The impact of the COVID-19 pandemic on the global economy needs not restating.[1] The saying “desperate times call for desperate measures” fits the current environment well. Governments throughout the world have instituted or are considering unprecedented measures to keep up with the demand for the medical products necessary to combat COVID-19. One such development comes from Russia and relates to the suspension of competitive bidding in government procurement, including for medical supplies. The second—gaining momentum in the United States through endorsements by several governors—urges President Trump to nationalize the medical supply chains to stymie shortages and price gauging and decrease lead-time of medical products.
As countries continue to promulgate new restrictions, confines, and regulations in an effort to thwart the commercial effects of COVID-19, supply chain stakeholders are advised to keep an ear to the ground not only to ensure they are optimally positioned to adhere to the new rules, but also to appropriately pivot so as to find favorable business opportunity.
Russia Relaxes State Procurement Rules
On March 19, 2020, Russia’s Ministry of Finance amended the state procurement rules, citing state of emergency amidst the COVID-19 pandemic.[2] Under the new rules, the state of emergency allows state purchasers to buy goods and services from a single contractor, bypassing the mandatory competition requirements for government purchases. The Russian government, citing force majeure, reasoned that the time-consuming state acquisition rules may not allow for the expeditious purchase of necessary goods. While the Ministry of Finance cited medical supplies and services as an example of items that may fall under the new rule, it also referred to “any goods, works and services” that relate to COVID-19.
The March 19 announcement is a significant departure from Russia’s state procurement rules. Federal Law No. 94 on Placing Orders for Provision of Goods, Works, and Services for State and Municipal Needs of July 21, 2005 governs the state procurement system in Russia.[3] Amended over a dozen times since going into effect, the law establishes mandatory procedures for all federal, provincial, and municipal institutions that enter into government contracts. These procedures include calls for bids and auctions, which seek to ensure companies awarded government contracts offer “best conditions” for the performance of the contract or the lowest price.
The new relaxed rules on competition effectively do away with the “best conditions” and lowest price requirements in Russia’s state procurement system.
US Governors Urge President Trump to Nationalize Medical Supply Acquisitions
In the past week, the United States has enacted two COVID-19-related packages[4] and the third one—topping $2 trillion—is imminent. On March 18, 2020, President Trump issued an Executive Order on prioritizing and allocating health and medical resources to respond to the spread of COVID-19 in the US, citing the Defense Production Act of 1950 (“DPA”).[5]
The DPA provides for a broad set of authorities to ensure domestic industry can meet national defense requirements. While the Department of Defense (DoD), Department of Homeland Security (DHS), and Federal Emergency Management Agency (FEMA) have used the DPA to acquire spare parts, protective equipment and supplies in times of natural disasters, its application in a global pandemic is novel. DPA permits the federal government to impose some control over private-sector industry to ensure the production of material that is deemed necessary for national defense. For example, the DPA would permit the federal government to alter the order in which companies fulfill their contractual obligations. As New York Governor Andrew Cuomo put it, the federal government would tell companies: “stop making dresses,” start making masks instead.
However, President Trump has not yet invoked the DPA to order companies to switch their manufacturing priorities to medical supplies. Several state governors, most notably New York’s Governor, have urged President Trump to do so. Further, Governor Cuomo and other states’ governors urge the federal government to nationalize the acquisition of medical supplies.[6] These governors describe the medical supply chain as the “wild west” because states cannot get organized allocations of necessary medical products from the federal government.[7] Rather, they are forced to compete with one another and globally on the open market for critical medical supplies. This not only has resulted in price gauging by sellers, but the decentralized approach is also failing to meet the ever growing demand in the US.
What Does This Means for Companies?
The situation in the US has been changing by the hour. Whether President Trump will go along with the state governors’ pleas remains to be seen. As the spread of the virus across the country continues to progress, the likelihood of him doing so may increase. To prepare for this possibility, in the US, companies manufacturing products with potential medical applications should develop a continuity plan in the event that their production is requisitioned in support of combating COVID-19. In addition, such companies should ensure they understand their rights to compensation, purchase guarantees, and available loans in the event that they are selected in support of the effort to boost medical supplies in the US.
In Russia, companies wanting to take advantage of the relaxed state procurement rules should clearly articulate how their goods and services advance the government’s response to COVID-19 pandemic. Smaller and medium-sized businesses with lines of business that directly relate to medical and other emergency needs should also be prepared for the possibility their operations may be taken over by larger state and private companies entering the COVID-19 market.
[1] See Coronavirus and Trade – US Perspective; What Comes Next?, The Trade Practitioner (Mar. 19, 2020), https://www.tradepractitioner.com/2020/03/covid19-coronavirus-trade-us-perspective/.
[2] https://zakupki.gov.ru/epz/main/public/news/news_preview.html?newsId=30021.
[3] https://rg.ru/2005/07/28/goszakaz.html.
[4] Squire Patton Boggs, US Policy Prognosis: The Legislative Response to COVID-19 (Mar. 19, 2020), https://www.natlawreview.com/article/us-policy-prognosis-legislative-response-to-covid-19.
[5] Defense Production Act (DPA) and Defense Priorities and Allocations System (DPAS) – Substance and Process (Mar. 19, 2020), https://www.squirepattonboggs.com/en/insights/publications/2020/03/defense-production-act-dpa-and-defense-priorities-and-allocations-system-dpas–substance-process-and-resources.
[6] https://www.cnn.com/2020/03/22/politics/andrew-cuomo-press-conferences/index.html.
