GLOBAL PROCUREMENT QUARTERLY

AGILITY CASE ILLUSTRATES THE STEEP PRICE OF NONCOMPLIANCE FOR CONTRACTORSBy Richard J. Vacura and Robert M. Nichols

The United States Court of Appeals for the Eleventh Circuit’s recent decision in Agility Defense and Gov’t Svcs., Inc. v. U.S. Dept. of Defense1 serves as a potent reminder of the suspension and debarment risks faced by federal contractors. On December 31, 2013, the Eleventh Circuit held that the suspension and debarment officer (SDO) could suspend Agility, a government contractor, indefinitely while its parent company was under indictment for defrauding the United States.

Though Federal Acquisition Regulation (FAR) 9.407-4 requires that a contractor not be debarred more than 18 months “unless legal proceedings have been initiated in that period,” the Eleventh Circuit held that the parent’s pending criminal proceedings allowed the SDO to suspend the affiliate for a longer period of time. The court noted that (a) Agility was controlled by an indicted firm, so the

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IN THIS ISSUEAgility Case Illustrates the Steep Price of Noncompliance for Contractors Page 1

Closing the Gap – European Union to Set Up Harmonized Framework for Awarding of “Concession Contracts” Page 2

European Union Overhauls Its Public Contract Procurement Regime Page 3

European Procurement: European Parliament Supports Exclusion of Bids from Non-EU Countries Page 5

European Procurement: New Threshold Values for 2014 and 2015 Page 6

Four Key Questions for Evaluating PPP Opportunities Page 7

Overview: Public Procurement in Japan Page 9

The United States Revises Its Rules Governing Federal Grants and Cooperative Agreements Page 10

MOFO

EDITORSRichard VacuraAlistair Maughan

Bradley WineAlyse Latour

CONTRIBUTORSZane Gresham

Yukihiro Terazawa

Rafael Hernandez Mayoral

Tina Reynolds

Felix Helmstädter

Catherine Chapple

Robert Nichols

Sarah Wells

Winter 2014

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government had cause to be concerned about whether it was responsible, and (b) requiring the SDO to reinstate the affiliate would enable the parent to shift the contracts and circumvent its own suspension.

The Eleventh Circuit’s decision is consistent with the trend toward increased scrutiny of federal contractors and greater willingness to impose harsh punishments on contractors (both firms and individuals) who break the law. The United States Congress is pushing further reforms, including a bill in the House of Representatives called the SUSPEND Act,2 which proposes consolidating and strengthening government efforts to identify and penalize wrongdoing among contractors.

Fortunately, contractors can mitigate the risk of suspension or debarment. The key is to identify any violations, take corrective action, and report the violations if mandatory or otherwise advisable.

1. Contractors should institute or strengthen compliance programs to prevent or identify violations. An effective compliance program is one that identifies key risk areas for the company, institutes training and reviews, facilitates reporting of improper conduct to company attorneys and leadership, and is audited regularly to ensure it remains on top of changes in the company or the law.

2. Once a contractor identifies a violation, it should be proactive in fixing it and also consider whether to disclose the violation to the suspension and debarment authority.

A compliance program provides contractors with several benefits, chiefly:

• Contractors that train their employees on federal requirements and ethics are less likely to commit a violation that would get them in front of the SDO.

• Contractors that identify and report certain violations avoid far greater penalties. FAR 52.203-13 requires that many contractors self-report violations of federal criminal law involving fraud, bribery, or conflicts of interest or violations of the civil False Claims Act. Moreover, FAR 9.4, which applies to all contractors, requires timely notification by any contractor if a principal is aware of any of the same violations or errors, or a significant overpayment. If the government finds out another way (for example, prosecutors will often mail a copy of an indictment to the SDO), penalties are usually more severe and are more likely to include suspension or debarment.

• Contractors that can both demonstrate prior efforts to prevent fraud or similar violations and respond to a

violation by further strengthening compliance are less likely to be suspended or debarred for a violation of contracting rules.

Agility provides a recent example of the perils facing contractors that are too evasive. In that case, the contractor applied for reinstatement twice without addressing its parent’s indictment and despite the government’s obvious concern about the indictment. Had the contractor instituted compliance measures that remedied the government’s concern about its parent’s fraud (before it alienated the SDO by twice ignoring the issue), it may very well have spent 2013 working on government contracts rather than in litigation.

CLOSING THE GAP – EUROPEAN UNION TO SET UP HARMONIZED FRAMEWORK FOR AWARDING OF “CONCESSION CONTRACTS”By Dr. Felix Helmstädter

In the European Union (EU), around 60% of public-private partnerships (PPPs) are entered into on a concession basis. This represents an EU-wide market worth more than €100 billion each year. For the first time, the EU has now issued legislation to harmonize and regulate procurement in the market for public concession contracts.

Under a concession contract, the concessionaire (commonly a private company) builds and/or operates some form of infrastructure project (e.g., a toll road, bridge, or port) or provides services of public interest (e.g., energy, public and ambulance transport services, or broadband cable network services for private households).

Unlike public contracts and works concessions (which are already governed by Directives 2004/17/EC and 20014/18/EC), the awarding of service concessions is currently not regulated by specific EU legislation. Nevertheless, starting with its judgment in the Teleaustria case in 2000, the European Court of Justice (ECJ) has developed minimum standards of transparency

For the first time, the EU has now issued legislation to harmonize and regulate procurement in the market for public concession contracts.

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and equal treatment to be guaranteed by contracting authorities when awarding concession contracts.

In order to harmonize the legal framework and to promote competition for service concessions, on 15 January 2014, the EU adopted as part of its major reform package on public procurement law3 a separate “Directive of the European Parliament and of the Council on the award of concession contracts” (DoC). Following the publication of the DoC in the EU’s Official Journal, the EU member states will have 24 months to transpose the DoC into their national laws. Despite the time allowed for implementation, several member states seem to be well prepared to amend their national laws in advance of this deadline.

• The DoC applies to so-called service concession contracts and to works concessions (the latter are currently governed by Directive 2004/18/EC). “Concessions,” as defined by the DoC, are contracts under which the contracting authority grants a right to exploit certain works or services to an economic operator, while the contracting authority obtains the benefits of the works or services.

• The DoC is applicable to contracts worth €5,186,000 or more, based on an estimate of the concessionaire’s total turnover during the term of the contract. The durations of these types of contracts are often quite long in view of the requirement for up-front investment. One aim of the DoC is to avoid unnecessarily long durations in the future.

• The DoC obligates public authorities to guarantee transparency (e.g., through publication of requirements) and non-discrimination (e.g., through binding application of predefined awarding criteria) but does not prescribe any specific formal procedure. The flexibility to design an individual awarding procedure is one major difference compared to the award of other types of public contracts. In addition, concession contracts will now fall into the scope of the EU Remedies Directives, ensuring that bidders have access to a system of effective legal protection, in particular against violation of the basic principles of transparency and equal treatment.

In light of the new regime on concessions, contracting authorities and private companies should begin to align their activities with the new regime at an early stage. Several countries are set to amend their national laws soon, and others (e.g., Austria, France, and Spain) have already adopted specific rules on concessions. Particularly in countries currently lacking any specific rules on service concessions (e.g., Germany and the UK), public authorities

will have to amend their practice of awarding concessions in order to ensure compliance with the new rules.

For companies interested in business opportunities across the EU, the new regime allows easier comprehensive monitoring of upcoming major concession contracts. In addition, companies will be able to rely on more precise procedural guarantees and can seek legal protection in case of non-compliance with the open tendering rules under the new regime.

EUROPEAN UNION OVERHAULS ITS PUBLIC CONTRACT PROCUREMENT REGIMEBy Alistair Maughan and Dr. Felix Helmstädter

On 15 January 2014, the European Union (EU) finally approved its latest overhaul of its public procurement regime. As well as a new directive dealing for the first time with the award of concession contracts (see preceding article), the EU has issued new directives that consolidate and update the existing regimes dealing with the award of contracts for supplies, services, or works, and the award of contracts in the so-called utilities sectors (water, energy, transport, and postal services).

IntroductionThe new directives have been a long time coming. The EU Commission originally proposed its changes a couple of years ago, but the proposals have been through prolonged consideration under the EU’s legislative procedures. From here, the directives are expected to come into force in March 2014, and the EU member states have 24 months to implement the new directives into national law.

The new directives are intended to modernize and simplify the EU public tender regime. In practice, it is perhaps questionable whether simplification has been achieved, although several aspects are either completely new or have been materially amended from the current regime.

Contract Award CriteriaUnder the current rules, EU contracting authorities can choose whether or not to base their proposed contract awards on the lowest cost or the “most economically advantageous tender” (MEAT). In the future, only the MEAT test will be available – or the best value for money, by any other name. The change to MEAT allows a broader focus on life cycle costing. Of course, the real issue remains how to assess which bid represents the most economically advantageous tender and how the different aspects of cost, quality, and other commercial factors are taken into account and assessed on a transparent basis.

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New Award ProceduresUnder the existing rules, a number of different types of contract award procedures have been allowed, including the open, restricted, and negotiated procedures as well as competitive dialogue. Each of these has its own uses and allows for different levels of engagement and discussion with bidders.

In the future, the ability to award contracts on the basis of a negotiated procedure will be allowed in a broader range of situations, thus aligning it more closely with the competitive dialogue procedure, which has been particularly promoted by a number of EU governments, including the United Kingdom.

The directives also create a new concept of “innovation partnership procedure” which is intended to allow the development and delivery of an innovative product or service and the subsequent purchase of items that result from that work.

New Simplified RegimeThe EU proposes a European single procurement document, which is intended to simplify procedures for bidders. At the time of submission of requests to participate on tenders, contracting authorities will be required to accept a European single procurement document as prima facie evidence of satisfaction of the core bidder selection criteria and confirmation that they do not fall within one of the mandatory grounds for exclusion. Subsequently, only the winning bidder will have to submit formal evidence to verify the information provided. Obviously, this will reduce bid costs for the majority of bidders in most procurements.

Member states will be required to ensure that all communications and information exchanged in the procurement process (including submission of tender documents) is done electronically. In addition, member states must move to full e-procurement within 54 months of the adoption of the directives.

The directives abolish the current distinction between Part A services (which are subject to the full rules) and Part B services (which are subject to limited procedural requirements). There is also a new simplified regime for certain types of social, health, legal, and other services, which will be covered by the directives only if a higher threshold (€750,000) is met. These services are subject to limited procedural requirements.

New Directive on ConcessionsAt the same time as updating the existing procurement directives, the EU has decided to harmonize the procedures for the award of concession contracts. For more information on this new directive, please see the preceding article.

Practical ConsequencesIt’s hard to say who the winners will be after the changes are introduced by the new directives. The EU Commission and national governments have been quick to highlight many changes that ought to help small and medium-sized enterprises compete more effectively for public contracts. Whether that happens in practice depends on how the new regime is applied by public bodies.

In the short term, companies should expect a generally higher level of uncertainty than normal as both bidders and awarding authorities get used to the new rules.

The new directives are intended to modernize and simplify the EU public tender regime. In practice, it is perhaps questionable whether simplification has been achieved, although several aspects are either completely new or have been materially amended from the current regime. MoFo Attorney News

Chuck Duross has joined the firm’s Litigation Department as a partner to head its global anti-corruption practice, resident in the Washington, D.C. office. He most recently served as Deputy Chief of the Fraud Section in the Criminal Division of the U.S. Department of Justice, in charge of all of the DOJ’s FCPA investigations, prosecutions and resolutions in the United States.

5 MoFo Global Procurement Quarterly, Winter 2014

EUROPEAN PROCUREMENT: EUROPEAN PARLIAMENT SUPPORTS EXCLUSION OF BIDS FROM NON-EU COUNTRIESBy Alistair Maughan and Sarah Wells

On 15 January 2014, the European Parliament approved plans that could allow European Union (EU) governments to exclude bids on EU public contracts that come from some non-EU countries. Ostensibly, the plans are designed to help EU firms compete for public contracts in third countries, although critics may point out that seeking to encourage openness elsewhere by allowing exclusion at home smacks of old-fashioned protectionism.

Under the EU public procurement rules, all requirements leading to a contract awarded by a public or government body must follow openly advertised tendering and contract award procedures. The EU has a number of international commitments in place to ensure reciprocity and non-discrimination, such as the World Trade Organisation Government Procurement Agreement (which sets out an agreed framework for procurement obligations) and other bilateral/regional Free Trade Agreements (with countries such as Mexico, Peru, Colombia, and Chile).

However, the EU has been concerned for some time that, in contrast to the EU’s policy of fostering openness in procurement markets and avoiding “Buy Local” rules, some countries do not encourage the same level of open market access. Many countries limit business opportunities for EU businesses to compete locally, including, in certain cases, implementing protectionist measures. Local content requirements exist in Australia, Brazil, and Turkey, for example. This means that there is a potential disadvantage for EU companies that cannot, in contrast to their foreign counterparts, bid for procurement contracts in such countries on a level playing field.

The Proposed RegulationAs we have previously written (see our April 2012 Alert “Non-EU Bids on EU Public Contracts” from our European Procurement and Government Contracts Digest), the European Commission set the ball rolling two years ago with a draft Regulation designed to allow an EU public authority proposing to award a public contract to reject bids from certain foreign countries in cases where (1) no international agreement is in place and (2) evidence shows a lack of substantial reciprocity in that foreign market towards EU suppliers, goods, or services.

The draft Regulation provides that the Commission has the right, at any time, on its own initiative or upon the application of interested parties, to initiate an external procurement investigation into alleged restrictive procurement measures. The proposed new rules have been approved by the EU Parliament and will now proceed slowly towards completion.

Where the Commission initiates such an investigation, upon request of a contracting entity, and provided the contract or tender has (1) an estimated value of over €5,000,000 and (2) goods or services originating outside the EU make up more than 50% of the total value of goods or services involved, the Commission will begin assessing whether a non-EU bid exclusion should be allowed. Any entity wishing to use this exclusion mechanism on the basis of such investigation must, however, inform bidders of this in their contract notice. If any tenders are submitted which meet the conditions for exclusion, the Commission must be notified within eight days.

The Commission will assess whether the definition of a “lack of substantial reciprocity” is met. A “lack of substantial reciprocity” is defined in the draft Regulation as:

“the existence of any legislative, regulatory or administrative measure, procedure or practice, adopted or performed by public authorities or individual procuring entities in a third country, restricting access to public procurement or concession markets, in particular by a lack of transparency compared to international standards and discriminatory legislative provisions and administrative practices, which results in serious and recurrent discriminatory treatment against Union economic operators, goods or services.”

A lack of reciprocity could also be deemed to arise if certain international labour law provisions in the investigated country have not been observed and have led to subsequent difficulties for European undertakings.

Any decision to approve exclusion of tenders on this basis must be implemented within one month of the request to exclude. There is, however, a provision for a maximum of one extension for a further month, effectively giving the Commission a maximum of two months to establish whether the exclusion should go ahead. The approval of any such exclusion is temporary, pending the final investigation results of the Commission, any effective consultation procedure with the country in question, and, where applicable, any subsequent and more permanent measures for further exclusion. If an exclusion is agreed

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to by the Commission, contracting authorities must indicate this, including the reasons for exclusion, in the contract award notice.

ConclusionThe European Commission has stressed that the aim of the draft Regulation is to remedy imbalances in the marketplace rather than as a form of protectionism – and it’s true that the potential to restrict bidders from foreign markets exists only if no reciprocity is in place between that country and the EU.

Importantly, the EU plans to offer protection to developing countries because the measures of the Regulation are not applied for countries “considered to be vulnerable due to a lack of diversification and insufficient integration within the international trading system.”

It will be interesting to see what changes are made to the draft Regulation as it advances in the adoption process. Furthermore, given that the Commission has to approve any exclusions, and has up to two months in which to do this, if the end result is a more lengthy and complex procurement process, the question remains as to whether it will end up being used at all by contracting authorities, who are usually concerned with getting through the procurement process with a minimum of delay.

EUROPEAN PROCUREMENT: NEW THRESHOLD VALUES FOR 2014 AND 2015By Alistair Maughan and Sarah Wells

Under the European Union (EU) public procurement rules, all requirements leading to a contract awarded by a public or government body anywhere in the EU must follow openly advertised tendering and contract award

procedures and comply with the principles of transparency, fairness, and equality. These rules cover both central, regional, and local government as well as entities operating in the so-called “utilities sector” (e.g., water, transport, and energy).

However, the rules apply only to requirements above a certain financial threshold, i.e., small contracts are not legally required to follow the same rules.

The European Commission updates the EU-wide threshold values every two years in order to make sure that they are consistent with the thresholds under the World Trade Organisation’s Government Procurement Agreement. During the last biennial review, the thresholds were increased – although not by much. These increases have been implemented via Commission Regulation (EC) No. 1336/2013 of 13 December 2013 (the “Regulation”).

As is always the case, separate thresholds apply more to the procurement of “works” (e.g., construction projects) than to “supplies” or “services.” With the exception of the utilities and defence sectors, the thresholds for 2014 and 2015 are as follows:

The Regulation prescribes the new threshold values in terms of euros, and a separate communication from the European Commission sets out how these new values should be translated into local currencies in EU member states (such as the UK) that have not converted to euros.

Subsidised contracts have the following thresholds:

• €5,186,000 for contracts for major civil engineering projects and the construction of hospitals, schools, universities, and other public buildings, where the works are subsidised directly by contracting authorities by more than 50%;

The European Commission has stressed that the aim of the draft Regulation is to remedy imbalances in the marketplace rather than as a form of protectionism – and it’s true that the potential to restrict bidders from foreign markets exists only if no reciprocity is in place between that country and the EU.

CENTRAL GOVERNMENT

DEPARTMENTS AND AGENCIES

€134,0004 €5,186,000

€207,000 €5,186,000

OTHER CONTRACTING AUTHORITIES,

E.G., LOCAL AUTHORITIES

SUPPLY AND SERVICES CONTRACTS AND

DESIGN CONTESTSWORKS

CONTRACTS

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• €207,000 for services contracts subsidised directly by contracting authorities by more than 50% (to the extent such services contracts relate to contracts for major civil engineering projects and the construction of hospitals, schools, universities, and other public buildings, where the works are subsidised directly by contracting authorities by more than 50%).

The thresholds for utilities contracts are as follows:

Separate thresholds apply to procurement of goods and services by entities in the Defence and Security sector. In relation to supply and service contracts in the Defence and Security sector, the new threshold is €414,000 and €5,186,000 for the procurement of works.

The Regulation came into force on 1 January 2014. Contracting authorities are therefore now obligated to follow the EU public procurement rules in relation to any procurement (assuming the other conditions are met) when the estimated value of the intended contract is above these threshold amounts. There are also aggregation rules in place to deter contracting authorities from attempting to bypass these threshold rules by dividing contracts into smaller segments.

The Regulation has direct effect in all EU member states, and all EU countries will have to apply the new threshold values immediately. It is interesting to note that, although the thresholds in euros have increased, because of the movement in the £/€ exchange rate in the past two years, the equivalent values in pounds sterling for UK-originated procurements have fallen slightly.

For a fuller analysis of the new EU thresholds, please review the recent Alert “New Threshold Values for 2014 & 2015” from our European Procurement and Government Contracts Digest.

FOUR KEY QUESTIONS FOR EVALUATING PPP OPPORTUNITIESBy Zane O. Gresham and Rafael Hernandez Mayoral

Public-private partnerships (also called PPPs or P3s) are all the rage, as governments seek new ways to deliver public infrastructure, facilities, and services in the face

of daunting budget limitations and doubts about older procurement modes. PPP projects and future prospects in states such as Virginia, Indiana, Texas, Illinois, and California have led European companies with large PPP portfolios to dive into the U.S. market. Many well-qualified U.S. companies are not familiar with the differences between the PPP and traditional procurement models.

We have advised clients over the years on numerous PPP transactions, from airports to courthouses to toll roads to railroads, among others. From that experience, we offer four questions that are key to evaluating any PPP, particularly for U.S. companies entering this increasingly popular field.

What is a “PPP”? Despite its name, a public-private partnership is not a partnership in the legal sense. Rather, it is a contractual relationship between private sector providers of project development and services and a governmental entity, which establishes a distribution of obligations and risks with a different risk/reward profile and within a different legal framework than traditional procurement methods. The differences arise principally from the underlying government rationale for the project and potential political risk, the underlying legislation for the proposal or bid process, the nature of such process, and the resulting contract with the governmental entity. Since PPPs come in different shapes and forms, you should approach each one bearing that name without preconceptions. Every one is at least a little different.

Why is the government proposing a PPP? Generally, U.S. governmental entities are quite conservative when it comes to procurement, so it takes some motivating factor to compel a change to a new procurement method. Hence, a crucial first step is to examine the government rationale.

Some PPPs are geared so that a governmental entity can “monetize” an asset and raise funds by selling or leasing an asset to the private sector. Another rationale is to tap into the operating expertise of the private sector. Both of these rationales were behind the PPP at the Luis Muñoz Marin Airport in 2013. These were also behind the recent PPP attempt at Midway International Airport, which was halted when the city of Chicago determined that the process could not guarantee an undisclosed threshold dollar amount to make the PPP worthwhile.

A very different governmental rationale would be to meet a recognized need for added capacity on a major highway but to transfer financing, completion, and operating risks to the private sector, as was the case with the series of Indiana I-69 toll road PPPs. Even within this “meeting a need” model, there are variations in whether (1) the

€414,000

€5,186,000

SUPPLY AND SERVICES CONTRACTS AND DESIGN CONTESTS

WORKS CONTRACTS

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governmental entities make construction progress payments or pay when substantially completed, and (2) the private sector receives a stream of payments over time, known to many as “availability payments,” or depends on the asset’s revenue-generating capacity, with methods such as toll road payments.

Yet a different government rationale for a large-scale project may be to meet a public need. For example, flood control works where the nature of the asset does not generate revenue or significant profit potential and there is no compelling private sector business model. These types of projects may be said to be policy driven but ultimately present risks to the private sector because the project may not provide reliable revenue. This appears to be the reason why São Paulo abandoned its effort for a PPP to build flood control structures. The potential bidders apparently were dubious about the reliability of payments from the government for “flood control services” if the massive capital investment were to be made.

In considering why the government is pursuing a PPP, the question of whether there is enough political will and support to carry it out is critical. A PPP announced by a state’s executive branch may be dead on arrival because the majority in that state’s legislature is adamantly and ideologically opposed to PPPs, assuming such approval is needed or because there is a change in administration. Also, political risks vary greatly depending on the underlying asset or project of a PPP. A court project PPP (paid for by a surcharge on lawsuit filing fees and availability payments) may not gather much attention, but projects that involve probable rate increases, such as increases for water rates and highway tolls, have inherently higher political risk profiles.

Is there an adequate legal framework to support the proposed transaction? Once you are satisfied with the reasons a PPP is being considered, it is then vital to ensure that the legislative framework for the PPP is complete, intelligible, and workable. The legislative framework largely provides the parameters for the bid/proposal stage and the resulting contract.

An increasing number of jurisdictions now have special PPP laws that effectively exempt PPPs from most traditional procurement laws. Some, like Puerto Rico’s, set up specific authorities to spearhead PPP efforts in cooperation with other governmental entities; others may provide the authority to a particular governmental entity like a Highway Authority. Key items to pin down include the extent of powers delegated to the contracting authorities, specific requirements for the PPP bidding and award process, limitations and requirements on the

bidders’ source of materials, project employee wages and benefits, use of subcontractors and the like, and dispute resolution provisions.

Is the specific PPP bidding process and proposed PPP contract acceptable – and financeable?A typical PPP statute provides greater flexibility in the bid/proposal stage than a typical procurement statute. How such flexibility has been utilized in a particular PPP needs to be examined carefully. It can result in two-stage processes with short-listing, revisions to the process of the government requirements, and a wider scope of negotiated contractual terms.

If the statutory framework permits it, a PPP bid/proposal project can also include greater flexibility in the design of the final product or asset to be delivered. Broadly speaking, a so-called social infrastructure project such as a school, hospital, or prison may provide certain parameters relating to capacity, functionality, and size of the facility but grant wide discretion in design and other elements of the project such as ongoing maintenance. This is one element of the PPP model that offers the potential for greater rewards for the private sector based on incentivized innovation and cost saving.

The bid proposal stage also poses distinct challenges. For example, large-scale PPPs often involve bidding by a consortium. This requires clarity as to which entities forming the consortium need to be prequalified, at which stage of the process prequalification is necessary for which type of participants, and the related levels of disclosure about each participant. This can prove challenging to large-scale institutional investors, particularly government-related pension funds. Similarly, there may be prequalification requirements for the consortium arrangements that can be tricky. Would the consortium need to produce a letter of intent, memorandum of understanding, or binding agreements among its constituents? What level of evidence is required regarding the financial wherewithal to undertake the project and when does that need to be demonstrated?

Negotiation of the PPP contract usually takes place during the bidding process with potential prequalified bidders

An increasing number of jurisdictions now have special PPP laws that effectively exempt PPPs from most traditional procurement laws.

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providing comments to the governmental authority in an iterative process prior to the bid or award. The nature and scope of the contract changes are another departure from most procurement processes. PPP contracts tend to be long-term contracts, which are sometimes effective for 30 years or more. Many involve performance or service standards that may evolve over time.

Accordingly, each PPP contract should be examined from the outset with great care by operating experts, as well as financial, construction, and legal experts. Even with PPPs, post-award renegotiation is typically infeasible, at least in the early years.

ConclusionIn the U.S. and internationally, more and more government projects are undertaken as PPPs. Hence, for your company to be competitive, you need to know how to quickly evaluate which PPPs make sense for you to pursue and the best way to engage in the promising PPP processes.

OVERVIEW: PUBLIC PROCUREMENT IN JAPANBy Yukihiro Terazawa

Basic FrameworkJapanese national government, local government, and quasi-governmental bodies must follow the Account Law (Kaikei Ho), the Local Autonomy Law (Chiho Jichi Ho) (LAL), and internal procurement rules, respectively, in procuring goods and services from a third party. The Government Procurement Agreement (GPA) also applies to the procurement of the goods and services specified in Exhibit 1 of the GPA. In addition, certain Voluntary Measures by Individual Sectors apply to specific business sectors, such as supercomputers, non-R&D satellites, computer products and services, telecommunications, and medical technology sectors. As of February 1, 2013, these rules cover procurement of goods and services by 23 national governmental ministries and agencies and 137 quasi-governmental bodies; however, in Japan, each governmental body administers its own procurement agreement because there is no centralized procurement system.

General Method – Open TenderingUnder the Account Law, open tendering is the standard method for public procurement. There are two exceptions: selective tendering (Shimei Kyoso Nusatsu) and direct negotiation (Zui-i Keiyaku). Selective tendering is allowed only where: a limited number of suppliers exist when considering the nature and the purpose of the agreement,

open tendering may be disadvantageous to the procuring body, the targeted contract price is below a certain minimum, or there is any other factor present as set forth in the relevant ordinance or governmental order. Direct negotiation is allowed only where: the national government is required to keep the contract secret, there is an emergency situation, the targeted contract price is below a certain minimum, or there is any other factor present as set forth in a relevant ordinance or governmental order (see Budget Settlement and Public Accounts Ordinance (BSPAO), if the national government is the procuring body, and the Order for Enforcement of LAL (OELAL), if the local government is the procuring body).

How to Participate in Public Procurement in JapanGenerally speaking, prequalification is required to participate in tendering in Japan. If the relevant government body believes that a candidate is qualified, such person or entity is listed in the “Tendering Participants List.” A foreign parent entity may apply through its Japanese subsidiary under its parent name. The requirements to be qualified are published in the official gazette (Kanpo), the local government’s gazette, or on the websites of the relevant entities. The qualification is effective for two to three years, depending upon the governmental body. The qualified entity must renew such qualification if it wants to continue to participate in tendering. The participant is required to pay 5% or more of its estimated price of the procurement to the procurement body.

The Case Where Government May Expel a Person from All TendersBSPAO and OELAL stipulate several instances in which a national government or local government may expel a person from all tendering activity for up to three years. One of the most common cases occurs when a participant fails to perform its obligations without a legitimate reason.

Generally speaking, prequalification is required to participate in tendering in Japan. If the relevant government body believes that a candidate is qualified, such person or entity is listed in the “Tendering Participants List.” A foreign parent entity may apply through its Japanese subsidiary under its parent name.

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For example, if a dispute arises between a government and a private entity, and the private entity ceases to perform additional work because the parties could not reach an agreement regarding the fees for such additional work, the government may expel the private entity from any future tendering opportunity for up to three years. Therefore, companies should be very careful in stopping work if the other party is a governmental body.

Dispute ResolutionA person who has a complaint about the tender process or who is expelled from a certain tender without a legitimate reason may file a complaint against the relevant governmental body with a court that has jurisdiction. If the contract price is above a certain amount (JPY 12,000,000 or more for general goods or services, and JPY 580,000,000 or more for a construction service) in a certain tender and the national government violated GPA or voluntary measures in such tender, the complaint may be filed at the Office for Government Procurement Challenge System (OGPCS) within 10 days from the time that the basis of the challenge became known. If the respondent is a local government, the complaint should be filed with the respective local government’s challenge system office. The final decision must be issued within 90 days from the filing date, and the respondent governmental body must follow the final decision.

THE UNITED STATES REVISES ITS RULES GOVERNING FEDERAL GRANTS AND COOPERATIVE AGREEMENTSBy Tina D. Reynolds and Catherine L. Chapple

In the final days of 2013, the White House Office of Management and Budget (OMB) released for publication long-awaited final guidance on administrative requirements, cost principles, and audit requirements pertaining to federal grants and cooperative agreements. In an effort to reduce fraud, waste, and abuse in federal funding and the administrative burden on federal fund recipients, the OMB has consolidated guidance previously found in eight separate OMB Circulars. The new rules have significant ramifications for “non-Federal entities” – defined by the OMB to include non-profit organizations, institutes of higher education (IHEs), state and local governments, and Indian tribes – and may also apply to for-profit and foreign entities in limited circumstances.

The final guidance was the result of a lengthy process. In February 2013, the OMB released draft guidance and sought comments from stakeholders. The draft guidance

and its proposed reforms were developed by the Council on Financial Assistance Reform, an interagency council created in 2011 and charged with assisting the OMB in cutting government red tape and reducing waste, fraud, and abuse in connection with the more than $500 billion spent annually on grants and cooperative agreements. More than 300 comments were submitted in response to the OMB’s proposed changes. The OMB considered these, many of which focused on the need for streamlined guidance, in developing the final guidance.

This final guidance, to be codified at Title 2 of the Code of Federal Regulations, supersedes and consolidates requirements from OMB Circulars A-21, A-87, A-89, A-102, A-110, A-122, and A-133, and those portions of A-50 pertaining to audits. These circulars had conflicting and duplicative language, which created increased administrative burdens on federal funding recipients. In addition to standardizing administrative requirements, the OMB has clarified policies that differ depending on the type of entity involved, and the final guidance includes sections that clearly delineate the type(s) of non-Federal entities to which they apply.

The final guidance applies to federal agencies as of December 26, 2013, its date of issuance. Agencies have six months to submit necessary draft implementing regulations to the OMB, and it is expected these will be finalized and effective no later than December 26, 2014.

The final guidance is divided into a series of subparts, which are described in detail below.

Subpart A – Acronyms and DefinitionsDefinitions and acronyms for key terms used throughout the new guidance can be found in Subpart A. Like the rest of the guidance, these key terms were originally part of eight different sets of requirements. They had to be standardized and conformed to apply universally throughout the guidance. Some of the definitional changes reflect OMB policy decisions.

One example of a change driven by policy is the clarified definition of “supplies.” In existing guidance, “supplies” are defined as all tangible personal property falling below the threshold for “equipment” ($5,000). The new definition of “supplies” now specifically includes computing devices when those devices (together with their accessories) fall below the $5,000 threshold. Concerns that calling computing devices supplies would remove the necessary protections applicable to the more rigorously regulated “equipment” were addressed by adding elsewhere in the guidance requirements for protection of personally identifiable information and other types of data.

Additionally, agencies now must provide the same categories of information in all Notices of Funding

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Opportunities and all Notices of Federal Awards. This will allow non-Federal entities to more easily compare opportunities and awards.

Subpart B – General ProvisionsThe general provisions found in Subparts B through D apply to grants and cooperative agreements. Subpart B makes clear that the guidance applies to all federal agencies. The guidance is written for non-Federal entities, but agencies may apply it to for-profit and foreign entities in the subsequent implementing regulations.

Importantly, the new guidance also contains requirements regarding conflicts of interest and other disclosures. Federal awarding agencies must now have conflict of interest procedures in place and non-Federal entities must disclose both personal and organizational conflicts of interest to awarding agencies and pass-through entities (fund recipients that in turn award sub-awards). Non-Federal entities must also now mandatorily disclose violations of criminal law involving bribery, fraud, or gratuity violations potentially affecting the federal award. Penalties for non-disclosure can include withholding of payment, termination of award, or suspension or debarment from future federal programs. Additionally, under the new rules, entities must certify knowledge of the statutory consequences of false certification of costs.

Subpart C – Pre-Award RequirementsThe final guidance includes provisions that strengthen oversight over federal awards in a number of ways. First, the OMB’s final guidance requires that federal agencies and pass-through entities must review risks associated with potential award recipients prior to any award, including by making better use of available past performance information in government-wide databases.

The guidance also includes examples of conditions that agencies may place on federal awards. These include requiring payments as reimbursements rather than

advance payments, asking for more-detailed financial reports, and requiring the non-Federal entity to obtain technical or management assistance. In connection with conditions placed on awards, however, the agency must tell the applicant or grantee the reason(s) why the additional requirements are being imposed and the nature of the actions needed to remove the additional requirements, if any.

Subpart D – Post-Award RequirementsThere are also a number of clarifications and additions to post-award requirements. For instance, a non-Federal entity’s responsibility for safeguarding protected personally identifiable information and information designated as sensitive is now explicit. The OMB also added a provision allowing for termination for cause after commenters pointed out that situations beyond the agency’s or non-Federal entity’s control can arise requiring that awards be terminated.

Additionally, new provisions make clear that recipients of federal awards are prohibited from earning or keeping any profits unless explicitly authorized by the terms and conditions of the award.

The guidance addresses cost sharing by non-Federal entities as well, specifying that voluntary cost sharing will be solicited for research proposals only when required by regulation and clearly articulated in the Notice of Funding Opportunity. Such voluntary cost sharing “may never be considered during the merit review” of the grant applicant.

Subpart E – Cost PrinciplesUpdated policies on direct and indirect costs are found in Subpart E. Non-Federal entities may treat administrative costs as direct costs when such costs meet conditions showing they are directly allocable to a federal award. With regard to indirect costs, the guidance includes provisions that provide for a de minimis indirect cost rate of 10% to non-Federal entities that have never had a negotiated indirect cost rate. Though commenters suggested that the de minimis rate be set at 15% to 20%, ultimately the OMB adopted the more conservative, lower rate, given its automatic application and indefinite allowability. The new guidance also requires federal agencies to accept negotiated indirect cost rates unless an exception is required by statute or regulation and to allow for a one-time extension without further negotiation of federally approved negotiated indirect cost rates for a period of up to four years.

Additionally, IHEs are now subject to more rigorous cost accounting standards only when their federal awards total $50 million or more – an increase from the prior $25 million threshold.

Non-Federal entities must also now mandatorily disclose violations of criminal law involving bribery, fraud, or gratuity violations potentially affecting the federal award. Penalties for non-disclosure can include withholding of payment, termination of award, or suspension or debarment from future federal programs.

continued on page 12

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The final guidance also limits the allowability of certain types of costs under federal awards. For instance, a provision regarding employee health and welfare costs eliminates the previous allowance for “morale” costs. New “relocation” guidance limits the previously unlimited amount of time for which a federal award may be charged for the costs of an employee’s vacant home to up to six months. Conference spending allowances have been clarified, and conference sponsors are instructed to use their judgment and discretion regarding conference expenses to limit costs under federal awards to only those that are appropriate and necessary. This latter provision was in response to recent U.S. scandals regarding excessive spending at government-sponsored conferences.

Subpart F – Audit RequirementsThe overall goal of the changes in the OMB’s guidance is to reduce administrative burdens while focusing oversight on areas with the greatest potential for waste and abuse. The Single Audit requirement imposes a significant burden, but it is vital to federal grant oversight. It requires at least an annual audit of many recipients of federal funds (those receiving $750,000 or more per year) by an independent auditor. The auditor’s report must (1) verify accuracy of financial statements; (2) report on internal controls; (3) determine whether the non-Federal entity has complied with the provisions of laws, regulations, and contracts or grants pertaining to federal awards; and (4) schedule questioned costs. Single Audit Reports must be published online with safeguards for personally identifiable information.

ConclusionThe first step in dealing with the new requirements is for each non-Federal entity to determine how the new rules will impact it and the way it does business. Entities should watch for the draft agency-specific implementing regulations to be issued mid-year and take advantage of opportunities for public comment. Entities should not wait to start putting into place necessary system and policy changes, as there are no penalties for early implementation. Familiarity with the new rules and adjustment of systems to ensure compliance will permit non-Federal entities to smoothly and successfully continue to be recipients of federal funds.

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1 No. 13-10757 (11th Cir. Dec. 31, 2013) http://www.ca11.uscourts.gov/opinions/ops/201310757.pdf.

2 13th Congress, H.R. 3345.

3 With regard to the amendment of the Directives on public contracts, please see “European Union Overhauls Its Contract Procurement Regime” for further details of the reform of the EU Directives on public contracts.

4 This threshold excludes contracts for the provision of R&D services, certain telecommunication services, and “Part B” services for which the limit is €207,000 (£172,514).

© 2014 Morrison & Foerster LLP, mofo.com

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