The Government Procurement Review: Mexico
Article 134 of the Mexican Constitution sets forth the values for the use of financial resources and public procurement at all governmental levels in Mexico. At the federal level, government procurement is particularly subject to: (1) the Law of Procurement, Leasing and Services for the Public Sector (LAASSP); and (2) the Law of Public Works and Related Services (LOPSRM), both with their respective regulations (jointly the Procurement Laws). Under the Mexican Constitution and the Procurement Laws, the general rule for public procurement shall be through public biddings and exceptionally by means of invitation to at least three participants or direct awards.
The entities subject to the Procurement Laws include: (1) the Presidency's administrative agencies; (2) the federal Ministries of State and the Legal Executive Office; (3) the Chief Federal Prosecutor; (4) federal state-owned companies or trusts; and (5) Mexican States, municipalities and its public agencies that totally or partially use federal resources. Generally the entities mentioned in items (1) to (4) issue specific internal policies, rules and guidelines that further detail the procurement of goods, leases, services and public works.
On the other hand, certain federal entities known as state productive companies, the legislative and judiciary branches, and autonomous constitutional bodies have their own specific regulations for public procurement (see Section III). States and municipalities also have their own specific public procurement rules.
On an international level, Mexico may carry out public procurement with local or foreign bidders by following the relevant free trade agreements' applicable chapters on government purchases. 'Public Procurement' chapters have been included in the agreements executed by Mexico with: the US and Canada (i.e., the North American Free Trade Agreement (NAFTA)), Colombia, Costa Rica, Nicaragua, Israel, European Union, European Free Trade Association, Japan, Chile and the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP).2 Although Mexico has been a member of the World Trade Organization since 1995, the Government Procurement Agreement does not apply.
Government contract regulations shall follow the principles set forth on Article 134 of the Mexican Constitution: (1) efficiency to obtain services, leases and make acquisitions at a low cost; (2) efficacy in order to obtain the best results; (3) economy to take advantage of and save the resources obtained; (4) transparency in the public procurement process, with standard procedures applicable to all participants and straightforward procurement results; and (5) honesty, including the proper exercise of authority by public officials.
According to recent amendments introduced by the new administration, with the exception of the Ministry of Finance and Public Credit (SHCP), Ministry of National Defence and Ministry of Navy, the heads of the new Administration and Finance Units (in charge of planning, budget, human and material resources, and accounting) of each federal entity will be appointed by the SHCP. Also, the SHCP has now the responsibility to establish and conduct the general policy on public procurement and consolidate procurement procedures for goods that it considers relevant (e.g., medicines), including the exercise of the corresponding budget.
The federal Ministry of Public Function (SFP) is the main agency in charge of verifying that public procurements comply with the Procurement Laws. The SFP may request information related to a specific project from public officials and suppliers that are involved with such procurement. Also, the Ministry of Economy is also empowered to oversee the enforcement of the Procurement Laws, particularly with respect to the promotion of small and medium businesses. The SFP may sanction conducts that violate the Procurement Laws by following the rules on the new General Administrative Responsibilities Law (LGRA). At the federal level, the Federal Superior Auditor (and autonomous body of the Chamber of Deputies) may also conduct oversight investigations of the use of public funds in government contracts. Similar accountability mechanisms exist on a state or municipal level.
On the other hand, public-private partnerships (PPPs) are also used by the Mexican government to promote long term competitive projects as an alternative to traditional public procurement procedures contemplated in the Procurement Laws. There are specific federal, state and even municipal regulations applicable to PPPs.
Finally, the granting of concessions regarding the use of public goods or the provision of public services are regulated under the relevant sector specific regulation and follow the principles of Article 134 of the Mexican Constitution.
Year in review
In November 2019, the Federal Republican Austerity Law became effective for, among other things, the appropriate use of public funds by public servants, the nullity of contracts executed that were improperly granted, the prohibition on acquiring savings insurance and the like, and other restrictions in public procurement. At the same time, the LGRA was amended to include, among other things, new liabilities against public officials to avoid breaching federal administrative and government contracts regulations.
Also, additional guidelines were issued by the SHCP, to exercise its new powers regarding the consolidation of contracting procedures to acquire or lease goods and services within the federal government.
Notwithstanding the foregoing, we have not identified that public contracting practices have improved with the new administration in government and new problems and hurdles have been put in place.
On the other hand, the covid-19 pandemic has brought significant last-minute changes within government contracts' procedures at federal and local level. For ease of reference, the SFP has recently issued an agreement to reduce health risks during the government contracts' procedures. At the same time, various administrative processes have been suspended to minimise the potential risks of the pandemic.
Scope of procurement regulation
i Regulated authorities
The entities subject to the Procurement Laws are those set forth in Section I. The entities listed below have their own procurement regulations, which follow the guidelines of Article 134 of the Mexican Constitution:
- autonomous constitutional bodies, such as the National Institute of Access to Public Information, the Federal Institute of Telecommunications, the Federal Economic Competition Commission, the National Commission of Human Rights and the National Institute of Elections, among others;
- entities that have a specific regime on public procurement such as the state productive companies (including its subsidiaries): Mexican Oil Company (Pemex) and the Federal Electricity Commission (CFE); and
- public investigation centres conducting acquisitions, leasing and services with their own funds for scientific investigations and for technology development encompassed under the Technology and Science Law.
ii Regulated contracts
In general terms, the contracts that are regulated by the LAASSP are the following: (1) the acquisitions and leasing of movable goods; (2) the acquisitions and leasing of movable goods that must be incorporated into immovable goods to accomplish the public works; (3) the acquisitions of movable goods that will be installed into an immovable good under the responsibility of public agencies or bodies; (4) the hiring of services relating to the incorporation of movable goods into immovable goods; and (5) the hiring of consultants, advisers or investigators.
On the other hand, the contracts regulated by the LOPSRM are those whose main purpose is building, installing, extending, remodelling, restoring, preserving, maintaining, modifying and demolishing immovable goods, such as: (1) maintenance, restoration and modification of goods incorporated into immovable goods; and (2) acquisition and installation of movable goods into immovable goods.
The Procurement Laws provide that public procurement may be carried out by means of the following procedures:
- public bidding (as a general rule) as an administrative procedure through which the relevant entity summons suppliers to offer the best conditions for procurement purchase;
- an invitation procedure to at least three participants (as an exception) where the relevant entity selects at least three suppliers that must have the capacity for immediate response to provide the relevant goods, lease, services or works under specific cases; and
- direct award (as an exception) where one supplier who has been previously selected by the relevant entity is directly awarded with the relevant contract under specific cases.
The LAASSP provides 20 and the LOPSRM 14 specific cases in which the invitation and direct award procedures could be conducted as exceptions and subject to the responsibility of the relevant entity. Some common examples are the following (in both laws): (1) where a single supplier has a special licence or exclusive rights (e.g., IP rights); (2) in cases of risk or danger to the economy, social order, public services or environmental security; (3) in the event of circumstances in which there could be important and justified additional losses or costs; (4) for procurements on defence, military and national or public security matters; and (5) in the event of force majeure and acts of god.
Under the Procurement Laws, government contracts must contain the following: (1) the name of the contracting entity; (2) the type of procurement used; (3) the budget of the contract; (4) whether the price is fixed or may be modified; (5) for leasing, whether there is an option to purchase the goods; (6) percentages for advance payments; (7) payment dates and terms; (8) penalties; (9) currency, (10) non-assignment clause (except payment rights); (11) causes for termination; (12) whether licences, authorisations and permits are required; and (13) alternative dispute resolution, among others.
Special contractual forms
i Framework agreements and central purchasing
The LAASSP provides the possibility for the SFP to execute framework agreements with two or more suppliers that would allow a relevant entity to follow a direct award or invitation exceptional procedure. The framework agreement must establish the price, quality, conditions and scope of the project. Some examples of these types of agreements are food vouchers as payments, granting software licences, and administering vaccines, among others.
Consolidating public purchases are relatively increasing in Mexico. As a way of example, the Mexican Social Security Institute (IMSS) and the Institute of Security and Social Services for State Workers (ISSSTE) have carried out purchasing of medicines and medicine supplies by means of consolidating public procedures in recent years. By doing so, the Mexican government pretends to obtain competitive prices and assuring quality efforts. Also, the new government has announced additional consolidation of public procurement procedures controlled by the SHCP.
ii Joint ventures
According to the Procurement Laws, agreements or any other procurement documents that are executed by and between the federal or state agencies and entities that are not subject to these regulations. However, these agreements are governed by the Procurement Laws when the relevant entity that is bound to deliver or provide the appropriate goods or services does not have the capacity to do it by itself and hires a third party.
Moreover, unless otherwise provided, PPPs are not subject to the Procurement Laws, and the relevant works or services that must be performed by the relevant private entity to fulfil its duties on a PPP project are not subject to the Procurement Laws.
The bidding process
According to the Procurement Laws, the call for competition for public contracts must be advertised in an electronic system called CompraNet, which is a governmental access-free mechanism. Among other things, the following information must be provided:
- name of the contracting entity;
- if the bidding process is national or international;
- description of the goods, leases, services or works that are going to be contracted;
- requirements to participate in the bidding process;
- criteria for evaluation of proposals and for the award of contracts; and
- draft of the contract.
Additionally, a summary of the call must be published in the Federal Official Gazette (DOF) including at least: (1) purpose of the bidding process; (2) volume of good, lease, services or public work to be procured; (3) number of the bidding process; (4) schedule process; and (5) the date on which the call was published in CompraNet.
Although autonomous constitutional bodies have their own regulations regarding public procurement, the rules established in those regulations for bidding process are quite similar from those established in the Procurement Laws.
On the other hand, as a result of Mexico's 2013 energy reform, procurement of hydrocarbons and electricity are out of the scope of the Procurement Laws and Pemex and the CFE have their own special regulations. Regarding hydrocarbons, private companies are currently able to enter into contracts with the state productive company Pemex for the exploration and extraction of hydrocarbons in oil fields under the special rules applicable. In a nutshell, the Ministry of Energy decides the form of public procurement process and establishes the guidelines of the call, as well as the draft of the contract, while the SHCP establishes the fiscal terms of such contracts. After that, the National Hydrocarbons Commission prepares and publishes the call, carries out the bidding process and awards the contract. The procedure for procurement of electricity is practically the same as the above, but carried out by the CFE.
In general terms, according to Article 134 of the Mexican Constitution and the Procurement Laws, the public procurement procedure must be conducted in the following manner:
- A call for competition must be published in CompraNet.
- At least one clarification meeting must be carried out. There must be at least six calendar days between the clarification meeting and the next stage of the procedure (submission and opening of proposals).
- Proposals must be submitted and publicly opened. Between the call for competition and the submission and opening of the proposals there must be at least: 20 calendar days for international biddings, and 15 calendar days for national biddings.
- All proposals must be evaluated in accordance with the bidding rules. The contracting entity shall issue a decision awarding the contract to the tender that meets the applicable requirements.
- The contract must be signed during a period of 15 calendar days after the award of the contract is declared.
The Procurement Laws provide that the bidding process may be carried out using electronic means, in which case the whole process must be carried out through CompraNet using electronic identification means.
In the bidding process of oil fields, it is not possible to use electronic means since the submission and opening of the proposals are broadcasted live on the National Hydrocarbons Commission website. In contrast, the entire bidding process of electricity projects could be done on the CFE's procurement electronic system.
iii Amending bids
Before issuing a call for competition, public entities are able to publish the project on CompraNet during at least 10 business days to receive relevant feedback from potential bidders. Comments and opinions received shall be analysed by public entities aiming to consider them in the final bidding document.
The contracting entities may change some terms and conditions of the bidding rules, provided that such changes are issued at least one week before the submission and opening of the proposals. All changes must be published on CompraNet.
i Qualification to bid
According to the Procurement Laws, bidders may be disqualified from bidding for a number of reasons, such as:
- not signing more than one public contract during a two-year period;
- not complying with their obligations in a public contract, causing severe damages to the contracting entity;
- delivering goods, services or public works that do not comply with the requirements of the bidding rules;
- providing false information;
- if one bidder is linked to another through the same partner or partners; and
- lack of authorisation to provide goods or services protected by intellectual property rights.
Other disqualification causes could be included in the bidding rules as needed or requested by the contracting entity.
ii Conflicts of interest
In order to avoid conflicts of interest, public entities are not able to receive proposals or award contracts to:
- companies in which relevant public officers have a financial, personal or family interest in the result of the bidding;
- companies in which public officers or their relatives are part of or have formed part, during a two-year period before the date of execution of the relevant contract; and
- persons who work for the government, unless it is authorised by the SFP.
As a general rule, in all bidding processes, participation of bidders who have conflict of interest is prohibited in order to avoid corruption, and particular rules could be included in the bidding documents. The LGRA also prohibits participation of bidders and authorities who have a conflict of interest.
iii Foreign suppliers
Foreign suppliers are able to bid in international bidding procedures. There are two types of international bidding procedures: (1) under international treaties, and (2) open. In the first case, only Mexicans and national of foreign countries that have signed a free trade agreement with Mexico that contains a public procurement Chapter are able to bid. In the latter case, Mexicans and any foreign supplier are allowed to participate in the bid.
In general terms, the Procurement Laws do not establish that foreign suppliers must set up a local branch or subsidiary. However, depending on the subject matter, the industry and activities of the bid, there may be restrictions under the Foreign Investment Law or other sector-specific regulations that require the incorporation of a Mexican company or having Mexican participation. For example, foreign companies that are awarded an oil fields contract must constitute a special purpose company if they do not have a Mexican branch or subsidiary, because exploration and extraction contracts of hydrocarbons can only be executed with Mexican companies. For contracts awarded by the CFE to consortium bids, the consortium has to register a company with a specific purpose in Mexico, aimed at executing the contract.
i Evaluating tenders
The criteria for evaluating proposals must be disclosed in the call. According to the Procurement Laws, there are three criteria that can be used to evaluate the proposals:
- points and percentages, which evaluates the best combination of quality and price;
- binary, which consists in the evaluation of whether the bids comply with all the requirements. The contract is awarded to the bidder who fulfils such requirements and offers the lowest price; and
- cost-benefit, which consists in the evaluation in monetary terms of the costs and benefits associated with the purchase, execution and operation of the good, lease, service or public work involved.
During the stage of submission and opening of proposals (economic and technical), all the proposals are received in a sealed envelope. Afterwards at the same act, proposals are publicly opened in order to put on the record what documents were submitted. The content of the documents is detailed but not evaluated at that moment.
Subsequently, the contracting entity evaluates the proposals according to the evaluation criteria contained in the bidding rules. Proposals that fail to comply with the requirement established are disqualified.
The award resolution must be notified in a public meeting within a 30-calendar-day period since the submission and opening of the proposals. This notice must contain: (1) a list of the bidders whose proposals were disqualified; (2) a list of the bidders whose proposals were in compliance with the requirements; (3) the name of the awarded bidder; (4) place, date and hour for signing the contract; and (5) name, position and signature of the public officer issuing the award.
ii National interest and public policy considerations
In bidding procedures regarding public works, public entities must consider the effects of such works in the environment. If the works can cause damages on the environment, the contract project must include the necessary works to preserve or restore such conditions.
The LAASPP sets forth that the procurement of wood goods, the bidders must submit a certificate that guarantee the origin and sustainable manage of the forest where the wood comes from. For the acquisition of office paper, the paper must contain a minimum of 50 per cent of recycled material or natural fibres not derived from wood or raw materials.
Regarding environmental considerations, domestic suppliers cannot be favoured.
In national bidding procedures only national goods, services and public works can be offered. For goods to be considered national, they must be produced in Mexico and have at least 50 per cent of national content. For public works and services to be considered national, they must be provided by nationals or companies registered in Mexico. These procedures are aimed to strengthen national industry.
When submitting the information to the calling entity, the bidder must provide all the information requested, which may include information regarding the shareholders, financial information, legal details and information alike. Confidential information submitted by participants shall remain confidential. Bids are not available to the public on CompraNet.
During the procurement process, the bidders do not have access to the information provided by other bidders. During the event for the opening of the envelopes containing the economic and technical proposals, the bidders have the right to know if their proposal has been accepted because it met the requirements set out in the bidding rules. At that time the bidders do not know the details of other bidders' proposals, but they receive information during the event on whether their proposal will be analysed by the public servants of the relevant public entity and how many of the proposals were turned down because the bidders failed to provide legal, financial or other information.
The outcome of the bid is notified in a public meeting that all the bidders can attend. In the case of electronic bids or bids conducted by electronic means, the outcome is notified through the CompraNet and both winning and unsuccessful bidders receive formal notification. When the outcome is revealed to the bidders, it is explained and detailed by the relevant calling entity the reasons why the contract is awarded to a specific bidder, as well as the reasons others' proposals were rejected.
The relevant entity determines whether the type of goods to be purchased, or the services to be hired, must remain confidential because may adversely affect, for instance, national security. In such a case, the relevant entity may decide to follow a direct award process instead of a public bid. Then the entity and the company to which the contract is awarded must keep sensitive information confidential, and for that purpose, the relevant entity classifies the information as reserved to keep its confidentiality in terms of the relevant regulations. This classification is made at the time the information is requested to be disclosed according to the provisions of the Transparency Law and Access to Public Information.
Regarding access to public information, in general terms, all the government information is public, although it could be reserved under specific scenarios, in which case it is prevented for disclosure. Although the data protection authority has ruled that the purpose, as well as the amounts of the contracts, are public information, the details of the activities to be carried out could be reserved by the calling entity. While the contracts are public, the information contained in the 'technical exhibit' could become reserved to prevent its disclosure to the general public.
If national security could be jeopardised, the relevant defence and security entities could carry out either an invitation procedure or a direct award in order to keep the confidentiality of the project.
Challenges are not so frequent and the chances of success are slim mainly because the government body that handles the challenges at the federal level (SFP) is also an entity of the executive branch and therefore, most of the times it validates the outcomes or the decisions made by the relevant calling entity.
The complaint must be filed before the calling entity within six business days of the occurrence of the act that motivates the filing of the complaint (as explained below).
The complaining party may request an injunction. If the authority determines that by granting an injunction would not cause damages to the public interest (because in such case the injunction is denied), the complaining party must contract a surety bond to guarantee any damages if the complaint is finally rejected. Such bond must be between the 10 and 30 per cent of the amount of the economic proposal of the complaining party.
According to the Procurement Laws, only a formal complaint can be filed with the SFP in the following cases:
- against the official call and the clarification meetings: Only bidders that have expressed interest in participating in the bid process are able to file the complaint within six business days of the last clarification meeting taking place;
- the official invitation to at least three participants: Only parties that received such an invitation are able to file the complaint within six business days of receiving the invitation;
- the act of presentation and opening of the proposals: Only bidders that submitted a proposal are able to file the complaint within six days of the official notification of the outcome of the public bid process;
- the cancellation of the bidding process: The complaint could be filed only by the party or bidder that submitted a proposal, within six business days of receiving official notification of the cancellation; and
- acts and omissions on behalf of the relevant calling public entity that prevented the execution of the contract as set forth either in the official call or the Procurement Laws. Only the awarded bidder is able to file the complaint within six business days of the expiry of the term set forth for the execution of the contract.
On the other hand, a bidder who considers affected during the public procurement process might file an amparo (constitutional challenge) before a federal court instead of following the provisions of the Procurement Laws. Nevertheless, courts are unlikely to rule in such situations and find the amparo invalid if the bidder first does not first follows the challenge procedure set out in the Procurement Laws. The relevant party can file an amparo against the resolution resolving the challenge procedure.
ii Grounds for challenge
The Procurement Laws only set forth the cases mentioned above as grounds for challenge acts within a public procurement procedure.
Normally, the SFP may determine the granting of injunctions, set aside contracts, order new tenders, replacing of one or more stages of the process, and measures alike.
For breach of procurement procedures, it is possible to impose fines on both the public servants that conducted the procedure and the private bidders as long as the latter agreed the breach with the former in order to obtain an illegal advantage (this may also constitute a felony under criminal laws). Breach of contracts can be sanctioned with fines that could range from around US$225 to US$4,500 and debarment for procurement procedures from three months to five years.
The public servants that breach a procedure can face dismissal, suspension and debarment, as well as fines if the consequence of the breach resulted in economic damage to the relevant calling entity.
From an antitrust perspective, the Federal Economic Competition Law (LFCE) prohibits absolute monopolistic practices, including any agreements, arrangements or combinations between competitors with the object or effect to coordinate positions or abstention in public procurement processes and exchange information towards this coordination. The LFCE sanctions this conduct as follows. From an administrative standpoint, fines for companies could be up to 10 per cent of annual income, and fines for individuals could be up to around US$900,000. From a criminal standpoint: individuals may receive from five to 10 years' imprisonment and fines from around US$4,500 to US$45,000.
In response to the global covid-19 pandemic, the Mexican government has recently allowed various extraordinary actions for the procurement and importation of health-related goods and services. For ease of reference, the Ministry of Health, the Ministry of Defence and the Mexican Social Security Institute, among other federal and local public agencies and entities, may execute government health contracts through direct awards. In other words, the aforementioned entities are not compelled now to carry out public bids for the procurement of health-related goods and services. However, the SHCP and Ministry of Economy will follow up and provide the appropriate assistance to the relevant health institutions for the procurement of services deemed necessary to provide medical care. It appears that the federal government is trying to centralise all procurement of goods to cope with covid-19 and has imposed some restrictions on local governments to acquire and private entities to sell certain products. There was no planning carried out to prepare for the fight against this pandemic and we may witness an abuse of direct awards that could create transparency and other problems.
Lastly, public procurement procedures may suffer additional changes to control the covid-19 crisis and treat patients.
1 Federico Hernández A is a partner, Ana P Rumualdo Flores is a senior associate and Julio S Zugasti González is an associate at Hogan Lovells BSTL, SC. The authors would like to acknowledge Amando R Zepeda Castillo (a former associate) for his valuable contributions to this chapter and the valuable research assistance of Adriana Medina Vargas (a law clerk).
2 Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.