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The Stimulus Package: Does the Buy American Provision Affect You?

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NEWS & INSIGHTS
Publications
13 MAR 2009

The Stimulus Package: Does the Buy American Provision Affect You?
GOVERNMENT CONTRACTS ALERT

C. Christopher Parlin Seamus Curley David S. Christy, Jr.

The Buy American provision in the stimulus package became law on February 17. Section 1605 of the American Recovery and Reinvestment Act of 2009 (ARRA), requires that all of the iron and steel and "manufactured goods" used in ARRA-funded projects for construction, alteration, maintenance or repair of "a public building or public work" be "produced in the United States." The Buy American requirement can be waived when: (1) application would be "inconsistent with the public interest"; (2) the iron, steel or manufactured goods are "not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality"; or (3) application of the requirement would increase the cost of the overall project by more than 25 percent. In addition, ARRA requires that the Buy American provision be applied "in a manner consistent with United States obligations under international agreements." The precise scope of the Buy American provision is unknown. It uses numerous terms that are undefined, and regulators have yet not indicated how they will implement the provision and its exceptions. In the immediate future, an Interim Rule is anticipated that will implement ARRA Buy American provision in the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS), which govern most federal procurements. However, it is far from clear that the Interim Rule will resolve many of the open issues. Further, without additional Congressional or Office of Management and Budget (OMB) guidance, it is unclear how, if at all, the new provision will apply to state and sub-state procurements. This article summarizes the expected impact of the provision and the open questions regarding its

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implementation, including the provision’s key elements and exceptions. Additionally, we highlight questions US and foreign businesses should ask to determine whether projects are – or might be – subject to the Buy American requirement of section 1605 of ARRA and make some general recommendations for moving forward. A. Three Key Elements of the Buy American Provision Will Determine Its Scope The provision has three key elements that must be defined before one can determine the precise scope of its application. They are: None of the funds appropriated or otherwise made available by this Act may be used "for a project for the construction, alteration, maintenance, or repair of a public building or public work unless"; "all of the iron, steel and manufactured goods used in the project"; "are produced in the United States." None of the key elements, bold-faced above, are defined in ARRA. Since the legislation passed, legal commentator have identified support for many of the possibilities – some drawing on definitions in different existing Buy American provisions and others based on the legislative history and intent of the stimulus package. Thus, these key terms might be defined in different ways, based on interpretations of existing statutes and FAR/DFARS provisions, that would have a significant effect on the scope of the provision’s applicability. Each key element is discussed below. Public Building or Public Work There are four major issues relating to the definition of "public building or public work": Is the scope limited to federal government procurement or procurements funded by federal agencies, consistent with the definition in FAR 22.401, or are state and local-level procurements covered? Notably, the House version of the stimulus bill incorporated the definition of the Buy American Act of 1933, which only applies to federal procurements. The final form of the legislation, however, omitted any definition at all. Thus, regardless of the treatment (or lack thereof) this term receives in the Interim Rule amending the FAR and DFARS, additional guidance likely will be necessary to resolve this important issue. Does the definition encompass procurements when stimulus funds are dispersed directly to private entities which then purchase iron, steel or manufactured goods? Are grants, cooperative agreements and other non-procurement vehicles excluded? Is the scope limited to heavy construction-type efforts, e.g.., does it exclude: (a) development of broadband networks; (b) purchases of equipment; and (c) other procurements not involving heavy construction-type efforts? As these questions make clear, there is uncertainty regarding this key definition. While some of the confusion will be lessened when regulations implementing ARRA are issued, interpretational issues almost certainly will remain. In close cases, careful legal analysis will be required to determine the best approach for a particular client’s interest. Manufactured Goods

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The application of the Buy American provision to "manufactured goods" could potentially have farreaching effects. The scope of "manufactured goods" will be determined based on the resolution of four major issues: What is the necessary linkage between the "public building or public work" and the "manufactured goods"? If manufactured goods are procured separately and not part of a contract for a public building or public work, does the Buy American provision apply? What is the scope of "manufactured"? Will "manufactured goods" include goods with intellectual property content, such as software? Will the Buy American provision be waived for manufactured goods not made from iron or steel, as the Federal Highway Administration did in 1983? For manufactured goods partially composed of iron or steel, must all of the iron or steel be produced in the United States? Once again, absent definitive interpretations, there are no certain answers to these questions and no substitute for careful, case-specific legal analysis. Produced in the United States There are at least two possible bases, drawn from existing law, for determining a manufactured good’s country of origin – i.e., whether it was produced in the United States, or elsewhere – and there are two subsidiary issues applicable to each of them: Should the country-of-origin determination be based on: the "substantial transformation" test, i.e., should a good be considered to be produced in the United States if either solely produced here or "substantially transformed into a new and different article of commerce" in the United States; or the "cost of domestic components" test, i.e., should country of origin be based on a "domestic content requirement" of more than 50 percent, with an additional requirement that manufacturing processes take place within the US? In either case, should the determination be made at the: end-product level; or component (or subcomponent) level?

For all potential bidders/offerors, the resolution of these issues could have a significant impact on many critical business decisions, such as the sourcing of parts for manufactured goods as well as particular production methods and locales. B. Exceptions Justifying Non-Application of the Buy American Provision Section 1605(b) of ARRA sets forth three situations that warrant a finding by the head of the relevant federal procuring department or agency that application of ARRA's Buy American provision should be waived: application would be "inconsistent with the public interest"; "iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient

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and reasonably available quantities and of a satisfactory quality"; and use of US-produced iron, steel and manufactured goods would "increase the cost of the overall project by more than 25 percent." Issues relating to the use of these exceptions, all of which are fact-specific, include: Inconsistent with the Public Interest This exception is discretionary. In the past, it has rarely been used to waive application of a Buy American provision. Use requires demonstration of significant harm to US national security and/or economic interests. To have any potential of success, a detailed, credible justification must be prepared and used to convince senior Administration officials. Not Produced in Sufficient Quantities and Satisfactory Quality The key issues are how "sufficient" quantities and "satisfactory" quality will be interpreted. By their nature, both terms are subjective, so well- prepared and presented arguments might well control the decision. Increase Project Cost by More Than 25 Percent While, in the main, use of this exception appears objective, accounting methodology for complex projects would affect the calculations of relative contribution to overall project costs, thereby requiring a careful analysis. The key issue is that the exception applies only when buying American would increase by 25 percent, not merely the cost for the specific input, but the cost of the total project. The differential is so large that, in practical terms, it is likely that the exception will rarely be invoked. C. Application Consistent with US International Obligations Section 1605(d) requires, at a minimum, compliance by procuring agencies with US obligations under the World Trade Organization (WTO) agreements, including the Agreement on Government Procurement (GPA); the North American Free Trade Agreement (NAFTA); and other bilateral and regional agreements to which the United States is a party. There are important issues affecting the applicability of each of these agreements. WTO Obligations 1. The Government Procurement Agreement US obligations under the WTO GPA require that in covered procurements (i.e., those conducted by covered federal agencies above certain monetary thresholds), end products from signatory countries must receive the same treatment as competing US-made end products, with the country of origin of both foreign and US end products determined using the highly fact-sensitive "substantial transformation" test. Designated countries include Aruba, Canada, the EU and its 27 member states, Hong Kong, Iceland, Israel, Japan, Korea, Lichtenstein, Norway, Singapore and Switzerland. Under such procurements, end products from non-signatory countries (e.g., China or Malaysia) may not be purchased. Thirty-seven states have also opted-in some of their agencies to be covered by these obligations.

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Some key questions to determine whether the WTO GPA applies to a given procurement include: Whether the US procuring agency is a "covered entity," i.e., one which the United States explicitly has designated under the GPA; this includes: most, but not all, federal government procuring entities; specified procuring entities in 37 states (coverage for some of the 37 states is very limited; the remaining 13 states, the District of Columbia, all territories and all local procuring authorities have no GPA obligations); and a few government-owned entities (including the Tennessee Valley Authority and the Department of Energy’s Power Marketing Administrations). Whether a state or sub-state procurement involves federal funds for "mass transit and highway projects" – if so, even if the procuring agency is a covered entity from a covered state, the Buy American provision of ARRA applies (because the United States excepted such procurements from GPA coverage). Further, because other Buy American-type legislation already applies to such projects, it will be have to be determined how ARRA provision will reconcile with these pre-existing laws. Whether the procurement is for "construction-grade steel (including requirements on subcontracts), motor vehicles and coal" by a procuring agency in 11 of the 37 states with some GPA coverage -- Delaware, Florida, Iowa, Maine, Maryland, Michigan, New York, New Hampshire, Oklahoma, Pennsylvania or Wyoming; if so, the United States excepted such procurements from GPA coverage. Whether the "estimated value of the procurement" meets or exceeds thresholds set in the GPA. for covered US federal government procuring agencies, approximately $190,000 for goods and services and $7.3 million for construction; for covered states, approximately $520,000 for goods and services and $7.3 million for construction services; and for government-owned entities, approximately $365,000 to $585,000 for goods and services and $7.3 million for construction. Whether one of the GPA’s exceptions can (and will) be invoked by the United States to preclude the GPA’s application – the principal exceptions are procurements for war and national security, or measures necessary to protect public order, life or health or intellectual property. As the above demonstrates, determining whether the GPA applies to a particular government procurement depends on a complicated analysis of multiple factors. In addition, trade press reports indicate differences of opinion between US government GPA experts and those from other Agreement signatories regarding several significant interpretive issues, including: What country of origin rules the US government should apply in determining whether a manufactured good is a product of a GPA-signatory country; and Whether state projects should be considered federal procurement because stimulus package money is distributed from the federal government (thereby negating GPA exclusion on bases applicable to state, but not federal, procurement). Finally, to add yet another layer to an already complicated analysis: with limited exceptions, federal

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procurements below the WTO GPA’s monetary thresholds are governed by the Buy American Act of 1933, related executive orders and rigid implementing regulations. This regime provides for a strong preference for US end products by inflating the price of foreign offers for evaluation purposes. Under such procurements, the country of origin of end products is not determined by the subjective substantial transformation test, but by a domestic content and manufacturing requirement (i.e., for a manufactured end product to qualify as a US end product, it must be manufactured in the US and more than 50 percent of the cost of all components must be domestic components). Further, while this specific regime does not apply to government entities below the federal level, some states and sub-state governments have enacted similar legislation. Thus, again, each potential procurement opportunity under ARRA will have to be vetted thoroughly to determine which domestic preference regime applies. 2. Other WTO Obligations When the WTO GPA does not apply, Article III of the General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Subsidies and Countervailing Measures (ASCM) may impose additional obligations upon the United States. For instance, Article III:4 of the GATT requires that all laws and regulations affecting sale, purchase or use must accord to imported products treatment no less favorable than that accorded to like domestic products (the national treatment obligation). This obligation applies to all WTO members, not just signatories to the GPA. There is a great deal of GATT and WTO precedent regarding Article III:4, which would have to be reviewed. However, the Buy American provision very well could be applied in a manner that is inconsistent with this obligation. The ASCM provides, in essence, that any financial contribution by a government entity to a designated private party (or group of private entities) is a “subsidy” if it provides a “benefit” to that party (i.e., if it is available on terms that the private party would not be able to secure in the commercial market place). These conditions appear to be met in the context of ARRA funding. For most subsidies, it must be established that the subsidy is causing material injury or serious prejudice to the interests of a company or industry of another WTO member. However, subsidies that require the use of local content are prohibited per se with no requirement to establish material injury or serious prejudice. Relevant GATT and WTO precedent would have to be analyzed carefully. However, certain applications of the Buy American preference could be within this category of prohibited subsidy. NAFTA Chapter 10 Procurement Obligations Products produced in Canada fall within US government procurement obligations under chapter 10 of the NAFTA and the WTO GPA. Mexico, which is not a GPA signatory, is entitled to NAFTA protection. The essence of the NAFTA and GPA obligations is the same, as are most of the issues discussed above with respect to the GPA. NAFTA coverage applies to: Goods, services and construction services whose country of origin is determined to be Canada or Mexico; Federal government procuring agencies and "government entities" identified in the US NAFTA procurement annex (but not state and provincial procuring agencies, which are not covered by NAFTA chapter 10); Contract values exceeding $50,000 for goods and services and $6.5 million for construction services; and Contracts not excepted from coverage on grounds of national security or necessary to protect public

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order, life and health and intellectual property rights. Other Bilateral and Regional Agreements The United States is a party to numerous treaties and free trade agreements that have provisions affecting applicability of the Buy American provision of ARRA. For instance, countries with free trade agreements with the US are entitled to have end products from their country treated the same as US end products by the federal government, provided the value of the acquisition meets or exceeds the applicable monetary threshold in the free trade agreement, most of which are lower than the thresholds set forth in the WTO GPA. Therefore, in each case, a company will have to determine whether any relevant treaties or agreements exist with respect to the country-of-origin of goods, services or construction services involved in a specific procurement, and the effect, if any, of the treaties or agreements on US obligations under the Buy American provision of ARRA. Given Lack of Guidance, Prepare Now There are many questions and few solid answers with regard to the applicability of the Buy American provision of ARRA, and it is not clear that the forthcoming Interim Rule will provide significant guidance to address all issues. Thus, companies that contemplate participating in ARRA-funded procurements would be well served to begin work now to prepare themselves for rapid, effective action when the procurement process begins. Further, when it is published, such companies should closely review the Interim Rule amending the FAR and DFARS to understand their obligations.

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