USAID Issues Proposed Rule for the Procurement of Commodities and Services Financed by USAID

August 19, 2011

This proposed rule implements the statutory requirement that funds made available by the United States Congress (Congress) to USAID under the authority of the Foreign Assistance Act of 1961, as amended (FAA), be used for procurement in the United States (U.S.), the recipient country, or developing countries. It does so by revising USAID's current source, origin and nationality (S/O/N) regulation to track more closely the statutory procurement authority provided under the FAA and referenced above; by establishing a single code for procurements from the U.S., recipient country and developing countries; by deleting the concept of ''origin,'' which is increasingly obsolete and difficult to apply in today's globalized economy; and by simplifying the concepts of ''source'' and ''nationality'' in order to reflect better Congress's directive to procure from the U.S., recipient or developing countries. Reference Federal Register Volume 76, Number 161 (Friday, August 19, 2011).

On February 16, 2011, USAID published in the Federal Register (76 FR 8961) an Advanced Notice of Public Rulemaking (ANPRM), notifying the public that USAID intended to review and revise its S/O/N regulation found at 22 CFR part 228, which in turn implements section 604(a) of the FAA. The Agency provided a forty-five (45)-day public comment period on the ANPRM, which ended Monday, April 4, 2011. The Agency also offered the public the opportunity to submit comments by surface mail, e-mail or fax. The ANPRM invited comments and suggestions on the existing S/O/N rules in 22 CFR part 228. In particular, USAID inquired:
What, if any, sections of 22 CFR part 228 lead to inefficiencies and ineffectiveness in implementing USAID development assistance activities and programs? What are the efficiency impacts to contractors and grantees from provisions reflecting the concept of ''origin'' and ''source'' (essentially, the country where a commodity is produced and the country from which a commodity is shipped to the cooperating country, respectively, see 22 CFR 228.01), given the difficulty of determining with specificity the origin and source of many commodities in an increasingly globalized economy?
Should the regulatory guidance concerning ''nationality'' (the place of incorporation, ownership, citizenship, residence, etc. of suppliers of USAID-financed goods and services) be modified, and if so, in what manner to improve efficacy of the rule, particularly as applied to suppliers of services and goods in the recipient country?
Should USAID modify the ''special source rules,'' FAA 604(b), (c), (e), (f), and (g), and reflected in 22 CFR 228.13, for procurement of agricultural commodities, vehicles or pharmaceuticals within limitations set forth in the FAA; and, if so, in what manner?
Should references in 22 CFR part 228 to other statutory requirements, such as the Fly America Act (49 U.S.C. 40118) be removed or changed? Specifically is it useful for USAID to include Agency-specific policy and procedures in 22 CFR part 228, when separate statutes and prevailing regulatory systems are already in place and publicly available from other sources?
What difficulties do contractors and grantees encounter when requesting a waiver to procure in any country other than those in the approved geographic code for each USAID-funded agreement (contract or grant)? How can USAID's waiver guidance be modified or improved for more clear and cost effective application of the statutory and regulatory waiver requirements? If commenters suggest modification, USAID requests specific proposals for what elements of 22 CFR part 228 should be modified.
USAID also sought comments in the ANPRM concerning the potential costs of modifying the existing regulation, and the potential, quantifiable efficiency benefits of modifying the regulation.

USAID received twenty-one comments in response to the ANPRM, all strongly in favor of substantial simplification of the regulation to reflect the globalization of the economy. Comments also urged revision of the existing regulation due to the growing obsolescence of concepts like ''origin'' in the globalized economy; and stressed the difficulty of applying the geographic codes established in the current rule, and in particular, of finding United States ''origin'' commodities and services, as defined by the current regulation, for procurement in support of USAID funded aid programs. Comments received in response to the ANPRM are discussed and addressed in greater detail, below in ''Background.''

The proposed rule, below, reflects comments received in response to the ANPRM, and has been reviewed by the Office of Management and Budget's Office of Information and Regulatory Affairs. The period for comments concerning the proposed rule has been established at forty-five (45) days, due to the high visibility of United States Government assistance programs in response to current and anticipated political, humanitarian and natural disaster crises, and the shortness and lack of complexity of the proposed rule.

The initial version of the FAA procurement provision in Section 604(a) provided that funds made available under the FAA could be used for procurement outside the United States only if the President made a determination that such procurement would not have adverse effects upon the economy of the U.S., or that any such harm was outweighed by the benefits of ''less costly government procurement outside the United States.'' USAID implemented this directive by adapting the concepts of ''source, origin and nationality'' developed under USAID's commodity import program (CIP),\1\, to all its procurements under the FAA. USAID also adapted the ''geographic source codes'' developed under the CIP to apply to all USAID financed procurements, in part in order to address Congress's concern that U.S. taxpayer funded foreign assistance not provide any direct benefits to the governments of communist countries during the Cold War.

In 1993, Congress amended the FAA procurement authorities in Section 604(a) to provide that funds made available to USAID may be used for procurement from the U.S., the recipient country, or developing countries (but not advanced developing countries). However, USAID did not change its procurement regulations to reflect the change in statutory procurement authorities, but instead self-imposed a policy to continue to follow the same limits on procurement in the recipient and developing countries as if the 1993 statutory amendments had not
occurred. The concepts of source, origin and nationality were maintained in USAID's procurement regulations at 22 CFR part 228, as were the geographic source codes, none of which captured in any single code Congress's clear 1993 directive to procure from the U.S., recipient country, or developing countries.

Because of the end of the Cold War and the subsequent globalization of the economy, this approach has become increasingly difficult to administer and in some respects obsolete. In an era of tightening budgets, the costs of compliance with the now needlessly complex regulation, and of the self-imposed and unnecessary restrictions on procurement in recipient and developing countries means that the foreign assistance dollar does not go as far as it would with a more straightforward regulation that reflects the statutory authority to procure in the recipient country and other developing countries, in addition to the U.S.

Comments received in response to the ANPRM detail the mounting inefficiencies and costs of the current regulation. Comments generally fell into the following categories: Strongly supportive of review and revision; eliminate the regulation entirely and rely instead on USAID's statutory procurement authority (FAA Section 604(a), above); replace the authorized geographic codes in the current regulation with a simpler approach; Geographic Code 000 (procure from United States source, origin and nationality) is not relevant in today's globalized
economy; adherence to Code 000 slows implementation and costs resources better devoted to development; commodities of Code 000 are ineffective in achieving development impact due to warranty and servicing problems abroad; services are frequently needed from non-Code 000 suppliers abroad; source requirements should be eliminated; origin requirements should be eliminated; and waiver procedures should be reduced and streamlined.

There were also many specific recommendations about particular types of commodity procurements, such as modifying the regulations concerning procurement of used or leased commodities. While USAID did not receive any cost-specific data, several commenters estimated that the time for processing of waivers needed when Code 000 (United States) commodities and services were unavailable ranges from 10-90 days, depending on circumstances such as the length of time needed to complete a market survey, draft the waiver documents, and process the waiver according to implementing partner and USAID procedures.

Several commenters made the point that because of the development of a world or globalized economy since the end of the Cold War, it is difficult to determine with any accuracy where a commodity is produced, due to the myriad sources of components that go into manufacture of many commodities and the movement overseas of the manufacturing operations of many U.S. producers (for example, one commenter commented that little if any computer hardware is manufactured in the United States). Other commodities, such as much information technology and office equipment, certain types of vehicles, and copiers, are not generally available from U.S. origin producers. Because of these challenges, USAID and its implementing partners are frequently required to process waivers to the current S/O/N requirements, costing (based on the data of one commenter) an average of 55 days delay and processing time per waiver. While USAID attempts to expedite such waivers, especially in response to natural or other foreign disasters requiring an emergency response, the waiver process can still slow USAID's emergency responses.

Other commenters note that because of their complexity (for example, the current regulation requires a ''systems determination'' to determine where the components that make up a system, rather than single commodity, are produced, as part of the determination of a commodity's ''origin''), the regulations are sometimes inconsistently applied by USAID missions across the world. Additional concerns about the unavailability of servicing and repairs, spare parts, warranty enforcement, voltage and video format incompatibility, and suitability of some U.S. origin commodities for use in the underdeveloped economies and countries in which USAID works, when taken together present a critique of a regulation in need of revision and updating.    Additional specific comments proposed revisions to the waiver provisions of the current regulation, and many advocated for increased local procurements as both good development and a spur for economic growth in underdeveloped countries. Several comments argued for revision of the restricted commodities provisions in the current regulation, and one urged a clarification that commodities from the General Service Administration supply schedule should be considered to be U.S. source commodities. USAID reviewed and considered all comments, which informed the proposed rule.

The Proposed Rule
Purpose of Rule
The purpose of this rule is to bring USAID regulations into full alignment with section 604(a) of the Foreign Assistance Act of 1961, as amended, which directs that funds made available under the FAA may be used for procurement ''in the United States, the recipient country, or developing countries.''

USAID Regulations Amended by This Rule
The proposed rule amends in its entirety 22 CFR part 228, Rules on Source, Origin and Nationality for Commodities and Services Financed by USAID. The proposed, amended rule applies to all commodities and services financed by USAID.

Summary of Changes to the Existing Rule
The proposed rule revises the existing regulation to track more closely the statutory procurement authority provided under the FAA by establishing a single code for procurements from the U.S., recipient country, and developing countries. The proposed rule also deletes the concept of ''origin,'' which is increasingly obsolete and difficult to apply in today's globalized economy, and in place of the concept of ''origin,'' simplifies and strengthens the concepts of ''source'' and ''nationality'' in order to reflect better Congress's directive to procure from the U.S., recipient or developing countries. Section 228.02 preserves statutory procurement authority that augments FAA 604(a), such as Support for Economic and Democratic Development of the Independent States of the Former Soviet Union, 22 U.S.C. 2295b, and Development Fund for Africa, 22 U.S.C 2293 et seq. The proposed rule clarifies that waivers to permit procurements beyond the United States, recipient, or developing countries will be to Code 935--any area or country but excluding countries to which assistance is prohibited by
law (such prohibited countries were formerly referred to as ''foreign policy restricted countries''). USAID will maintain a list of countries to which assistance is prohibited by law, which will be available in USAID's Automated Directives System, ADS 310. The proposed rule also proposes to raise the amount, from $5 million to $10 million, for which foreign owned local firms will be eligible for construction procurement, 22 CFR 228.13, because that amount has not been raised in over fifteen years. Finally, the proposed rule also clarifies that case by case waivers can be approved by commodity or service type or category (for example, a category of medical equipment like diagnostic machinery, or of services like translation services), to obviate the need for repeat or serial waivers for the same type or category of commodity or service.

Comments must be received by close of business October 3, 2011. You may submit comments, identified by Regulatory Information Number, RIN 0412-AA70, by any of the following methods:
Federal eRulemaking Portal: Follow the instructions for submitting comments.
E-mail: Include RIN number 0412-AA70 in the subject line of the message.
Mail: U.S. Agency for International Development, Office of the General Counsel, Room 6.07-105, 1300 Pennsylvania Ave., NW., Washington, DC 20523, Attention: John R. Niemeyer, Esq.

Instructions: All submissions received must include the Agency name and docket number or Regulatory Information Number (RIN 0412-AA70) for this rulemaking. All comments received will be included in the public docket without change and will be made available online at, including any personal information provided. Public Participation: Because security screening precautions have slowed the delivery and dependability of surface mail and hand delivery to USAID/Washington, USAID recommends sending all comments to
the Federal eRulemaking Portal. The e-mail address listed above is provided in the event that submission to the Federal eRulemaking Portal is not convenient (all comments must be in writing to be reviewed). You may submit comments by electronic mail, avoiding the use of any special characters and any form of encryption.

USAID will consider all comments in response to the proposed rule as USAID determines how to revise its S/O/N regulation, and will reconcile all comments (similar comments by category) in any published, final rule. All comments will be posted at the portal for Federal rulemaking,, under Regulatory Information Number, RIN 0412-AA70.

FOR FURTHER INFORMATION CONTACT: John Niemeyer (or designee), Attorney Advisor, Office of the General Counsel, USAID, Rm. 6.07-105, 1300 Pennsylvania Ave., NW., Washington, DC 20523; telephone: (202) 712-5053 (this is not a toll-free number); 

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