The Buy America Act Requirements for U.S. Highspeed Rail Projects
The German Practice Alert
Overview and Significance for German Manufacturers
The United States Federal Railroad Administration (FRA) is investing currently in new highspeed rail projects in the five most densely populated regions in the United States. These include (1) the Seattle-Portland line, (2) the San Francisco-Los Angeles line, (3) the Charlotte-Raleigh-DC line, (4) the Midwest hub, and (5) the Northeast Corridor. Additionally, construction has begun on the Miami-Orlando “All Aboard Florida” highspeed rail line. German companies (in addition to many other global train manufacturers) are bidding for these highly lucrative long-term projects. For example, a well-known German company has recently been selected as the train manufacturer for the “All Aboard Florida” project and has submitted a bid for the California high speed rail.1 Irrespective of who will be chosen for the various projects as the main manufacturer, it is certain that, given their historical experiences with the German ICE high speed train, many German businesses will in one way or another be involved in some, if not all, of these projects.
There are essentially three financing alternatives involving the Department of Transportation: (1) grants, (2) governmental loans and (3) private activity bonds (tax exempt bonds issued to institutional investors with the approval of the Department of Transportation). Only grants and loans are subject to the Buy America Act requirements outlined below. In the case of private activity bonds, however, no U.S. taxpayer funds are involved and the Buy America Act is not applicable. The five above projects all include grants and/or governmental loans, while the “All Aboard Florida” project may possibly be financed exclusively from private funds.
The Buy America Act Requirements
If funding is provided by the FRA, the provisions of the Buy America Act codified in 49 U.S.C. §24405(a) apply. That statute requires that steel, iron and manufactured goods used in (among other things) the above high speed rail projects, if funded by the FRA, must be produced in the United States.2 Note that the Buy America Act does not require a U.S. company to be the manufacturer. Only the production has to occur in the United States, irrespective of the domicile of the producer. That means also, however, that a German company won’t comply with the Buy America Act simply by establishing a U.S. subsidiary; it has to structure its manufacturing process in accordance with the Buy America requirements.
Currently, the Buy America Act requirements are implemented through certain regulations of the Federal Transportation Authority, codified in 49 C.F.R. Part 661.3
For rolling stock (i.e., trains and coaches) as manufactured “end products” to be considered produced in the United States the following requirements must be met:
- All of the manufacturing processes for the end product must take place in the United States; and
- All of the components of the end product must be of U.S. origin. A component is considered of U.S. origin if it is manufactured in the United States, regardless of the origin of its subcomponents.
There are two key questions for a German company intending to submit a bid for rolling stock or components of rolling stock subject to the Buy America Act requirements:
- What are components/subcomponents?
The FRA has developed a Buy America Worksheet (Form CER 7.7) with a comprehensive list of items that it considers components of rail rolling stock. When structuring Buy America compliant manufacturing procedures, manufacturers are well advised to consider this list, because these components must be manufactured in the United States. Items that constitute parts of these components are deemed subcomponents and do not have to be of U.S. origin.
- What is a manufacturing process?
The FRA has determined that the “manufacturing process” applicable to end product rolling stock must include its “final assembly,” which is the creation of the end product from individual elements brought together for that purpose.
For components of rolling stock, the applicable “manufacturing process” is “manufacturing.” “Manufacturing” means the application of processes to alter the form or function of subcomponents of the product in a manner adding value and transforming those materials or elements so that they represent a new end product functionally different from that which would result from mere assembly of the elements or materials. The key element of the definition of “manufacturing” is the transformation of subcomponents to form a new product. The processes of transformation may include forming, extruding, material removal, welding, soldering, etching, plating, material deposition, pressing, permanent adhesive joining, shot blasting, brushing, grinding, lapping, finishing, vacuum impregnating, and, in electrical and electronic pneumatic, or mechanical products, the collection, interconnection, and testing of various elements. Mere assembly of the subcomponents does not constitute substantial transformation.
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German manufacturers will undoubtedly play a role in U.S. highspeed rail projects, be it as the manufacturer of rolling stock or components. The Buy America Act imposes strict requirements related to the location of the manufacturing process for rolling stock and its components. To avoid violations of the Buy America Act and its potential consequences (including exclusion from future projects, fines and contractual damage claims), careful advance analysis of the Buy America Act requirements and, if necessary, adjustments to manufacturing processes and sourcing of items are recommended.
1 See http://www.allaboardflorida.com/recent-news/press-announcements/all-aboard-florida-selects.html.
2 The statute allows for waiver applications, but the requirements are very strict and mostly not applicable to the Buy America Act requirements for highspeed railway projects.
3 The FRA has not yet come out with its own regulations, but has stated that in the interim the cited regulations of the Federal Transportation Authority are applicable.