United States: Leveling The Field: The TPP's Effect On Global Government Procurement

Last Updated: September 6 2016
Article by D. Grayson Yeargin

Coverage of the Trans-Pacific Partnership ("TPP") has focused on tariff reduction, intellectual property, and dispute resolution, but there are also provisions of interest to government contractors. Chapter 15 of the TPP contains provisions designed to level the field for all TPP parties' companies competing for government procurement work.

Most notably, the TPP would: (i) limit countries' protectionist mechanisms regarding government procurement of foreign goods and services by reducing the artificial barriers to entry created by domestic preference requirements; and (ii) require countries to establish robust government procurement procedures to enhance transparency and fairness and to provide remedies for anti-competitive behavior.

This article first discusses the general structure of the TPP's government procurement provisions and then analyzes Chapter 15's two main components, i.e., the reduction of protectionist measures and the bolstering of government procurement procedures. The article then outlines the ratification process and concludes with advice on how U.S. government contractors can prepare for the TPP's potential ratification.

General Structure

To determine whether a procurement would be subject to Chapter 15's requirements, contractors would be required to consult both Chapter 15 and a country-specific schedule, as appended in Annex 15-A. Chapter 15 would apply only to "covered procurement[s]," which are defined as government procurements "of a good, service, or combination thereof ... by any contractual means"1 included in the procuring country's schedule. The country-specific schedules provide financial thresholds (measured in the International Monetary Fund's Special Drawing Right ("SDR") currency valuation) over which government procurements must be opened to other TPP parties' suppliers. The schedules also identify procuring entities, goods, and services that each TPP party agrees to subject to Chapter 15's requirements.

The country-specific schedules are detailed and unique to each country. For example, the schedule of the United States implements financial thresholds of 130,000 SDRs for goods and services and five million SDRs for construction services.2 It states that Chapter 15 applies to all goods and most services3 procured by 86 U.S. federal agencies, with nine exceptions,4 but it does not apply to procurements by state and local governments. In addition, procurements by seven other entities, primarily energy institutions such as the Tennessee Valley Authority, are covered, although with distinct financial thresholds. "Buy America" requirements attached to federal funds for mass transit, highway, and water projects, set-asides for small or minority-owned businesses, and certain other procurement programs are excluded from Chapter 15.5

Finally, Article 15.23 would create a Committee on Government Procurement composed of representatives from each party and charged with ensuring cooperation, facilitating the participation of small-to-medium enterprises in government procurements, implementing transitional measures, and considering further negotiations relating to government procurement. However, at this time, it is unclear how influential this committee will be and what effect it will have on government contractors.

Reducing Protectionist Measures

The TPP's first major government procurement component is the reduction of protectionist measures by mandating national treatment and most-favored nation treatment to foreign suppliers from TPP countries. Under the framework established in Chapter 15, each TPP party "immediately and unconditionally" agrees to extend to foreign TPP parties' suppliers "treatment no less favourable" than the treatment provided to "domestic goods, services and suppliers" (i.e., national treatment) or to "goods, services and suppliers of any other Party" (i.e., most-favored nation treatment).6 These core commitments prohibit TPP parties' central governments from applying domestic preference "taxes" to procurements above threshold amounts set in the TPP.

This, in essence, exports the U.S. framework established under the Buy American Act, 41 U.S.C. § 8301 et seq. ("BAA"), and Trade Agreements Act, 19 U.S.C. § 2501 et seq. ("TAA"), to the other TPP parties. Under the BAA, U.S. procuring agencies must give preference to U.S. sources, unless certain exceptions like unavailability apply. While a gross simplification of the actual process, this effectively is done by requiring the agency to add a "tax" to non-U.S. offers to artificially raise their price in comparison to domestic offers. The TAA, however, provides an exception for certain procurements from countries that are parties to free-trade agreements7 with the United States. If the procurement value meets or exceeds the financial thresholds in Subsection 25.402 of the Federal Acquisition Regulation ("FAR"), the TAA permits the President, acting through the U.S. Trade Representative, to waive the requirement for procuring agencies to apply the "tax" to non-U.S. offers from these trade allies, allowing the agency to evaluate each offer based on actual price.

Improving the Procurement Process

The TPP's second major government procurement component is the requirement of a uniform procurement process designed to promote transparency during the solicitation, award, and post-award procurement stages.

At the solicitation stage, Chapter 15 requires that procuring entities ensure an open procurement. Procuring entities must publish a notice of intended procurement that identifies the procuring entity, describes the nature of the goods or services to be procured, and specifies delivery time frames, along with other details.

In addition, solicitations cannot include technical specifications that create unnecessary obstacles to trade between TPP parties and must be provided "in terms of performance and functional requirements, rather than design or descriptive characteristics."8 Similarly, conditions on participation must be limited to "those conditions that ensure that a supplier has the legal and financial capacities and the commercial and technical abilities to fulfill the requirements of that procurement."9

At the award stage, tenders must be treated with fairness, impartiality, and confidentiality. The tender documents must include a complete description of the procurement, any conditions on participation, the evaluation criteria and their relative importance, details on the timing of the procurement, and other information.

Procuring entities then must provide adequate time for potential bidders to submit requests for participation and responsive tenders, respond to requests for information, and permit suppliers to modify their tenders if the procurement is modified. Most importantly, contracts must be awarded "based solely on the evaluation criteria" to the contractor with either "(a) the most advantageous tender; or (b) if price is the sole criterion, the lowest price."10

At the post-award stage, unsuccessful suppliers must be provided with adequate information about the award decision and an opportunity to challenge the decision. Procuring entities must inform the suppliers of the award decision, publish an official notice and respond to nonprejudicial requests for explanation and other information concerning the award decision. TPP countries must ensure that criminal and administrative remedies exist to combat corruption and create independent, impartial administrative or judicial review boards to review challenges to procurements.

Not only are these changes designed to create more opportunities for global procurement, they also aim to reduce the competitive disadvantage that U.S. suppliers, as well as suppliers from other countries with developed procurement regulations, face in developing markets. These companies must comply with procurement regulations and anti-corruption laws (such as the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq.), which increase the costs of operation and may reduce the likelihood of receiving a contract award, as compared to suppliers not subject to similar laws and regulations. Raising the standards of procurement in the TPP countries aims to apply the same standards to suppliers bidding on government procurement work.

Next Steps

Ultimately, the significance of the TPP's government procurement components depends upon the entry into force of the agreement. Although the 12 TPP parties signed the final text of the agreement on February 4, 2016, each TPP party must ratify the agreement through their own unique and complex ratification processes before it has legal force.

Pursuant to Article 30.5, the TPP parties have two years from the date of signature to ratify the agreement, i.e., until Feb. 4, 2018, and the agreement will enter into force 60 days after all 12 TPP parties have written to confirm ratification. If all 12 TPP parties have not confirmed ratification of the agreement within two years, the TPP still will take effect as long as at least six original signatories that account for at least 85 percent of the combined gross domestic product ("GDP") of the original signatories have ratified the agreement.

While many TPP parties are optimistic their countries will ratify the agreement well before the two-year deadline, the entry into force of the TPP hinges on U.S. ratification. Not only have certain TPP parties indicated that they may wait to ratify the agreement until after the United States has done so, the 85 percent GDP threshold necessitates U.S. ratification. As the TPP party with the largest GDP by a significant margin, accounting for approximately 62 percent of the total GDP of the TPP parties, it is impossible to reach the 85 percent GDP threshold without ratification by the United States.

In the United States, ratification is complicated by the election year, and the ratification timeline remains uncertain.

With the election year's limited legislative calendar, competing legislative priorities, tepid congressional support for the TPP, and an increasingly strained relationship between Congress and the Obama administration, predicting ratification—much less pinpointing a target date for ratification—would be speculative, at best. Moreover, both remaining presidential candidates have spoken out against the TPP.

Practice Tips

Despite the TPP's uncertain future, ratification of the agreement would affect government contracting domestically and abroad. As a result, U.S. government contractors must consider how to adapt their businesses to remain competitive following ratification. Here are a few examples of how these contractors can prepare:

  • Closely Monitor Developments in the TPP's Ratification Process. As explained above, ratification of the TPP is far from certain and may extend beyond the election. U.S. government contractors should closely monitor the TPP parties' ratification processes, particularly the United States.
  • Prepare for Increased Competition for "Covered" Domestic Procurements. If implemented, the TPP will open certain U.S. federal government procurements to foreign suppliers from TPP parties. U.S. government contractors should begin considering how to make their proposals more competitive in response to this increased competition.
  • Evaluate Potential Foreign Procurement Opportunities. Conversely, many of the barriers to entry imposed by TPP parties' governments would be reduced or removed by the TPP. U.S. government contractors should evaluate procurement opportunities that previously may have been considered too risky or unprofitable to consider expansion into other TPP parties' procurement markets.
  • Guard Against Continued Procurement Issues. Article 15.3 contains exceptions that permit TPP parties and their procuring entities to adopt measures "necessary to protect public morals, order or safety; ... human, animal or plant life or health; [or] ... intellectual property," as well as measures "relating to a good or service of a person with disabilities, of philanthropic or not-for-profit institutions, or of prison labor."11

    In addition, Article 15.5, in conjunction with certain TPP's parties' schedules, permits country-specific transitional measures, such as price preference programs, offsets, phasing in of certain sectors, and temporary threshold increases. While the TPP would likely reduce corruption and abuse in procurements, these exceptions and transitional measures have the potential to be interpreted broadly and are subject to abuse, potentially nullifying some of the procurement opportunities created by the TPP.
  • Understand Each TPP's Party's Procurement Processes and Review Boards. While Chapter 15 would implement measures to ensure fairness in government procurements, these measures are stated as general principles that allow TPP parties to craft their own procurement processes and administrative or judicial review boards. There likely will be significant differences between the TPP parties' procurement systems, and U.S. government contractors should consider engaging counsel with familiarity with a TPP party's procurement system before bidding.
  • Continue to Track Country of Origin Requirements. The TPP will affect country-of-origin requirements, which could require contractors to modify existing practices and procedures relating to these obligations. U.S. government contractors should continue to track changes to country-of-origin rules and regulations to ensure compliance.

Conclusion

If ratified, the TPP would reduce protectionist measures and help establish robust and transparent procurement processes in TPP countries. However, the prospects and timeline for ratification remain uncertain. U.S. government contractors should prepare for the opportunities, as well as the challenges, that go well beyond tariff and trade implications.

A version of this article was published in BNA Federal Contracts Report on July 19, 2016.

Footnotes

[1] TRANS-PACIFIC PARTNERSHIP, ART. 15.2(2). However, Chapter 15 does not apply to: (1) acquisitions or rentals of immovable property; (2) noncontractual agreements or assistance (e.g., grants, loans and fiscal incentives); (3) acquisitions of public debt, depository services or liquidation and management services for regulated financial institutions; (4) public employment contracts; (5) procurements involving international aid, either from a TPP party or an international organization, or involving the stationing of troops; and (6) procurements outside the territory of a TPP party for consumption outside the territory of that TPP party. See TRANS-PACIFIC PARTNERSHIP, ART. 15.2(3).

[2] These thresholds would be recalculated every two years in accordance with an International Monetary Fund formula.

[3] Chapter 15 does not apply to transportation services, operation of government-owned facilities, public utilities services, research and development, or any service in support of military forces located overseas.

[4] Notable exceptions include Defense Department procurements of certain Federal Supply Code classified goods and specialty metals, Department of Energy procurements of nuclear materials and technologies under the Atomic Energy Act, and Federal Aviation Administration procurements.

[5] The "Buy America" requirements in the Surface Transportation Assistance Act of 1982, 49 U.S.C. § 5323(j), and 49 C.F.R. Part 661 are distinct from the Buy American Act, 41 U.S.C. § 8301 et seq., which will be discussed later. The "Buy America" requirements apply only to mass transit, highway, and water project procurements, and require that U.S.-made products be given preference.

[6] TRANS-PACIFIC PARTNERSHIP, ART. 15.4(1)(a)–(b).

[7] The U.S. Trade Representative has waived the BAA for acquisitions covered by the World Trade Organization's Agreement on Government Procurement, the North American Free Trade Agreement, the Central America-Dominican Republic Free Trade Agreement, and the Israeli Trade Act, as well as individual FTAs with specific countries.

[8] TRANS-PACIFIC PARTNERSHIP, ART. 15.12(2).

[9] TRANS-PACIFIC PARTNERSHIP, ART. 15.8(1). Chapter 15 also places robust restrictions on the use of supplier registration systems, selective tendering, multiuse lists, and limited tendering. See TRANS-PACIFIC PARTNERSHIP, ART. 15.9–10.

[10] TRANS-PACIFIC PARTNERSHIP, ART. 15.15(4).

[11] TRANS-PACIFIC PARTNERSHIP, ART. 15.3(1)(a)–(d).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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