Overview on the Brazilian Tender Process to Contract Infrastructure ...

<strong>Overview</strong> on the Brazilian Tender Process to Contract Infrastructure WorksLucas Sant’Anna 1It is of common knowledge that Brazil faces increasing needs for investments in itsinfrastructure sector, in order to create proper conditions to support the economic boom and theso called transition from a developing country to a developed one. Such investments areprimarily carried out by the Government; therefore participating in the infrastructure sector inBrazil means the establishment of a contractual relationship between private parties and theBrazilian Government.In this scenario, any company (domestic or foreign) that intends to invest in theBrazilian infrastructure should be aware of (i) the usual proceeds that the Government mustobserve before contracting infrastructure works and (ii) the sort of discussions and challengesthey should expect during each phase of such proceeds.In this sense, the purpose of this article is to provide all the interested companies withan overview of the main aspects of the Tender Process in Brazil 2 . For purposes of facilitatingthe understating we divided it into five topics.(A)Preliminary PhaseThis stage refers to the preparation of the public tender. In order to launch a publictender for the operation and exploitation of a public service in Brazil, the Government isrequired to prepare feasibility studies on the at least the following topics: (i) financial andeconomic aspects, in which the revenues and expenses for the project shall be assessed to verifyits sustainability and its impact in the public budget, (ii) technical aspects, (iii) environmentalaspects, meaning the issuance of the preliminary license or the terms of reference for thepreliminary license by the competent authorities, and (iv) legal aspects, in order to provide legalbasis for tender.The Government may prepare the above mentioned studies (i) by itself, (ii) by aconsultant specifically hired for such purpose, or (iii) it may receive and validate studies carriedout by private interested parties. The last option, involving a private party to carry out thestudies and a simple validation from the government is known as Manifestation of Interest1 Senior Associate at Machado Meyer’s Infrastructure Department.2 Please note that we it is not our intention to cover all regulations and peculiarities applied to the infinite industriesthat comprise the infrastructure sector in Brazil. The main topics of this article are based on Laws that regulateconcessions of public services and concessions of public works.

Process (Processo de Manifestação de Interesse or “PMI”). The legal basis for this kind ofpreliminary studies is provided by Article 21, of Law 8.987/95 (“Concession Law”) – meaningthat it applies only to projects that involve concessions of public services or concessions ofpublic works.Nevertheless the Government has to observe mandatory procedures in order to advanceto phase I. In such regard, whenever the projected value for the concession agreement reachesan amount higher than R$150,000,000.00 (one hundred and fifty million reais) a public hearingshall be set up by the Government. In the public hearing the interested parties shall have accessto the information regarding the tender and shall have the right to demonstrate their opinions.The public hearing shall occur 15 (fifteen) business days prior to the launching of the Requestfor Proposal (“RFP”, that includes the Tender Document – Edital - and the ConcessionAgreement).Also, whenever the contractual arrangement is a PPP, the Government shall publish thedraft of the RFP for a public consultation that shall take at least 30 (thirty) days.For ease of reference, the legal basis that describes the present phase area, among othersalready mentioned above, Article 10, of Law 11.079/04 (“PPP Law”), and article 39, of Law8.666/93 (“Public Biddings Law”).(B)Phase IPhase I comprises the steps from the launching of the RFP to the date set for the auctionitself. The entire period takes at least 30 (thirty) days. The RFP shall specify all requireddocuments for qualification, including whether the parties may participate in a consortiumformat. Also, the RFP shall indicate whether a technical proposal is required and its weight incomparison to the required financial proposal.In this sense, during such phase the interested parties shall: (i) review the RFP andprepare the documents required for qualification, (ii) enter into corporate arrangements withother parties (e.g Memoranda of Understandings), in order to organize themselves as aConsortium, if necessary and interesting to the parties, (iii) prepare the financial, economicproposal, and the technical proposal, if required.The parties have the right to prepare questions and to have the questions answered bythe Government. Although Brazilian Laws do not specify a specific deadline for addressing

questions, the RFP usually sets a date that varies from 10 (ten) to 5 (five) days before the dateset for the Auction.On the other hand, the Public Biddings Law provides that any citizen and any biddershall have the right to appeal from illegal provisions in the RFP. The first shall present hisappeal up to 5 (five) business days before the date set for the auction meanwhile the biddershall present his appeal up to 2 (two) business days before the date set for the auction. Thepresentation of appeals neither precludes the bidders to participate in the auction nor stops theregular course of tender process, unless the Government decides to accept the appeal.For ease of reference, the legal basis that describes the present phase area, amongothers, Article 40, Sections I to XVII, and 41, Paragraph 1 st , of the Public Biddings Law, andArticle 19, sections I to IV, of the Concessions Law.(C)Phase IIPhase II comprises the moment in which the bidders submit both qualificationdocuments and proposals (economic and/or technical) for the awarding of the contract to thewinner bidder. There are two possible procedural arrangements for this phase: (i) regular courseand (ii) reverse course.In the regular course, the Government opens the qualification documents of all biddersand qualifies or disqualifies all or some of the bidders. Then the Government gives theopportunity to the bidders to analyze and identify flaws in the documents presented by theircompetitors. The identified flaws will give reason to appeals to be presented in 5 (five) businessdays. The bidders attacked by their competitors may counter-appeal in 5 (five) business days.Then, the Government decides on the appeals. Only the qualified bidders will have theirfinancial and technical proposals opened. As one may notice, the regular course brings to thetender process a wide open field to litigation. Such litigation may even shift from the field of thetender process (administrative process) to the judiciary, since in Brazil, by a constitutionalprinciple, all decisions may be reviewed by the courts.In the reverse course, the Government firstly opens the financial proposals. Then thebidders are classified in accordance to the benefits presented to the Government. Only thebidder that presented the best offer shall have its qualification documents opened and analyzedby the Government and the other bidders. Other bidders have the right to appeal against thequalification documents presented by the best classified bidder, in 5 (five) business days. After

that, the Government shall decide whether the bidder best classified shall be awarded with thecontract or the documents presented by the second best classified bidder shall be opened, whichmeans the disqualification of the first best classified. In reverse course tender processes, thelitigation tends to be reduced, expediting the decisions and awarding of the contract. Publictenders for PPPs Contracts usually follow the reverse course method.For ease of reference, the legal basis that describes the present phase area, amongothers, Article 13, of PPP Law, Article 43, of Law Public Biddings Law, and Article 18-A,Sections I to IV, of the Concessions Law.(D)Phase IIIAfter the final awarding of the contract, the awarded bidder usually has around 30(thirty) to 45 (forty five) days to incorporate a Special Purpose Company (“SPC”) and to presentguarantees and insurances in order to finally execute the Contract 3 . Therefore, phase III containsa great number of legal steps that the awarded bidder shall comply with to be ready to theexecution of the Contract.In case the awarded bidder is organized under a consortium format, we can anticipatediscussions not only in connection with the drafting of the By Laws and the Articles ofIncorporation of the SPC but also shareholders agreement to sort obligations and liabilitiesamong the shareholders of the SPC. Also, the contracting of insurances and guarantees (e.g.performance bond) may give reason to the draft of legal documents, such as counter-guaranteesagreements.It is worth notice that usually RFPs require a minimum capital stock to be paid in by theSPC before the execution of the Contract.In this phase, discussions on the financing terms shall take place during this phase. Inthis sense, the corporate documents shall be designed envisioning the future loan agreements tobe executed by and between the SPC and the Lenders.3 Please note that the need for the incorporation of a SPC varies according to the purpose of the GovernmentContract. For simple public works (without the provision of services within the contract) the Government seeks tocontract with the bidders themselves (not a specific vehicle).

For ease of reference, the legal basis that describes the present phase area, amongothers, Article 9, of the PPP Law, Article 19, paragraph 1 st , and Article 20, of the ConcessionsLaw.(E)Phase IVPhase IV refers to the proper execution of the Contract and the performance of theservices. The discussions on level of services and performance shall give the line of therelationship with the Government. Possible claims of economic equilibrium shall also take placeduring this phase.(F) ConclusionAfter going through the main aspects of the process for contracting infrastructure worksby the Government in Brazil, it is important to keep in mind that in all phases the lawguarantees publicity and many chances of participation for all interested parties. In this sense,any investor currently pursuing opportunities in the infrastructure sector in Brazil should lookfor means of getting aware of public tenders. Also, investors should try to achieve a betterunderstanding of all rights and risks involving Government contracts and most of them arerelated to the mandatory tender process involved.