Chile’s public procurement market has undoubtedly generated great interest among foreign investors and entrepreneurs during the past decade. Since the last major reform of the regulatory framework, which occurred in 2003, the public procurement market has undergone explosive growth: 7.7 billion Chilean pesos was traded on the Public Market website during 2017, which represents a 20.1 per cent increase compared with 2016, and amounts to a saving of more than 5.9 per cent in the use of public resources in comparison to 2016.
Chile’s success is due to the following causes:
a a clear and stable regulatory framework;
b an open investment regime that promotes and ensures safe trading conditions for foreign investors;
c numerous free trade agreements that avoid international double taxation;
d an independent judiciary; and
e a government that over the past few decades has openly promoted foreign investment and entrepreneurship.
While it is true that, depending on the specific contract in question, the public procurement market is subject to regulatory fragmentation, there are principles and rules that are applicable to all public contracts. Many of these are contained in the Constitutional Organic Law of General Basis of the Government No. 18,575.2 For instance, the Law establishes as a general rule that every contract has to be preceded by a public tendering process where the contractor will be selected. It also mandates that free competition among competitors must be secured at every public tendering procedure. Moreover, it requires that the tendering procedures must be transparent, and it also regulates conflicts of interest, prohibiting the participation of any party that is conflicted.
Additionally, many rules and principles are also included in Chile’s laws that regulate each public contract, such as Law No. 19,886 in the case of supply contracts; the sale, maintenance and leasing of movable property; and service contracts concluded by public entities.
These, and many other reasons that will be discussed in this chapter, explain the success of the Chilean public procurement market over the past decade.
II YEAR IN REVIEW
While the public procurement sector did not undergo any particular modifications in 2017, the year was marked by efforts made by the Office of Public Procurement to improve the use of technology, with the incorporation of a new fully electronic bidding form and the improvement of the MercadoPúblico online bidding platform.3 In addition to the latter, the Office of Public Procurement launched two new sites to enhance the exposition of market data,4 giving the public access to information concerning the amount of money traded and the items being bought, and increasing transparency in a conflict-prone market.
In relation to the latter, the authority issued Guideline No. 28, which contained moral recommendations for buyers of the public market, all of which are consistent with the efforts made in order to avoid the misuse of dominating market positions between buyers, such as municipalities or other authorities and the offeror.
III SCOPE OF PROCUREMENT REGULATION
i Regulated authorities
Broadly speaking, the rules on public contracts are intended to govern government procurement processes. Thus, the enforcement of these rules is obligatory for the executive branch, every public service and the municipalities, as this follows on from the Constitutional Organic Law of General Basis of the Government. The application of the Law on Administrative Contracts of Supply and Services is also obligatory.
Notwithstanding the foregoing, Congress, the judiciary and the General Comptrollership have been voluntarily submitted to the mechanism recognised in the Law on Administrative Contracts of Supply and Services. Consequently, the basic rules on public procurement are applicable in practice to the entire state apparatus, regardless of which branch is concerned.
Finally, even though state-owned enterprises are covered by the constitutional principle whereby they are ruled by the legislation that regulates private entities, the jurisprudence issued by the General Comptrollership has ruled that the principles of public procurement are applicable. Likewise, the General Comptrollership has also ruled that the principles of public procurement are applicable to foundations and associations that participate in or belong to public entities, even though they have a private nature.
ii Regulated contracts
The Constitutional Organic Law of General Basis of the Government regulates any contract entered into with the government regardless of its subject or purpose. Under the Law, the contract must be preceded by a public tender; the principle of equality of competitors and free concurrence5 among them must be ensured in the public tender by the procuring entity; and the procuring entity may use only exceptionally a private tender procedure as a contracting mechanism, and must precede such procedure with a reasoned decision.
In general terms, Law No. 18,803 authorises the executive branch to enter into contracts under which it entrusts to private entities all actions to support its functions that do not correspond to the exercise of its powers. Contracts concluded under the Law must be preceded by a public tender and may also include arbitration clauses.
That said, it must be remembered that a special feature of Chilean legislation on public procurement is that each contract has a particular regulation. However, generally speaking, the following areas can be highlighted.
Supply and services administrative contracts
These contracts are regulated by Law No. 19,886 and Decree No. 250/2014 of the Ministry of Finance, and cover contracts of supply; contracts of sale, maintenance and leasing of movable property; and services contracts.
In addition, Law No. 19,886 is used in practice as a supplementary law to address any loopholes or gaps that exist in another specific rule’s treatment of different administrative contracts. As such, it is the law that is most often used in the public procurement market.
In Chile, this technical expression refers to the duty of the state to ensure free competition among competitors, which is broader than equal treatment.
Contracts for the construction of state civil works
There are special rules in Chilean legislation for:
a the awarding of a concession contract for public works (Decree No. 124/2004, Ministry of Public Works);
b construction contracts for social housing entrusted by the Housing and Town Planning Service (Decree No. 236/2003, Ministry of Housing); and
c when urban financing shared between public and private actors is required (Law No. 19,865) that is destined for the award of properties, or for the execution, operation and maintenance of urban works.
Lease, sale or concession of state-owned immovable property
Decree-Law No. 1,939 regulates the sale, lease, concession and occupation of state-owned immovable property, and entrusts the Ministry of National Property with negotiating, executing and overseeing these contracts. Generally, concessions may not be granted for a period longer than 20 years and leases for more than five years.
An arbitral tribunal will settle differences that may arise between the parties in connection with the execution of the concession contract.
Contracts with the armed forces
There are special rules regarding contracts related to war materials and military vehicles, and systems and equipment for information, command, communication, intelligence and computational services. The general legislation would not be applicable to contracts concerning goods and services necessary to prevent exceptional risks to national security or public security. Therefore, these contracts would be ruled by Law No. 13,196, Law No. 18,928 and Decree No. 124/2004 of the Ministry of Defence.
Municipal concessions are awarded to private entities for the administration of properties that belong to a municipality, and for municipal services (e.g., refuse collection). They may also be used for awarding to private companies the use of underground land for various purposes (e.g., underground parking).
Contracts for the provision of health services
Health services that the government contracts to private establishments would be ruled by special rules (Decree-Law No. 2,763).
Finally, it should be noted that as a general rule contractors cannot transfer public contracts. Article 14 of Law No. 19,886 states that the rights and obligations arising during the development of a tender procedure (and from the consequential contract) shall not be transferable unless a law expressly permits it. For example, Decree-Law No. 1,939 prohibits the transfer of leases for state-owned immovable property unless this is expressly authorised by the Ministry of National Property.
IV SPECIAL CONTRACTUAL FORMS
i Framework agreements and central purchasing
Framework agreements are covered by the legislation on contracts for supply and services (Decree No. 250/2014 of the Ministry of Finance). They consist of a large number of contract procedures with catalogues and lists elaborated by the Office of Public Procurement.
The products and services under these framework agreements are previously selected through a competitive public tender and, when they become effective, the procuring entity may contract directly through the Public Market website.
If the procurement process conducted through the framework agreement exceeds approximately US$65,000, the procuring entity shall convene a process called a large purchase. In this case, the procurement entity must give public notice to the market at least 10 days in advance about its intention to purchase. During this period, all interested competitors who are registered in the relevant specific list or catalogue may submit their offers, and the contractor will be chosen from among them as if the process were a public tender.
It is important to note that if a particular good or service is available under any of the catalogues or lists, the contracting entity is forced to purchase it through the existing framework agreements, and is forbidden to call for a public tender and contract directly.
As an exception, these rules are not mandatory for municipalities and the armed forces. However, in practice, the framework agreements have been used for these cases.
ii Joint ventures
Article 19 No. 21 of the Constitution prescribes that public entities are not allowed to develop economic or enterprise activities unless there is a special law that specifically allows this. As such, the possibility for public entities to participate in public–private partnerships or in joint ventures is in reality very limited.
In the case of state-owned enterprises, three circumstances must be considered:
a state-owned enterprises can provide goods and services to public entities, but this must be done on an equal basis to private suppliers and in compliance with all legal provisions;
b state-owned enterprises may participate in a tender process as part of a consortium with other private competitors on an equal basis; and
c state-owned enterprises may participate in public–private partnerships or joint ventures with private parties to provide the government with a particular good or service (e.g., ENAP, the national oil company, holds public–private partnerships with private entities for the exploration and exploitation of natural gas).
Different laws specifically allow public–private partnerships or joint ventures. For example, Law No. 19,865 outlines a shared financial mechanism between municipalities and housing services with private entities for the award of properties, or the execution, operation and maintenance of urban works. In the same way, private entities can offer to public entities the realisation of different concessional projects, such as public work concessions for sewage system, water or geothermal energy services.
V THE BIDDING PROCESS
In compliance with the principles of transparency and the free concurrence of competitors, there is abundant case law on the duty of contracting entities to disseminate their tender processes as widely as possible. Thus, calls to tender processes will always be published in the major newspapers, and will also be posted on the websites of the respective procuring entities.6
The Public Market website deals with supply and services administrative contracts. Potential competitors can review on its website any procurement processes called by public entities.
Broadly speaking, there are four main procurement processes that can be used by public entities.
As previously mentioned, these consist of a massive number of contract procedures with catalogues and lists elaborated by the Office of Public Procurement. For the elaboration of the catalogues, the Office of Public Procurement will call a tender process during which every bidder that complies with the requirements indicated in the tender bases will be selected. Once this list is finished, it is uploaded to the Public Market website, and public entities can contract directly through the website.
If the good or service required is available under a framework agreement catalogue or list, its utilisation is mandatory, and it is forbidden to call a tender process. As an exception, these rules are not mandatory for municipalities and armed forces. Nevertheless, in practice, the framework agreements have been used in these cases.
Under this contest procedure, a public entity makes an open call inviting interested actors to present their offers. It will then select and accept the most convenient offer from among these.
If the good or service is not available under the framework agreements, a public tender would as a general rule be used and, in the case of contracts above US$72,000, it is always mandatory to use the public tender procedure.
The public tender procedure can start with a pre-qualification or pre-selection stage to indicate which interested parties will be able to participate in the tender process. The evaluation at this stage must be based only on technical criteria. In any case, the tender is initiated with the publication of the tender bases on the Public Market website.
Following this, competitors can ask questions of and clarify doubts with the public entity, which must provide answers within a time frame that ensures a competitors have adequate time for preparing their offers. The offer submission must be made on the date and at the time previously indicated, and generally contains a technical offer and an economic offer.7
After this, the offer will be opened at a public event that guarantees adequate transparency and publicity. The procuring entity must then evaluate every offer on equal conditions, for which task it may appoint an evaluation committee.
Finally, the decision to select a competitor must be done in a transparent way, and must be communicated to the other, non-successful competitors.
Under this contest procedure, a public entity invites certain competitors that, on the basis of certain bidding criteria, make offers, from which the public entity will select and accept the most convenient. This procurement mechanism only proceeds if there is a reasoned decision that authorises it, and only if there is a cause foreseen for it (e.g., when there are no participants in a public bid, in emergency situations, for confidential services or when the announcement of the procedure could affect national security).
Private bids follow the same procedure as public bids.
Direct contracting is a contracting procedure where the contract conditions are negotiated directly with a private contractor without a previous tender process.
As in the case above, this procurement mechanism can only proceed after a reasoned decision authorises it, and only if it is strictly necessary due to the subject matter of the contract.
iii Amending bids
In relation to the pre-contractual stage, once the call to tender has been made, modifications to the contract or the timeline are allowed as a general rule, with the limitation that they cannot affect the essence of the tender bases or cause damages that affect the participation of competitors. The Comptrollership General has also ruled that if the nature of the tender bases is altered as consequence of multiple modifications, the procuring entity shall call a new tender process.
Any modification to an offer is forbidden after its submission. In the same way, the awarded offer is not allowed to be modified prior to concluding the contract. Exceptionally, modification is allowed to correct formal errors, but only if this situation does not affect the equality of competitors.
With regard to the contractual stage, even though the legislation allows public entities to modify the contractual conditions (ius variandi), there are two limitations to the execution of this power:
a the alteration of the contractual conditions cannot affect the essence of the tender bases, because these prevail over the contract. Thus, the only changes that are currently allowed by the Comptrollership General are quantitative ones, such as changes to timescales; and
b the contractual modifications must respect the economic equality of the parties to the contract. As such, in cases of alteration of contract conditions, economic elements must be renegotiated.
i Qualification to bid
Interested parties may not participate in a public tender called by procuring entities that, at the date of the tender call:
a are public officials of the procuring entity that calls for the public or private tender, or that maintain family ties with any such public officials;
b have been judicially condemned, within the previous two years, for anti-union practices or actions affecting the fundamental rights of employees;
c have been judicially condemned, within the previous two years, for bankruptcy offences; or
d have been judicially condemned for a breach of contract with regard to a previous contract arising from negligence or lack of diligence in the discharge of their contractual duties, as long as the procuring entity that had previously contracted with the interested party had requested that the Office of Public Procurement suspend such parties.
Neither may those interested parties that, even having been awarded a contract under a public tender, have unpaid social security debts due to their workers at the time of the conclusion of contracts with public entities.
Any interested party who is not in one of the above-described situations shall be entitled to participate in the tender process, and may only be disqualified if it has not fulfilled the tender bases. Such disqualification shall be declared by the procuring entity through a reasoned decision, specifying the exact reason why an interested party was disqualified.
ii Conflicts of interest
Article 4 of the Law on Administrative Contracts of Supply and Services forbids procuring entities from concluding contracts with their public officials or their family members. In the same way, procuring entities are forbidden from contracting with companies or firms in whom their officials or their families have some degree of participation or relation.
In addition, those who have the task of evaluating the offers submitted in a tender may not have any conflicts of interest with the participants.
A conflict of interest is considered to exist if an official involved in the evaluation:
a has a personal interest in the outcome of the tender process or the execution of the contract;
b has a family relationship with one of the participants, or if a family member is involved in a company that participates as a competitor;
c has any friendship or enmity with one of the competitors; or
d the official has had professional or business relationships with one of the competitors during the previous two years.
iii Foreign suppliers
As a general rule, a procuring entity that calls a public or private tender cannot make any distinction between foreign and Chilean competitors or discriminate against foreign competitors. This is a consequent on the fact that Article 57 of the Civil Code states that the law shall not recognise any difference between Chilean and foreigner competitors.
Exceptionally, Article 4 of the Law On Administrative Contracts of Supply and Services states that a public entity is entitled to require that a foreign competitor that has been awarded a contract under a tender process must constitute a subsidiary in Chile or a local branch of the foreign company with whom the contract will be concluded. In similar terms, Article 9 of the Law on Public Work Concessions establishes the obligation of a foreign competitor that is awarded a contract under a public tender to constitute a subsidiary or a local branch in Chile as a precondition for the conclusion of the contract.
i Evaluating tenders
The evaluation of offers will be conducted by a commission specially appointed for such purpose, and will involve an economic and technical analysis of both actual and future benefits and costs of the proposals submitted by those competitors whose offers have previously been declared admissible.
The criteria under which the offers will be evaluated must be those previously declared in the tender bases. Inter alia, the following may be considered as technical and economic criteria: price, experience, methodology, technical quality, technical assistance or support, after-sales services, deadlines, transportation surcharges, environmental considerations, energy efficiency, previous contractual behaviour and the accomplishment of formal requirements.
As prescribed in Article 10 of the Law on Administrative Contracts of Supply and Services, the contract will be awarded to the competitor who presents the best offer with regard to the procuring entity’s interests, considering the conditions and an evaluation of the economic and technical criteria established in the tender bases. It is noteworthy in this regard that numerous judicial decisions have pointed out that the cheapest offer is not necessarily the most advantageous, as this is just one of the criteria to be evaluated.
ii National interest and public policy considerations
As previously mentioned, a procuring entity that calls a tender process cannot differentiate or introduce discriminatory measures favouring national competitors, unless expressly authorised by law. As an example, Decree-Law No. 1,939 expressly prohibits the granting to foreigners of a concession or lease of public land that has been previously declared borderland.
VIII INFORMATION FLOW
As prescribed by Law 20,285 on Access to Public Information, all documents of public entities shall be public and, as such, may be requested by any interested party. All information about tender processes and contracts must be made available on the website of the Public Market or on the website of the respective procuring entity, or on both. Further, any news about or decision of a procuring entity about the development of a tender process shall be notified to the involved competitors and shall be made public. Thus, a procuring entity shall communicate simultaneously its decision on the evaluation of offers to each competitor, whether such competitor was awarded the contract or not. At the same time, it should be reported if offers have been found inadmissible for failing to meet the minimum requirements.
Exceptionally, tender processes called by the armed forces and the Ministry of Defence may be confidential if they have as their purpose the acquisition of war materials.
As an exception to the above, the offers of competitors are not considered to be public information. In fact, it is held by legislation and jurisprudence that these may contain private financial or technical information that can often be strategic for the company or even considered to be an industrial secret. Thus, offers are not published. Only the evaluation report of the admissible offers is handed to each competitor, and it is also published on the Public Market website.
IX CHALLENGING AWARDS
There are several ways to challenge an act or omission of an arbitrary or illegal nature committed by a procuring entity during a tender procedure or in the subsequent execution of the contract.
At both stages, the procuring entity can always be requested to make an administrative reconsideration of its decision, which should be conducted within five working days. In cases of refusal, it can be requested that the administrative hierarchical appeal be made known to its administrative superior. Likewise, a complaint of illegality, in which the procuring entity is accused of having committed arbitrary or illegal acts, can always be filed before the Comptrollership General.
During the pre-contractual stage, a special action exists to challenge an arbitrary or illegal act committed during the bidding process that may be brought before the Public Procurement Tribunal. Through this action for annulment, any arbitrary or illegal act committed by the procuring entity from the time it called for the public tender up to its award of the respective contract may be challenged. During this stage, complaints denouncing malpractices during tender processes can also be filed before the Office of Public Procurement, which acts as an enforcement body with regard to public entities that have called tender processes.
With regard to the execution stage of the contract, a constitutional action for protection can be brought before the Court of Appeal if such execution is injuring any constitutional right. Similarly, ordinary actions recognised under public law, such as an action regarding the pecuniary liability of the state and an invalidity action, can also be filed before the common tribunals.
The following table provides an outline of the actions that can be taken:
Administrative reconsideration of a decision
The same procuring entity
Five business days
One to two months
Administrative hierarchical appeal
The same public entity that issued the challenged decision
Five business days (the appeal must be filed simultaneously with the administrative reconsideration of the decision)
One to two months
Complaint of illegality
Six to eight months
Action for annulment
Public Procurement Tribunal
10 business days
Denouncement of malpractices
Office of Public Procurement
Constitutional action to protect constitutional rights
Court of Appeal
30 calendar days
Three to five months
Although there is no deadline to file common actions, there is a limit to the general procedure (statute of limitation)
Five years or more
Finally, it should be mentioned that there are several special arbitration proceedings with regard to some administrative contracts, such as in the case of public works concessions, contracts for shared urban financing and concession contracts for public land.
ii Grounds for challenge
To substantiate a challenge, it suffices that the procuring entity that has called for a tender process, or with whom a contract has been concluded, has committed an action or omission of an arbitrary or illegal nature; and that the competitor or contractor has been affected as a result of that action or omission.
During the execution of a contract, the procuring entity is entitled to impose on the contractor fines for breaches of its contractual obligations or to enforce the guarantees established in its favour in the contract. Similarly, the public entity is allowed to terminate the contract early in cases of a serious breach of the contractor’s obligations or if the contractor becomes insolvent.
The contractor may challenge at an administrative or judicial level the decisions of the procuring entity that called a tender process or with whom the contractor concluded a contract. At the administrative level, the procuring entity usually will not grant a preliminary injunction preventing the conclusion or execution of the awarded contract. Therefore, in practice, a preliminary injunction will always have to be requested from the Public Procurement Tribunal or from the ordinary tribunals. In this regard, it should be mentioned that the tribunals are not very propitious in granting such measures at a preliminary stage of a challenge. Notwithstanding the foregoing, to settle the dispute, the tribunals will have broad freedom to grant the injunction requested by the petitioner’s request, even if this means annulling the tender process or the previously concluded contract.
An amendment to the Law on Administrative Contracts of Supply and Services is yet to be announced, its main purpose being to extend the scope of the Public Procurement Tribunal and provide more detailed regulation on how to deal with conflicts of interest during the evaluation of the offer in a tender process.
The Office of Public Procurement has been focused on increasing the participation of small and medium-sized enterprises in the public procurement market, which has led to sales at the Office of Public Procurement reaching more than 59 per cent of the national amount. Following this and the continuous development of transparency and efficiency policies, the focus has been on the modernisation of the purchase platforms, including the strengthening of e-commerce. This is aimed at, among others, improving payment periods, which can constitute a major problem, particularly for small and medium-sized enterprises.
A new website is therefore being planned for the Public Procurement Tribunal, designed to allow the online processing of challenges, which is directly related to the recent Electronic Processing Law.8
1 José Luis Lara is a partner and Antonia Schneider is a junior associate at Philippi Prietocarrizosa Ferrero DU & Uria. This chapter is an update of last year’s version prepared by José Luis Lara and Antonia Schneider.
4 www.observatoriofiscal.cl; datosabiertos.chilecompra.cl.
5 In Chile, this technical expression refers to the duty of the state to ensure free competition among competitors, which is broader than equal treatment.
6 For example, www.concesiones.cl regarding public work concessions.
7 For example, www.concesiones.cl regarding public work concessions.
8 Law No. 20.886.