Does the Small Business Administration really matter to the health of America's small business community? The agency's size and status have been shrinking for years–President George W. Bush demoted the agency from cabinet-level status--and it has gotten its share of bad press.

This spring, the agency was subjected to bipartisan bashing after the public learned of massive SNAFUs and rampant fraud in providing SBA-guaranteed disaster loans after Hurricane Katrina. There have been allegations of increasing abuse of small-business set-asides in federal procurement programs, including huge contracts for Boeing Corp., as reported recently in the New York Times. And a chorus of SBA critics sang out when they learned the identity of the nominee for chairman this spring–Steven C. Preston, a Washington neophyte and former Lehman Brothers investment banker who was most recently an executive with $3.2 billion Service Master, a holding company with maintenance, janitorial, gardening and other service companies that employ 39,000.

Congress, which confirmed Preston after a brief hearing on June 29, is now working on the SBA's annual reauthorization. Its budget has decline from $1.2 billion in fiscal 2001 to $499 million in 2006. The Administration has requested $429 million in fiscal 2007, not including funds for disaster loans. While the agency provides a range of services, including the 7(a) loan program, which guarantees up to 85% of the value of loans made by participating lenders to qualified small businesses, the overall effectiveness of the SBA in promoting the viability of small businesses is difficult to assess.

Recently Fortune Small Business called for eliminating the SBA, citing a long history of bungling (See "Now Is the Time to Tear Down the SBA" FSB, June 2006). "If the SBA wants to live up to its own mission statement–'helping small business succeed'--it will close its doors," the authors sniped. The agency has long been a target of free-market purists who object to the taxpayer-supported subsidies that the SBA administers, including community development programs that target minority and women-owned businesses. The magazine quoted Véronique de Rugy, a resident fellow at the American Enterprise Institute and an advocate of abolition, who called the agency "a big corporate-welfare program."

Ms. De Rugy is right–if you change the punctuation, according to Lloyd Chapman founder of the American Small Business League. He says the problem is that the agency has turned into a big-corporate welfare program, which advances the interests of the nation's largest and most politically connected corporations at the expense of small businesses. A former small business owner, Chapman says he began scrapping with the agency in 1992 after his software company lost a federal contract under a small-business set-aside program to a Dutch-owned firm with 26,000 employees.

Since then, Chapman has been on a crusade. He founded ASBL, which he claims now has 100,000 members, and has launched a series of lawsuits to compel the SBA to disclose how it administers the set-aside program. The SBA was created in 1953 with legislation that provided a specific mechanism to nurture small business: It requires that they get their fair share--23% to be precise--of federal spending.

Chapman alleges that through a series of moves–by both Democratic and Republic administrations–the SBA has been co-opted by big-business interests. One of the most significant changes occurred in the Reagan years, when the agency redefined small business to include companies with as many as 500 employees, up from 100 in the original SBA rules. That put the majority of small businesses in competition with far more powerful rivals. (Nearly 99 percent of the businesses with employees in the U.S. that had any employees in 2003 had fewer than 100, according to the Census Bureau). Since then, Chapman says, a series of administrative rules–such as letting large corporations acquire small businesses and retain eligibility for set-asides–have created huge loopholes for giant defense and aerospace contractors. "They have adopted a number of policies that I would have to describe as anti-small business," says Chapman.

Chapman says his litigation has forced the SBA to remove 600 corporations that exceed the size standard from federal small business contractor lists and is using Freedom of Information Act requests to get the agency to disclose the identities of companies that are winning bids that are intended for small businesses. This summer Chapman is fighting a proposal in the reauthorization bill inserted by House Small Business Committee Chair Donald A. Manzullo (R- Ill.) that, the ASBL says, could let franchisees affiliated with large corporations qualify for small business set-asides.