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Trading with procurements

|Written By Paul Brent
Trading with procurements
Illustration: Steve Munday

The growth in international trade has made the world smaller, more interconnected, and more complex. It has taken longer, and has received less public attention, but that same dynamic is also occurring when it comes to cross-border government procurement.

Living as we do in a sparsely populated, continent-spanning country, Canadians have long known that trade is essential to our economy and we have crafted trade deals accordingly. With that rising trade, more attention is being paid to Canada’s obligations under agreements such as NAFTA, the World Trade Organization, and the still-under-negotiation trade pact with the European Union. The European Union trade discussions and recent tension with the United States over access to federal stimulus spending money have both served to put access to government procurements by foreign companies at centre stage.

“The world is quickly changing when it comes to international government procurement,” says Brenda Swick, an Ottawa-based partner of McCarthy Tétrault LLP and part of the firm’s international trade and investment law group. Government procurement is attracting increasing scrutiny and attention in part because of the rounds of stimulus spending enacted in recent years by developed countries trying to kick-start their economies and the critical role played by existing and proposed trade agreements in guaranteeing access to that spending by foreign suppliers.

All that attention is warranted: governments account for a large and growing share of overall spending, accounting for between 12 and 14 per cent of gross domestic product in Canada and the United States. As the largest purchasers of goods and services in their respective economies, foreign access to government contracts on an equal footing with domestic suppliers is understandably the focus of trade negotiators.

Steve Verheul, Canada’s chief trade negotiator in the EU-Canada trade talks, told The Globe and Mail late last year that a major concession his European counterparts are calling for is open access to government procurement — not just federal spending but at the provincial and municipal levels. “We’ve never really negotiated those areas with a trading partner in a free-trade agreement,” he said. “The EU has indicated that’s probably their No. 1 objective.”

The spur to Ottawa to ink a pact with Europe comes down to the promise of an increase in cross-Atlantic trade and a lessening of dependence on north-south trade with the United States. A joint Canada-EU study predicted Canada’s GDP could be increased about $12 billion and bilateral trade would rise by 20 per cent to about $38 billion in two-way trade.

International trade lawyers agree that granting such access to the EU or any other trading partner will be a game changer. “The Europeans have viewed access to sub-federal procurement in Canada as the golden egg,” says Gerry Stobo, a partner and trade lawyer in the Ottawa office of Borden Ladner Gervais LLP, whose practice includes government contracting and procurement law.

Stobo believes a Canada-EU trade deal will get done, but that it may take longer than the year-end prediction of the participants. “I think there are some very difficult issues that have to be solved, not just on the procurement chapter,” he says. Farm subsidies, for one, remain a major hurdle. And while getting Canada’s disparate group of provincial governments to agree on anything can be difficult, Stobo believes the provinces “are generally supportive” of the trade deal.

A key reason behind that growing acceptance among the sub-federal governments for more foreign sourcing stems from what happened before the eventual creation of the 2010 Canada-U.S. Agreement on Government Procurement, which greatly expands the bilateral trade relationship of Canada and the United States. The 2010 agreement was born out of the controversy fostered by the American Recovery and Reinvestment Act of 2009 and its controversial “Buy American” provisions into force. The U.S. stimulus program, put in force during the darkest days for the U.S. economy, was “enacted in the spirit of old-fashioned protectionism in the midst of the financial crisis, had the effect of effectively shutting out Canadian suppliers from sub-central stimulus-funded procurement contracts for iron, steel and manufactured products,” McCarthys’ Swick wrote in a summary paper on the agreement.

Her international government procurement practice has her advising procuring entities as to their rights and obligations under new and older trade commitments and on the other side advising tendering companies and, when necessary, seeking the review of contract awards for government requests or tendering procedures that are seen to be “offside.”

The plight of a number of Canadian firms caught in the Buy American frenzy — some having pipes and other “made in Canada” equipment literally ripped out of U.S. soil — was well publicized and became a top priority for the federal government as a result. Prime Minister Stephen Harper made it a chief topic of discussion with the U.S. government throughout 2009. U.S. President Barack Obama told the media Harper brought the issue up every single time the two leaders met.

The Buy American Act, tied as it was to the American Recovery and Reinvestment Act, is “just another layer of pre-existing rules and regulations,” says David Hamill, a trade policy and dispute lawyer with the Washington, D.C.-based law firm Arent Fox LLP, who advised a number of Canadian companies, including Ontario-based industrial equipment supplier Hayward Gordon. The Buy American Act “just got a lot of attention because it applied some additional rules to a current pot of money, if you will, that was part of the [ARRA].”

Government procurement is always a political issue and when a program is dubbed Buy American and is part of an effort to get a struggling economy back on its feet, the idea of handing taxpayer funds to foreign suppliers is controversial. Hamill doubts that the anti-foreign mood behind the effort will fade any time soon. “I think there is going to be continued pressure encouraging U.S. government contracts to source locally. In the case of the ARRA, that they did it a certain way doesn’t mean that they won’t do it again but maybe they will do it [in a different form].” Flexibility on the foreign firms seeking U.S. business could be key. “With ARRA, that money has already been spent . . . we could have new laws next year that provide for funding of various infrastructure projects and they could have their own requirements including Buy American requirements.”

From his Ottawa office, Stobo views the 2010 U.S.-Canada agreement forged to resolve the Buy American dispute as an indication that Canadian sub-federal government entities, at least, will award contracts on a best-supplier basis. “The provinces have said ‘OK, we are going to open opportunities up to everyone,’ and, frankly, Canadian governments rarely discriminate against suppliers on the basis of geography. We so desperately want to get the best price, the best product, that we open it up to as many suppliers as we can,” Stobo says. “The real winners in that whole process were the politicians who can say that when Canadian businesses screamed at being locked out of U.S. purchasing opportunities, the politicians listened. Whether it is going to be all that meaningful in an actual purchasing sense remains to be seen.”

What the Buy American dispute laid bare was that for the 15 years or so that NAFTA and the World Trade Organization Agreement on Government Procurement have been active, neither the United States nor Canada had opened up spending at the sub-federal level to each other’s suppliers. (While provinces were exempt from the agreements, U.S. commitments to the WTO-AGP did cover for the procurement activities of 37 states with many exemptions and exclusions.)

Business entities in both countries wanted access to those state/provincial and municipal outlays because that is where most of the government spending occurs. In Canada, it is estimated that all levels of governments combined spend almost $100 billion per year and of that about 70 per cent is estimated to be spent by municipalities, hospitals, and academic entities.

“We learned something from NAFTA,” says Cyndee Todgham Cherniak, an international trade lawyer with McMillan LLP in Toronto. “We had quite robust and open bidding procurement systems and bid challenges for when there was a perception or actual problem.” She adds, however, that with the Buy American situation they learned the provinces, municipalities, and states were not covered.

Since the 2010 agreement between the U.S. and Canada to deal with the issues of the Buy American Act, Todgham Cherniak says that her clients are still encountering lingering issues. “I have talked to actual real companies, which find this to be an issue,” noting one company was recently asked to remove its product from a completed project “under the guise” of the Buy American program. Even more recently, she was retained by a business to draft a contract on a project that asked to conform to the Buy American rules. “We had to revise that clause to state the correct situation that this particular contract was exempted from the Buy American provisions. But you had a local government that had inserted this clause into a contract thinking that they were supposed to do it.”

The McMillan lawyer has also heard from clients in the steel industry that there is a “chill effect” as a result of the Buy American introduction. “Companies wanting to comply with U.S. law . . . because the fines are so high, they don’t want even the air or even the appearance of doing what they are not supposed to do which causes a chill rippling into Canada.”

Rather than solve and simplify the issues involved with international government procurement, new agreements — the U.S.-Canada 2010 deal as well as the current EU-Canada trade talks — are adding another layer of complexity for potential suppliers as well as government buyers rather than making international government procurement clearer. “It has gotten increasingly complex. The devil is in the detail in all these agreements,” says Swick. “If I am in-house counsel and I’m looking to sell to the government and I am wondering what they are doing is offside, I would apply three tests first to any contract that I am looking at,” she says. In-house counsel first need to identify what level of government the bid is dealing with. The level of government or public entity that the vendor is targeting will determine which trade commitments apply to that government body. Second, a seller needs to discover whether the contract value is above the designated monetary threshold to be considered covered by a trade agreement. Third, is the level of government or public entity included in the international trade agreement? Swick adds a fourth question for potential bidders: Are the goods or services requested subject to a relevant trade agreement?

In presentations, Swick routinely describes the various agreements as a “spaghetti bowl” of trade agreements that is now up to seven separate strands. They include three new ones: the Canada-U.S. agreement on government procurement (2010), the New West Partnership Trade Agreement (an accord between the governments of British Columbia, Alberta, and Saskatchewan that creates Canada’s largest, barrier-free, interprovincial market), and the still-unfinished EU-Canada trade deal. Those three have been added to the WTO-AGP, NAFTA’s Chapter 10, the Canadian Agreement on Internal Trade (1995), and other regional international trade agreements.

Swick has found that she needs to give regular seminars on the topic of international (and domestic) government procurement to inform government buyers what their obligations are and to businesses trying to sell to government because the subject is so complicated and the financial stakes are so high. When it comes to potential bidders, they should not only know going in which relevant trade agreements cover any potential tender, they should know what their recourse is should they believe that they were unfairly treated in the process. “Resorting to filing a claim for damages against a government, your customer that you are trying to sell to, is never ideal if you think the government is offside,” she says. “Sometimes the trade agreements provide for very effective remedies which you can pursue without having to go to court.”

While attention is now focused on what will come out of the trade negotiations with Europe, the long-term impact of the 2010 U.S.-Canada international government procurement trade accord has been passed seemingly with very little comment or contemplation on the part of Canadian government purchasers and businesses.

The compromise settlement gives U.S. suppliers the very thing EU negotiators covet most: securing guaranteed permanent access to provincial, territorial, and municipal procurements over set monetary thresholds (above US$500,000 for goods and services and above US$7.5 million for construction services). The level of commitment varies, being highest in the four western provinces as well as in the Yukon and Northwest Territories with all but a few entities included, and much lower in Ontario where all ministries and only certain agencies are included and highway construction is excluded.

The Canadian business community has yet to realize the long-term impact of foreign competition that comes with the new U.S.-Canada accord and appears likely to be on the way with a EU-Canada trade pact, Swick fears. The trade agreements could “greatly diminish those governments’ flexibility to decide the circumstances under which they will contract with foreign companies and it could adversely affect the number of government contracts awarded to Canadian companies.”

New agreements such as the 2010 compromise struck between Ottawa and Washington also offer new opportunities for Canadian businesses to sell goods and services to various U.S. government agencies and departments. With that in mind, Washington, D.C., trade lawyer Hamill has some advice for in-house counsel and other company executives: “Make sure they know and have good relations with their suppliers so that if issues such as origin come up they can either get certifications or information” to provide to the prime contractor.

As well, cross-border businesses should determine where the money is coming from. “A federal project may actually be a state or municipal project. Follow the money and identify who is in control in terms of decisions.” Finally, he says businesses should be careful to sign on the dotted line. “Don’t just sign a piece of paper just because a potential contractor asks you to sign it. Make sure you understand it. In many cases these are government contracts and by making a false statement you are making a false statement to the government, and that can create significant liability issues both corporately and personally.”

As to the question of whether would-be cross-border bidders should seek international counsel on government acquisitions, Hamill says there is no hard and fast rule.

“If I were an in-house lawyer and I was approaching this for the first time, I would want someone. If it was a U.S. federal agency, get someone who knows the FAR (the 53-part Federal Acquisition Regulation) and maybe even someone, a number of our attorneys have done so, that has worked the process not only outside but inside.”

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