The Government Procurement Review: Brazil
The procedure Brazilian public authorities must observe while purchasing goods and services is mainly governed by the Brazilian Constitution, and by Federal Statute 8,666 of 1993.
The Brazilian Constitution sets forth the framework of government procurement, providing that all public entities, as a rule, must acquire goods and services by means of a public bid proceeding that ensures equal conditions to all bidders (Article 37, XXI). The Constitution also sets upon the Federal Union the power to pass general rules about public bidding. Individual states and municipalities may also pass their own regulations, so long as they do not conflict with federal law (Article 22, XXVII).
Statute No. 8,666 of 1993 lays down the general rules about public bids and contracts. According to its Article 3, bidding procedures have three main objectives: (1) to guarantee isonomic treatment to the interested parties; (2) to select the most advantageous proposal to the public administration; and (3) to promote sustainable national developments.
Bidding procedures must, furthermore, observe the following basic principles:
- legality: the interested parties must be equally subject to all rules, procedures and terms applicable to bidding proceedings;
- impersonality: favouring of a personal nature is disallowed;
- morality: the interested parties must follow ethical good-faith and fairness standards throughout the course of the procedure;
- equality of conditions: the public administration is barred from setting forth requisites that may compromise the competitive nature of the procedure, especially if they are impertinent or irrelevant to the contract;
- publicity: all actions pertaining to the procedure must be made public and accessible;
- administrative probity: imposing administrative, civil and criminal repressive sanctions to all actions capable of generating damages to the treasury, or causing unjust enrichment of any of the players, or of the public agent;
- attachment to the bid announcement notice: meaning that the rules laid down in the announcement notice bind not only the bidding parties, but also to the public administration; and
- objective analysis of the proposals: the proposals must be analysed based on precise criteria priorly set forth by the bid announcement notice.
Year in review
One of the most relevant legal innovations of 2019 was Federal Statute 13,874, which was labelled the Economic Freedom Act. Its main purpose is to set forth free market guarantees and limit the state's intervention in the economy. Despite bringing forth some vague statements, the Statute establishes some concrete obligations, which may have an impact on the rules of government procurement.
To mention the main ones: (1) the requirement that the administration perform regulatory impact analysis for public actions that affect the interests of economic agents; (2) the attribution of juridical effects to the silence by the public administration: requests are deemed as having been tacitly approved, once their analysis term expires; and (3) the creation of the 'regulatory power abuse' figure, forbidding, for example, actions taken by the public administration that may create market reserve, favour economic agents to the detriment of other competitors, require technical skills that are unnecessary to attain the desired end, increase the costs of the transactions without further demonstrating their benefits, or which may create an artificial compulsory demand of products, services or professional activities.
Another relevant innovation is the passing of Federal Statute 13,848, which governs the regulatory agencies. The Statute lays down rules to strengthen the independency of the agencies, both in relation to the government, as to economic agents. Furthermore, it (1) reaffirms the requirement that the regulatory agencies must perform regulatory impact analysis before they propose general interest normative rules, and (2) makes the performance of prior public consultation mandatory.
The most important court decision relating to government procurement in 2019 arose from Direct Unconstitutionality Action No. 5,624. In this lawsuit, the Federal Supreme Court concluded that the privatisation of companies that are subsidiaries of, or controlled by the state, does not depend on legislative authorisation, nor does it depend on public bidding, so long as the competitiveness between the potentially interested parties is guaranteed, and provided that the general principles applicable to the public administration are observed.
Scope of procurement regulation
i Regulated authorities
According to Brazilian law, all public entities must go through bidding procedures to procure goods and services. Brazil is a federative republic composed of 26 states, one federal district, and 5,565 municipalities. All three levels of government (federal, state and municipal) can create new legal entities, in the form of public foundations, regulatory agencies, state-owned companies and mixed-capital companies, all of them with administrative and financial autonomy.
Each one of these units can define their own budgets and proceed with the acquisition of whichever goods and services are necessary to achieve their ends. They are, as a rule, subject to the rules of public procurement. Although Federal Statute 8,666 of 1993 contains the main guidelines for public procurement, the states and municipalities may also pass their own rules, so long as they do not conflict with federal rules.
ii Regulated contracts
Pursuant to Federal Statute 8,666 of 1993, the acquisition of construction works, leases, goods and services, as well as the disposal of assets, concessions and permissions by the public administration must necessarily be preceded by a bidding proceeding, by means of processes that guarantee equality of conditions to the interested parties.
However, there are exceptions to the public administration's obligation to promote a bidding procedure.
Public entities may directly procure assets produced and services rendered by other organisations or entities that are part of the public administration, regardless of bidding procedures. In special situations, that may also be the case for assets produced and services rendered by public services concessionaires, or by non-profit associations owned by the physically disabled.
The public administration may also directly procure low-value goods and services. Currently, Federal Decree No. 9,412 of 2018 lays down the limit of 33,000 reais for construction and engineering services, and of 17,600 reais for other assets and services.
Bidding proceedings may also be dispensable: (1) if there is no competition in the market, such as for procuring exclusive products of highly specialised professionals; (2) in emergency situations, such as, for example, in cases of public calamity, grave disturbance of the order, national defence or war; or (3) to intervene in the economy, regulating prices or normalising the supply of goods and assets.
Special contractual forms
Federal Statute 8,666 of 1993 has been criticised due to the excess of formalism and the ample alternatives the interested parties have to challenge awards, which increase litigiousness, tardiness and the costs of bidding procedures. Several special statutes were enacted in attempts to remedy these problems, simplifying the procedure, or adapting it to better serve some types of procurement.
In 2002, the National Congress passed Federal Statute 10,520, which allows procurement of 'ordinary' assets and services (those whose quality standards can be objectively defined), by means of reverse auctions. In this method of bidding, the procedure is simplified, and the suppliers may offer their tenders in public sessions, whether physically or electronically.
In 2011, due to the urgency to complete the infrastructure constructions to host the 2014 World Cup and the 2016 Olympic Games in Rio de Janeiro, the National Congress passed Federal Statute 12,462, which created the 'differentiated government procurement regime' (RDC), with the purpose of making bidding procedures less bureaucratic. Initially, the RDC was to be applied solely to the procurement of constructions and services necessary for sporting events, and it would expire in 2016. However, the law was repeatedly amended to apply the RDC to engineering work related to public healthcare, construction and reform of criminal facilities, urban mobility and logistics infrastructure and entities dedicated to the sciences, technology and innovation.
On the other hand, there are special contracts that follow different bidding procedures. For ordinary public service concessions, under which customers pay the administration directly to render services, the bidding procedure and the possibilities to procure are set forth by Federal Statute 8,987 of 1995. For public service concessions paid, partially or wholly, by the state (also called public-private partnerships under Brazilian law), the bidding procedure is regulated by Federal Statute 11,079 of 2004.
Procurement of publicity services rendered by advertising agencies is governed by Federal Statute 12,232 of 2010. Contracts involving defence goods and services follow a special procedure, with the purpose of protecting national interests, as provided by Federal Statute 112,589 of 2012. Furthermore, purchases undertaken by public and mixed-capital companies follow a simplified procedure, laid down by Federal Statute 13,303 of 2016.
i Framework agreements and central purchasing
The Brazilian public administration traditionally procures goods and services in a decentralised manner. In 2014, nonetheless, the federal government created the Central Purchasing and Procurement Department for the acquisition of standardised items ordinarily used by the public administration's agencies and entities. Centralised procurement, however, is not customary and has been used especially for the purchase of airline tickets, procuring travel agencies, and telephony and IT services.
ii Joint ventures
Public and mixed-capital companies are also subject to government procurement rules and regulations. According to Brazilian law, a public company is defined as a company whose share capital is fully owned by the Federal Union, by the state or by the municipalities (the capital share is exclusively public).
A mixed-capital company is a corporation in which the majority of the voting shares belong to the Federal Union, the states, the Federal District or the municipalities, with the admission, however, of private shareholding interest (public and private capital share).
According to Federal Statute 13,303 of 2016, public and mixed-capital companies shall preferentially adopt the reverse auction procedure to procure ordinary goods and services. Bidding procedures are unnecessary when the procured amount is less than 100,000 reais for engineering work and services, or 50,000 reais for all other purchases and services.
Private companies with minority shares owned by the state do not have to go through bidding procedures to procure goods and services, but they may not be directly hired by public entities either. Even if such companies intend to render services to the public entity that holds interest in it, the bidding procedure is still mandatory.2
The bidding process
The bidding announcement notice is the most essential instrument of a bidding procedure. It lays down: (1) the object of the procurement; (2) the time frame and the conditions to execute the contract; (3) the sanctions applicable in cases of breach; (4) information about the basic project; (5) the conditions to participate; (6) the way the proposals shall be presented; (7) the criteria to analyse the proposals; (8) the price admissibility criteria; (9) the criteria for adjustment of prices; (10) payment conditions; and (11) the rules and instructions to challenge awards. The announcement notice is the law applicable to the procedure and must be strictly complied with by the administration and by the interested parties.
According to Federal Statute 8,666 of 1993, announcements containing the summaries of public notices, as a rule, must be published in advance in the Official Gazette and in a newspaper of wide circulation within the location where the bidding proceeding will take place. The published announcement must indicate the place where the interested parties can read and obtain the full text of the public notice and all information about the bid.
From 2011 on, with Federal Statute 12,527 – also called the Information Access Statute – the dissemination of bidding public notices through the internet became mandatory, with the purpose of ensuring greater publicity and competitiveness to the procedure.
Federal Statute 8,666 of 1993 sets forth five models for public bidding, each one bearing its own procedure: invitation to bid; price quotations; competitive bidding; auctions; and bidding contests. Special laws also allow for different models of bids: reverse auctions, as provided by Federal Statute 10,520 of 2002; and the Differentiated Government Procurement Regime, regulated by Federal Statute 12,462 of 2014.
Invitation to bid
Invitation to bid is the model used for low-value acquisitions, which currently comprise goods and services of up to 176,000 reais, or constructions and engineering services of up to 330,000 reais. Under this model, goods and services suppliers are chosen and directly invited by the administration to present their proposals. To guarantee isonomy, the invitation must be addressed to at least three suppliers. Furthermore, the administration must publish a copy of the invitation in the public body's bulletin board, to allow other interested parties to file their proposals if they wish to. It is unnecessary to publish the announcement notice in the Official Gazette, or in newspapers with a large circulation.
Price quotation is the bidding model used for procurement of goods and services of up to 1.43 million reais, or constructions and engineering services of up to 3.3 million reais. Once the announcement notice is published in the Official Gazette and in a large-circulation newspaper, suppliers previously enrolled with the public entity, or who meet all the conditions required for the enrolment, may be part of the bidding procedure. The 'enrolment' corresponds to a pre-examination of legal, technical and economic qualifications of the company.
Competitive bidding is the procedure that allows the largest number of participants. It is mandatory for procuring goods and services in amounts over 1.43 million reais, or constructions and engineering services in amounts over 3.3 million reais. It is also mandatory, whichever amount involved, for: (1) purchase or disposal of real estate; (2) granting of in rem rights; and (3) for international bidding. Exceptionally, international bidding can also admit the modalities of price quotations, when the public entity has an international enrolment list of suppliers, or invitation, when there is no supplier of the goods or services within the country.
The competitive bidding procedure encompasses a qualification phase that precedes the analysis of the proposals, which consists in verifying the legal, technical and economic aptitude of the interested parties. Following that, the administration will open the qualified suppliers' proposals, which are presented in sealed envelopes. The dispute method is, thus, sealed, considering all proposals are secret, up to the day of the award decision. The proposals are classified according to the criteria set forth by the public notice, and the award goes to the best proposal.
Auctions are used exclusively to sell assets that are unserviceable for the administration or to sell apprehended or pledged goods. In an auction, anyone may bid, and the award winner is the one who offers the highest amount, so long as it is equal or superior to its evaluation by the administration.
Bidding contests are used to choose technical, scientific or artistic services, awarding prizes or paying remuneration to the winners, according to the criteria exposed in the public announcement notice, published in the Official Gazette with a minimum 45-day advance announcement.
The reverse auction is set forth by Federal Statute 10,520 of 2002. It allows the public administration to acquire goods and services by means of a dispute in which the suppliers offer their proposals in a public session, which can take place physically or electronically. Reverse auctions do not bear any amount limitation and may substitute the invitation, price quotation and competitive bidding, so long as it is used to acquire goods and services 'ordinarily' used, namely those whose quality standards can be defined objectively.
Once a reverse auction session starts, the auctioneer discloses the proposals filed by the interested parties. Both the supplier with the lowest offer, and the suppliers with prices of up to 10 per cent above this offer, may proceed with further verbal and successive bids, until a winner is declared. The dispute method is, thus, open, considering the interested parties are aware of the offers presented by their competitors, and may present new offers by means of new public bids.
The validation of the technical and legal qualification of the suppliers only takes place at the end and is applicable only to the winner. In the event the winner is deemed unqualified, the second-place contestant will be validated on its technical and legal qualification, and so forth. The reverse auction is, currently, the most used method of bidding for public purchases, due to the transparency and simplicity of the procedure.
Differentiated government procurement regime
The RDC, as provided by Federal Statute 12,462 of 2011, was originally conceived to expedite procedures for infrastructure work and services relating to the 2014 World Cup and the 2016 Olympic Games in Rio de Janeiro. Nevertheless, and considering the regime was well received, the law was amended and the RDC started being applied for other infrastructure works, unrelated to sports events.
In the RDC regime, bidding will preferentially take place electronically. The dispute may be open (while the parties present public offers and bids) or sealed (by means of confidential offers), as laid down by the respective public announcement notice. As in the reverse auction method, the validation of legal and technical qualifications will only take place at the end and is only applied to the award winner.
Other distinctions in the RDC regime are that (1) the public administration may choose to indicate the brand or model of a product that is about to the procured, so long as this choice is duly justified, and (2) the remuneration for this procurement may vary, bound to the supplier's performance, based on goals and time frames pre-set by the respective public announcement notice.
i Qualification to bid
The administration must require that the parties interested in a bidding proceeding present documents showing they are capable and competent to follow through with the intended contract. If the interested party does not meet the requirements set forth by public notice, it will not be declared the winner, even if it has the best offer. Brazilian public authorities are customarily rigid in the analysis of qualification documents and, consequently, a formal defect may lead to the disqualification of the bidding party.
According to Federal Statute 8,666 of 1993, the documentation necessary to qualify an interested party relates to the suppliers' legal, technical and economic aptitudes. The administration may require, for example: (1) copies of the company's commercial registration and articles of incorporation; (2) documents that corroborate the election of its officers; (3) proof of registration within the applicable professional class association, if necessary; (4) the authorising decree to operate in Brazil, when the party is a foreign company; (5) acquittance with labour and tax obligations; (6) proof of technical qualification of the professionals in charge; (7) financial statements and balance sheets of the last fiscal year; and (8) bankruptcy and judicial rehabilitation good standing certificates.
The supplier may also be disqualified due to its disreputability. There are illegal actions in Brazil that are punishable with the party's temporary prohibition from entering into agreements with the public administration. That can be the case, for instance, in the event a party breached a prior agreement entered into with the administration (Article 87 of Federal Statute 8,666 of 1993), or when there is an administrative misconduct (Article 12 of Federal Statute 8,429 of 1992).
According to Federal Statute 13,303 of 2016, public and mixed-capital companies may create a list of pre-screened suppliers, which will be automatically qualified to execute agreements with the public administration. They may also restrict the participation of pre-qualified suppliers in bidding procedures.
ii Conflicts of interest
Federal Statute 8,666 of 1993 prevents government officials who are members of the procuring public administration from participating in a bidding procedure, due to the understanding that their participation could compromise the procedure's isonomy. This prohibition is amply interpreted by the precedents of the Court of Auditors, in the sense that companies whose shareholders or officers have family ties to court officials involved in the bidding procedure may be prevented from entering it.3
As a rule, bidding procedures presuppose the existence of basic and executive projects, and the authors of such projects are usually forbidden from bidding because they could, in theory, develop the projects in a way as to hinder access to other contestants. However, there are exceptions: the RDC permits 'integrated hiring', allowing one supplier to go through with all stages of the project, from the drafting of the basic project, through to the execution of the construction work.
iii Foreign suppliers
Any person or company who meets the requirements set forth by the public announcement notice may participate in the bidding procedure. Thus, in principle, it is illegal to veto the participation of foreigners, or to lay down discriminating requirements that may hinder their participation in the procedure. However, to be part of the bidding proceeding, a foreign company must meet the requirements set forth in Brazilian civil law and, additionally, may be subject to differentiated restrictions and conditions, as may be required by national interests.
For companies set up outside Brazil, which operate within the borders of the country, it is necessary to present the authorising decree required by Article 1,134 of the Brazilian Civil Code (a foreign company may not operate in Brazil, even by means of subordinated establishments, without the authorisation of the Brazilian Executive Branch).
Foreign companies that do not operate within the country must present, whenever possible, documents equivalent to those issued by Brazilian authorities, authenticated by the respective consulates and translated into Portuguese by a sworn translator. These companies must also have a legal representative in the country, with express powers to be served with process and to answer administratively and judicially on the company's behalf.
Some activities, nevertheless, are exclusively reserved for Brazilians or companies set up in Brazil, as it is the example of broadcasting activities (Article 222 of the Brazilian Federal Constitution). Others, as is the case for defence products, services and systems, impose a different treatment for foreigners (Federal Statute No. 12,598/2012).
Award granting in bidding procedures is objective, and the public administration must analyse the proposals in exclusive obedience with the criteria set forth by the applicable announcement notice.
i Evaluating tenders
Pursuant to Federal Statute 8,666 of 1993 the criteria to adjudicate awards to the most advantageous proposal may be based on three aspects: (1) the lowest price; (2) the best technique, when the most relevant factor is the quality of the goods or services; or (3) a combination of the two, conjugating elements of both of the aforementioned criteria.
For purchases made under the RDC, the adjudicating criteria may be: (1) the lowest price or the highest discount; (2) the best technique and price; (3) the best technique or artistic content; (4) the largest price offer; or (5) the most advantageous economic return.
Public and mixed-capital companies that are subject to the regime set forth by Federal Statute 13,303 of 2016 may adopt the following adjudicating criteria: (1) the lowest price; (2) the largest discount; (3) the best combination of price and technique; (4) the best technique; (5) the best artistic content; (6) the largest price offer; (7) the most advantageous economic return; and (8) the best destination given to sold goods.
ii National interest and public policy considerations
There are situations in which the duty towards isonomy is mitigated. As criteria to untie the adjudication of an award, preference will be given to the goods and services produced: (1) in Brazil; (2) by Brazilian companies; (3) by companies that invest in technology research and development in the country; (4) by companies that meet quota requirements, hiring disabled personnel, or employees rehabilitated by the social security system and that comply with the accessibility rules laid down by law; (5) by micro-enterprises and small businesses, defined according to the criteria provided by Complementary Statute No. 123 of 2016; and (6) by private individuals or families who are rural producers.
The administration may also establish a margin of preference to goods and services that meet Brazilian technical regulations, and to companies that prove to have complied with the quota reservation for disabled people or those rehabilitated by the social security system. The preference margin, however, may not supersede 25 per cent of the price of foreign goods and services.
Bidding procedures are guided by the publicity principle, to guarantee the participation of the society and the supervision of controlling organisations. There is no secret bidding procedure in Brazilian law. The only secrecy the system allows regards the content of the proposal, in the event of biddings under the sealed method – and that goes only as far as the time when the envelopes are opened.
Federal Statute 8,666 of 1993 guarantees to any party to the procedure access to all its stages. Furthermore, Federal Statute 12,527 (the Information Access Statute) compels public entities to disclose collective interest information, especially information regarding bidding procedures, including the announcement notice, the awards and the agreements executed.
Decisions made by the authorities in charge of bidding procedures may be challenged, both administratively and judicially. The broad alternatives to appeal undoubtedly contribute to the tardiness of bidding procedures in the country.
In Brazil, where litigation levels are high, it is not uncommon for the bidding procedure to end up being challenged by the contestants, by the controlling bodies, by the Public Prosecutor's Office or by the Court of Auditors (administrative courts responsible for accounting, financial, budgetary, and assets supervision of the administration entities), or even by common citizens.
Administrative challenges, as a rule, are cost-free and do not depend on the participation of an attorney. They may be decided over the course of a few weeks or months, depending on the complexity of the matter. Court challenges, on the other hand, depend on payment of costs (based on the amount under discussion) and demand the participation of an attorney. They may be decided over the course of a few months or in years, depending on the complexity of the case.
The administration's actions may be challenged internally (by means of an appeal to the administration itself), or externally (by means of lawsuits, or representations before the Court of Audits).
The bidding announcement notice may be challenged administratively by the bidder or by any citizen. The challenge's purpose is to show the administration there are legal defects, or inconsistencies in the requirements made by the bidding notice, to enable the administration to remedy them. All other phases of the bidding procedure, such as the qualification, non-qualification, adjudication and classification of the proposals may be challenged by the interested parties by means of a hierarchic appeal, to be filed within five business days. The filing of the appeal must be communicated to the other participants, who can file their answers within five business days.
Any damage, or threat of a damage, to the interest of the participating parties may be taken to the appreciation of the courts, which will analyse the legality of the administrative action and the compliance with the bidding notice regulations. In addition, the Court of Auditors, due to its institutional purpose, may supervise the legality and the cost-effectiveness of the procedure, by means of representations by any of the interested parties.
ii Grounds for challenge
The actions by the administration and by private parties may be administratively or judicially challenged by the interested parties, based on the law, or on the regulations of the bidding notice. The Public Prosecutor's Office can also file a lawsuit defending the principles that govern public law, or in the event of administrative misconducts.
Furthermore, according to Brazilian law, any citizen is permitted to judicially request the annulment of a bidding procedure that may be potentially harmful to the Public Treasury, in the form of a 'popular lawsuit' (a modality of lawsuit in which any citizen may require the annulment of administrative actions that may be harmful to public property).
Brazilian courts may impose a variety of measures to forbid or correct illegality or vices in a bidding procedure. It may, for example, suspend the proceeding, allow the participation of a bidder unfairly excluded from participating, declare the nullity of the bidding notice or of the agreement and, additionally, impose the payment of a damages penalty on the party responsible for causing losses to a third party.
If administrative misconduct is configured (such as kickback payments, personal favouring, or undue waiver to bid in a procurement) the public entity or the Public Prosecutor's Office may request the courts to apply civil and administrative penalties to the responsible parties, such as payment for damages, fines or the temporary suspension of the right to enter into agreements with the public administration.
Currently, the government procurement regime in Brazil is complex, due to the broad quantity of exceptions and specific regulations. It may also be time-consuming, considering how simple it is to appeal, and due to Brazil's litigious culture.
Nevertheless, there are bills undergoing Congress analysis that attempt to correct the main flaws of bidding proceedings. In 2018, the main bills (Bills 1,292/1995 and 6,814/2017) were gathered into one, and on 17 September 2019, a substituting text was passed by the House of Representatives. Because Brazil has a bicameral system, the bill currently awaits the Senate's analysis.
Some of the main changes provided by the bill are: (1) the creation of a Public Procurement National Portal online, to ensure transparency in all contracts executed with the administration; (2) the obligation, for public authorities, to perform long-term planning for their procurements, which must be disseminated publicly; (3) the creation of pre-qualified supplier lists, which must be permanently open; and (4) the simplification of administrative appeals.