Buy-American and not-buy-from-China rules have raised concerns from contractors. Meanwhile the FTC proposes new rules on contractor mergers that look practically unworkable. The Federal Drive with Tom Temin got industry analysis from the executive vice president for policy at the Professional Services Council, Stephanie Kostro.

Interview Transcript:

Stephanie Kostro Thanks for having me, Tom. I would say I like the characterization that it’s busting out all over because we are very, very busy. The government is keeping contractors very busy with comments on a variety of rules. The Buy America one that you mentioned had a 400 council rule come out in March of 2022, took effect last fall. The one up for comment with comments due today, August 8th, is one for the Defense Department. And so this is really looking at determining domestic content in the, quote, year of delivery. And that’s something that our segment of industry is really interested in. It’s not particularly feasible for long term defense contracts. And we are proposing that they consider content determination on award. The other issue is the moving goalposts for domestic content. And you may remember this, Tom, from when the executive order came out from the Biden administration. That is to say, as the years go on domestic content requirements when we’re looking at defense contracts that are five, ten years long, or if you look at shipbuilding, obviously shipbuilding is subject to different regulations. But I would say domestic contracts threshold is hard to determine as you go over time. And we’re encouraging that the use a year of award for the requirements for defense contractors.

Tom Temin Got it. And people still can comment on that today, but you better hit those keyboards pretty soon.

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Stephanie Kostro Yeah, before midnight.

Tom Temin And this rule about certain areas, the weaker autonomous region in China, I mean, China’s pretty much verboten for defense procurement anyway. So why the emphasis on the Uyghur region since that’s part of China?

Stephanie Kostro Thanks, Tom. This is also a very important interim rule rather than proposed rule. This is really about not using products that have been touched by forced labor in the Uyghur region. It’s part of China where they are subject to some human rights abuses because of their ethnicity or their religious beliefs. Many Uyghurs are Muslim. And so this is another rule, like the Buy America Act rule, where PSC members are generally supportive of the intent. The question, though, for this rule comes down to feasibility. You’re right to say that a lot of products from China are not allowed in government contracts. So what makes this one different across the board? What the Department of Defense is asking industry to do is to look at their entire supply chain. And I would note that when DoD looks at its supply chain, it really only has privity of contract with prime contractors. The same is true of those contractors. Prime contractors only have insight into what DoD requires. And to what their first tier subcontractors are doing. If you think about supply chain, you think about ten layers down. Does the prime contractor really know and can they represent that that contains no no products or anything touched by forced labor in China? And it’s really, really difficult. So PSC’s comments which we plan to submit, will talk about the feasibility of this. Is it actually realistic and what waivers or exceptions might be available to contractors should they not have that supply chain or elimination that is so elusive?

Tom Temin And all of this comes in the context of and not in any way advocating, let’s add, China because of capacity needs, but the realization that the defense industrial base is really not where it should be if the country’s trying to replenish supplies that were sold to Ukraine and simply gearing up for what might be a long term issue with Russia and China, now there’s just not enough capacity out there takes years and years and years to build one single ship for the Navy, for example.

Stephanie Kostro Tom, this is not a sprint for domestic content. This is really a marathon and it is really important to keep the long term goals in mind, understanding that it’s going to take several years to get there. And the Biden-Harris administration understood that when they created the Made in America executive order, looking at domestic content and making sure that we’re not sourcing supplies and products and services from from bad actors. That said, there need to be safeguards in place and liability protections for contractors who unknowingly may touch on things that are, I believe a word you might have used in the past was verboten. But the German speaker in me kind of laughs at that. But they are forbidden. They are they’re not allowed to be in the content of the of these items that are being procured. And that said, you mentioned defense industry. There’s been a lot of talk in the last few years about industry consolidation, a lot about where is industry heading and we are watching that space. Very, very closely.

Tom Temin We’re speaking with Stephanie Kostro. She’s executive vice president for policy at the Professional Services Council. And that brings up the question of Federal Trade Commission proposed rules. And this FTC the Biden administration’s FTC has gone after mergers and acquisitions everywhere it can. It has not prevailed very much in court as a matter of record. But now it is concerned with mergers and acquisitions in the defense industrial base.

Stephanie Kostro The Federal Trade Commission, Tom, has put out lots of rules recently that PNC has commented on, whether it’s the the banning of non-compete agreements and whether they’re applicable to government services contractors, where it’s a knowledge knowledge industry. The ones that we’re talking about right now, there’s a proposed rule on pre-merger notifications. You know, on the face of it, it’s supposed to be a sort of a reorganization of the kind of information a company has to submit for a transaction, a merger and acquisition. But in reality, it’s a bit onerous in terms of what they are requiring they would require. I would say that it’s a proposed rule. So what they would require should it become final from contractors. The other piece that the FTC recently released and they’re open to public comment, are these draft merger guidelines. And these are 13 guidelines regarding how the government would be looking at potential transactions, mergers and acquisitions, and what it means for market concentration. PSC has some strong concerns in this regard because I am not convinced and many of our members are not convinced, that government officials understand market dynamics in this global marketplace and what it means to be vertically integrated. And so as we move forward, we will be putting comments forward on that piece as well.

Tom Temin Yeah. So there’s almost like two crosscurrents happening in the whole defense contracting world. One is capacity, which would seem to be at odds with the idea of mergers and acquisitions, but they’re not really necessarily opposed. I mean, mergers and acquisitions, vertical integration doesn’t necessarily have an effect one way or the other on sheer capacity. Fair to say.

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Stephanie Kostro I think that’s fair to say. I think this is also against the backdrop of what they’re doing in terms of mentor-protege, joint ventures and partnering agreements that the government’s looking at. Many multi-year multi award contracts or solicitations, rather, are being released, whether it’s Oasis Plus or Alliance Three or other other large vehicles that are governmentwide vehicles. But they all have slightly different definitions of what kind of partnering is allowed. So I think against the backdrop of what is allowable in partnering, what’s allowable in mergers and acquisitions and what content requirements are being put on contractors. This is a very, very busy space, particularly for PSC as we comment on all of this. But for our member companies looking at the landscape, it is getting increasingly confusing for them.

 

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