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P.L. 480 Federal Regulations

Regulations Governing the Financing of Commercial Sales of Agricultural Commodities


Discussion of Comments

Purchase authorizations. After CCC and the participant have signed a title I agreement, CCC issues a purchase authorization (PA) in response to a request from the participant. One comment asked that the importer or the shipping agent be permitted to request the PA. However, having the participant prepare the brief written request helps to insure that the participant also signs the PA when it is issued a few days later. By this signature the participant accepts the specific contracting and documentary requirements in the PA which govern CCC financing under the program. Because the participant must bear any costs which are not eligible for CCC financing, it is important that the participant be fully involved in both requesting and signing the PA. Since the requirement for requesting PA's appears in the title I agreement, there is no need also to include it in the regulations and this portion of the proposed rule will be adopted without change.

Shipping agents. The proposed rule would require an agent of the participant or importer (shipping agent) to provide complete information on the firm and its activities only once per fiscal year, instead of each time the firm is nominated by a participant. One commenter requested that we further change the procedure to adopt an "initial registration" of interested firms at the beginning of each fiscal year, similar to the determination of eligibility for commodity suppliers. The firm would not have to be nominated by a participant to be registered.

We do not believe that adopting this suggestion would further reduce the reporting burden on a shipping agent, or expedite the FAS review process. In fact, it would place a greater burden on firms which would submit information for such "initial registration," yet never be nominated as a shipping agent. Also, if FAS were to "register" any interested firm, regardless of whether a participant wished to employ the firm, FAS' workload would be increased. Finally, such "registration" could imply endorsement or approval by FAS, which could be misleading to participants. FAS does not investigate firms which wish to act as shipping agents; it simply accepts the nomination of an agent by the participant if the requirements of the regulations are met. The regulations implement the provisions of section 407(b)(4) of the Federal Agriculture Improvement and Reform Act of 1996 regarding conflicts of interest. Based on this evaluation, CCC will adopt the rule as proposed.

Eligibility of Commodity Suppliers. The proposed rule would have permitted any supplier eligible under the GSM-102 or GSM-103 programs to participate in sales under title I. FAS would not have evaluated the firm's responsibility or its experience as an exporter of U.S. agricultural commodities. After reviewing the potential impact of this change on food aid recipients under the program, we have reinstated the requirement for a separate, but simplified, eligibility determination for title I suppliers. It is crucial for most food aid recipients that suppliers fulfill their contracts without problems or significant delay. Title I shipments are often a key part of the supply pipeline for recipients, which generally are not able to make a prompt commercial purchase should a supplier fail to perform. In addition, if a commodity supplier did not deliver the commodity, the recipient might also be required to pay the full shipping costs to the contracted vessel ("deadfreight"). By retaining the requirement that FAS evaluate the export experience and financial responsibility of a prospective supplier, we will help protect participants against non-performance.

One comment noted that the IFB requirements for bid and performance bonds have "adequately guaranteed performance by suppliers in the past." It is true that recipients normally require commodity suppliers to submit a bid bond (generally 2% of the value of the offer) and to open a performance bond when they receive a contract. The performance bond is usually 5% of the value of the contract. These bonds provide some protection against an unreliable supplier, but would be insufficient to cover the full cost of "deadfreight," for example. Buyers, of course, have not relied solely on these bonds in the past; FAS has screened out firms which did not demonstrate export experience and financial responsibility. It is not practical for recipients to increase the amount of the bid and performance bonds to cover the maximum costs of a default by the supplier; such bonds would be more expensive for the suppliers, and would increase all commodity costs under the program.

Under Title I, recipients must buy either on the "lowest landed cost" basis (the lowest combination of commodity and freight offered) or on the basis of the lowest priced commodity offered. This helps insure that CCC funds provide as much tonnage as possible, and to give qualified commodity suppliers an equal opportunity to compete. Because of this program requirement, recipients may not simply select the supplier(s) with which they are familiar. It would be inefficient to require each recipient to evaluate the ability of potential U.S. suppliers to perform; some recipients would not be able to conduct such an analysis. Submitting information to each recipient would also increase the workload for suppliers wishing to participate in the program.

In order to reduce the reporting burden for suppliers, we have eliminated the requirement that prospective suppliers provide the name, address and chief executive officers for all branches, affiliates and subsidiaries, and that eligible suppliers keep this information current. Although the final rule is not as beneficial to suppliers as the proposed rule, it does reduce the reporting burden for suppliers while maintaining an acceptable level of protection for the recipient. As a result, CCC has determined to adopt the provisions in the final rule regarding eligibility of suppliers.

Invitations for Bids. One comment asked that the Invitation for Bids (IFB) specify how the buyer will pay the supplier whenever the buyer requests a supplier to bear a cost not eligible for CCC financing. Although 17.5(e) provides that the contracts between commodity suppliers and buyers "...should stipulate the responsibility of each party for payment of any costs not eligible for financing by CCC," we agree that this information should also be included in the IFB. Sections 17.5(c)(2) and 17.8(b)(1)(iv) have been amended to add this requirement for IFB's for commodity and for ocean transportation.

In this regard, it is important to note that some payments which had been permitted under the existing regulations, but which cannot now be financed by CCC, will be prohibited when this final rule becomes effective. This includes consular fees for legalization of documents, for example, and total brokerage commissions which exceed 2-1/2 percent of the freight. We have added a new paragraph, 17.6(c)(3), for improved clarity regarding total brokerage commissions. This paragraph is consistent with the regulations governing brokerage commissions for commodities shipped under section 416(b) of the Agricultural Act of 1949 and the Food for Progress Act of 1985 (7 CFR 1499.8(d)). The preamble to the proposed rule discussed the ceiling on brokerage commissions and requested suggestions for other ways to address the general issue of costs which are ineligible for CCC financing. Since no comments were submitted offering alternative procedures, the final rule retains the provisions in the proposed rule.

Ocean transportation. A comment asked that we delete the requirement that the vessel owner may claim detention when a required letter of credit is not available at loading ( 17.8(k)(6)). The comment questioned the appropriateness of a claim for detention in this case since the freight could not be collected until after the vessel arrived at the first discharge port. However, it is very important to the program that the vessel owner have the letter of credit available before loading. This provides assurance of payment when the voyage is completed, reducing the owner's risk and thereby keeping freight costs as low as possible. The comment also noted that the requirement for detention disadvantaged foreign flag vessels. The regulations apply to freight contracts for voyages for which CCC finances all or part of the costs, whether on U.S.-flag or non-U.S. flag vessels.

Another comment agreed with the proposed change ( 17.8(b)(2)) which no longer prohibits clarification or submission of certain technical information after opening of ocean transportation offers; the author requested confirmation that this would not be a vehicle through which an offer could be made responsive after it had been submitted. As described in the preamble to the proposed rule, only freight offers which are responsive to the terms of the IFB as of the date and time for receipt of offers could be considered. No information or clarification submitted after that date and time could be used to make the offer responsive. The prohibition against negotiation also remains in the regulations. The change simply acknowledges that it is occasionally necessary to seek factual information after an offer has been submitted, such as the maximum tonnage which can be loaded at a certain port, given existing draft conditions and stowage factors for the commodity in question. Another comment requested that ocean freight be earned (and paid) when the vessel loads, stating that this is the commercial standard. The program operated in this manner before 1960, at which time CCC found it necessary to change freight procedures to protect its interest, so that freight was payable on the vessel's arrival at the first discharge port. An importing country had fixed a vessel which was abandoned by the owner before the vessel departed the load port, but after receipt of freight payment on loading. CCC incurred additional costs and freight charges to ship the cargo on another vessel. More recent program experience still supports this position. Within the last ten years, several vessels carrying title I cargo sank en route to the discharge port. Under the final rule, the risk of non-performance of the voyage remains on the ocean carrier, subject to a determination of force majeure. The final rule does continue the policy of allowing a supplier to receive freight prior to arrival if the supplier posts acceptable security.

In general, requiring freight to be payable on discharge maximizes the incentive to the supplier of ocean transportation to complete the voyage as contracted. In order to maintain this protection for CCC, and for program recipients, the proposed rule has been adopted as proposed. The requirement applies, of course, only when CCC finances any part of the ocean freight.

The same comment also requested that we change the method for settlement of demurrage and despatch at the load port. The current procedure was instituted in a final rule published December 7, 1995 (60 FR 62702). This rule provided that demurrage and despatch at load would be settled between the parties which controlled the loading (the supplier of ocean transportation and the commodity supplier.) This change was made to make the program operate closer to commercial practice than in the past, when CCC shared in despatch earnings. It also made title I more consistent with other food aid programs in this regard. Although it is true that no contract exists between the two suppliers, FAS has not heard of serious problems in arranging payment of demurrage and despatch on this basis. We have retained this provision in the final rule, but will review the issue if it appears appropriate based on further experience.

Payment to suppliers. Most comments supported the proposal that CCC pay suppliers directly for all amounts which CCC finances, instead of requiring participants to open letters of credit covering these amounts. Two comments asked whether CCC would be able to pay as promptly as a bank does (generally, examining documents within two business days from presentation, with payment no later than one business day following the date documents are found in order.) Another comment asked whether the Uniform Customs and Practices for Documentary Credits ("UCP 500") would be the standard by which CCC would examine documents. CCC's examination of documents will be more extensive than that conducted by banks; it will not be based on UCP 500 but on the "post audit" process now performed by CCC on documents submitted to CCC by banks after they have made payment to suppliers. CCC staff will compare the documents to the documentary requirements in the PA and the IFB, and will check all calculations on the documents to ensure that no mathematical errors have been made. CCC will also review the documents received to ensure there are no discrepancies among the documents. As part of the direct payment process, CCC must also prepare and process the payment document, SF-1166, "Voucher and Schedule of Payments." The CCC review will replace CCC's existing "post audit" of documents and the banks' own review of documents. CCC expects to be able to pay suppliers within a maximum of seven business days after receipt of all the required documents, if there are no discrepancies. CCC will not disburse any funds to the supplier until all documents are received, audited, and found to be in order.

Therefore, suppliers should take note that they are solely responsible for ensuring that all the proper documents are included in the package submitted to CCC for payment, and that they are completed correctly. This will help CCC pay the suppliers sooner. Section 17.9(a)(3) has been revised to contain a more detailed description of the examination of documents by CCC. In addition, a new 17.9(a)(4) has been added to reflect the provisions of the Debt Collection Improvement Act of 1996, Pub. L. 104-134, which requires that CCC must issue all payments by electronic transfer. Suppliers must provide CCC with the necessary information to facilitate this procedure.

One comment said that the seller had no assurance of receiving payment without a letter of credit since CCC can alter or revoke the PA. However, 17.3(d) states that, if the GSM were to "supplement, modify or revoke" a PA, CCC would "...reimburse suppliers who would otherwise be entitled to be financed by CCC for costs which were incurred as a result of such action...in connection with firm sales or shipping contracts...." This long-standing provision remains in the regulations.

The comment added that the proposal overstated the benefits to recipients of the change to direct payment by CCC, in part because the banking fees were actually lower than estimated in the proposed rule. The fees charged by banks related to letters of credit are not public information, but the estimate in the proposed rule was based on comments from program participants, which have paid such fees. The issue is greater than the bank fees, however; participants face the very real potential for significant freight and commodity costs (detention and carrying charges) which are not financed by CCC. These costs must be paid by the participant when loading is delayed because operable letters of credit were not available. If a dispute arises, participants may also be responsible for legal costs.

Finally, this comment stated that banks may be reluctant to issue letters of credit for small amounts of freight not covered by CCC, or may increase their fees to cover costs for these low-revenue transactions. It is possible that some banks may forego this business, or increase their fees slightly, but we do not anticipate that all banks will decline to participate.

We have evaluated these comments carefully. It is true that suppliers may not be paid by CCC quite as quickly as they were by banks under letters of credit, because of the more detailed document review conducted by CCC, and that this may lead some firms to increase commodity prices slightly under the program, to cover a few days of lost interest. To the extent this occurs, it would mean a very small reduction in the commodity tonnage which could be shipped within the fixed funding provided under a Pub. L. 480, title I agreement. However, we anticipate that the significant cost saving to recipients will clearly outweigh this disadvantage, and the other concerns discussed in this preamble. Recipients must pay bank charges for letters of credit and must pay suppliers if loading is delayed because the letter of credit is not available. (Commodity suppliers receive "carrying charges" in such cases, and suppliers of ocean transportation can collect "detention." One day of "detention" for a U.S.-flag vessel can cost the recipient as much as $25,000.) As a result, the final rule retains the change to direct payment by CCC. However, we will carefully monitor the impact of this change and will review the decision based on a year's experience.

Documentation.

A comment requested that weight certificates be issued only by the Federal Grain Inspection Service, USDA (FGIS) or its cooperators. By law, FGIS must weigh certain commodities which are exported, such as wheat or corn. For other commodities, the program has, for many years, permitted private firms to provide weight certificates. Since including this option is consistent with commercial practice and it gives both buyer and seller more flexibility in contracting under title I, we have determined that the proposed rule will be adopted as published.

Another comment asked whether the "federal appeal inspection certificate" ( 17.9(c)(5)) were still valid. We have revised this paragraph to reflect the current procedure when a certificate is issued representing an appeal inspection. The same comment noted that a phytosanitary certificate issued by USDA cannot show a number on its face, including the PA number. ( 17.9(b) requires that the supplier arrange for the PA number to be put on required documents.) The comment explained that the PA number could be placed on a separate sheet of paper which is stapled to the phytosanitary certificate. CCC will accept this procedure for the phytosanitary certificate, and the provision will be adopted as proposed.

List of Subjects in 7 CFR Part 17

Agricultural commodities; exports; finance; maritime carriers.

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