Government Procurement and PPPs

Brazil has very formalistic and regulated procurement laws and government purchasing methods. Since 2011 a special regime for public contracting has applied for certain purchases.

The vast majority of public tenders are limited to companies registered in Brazil. However, in some cases, foreign companies can participate in the process as a party to consortia where a company registered in Brazil is the leader.

Due to the lack of funds available for large projects, in recent years governments have started making use of public-private partnerships.

A modern Anticorruption Law came into force in 2014 and its effects are already being felt – especially in large corporate groups.

Procurement Laws and Purchasing Methods

Brazil’s Procurement Law provides the general rules for procurement in Brazil. The Law prevails over any State or Municipal legislation whenever there is any inconsistency between the two.

The Procurement Law applies to all levels of government. It contains very strict procurement rules that offer little room to public officials without violating its provisions.

In addition to the Procurement Law, there are general principles of public procurement which are set out in the Federal Constitution and that apply to all public procurement processes. They are the principles of legality, impersonality, morality, publicity and efficiency. Each of them encompasses many general principles and they tend to operate somewhat like maxims rather than specific “hard and fast” rules.

The Procurement Law (and related laws), set out six different types of procurement methods:

  • competition (concorrência);
  • price taking (tomada de preços);
  • invitation (convite);
  • contest (concurso);
  • auction (leilão); and
  • live auction (pregão).

Each procurement process method has its own specific rules. In addition to these, in some very limited circumstances, government bodies may purchase goods and services without choosing any of the above methods. These include, for instance, where the product being sought is only supplied by one company and there is no similar product available to fulfil the purchasing entity’s needs.

Special regime for public contracting

Initially devised to speed up civil infrastructure works for both the 2014 World Cup and the 2016 Olympic Games, a special regime was put in place to govern the public tenders. Initially passed as a Provisional Measure (that is, a Presidential decree), it was later converted into a Law by Brazil’s Congress.

The Special Regime for Public Contracting Law allows for a faster procurement process for certain government projects in the health; public safety; logistics, science and technology; and leasing of real or personal property by the government.

There has been much criticism over the use of the special regime, especially in light of the various corruption investigations involving Brazilian construction companies in recent years.

Use of consortia

Brazilian companies may also be organised as consortia (consórcios) for specific projects. Under Brazilian law consortia are regarded as contractual joint ventures. A consortium does not have independent legal capacity, but the consortium agreement must be registered with the Companies Registry in the State where the consortium’s registered office is located.

Consortia are often used to participate in international public tenders, where one Brazilian company is the leader and foreign suppliers are made members of the consortium, as provided by the Procurement Law.

In international public tenders there are significant advantages for companies to use consortia to minimise the overall tax applicable to the purchase.

Public-private partnerships

With the coming into force of the Public-Private Partnerships Law in late 2004, public-private partnerships (“PPPs”) became an alternative for foreign investors wanting to take part in large projects in Brazil. The PPPs Law has made Brazil’s strict government procurement procedures more flexible and investor-friendly.

Projects that may be subject to the PPPs Law must be valued at R$20 million or more and be for the supply and installation of equipment, construction works or the provision of services. Contracts must be for a period of between five and 35 years.

A major improvement brought about by the PPPs Law was to allow governments to establish specific funds to ensure the performance of contractual obligations. These funds operate like the way escrow accounts/trusts operate in common law countries. The PPPs Law also gives flexibility as to the type asset to be given by the government as security/collateral. Government-owned real estate, shares in state-owned public companies and government revenues can be specifically set aside for the PPP fund. For Federal projects, the maximum amount permitted under all funds added together is R$6 billion.

Another important innovation that the PPPs Law has brought about is the possibility of the private partner having the government as the client rather than offering services only on a “user-pays” basis to the public in general under a licence.

Finally, the PPPs Law allows for litigious matters that have the government as a party to go to arbitration, avoiding the notoriously slow Brazilian courts. Yet, the arbitration will need to be held in Brazil and be conducted in Portuguese.

Any foreign company thinking of being a party to a PPP should understand that the process of selection and negotiation will require major effort and investment. The vast majority of procurement processes have traditionally been won by Brazilian companies, so it is highly advisable that foreign companies consider having a Brazilian partner when bidding for any type of government work.

Anticorruption Law

Brazil’s Anticorruption Law imposes strict liability for certain acts carried out against a State (Brazil or any other country) and applies to both local and foreign companies, as well as Brazilian and foreign officials.

(a) Legal entities and individuals may be liable

Legal entities affected by the Anticorruption Law include: (i) companies, partnerships and sole proprietorships, whether incorporated or not, “regardless of the type of organisation or corporate model adopted”; (ii) trusts, foundations and associations; and (iii) foreign companies with their head office in Brazil, or with a branch or representation in Brazil, including de-facto companies and those formally registered, even if on a temporary basis. The Law provides that the legal entity itself will be held civilly and administratively liable irrespective of the liability attributed to its directors, officers, employees and agents.

The individuals affected include directors, officers, employees and agents of a legal entity. They will be held liable to the extent of their culpability for wrongful acts. Additionally, the corporate veil will be lifted when the legal entity abuses a legal right to facilitate, conceal or disguise the performance of a wrongful act or to comingle assets. In that case, all sanctions will be extended to the legal entity’s officers, and shareholders/partners with management powers – as well as other persons that may have been involved in the wrongful acts.

(b)   Strict liability

Legal entities will be strictly liable for wrongful acts committed against the Brazilian state or a foreign state (even if committed abroad), for as long as it was done “in their interest” (i.e. seeking some gain) or for their “benefit”. This strict liability standard applies regardless of whether another person also benefitted from the entity’s acts. Prohibited acts of a legal entity or its officers only need to be proven to have been carried out for these purposes.

(c)   Successor liability

A legal entity’s liability will continue even in the event of corporate changes (including a conversion, merger, acquisition or spinoff). However, in mergers and acquisitions, successor liability will be restricted to the obligation for paying fines and provide full restitution for the damage caused, up to the limit of the value assets transferred. With specific exceptions, sanctions will not apply to it insofar as they relate to acts and events that occurred before the date of the merger or acquisition. Corporate parents, controlled or affiliated companies and consortium members will be jointly responsible to pay fines and for restitution of damages caused.

(d)  Wrongful acts covered

The wrongful acts covered by the Law are those “in detriment to domestic or foreign public assets”, or that go against the principles of “public administration” or Brazil’s international obligations.

Article 5 of the Law lists the types of prohibited conduct, which are not limited to acts of corruption. It includes: (i) promising or offering, directly or indirectly, to give an undue advantage to a public official, or any third party related to him/her; (ii) to finance, bear the expense of, sponsor or in any way subsidise, the performance of wrongful acts; (iii) to use a legal entity (or individual) as an intermediary to conceal or disguise its real interests or the identity of the beneficiaries of the acts performed; and (iv) to hinder or interfere with the investigation of public agencies or officials.

There are also specific provisions regarding public procurement and government contracts.

(e) Penalties

Penalties include fines, administrative sanctions and court-ordered sanctions.

Fines range from 0.1% to 20% of a company’s gross revenue excluding taxes. These fines are calculated based on the previous fiscal year and cannot be lower than the advantage obtained by the perpetrator. Where the gross revenue of a company is not able to be determined, fines may range from R$6,000 to R$60 million.  Fines can be cumulative and will be assessed considering the facts of the case.

Administrative sanctions will be made public and widely circulated in the area where the violation took place, and the area of operation of the company or in a nationally circulated publication, in addition to a publicly visible notice, for a minimum of 30 days, at the place of business, and on the web. Moreover, the corporate names, corporate taxpayer numbers (CNPJs), sanctions, dates, and details of leniency agreements are kept at the National Registry of Punished Companies.

Contact me if you require further information.