Preferences in the acquisition of brazilian products and services in public biddings

The Brazilian Government has recently enacted new regulations for public biddings setting forth margins of preference for Brazilian manufactured products and services rendered in Brazil. The purpose of such regulation is to promote national development by creating an incentive to suppliers and service providers to perform its business activities in Brazil, creating here, and not abroad, employment, income, industrial development, tax revenues, among others benefits.

The margins of preference are concessions established in percentages that once applied over the price of certain products and services, will authorize the Government to (i) hire the ones manufactured/supplied in Brazil; and, (ii) disregard its foreign counterparts offered at lower prices.

After amending the Procurement Law, the Government has now legal permission to disregard foreign manufactured products and services offered at lower prices for the benefit of higher priced products and services rendered in Brazil, based in the need of local industry development. Despite this permit, however, the establishment of the margins of preference and their actual effectiveness require a series of studies and regulatory measures, which have began to be implemented by the issuance of Federal Decree 7.546/11 (“Decree”).

The Decree provided the definition of key expressions included in the Procurement Law, such as “ordinary margin of preference”, “national manufactured product”, “national service”, among others. In addition, the Decree restated the 25% limit for the margins of preference to Brazilian manufactured goods and services, in accordance with the limitation already set forth by law.

It has been determined that the margins of preference are mandatory for the Federal Administration (Executive Branch), including state companies such as Petrobras, Banco do Brasil, Caixa Econômica Federal and Embrapa. The States, Federal District, Municipalities and also the Legislative and Judiciary Branches have the option, but not the obligation, to adopt the margins of preference.

The margin of preference will be applied over the price of the best proposal presented by a foreign manufacturer or service provider. In practical terms, this means that if the lowest bid price has been offered by a foreign bidder*, and the margin of preference for such product (or service) is 25%, preference will be given to the Brazilian bidder who has offered the product (or service) in a price up to 25% higher than the one offered by the foreign bidder. So, if the lowest price is equal to R$1,000.00, the national service or manufactured product may have preference if offered up to R $ 1,250.00.

In addition, the Decree also addresses the next steps for the effective application of the margins of preference in Brazilian public biddings. To this purpose, a new decree will be issued by the Federal Government, in which the margins of preference (in percentages for products and services) will be set and also the range of its application.

To attend this purpose, a ministerial commission (the Joint Ministerial Commission for Public Procurements – CI-CP) has been created and given powers to suggest and monitor the implementation of the margins of preference. Among the IC-CP’s tasks is the draft of normative proposals concerning the margins, the analysis of studies related to the definition and implementation of such margins, among others.

The margins of preference should be established based upon technical studies which shall consider a number of factors, including job and income creation arising from the production of the goods or provision of services in Brazil and the impacts on tax revenues. These studies shall be reviewed periodically within a period not up to five years. The margins will be determined taking into account the general guidelines of the industrial, technological and foreign trade policies adopted in Brazil.

Although the Decree has started to regulate the margins of preference, it only represents the beginning of the regulatory measures that shall be structured by the Federal Government in order to assure the effective increase of the local industry activities. More complex issues arise at this time, when the studies to define the margins begin to be developed and the Government shall decide the sectors, products and services that may benefit from the margins.

It must be observed, however, that the margins of preference will not apply to products and services whose capacity of production / national supply (i) is less than the amount needed, or (ii) is less than the minimum necessary to assure economies of scale.

* From a legal standpoint, a company incorporated in Brazil in accordance with local laws whose headquarters and management are in the country is deemed a Brazilian company, regardless of its shareholders nationality. This means that a Brazilian subsidiary of a foreign company can benefit from the margins of preference.

Lucas Martins Magalhães da Rocha is a Lawyer from the Department of Infrastructure and PPP at Azevedo Sette Advogados, Rio de Janeiro.

Azevedo Sette Advogados