank other Members that are here present to listen to this discussion.

    Let me also add that it is an honor to represent Secretary Cuomo. The Secretary is strongly committed to the America's Private Investment Companies, or APIC, proposal and, more broadly, he has made the expansion and enhancement of HUD's economic development tools a high priority of his tenure, both as Assistant Secretary and as Secretary at HUD. I should add that he is very pleased with the progress we have made this year with the Appropriations Committee and leadership in getting APIC funded, with pending authorization of course.

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    I want to provide the highlights of this important proposal, which was made by the President earlier this year and introduced in the House by Representative LaFalce as well as other co-sponsors as H.R. 2764, the America's Private Investment Companies Act.

    As you know, this APIC bill reflects the hard work of many. At Secretary Cuomo's direction it was organized by HUD's policy staff, including Xavier de Souza Briggs, our Deputy Assistant Secretary, who has joined me as a witness today and will be available to answer questions after I have delivered my testimony.

    We have been working together with the White House National Economic Council under the President's Senior Advisor Gene Sperling. We are also working with the Small Business Administration and the Treasury Department. In the case of APIC, the New Markets tax credit, the New Markets Venture Capital Companies proposal and the other elements of the Administration's New Markets Initiative, the process also included a dialogue with congressional leaders and staff, leaders in the investment world, local economic development experts, State and local elected officials and community-based organizations active in job creation and the capital arenas. Like the proposed APIC investment funds themselves, the process was a partnership. We insisted on and we are presenting to you a non-bureaucratic program that grew out of this process.

    The reason we worked so hard is this, and it is quite simple: We believe that America's extraordinary economic expansion over the last six years presents us with a historic opportunity. We have the resources in this record breaking economy, we have the financial tools and capital markets to make a difference, and we have the leadership.

    As you know, just last week, the Speaker of the House and President Clinton stood up together to announce a commitment to work together to enact the best of each party's agenda for fighting poverty, empowering communities, minimizing Government bureaucracy and tapping into new markets in places that are too often left behind.
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    We appreciate the proposal put forward by Congressmen Watts and Talent and we look forward to working with them to achieve common goals. The Secretary had the honor of joining the President and you, Representative Kanjorski, on the New Markets tour this past summer and I should note that Representative Kanjorski, and Ranking Member, joined the President for all stops on this tour, as noted by the Chairman. The message from the private sector was very clear. Talking with corporate CEOs, leading bankers and others at the Pine Ridge Indian Reservation, in Appalachia, and in other distressed communities, it was clear that the captains of capital are ready for a bold vehicle that helps the private sector make major equity investments that empower low- and moderate-income areas of our country. This is precisely the role of APIC.

    Now, backing up for a moment, what are new markets? When I speak of new markets, I mean low- and moderate-income communities where attractive opportunities exist to establish or expand businesses; in other words, places where gaps in information and capital access exist. By that, I don't mean fictive markets created by subsidies that distort market signals or financial discipline. In this context, APIC is a simple idea. It is venture capital for these places left behind. It would stimulate the creation of private investment companies, making market driven decisions about investment in low- and moderate-income areas of our Nation, both urban and rural. About 35 percent of the Nation's populations live in census tracts that would be targeted under the proposed poverty and income criteria, which also drive the New Markets tax credit and other elements of the New Markets Initiative.

    As a complement to the existing SBA program to provide venture capital to small businesses, APIC would focus on large scale businesses. The private investments companies licensed by HUD, under this program, would finance a wide array of project types, from retail centers, industrial parks and other forms of commercial real estate to back-office call centers, equipment upgrades at manufacturing facilities and more, so long as the targets of investment are active businesses that employ people and to the greatest extent possible people in low- and moderate-income communities.
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    The licensed investment companies could even act as ''funds of funds,'' investing in other capital funds that, in turn, invest in active businesses. APIC adapts and expands on models that work, in particular the small business investment companies or SBIC program at SBA. The SBIC program has a simple focused goal: To increase the availability of private equity capital for small businesses; the first money into a deal and the first at risk, the money then that often makes the investment bankable in the sense that it becomes a good bet for a bank loan.

    Like the program for smaller businesses, APIC would license qualified fund managers who would come forward with an investment strategy and equity commitments from investors. The licensed investment companies are then eligible for an allocation of federally guaranteed debt on a ratio of 2-to-1. They make a portfolio of investments and spread their risk across the portfolio, in a true and tried financial concept beyond this. And I would like to say that it also, for the record, is detailed in this handout that I would like to submit for the record as an attachment that actually describes the method and how APIC works and elaborates with a very succinct overview.

    Many well-known names in modern businesses when they were just small businesses or startups were financed by the SBIC investment funds, licensed by SBA, including, for example, FedEx and Outback Steakhouse, and this program concept was identified for overseas about a dozen years ago by the Overseas Private Investment Corporation, which adopted the SBIC model to launch its investment funds program.

    The President directed us to tackle the challenges of financing large scale businesses that can turn around whole economies and distressed communities right here in America, calling these places, ''Our greatest emerging markets.'' And he turned to HUD for its experience in lending large scale revitalization. For thirty years HUD has used a wide variety of financing tools, including flexible community development block grants and related loan guarantees to help communities expand the job base and tax base and set distressed neighborhoods on the path to recovery, and more.
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    Five years ago, we added the innovative economic development initiative grants that increased community use of the Section 108 economic development loan program, wherein communities borrow with a Federal guarantee using their future CDBG allocation as collateral. Together, EDI and Section 108 have financed highly successful, high impact community economic development across the land, from the full service Minyard Supermarket in an African American community in Fort Worth, Texas, to a supermarket-anchored retail center right here in Anacostia that was developed by a community development corporation, or the state of art Learning and Work Complex developed in partnership with Cessna Aircraft where over 200 high wage jobs have gone to adults in their transition from welfare to work.

    HUD knows how to facilitate large scale community and economic development and how to handle the complex real estate transactions that are so often central to that development, but we want to do more than we can with our current tools, first, because there is never enough grant assistance to meet the need or fund worthy projects, and second, because we don't feel we are doing all we can to directly stimulate the private sector. APIC will create big private funds to do a big job. It will create a national network of such institutions, which focus on identifying, evaluating and investing in the most promising targets where large scale private equity investments can grow businesses to have a major impact, period. We never before created such a crop of private institutions to take on this work.

    But there is more to the model than licensing entrepreneurial fund managers and leveraging the equity to create larger capital pools. The key is that the taxpayer is protected.

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    I want to emphasize that. The taxpayer is protected. For every dollar of private equity capital that goes into it, it has to be lost first before any Government guarantee kicks in. This ensures that private fund managers will make market driven decisions. Government gets involved merely to ensure that the program is functioning according to its intended purpose. It does not second-guess the financial wisdom of private investment funds.

    As a former mayor of Laredo, Texas, a fast growing city with deep distress in some neighborhoods, I can tell you we could have used APIC when I was at city hall.

    First we needed a tool for expanding partnerships between our local government on the one hand and private investors on the other.

    Second, we needed, and our Nation's communities need today, ways to extend scarce community economic development grant dollars, much of which is provided by HUD.

    And third, we needed equity capital to place that first commitment on promising growth businesses so that banks would come in and invest.

    While the value added by APIC to the existing Federal tool box is vital, what APIC would do for major private sources of capital is just as important, because for the first time we would be offering banks, pension funds, insurance companies, major corporations, foundations, State and local governments and others a vehicle for making large-scale equity investments that are socially responsible but yield an attractive return.

    APIC is the infrastructure. It would create a highway for driving large amounts of equity capital to places in the economy that have room to grow, with untapped land, labor, retail demand and other assets, but too often lack the capital and especially the equity to make that growth happen.
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    Our expectation is that some investment companies would propose a regional focus; others giving major employers, area banks and other opportunities to act as good neighbors while reinvesting in the region's competitiveness.

    Other APICs might be of a national scope, or some might focus on particular business sectors, such as inner city retail or rural high technology manufacturing or data processing.

    In closing, I would like to mention that the $20 million in credit subsidy appropriated for APIC in HUD's Fiscal Year 2000 budget would allow us to guarantee an estimated $556 million in private debt, leveraging an additional $278 million in private equity. That's a total of $834 million of private capital and many thousands of jobs at a cost to the taxpayer of just $20 million.

    The leverage on the tax dollar is more than 40-to-1 and the SBIC as well as OPIC programs show that it works.

    We look forward to working with the subcommittee to authorize this important program and put these $20 million to work throughout our Nation.

    Thank you again for the time this morning. Our Administration looks forward to working with the Speaker of the House, as well as you, Mr. Chairman, and the Ranking Member, and other leaders in helping make the New Markets agenda a reality, including APIC, the New Markets tax credit, the New Markets venture capital companies.
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    I would like to close by saying Secretary Cuomo is excited at this opportunity. My colleague Xav Briggs and I stand to answer any questions that you may have. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Ramirez.

    Mr. Briggs, did you have a statement as well?

    Mr. BRIGGS. I do not, Mr. Chairman.

    Chairman BAKER. Thank you.

    One of my concerns about how we stimulate economic development, particularly in areas where you don't have existing business enterprises, whether it be rural community or inner city, is that you can have an excellent business plan and a great idea, but unless you have sold a product and have a demonstrated record of success in a particular field of activity, that is not a bankable loan, whether you have APIC or not.

    Have you given thought—and I recognize, I will say it right up front, that we were now talking as opposed to venture capital, which is risky enough, that startup capital is at the edge of the risk universe and that it may not be possible to place Government guarantees behind that type of activity, but there has to be some way to give creative thought. How do we help someone that a business person could look at the plan, look at the individual's own business experience and come to some conclusion that this is worth $5,000?
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    Under the micro-loan program of the SBA, an individual can apply for up to $25,000 on a one-page form and get an answer in a very short period of time, which is a Government guaranteed private lending arrangement. It is the only loan program I am aware of that reflects the demographics of the country. When you look at the number of minorities, the number of women, you look at all the demographics of that loan portfolio, you find it works and it reaches people at all economic and racial levels.

    I don't know what it is about that particular program. Maybe it is just its simplicity. I have been involved in the development of another program which is now in a pilot stage in ten States in the country. Having had some experience with the 8A program, I know that very few minorities qualify. Of those who get on the qualified list, even much fewer actually get a contract and most get in the program and graduate out after the time runs without ever having seen a dollar come from the 8A set-asides.

    In my own State, less than 5 percent of the qualified corporations get 90 percent of all of the dollars that are contracted for.

    The principal reason is that what is defined as a small business under that code can be up to 500 employees. I have never walked in a business with 300 employees and said, ''My, what a fine small business this is.''

    The pilot describes a business which has 20 or less employees, with gross receipts of a million dollars or less in an annual period, with no racial or other designation for the owner of the business, but requires that the Government enterprise set aside a certain percentage of its procurement dollars for competitive bidding among only those businesses that qualify under that definition; less than 20 employees, less than a million dollars.
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    So when Ford XYZ wants to buy $3,000 worth of pencils, they go to their Internet site, see how many pencil vendors there are that meet this criteria, and if there are two or more they put it out to bid in that State so that any small business can then compete without the fear of having Wal-Mart beat them out of the marketplace.

    In the short period of time that has been operative, we have had about $200,000 worth of awards in my State. The largest single award has only been $4,000, but it has been a program which has enabled Main Street mom and pops to have a shot at Federal procurement dollars where there has never been an opportunity before.

    I think it is a valuable tool. We are only six months into this pilot. One of the elements that I would hope could come out of this is that your office could take a look at that concept and perhaps find a way to help kick it up a notch.

    It is not working as well as I had hoped, because most small businesspeople don't spend their days reading the Federal Register. You can't get the information in front of the business person in a concise form where they can see an immediate benefit by reading two paragraphs. It is an educational problem.

    I think it is an example of the way you do get money to startups. Someone who doesn't have a pencil business can register, put his name and address, hold himself out as a prospective business enterprise, go to the micro-loan program, if necessary, and compete against other small businesses of equal economic resources.

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    So I wanted to put that out to you and have you respond a little bit to what do we do about startups, because venture capital is great and we need it, but if we are really going to see economic expansion in rural communities or inner cities we have got to have people who are just at the edge of business enterprise have some way to get in the door.

    It is a long way of saying tell me what we ought to do, but that is what I am asking.

    Mr. BRIGGS. Thank you, Mr. Chairman. That is a critical question. I should start by saying, as a small businessman myself about six years back I remember trying to get on one of those contractor lists and it is a maze of forms. I mean, it is incredibly just disheartening to try and become a special vendor. You know how the programs work. There has got to be a way to simplify those.

    You have asked the question that cuts to the core of the New Markets Initiative, which is a menu of programs, each of which serves a distinct scale of capital need.

    For example, APIC is what is sometimes referred to as—would function as ''late-stage venture capital.'' In other words, companies that are already mature that need to take that next step, but are already fairly large-scale businesses, as the Deputy Secretary outlined in his remarks.

    There is an SBA proposal before the Congress, the New Markets Venture Capital Companies, focused on startups, the little guys, the real startup companies that don't have a history of revenues to point to; that are having trouble, for example, getting a bank loan because they don't have collateral. There is an idea, a concept, an entrepreneur. It is the classic American story. We want to be able to serve that need, but we recognize that each of these tools has a role to play, has a purpose, but also has limits.
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    The APIC tool is a piece of a larger menu, where at the small end you would have the New Markets Venture Capital Companies for startups and they would join a certain amount of technical assistance. As you know, a small startup often needs a little bit of help making use of that money, getting a financing system in place, a personnel system, these kinds of ''organizing the shop'' kinds of activities. A notch above that, you have small business as distinct from startup and in SBA's definition that can run up to something like $18 million in net worth. Then above that, you have a scale of business that really none of our programs were serving here in country—the OPIC program notwithstanding, which is overseas—and that is where APIC comes in. We think it is powerful to think about it as a menu wherein APIC has a very distinct purpose and it is the only one of the programs I have called off that could also do the real estate which, as you know, Mr. Chairman, is fundamental in some of these neighborhoods that have not shared as much as we would like in the rising tide. They have got serious real estate acquisition, rehab, construction issues, in addition to financing the ventures that can grow jobs.

    So I hope that is responsive to your question. We would love to follow-up. If there is a specific program, the one you mentioned that you want us to take a closer look at, we would very much like to do that.

    Chairman BAKER. I thank you. I will come back. We do have other Members who are here so I won't be more abusive of my time than I have been.

    Mr. Kanjorski.

    Mr. KANJORSKI. Mr. Chairman, I thank you very much.
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    I am particularly supportive of APIC for the very reason Mr. Briggs pointed out. It completes the menu.

    What I found, in traveling this summer and last week, to these distressed areas is that they do not all have common reasons of why they are distressed. As a matter of fact, they are quite unique. Some are educational level and skill and training that all the capital in the world put into the area without a trained workforce is not going to stimulate a good economy.

    On the other hand, it was very common that the areas lack substantial large employers or economic bases, and if you look around the country and you see the Intels, the Motorolas of the world, they are following a pattern of locating not in rural and distressed communities, but in rather successful communities.

    Mr. BRIGGS. Right.

    Mr. KANJORSKI. They create a great economic base. But it is not just the dollar turnover or the employment; it is the leadership. I call it reinfusing the gene pool, if you will. To a large extent, when you go to these distressed areas what you discover is the best and the brightest have already left. If they have finished college or graduate school, they are on their way to the big town to make their time, and even though they came out of these distressed communities they are no longer part of the leadership to build these distressed communities. And the leadership tends to be on the older side, tends to be less risk-taking and tends not to be as optimistic as you would like to have.

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    I think that APIC will offer particularly what I call the secondary and tertiary market areas the opportunity to spread broadly through the economy; the mature, sophisticated company that will bring along with it the executive and the infusion of the new gene pool into the area that will set standards in other areas such as education and infrastructure, housing, and just generally community leadership, that will eventually turn these distressed areas into middle class America.

    I want to compliment the Administration on that. I want to say, however, that we have got to find some way to set up a dialogue with the other side of the aisle, both in the House and in the Senate. I think maybe our atmosphere up here has been poisoned somewhat by a high measure of distrust now, and if we can put that to bed and put that aside, certainly I have seen brain power on both sides of the aisle in these pieces of legislation that are very contributive to the economy and have a pretty good depth of understanding to create Mr. Briggs' menu. I want to compliment the Administration for bringing it up.

    I am not going to take any more time or ask any more questions and allow my colleagues that are here to do what they are here to do.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Ms. Hooley.

    Ms. HOOLEY. Well, first of all, I would like to thank you for holding these hearings. I think this is really important, and it is interesting, because when I look at my State, which is Oregon, and you look at the metropolitan area, Portland metropolitan area, it is booming, it has done extremely well, but it is interesting, just to coincide with this hearing, our largest newspaper just published an article called ''The Growing Gap.'' It stated in the article, ''Oregon's rural counties aren't keeping pace with Portland in terms of number of jobs and wages. Despite a decade of prosperity, geographic inequalities not only exist, but they appear to be growing.''
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    In fact, one of the machinists that was quoted in the article said, ''People are standing in line for minimum wage jobs in my community.'' This sure doesn't sound like a booming economy that I read about every day in the New York Times or The Washington Post.

    My question is: We know this is happening and the gap is growing wider. When we look at APIC and some of the other new market proposals and they focus on some large scale businesses, tell me how this proposal will help our rural communities. I mean, that is where we have the growing gap.

    Mr. BRIGGS. Well, ma'am, I think it would help them in a number of ways. I should mention that earlier this year, in April, HUD put out a report entitled ''Now Is the Time: Places Left Behind in the New Economy.'' We focused that report on cities, but we provided an overview of what we saw as the rural picture that really needed to be revealed, the story that needed to be told nationally. We announced that we would be working on a report focused on rural America. We are hard at work on that now.

    So when you look at rural America, a couple of things are distinct. You don't always have the access to institutions of the kind that exist in cities. You have even greater isolation from capital. If we name a number of the cities that have deep poverty problems, at least there are banks, there are venture capitalists, there are these folks who make their residence in the city, who feel some identification, who know the neighborhood economies. You don't necessarily have that in rural America.

    On the other hand, in many instances you have cheaper land costs, less expensive labor in rural America, and in many cases a skilled and a highly motivated workforce that needs to be retooled, if you will, just the way the economy itself has been retooling over the last generation or so.
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    APICs could help in a wide variety of ways. As the Deputy Secretary mentioned, they can make an array of different investments. They can specialize in real estate in, for example, industrial parks and rural manufacturing, high technology, biomedical, you name it. Transshipment or distribution centers are the business types that have worked in some rural areas.

    Now, we haven't written a straitjacket into the legislation in working with Members of the House. We don't think you can say, for example, there will only be high technology jobs. That would be too restrictive. We recognize, as the Ranking Member pointed out, that you have a variety of different situations these communities find themselves in and they have different assets that they bring to bear, that they can grow with. But to the extent possible, it would be fantastic if you saw a focus on high quality, real value added jobs that sustained these places and not be part of a new boom and bust.

    We think that is the pattern we have seen in the past when you had rural areas entirely reliant on agricultural or extracted industries. In your home State obviously timber has been very important.

    So the idea ought to be to broaden the base, I think. At least this is what folks from your region and other regions have told us, and APICs give you an extraordinarily flexible way to pump equity and certain preferred forms of debt capital into these communities.

    We think many of them might be organized regionally so you would have one focusing on your community.

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    Mr. RAMIREZ. And if I may add, not only does it become a very powerful tool in the Federal tool box, but the effort is not just a HUD effort. It is multiple agencies. We have got the Department of Transportation involved in dealing with the infrastructure. We have got Commerce and Labor, and so when you take the costs of the different agencies and their input into this initiative, they have a direct impact in dealing with the issues that impact rural America.

    Ms. HOOLEY. I am very aware of what happens when a community is a one-industry community.

    I know that you have spent an enormous amount of time on this particular project. How do you know businesses will take advantage of this?

    Mr. BRIGGS. There are a couple of reasons. I mean, they have told us so straight out in a number of instances, and I am talking about different kinds of businesses.

    Ms. HOOLEY. OK.

    Mr. BRIGGS. I am sorry?

    Ms. HOOLEY. I just said OK. Elaborate.

    Mr. BRIGGS. OK. We are aware, for example, that a number of large banks have been trying to create equity funds for some time.
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    This gives them a way to do it more easily, more powerfully, to leverage their equity to get a greater return.

    One of the principles, as you know, ma'am, of financial investment, as the Deputy Secretary mentioned in his remarks, is spreading your risk across different investments. This sets up a vehicle wherein you run in a portfolio mode, spreading your risks across different investments. You have a larger pool because the Federal Government is leveraging your equity with guaranteed debt, and companies that have equity to invest are very excited about that. Insurance companies have made terrific use of the OPIC investment funds program. We think that is wonderful, and we think it is great for OPIC, but why isn't some of that money staying here at home in America?

    So the usefulness of the existing SBIC and the OPIC program to these banks, insurance companies, pension funds, says to us that there really is a hungry market. And when we have laid out the proposal, we have certainly seen a lot of excitement.

    Mr. RAMIREZ. To just close that, it creates the vehicle that standardizes the kind of tolerance for the risks that the pools are being created for, and as a result, as Xav mentioned, it does attract a certain type of fund or institution to participate in these kinds of investments to create a standardization and a tolerance for the kind of risk that these funds are willing to assume.

    Mr. BRIGGS. If I could add a quick word, take a community that is booming in the Deputy Secretary's home State of Texas. Austin is a high tech corridor these days, enjoying significant venture capital investment. It is one of those areas that has quite a bit of equity capital going into business development, but a number of high technology companies and other Members who have these sorts of firms in their backyards can testify to this, these companies are maturing. They are beginning to think as philanthropists. They are beginning to think about how they can strategically help the area's economy to grow. It is good for their PR, quite frankly. It is enlightened self-interest, but it also means you are acting as a good neighbor, and you are doing it through the secure vehicle that the Deputy Secretary mentioned. So we think that there are a number of appeals to creating a vehicle like APIC, vis-a-vis those who have the capital to invest, but don't necessarily want to make the decisions day to day as to the firms that are a good bet to invest in, if you get my meaning.
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    Ms. HOOLEY. Right. I really appreciate all of the hard work that has gone into the New Markets Initiative, and I am excited that the private sector is involved and APIC, and I am anxious to see how it works on the ground.

    Mr. BRIGGS. Thank you, ma'am.

    Mr. RAMIREZ. We did submit this for the record and we do have extra copies, and it does highlight and provides a good version of how it works and the different mechanisms that would be in place as a result. I would encourage you to take a look at it, Congresswoman.

    Chairman BAKER. If I may, we are going to get pinched on our time here. I want to make sure that Ms. Jones and Mr. Capuano both get their questions in.

    Ms. Jones.

    Mrs. JONES. Thank you, Mr. Chairman.

    Good morning.

    Mr. RAMIREZ. Good morning, ma'am.

    Mr. BRIGGS. Good morning.

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    Mrs. JONES. As you know, I come from Cleveland and I represent the 11th Congressional District, which is Cleveland and East Cleveland, about fifteen of the oldest suburbs, we call them the ''inner ring'' suburbs of the City of Cleveland.

    Fortunately in Cleveland we have seen a great boost in housing development, meaning single family homes, and so forth. One of the things that I hope to do in my time here in Congress is help with economic development.

    My concern—and I am real excited about the New Markets Initiative, because it sounds like it was written just for my district, but my concern is the coordination. What I have found since I have been a Member of Congress, in having small business conferences, is a lot of people can't get this information, or by the time they get it, it is late in the process and they are trying to run and catch and pick up. What I would be most concerned about is seeing how you anticipate, is it going to be me, the congressperson, that says, ''OK, these programs are available, everybody. Here is how we go about it.'' Are your people going to be on the ground? Are the private people—I mean, I think that it is great, but it has got to have some mud to put all of these great programs together, or for people of access.

    Coming new to Congress, maybe there is a way to do it and I just don't know it. Help me out.

    Mr. RAMIREZ. We have, over the last couple of years, been very aggressive in reforming the way we do business at HUD. One of the most innovative things that we have done is create a central point of contact for all of our programs. That is our community builder. We have them located in communities such as Cleveland, and our principal point of dissemination on these particular programs would be our community builders, who are also be able to open up the entire tool box of programs.
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    This particular initiative of a multiple strategy in dealing with new markets would deal with a certain type of businesses and a certain amount of investments.

    As I mentioned in my testimony, and Xav alluded to in response to a question, that it goes toward growing businesses and businesses that have been established and getting in major investments to grow those businesses.

    We have been working with the Small Business Administration in communities where we have been able to partner what we currently have and what they are doing to help grow small businesses, but in our regard we are pushing to make sure that we have one contact point for the community, and it can be multiple individuals, but to be able to disseminate the information in a very effective way and to work with Congress and their local representatives and staff to make sure that when opportunities present themselves that a constituent company brings this kind of an issue to the forefront that we are there to help address that, Congresswoman.

    Mrs. JONES. This is not the subject matter per se of this particular hearing, but I am faced with a situation where we have got a company that wants to come in and take over a HUD property that the prior company didn't do such a good job. Is this money available—but what is being said right now is the idea is going to cost money that we don't have available. Would a program such as this be the way in which a company who has great experience at bringing inner city property back to life have this money available to them?

    Mr. RAMIREZ. Yes.

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    Mr. BRIGGS. The quick answer, ma'am, is yes, on the commercial side, on the side that has to do with business creation. When you said that, I wasn't sure if you meant a residential property or a commercial one.

    Mrs. JONES. The proposal is a little bit of both.

    Mr. BRIGGS. I see. Well, mixed use development has an important role to play, too, when you have shopping and housing near one another, and that is true in cities as well as suburbs, but this would be a terrific vehicle for that.

    Mrs. JONES. Well, would you please put me on the list of Congresspeople that is particularly excited and wants to know what is going to happen and keep me in place?

    Mr. BRIGGS. We would love to do that.

    Mrs. JONES. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, ma'am.

    Mr. Capuano.

    Mr. CAPUANO. Thank you, Mr. Chairman.

    My concern, I guess, is parallel to Ms. Jones' in that I understand the difficulties of coordinating information, but I am interested today in talking about the difficulties of coordinating policy.
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    A few years ago, HUD came out with a great proposal. The President was all for it. Everybody in the whole country jumped up and down, and we made all kinds of promises, hundreds of millions of dollars to the inner cities and different areas, we called them Empowerment Zones, not just in the cities, but mostly. In the last couple of years, I have to tell you it looks like the Federal Government is walking away from them. We created these things. We have slapped ourselves on the back and said what a great job we have done and honestly we haven't even come close to fulfilling our commitment. You know that better than I do. To me, I would like to see some of the things that we are doing actually done well before we jump on to other proposals.

    This is a good proposal. I have no problem with this. I actually like the idea of spreading the wealth, which I thought was what Empowerment Zones were supposed to do in a certain way. This is another way to do it. It is a good proposal, but I guess I would like to hear HUD's perspective as to how do you jump from one policy goal to another when you haven't finished, even come close to finishing, ones that you promised, you made big fanfare on? Everybody got lots of TV coverage, Empowerment Zones going to be the recovery of all of these areas that have been forgotten, used to be the engines of the economy, now they have been forgotten.

    I don't see anything here—again, I am not the expert on this yet, and enlighten me if I am wrong. I don't see anything here that coordinates the two policies. So why jump from one to another to another to another to another without inherent, detailed, understandable coordination between the parties?

    Mr. RAMIREZ. Well, to expand a little bit more on what you have just stated, Congressman, and we will be glad to forward information on the Empowerment Zones themselves and the enterprise communities, they have been a success.
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    Our commitment to the Enterprise Zones is a long-term commitment, a ten-year commitment. Our first round was fully funded.

    The resources that the community gets directly by way of grants, the $10 million a year in grants, are to deal with trying to create additional leveraging opportunities.

    This particular initiative heads toward establishing growing businesses, to go into those kinds of areas and create additional opportunities for equity capital to be invested within Empowerment Zones or other underserved areas of our country.

    Our link in this is that this is one additional tool that is made available at a national level, and not in a targeted way except for the census tracts that have been identified as low-income or moderate-income tracts that would be able to participate, to be able to get a major infusion of capital into these areas. And although this isn't the hearing for the Empowerment Zones——

    Mr. CAPUANO. Excuse me. I don't mean to interrupt—actually, I do mean to interrupt, because I got to tell you, what I am hearing is that you want to be all things to all people. Now, I could draw some problems with what I saw in the Enterprise Zones as well, and don't get me wrong. The Empowerment Zones, I kind of had some problems with targeting it to specific census tracts as well, but you did it. And therefore how can you do that and simultaneously say, well, we will do that, we won't do other things, we are going to do everything? We are going to be everything to everybody with a limited pot of money, and I just want to correct one thing. I mean, maybe you fully funded the first round. What about the second, the third, the fourth, the fifth and the tenth?
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    Mr. RAMIREZ. That is what I was going to say, that we were very supportive of the second round that was authorized. It was not fully funded. The first round was.

    So I think it is a commitment on the part of our Nation that if we are committed to this program, that the programs be fully funded so that they can carry out the kind of activities that have been authorized in these programs.

    We do not want to be everything to everyone. What we do want to create is an opportunity to have a menu of different programs that can deal with varying needs of areas.

    Mr. CAPUANO. If that is the case, if you want to have both things, I don't have any problem with that. Why don't you give—and again, I am not the expert on this program. Maybe it is here, and correct me if I am wrong. Why don't you give extra added incentive to anybody who wants to take advantage of this program who then goes to an Empowerment Zone or an enterprise zone?

    If you want to have two policies—and I understand that. I understand spreading the wealth. I understand that very much. But if you have already got one program, I am not aware of anything in this program that says you are going to get an extra added advantage, you are going to get a little extra help, or we are going to push you a little bit more and then go to the Empowerment Zones?

    Mr. RAMIREZ. I will have Xav speak to the technical, but on the more practical side we will never have enough grant money provided to be able to deal with the kinds of needs that these areas have. $10 million a year to an Empowerment Zone is not enough to make the Empowerment Zone work, and the difference being that in this particular case we are investing $20 million, if authorized, that will then generate a leveraging of over $40-to-$1 in capital infusion into these areas, to a total of over $800 million.
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    So on the simple level, it is leveraging private capital into areas where we recognize that all the Federal money that we can make available into those areas will not be sufficient enough to be able to generate the kind of sustainable growth that we are trying to generate in those areas.

    Mr. CAPUANO. But you made a promise of $10 million to the different zones—and don't get me wrong. I mean, I could argue all day long that maybe you shouldn't have made the promise, but you did.

    Mr. RAMIREZ. Well, I think the promise was made in conjunction with Congress.

    Mr. CAPUANO. Believe me, I understand that. But at the same time that doesn't mean—just because two parties—one party broke its promise doesn't mean the second party should as well.

    Mr. RAMIREZ. And we don't want to, sir.

    Mr. BRIGGS. Mr. Chairman, if you will allow me, I know we are short on time, but I will just make a couple of very quick points. First of all, the Administration remains committed to full funding for the second round of Empowerment Zones. We had asked for it in the budget that the President submitted earlier this year. We were disappointed at the markup stage that we had no funding for the second round. We are pleased that even in a very tough budget year, and we salute all the Members here, that we were able to get the $70 million, but we are holding out on the full funding and we are looking for that next year obviously, and we are working very hard on that.
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    We are not cluttering the stage with this proposal, I want to reassure you, to start with your first question. Think of these APICs in the category that you would think of banks that are already local partners for the Empowerment Zones, and that was one of the critical ideas in the Empowerment Zone program, to win large scale private capital commitments to go with the Federal money, State money, local money. Right now you don't have a separate category of investor with large scale equity to bring to bear in the Empowerment Zones and other areas; fully private, not run by the State or local government or HUD, not directed by us, that can do the due diligence on these companies, evaluate the investments, make large scale investments that oftentimes are the key to making these deals more bankable by the existing financial institutions.

    Think of this is as creating a new crop of institutions that can add to everything that is happening in the Empowerment Zones, to giving them a preference in the bidding, for example, or encouraging investment companies to focus on Empowerment Zones since the Federal Government and Members on both sides of the aisle obviously have a large investment in those zones, worked hard to create them.

    We would be open to exploring that. There is nothing to preclude it at all and we think that the Empowerment Zones are already ahead of the game, if you will, and that they have many of these relationships already of the kind that you would need to develop a new APIC and get it going.

    Before I forget, Mr. Chairman, a number of these points are addressed in a wonderful letter by the President and CEO of the Local Initiatives Support Corporation, LISC, which has supporters throughout the land and on both sides of the aisle, and I respectfully ask that it be introduced into the record, sir. It is addressed to you, I believe, and Mr. Kanjorski.
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    Chairman BAKER. Mr. Kanjorski has already brought it to my attention.

    Mr. BRIGGS. Wonderful.

    Chairman BAKER. It will be made a part of the official record.

    Mr. BRIGGS. Thank you, sir.

    Mr. CAPUANO. Thank you, Mr. Chairman.

    Chairman BAKER. Mr. Kanjorski.

    Mr. KANJORSKI. Yes. In response to my good friend's comment from Massachusetts, what really is good about APIC is that it expands this idea of the Empowerment Zone communities that we have been using, although successes have been really very limited. What this does is takes a whole new approach and sort of throws away the concept of using census tracts and MSAs that define distress and depression within the zone definition.

    It tries to move upon them. As a matter of fact, the Administration worked very closely with me in redefining the whole methodology by which we identify APIC qualified communities, and I don't know exactly if you are capable of giving that description of how we have changed it, but basically we are running across the proposition that 20 percent of the qualified community had to be below 80 percent of the average income of the MSA. And what happens if you are in Westchester County, New York, that may be $54,000 a year, and if you are in Hazard, Kentucky, even if you make $12,000 a year on average you may not qualify.
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    So what we were basically doing was pegging economic distress at its given level and running the programs to keep them at that level. This program really changes that all around and moves from the MSA figure or the State figure. So that we are trying to bring these distressed areas up to an average income level that is more comparable to the Nation as a whole, rather than keeping it targeted in depressed areas and keeping those areas depressed.

    Mr. CAPUANO. Mr. Chairman, if I could, I have absolutely no problem with that concept. To be perfectly honest, had I been here I would have argued for that concept at the creation of Empowerment Zones.

    Mr. KANJORSKI. Right. Some of us did.

    Mr. CAPUANO. So I have no problem with that.

    My concern now is that right or wrong, Empowerment Zones are relatively new. Promises have been made. Commitments have been made. Money has been put into them. My argument is, I have no problem expanding it the way—along this concept line. My concern is not forgetting those people who have already taken action and done certain things based on a relatively new congressional, United States promise and not ignoring them. I have absolutely no problem with the concept of APICs. I like it. I think it should have been done in the first place, but it wasn't, and therefore I don't think that those people who fulfilled what they were told to do should be ignored and forgotten at the same time.

    Chairman BAKER. Thank you, Mr. Capuano.
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    If I may return to my prior subject just one more time. The United States Government and its agencies is the single biggest acquirer of goods and services in this Nation. If you look at the profile of small businesses—these numbers aren't exact, but as I recall about 90 percent of all employees work in companies that employ less than 25 people. Women-owned businesses in this country employ more people than all the Fortune 500 companies put together; women-owned businesses. We are indeed a Nation of small business.

    Our struggle is to get very small business up to moderate sized business. Technology has broken the traditional barriers to business growth. If you are manufacturing a simple product, a gift basket, and you are located in a community of 2,000 people, historically you had a target of a couple of folks and when you sold to those couple of hundred, that is it. With a very inexpensive computer and credit card capability, you are now able to take that same small business, located in that community of 2,000 people, and sell to Japan, very inexpensively.

    My point is, is that with the small business set-aside, and it is called the very small business set-aside, we target the resources of the United States Government and make them available only to very small businesses on a competitive bid basis.

    Now, fine, we may pay a nickel for a pencil that you could buy for three cents, but I believe the American public would be very tolerant of a program that channeled resources back, Federal tax dollars, to their community, and enables a whole new benefactor of Government spending to be created, which is mom and pop, and the United States Government buys every—I was amazed when I looked at what we spend tax money for, and how much we spend. All too often, it is a Government entity, a person, making a decision to buy on a credit card. The bulk of purchasing now for things under $100 grand is by credit card. You provide the service and you don't even have the thirty-day wait to get your money. You get paid immediately.
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    Rather than create a whole new product, if we were going to create a soft drink I would suggest you now create one called Coke, you know.

    Mr. KANJORSKI. Mr. Chairman, actually on Thursday of this last week or Friday, we went to Hermitage, Arkansas, a little town about 100 miles out of Little Rock. That very point was spelled out here. Here were these wonderful tomato farmers, hundreds of families that have tremendous capacity to grow tomatoes, and each of them packed and qualified their tomatoes at home. As a result there wasn't a standardization or a standardization of packing. To compete in the market today these small individual producers lack that capacity for uniform standardization and packing. The Federal Government through one of its loan programs of the Agriculture Department helped a cooperative of these people who came together, put a packing house together, standardized their materials, standardized their packing, standardized their marketing and now they are one of the largest suppliers to Burger King of tomatoes in the United States.

    What it means is the mom and pop business was able to get and sell to Burger King, but couldn't do it individually, had to utilize the efficiencies and the technologies of a cooperative and standardization process. I think that is what APIC would allow us to do in these distressed communities. Where there are small businesses, there is opportunity to sell to the United States Government. A ma and pop operations is never going to be able to go through the regulations of standardization and the bid processes of dealing with the Government. They won't even try.

    Chairman BAKER. Well, they can't if they can't afford to. It is inefficient.
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    Mr. KANJORSKI. But if they come together as cooperatives whether it is on the Internet throughout the country, these little producers, they will be able to be competitive producers with the largest industry of Federal materials.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Ms. Waters, we are under some time constraint. We have to end our hearing here momentarily because of the full committee.

    Gentlemen, I very much appreciate your appearance here this morning. Obviously, we have had twelve Members come through the hearing in the course of the meeting this morning. There is considerable interest in making this work. To the extent you wish to advise the subcommittee of any actions we can take to be of further assistance, we certainly stand ready to do so. I am sure there will be Members with follow-up questions they may submit in writing.

    Thank you very much for your attention. Our meeting is adjourned.

    Ms. WATERS. Mr. Chairman, is it possible to submit a statement for the record?

    Chairman BAKER. Without objection.

    [Whereupon, at 11:15 a.m., the hearing was adjourned.]

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