Deal Structures:
BPO / F&AO / Finance & Accounting for Governments

    Governments of all sizes have hired external service providers to support their operations.   In one late-2004 non-U.S. contract, the government hired a U.S. contractor's local affiliate for ten years to manage information technology infrastructure and design new processes and systems to administer the government's non-tax revenue collection.  Aggregate cost is estimated at between $400 million and $500 million. Ironically, that country's very strict privacy laws were not an impediment to hiring a foreign-owned firm. 

    The Outsourced Services.  The government's aging computers were unable to meet the need to ensure collection.   The "days outstanding" for unpaid private debts to the government were undoubtedly much higher than for similarly situated retail and wholesale commercial establishments.  The debts include all non-tax debts, which can include debts incurred for ambulance and emergency medical services to medical-insurance premiums.    

    The outsourced services include:

• management of the government's information technology infrastructure;

• design new processes and systems to administer the government's non-tax revenue collection; and

• collecting non-tax revenues.

    Privacy Law.   The country has adopted a law that is one of the world's most stringent prohibitions on disclosure or use of personally identifiable information.  The law applies to both government and the private sector.  

    Public Procurement Law.   The WTO Agreement on Government Procurement sets forth rules for governmental purchasing of goods and services or any combination.  By adhering to this agreement, the foreign government had rejected xenophobia as a factor for selecting contractors to provide goods and services. 

    National Treatment.  In general, governments of WTO countries are required to provide "national treatment" "unconditionally to the products, services and suppliers of other Parties offering products or services" that is not less favorable than the treatment accorded to "products, services and suppliers" of the local country or any other WTO member.  Art. III, Sec. 1.

    Query: Abusive Technical Specifications?  The local government had to avoid abusing the use of definitions of "technical specifications" as a tool for discrimination against foreign suppliers.  

"Technical specifications laying down the characteristics of the products or services to be procured, such as quality, performance, safety and dimensions, symbols, terminology, packaging, marking and labeling, or the processes and methods for their production and requirements relating to conformity assessment procedures prescribed by procuring entities, shall not be prepared, adopted or applied with a view to, or with the effect of, creating unnecessary obstacles to international trade."   Art. VI, Sec. 1.  

Notably, this WTO Agreement says nothing about the use of technical specifications dealing with the privacy of its own citizens.   The Uruguay Round did not address the emerging vital public policy interests of governments relating to the personal data of their subjects.

    Security in Lieu of Privacy.  Under the WTO agreement structure, exceptions to non-discrimination and technical specifications requirements apply for protection of security.   Privacy depends on security, which in turn depends on physical, logical and technological limitation on access.   Thus, security becomes a legitimate proxy for allowing local governments to apply privacy laws in international procurement of goods and services.

    Best Practices in Governmental Outsourcing (BPO).    It is well known (or at least widely believed) that foreigners introduce risk of security breach.  We call this the "xenophobia" risk, where the foreigners are considered to be such a risk that special prophylactic measures should be taken legally and technologically.  As a result, the government adopted some unique "best practices" in international outsourcing.

• Privacy.   By contract, no personal data can be transferred or processed outside the home country.  This includes help desk, "customer" service and contact center operations, collection activities and other customer-touching operations.   

• Jurisdiction.   The government contracted with the local subsidiary of the U.S. service provider.   Press announcements did not reveal whether the foreign parent was required to submit to the local jurisdiction or otherwise ensure that adequate financial resources would be available to respond to any claim of contract breach.  In addition, all employees of the local subsidiary having access to private data were required to be local and therefore subject to the local court jurisdiction.  

• Infrastructure Support.     At the same time, the service provider remains free to perform some tasks unrelated to privacy without regard to the location of the services.  Using telecommunications and software allowing for remote administration of networks, software upgrades and bug fixes and other operations not touching personal data, the service provider remains free to perform infrastructure support services from any location in the world.
  

• Ownership of Infrastructure, Computer Systems and Software Licenses.    To avoid the risk that a foreign government might foreclose on information technology that supports local governmental services, the government retained ownership of all technology and data relating to its citizens.   If there is to be any force majeure, the local government will be in charge of establishing the conditions in its own Act of State.  No foreign Act of State could thus impede local governmental operations.

    Further Reading

  Swiss Banks Can Outsource Offshore

    Note:  This particular transaction contained many specific provisions for best practices, both for government and commercial enterprise customers, that are too numerous to detail here.  Please feel free to contact us at wbierce@outsourcing-law.com for more information.

    Posted: January 7, 2005