Cesar A. Guimarães Pereira*

1. Introduction

Brazil has just enacted new legislation creating "buy national" preferences. Many aspects are still subject to further executive regulation, but there is a legal limit of 25% for the advantage that may be granted to companies that are established in Brazil or comply with certain minimum nationalization requirements. The issue is relevant especially due to the massive amount of government investments foreseen for the near future in Brazil, also due to the FIFA 2014 World Cup and the 2016 Olympics in Rio.

The new legislation (Provisional Measure [MP] 495, of July 19, 2010) alters the traditional approach of Brazilian procurement regulation, which was based on a rigorous equality between foreign and domestic bidders. Together with other new rules (MPs 488 and 489) recently enacted to govern the public procurement for those international sports events, MP 495 promises to draw the attention of foreign companies interested in the Brazilian public procurement market to the advantages of a certain level of direct investment in Brazil.

It should be clarified that "Provisional Measure" is a form of statute issued by the Executive Branch with immediate legal force but which requires ratification by Congress within a maximum of 60 days, extendable for an additional delay of 60 days.

2. Background

Brazil already has legislation favoring small companies ("Lei Complementar 123/2010"), but it is based on the assumption that they are located in Brazil. MP 495 favors national development and products and services made in Brazil, but it does not rule out possible joint ventures or partnerships between foreign and Brazilian companies.

In addition, similarly to the recent US stimulus package, MP 495 provides that any advantage to Brazilian firms will be extended to the signatories of public procurement international treaties signed by Brazil. So far, that means only the Mercosur treaty, since Brazil is not a signatory to WTO's GPA.

3. Specific changes

MP 495 amends the current Brazilian public procurement law (Law 8.666 of 1993) in several topics.

Article 3 of Law 8.666 now provides that the purposes of the bidding process "are to ensure compliance with the constitutional principle of equality, to select the bid that is the most advantageous for the Administration and to advance the national development". This rule is complemented by § 1, I, of article 3, which rules out "preferences or distinctions based on the place of birth, principal business office or residence of the bidders or any other circumstance that is impertinent or irrelevant to the specific object of the contract". The rule expressly admits the preferences provided for in §§ 5 through 12 of article 3 of Law 8.666 and in article 3 of Law 8.248 of 1991.

Article 3, § 2, of Law 8.666 has been changed to include new criteria for breaking ties. Preference in case of a tie will be given to products and services (i) made in Brazil, (ii) made or provided by Brazilian companies, or (iii) made or provided by companies that invest in research and technology development in Brazil, in this order. If that does not solve the tie, there will be drawing of lots (article 45, § 2, of Law 8.666).

MP 495 inserted §§ 5 through 12 in article 3 of Law 8.666. In § 5, MP 495 provides that "a margin of preference may be determined for national manufactured products and services that comply with Brazilian technical standards". The specific margin will be defined in a presidential decree, but there is already a provision defining that it is "limited to up to twenty-five percent above the price of the foreign manufactured products and services". The margin of preference must be determined after studies that establish criteria based on "job creation and income generation", "effect on the collection of taxes" and "development and technological innovation made in Brazil". However, § 9 enables the government to disregard such preferences when "there is no output of manufactured goods or capacity to provide the services in Brazil".

Another topic in which MP 495 departs from traditional Brazilian public procurement law is § 11. Law 8.666 has long provided that it is "forbidden to include in the scope of a bidding process the obligation to obtain financial resources for the execution of the works or services, regardless of the source of such funds, except in the case of projects executed and exploited under a concession system, in accordance with specific legislation". Now, § 11 of article 3 provides for the opposite and includes the possibility of the invitations for bids to require the contractor to "carry out or obtain, in favor of the government or (…), measures of trade, industrial or technological offset or access to advantageous conditions of financing, together or not".

Article 3, § 12, provides for the existence of certain biddings in which the competition "may be restricted to goods and services using technology developed in Brazil and produced according to the basic productive process referred to in Law 10.176, of January 11, 2001".

Article 6 of Law 8.666 contains definitions. MP 495 has included some new definitions: national manufactured products (article 6, item XVII), national services (article 6, item XVIII) and information technology and strategic communication systems.

The new item XXXI of article 24 provides for a waiver of bidding (direct award) in the acquisitions for compliance with articles 3, 4, 5 and 20 of Law 10.973, of December 2, 2004. This law contains a series of measures to advance Brazilian development by means of a stimulus to highly technological processes.

Article 57 deals with duration of contracts. The new duration may be of up to 120 months (increasing from the original 60 months) in specific cases: defense contracts (article 24, items IX, XIX and XXVIII) and the technology contracts (article 24, item XXXI).

MP 495 expressly applies to reverse auctions (procurement auctions), pursuant to article 2.

4. Recent comments

The new legislation has been widely discussed by international specialists. TOM BUSCHMAN, a UK practitioner, has voiced an interesting opinion about the effects of MP 495:

This has significant implications, considering the widespread of public authorities in the Brazilian economy, the size and growth of the economy, the youth of its population and its eagerness to try new products and services.

This legislation stipulates an explicit option for the Federal Government to define strategic ICT projects that need to be controlled / developed / supported by Brazilian resources, which is understandable. It further stipulates that for all other products and services there is a limit to the discrimination of foreign companies by defining that government agencies could require foreign firms to be 25% or more price competitive with national firms, but not more. And this discrimination has to be substantiated with market studies.

So foreign firms will have to be treated equally to Brazilian firms that under certain circumstances could be offering their services max 25% more expensively than these foreign firms. This is fair if one realises that exports to Brasil in general do not require the exporter to charge VAT, but Brazilian firms have to pay ICMS (a State-levied VAT), which on average is 20%.

In practice foreign firms could easily be price competitive, depending on their view of the Brazilian Real exchange rate, their access to lower cost foreign capital and the height of import duties. Imagine a company with a sufficiently unique product or service: when operating from another Mercosur country, when partnering with a Brazilian company or even when operating from outside Mercosur and simply being price competitive in Brazilian Reais: what would be against growing revenues and margins from the opportunities provided by the Brazilian government?

(PEPPOL - Pan-European Public Procurement Online, LinkedIn, access on August 17, 2010)

The same website features the opinion of TIM MCGRATH, who believes that this new legislation will "penalize smaller foreign companies (who cannot afford offices in Brazil) when participating in public tenders. It seems more of a barrier than an incentive. As these smaller organizations tend to offer more innovative solutions it may not be in Brazil's best interest either".

As mentioned above, the solution for this concern could be the creation of joint ventures or partnerships between foreign small firms and local companies. In addition, this new regulation does introduce clearer rules on local preferences, as indicated by BUSCHMAN. Article 42, § 4, of Law 8.666 already states that, "For the purpose of judgment of the bidding, the bids submitted by foreign bidders shall be increased of the amount corresponding to the taxes that burden exclusively the Brazilian bidders with regard to the sale operation". This rule was much criticized and considered inapplicable for the lack of a general rule establishing that the bidding procedure could be used as a means to advance national development, even if that caused the procuring agency to enter into a contract at a higher financial cost (see MARÇAL JUSTEN FILHO,Comentários à Lei de Licitações e Contratos Administrativos [Comments on the Biddings and Government Contracts Law], 14th ed., Dialética : São Paulo. 2010, notes on article 42, §§ 3 and 4. Available in Portuguese). This difficulty is now solved with the enactment of MP 495.

The effects of MP 495 with regard to the purposes of public bidding procedures are also examined by MARÇAL JUSTEN FILHO in item 8.7.1.5 of his Curso de Direito Administrativo [Administrative Law], 6thedition, upcoming in 2011, ed. Fórum, Belo Horizonte – available in Portuguese.

5. Closing remarks

MP 495 still requires great supplementary regulation by means of a presidential decree to be shortly issued. However, it is already a bold step toward the creation of national preferences in public procurement, a feature that Brazilian law had eliminated in the mid-1990 by means of constitutional and statutory amendments.

An interesting characteristic of the new legislation is its concern not to affect international commitments undertaken by Brazil with regard to public procurement. The stipulation of national preferences and this clear statement in favor of international undertakings are expected to cause greater debate in Brazil. Many will view this as an adequate time to push forward the agenda toward the ratification of the Mercosur government purchases agreement and the signature and ratification of WTO's GPA.

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* Cesar A. Guimarães Pereira, partner of Justen, Pereira, Oliveira & Talamini - Advogados Associados