Maintaining Current Small Business Set-aside Level

The House of Representatives’ expansion of set-asides for U.S. small businesses could raise objections from trading partners.

Tucked into the National Defense Authorization Act (NDAA) for FY 2016, as passed by the U.S. House of Representatives in mid-May, is a provision that would increase the simplified acquisition threshold from its current level of $150,000 to $500,000. The change would allow federal agencies to use simplified procurement procedures for more procurement. But, it would also more than triple the procurement that must be set-aside for U.S. small businesses. While this change would not violate U.S. trade obligations, it would likely generate sharp criticism from America’s trading partners, which have long complained about set-asides that exclude their firms.

Currently, contracting officers must automatically reserve all procurement above a $3,000 micro-purchasing threshold and below a $150,000 simplified acquisition threshold exclusively for small businesses, unless the so-called “rule of two” is not met. The rule of two means that procurement is set-aside unless the contracting officer determines there is no reasonable expectation two or more responsible small business concerns that are competitive in terms of market prices, quality and delivery will submit offers. If a set-aside is not used in a contract award within this dollar range, the officer must document the reason. Procurement above the simplified acquisition threshold must also be set-aside for small businesses when certain conditions are met.

The proposed threshold increase would not violate U.S. obligations under trade agreements because the U.S. takes a broad carve-out for procurement subject to preferences for U.S. small businesses. The U.S. includes this exception in all agreements with commitments to open its procurement to foreign suppliers.

In those agreements, which include the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs), the U.S. agrees to open U.S. procurement above specified thresholds: $200,000 in the GPA and FTAs with Bahrain, Morocco, Oman, Panama and Peru; $100,000 in the FTA with Korea: $80,000 in the FTAs with Australia, Chile, Colombia, the Dominican Republic, Central American countries, Mexico and Singapore; $50,000 in the FTA with Israel; and $25,000 for goods from Canada. These are the thresholds applied by both the U.S. and its trading partners, subject to exclusions such as the U.S. small business set-asides.

The House’s increase in the simplified acquisition threshold would reduce significantly the procurement opportunities that the U.S.’ trading partners expect would be available to their own small businesses. In addition, it would give U.S. firms access to foreign procurement markets at a much lower monetary level than foreign firms would have access to U.S. federal procurement as a consequence of the set-asides. That disparity may well draw criticism from U.S. trading partners. The increase would add another basis for their complaints about the U.S.’s continued use of small business set-asides.

The U.S. preferences contributed to the GPA parties’ interest in establishing a work program on small and medium-sized enterprises in the recent revision of the GPA. Two trading partners that have been particularly vocal with regard to the small business preferences are the European Union and Canada. The EU has made access to those set-asides one of its objectives in the negotiations of the Transatlantic Trade and Investment Partnership (TTIP).  Canada has long sought access to the set-asides for its firms.

The Senate has not yet taken up the NDAA legislation nor has it included the simplified acquisition threshold increase in its NDAA bill (S1376).  Thus, there is an opportunity to seek support in the Senate to keep the provision out of its bill and to ensure the deletion from the House-passed provision in any conference discussions. If omission or deletion is not an option, then a more modest increase should be considered, based on past precedent. In the most recent change of the simplified acquisition threshold, it was increased by only $50,000.

Jean Heilman Grier

May 26, 2015

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    Book: The International Procurement System Government procurement required 40 years and substantial efforts to become part of the international trade regime, even though it comprises a significant part of the global economy. The international system requires governments to balance protectionist forces favoring local suppliers against the pressures of liberalization, which expand procurement markets and lower prices.