Defense Acquisition Regulations System September 29, 2008

Attn: Ms. Amy Williams

OUSD (AT&L) DPAP (DARS), IMD 3D139

3062 Defense Pentagon

Washington, DC 20301-3062

Reference: DFARS CASE #: 2008-D002 as implements Section 886 of National
Defense Authorization Act for Fiscal Year 2008

Dear Ms. Williams:

We respond to DFARS Case \# 2008-D002 as American taxpayers, a US
Military defense contractor for more than a dozen years, and a small
woman-owned business.

If the US government required that all funding of any resulting
acquisition be 100% reimbursed from Iraq or Afghanistan then we would
not comment, no matter what the impact would be on the US industrial
base. However, as Congress decided that U.S. taxpayers should fund these
US government-sponsored enterprises, we offer the following.

We understand the goal of trying to make Iraq and Afghanistan self
sufficient and to establish an industrial base within these countries so
the US can get out. However, the goal of creating, developing and
strengthening US government-sponsored Iraq and Afghanistan enterprises
should not damage US businesses. Since it is tax payers who are creating
and subsidizing these international competitors, every effort should be
made to assure the US industrial base is not damaged, particularly since
it will no longer be paying the same taxes into the US Treasury as
before the subsidy to international competitors. This loss of tax
revenue is an additive cost to the contract not considered in the DFARS.

Both the DFARS, and Section 886, ignore the effect on the US industrial
base for products or services used only by the foreign military, police
and security. For non-military, police and security products, DFARS
225.7703-2 (b) (1) (ii) (B) states that "*the authorizing official
generally may presume that there will not be an adverse effect on the
U.S. industrial base*." Only if he/she subjectively has doubt, will such
consideration be made. Both types of products should require a
determination of the affect on the industrial base.

The DFARS needs to require that US government-sponsored contracts be
awarded only if 100% of the product is from Iraq or Afghanistan, without
allowances to use non-Iraq or Afghanistan components (DFARS 252.225-7021
(a) (14)(ii)). This will force the business infrastructure to develop,
avoiding the funding of local government corruption by the US. For
example, the Washington Post (Sept 24, p 23) reported that the factory
producing Afghanistan military uniforms cannot purchase textiles locally
due to the corruption in the government levels. Since uniforms would be
included in the DFARS case, unless a US supported contract strictly
required the textiles used in uniforms to be similarly produced in
Afghanistan, US taxpayers would be funding the continuation of such
corruption.

**1. "Industrial Base" Should Be Defined As Potential Direct US
Competitors**

\(a\) It is too easy to disregard or minimize the impact on US
businesses in the DFARS draft. For each acquisition, military and
non-military, the US industrial base impact should be evaluated and
documented in the determination. If US industrial base is adversely
affected, the acquisition may need to proceed, but at least it will
proceed with the knowledge of the damage and potential damage it creates
or may create.

\(b\) DFARS 225.7703-2 (b) (1) (ii) (B) needs to be revised to state
that a determination of the impact on the US industrial base must be
made. In reading Section 886 (b) (2), we believe acquisitions are
permitted IF there is no adverse affect on the US industrial base. In
contrast, we read DFARS 225.7703-2 (b) (1) (ii) (B) to erroneously imply
that because the acquisition is to proceed, the assumption can be made
that no adverse impact on the industrial base will occur. This DFARS
inverse is not fundamental, logical, or likely true.

\(c\) In addition, the industrial base needs definition within the DFARS
to give guidance to the procurement personnel. We believe that the US
industrial base needs to be defined for each specific acquisition as
those U.S. companies which could likely supply such products had it not
been for the subsidy and preference for products from Iraq or
Afghanistan. For example, the industrial base for military rations for
the Iraq military or police would not be the "food industry" or the
"prepared meals" industry as most of these products would not be
suitable for rations. Instead, the group of companies which would
provide rations, including its supplier network, would be evaluated.

> If too broadly defined, the broad industrial base may not be
> unbearably impacted. However, when defined somewhat more narrowly by
> product category within that broad definition, that industrial base
> may very well be severely and adversely affected. We believe the DFARS
> should reflect and define this impact. If too broadly defined, the
> impact analysis is meaningless.

**2. Defining "adversely affected"**

\(a\) How negatively must the defined US industrial base be affected to
be defined as adverse? We see two critical aspects which we believe need
to be included in the DFARS wording.

First, there is the loss of [volume]{.underline} for every prime
contractor and its supplier network, potentially increasing costs of its
remaining business, negatively impacting its competitiveness. This could
force the base to increase its prices for other products purchased by
the US government, adding to the cost of the subsidized purchase.

There is also the opportunity loss of losing key suppliers due to
reduced volume purchases. Worse, there is the long-term damage of
artificially creating and supporting a business to compete
internationally with US industrial base businesses.

\(b\) We believe the DFARS should clearly state that the US industrial
base, operating in a free market, would be adversely affected unless
determined otherwise.

Free markets expect competitors to enter the market to try to compete
with existing businesses which makes the market stronger. Free markets
do not have US government subsidized competitors, with funded price
supports of 50% over competitors' bid prices (as stated in DFARS
252.225.7023 (d) but not in the Act). Instead, free markets may expect
the US government to provide sizeable tax incentives to US investors in
Iraq and Afghanistan businesses as an indirect means to develop and
strengthen the developing industrial bases in those countries by those
with an incentive to work the market locally.

As a result, we believe DFARS 225.7703-2 (b) (1) (ii) (B) should be
reworded to eliminate all reference to the presumption that the
industrial base is not adversely affected, such as:

> "(B) *The US industrial base. The US industrial base is hereby defined
> as limited to and inclusive of, all potential U.S. contractors and
> direct U.S. sub-contractors of the same or similar end product."*

**3. Including US competition**

The exclusion of US competitors in DFARS 225.7703-1(a) and the inclusion
of the increase by 50% of the cost of non-Iraq or non-Afghanistan end
products in DFARS 252.225-7023 (d) further damages the US industrial
base. In addition, there is no provision within the DFARS to require a
"Buy Iraq or Afghanistan" Act, as US competitors would have with its Buy
American Act.

To make matters worse, without the US industrial base competing for
contracts, there is no barometer of reasonableness to compare Iraq or
Afghanistan awarded contract pricing other than other Iraq and
Afghanistan competitors. There is a need to include the US industrial
base in the contracting action.

**4. A real life example of what happens when an [actual]{.underline}
exclusionary contracting action is made**

\(a\) About 2005/2006 the US government announced its intention to start
transitioning more and more to the Iraq government to procure directly.
From the announcement, it appeared that the intent was for the Iraq
government to budget and pay for the procurements. However, according to
Iraq's Ministry of Defense Director of Contracting, Mr. Mudafa, this was
not going to happen for years because of all the corruption within his
government (source MNSTC-I newsletter dated February 3, 2007.) So, the
US would need to continue to fund and procure products in support of
Iraq military operations.

\(b\) By way of example, we experienced an actual contract action made
by DSCP/DLA between January 2005 and October 2006, which excluded the
impact on the US Industrial base in its decision process. It was with
much of the same emphasis and rationale as DFARS 2008-D002 to create a
local industrial base, that the US government moved the source of halal
MREs used by the Iraq military from a US contractor to a Middle Eastern
contractor. Without the current DFARS case, DSCP/DLA used DFARS
225.7002-2 (f) (1) as its authority to search for and create a new
foreign industrial base.

> *"DFARS 225.7002-2 (f) (1) allows for the purchase of non-domestic
> food products for contingency operations. Operations in support of
> both Iraq and Afghanistan meet the criteria for contingency ....\"*

It was done to establish a local supplier base of halal MREs (rations)
to be used by the Iraq military. Some goals were different from those
specified in DFARS case 2008-D002, but it used the same approach as this
DFARS case. This contract action shows what happens when:

-   the impact on the industrial base is ignored and/or defined too
    broadly to be significant to an analysis,

-   the immediate and long term impact on US industry is not considered,

-   the industrial base is eliminated from competing,

-   specifications and standards are relaxed to fit the local market,
    and then irrelevant comparisons are made to dissimilar US industrial
    base products and prices to justify the purchase. Yet the US
    products have stricter specifications and standards including a Buy
    American requirement.

\(c\) Brokers, distributors and middlemen.

We believe that the DFARS wording should specifically eliminate brokers,
distributors and middlemen from being awarded any contracts. If the US
government is buying a product, the DFARS should require buying it
directly from the source. Without this requirement, the main industry
developing will be the middlemen. This wording would eliminate much of
the potential for corruption, and assure that the local "industrial"
base of Iraq/Afghanistan "producers" is benefiting. It also saves US
taxpayer dollars wasted on various middlemen.

In our MRE example, DSCP/DLA replaced its US-sourced halal MRE being
used in Iraq with an MRE from a Kuwait distributor contractor, PWC
Agility (PWC). In keeping with the concept of developing a local
supplier base, DSCP/DLA should have directly procured the MRE from
companies producing it in Iraq first, then in the Middle East region.
Instead, this contracting action authorized a "local" Kuwait middleman
(PWC) to purchase at US government expense, stock and distribute a halal
MRE completely produced and assembled in Europe, thereby replacing a US
industrial base product with a European one. This middleman contracting
action did not benefit the local industrial base.

In fact, the situation was worse to both the local market and to the US
industrial base. The action had the appearance of being a local
procurement, which it was not. And since PWC sourced the European MRE on
behalf of the US government, it had a profit motive preference for its
MRE over the US sourced MRE, which was being rotated out. We believe
this profit motive caused PWC to require the US government to buy excess
quantities of the European-sourced MRE. It also provided an incentive
for PWC to distribute its ration instead of the US ration already in
government inventories, allowing US sourced inventories to go past their
"best buy" date, further wasting taxpayer dollars.

In this example, allowing middlemen in the contracting action adversely
affected the US industrial base of large and small businesses. While a
CW5 told us that the dollars of the contracting action were considered
too small to come to much scrutiny at the time, not only were we as
small business contractors adversely affected from our lost business,
but major food companies in our industrial base supplier network were
also adversely affected. With the US sourced inventories not being drawn
down in Iraq and Kuwait in preference to the PWC-procured ration, our
military sales were virtually eliminated for 18 months.

\(d\) Immediate and long-term impact on industrial base of large and
small businesses.

With this replacement, the US government risked losing us as a US
contractor of halal MREs. General Mills complained about losing our
sub-contract orders as its biggest customer for some of the products we
were purchasing. This ultimately affected their long-term production and
they dropped two products offerings. Nonni's dropped one variety we had
been purchasing and did not add a new variety we were planning for our
ration. Kellogg's lost us as a significant cereal customer. Sturm Foods
wrote us a letter stating that they would no longer sell us cocoa as our
volume was too low, which we eventually got them to reverse. We
sustained sizeable write-offs of the cost of components in our
inventory. One halal meat supplier was sold to a major beef company
which then got out of the halal meat business completely. Losses due to
excess capacity adversely impacted our key sub-contractors. Other
suppliers had losses on packaging inventories built for potential sales
which were lost. The entire industrial base of suppliers was adversely
affected. And the long term impact to the US military was a loss in
variety.

\(e\) Under the DFARS case as written, contracts could be let using
non-Iraq or Afghanistan product components. While the language of
Section 886 and the DFARS definition section 225.7701 implies that
products must be 100% Iraq or Afghanistan product, there is an allowance
for non-Iraq or Afghanistan products in DFARS 252.225-7021 (a) (14)
(ii), which states, "*In the case of an article that consists in whole
or in part of materials from another country, has been substantially
transformed in Iraq into a new and different article of commerce with a
name, character, or use distinct from that of the article or articles
from which it was transformed*." This allowance needs to be eliminated
or clearly defined and minimized in terms of contract value.

To use our contracting action as an example, if it had been an Iraq
halal MRE assembler buying all ration items from outside Iraq, and
putting them together in a package, it may have been considered to have
been substantially transformed them into a new article (MRE) with a new
name, character and use. Yet the intent and wording of Section 886 seems
to be to create a supplier network, which inherently means "producing"
products under contract or directly within the country of Iraq or
Afghanistan. We believe the DFARS differs from the wording and intent of
Section 886. Foreign raw materials, ingredients, components and/or items
should not be permitted unless the total value of such foreign sourced
items is minimal, possibly less than 5% of the total cost of the product
offered for sale. We recommend rewording the DFARS 252.225-7021 language
to clearly state that non-Iraq/Afghanistan components may only be used
if they have a DFARS-specified minimal x% value to the contract. At the
very least, a penalty should be assessed on non-Iraq and non-Afghanistan
raw materials, ingredients, components and/or items. We believe the
current wording is too ambiguous. In our contracting example , this
foreign component allowance was not specified, so a European MRE was
procured from a middleman, having the erroneous appearance of being a
locally sourced purchase.

\(f\) We believe that Section 886 is stronger in its requirement
language of "locally sourced" than the DFARS language. It appears that
the goal of the US government's use of US taxpayer dollars is to
subsidize and create a local industrial base to produce products (or
provide services) for use within Iraq and Afghanistan. To succeed in
this goal, we believe it is important to look at the industrial base as
a [system]{.underline}, not in terms of [end product]{.underline}
purchased in any contracting action. We believe that the way the DFARS
is worded, it is possible that a local company could produce or assemble
an end item which is comprised mostly of non-local raw materials,
ingredients, components, or items and still offer a "local" product
under the phrasing of the DFARS. Failure to identify and quantify the
value of these non-local parts of the end item will not "force" the goal
of developing a supply chain infrastructure to support the system in the
long-term. We assert that requiring the local bidder to prefer local
parts for the end product in his bid will assist in providing more
long-term stability than as currently worded, thus improving the
prospects of meeting the goal.

\(g\) To implement this, we believe several sections of the DFARS
require modification, as shown in italics.

> \(i\) DFARS definitions sections 225.7701, 252.225-7024 (a) (1),
> 252.225-7026(a) (1) and 252.225-7021 ALTERNATE I (a)(14)(i), should
> each be modified to read more in terms of the following.
>
> "\'Product from Iraq or Afghanistan' means a product that is mined,
> produced, or manufactured in Iraq or Afghanistan, *and that end
> product is wholly comprised of raw materials, ingredients, components
> and/or items that are all mined, produced or manufactured in Iraq or
> Afghanistan*."
>
> \(ii\) DFARS 252.225-7021(a)(14)(ii) would be reworded to insert
> language such as:
>
> "In the case of an article that consists in whole or in part of
> materials from another country, has been substantially transformed in
> Iraq into a new and different article of commerce with a name,
> character, or use distinct from that of the article or articles from
> which it was transformed. *The value of all materials used in and/or
> that are an integral part of, end product(s) offered which originated
> from another country shall be provided in section 252.225-7021 (a)
> (14) (iii) of this provision.* ...."
>
> \(iii\) Clause DFARS 252.225-7021 (a) (14) (iii) would be added with
> wording such as:
>
> *"The following* *raw materials, ingredients, components and/or items
> used in and/or that are an integral part of the end product(s)
> offered, are all mined, produced or manufactured in countries other
> than Iraq or Afghanistan as shown:*
>
> *[End Product Offered]{.underline} [Item Used in End
> Product]{.underline} [Country of Origin]{.underline}
> [Value]{.underline}*
>
> \(iv\) DFARS 252.225-7022 (c) (1) "Certification of Country of Origin"
> would be reworded with the addition to the end of the line of wording
> such as:
>
> "... paragraph (c) (2) of this provision, is a U.S.-made, qualifying
> country, Iraqi or designated country end product, *and all* *raw
> materials, ingredients, components and/or items used in and/or that
> are an integral part of the end product(s) offered, are U.S.-made,
> qualifying country, Iraqi or designated country end products."*
>
> \(v\) Clause DFARS 252.225-7022 (c) (3) would be added with wording
> such as:
>
> *"In the case of Iraqi End Products, the following* *raw materials,
> ingredients, components and/or items used in and/or that are an
> integral part of the end product(s) offered, are all mined, produced
> or manufactured in countries other than Iraq as shown:*
>
> *[End Product Offered]{.underline} [Item Used in End
> Product]{.underline} [Country of Origin]{.underline}
> [Value]{.underline}*

\(vi\) DFARS 252.225-7023 (d) would be reworded to include language such
as:

> "Evaluation. For the purpose of evaluating competitive offers, the
> Contracting Officer will increase by 50 percent the prices of offers
> of products or services that are not products or services from Iraq or
> Afghanistan, *and to increase by 50% the prices of all raw materials,
> ingredients, components and/or items used in and/or that are an
> integral part of the end product(s) offered, are all mined, produced
> or manufactured in countries other than Iraq or Afghanistan as shown
> in (d) (1) of this provision.*
>
> *(1) "The following* *raw materials, ingredients, components and/or
> items used in, and/or that are an integral part of the end product(s)
> offered, are all mined, produced or manufactured in countries other
> than Iraq or Afghanistan as shown:*
>
> *[End Product Offered]{.underline} [Item Used in End
> Product]{.underline} [Country of Origin]{.underline}
> [Value]{.underline}*

\(h\) To succeed, we contend that each contracting action must demand
products offered be of Iraq or Afghanistan sources, including all raw
materials, ingredients, components and/or items used in each line item,
end product offered. As the local economic "industrial bases" of Iraq
and Afghanistan develop, it may not be possible that all raw materials,
ingredients, components and/or items are from Iraq or Afghanistan
sources. Therefore, the interim use of a 50% price gross up for
foreign-sourced components needs to be included in the language of the
DFARS to truly get the "industrial base system" developed.

In other words, the Iraqi or Afghani bidder who is working diligently to
help create an industrial base in his country by using locally produced
components in his product should be rewarded for his effort in
comparison to a competing bidder supplying an end product which has more
foreign-sourced items in it. For example, one competing bidder using
less costly textiles sourced from India in manufacturing uniforms may
cost less than the bidder who successfully got the local fabric
manufacturer in Bagdad to open his factory to produce fabric. The 50%
evaluation factor needs to be used at the lowest level possible in the
raw materials used to produce the end product, not only the line item
end product itself.

\(i\) In our contracting action example, the MRE was procured through
PWC, a local Kuwait distributor, but was entirely assembled and produced
from components from Europe. If the Contracting Officer worded a future
solicitation as providing the "service" of distributing a halal MRE, it
could again be procured under the new DFARS as a local service to the
detriment of both the true local industrial base and the US industrial
base.

The impact of our actual contracting action example was that US
contracting personnel improperly and incorrectly described the "local"
product as less expensive than its US sourced predecessor. We believe it
was too expensive for what was actually delivered. The performance
requirements had been significantly reduced to match the potential
bidders' capabilities. The winning PWC MRE, among other factors, had
fewer varieties, lower quality, and fewer stringent nutritional
requirements than its US product predecessor. Meals were packaged in tin
cans, meaning it could not be used for its intended use for prisoners or
detainees for security reasons. It was not required to be halal
certified, which put our country's reputation within the Islamic
community at risk. All of these adversely affected both the US and local
industrial bases.

**5. What happens when the US subsidies leave Iraq and Afghanistan?**

Assuming MNSTC-I or others agencies successfully transfer procurement
contracting to the local government, what is left behind when the US
government funded enterprises no longer have US taxpayer subsidies? By
definition, government subsidies do not create a commercial market.

> *"Because the truly successful \[Japanese\] companies were such
> incredible engines of profit, they provided the government with the
> resources to subsidize those that were weaker. Japan had the luxury --
> mistakenly, it now seems -- to prop up weak companies rather than to
> expose them to the rigors of global competition. Sheltered, they never
> grew tough. And they became addicted to government support." (Kenichi
> Ohmae in Harvard Business Review, May/June 1995)*

The DFARS, and PGIs have the opportunity to implement Section 886 plus
succeed in developing a long-standing, local industrial base after we
leave. A local market addicted to U.S. government subsidies cannot
function on its own. Yet, the DFARS, by operation, could be the tool to
propel local bidders to "force" the development of a supplier network
within its country, something our government cannot do with the DFARS as
written. Emphasizing only end product procurement cannot do this, but
forcing the local bidders to create an industrial base system and
supplier network in order to gain "lucrative" contracts can be the
backbone to support its development. By creating a lucrative industry,
corruption should be reduced. We believe the DFARS changes we
recommended can provide the US government with some tools to do this.

It will be difficult for all, but may help reduce the potential for
corrupt bidders. The bidders will work and scurry to force local
suppliers to develop and participate, wherever possible, to avoid the
50% penalty on foreign components. The US Contracting Officers will be
forced to evaluate and quantify the impact on the US industrial base so
that policy people can make informed decisions about what contracts to
make preference ones and which ones not to provide preference to Iraq or
Afghanistan. Local contracting officers will need to evaluate the
validity of the information provided and then confirm that the actual
end item finally delivered meets both the performance requirements as
well as the use of local sub-contractors and materials.

Local bidders will require financing, so the proposed revisions could
help them secure financing from local and foreign sources. The value of
a US government contract may provide potential investors with an
incentive to invest in the bidder's company. And then, outside the scope
of this response is the US Congress, which set this intended goal and
now needs to consider tax incentives to American businesses to encourage
them to invest in the promising industrial bases in Iraq and Afghanistan
Section 886 offers.

**[Summary:]{.underline}**

We believe that the effect on the US industrial base should be a
consideration factor in any contracting action and should be presumed
adverse unless otherwise documented. While the contracting action may be
deemed necessary to proceed anyway even with an adverse affect to the US
industrial base, the impact of an adverse effect on the industrial base
may impact other goals and objectives of the U.S. military and
government. Failure to consider and document the adverse affect could
have severe U.S. security or U.S. military operation implications, short
term and/or long term, which would need to be addressed should the
contracting action in preference to Iraq and/or Afghanistan proceed. As
such, we recommend that language in the DFARS to the contrary be removed
and/or modified.

To meet Section 886's goal of providing a stable source of jobs in Iraq
and Afghanistan, we believe tough contracting procedures can compel
local bidders to work toward the creation of a sub-contractor supplier
network within Iraq and Afghanistan. As long as our US taxpayer dollars
are funding the effort, the Contracting Officers need support to stay
tough on potential suppliers to assure valid bidding information is
received and end products eventually delivered meet the specifications.
In addition, it is important they also monitor the bids and end product
deliveries to confirm declarations of country of origin of all raw
materials, ingredients, components and/or items are as disclosed in the
bid.

In addition, contracting officers could use the proposed changes in the
DFARS to reject all offers until more local supplier sub-contractors are
used in the bids as a means to impose the development of a local
supplier network. This will likely require contracting officers with the
determination and strength to avoid the easy path, who can force the
tougher and more challenging decisions employers in Iraq and Afghanistan
will need to make. The time, effort and investment, as frustrating as it
may be from time to time, should be worth the effort in forcing the
creation of a self-sustaining, local supplier base. We compete for
business in this region and believe failure to take the tougher course
will prolong the corruption in those countries that cannot be ignored,
and delay the development of a viable supplier network and industrial
base.

Sincerely,

(signed)

Mary Anne Jackson

President