Small businesses in economically depressed areas and emerging industries will get preferential treatment for state contracts under a recently adopted set of procurement rules.

The program will funnel state custom computer programming/software development as well as alternative energy/energy efficiency contracts to small businesses.

Additionally, state contracts for work in Wai'anae, Ka'u and Puna districts, along the Hamakua Coast and on the island of Moloka'i will be directed to small businesses.

The so-called small business set-asides are likely to result in less competition and could lock out large contractors from bidding on work they've received in the past. That might end up costing the cash-strapped state more money and could lead to more protests.

However, the set-asides could provide social and economic advantages by creating jobs in economically depressed communities, said state comptroller Russ Saito. They're also aimed at fostering the growth of local companies in sectors such as software development.

"You don't have to be big to write programs, so if we set that aside for small businesses, then these businesses can grow as a result of government contracts," Saito said. "Then at some point when they become viable, then you say OK we don't need to set them aside anymore."

State government procurement practices, like federal ones, can have a powerful impact on the economy.

"The rationale initially was to have the state procure goods and services in those areas in which they want to develop the economy," Saito said.

The preference program was an early policy initiative by Gov. Linda Lingle. Created under Act 50 of 2005 the program attempts to emulate federal government programs meant to spur growth of small business.

The definition of a small business varies by industry and is based on employment and annual sales.

For example a manufacturer with 500 employees is considered a small business as is a retailer with $7 million in sales.

Deciding which geographic areas and industry sectors should be set aside for small businesses is up to a Small Business Utilization Council.

The council makes recommendations to a Procurement Policy Board, which adopted the framework of the new procurement program in 2006. Since then the groups have been working out the practical details about how the program will work.

In September the Procurement Policy Board identified five geographic areas that would be set aside for small businesses. Then in May the board identified which industrial classifications could be used to help identify computer programming/software development as well as alternative energy/energy efficiency businesses.

However, according to minutes of Small Business Utilization Council meetings in April and May there were lingering concerns that the small business set-aside rules may provide agencies too much discretion to decide which small businesses can qualify for work within geographically identified areas and set-aside industries such as alternative energy.

That could put the state in a weak position if there's a protest.

Saito acknowledged that there were some lingering issues including how to determine which businesses can qualify for work in designated geographic areas. The question is should these businesses be based within the designated area or should they hire a portion of their employees from that area.

For the most part the program is ready to launch and agencies now need to start setting aside work for small businesses, Saito said.

"It's effective immediately," he said. "Any solicitation that hasn't started yet should now use this set aside process."

Earlier this year the Department of Public Safety attempted to award a contract under the new rules, however, there was insufficient competition from small businesses.

If a project that's set side for small businesses fails to attract enough competition, then the contract will be resolicited and opened up to businesses of all sizes.

Under the program Mainland companies can also bid on projects set aside for small businesses.

Attempts to stimulate sectors such as alternative energy could pay dividends in the long-run, said Leroy Laney, a Hawai'i Pacific University economics professor.

"Oil prices will go up and alternative energy will become more economical and if we're better prepared for it because we've encouraged small businesses to get into that kind of thing, then that's good," he said.

However, such preferences are akin to state government picking which business should succeed and which should not, warned Laney.

"There is some danger here when government gets involved in trying to pick the winners," Laney said. "Government might not be the best judge of what might be successful or not."