Port security risk management

Since September 11, 2001, the United States, through the centralised Department of Homeland Security (DHS), has generally stepped up national defence and law enforcement with respect to port security, sought international cooperation through programmes such as the Container Security Initiative (CSI) and fostered public-private partnerships through programmes such as the Customs Trade Partnership Against Terrorism (C-TPAT).

According to US Customs Authority sources, through these and other efforts, nearly 80% of containerised cargo bound for the United States is catalogued before departing from foreign ports, and nearly 80% of cargo is screened for radiation upon entry through US ports. However, US authorities recognise that 80% is not enough, and current legislation will require the installation of radiation detection devices at 22 ports that receive 98% of incoming cargo.

These ports are inherently vulnerable to physical attack in and of themselves, because of their physical size, accessibility by land, sea and air, proximity to major urban centres and links to multimodal transportation networks. The sheer volume of daily cargo also makes ports a likely stop for cargo carrying weapons of mass destruction intended to damage US interests and the global trade community as a whole.

To help bridge perceived vulnerabilities, the United States Congress passed - and President Bush signed into law -The Security and Accountability for Every Port Act of 2006 (SAFE Port Act) Through the SAFE Port Act, Congress strengthened the role of the DHS in several key ways, including by designating it as the sole agency for port security in America, and by authorising it to expend an additional $5 billion in risk management resources over the next six years to increase security at US ports. As administered by the DHS, this additional $5 billion in resources will probably be used in one of two ways - both of which will be of interest to the international trade and security communities.

Federal procurement

The US Federal Government purchases over $600 billion in goods and services each year. As authorised by a number of statutes and implemented through the Federal Acquisition Regulations (FAR), public procurement in the United States is highly structured and regimented, yet allows the government great flexibility in setting its procurement requirements and source selection methods.

Most of the SAFE Port Act procurement will probably be implemented through the DHS and its constituent agencies. Most procurement is likely to be awarded through competitive award procedures or through multiple award schedule style contracts.

In any event, there will be procurement opportunities for service providers and suppliers at both the prime and sub-contract levels for increased procurements using SAFE Port and related funding modes. With these opportunities come compliance challenges that will have to be costed into corporate risk and business models of contractors and suppliers who are new to US federal procurement. Ethics guidelines, financial controls and contractual accountability systems will probably need bolstering for such contractual commitments, most importantly at the prime contract level. However, with the potential for new business at the levels proposed in the SAFE Port Act, meeting the additional compliance regimes may well be worth the effort.

Federal grants

In addition to directly acquiring goods and services through the formal procurement process, the US Federal Government also provides funding to state and local governments, universities and non-profit entities to promote infrastructure development, targeted research and social programmes. In order to implement grant programmes, the legislative branch authorises funding to various executive branch agencies.

The SAFE Port Act creates a distinct federal grant facility in order to promote port security. In addition to the traditional grant recipient entities, the Act provides that port authorities, facility operators, shippers and terminal operators are also eligible to receive SAFE Port grant funds. Subject to a mandatory minimum 25% contribution from the recipient, these funds may be used generally to address vulnerabilities at a particular port or to ensure compliance with area maritime transportation security plans or other facility security plans mandated by Congress.

Subject to normal allowable cost restrictions, SAFE Port grant funds may be used for additional security personnel (salaries, benefits, overtime and retirement contributions), as well as for the procurement of security equipment, such as fencing, gates, barriers, lighting, and surveillance and detection equipment. In addition, recipients may use grant funds to support the costs of conducting training exercises for terrorist attack preparation, information sharing mechanisms regarding terrorist threats and equipment designed to store and handle classified information. In short, the SAFE Port Act provides for a very broad range of activities and equipment that may be funded through a SAFE Port grant.

Unlike the more established Homeland Security Grant Program, the SAFE Port Grant Program remains in its infancy and further guidance from the DHS will probably be required. However, the DHS is expected to publish a notice of SAFE Port grant availability during the second quarter of the year and issue a grant application kit or some other form of request for expressions of interest. SAFE Port grant applications will probably be required to be submitted by the end of July, with grant awards made by 30 September - the end of the US federal fiscal year.

Recipients awarded a SAFE Port grant will not only have to perform in accordance with the programme description of the grant, but they will also have to be prepared to comply with the various terms and conditions of the grant. Based on standard federal grant principles, these conditions will key on financial considerations including allowability, allocability and reasonableness.

Certain costs are "allowed" for reimbursement under federal grants. Most programme costs are allowable but certain expenditure, such as alcohol or entertainment, is not. Likewise, costs must be capable of allocation to the grant at issue. Thus, even costs that are allowable may ultimately be denied if they fall outside the scope of the terms of the grant. Finally, costs must be reasonable and documented as such, through either competition or adequate cost/price analysis. Grant recipients will be required to return costs that the government finds at the close-out of the grant are not allowable, cannot be allocated or are not reasonable. Therefore, SAFE Port grant recipients must have compliance systems in place to ensure that grant funds are prudently used.

The SAFE Port Grant Program will also provide opportunities for non-grant recipients. Specifically, under US federal grant law, procurement under grants is often the bulk of an overall grant. Therefore, service providers and suppliers should consider approaching some of the likely applicants or recipients to inform them of the goods or services that could be provided under a particular grant.

Protecting trade

The SAFE Port Act also directed the DHS to develop, or enhance, two important areas of trade security. First, it must develop and implement a strategic plan for the security of the international supply chain. Among other things, this direction will seek involvement from a wide spectrum of government and private stakeholders concerning goals for securing commercial operations and the impact of supply chain security requirements on small and medium sized businesses.

The second of these areas requires the DHS to develop protocols for trade resumption in the event of an accident or terrorist attack. These protocols should cover at least the following: redeployment of resources to re-establish trade, training of Coast Guard, border and customs agents, and prioritisation of vessels and cargo to be allowed to enter the United States after an accident or attack. The Act permits the DHS to give priority for re-entry to vessels with approved security plans, those seeking to enter the United States from a secure foreign port or those whose cargo has been screened prior to entering the supply chain.

Conclusions

The SAFE Port Act represents a vital next step in the efforts of the United States to safeguard its ports and trade supply. The Act and the expected DHS rulemaking and other implementation efforts are also quite important to all commercial stakeholders in international shipping and trade. Opportunities exist to review, and potentially influence, the course of federal decision making at its earliest stages.

Christopher Rissetto and Jason Matechak are partners working within the government contracts, grants and trade group of the law firm, Reed Smith in the Washington, D.C. office.

crissetto@ReedSmith.com

www.ReedSmith.com