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CHIPS Act Strategy: Department Of Commerce Releases Additional Information On Applications For $50 Billion In Funding – Government Contracts, Procurement & PPP


On September 6, 2022, the U.S. Department of Commerce
(“Department”) released a 20-page document providing key
details on the administration and application process for the award
of $50 Billion through the Creating Helpful Incentives to Produce
Semiconductors (CHIPS) for America Fund.

The “Strategy for the CHIPS for America Fund
included important information about the breakdown of the funding
it will disburse, the priorities it will set for awarding grants,
the intended timeline for the first awards and how the agencies
will staff the programs, among other items. Here are the key
takeaways:

Program Administration

The program will be administered through two new offices at the
Department of Commerce’s National Institute of Standards and
Technology (NIST). The CHIPS Program Office (CPO) will implement
the Section 9902 semiconductor incentives program and provide
policy and stakeholder engagement support across CHIPS programs.
The CHIPS research and development (R&D) office will
“incubate” the National Semiconductor Technology Center
(NSTC), and manage the Industrial Advisory Committee, Advanced
Packaging, Manufacturing USA and R&D activities. Staff have not
yet been publicly named to lead the CPO or CHIPS R&D
office.

Key Initiatives

The CHIPS Act of 2022, which we previously analyzed in a July
27, 2022 client alert here, directly appropriates $39 billion in
funding to incentivize domestic chip manufacturing and $11 billion
for semiconductor research and development, provides some guidance
on how to disburse that money but gives significant discretion to
the Secretary. For example, the statute says that up to $6 billion
may be used for the cost of direct loans and loan guarantees and $2
billion is explicitly provided solely to focus on legacy chip
production. However, the Department’s newly released strategy
offers the first window into how the Secretary will use her
discretion to award funding under the CHIPS programs. It identifies
three key initiatives:

  • Leading Edge Logic and Manufacture Clusters.
    The Department will dedicate $28 billion through grants, cooperate
    agreements or loans/loan guarantees for proposals involving the
    construction or expansion of manufacturing facilities to fabricate,
    package, assemble and test these critical components, particularly
    focusing on projects that involve multiple high-cost production
    lines and associated supplier ecosystems. The Department expects
    this initiative to account for roughly three-quarters of the CHIPS
    incentives and drive “large-scale” change.

  • Mature Chips, New and Specialty Technologies, and
    Suppliers
    . The Department will allocate $10 billion
    through grants, cooperate agreements or loans/loan guarantees for
    proposals that involve but are not limited to:

    • Construction or expansion of facilities for fabrication,
      packaging, assembly and testing of mature semiconductors, including
      all types of logic, memory, discrete, analog and optoelectronic
      chips.

    • Facilities to produce new or specialty technologies like
      advanced analog chips, radiation hardened chips, compound
      semiconductors or emerging technologies.

    • Facilities that manufacture equipment and materials for
      semiconductor manufacturing.

    • Equipment upgrades for near-term efficiency improvements in
      fabrication facilities.

The Department encourages “industry participants to craft
creative proposals” and expects this pot of funding to support
potentially dozens of grants with the total financial assistance
varying considerably “depending on the specifics of each
project.”

  • Research and Development. The CHIPS Act
    already details how much funding each of the new research and
    development initiatives—the National Semiconductor Technology
    Center (NSTC), the National Advanced Packaging Manufacturing
    Program (NAPMP) and the three new Manufacturing USA
    Institutes—will receive over the next five fiscal years.
    Instead, the new strategy document shares new details about the
    mission for each of these centers.

    • National Semiconductor Technology Center – the strategy
      imagines the NSTC as a long-term “force for advancing
      innovation in semiconductors and microelectronics, with substantial
      financial and programmatic support from companies, universities,
      investors and other government agencies.” The NSTC will seek
      to ensure broad participation from startups, small firms and
      fabless companies “rather than being tuned to the needs of
      specific companies” or technologies as well as the ability to
      attract leaders who understand the entire semiconductor ecosystem
      and can manage large public-private partnerships.

    • National Advanced Packaging Manufacturing Program – the
      strategy notes that the Department “envisions forming a
      network of entities to create a robust domestic advanced packaging
      capacity.”

    • Manufacturing Institutes – the statute requires the
      Department to establish up to three new institutes related to
      semiconductors and the strategy explains that the Department now
      expects these institutes “to emphasize virtualization and
      automation, among other topics.”

Timeline

The strategy notes that the Department intends to solicit
funding applications before February 2023 for the semiconductor
incentives programs (i.e., key initiatives 1 and 2 above). In
addition, CPO will establish “a preliminary application stage
that will enable applicants to get feedback” from the
Department before final applications are due.

Application Prioritization:

1. Cost Share/Private Capital. A significant
project cost share by the applicant will either be required or
result in a significant prioritization for funding. In
addition, the Department is encouraging proposals that leverage
private capital, both investments from the fab companies themselves
as well as outside sources of capital. In addition to committing
their own significant resources, semiconductor companies are
encouraged to explore creative financing structures to tap a
variety of sources of capital at different places on the
risk-reward spectrum to reduce the overall cost of capital.

2. Expanded Covered Incentives. The Department
expects to prioritize applications “that include
state and local incentive packages with the potential for large
spill-over benefits, are based on performance, and maximize
regional and local competitiveness as well as economic gains,
including supporting a robust semiconductor ecosystem rather than a
single company.” Encouraged expanded incentives include, but
are not limited to: (1) support for broader development of a
supplier ecosystem such as shared utility, logistics and production
capacity, (2) workforce investment and (3) long term tax
credits.

3. Quick Delivery/Low Project Risk. The
Department will prioritize funding for proposals that can
“move quickly, reduce project risk, demonstrate ample local
support and/or regional cooperation, and provide broad-based
benefits.”

4. Security and Resiliency. The Department
expects to prioritize projects that “adhere to
standards and guidelines on information security, data tracking and
verification, and that collaborate on further development and
adoption of such standards.”

5. Workforce. The Department expects to
prioritize investments in projects that connect workforce
training dollars to quality jobs that exceed the local prevailing
wage for an industry in the region, including basic benefits (e.g.,
paid leave, health insurance, retirement/savings plan) and/or are
unionized.

6. Diversity and Underserved Populations. The
Department will prioritize “applicants with
well-developed proposals designed to increase participation of and
outreach to economically disadvantaged individuals, minority-owned
businesses, veteran-owned businesses, women-owned businesses, and
rural businesses in the geographic area of each project.”

Encouraged to Include in Application

1. Collaboration. The Department is
encouraging applications that evidence collaboration
between industry stakeholders, investors, customers, designers and
suppliers; and international firms. This can include (1) purchase
commitments, (2) enabling fabless design firms and/or (3)
“consortium-like proposals, by semiconductor fabricators and
their upstream suppliers (e.g., of substrates or specialty
chemicals), equipment providers, and downstream partners (e.g., of
assembly, test, and packaging).”

2. State/Local Commitment. The Department notes
the benefit and potential prioritization of applications that
demonstrate significant state and localities commitment beyond the
required covered incentive. This could include:

  • Expedited processes for environmental, health and safety
    reviews and permits.

  • Liaisons to assist with site selection, supplier discovery and
    compliance with local laws.

  • A systems integrator that works with ecosystem companies to
    address shared issues like navigating permits, building
    infrastructure, finding workers and coordinating incentive
    applications.

  • Planning and support for other ancillary investments such as
    housing and community development.

  • Partnership with other states and localities to develop
    regional ecosystems and corridors that encompass multiple
    jurisdictions.

3. Workforce. The Department is
encouraging projects that include effective and creative
workforce development solutions at the scale required to meet
demand.

Project Details Required

The Department has stated that each application will require the
submission of the following details:

1. An executable plan to sustain the facility without further
Section 9902 funding that covers the expected useful life of the
facility receiving support.

2. Provisions for necessary investments and upgrades to ensure
that the facility remains competitive and commercially viable for
its useful life.

3. Commercially reasonable assumptions for revenue, operating
costs, cash flows and other drivers of financial
sustainability.

4. An analysis of how the Incentive Tax Credit will impact the
financial results of the project.

Unanswered Questions

While the Commerce’s strategic plan is extraordinarily
helpful as entities develop proposals, many critical questions
remain unanswered, including the following:

  • Accountability Regime. While the
    Department’s strategy and other documents include much
    discussion about the focus on transparency and accountability for
    the expenditure of federal dollars, the Department has yet to
    announce whether the Department will follow the standard grant and
    cooperative agreement regulations found at 2 C.F.R. § 200 or
    develop a new system.

  • Foreign Manufacturing Guardrail. A direct
    recipient of Section 9902 funds must execute an agreement with the
    Department agreeing to “not engage in any significant
    transaction, as defined in the agreement, involving the material
    expansion of semiconductor manufacturing capacity in the
    People’s Republic of China or any other foreign entity of
    concern.” The agreement will be operative for 10 years
    following date of award. The strategy does not define critical
    terms including “significant transaction” or
    “material expansion.” It also does not address whether
    these agreements will be negotiated on an individual awardee
    basis.

  • Technology Guardrail. The full amount of an
    award provided to a direct recipient of Section 9902 funds shall be
    recovered by the Department of Commerce, if during the specified
    award term, the recipient knowingly engages in any joint
    research or technology licensing effort with a foreign entity of
    concern (China, North Korea, Russia, Iran and others identified by
    the U.S. government “engaged in conduct detrimental to U.S.
    national security or foreign policy”) that relates to a
    technology or product that raises national security concerns and is
    communicated to the recipient before engaging in the joint research
    or technology licensing. The strategy does not provide further
    information on how this provision will be implemented.

  • Buy America Act. Under the Infrastructure
    Investment and Jobs Act (IIJA) passed last December, federal
    agencies must ensure that no funds made available for a federal
    financial assistance program for infrastructure is obligated for a
    project unless all of the iron, steel, manufactured products and
    construction materials used in the project are produced in the U.S.
    The Department’s strategy does not provide any information on
    whether Section 9902 funding will be considered an infrastructure
    project subject to the Buy America Act requirements.

  • Intellectual Property. A significant open
    question is the intellectual property rights that Commerce will
    require as a condition of funding. The new strategy does not
    provide any guidance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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