Brazil has very formalistic and regulated procurement laws and government purchasing methods.
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.
Due to the lack of funds available for large projects, in recent years governments have started to enter into 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
Two Federal Procurement Laws currently in force
Brazil’s new Procurement Law and old Procurement Law provide the general rules for procurement in Brazil. These Laws apply to all levels of government and prevail over any State or Municipal legislation to the extent of any inconsistency. They contain very strict procurement rules that offer little room to public officials without violating their provisions.
Brazil’s new Procurement Law came into force on 1 April 2021. However, public bodies may choose if the procedures will be entirely governed by the new Law or partially under the old Law, which will remain in force until 4 April 2023. The better view is that the provisions in the new Law relating to governance and internal procedures cannot be avoided by choosing to apply the old Law and the same applies to the direct purchasing process set out in the new Law.
The new Procurement Law sets out five different types of procurement methods:
- competition (concorrência), which is used for the hiring of special goods and services and common or special engineering works and services;
- contest (concurso), which is used for the hiring of technical, scientific or artistic services;
- reverse auction (leilão), which is used for selling real estate or goods considered useless;
- live reverse auction (pregão), which is used for contracting common goods or services, with the exception of engineering contracts; and
- competitive dialogue (diálogo competitivo), which is a new type of procurement process for contracting works, services and purchases in which the public body conducts discussions with previously selected bidders according to objective criteria to develop one or more alternatives capable of meeting to their needs, and bidders must submit a final proposal after the discussion process is finalised.
The old Procurement Law still allows two additional types of procurement methods:
- price taking (tomada de preços), which is used for those previous registered suppliers that meet all requirements for the procurement process;
- invitation (convite), which is used for chosen suppliers invited by the public body to make bids and whose bids will be made public for previously registered bidders to meet the price within 24h;
Initially devised to speed up civil infrastructure works for both the 2014 World Cup and the 2016 Olympic Games, the Special Regime for Public Contracting Law allows for a faster procurement process for certain specific government projects in public health, public safety, logistics, science and technology, and leasing of real or personal property by the government. The new Procurement Law provides that the Special Regime will end on 4 April 2023.
Each procurement process method has its own specific rules. In addition to these rules, 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 or service being procured is only supplied by one company or agent and there is no similar product available to fulfil the purchasing entity’s needs.
Among other innovations brought about by the new Procurement Law is the possibility of public bodies entering into efficiency contracts (contrato de eficiência), where the supplier is rewarded based on the efficiency gains obtained by the public body from the supply. This has been a consistent demand made by many international suppliers over the years that now will become a reality.
Direct purchasing is allowed in cases of non-mandatory competitive process (inexigibilidade de licitação) or in case of exempted competitive process (dispensa de licitação).
For non-mandatory competitive process, the new Procurement Law provides that the competitive process will be required competition “is not viable”. Specific cases mentioned in the new Procurement Law include purchases where there is only one supplier or exclusive distributor, for services provided by professional artists and for technical services with “professionals or companies with notable specialisation”.
For exempted competitive process, the new Procurement Law also sets out new amounts for exemption from procurement processes for purchases for less than R$100,000 relating to engineering works or services, or automotive vehicle maintenance services; and for less than R$50,000 for other services and purchases.
Strict rules apply to direct purchasing which expose the public officer responsible for the purchase to personal liability.
Use of consortia
Brazilian suppliers may also enter into consortia (consórcios) to bid on specific tenders. 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 for the purposes of participating in international public tenders, especially where a significant part of the goods are to be supplied from abroad. Under the old Procurement Law, the leader of consortia had to be a company registered in Brazil. This is no longer the case under the new Procurement Law. In international public tenders, there are significant advantages for companies to use consortia to minimise the overall tax applicable to the purchase.
In addition to the rules set out in the Procurement Laws, there are guiding principles of public procurement which are set out in the Federal Constitution that apply to all public procurement processes. These include the principles of legality, impersonality, morality, publicity and efficiency. Each of them encompasses a number of general principles and they tend to operate somewhat like maxims rather than specific “hard and fast” rules.
The new Procurement Law goes further, expressly adding the principles of public interest, administrative probity, equality, planning, efficacy, segregation of functions, motivation, adherence to the procurement invitation document (edital), objective judgment, legal certainty, reasonability, competitivity, proportionality, celerity, economy and of the sustainable national development. These broad principles are given more a detailed meaning by court decisions and scholarly writings. It is expected that they will continue to play a major part in the decision-making process by public bodies and courts alike.
Choice of forum and arbitration
The New Procurement Law allows the use of alternative resolution methods such as conciliation, mediation, arbitration, and dispute boards. The arbitration will be governed by law and the proceedings must be made public (that is, the arbitration will not be confidential).
The chosen procedure to appoint arbitrators, arbitral institutions, and members of dispute boards must apply isonomic, technical, and transparent criteria.
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.
There are two types of PPPs:
- sponsored concession (concessão patrocinada), whereby the private concessionaire receives a portion of revenue from user tariffs and the agreed payments from the public partner;
- administrative concession (concessão administrativa), whereby the private concessionaire only receives the agreed payments from the public partner.
Projects that may be subject to the PPPs Law must be valued at R$10 million or more and must not be for the sole purpose of supplying and installing equipment, for construction works or for 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 somewhat like escrow accounts operate in common law countries. The PPPs Law also gives flexibility as to the type asset to be given by the government as 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.
The PPPs Law also allows for the private partner to have the government as the client rather than supplying services only on a “user-pays” basis to the public in general under a licence.
Finally, the PPPs Law permits that the PPP agreements be resolved by arbitration, for as long as it is held in Brazil and is 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.
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.
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 Anticorruption 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 subject to the Anticorruption Law include directors, officers, employees and agents of a legal entity. They will be held personally 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 with management powers – as well as other persons that may have been involved in the wrongful acts.
Legal entities will be strictly liable for wrongful acts committed against Brazil or a foreign state (even if the acts take place abroad), for as long as the act is 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.
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. With specific exceptions, sanctions will not apply 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 making restitution of the damages caused.
Wrongful acts covered
The wrongful acts covered by the Anticorruption 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 Anticorruption Law lists the types of prohibited conduct, which are not limited to acts of corruption. These include: (i) promising or offering, directly or indirectly, to give an undue advantage to a public official, or any third party related to him or 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 carried out; 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.
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 company. 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 internet. Moreover, the corporate names, corporate taxpayer numbers (CNPJs), sanctions, dates, and details of leniency agreements will be kept at the National Registry of Punished Companies.