In December 2018, the Frank LoBiondo Coast Guard Authorization Act (the “LoBiondo Act”) was enacted to, among other things, improve and support the operation and administration of the Coast Guard and update maritime and environmental policy. Section 713 of the LoBiondo Act directs the Comptroller General of the United States to “conduct a study that examines the immediate aftermath of a major ocean carrier bankruptcy and its impact through the supply chain.” In accordance with that mandate, in January 2020, the U.S. Government Accountability Office (“GAO”) published a report on the role of the Federal Maritime Commission (the “FMC”) and Department of Commerce (“Commerce”) in an ocean carrier’s bankruptcy case.
The study was prompted by supply chain disruption at sea and at numerous ports caused by the bankruptcy of Hanjin Shipping Co., Ltd. in August 2016. At the time, Hanjin was one of the world’s largest integrated logistics and container shipping companies transporting cargo to and from ports throughout the world. The GAO concluded that the FMC and Commerce played an important monitoring function in the industry, but did not recommend any changes to either agency’s role in an ocean carrier bankruptcy. This is because the GAO found that industry participants have already taken steps to mitigate the effects of another ocean carrier bankruptcy and current law does not authorize these agencies to have a more active role.
The Ocean Carrier Industry
The maritime transport industry is the backbone of globalized trade and the manufacturing supply chain. According to the United Nations Conference on Trade and Development’s Review of Maritime Transport 2019, more than four-fifths of world merchandise trade by volume is carried by sea. Annually, more than one trillion dollars in U.S. exports and imports are moved by ocean vessels. Prior to the current pandemic, the industry was already coping with low-freight rates, reduced earnings, and oversupply as a result of increased global tariffs, volatility in demand, and new environmental regulations. These market conditions have led to the continued consolidation of ocean carriers. “In February 2019, the [top] 10 deep-sea container-shipping lines represented 90 per cent of deployed capacity and dominated the major East-West trade routes through three alliances.” This consolidation in the industry increases the risk of disruption that the financial instability of any one shipping company can have on the global supply chain.
Scope of the GAO Study
To address the objectives mandated in the LoBiondo Act, the GAO reviewed documents filed in Hanjin’s bankruptcy case and documents provided by the FMC and Commerce. Additionally, the GAO interviewed 15 industry stakeholders representing various roles in the supply chain including representatives from four ports, two ocean carriers, one association representing carriers, one association representing freight forwarders and customs brokers, five associations or companies representing transportation and equipment providers, one association representing retailers, one association representing agricultural cargo owners, and officials with the FMC and Commerce. Continue Reading
Over the past 18 months, members of the international maritime community have expressed a keen interest in exploring how 21st century blockchain technology can modernize the ancient world of seaborne commerce. Blockchain has in turn spawned many novel business ideas from various startup companies throughout the marine industry. These new business ventures all generally seek to employ blockchain to streamline the logistics process and to provide greater security and transparency to the commercial endeavor. At the same time, these companies are setting a new course through uncharted waters with respect to how they 1) generate startup capital, and 2) propose to conduct day-to-day business in the electronic, digital asset (or crypto) realm.
After a long wait and much anticipation, the Small Business Administration (“SBA”) issued its final rule expanding the mentor-protégé program to all small businesses on July 25, 2016. The new rule broadly expands upon the existing 8(a) mentor-protégé program, and is projected to result in two billion dollars in federal contracts to program participants. The final rule makes some key changes to the February 2015 proposed rule, including changes regarding size certification and reporting. As the new rule is now final, contractors in the maritime industry, both large and small, should prepare now to take advantage of what the newly expanded program has to offer.
The SBA mentor-protégé program has long-allowed large businesses to provide technical, management, and financial assistance to small businesses, and for the mentor and protégé to compete together for contracts. The program was designed to help protégé businesses by leveraging the experience and expertise of the larger mentor contractors. Originally limited to 8(a) concerns, the program was extremely successful. Large businesses were attracted to the program because it allowed them to pursue small business set-aside contracts as a joint venture with a protégé and foster small business relationships, and small businesses benefited from the resources and expertise of their mentors.
In 2010 and 2013, Congress authorized the expansion of the mentor-protégé program. In February 2015, SBA issued its proposed rule expanding the program to include all small businesses, although the 8(a) program will also remain independent of the new program. The proposed rule indicated that the SBA was contemplating a number of changes to the 8(a) model, including size certification approval requirements from the SBA and additional reporting and compliance requirements, particularly with regard to the structure of the joint venture. Many of these new requirements remain in the final rule, but there are some significant changes that government contractors in the maritime industry should be aware of.
Key Provisions of the Final Rule
The key changes and provisions of the final rule are discussed below.
1. Size Status Determination: The proposed rule contained a requirement for formal SBA verification of the size status of the protégé. This requirement was removed from the final rule. The SBA will continue to allow protégés to self-certify, and will rely on the size protest mechanism to ensure that businesses are accurately certifying their size.
2. NAICS Code Standard: Under the final rule, businesses that do not qualify as small under their primary NAICS code can still participate under a secondary NAICS code if the protégé can show that it would benefit from the progression into a secondary industry to enhance its current capabilities.
3. Financial Condition of the Mentor: Under the proposed rule, a mentor was required to demonstrate to the SBA that it was in “good financial condition.” This requirement was removed from the final rule. The SBA acknowledged that as long as the mentor can meet all obligations under its mentor-protégé agreement, then the “good financial condition” requirement was unnecessary and created too much confusion, since the term was undefined.
4. Duration of the Agreement: The proposed rule limited the mentor protégé agreement to three years. It also only allowed for a protégé to engage in one three-year agreement with one entity and one with a separate entity, or two three-year agreements with the same entity. Commentors did not believe that three years was long enough. SBA’s final rule allows for two three-year agreements with different mentors, but also allows for each agreement to be extended for an additional three years as long as the protégé continues to receive the agreed-upon business development assistance.
5. Joint Venture Entity: The SBA clarified in the final rule that a joint venture need not be, but could be, a separate legal entity. The SBA sought to clarify that formal or informal joint ventures were permissible. Also, consistent with the proposed rule, the SBA clarified that a joint venture may not be populated with employees who are performing the contract, as this would defeat the purpose of the protégé learning from the mentor. A mentor may, however, own up to 40 percent of their small business protégé under the final rule. If ownership continues after the mentor-protégé agreement expires, the SBA indicated that its affiliation rules would apply.
6. Compliance and Reporting: In order to ensure the program serves its purpose and is not abused, the SBA has enacted rigid reporting requirements under the final rule. The SBA requires both the mentor and protégé to certify the joint venture’s compliance with the regulations, the terms of the joint venture agreement, and the performance requirements of the particular contract. The protégé is also required to engage in annual reporting on compliance. Penalties for non-compliance can include suspension and debarment.
Impacts on Government Contractors
Contractors should be aware that nearly all future small business set-aside contracts will draw bids from mentor-protégé joint ventures. Given this expansion to all small businesses, mentors will now have a wider selection of protégés to choose from. The new rule is expected to result in thousands of additional applications for the program. Indeed, the SBA has created an entirely new division within the Office of Business Development to process and review applications, and has left open the possibility of imposing open and closed enrollment periods for the program. Companies that are interested in participating in the program should make sure they obtain appropriate guidance on the final rule to ensure that all application, performance, and reporting requirements can be met.