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IRAQI RECONSTRUCTION CONTRACTS AND THE WTO: "INTERNATIONAL LAW? I'D BETTER CALL MY LAWYER” [1]
Professor Joost Pauwelyn [2]
Duke University School of Law
JURIST Guest Columnist

On December 5, 2003, the US Deputy Secretary of Defense Paul Wolfowitz officially determined that competition for 26 Iraqi reconstruction and relief contracts will be limited to “firms from the United States, Iraq, Coalition partners and force contributing nations”.[3] Countries thus barred from bidding for lucrative contracts totaling $18.6 billion reacted in disbelief. Leaving aside the political controversy, what do the rules of the World Trade Organization (WTO) say about this type of discrimination?

The most relevant rules are provided for in the WTO’s Agreement on Government Procurement (GPA).[4] This is a so-called plurilateral agreement because it is binding only on 26 of the WTO’s current 147 members.[5] Both the United States and the 15 member states of the EU are party to the GPA. In contrast, other countries that have voiced criticism, such as Russia and India, are not (Russia is not even a member of the WTO). Obviously, only countries that are a party to the GPA can challenge the United States for breach of the GPA.

Importantly, the GPA covers the procurement of both goods (say, oil) and services (such as public works, communications or transport). It also applies to both general procurement regulations and decisions in specific tenders.[6]

On its face, the December 5 determination is a clear violation of the non-discrimination principles in Article III of the GPA. Pursuant to this provision, the United States must

provide immediately and unconditionally to the products, services and suppliers of other Parties [such as France or Germany] … treatment no less favourable than:

(a) that accorded to domestic [i.e. US] products, services and suppliers; and
(b) that accorded to products, services and suppliers of any other Party [such as the UK or Japan]

By excluding countries such as France or Germany from contracts that are open to the United States and other GPA parties such as the UK and Japan, the United States thus seems to breach the principles of, respectively, national treatment and most-favored-nation.

However, this is only the beginning of the story. Restrictions and exceptions apply based on (1) provisions in the GPA itself; and (2) the US-specific annexes attached to the GPA. These restrictions and exceptions relate to

(1) the US entities covered by the GPA;
(2) the type or nature of the procurement contract; and
(3) the specific product or service contracted for;
All of these limitations apply cumulatively and may either carve out the very application of GPA non-discrimination provisions or justify such discrimination. They are further examined below. In addition, based on US Annex 1 to the GPA, only contracts exceeding the threshold value of 130,000 SDR for supplies and services, or 5 million SDR for construction, are subject to the GPA (at the time of writing 1 SDR equals 1.46 US$).

The multiple restrictions and exceptions in the GPA point at how difficult it would be for a WTO panel to uphold a GPA complaint against the United States in this dispute. In addition to the risk of paralyzing the WTO with such a politically sensitive case, these limitations should caution any WTO member when considering to submit this matter to WTO dispute settlement.

1. Are the US Department of Defense (DOD) and/or the Coalition Provisional Authority in Iraq (CPA) entities covered by the GPA?

Pursuant to the December 5 determination itself, the 26 Iraqi reconstruction contracts “are to be awarded by the Coalition Provisional Authority (CPA) and by the Department of Defense, on behalf of the CPA”.

While WTO rules on trade in goods set out in the GATT apply, in principle, to all goods, the GPA only applies to procurement by entities specified in the country-specific annexes to the GPA.[7] The GPA thus follows a so-called positive list approach: only those entities covered in the US annexes to the GPA are subject to GPA discipline.

Crucially, the US annexes to the GPA include (some) purchases by the “Department of Defense [DOD], including the Corps of Army Engineers”.[8] For obvious reasons, no reference is made, however, to the Coalition Provisional Authority (CPA) in Iraq (after all, the GPA was concluded in 1994; the CPA was established only in 2003). On this basis, the main line of defense of the United States is that “purchases on behalf of the Coalition Provisional Authority (CPA) are not covered by international procurement obligations because the CPA is not an entity subject to these obligations”.[9]

This raises two questions:

(1) even if the CPA is not explicitly mentioned in the US annexes to the GPA, could it nonetheless be regarded as a covered entity because of its close relationship to the DOD, an entity that is listed?;
(2) in those cases where the DOD acts “on behalf of the CPA”, is it still covered by the GPA?
In the only WTO panel report applying the GPA so far (Korea - Government Procurement), the first question arose. In that case, the tables were turned around and it was the United States that challenged the procurement by Korea of the new Inchon International Airport in Seoul. The main question was whether the Korean Airport Authority (KAA) was covered by the GPA even though it was not explicitly mentioned in Korea’s annexes to the GPA. The United States argued that it was: “given the degree of control exercised by MOCT [Korea’s Ministry of Construction and Transportation, an entity that is listed in Korea’s Annex 1] over KAA and its successors, procurement by those entities are actually procurements by MOCT”.[10]

This US argument is, of course, surprisingly similar to what opponents to the December 5 determination now invoke: even if the CPA is not explicitly listed, since it is controlled by the DOD, the Iraqi contracts are actually procurements by the DOD and hence subject to the GPA.

In what would seem an important precedent, the panel on Korea - Government Procurement decided that “entities that are not listed in an Annex 1 to the GPA … can, nevertheless, be covered under the GPA”.[11] At the same time, the panel could not agree with “the overall US position that a ‘control’ test should be read into the GPA”.[12] Nonetheless, “the issue of ‘control’ of one entity over another can be a relevant criterion among others”.[13] In the panel’s view, an entity not listed would, however, still be subject to the GPA if it is either

(1) “essentially a part of” or “legally unified with” an entity that is explicitly listed as covered by the GPA; or
(2) “acting on behalf of” an entity that is explicitly listed as covered by the GPA “as, for example, in the case where a principal/agent relationship exists between the listed entity and another entity”.[14]
Applying this precedent to the Iraqi contracts, the CPA could still be subject to the GPA if, but only if, it is either (1) “essentially a part of” or “legally unified with” the DOD or (2) “acting on behalf of” the DOC as in, for example, a principal/agent relationship.

It is unclear whether the CPA-DOD relationship in the case of Iraqi reconstruction contracts would meet either of these tests. At least in strict legal terms there are serious arguments against. For example, given that the CPA is, at least in theory, a multinational entity formed and run not by the United States alone, but by the so-called coalition of the willing, it is difficult to qualify the CPA as merely a part of, or legally unified with, the DOD. After all Security Council Resolution 1483 (2003) recognized “the specific authorities, responsibilities, and obligations under applicable international law of [the United States and the UK] as occupying powers under unified command (the ‘Authority’)”.[15] Moreover, the CPA, although undoubtedly dependent on the DOD, acts as an interim Iraqi administration. As a result, it temporarily exercises power for the Iraqi people and also its procurement activities are, or ought to be, to the benefit of Iraq, not so much the DOD or the United States.

In contrast, from a more practical point of view, the argument could be made that, in effect, the DOD is in full control of the CPA and actually runs, staffs, decides and fully funds the procurement cycle so that the CPA is “essentially a part of” the DOD and thus covered by the GPA. The fact that the December 5 determination was made by the DOD (not the CPA), pursuant to US law applicable to DOD procurement rules and with reference exclusively to US funds, supports this CPA dependency on the DOD. It remains doubtful, however, whether these factors would be enough to convince a WTO panel that the CPA is, in fact, covered under the GPA.

The second question referred to earlier - namely: in those cases where the DOD acts “on behalf of the CPA”, is it still covered by the GPA? - may be easier to answer. In that case, rather than questioning whether the contracting entity is closely enough linked to an entity that is listed as subject to the GPA, the problem is rather: does the fact that an entity explicitly listed (here, the DOD) acts on behalf of an entity not so listed (here, the CPA), mean that the procurement is no longer subject to the GPA? Nothing in the GPA seems to bar application of the GPA in case a covered entity acts on behalf of someone else. In other words, for those cases where the DOD does the contracting, in principle, the procurement will be covered by the GPA (subject to the restrictions explained below) even if the DOD acts on behalf of the CPA. This argument may, however, be enough for the United States to make sure that in future the contracts are, at least on paper, awarded by the CPA, and not by the DOD.

2. The Type or Nature of the Procurement Contract: Foreign Assistance and National Security

Even if a WTO panel could be convinced that the Iraqi reconstruction contracts are, indeed, handled by an entity covered by the GPA, other hurdles remain.

US foreign assistance

Perhaps the most important obstacle is a collection of provisions, in both the main text of the GPA and the US annexes thereto, which exclude certain types of procurement taking the form of (US) government assistance, especially foreign assistance. Four such provisions can be pointed at. Firstly, a note to Article 1.1 of the GPA excludes from the scope of the GPA "procurement made in furtherance of tied aid to developing countries so long as it is practiced by Parties."

Since the 26 reconstruction contracts are to be funded exclusively by a US grant to Iraq (appropriated by Public Law 108-106) and Iraq could self-designate itself as a developing country, the argument could be made that the discrimination in the December 5 determination relates to “procurement made in furtherance of tied aid” to Iraq and hence falls outside the GPA.

Secondly, although the 26 contracts in question are not awarded by the US Agency for International Development (USAID), other Iraqi contracts are and seem to be excluded from the scope of the GPA, based on US Annex 1, item 10, which lists USAID as a covered entity but excludes "[USAID] procurement for the direct purpose of providing foreign assistance."

Obviously, this provision could work both ways for DOD/CPA contracts. On the one hand, one could argue that the exclusion of foreign assistance by USAID is an important indicator that other GPA provisions must be interpreted in a similar vein so that also foreign assistance by the DOD ought to be excluded (perhaps even a fortiori). On the other hand, the item in US Annex 1 relating to the DOD does not set out a similar exclusion for foreign assistance. Hence, the argument could run that a contrario for the DOD, foreign assistance is, in principle, covered.

Thirdly, when it comes to the procurement of services, US Annex 4 excludes from the scope of the GPA "All services purchased in support of military forces located overseas."

Based on this provision, the argument could be made that all services contracted for by the CPA/DOD are, in fact, in support of US (and other) military forces in Iraq and hence excluded from the GPA.

Fourthly, the US General Notes annexed to the GPA exclude "except as specified otherwise in this Appendix … any form of government assistance, including … grants … and governmental provision of goods and services to persons or governmental authorities not specifically covered under U.S. annexes to this agreement."

Based on this exclusion, it could be argued that the 26 contracts in question take the form of US “government assistance”, funded by US “grants”, or the “governmental provision of goods and services”, to the CPA and/or Iraq, i.e., “governmental authorities not specifically covered under U.S. annexes”. As a result, the GPA should not apply to these contracts.

US national security

In addition to the multiple exclusions for different forms of US government assistance, another limitation related to the type or nature of the procurement contract applies. This restriction is not limited to US annexes to the GPA, but incorporated in the main text of the GPA. Article XXIII:1 of the GPA, entitled ‘Exceptions to the Agreement’, provides as follows:

Nothing in this Agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defense purposes (emphasis added).
At first, this seemed to be the exception relied on in the December 5 determination which itself stated (copying verbatim the crucial words of Article XXIII:1 of the GPA):
The [US] President has made clear that the Coalition’s actions to reconstruct Iraq are indispensable for national security and national defense purposes. … It is necessary for the protection of the essential security interests of the United States to limit competition for the prime contracts … Limiting competition for prime contracts will encourage the expansion of international cooperation in Iraq and in future efforts. … [it] should encourage the continued cooperation of coalition members (emphasis added).[16]
Subsequently, however, US administration officials admitted that in an eventual WTO complaint the United States would not use a national security exemption, but rather the defense based on the CPA not being an entity covered by the GPA.[17] The national security defense does, indeed, raise several questions.

First, although some of the contracts would seem protected by national security arguments (such as contract no. 26 “Equip New Iraqi Army”) and the United States would likely be given a rather wide discretion to define its essential security interests [18], it may be difficult to put all 26 reconstruction contracts under the umbrella of national security. In some cases, the nexus between the goods or services contracted for and US essential security interests may be too remote.

Second, national security in government procurement relates mainly to permitting governments to keep their procurement needs (and hence their capacity) secret. Article XXIII:1 of the GPA itself focuses on “taking any action or not disclosing any information”. The national security exemptions in US government procurement rules do so even more pointedly. US rules are, indeed, explicitly limited to cases where "the disclosure of the agency’s needs would compromise the national security unless the agency is permitted to limit the number of sources from which it solicits bids or proposals (emphasis added)."[19]

Moreover, US implementing rules add the following restriction:

This authority [under the US national security exception] may be used for any acquisition when disclosure of the Government’s needs would compromise the national security (e.g., would violate security requirements); it shall not be used merely because the acquisition is classified, or merely because access to classified matter will be necessary to submit a proposal or to perform the contract (emphasis added).[20]
Quite clearly, the national security interest at stake in the 26 Iraqi contracts is not one of keeping information in tenders secret. The tenders are, or will be, placed on the CPA’s and several other US websites. Rather, the national security involved relates to strengthening and expanding the so-called coalition of the willing, i.e., it relates to, in the words of the December 5 determination, “the ultimate success of the war effort”, “encourag[ing] the expansion of international cooperation in Iraq and in future efforts” and stimulating “the continued cooperation of coalition members”.[21] The fact that a country will be able to bid for the contracts as soon as it joins the coalition or contributes forces to Iraq, confirms this motivation.[22]

Crucially, the Pentagon itself confirmed that it is not relying on national security as it is construed in US regulations on government procurement. Rather than opting for the exemption in US law on national security, the December 5 determination is justified on another basis, namely a situation where “the head of the agency … determines that it is necessary in the public interest to use procedures other than competitive procedures”.[23] This public interest exception is described as follows in US implementing rules: “This authority may be used when none of the other authorities [including that based on national security] apply”.[24]

In sum, the -- intuitive but legally not conclusive -- argument could be made that if the United States did not even use the national security exception in its own legislation, how could it rely on national security before the WTO?[25]

3. Is the Specific Product or Service Contracted for Subject to US Obligations under the GPA?

Even if the hurdle of “covered entity”, as well as the just described limitations related to US government assistance and national security can all be overcome, the end line for a successful WTO complaint under the GPA would still not be reached. Further restrictions apply. The next question is, indeed, whether the specific procurement contract is for a product or service covered by the GPA as it applies to the United States. In the context of the 26 Iraqi reconstruction contracts, three restrictions apply:

(1) US Annex 1, item 87, which explicitly includes the DOD, excludes certain DOD purchases with reference to specific categories of goods in the Federal Supply Classification (FSC), such as, certain textiles and clothing, subsistence, buses, certain specialty metals, naval vessels, weapons and ammunition and aircraft. These exclusions take, for example, most of contract no. 26 (“Equip New Iraqi Army”) out of the scope of the GPA.

(2) US Annex 4 to the GPA excludes a number of services from US obligations under the GPA, such as, transportation services, dredging, management and operation contracts and public utilities services. This may exclude contract no. 1 (“Program Management Office Services”) and many of the power generation, electricity, water, transport and communication components of the other contracts from the scope of the GPA.

(3) US General Notes annexed to the GPA set out general restrictions on US obligations under the GPA and further limit the services covered in that a GPA party such as France or Germany can only challenge the US procurement of a service (even those services not excluded in US Annex 4) if that GPA party has itself included the particular service in its own GPA commitments (a so-called reciprocity requirement). This, again, may narrow the scope of Iraqi reconstruction services that other GPA parties can complain about.

Conclusion

Although there may be good reasons to object to the outright exclusion of certain countries from Iraqi reconstruction and relief contracts, a clear-cut violation of WTO rules is not one of them. A long series of restrictions and exceptions obstruct the potential for success of a complaint under the WTO’s Agreement on Government Procurement (GPA):

  1. only 26 WTO members (including, however, the United States and the 15 EU members states) are a party to the GPA;
  2. only a limited list of US entities are bound by US obligations under the GPA (including some purchases by the US Department of Defense (DOD), but excluding, arguably, the Coalition Provisional Authority unless it can be seen as actually a part of, or acting on behalf of, the DOD);
  3. multiple provisions exclude from the scope of the GPA different kinds of US foreign assistance, in particular, tied aid to developing countries;
  4. some reliance could be made on the national security exception in the GPA (albeit in a rather limited way, as the US administration itself seems to admit); and
  5. US annexes exclude from the GPA a rather long series of specific goods and services.
Finally, even if a complaint under the GPA were to succeed, the remedy available at the WTO may be of little use in that too little comes too late. As in other disputes, WTO remedies normally work only prospectively, i.e., would simply prohibit the United States from further excluding certain countries in the future (no explicit reference is made to compensation for harm suffered in the past). In the meantime, the United States would have had the opportunity to exclude countries for as long as it takes to finish the WTO dispute settlement process (i.e., for at least 1,5 years). By then most (if not all) of the contracts may have been awarded and some even performed, and the Coalition Provisional Authority in Iraq may already be dismantled. Moreover, the standard WTO remedy of last resort -- trade sanctions -- may not bite as much for government procurement violations as it does for other WTO violations (recall the US - Steel dispute). Unlike in other WTO disputes, the winner of a GPA dispute cannot cross-retaliate in areas other than the one in which a violation was found. Put differently, if, for example, France (represented by the EC) were to win a GPA complaint against the United States, France could, as a last resort, only retaliate by itself violating the GPA as against the United States; not, for example, by imposing higher import tariffs on orange juice from Florida.

The list of carve-outs and limitations discussed in this note highlight the patchy nature of WTO rules on government procurement. Government purchases typically represent between 10 and 15 percent of a country's GPD. If government procurement is to enter the mainstream of WTO disciplines more and wider negotiations, as called for in the Doha agenda, must be carried out.


Notes

1. US President George W. Bush discussing Iraq reconstruction contracts an interview, December 11, 2003, transcript available at http://edition.cnn.com/TRANSCRIPTS/0312/11/se.01.html.
2. Associate Professor, Duke Law School. Formerly, legal officer with the World Trade Organization. Comments welcome at pauwelyn@law.duke.edu.
3. Deputy Secretary of Defense, Determinations and Findings, December 5, 2003 available at http://www.rebuilding-iraq.net (hereafter “the December 5 determination”).
4. Basic GATT and GATS non-discrimination provisions could also be referred to, but GATT Article III:8(a) and GATS Article XIII carve out most of government procurement from the scope of these non-discrimination principles (i.e., “laws, regulations or requirements governing the procurement by governmental agencies of products [services] purchased for governmental purposes and not with a view to commercial resale or with a view to use in the supply of products [services] for commercial sale”). Note also that as between the United States and Canada/Mexico, NAFTA rules on government procurement could be invoked.
5. The 28 parties to the GPA (representing, in fact, only 26 countries) are: Austria, Belgium, Canada, Denmark, European Communities, Finland, France, Germany, Greece, Hong Kong China, Iceland, Ireland, Israel, Italy, Japan, Korea, Liechtenstein, Luxembourg, Netherlands, Netherlands with respect to Aruba, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, United States.
6. See, generally, SUE ARROWSMITH, GOVERNMENT PROCUREMENT IN THE WTO (2003).
7. GPA Article 1.1.
8. US Annex 1, item 87.
9. Statement from Richard Mills, USTR Spokeman, December 10, 2003, available at http://www.ustr.gov.
10. Panel Report, Korea - Measures Affecting Government Procurement ("Korea - Procurement "), WT/DS163/R, adopted 19 June 2000, para. 7.17.
11. Id., para. 7.58.
12. Id., para. 7.57.
13. Id.
14. Id., para. 7.59.
15. UN Sec. C. Res. 1483 (2003), 22 May 2003.
16. December 5 determination, supra note 3, paras. 3-6.
17. See supra note 9 ("there is no need to invoke the 'essential security' exception to our trade obligations").
18. US Annex 1 confirms Article XXIII:1 of the GPA on national security, in particular under item 87 on the DOD, noting that DOD covered purchases are “subject to United States government determinations under the provisions of Article XXIII, paragraph 1”.
19. 10 U.S.C. 2304(c)(6) and 41 U.S.C. 253(c)(6).
20. FAR 6.302-6.
21. December 5 determination, supra note 3, paras. 3, 5 and 6.
22. See Statement by Pentagon spokesman Lawrence Di Rita, in Only coalition countries allowed to bid on Iraqi contracts, American Forces Press Service, December 10, 2003, available at http://www.defenselink.mil/news/Dec2003/n12102003_200312109.html.
23. 10 U.S.C. 2304(c)(7) and 41 U.S.C. 253(c)(7), emphasis added, explicitly referred to in para. 1 of the December 5 determination.
24.FAR 6.302-7, emphasis added, explicitly referred to in para. 1 of the December 5 determination.
25. Note, however, that Article XXIII:2 of the GPA also includes a limited public interest exception, permitting measures “necessary to protect public morals, order or safety”.


Joost Pauwelyn is Associate Professor at Duke Law School and a former legal officer with the World Trade Organization. Comments welcome at pauwelyn@law.duke.edu.

December 19, 2003

GUEST COLUMNIST

JURIST Guest Columnist Joost Pauwelyn is a professor of law at Duke University School of Law, where he concentrates on international economic law, in particular, the law of the World Trade Organization, public international law and European Union law. His research focuses on the problem of conflict of norms in public international law, in particular, the relationship between WTO law and other norms of international law, and the settlement of disputes in the WTO and other international tribunals, especially health and environmental disputes.

Prior to joining the Duke Law faculty, he served as a Legal Affairs Officer for the World Trade Organization in Geneva (1996-2002), first, in the Legal Affairs Division, then in the Appellate Body Secretariat.

Professor Pauwelyn has published numerous articles in the field of international trade and public international law. His latest work is a book on Conflict of Norms in Public International Law, published with Cambridge University Press in July 2003.