SEPTA, feds slack on $140M Chinese contract: Report

(The Center Square) — A federal report warns that SEPTA’s contract with a state-owned Chinese company lacked proper oversight and may not have met federal guidelines for Buy America requirements.

However, much of the problem came from vague guidance from the federal government itself.

The contract, a $138-million deal with the China Railway Rolling Stock MA Corporation, or CRRC, would have delivered 45 passenger railcars to the Philadelphia region’s transit agency by 2025. 

Awarded in 2017, the contract attracted the attention of three federal congressmen by 2022 who raised concerns with the Federal Transit Administration over whether the corporation met Buy America requirements in its agreements with SEPTA and other transit agencies, worth about $3 billion. 

An FTA review ensued, leading to the suspension of money to SEPTA for the project in February 2024, and the contract’s termination by SEPTA in April for cause. 

The FTA was “without confidence that the multi-level railcars comply with Buy America,” it stated in a letter to SEPTA. As of January 2024, SEPTA spent more than $55 million in federal dollars on the project and was looking to recover the money.

Though SEPTA fell short, the fault was shared.

“Weaknesses in FTA’s Buy America guidance hindered its oversight of SEPTA’s compliance,” the U.S. Department of Transportation’s Office of Inspector General argued in a July report.

Buy America rules apply to several federal projects connected to highways, public transportation, aviation, and passenger rail. They aim to protect domestic manufacturing jobs.

When federal agencies try to apply those rules, however, things can go wrong.

In SEPTA’s Chinese contract, cracks appeared when SEPTA couldn’t effectively oversee the pre-award audit, which verifies that CRRC meets Buy America standards and happened a month after the contract was announced.

SEPTA declined to comment when asked about whether it would update its policies to improve oversight.

“FTA does not require recipients to retain supporting documentation for pre-award audits or to verify suppliers’ Buy America information,” the OIG report noted. “Without clear guidance, FTA could not rely on SEPTA to provide oversight of rolling stock procurements and risks that recipients miscalculate domestic content costs—raising concerns about whether FTA’s Buy America rules are being met.”

When the administration only suggests that transit agencies do some things, it makes oversight harder.

“The agency does not require recipients or third-party auditors to retain any documentation from the pre-award audit in order to maintain confidentiality regarding manufacturers’ cost data,” the report noted. “However, without this documentation, FTA and SEPTA have no assurance as to the quality and thoroughness of the pre-award audit work performed.”

In one instance, the outside auditor, Atkins, couldn’t share information with SEPTA.

When Atkins looked at CRRC’s books to verify it met Buy America requirements, it signed a nondisclosure agreement.

“SEPTA was not able to review the cost information contained in the pre-award audit because it did not have a nondisclosure agreement with CRRC,” the report noted. ”As such, only the Atkins auditor was allowed to see CRRC MA’s cost information, thus positioning SEPTA to rely solely on what was written in the audit report.”

When asked by the OIG if signing an NDA with corporation would help SEPTA get better oversight of its project, officials “said they hadn’t thought about it before since they relied on Atkins but were open to the idea.”

SEPTA also declined to comment about whether it agrees with the OIG report calling it “ill-positioned” to ensure compliance, and whether it made any efforts to figure out how much of the money paid to CRRC came from federal or SEPTA funds.

Nor could the FTA get the information they needed from CRRC.

“CRRC MA was often resistant when responding to requests for documentation, lacked sufficient documentation, or provided voluminous amounts of irrelevant documentation that make it difficult to identify specific items for review,” the report noted. “All of which has led to significant delays in FTA’s enhanced compliance review.”

The FTA gave SEPTA and CRRC “numerous opportunities” to demonstrate the contract complied with Buy America rules for over a year and “did not receive satisfactory responses,” the report noted.

In the end, information requests turned into a circular game. CRRC refused a request from SEPTA for more information and claimed they gave the information to FTA and Atkins, but SEPTA could not verify the information.

“SEPTA was ill-positioned to ensure Buy America compliance on the CRRC MA contract,” the report noted.

If SEPTA couldn’t verify the work independently, it wasn’t because it ignored FTA guidelines: State agencies aren’t expected to collect the relevant information.

“FTA does not require recipients or its auditors to retain any workpapers, formal or informal notes, or other records to support the pre-award audit,” the OIG report noted. “Instead, FTA suggests only that manufacturers ‘may’ maintain records of the information and documentation for the audit.”

The FTA only suggests keeping those records as a best practice.

“Without actual requirements for recipients, third-party auditors, or manufacturers to retain pre-award or post-delivery audit documentation, the lack of audit evidence hinders FTA’s ability to evaluate and validate Buy America compliance for rolling stock procurements,” the report noted.

The OIG recommended that the FTA create requirements for how grant awardees or third-party auditors review documentation for audits; ensure that awardees have the same access to confidential information as third-party auditors; establish requirements to document verification of suppliers’ Buy America information; and develop policies for when to initiate compliance reviews for Buy America.

The difficulty of verifying that agencies and private companies follow Buy America rules extends to the difficulty of knowing whether these rules boost American manufacturing.

“Although the Buy America provisions have been in place in some form for more than 40 years in transportation, it is difficult to know how they have affected steel and rolling stock  manufacturing in the United States, whether measured by jobs, output, or any other indicator,” a 2019 report from the Congressional Research Services noted. 

The report did warn, however, that Buy America rules may drive up project costs.