What statutes or regulations govern procurement of defence and security articles?
Article 134 of the Mexican Constitution provides the general principles for public procurement in Mexico at the federal and state levels. The Law of Acquisitions, Leases and Services of the Public Sector (the Public Procurement Law), together with its ruling (the Regulation of the Public Procurement Law) comprise the main legal framework under which all federal public procurement for defence and security matters are regulated, and detail the general constitutional principles.
At the local level, procurement for security goods and equipment is regulated in state and municipality’s public procurement legal framework, all of which contain somewhat similar provisions to those contained in the Public Procurement Law and its ruling.
How are defence and security procurements identified as such and are they treated differently from civil procurements?
Defence and security procurements are identified as cases for exceptional procedure under article 41, subsection IV of the Public Procurement Law. Owing to their special status, they are treated differently from standard civil procurements in the understanding that all defence and security procurements are exempt from being mandatorily awarded by means of a prior public procurement public bidding process. This is the general principle followed by all public agencies before engaging in any commercial relationship with third parties to ensure the best contractual conditions available in the market for Mexico.
How are defence and security procurements typically conducted?
The Public Procurement Law provides that, prior to the execution of any public procurement agreement (including those related to defence and security), market research must be conducted to verify: the existence and availability of the required goods and assets; whether the respective manufacturer or distributor is national or foreign; and the estimated price.
After market research has been duly conducted, the respective defence or security government body that requires the acquisition of defence- and security-related assets must substantiate its reasons in connection to why such procedure should not be executed via the traditional public bidding process but by a direct award process instead.
At the local level, this procedure might differ from those contemplated in the local applicable law.
Are there significant proposals pending to change the defence and security procurement process?
As of now, there are no pending proposals or amendments to the Public Procurement Law and its ruling that could change the defence and security procurement process. At this moment, there are no projects in the Federal Congress for amending the current legal framework for the defence and security procurement process.
Are there different or additional procurement rules for IT versus non-IT goods and services?
No. Nevertheless, the Public Procurement Law, the defence or security government body interested in acquiring or leasing any goods or services that require or have advanced technical specialities or technological invocations, must use the ‘points and percentages’ or ‘price-performance ratio’ evaluation methods.
The points and percentages evaluation method is used to grade the proposals of all bidders in a public bidding process in which certain points are attributed to: disabled bidders, or companies that employ disabled persons (at least 5 per cent of their total employees are disabled); small and medium companies that produce innovative technological goods; and companies that have put in place and practice gender equality policies.
The price-performance ratio evaluation method is used to assure the best price in accordance to the benefit to be obtained by a certain acquisition or lease to be executed by the federal defence government bodies.
Are most defence and security procurements conducted in accordance with the GPA or other treaty-based procurement rules, or does this jurisdiction commonly use the national security exemption to procure them?
All defence and security procurements are conducted in accordance with the national security rules and regulations (including the exemption to procure them).
Disputes and risk allocation
How are disputes between the government and defence contractor resolved?
According to Chapter 6 of the Public Procurement Law, there are different dispute resolution procedures that may be applied to solve disputes between the government and the contractors:
- Nonconformity procedure: this procedure is purely administrative; it is filed before the Ministry of Public Affairs when the dispute relies in procedural grounds regarding the different instances of a public bidding.
- Conciliatory procedure: this procedure is filed before the Ministry of Public Affairs whenever a party of a public procurement agreement considers that the other party to such agreement has breached its obligations. The Ministry of Public Affairs conducts a conciliatory hearing to try to broker a solution between the parties, and this agreed solution is written in a binding special agreement.
- Arbitration and other alternative dispute resolution methods: the parties to a certain public procurement agreement can agree to an arbitration procedure or other dispute resolution procedures, such as mediation and conciliation, with regard to the interpretation or execution of the agreements. However, parties are forbidden from agreeing to an alternative dispute resolution method with regard to disputes in connection to the early termination of the agreements, and termination by breach.
- Administrative courts: if no alternative dispute resolution method has been agreed to by the parties, or if such methods are forbidden by law, the disputes will be resolved by the competent federal courts of Mexico.
These dispute resolution procedures are applicable only to federal public procurement processes, and such process may differ from those contained in the local public procurement laws and regulations. We strongly recommend reviewing the specific local applicable law, since each of the 32 Mexican states have a specific applicable law.
To what extent is alternative dispute resolution used to resolve conflicts? What is typical for this jurisdiction?
The alternative dispute resolution procedures are commonly used by contractors and government agencies to solve disputes. A clause stating the aforementioned is usually included in the public procurement contracts.
What limits exist on the government’s ability to indemnify the contractor in this jurisdiction and must the contractor indemnify the government in a defence procurement?
All payments in favour of the contractor to be paid by the corresponding government body must not exceed 20 calendar days after delivery of the corresponding invoice, the delivery of the goods or assets, or the rendering of the corresponding services. In the case of a breach to the payment obligations of the corresponding government body, the government body must pay all financial expenses (limited to the interest rate established in the Federal Income Law, for extension regarding unpaid taxes). This financial expenses will be calculated over all unpaid amounts and counted in calendar days until the contractor is fully paid.
As stated in the Public Procurement Law, all contractors must guarantee: the advanced payments (for their total amount); and the full compliance of the agreement. Usually, this is 10 per cent of the total amount of the agreement (this last guarantee may be waived in all public procurements related to defence and security procurements). Also, contractors are obliged to guarantee all latent defects of the goods delivered or services rendered.
Parties are allowed to agree on a contractual penalty in the case of delay in delivery by the contractor of the goods, assets or services under the corresponding public procurement agreement. Such penalty must not exceed the total amount of the agreement compliance guarantee (required to be granted by contractor in favour of corresponding government body) and be determined taking in consideration the goods and assets or services that were not timely delivered or executed.
The above-mentioned indemnification provisions are only applicable to federal procurement processes. Indemnification provisions may vary at local level and, therefore, we strongly suggest reviewing the specific local applicable law, since each of the 32 Mexican states have a specific applicable law.
Limits on liability
Can the government agree to limit the contractor’s liability under the contract? Are there limits to the contractor’s potential recovery against the government for breach?
All contractors must guarantee the full compliance of the agreement. The amount of this guarantee is determined by the corresponding government body in the bidding documents, executed in the case of non-compliance of the agreement, and will constitute the limit of the contractor’s liability under the corresponding contract.
In the case of breach to the payment obligations of the corresponding government body, the government body pays to the contractor all financial expenses (limited to the interest rate established in the Federal Income Law, for extension regarding unpaid taxes). These financial expenses will be calculated over all unpaid amounts and counted in calendar days until the contractor is fully paid.
The above-mentioned provisions are applicable only to federal procurement processes. Liability limitation provisions may vary at local level and, therefore, we strongly suggest reviewing the specific local applicable law as each of the 32 Mexican federal states have a specific applicable law.
Risk of non-payment
Is there risk of non-payment when the government enters into a contract but does not ensure there are adequate funds to meet the contractual obligations?
Yes; although all federal government expenses and contracting procedures are originally approved and stated in the Federal Expenditure Budget, there is still a minor risk of payment default. Nevertheless, by request of the contractor, the corresponding government body pays to the contractor all financial expenses in accordance with the rate established in the Federal Income Law until the contractor is fully paid.
Under what circumstances must a contractor provide a parent guarantee?
The Public Procurement Law provides that all contractors guarantee:
- all advanced payments (for their total amount);
- full compliance with the agreement. Usually, the corresponding guarantee is for the 10 per cent of the total amount of the agreement (this last guarantee may be waived in all public procurements related to defence and security procurements); and
- contractors are also obliged to guarantee all latent defects of the goods delivered or services rendered.
Government officials of the corresponding government body will set the conditions and amounts on which the guarantees will be granted, taking in consideration the compliance history of the contractor.
The above-mentioned guarantees will be granted either in favour of the Treasury or in favour of the contracting government body, depending of which government body is a party to the main public procurement agreement.
Defence procurement law fundamentals
Mandatory procurement clauses
Are there mandatory procurement clauses that must be included in a defence procurement contract or that will be read into the contract regardless of their actual inclusion?
Yes, all public procurement agreements must contain the following:
- the name or corporate name of the government contracting body;
- the nature of the procedure by which the agreement was granted to the contractor;
- information regarding the authorisation of the budget granted to the corresponding government body to execute the agreement;
- information that proves the legal existence of the contractor;
- a description of the goods, assets or lease matter of the public procurement agreement;
- a consideration price to be paid for the goods, assets or services rendered by the contractor;
- the terms of payment;
- guarantees to be granted by the contractor;
- cases in which extensions may be granted;
- grounds for termination of the agreement;
- latent defects provisions;
- the general terms and conditions of the applicable contractual penalties;
- liabilities regarding the breach of intellectual property; and
- dispute resolution procedures.
Moreover, if no dispute resolution procedure has been agreed and included in the corresponding public procurement agreement, all disputes will be resolved in the Mexican federal courts.
How are costs allocated between the contractor and government within a contract?
All costs arising from or regarding the public bidding process and in connection with the execution of the public procurement agreement are to be bear by the contractor.
What disclosures must the contractor make regarding its cost and pricing?
The contractor must disclose the price per unit and the total price of the goods or services to be rendered. Also, if applicable, the contractor must disclose the way in which the final price is determined.
The contractor should also indicate if the price is fixed or variable. If it is variable, the contractor should indicate the formula by which an increase in the price will be calculated.
How are audits of defence and security procurements conducted in this jurisdiction?
Pursuant to the Public Procurement Law, the Ministry of Public Affairs may verify, at any moment, that all public procurement agreements have been duly executed in accordance with the applicable laws. At the local level, the applicable laws may allow certain local governmental body to conduct such audits.
Moreover, the Ministry of Public affairs may conduct visits and inspections to the government bodies that requested and executed the corresponding public procurement agreements, and may also request from the involved officials and contractors all related data and information.
The Ministry of Public affairs may also conduct product quality verifications.
There is no exception with regard to audits of defence and security procurement as such. The only exemption is that all defence and security procurements executed through a direct award and not via public bidding must not be reported by the corresponding government body to justify their exemption from the traditional public bidding process.
Who gets the ownership rights to intellectual property created during performance of the contract? What licences are typically given and how?
Unless there is a specific prohibition or impediment, the ownership over all intellectual property created during performance of the contract will be granted to the contracting government body.
Are there economic zones or other special programmes in this jurisdiction commonly utilised by foreign defence and security contractors for financial or other procurement-related benefits?
Mexico has recently implemented a special economic zones programme. These zones are designated geographical areas in which economic, tax and other administrative advantages are to be granted to the private sector, which operates in them. These zones were designed as instruments to boost economic development in underdeveloped areas. Each special economic zone has a specific niche and, therefore, only certain industrial or commercial activities can be developed in such areas, and only those activities will be subject to the advantages contemplated in the Federal Law of Special Economic Zones.
This programme has just been launched by the Mexican government as is still not operational. However, if a special economic zone is declared in which defence- and security-related goods or assets are to be manufactured or produced, then the manufacturer or producer installed in such zone may be subject to certain economic, tax and other administrative advantages.
Forming legal entities
Describe the process for forming legal entities, including joint ventures, in this jurisdiction.
Legal entities, such as corporations and companies are incorporated pursuant to the provisions contained in the General Law of Business Corporations. Certain steps must be taken to incorporate a legal entity in Mexico. In general, these are the following:
- getting the approval of the Ministry of Economy for the use of the desired corporate name;
- after drafting the articles of incorporation (which must contain all information stated in the Business Corporation Law), such articles will be formalised before a Mexican notary public and constitute the articles of incorporation of the newly formed legal entity. These articles of incorporation must also be registered in the corresponding Public Registry of Commerce;
- other important information must be contained in the articles of incorporation, such as the company’s attorneys-in-fact and their corporate authority, the appointment of the board of directors and managers, etc; and
- the newly formed entity should also be registered before the Mexican Internal Revenue Service.
This process usually takes no longer than two to three weeks and its costs are relatively low.
Access to government records
Are there statutes or regulations enabling access to copies of government records? How does it work? Can one obtain versions of previous contracts?
In terms of the Federal Law of Transparency and Access to Public Government Information, all public entities must provide each year, general or specific information via ‘CompraNet’ (the official website regarding government procurements) no later than 31 January, all information regarding their annual procurement programme, with respect to the ongoing fiscal year.
Nonetheless, certain contracts (and related documentation) may be exempt from disclosure, since such information may be sensitive and thus pose a risk to national security.
Supply chain management
What are the rules regarding eligible suppliers and supply-chain management and anti-counterfeit parts for defence and security procurements?
As stated in the Public Procurement Law, persons will not be eligible to execute a contract if:
- they share a personal or business interest with their employer, such as that which may provide personal benefits or advantages;
- they are employed or have a position or commission with the public service or legal entities that involved, without prior authorisation by the Public Service Ministry;
- they are a supplier that the ministry or legal entity that executed the contract cancels or rescinds such contract with;
- they are disabled by a resolution of the Public Service Ministry in terms of the Public Procurement Law;
- the suppliers are delayed in the delivery of the goods and supplies with respect to prior executed contracts;
- they have been declared in a bankruptcy process or any other similar process;
- they are suppliers or legal entities who file certain propositions in the same field of a good or service in a contracting procedure that may be related;
- they are suppliers or legal entities who pretend to participate in a contracting procedure and that are part of a holding corporation that has been or is currently involved in another contract;
- they are suppliers or legal entities that execute contracts with respect to matters regulated by the Public Procurement Law, without express faculties to use intellectual property rights;
- they use unduly provided privileged information;
- they contract advice, consulting services or any other support in terms of governmental contracts; or
- they are bidders who did not formalise the contract for unjustified causes.
With respect to supply-chain management, there are no general rules or regulations that establish how to proceed; a supply-chain agreement will be valid even if it is executed by and between the government and any other part. However, regarding anti-counterfeit parts, any contractor that commits fraud or acts in bad faith in any of the government procurement contract will be subject to the fines and penalties established in the Public Procurement Law.
International trade rules
What export controls limit international trade in defence and security articles? Who administers them?
In principle, the export of goods from Mexico is regulated by the Mexican Customs Law, the Mexican General Import and Export Duties Law and any other applicable law (national or international) depending on the tariff code in which the defence and security article is covered.
In this regard, on 25 January 2012, Mexico joined the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (WA), becoming the 41st state participant in the agreement. The WA has been established to contribute to regional and international security and stability by promoting transparency and greater responsibility in transfers of conventional arms and dual-use goods and technologies, thus preventing destabilising accumulations. The aim is also to prevent the acquisition of these items by terrorists.
At the national level, on 16 June 2011 Mexico published in the Mexican Official Gazette the ‘Agreement in which the export of conventional weapons, their parts and components, dual-use goods, software and technologies that could be diverted for the manufacture and proliferation of conventional arms and weapons of mass destruction are subject to a prior permission from the Ministry of Economy’.
On the other hand, on 30 January 2007 the ‘Agreement that establish the classification and codification of goods whose importation or exportation is subject to Regulation by the Secretary of National Defence’ was published in the Mexican Official Gazette.
In this regard, the defence and security articles will be regulated depending its tariff code and may need permission form the Ministry of Economy and National Defence.
Present information does not include nuclear material or use of pesticides, fertilisers and toxic substances.
What domestic preferences are applied to defence and security procurements? Can a foreign contractor bid on a procurement directly?
Since all defence and security procurements are exempted from the traditional bidding process and may granted via direct award instead, there are no applicable domestic preferences.
Are certain treaty partners treated more favourably?
Are there any boycotts, embargoes or other trade sanctions between this jurisdiction and others?
As part of the United Nations, Mexico agreed to comply with the decisions of its Security Council and, through its national policies, ensure that transfers of arms, dual-use goods and technology do not contribute to the development or enhancement of military capabilities that undermine these goals, and are not diverted to support such capabilities.
In this regard, on 29 November 2012 Mexico published in its official gazette the ‘Agreement establishing measures to restrict the export or import of various goods to the countries, entities and persons indicated’, by which Mexico restrict the exportation, among others, of defence and security articles to the countries established in such Agreement.
Are defence trade offsets part of this country’s defence and security procurement regime? How are they administered?
Ethics and anti-corruption
Private sector appointments
When and how may former government employees take up appointments in the private sector and vice versa?
The Government Employees’ Responsibilities Federal Law provides that former government employees are subject to restrictions associated with their office or ministry. Former government employees must allow a specific period before they join a private or public sector employment that has significant dealings with the government or has any other restriction with respect to their job.
How is domestic and foreign corruption addressed and what requirements are placed on contractors?
In connection with public procurement, domestic and foreign corruption is addressed by several different approaches and measures. In all public procurement agreements of which the total amount is above 5 million days of minimum wage (around 441 million Mexican pesos)or that may have certain impact in the programmes of the contracting government body, individuals who are known as ‘social witnesses’ must participate. These individuals are in charge of supervising the procurement process to prevent and detect potential corruption or irregularities in the procurement process.
Also, as a means to prevent corruption, certain public procurement bidding may be executed through electronic means in accordance with applicable law.
To be eligible, contractors must register with the Contractors Sole Registry, in which they will have to disclose certain vital information of their own and their activities.
The Ministry of Public Affairs will be in charge of managing a government public procurement electronic system, which will contain all documentation in connection with all public procurement acts executed. All information must be kept for a period of at least three years.
In general, all domestic and foreign corruption is addressed and prevented by certain general provisions stated in the Federal Anti-Money-Laundering Law, in the Criminal Code and in the Public Officials Liabilities Federal Law.
What are the registration requirements for lobbyists or commercial agents?
There are no specific rules of general application regarding the registration of lobbyists or commercial agents.
Limitations on agents
Are there limitations on the use of agents or representatives that earn a commission on the transaction?
There are no specific rules of general application regarding the use of agents or representatives that earn a commission on the transaction.
Conversion of aircraft
How are aircraft converted from military to civil use, and vice versa?
According to current Mexican legislation, there are no provisions regarding the conversion of an aircraft from military to civil use or vice versa.
What restrictions are there on manufacture and trade of unmanned aircraft systems or drones?
Pursuant to mandatory rule ‘CO AV23/10 R4’, issued by the Ministry of Communication and Transportation by virtue of the General Civil Aviation Directorate, to market remote piloted aircraft (RPA), manufacturers must:
- install an automatic mechanism on the RPA preventing the pilot from flying the aircraft beyond the pilot’s horizontal distance;
- install an automatic mechanism on the RPA preventing pilot from flying the aircraft beyond a certain altitude;
- add or install a mechanism allowing the RPA automatic identification (only applicable to the ‘heavy’ RPA category); and
- type approval or type certificate issued by the aviation authority.
Further, RPA sellers must comply with the following as set forth in such mandatory rule:
- the RPA package must include information that alerts the RPA owner that registration of the RPA with the Ministry of Communication and Transportation through a specific website General Civil Aviation Directorate is necessary, and that the owner must comply with the requirements and technical limitations established on such mandatory rule; and
- every time an RPA with a maximum takeoff weight of 250g is sold, the form found on mandatory rule ‘CO AV23/10 R4’ must be completed and filed with the General Civil Aviation Directorate.
Which domestic labour and employment rules apply to foreign defence contractors?
In accordance with the Federal Labour Law, the companies must employ 90 per cent of Mexican employers and a maximum of 10 per cent of employer’s workers. For every employer that has a source of employment in Mexican territory, the applicable law will be the Employment Law.
Defence contract rules
Are there any specific rules that contractors, foreign or domestic, are bound by in defence contracts?
Contractors are bound by the legal framework outlined in the previous answers.
Do contractors avail themselves of these rules when they perform work exclusively outside of the jurisdiction?
The defence contracts are governed by the Mexican public procurement laws (excluding the place of performance of the corresponding works).
Must directors, officers or employees of the contractor provide personal information or certify that they fulfil any particular requirements to contract with a government entity?
The contractors will not be disqualified to contract with the Mexican government if they do not fall under 14 causes contemplated in the Public Procurement Law, among others:
- if the contractor has any ties and interests, either personal or business, with a public servant involved in the procurement process that may benefit him or her, his or her family members, or any third party with whom he or she maintains any professional, employment or business relationships;
- if the contractor is employed or in charge of any area or division in the public service, or any corporation of which a public servant is a member of, without prior approval from the Ministry of Public Affairs; and
- all contractors that have incurred in breach of more than one public procurement agreement, within a period of two years since the corresponding notification of breach was issued.
Moreover, certain information regarding the contractor’s shareholders and legal representatives must be disclosed by the contractor for its registration under the Contractors Sole Registry to be approved as a government contractor. The information to be provided by contractors is the following:
- corporate name, nationality and address;
- incorporation files and any amendments to their by-laws;
- a list of their current shareholders;
- name of their legal representatives and their corresponding appointments;
- the expertise and experience of the contractor;
- information regarding their technical and financial capacity; and
- record of contractor in prior public biddings.
What registration or licensing requirements exist to operate in the defence and security sector in the jurisdiction?
As any other contractor with the Mexican government, defence and security contractors can only be registered as approved contractors in the Contractors Sole Registry.
The above-mentioned requirement is applicable only to federal procurement processes. The registration or licensing requirements may vary at local level and, therefore, we strongly suggest reviewing the specific local applicable law since each of the 32 Mexican federal states have a specific applicable law.
What environmental statutes or regulations must contractors comply with?
Contractors are expected to comply with environmental statutes and regulations of general application established in such law and in the Mexican legal framework concerning the protection of the environment and sustainable development.
Must companies meet environmental targets? What are these initiatives and what agency determines compliance?
Environmental targets should be met by companies during the performance of the procurement contract. The compliance with these laws is determined by the Ministry of Environment and Natural Resources (regulatory authority) and the Federal Prosecutor’s Office for Environmental Protection (sanctioning authority).
Do ‘green’ solutions have an advantage in procurements?
No, since all bidders must comply with the regulations contained in the Public Procurement Law and with the Mexican legal framework regarding the protection of the environment and sustainable development.
However, contractors must ensure in the bidding process the best available conditions in terms of energy efficiency, responsible use of water, optimisation and sustainable use of resources, as well as environmental protection.