Public Procurement and Government Contracts 2018 Comparisons

Last Updated November 06, 2018

Law and Practice

Authors



Galindo, Arias & López has a public procurement and public contracts department comprised of eight members that works closely with the litigation and energy departments, and provides advice to private clients on procurement regulations applicable to all sectors; gives advice on procurement regulations to public entities, including the Panama Canal Authority; reviews and analyses tender documents; prepares and presents bid proposals on behalf of private clients; reviews and negotiates public contracts on behalf of clients and the administration; and submits bid protests and challenges to awards or termination of contracts. The firm’s partners regularly participate in the drafting of new legislation, including the Administrative Disputes Code, the recent amendment to the Government Procurement Law and the USD5 billion arbitration process related to the Panama Canal Expansion project.

There are no statutes specifically governing cost reimbursement or pricing issues for government contracts in Panama. The general Panamanian government procurement law does not contain any provision related to cost reimbursement or pricing issues as a rule of general application. Neither do the Acquisition Regulation applied by the Panama Canal Authority (ACP), the Tocumen Airport (Aeropuerto Internacional de Tocumen, SA, or AITSA) regime for concessions contracts, or the regulations applicable to the Social Security Administration (CSS Acquisition Regulation). Contractors will generally establish and determine the price to be offered for goods and services based on their internal, undisclosed, analysis of their estimated costs and intended profit for the particular contract.

Despite the fact that there is no specific legislation dealing with pricing issues in Panama, according to the general procurement law (Law 22 of 2006 or Law 22/2006) there are two situations where a government entity may disqualify a proposal (or a proponent) due to high prices: (i) if a proposal is deemed “onerous” according to the tender documents, meaning that the price proposed by the contractor is above a certain threshold clearly established by such tender documents; or (ii) if a proponent is part of a “Framework Agreement” (Convenio Marco) and is not complying with its terms.

Framework Agreements are contracts entered into by the government with one or more prequalified bidders for the acquisition of mass consumption products and services, with prices and conditions determined during a defined period of time through a reverse auction mechanism. While the initial Framework Agreement bid is intended to include all the bidders that qualify under specific technical and legal criteria for certain products or services regardless of the price, once a particular contractor qualifies in the initial Framework Agreement bid, it enters the product database as a qualified provider and can lower the price offered (but never increase) as often as it chooses in an effort to increase its chances of securing awards, which are delivered to the specific Framework Agreement bidder with the lower price in a specific time. A Framework Agreement contractmakes sure that the government is receiving the most favoured consumer treatment due to the fact that the administration may suspend or disqualify a proponent from the particular Framework Agreement for consistently offering to the government products or services at prices that are above general market prices. Government entities may only purchase goods or services covered under the Framework Agreements to the lowest bidder and are not authorised to launch separate tenders for such products or services. Currently, there are approximately 18 Framework Agreement contracts signed by the Panamanian government covering a wide range of products including airline tickets, consumer electronics, mobile telephone services, gas, tyres, batteries and car lubricants, among others.

Moreover, pricing issues are indirectly addressed after proposals are submitted and awarded on a case-by-case basis, when contractors intend to enforce the procurement principle of “contractual equilibrium”. The contract equilibrium principles contained in Article 29 of Law 22/2006 basically provide that contracts should maintain at all times an equality or equilibrium among rights and obligations between the parties as existed at the time of the proposal submission or the contract execution. According to Law 22/2006, if such equilibrium is broken, for reasons not attributable to the affected party, the affected party may require restoration of the contractual equilibrium. Such demands of equilibrium restoration are usually filled through a written submission requesting an increase in the proposed price, which will need to be duly attested through a detailed description of the costs increase and supported by evidence. Also, some contracts (usually construction contracts) contain specific price increase clauses as well as price increase formulas, regulating the allowable cost that will be recognised as “having an increase”, as well as the allowable base reference that will be taken into account to calculate the increase properly.

There are no specific regulations governing cost reimbursement and pricing issues for government contracts; however, Agreement No 24 of 4 October 1999 issued by the ACP establishes certain provisions relating to “onerous contracts”, as does Executive Decree No 366 of 2006, which regulates Law 22/2006, which also develops the legal basis for Framework Agreements.

Public procurement is regulated in Panama under several legal instruments: the general government procurement law (Law 22/2006), the Acquisition Regulation applied by the Panama Canal Authority, the Tocumen Airport and the regime procurement procedure of the Social Security Administration.

The most common types of procurement and contract mechanisms are:

  • simple bids, where the contract is awarded to the lowest bidder, usually in simple purchases of products or services;
  • best value bids, where the contract is awarded to the bidder presenting the best technical offer (which is not necessarily the lowest bid);
  • best value bids with separate evaluation, where the bids are evaluated in two separate stages (first the technical component, then the economic component and the contract will be awarded to the bidder presenting the best technical offer, which is not necessarily the lowest bid);
  • Framework Agreement bids, where contracts are entered into by the government with one or more prequalified bidders for the acquisition of mass consumption products and services, with prices and conditions determined during a defined period of time through a reverse auction mechanism; and
  • exceptional procedure, where the contract is awarded directly to one proponent without the need of a bid, when special circumstances occur.

In some instances, and for some projects, a prequalification process of the proponents will be issued. Otherwise, eligibility of proponents will be determined by due submission of documents and formalities that are required of all proponents: corporate authorisations to participate in the bid as well as a power of attorney, certificate of incorporation of companies issued by a qualified entity in the country of origin, a document attesting to the ability to conduct the business in the country of origin, sworn declarations and good standing certificates, among others. Proponents will need to be registered as such, in the respective database, before submitting proposals.

For ACP contracts, the ACP’s Ethics and Conduct Regulation applies, covering the conduct of employees and former employees that indirectly may also impact ACP contractors, since former employees shall not represent another person, entity, group, or organisation at the ACP in relation to any contract or particular business in which the former employee participated in a personal and substantial manner while employed by the ACP.

Disappointed bidders challenging an award by a government agency have different procedures depending on the legal support of the respective bid. For contracts awarded or bid for according to Law 22/2006, disappointed bidders may challenge the process through (i) claims (Acción de Reclamo) submitted before the General Directorate of Public Procurement of the Ministry of Economy and Finance, which may be filed by proponents against any illegal or arbitrary act or omission that occurred during the procurement process before it is formally awarded through a resolution;and (ii) appeals (Recurso de Impugnación) to be submitted before the Public Procurement Tribunal, which is an independent court that will hear cases filed by proponents considered to be aggrieved by a resolution awarding a public contract, or terminating it, and which requires posting of a bond (10% of the proposal for purchase contracts and 15% of the proposal for construction contracts). According to the ACP’s Acquisition Regulation, the tender documents or the awards may be challenged through a protest, before the contracting office. According to the Acquisition Regulation of the Social Security Administration, any challenge to an award issued according to Law 51/2005 should be submitted before the Third Chamber of the Supreme Court directly. Challenges to an award of a concession in the Tocumen Airport should be filed before the Tocumen Airport Board.

According to the ACP’s Acquisition Regulation, in cases of disputes with contractors the contracting officer will try to reach an agreement. If the dispute persists, the dispute will be solved in accordance with the arbitration mechanism included in the specific contract. According toLaw 22/2006, the Public Procurement Tribunal may hear cases related to unilateral termination of contracts by the administrations and a special procedure is established for such cases. Disputes associated with other issues not related to termination of a contract are governed by the arbitration mechanism included in the specific contract, if any. According to Law 51/2005, all unilateral actions related to the acquisition of medicines, medical equipment and supplies are to be challenged before the Third Chamber of the Supreme Court, which requires the posting of a bond (15% of the proposal). Disputes related to a concession in the Tocumen Airport will be heard by the Tocumen Airport Board.

The Panamanian government has a formal process for soliciting proposals from potential government contractors, which will differ in certain aspects depending on the type of contract or the legal basis used to launch the particular bid; however, they generally follow the same structure.

Tender Preparation

Although, according to the general Panamanian Government Procurement Law 22/2006, there is no formal stage of the procurement process similar to "sources sought or request for information as"existing in other jurisdictions, government agencies may conduct informal research and contact some prospective contractors when their needs, or the required solutions, are not clear. On the other hand, the ACP’s Acquisition Regulation does provide the option to conduct market research to determine possible suppliers, market practices and availability of the product or service in the market. In such cases, active participation and responses by interested companies are recommended since that may influence the process in favour of the respondent.

Notice

After a government agency identifies a particular need, it prepares the tender containing the procurement terms and conditions. Notices of the tenders are generally published in advance on the PanamaCompra website (for contracts under Law 22/2006), which is only available in Spanish. Such notices include the terms of the tender, comprising detailed technical and legal terms for the proposal as well as a date for the site inspection (if any), a date for the open meeting (if required by law or regulation) and the deadline for proposal submission. In some cases, as is the case of tenders issued by the Tocumen National Airport for awards of concession contracts, notices are published only in national newspapers, where the deadline for proposal submission is included as well as the information regarding the date and place for interested companies to purchase the legal and technical tender conditions. Furthermore, it is important to bear in mind that any tender process of the ACP is dealt with through its Tender Online System (SLI,alsoavailable in English). When submitting tender proposals, proponents should give special attention as to every single detail of the notice and tender documents, since the Panamanian government procurement process is generally driven by formality in the documents submission and even an otherwise curable defect might render a proposal void.

Prior Open Meeting

According to Law 22/2006, tenders valued in excess of USD175,000.00 require holding a prior open meeting by the respective government agency where parties may present their questions and concerns related to the project. The purpose of the meeting is to standardise terms and conditions of the tender documents. The government agency may modify the tender documents based on questions raised at the open meeting; however, after a meeting is held and questions and concerns are presented, prospective contractors that submit proposals are deemed to agree and accept the terms of the tender documents as established by the government entity.

Proposals

Written proposal submissions are made online at the PanamaCompra website or directly in a paper-based submission to the government agency at the set place and time. In all online tender systems, either PanamaCompra or SLI, there is a need to register before submitting a proposal. Also, even if a proponent decides to deliver a paper-based submission, and not through the PanamaCompra website, the respective proponent needs to register in the database as a proponent. Therefore, it is recommended that prospective contractors initiate the paperwork early to register in the respective online system, as first-time users might find the registration process a cumbersome task (especially the PanamaCompra online system).

Award

After proposals are submitted, an Evaluation Commission issues a report recommending to the head of the government entity the issuance of a formal award to the winner of the tender. The report might be accepted or not by the head of the respective government agency. If the evaluation report is accepted, the head of the government agency awards the contract; otherwise, the head of the agency might request a new analysis of the offers or cancel the tender. Tender awards are subject to legal actions that differ according to the legal framework used to launch the particular bid.

Applicable Statutes and/or Regulations

There are generally four different procurement legal frameworks that contractors will follow when providing goods and services to the government:

  • Law 22/2006 as subsequently amended, which governs the government procurement process of general application in the Republic of Panama, regulated by, among others, (i) Executive Decree No 366 of 2006, (ii) Decree No 317-Leg of 2006, which regulates the use of bonds in public bids, and (iii) Decree No 517 DFG of 2015, which regulates the inspection guidelines of public funds conducted by the General Comptroller's Office;
  • Title XIV of the Constitution, developed by Law 19 of 1997 and regulated by Agreement No 24 of 4 October 1999 issued by the ACP as subsequently amended (Acquisition Regulation applied by the Panama Canal Authority, or ACP's Acquisition Regulation);
  • Law 23 of 2003 as subsequently amended (Law 23/2003), regulated by, among others, Resolution 005-JD 2017 issued by the Tocumen Airport company (AITSA's Concessions Regulation); and
  • Law 51 of 2005 as subsequently amended, regulated by, among others, Resolution No 38,491-2006 JD issued by the Social Security Administration (Caja de Seguro Social, or CSS) as subsequently amended (CSS's Acquisition Regulation).

Only under the ACP's Acquisition Regulation are there “negotiated tenders”.

According to ACP's Acquisition Regulation, the opening of tender submissions is not made publicly, but rather done in the presence of ACP authorised personnel. Bids may be submitted online or by other means authorised by the tender documents. The ACP may make changes in the requirements on negotiated tenders after the opening of tenders has been held, as long as these changes are caused by a variation in the needs of the ACP and do not modify the contract objective.

Negotiated tenders are:

  • based on the lowest price, where awards are granted to the proposal with the lowest price presented by a qualified offeror;
  • based on the “best value”, where awards are granted to tenders having the best technical evaluation score that also complies with all of the requirements of the tender document, contains the lowest price and not rendered as onerous (a tender might be deemed onerous if it exceeds a certain threshold of the tender reference price as established by the ACP); or
  • reverse negotiated solicitations where a contract is awarded to the lowest bidder competing in real time on the internet to determine the best price in a predetermined period of time.

The government does not audit or otherwise verify pricing in proposals submitted by contactors, as there is no specific statute or regulation requiring government entities to do so. Although the ACP's Acquisition Regulation indicates that its contracting system shall be based on a set of principles including “post auditing of all expenses”, such audit refers to inspection of disbursements conducted by the ACP by the General Comptrollers Office and not to audits of proposals itself to verify pricing issues.

Agreement No 24 of 4 October 1999 issued by the ACP as subsequently amended establishes the negotiated tenders (Articles 76-89B). No specific provisions or mechanisms are in place in Panama to audit proposals submitted by contractor under Law 22/2006, Law 51/2005, the ACP's Acquisition Regulation, or AITSA's Concession Regulation.

In preparing their price proposals, offerors as well as all other companies in Panama will normally comply with the International Financial Reporting Standards (IFRS) and the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) if applicable.

Whether offerors submitting their proposals to the government are required to provide certifications in support of the prices offered will depend on the tender documents and whether the particular tender requires an itemised and detailed proposal. Usually long-term construction contracts, which will run for several years, require itemised proposals and offerors will submit supporting documentation, since price adjustment formulas might be added to the tender documents that will be applicable in cases of authorised price increases to certain price elements (eg, increases in the price of cement, steel, or other inputs as originally quoted) and the supporting documentation submitted in the proposal will serve as a foundation to accredit the base price to calculate the increase.

There is no statutory or regulatory obligation to certify or support the price offered in a public tender and offerors submitting their proposals to a particular bid will be bound on this issue by the tender documents themselves.

There is no standard certification language in support of the prices offered. If offerors submit supporting documentation in a foreign language (eg, quotes for international steel prices) to benefit from price adjustment formulas, such documents will need to be translated into Spanish by a Certified Public Translator, duly authorised by the Panamanian Ministry of Education to act as such.

Accounting registry requirements are general in nature and not specifically directed to government contractors. Manual accounting registries are still acceptable as well as registries handled through automated, computer-based or electronic means such as microfilm, optic systems, or any other means. Any technology used should ensure that accounting registries recorded are unalterable and irreversible as well as capable of being recovered (printed). The use of electronic means should be endorsed by a Certified Public Accountant, certifying that such registries will follow the accepted accounting principles in Panama.

It is worth nothing, however, that pursuant to Law 72 of 2011, there is a general regulatory requirement to issue invoices through a qualified tax printer (impresora fiscal), subject to certain exceptions for small companies and natural persons. Although the mandatory use of the qualified tax printer is in the process of phasing out, they are still obligatory until the new system allowing for online electronic invoicing is in place. Therefore, even though there is no mandatory accounting system, users will tend to purchase computer or cloud-based accounting systems that properly interact with the selected/available qualified tax printer.

Executive Decree 34 of 1998 issued by the Ministry of the Treasury, Resolution 201-1916 of 1997 and Resolution 201-909 of 1996 issued by the Revenue General Directorate (DGI) establish the requirements for electronic accounting registries.

Since there is no mandatory requirement to have any particular accounting and/or estimating system, such systems are not subject to either audits or inspections. However, the use of the qualified tax printer is mandatory, unless specifically exempted by regulation, and therefore it is subject to inspection by the DGI. Moreover, any person or company that delivers to vendors any payment for the delivery of goods or services is legally required, subject to penalty, to request to the vendor, and actually receive, a “fiscal invoice” (facture fiscal) issued by a tax printer. Government contractors are not exempted from such obligation, therefore fiscal invoices will also need to be submitted to the government entity when requesting the respective payment for the goods and/or services provided.

Contractors are usually paid at the end of the contract performance. In cases of construction contracts, and subject to the tender and contract conditions, contractors might receive partial payments throughout contract performance. Also, according to the terms specified in the particular tender, contractors may receive an initial advance payment upon delivery of a payment bond, limited up to 20% of the contract price. Tender documents will determine the specific activities that will be developed using the advanced funds. The contractor is mandated to submit information regarding the use of the advance funds and the General Comptroller's Office will confirm said use. Usually each payment delivered throughout performance will be subject to retention of the invoiced price (usually 10%), which will be delivered to the contractor after final acceptance is completed.

Apart from evidencing due performance of the specific contract, in order to receive payment contractors should submit with every fiscal invoice two good standing certificates, issued by the CSS and the DGI, evidencing that the company's social security obligations as well as tax obligations are duly paid.

For contracts under Law 22/2006, payments should be made according to the terms of the contract and any delay in such payments, for causes not attributable to the contractor, will be entitled to interest on arrears pursuant to the Tax Code. This also applies in the event that a contractor is not able to execute the work within the agreed term due to non-compliance with the responsibilities of the entity stipulated in the respective contract. The Panamanian Tax Code only includes clear provisions of interest payment by a taxpayer to the administration for delayed tax payments at an interest rate that will be two percentage points on the reference rate of the market annually indicated by the Superintendency of Banks and the reference rate of the market will be fixed in response to the interest charged by local commercial banks during the previous six months in commercial bank financings; therefore, according to Law 22/2006, the administration should apply the same rate in cases of its own delayed payments.

For contracts governed by the ACP's Acquisition Regulation, payments will be made to ACP contractors after 30 calendar days of contract completion and the corresponding invoice delivery. When there is a delay in the inspection or payment attributable to the ACP, an interest on arrears will be paid, automatically, on the basis of the three-month London Inter-bank Offered Rate for the term of the corresponding delay. The ACP also provides for a special payment option, before the 30-day term, if the contractor offers a discount acceptable to the ACP.

For supply lease and services contracts under the CSS Acquisition Regulation, the CSS should deliver payment 45-60 calendar days after the invoice is presented, verified and accepted. For construction contracts under the CSS Acquisition Regulation, the CSS should deliver payment 90 calendar days after the invoice is presented, verified and accepted.

Applicable statutes and/or regulations governing contractor payments are Law 22/2006, the ACP Acquisition Regulation and the CSS Acquisition Regulation.

The Panamanian government will pay contractors not on actual costs but based on the bid proposal and the payment schedule included in the contract and/or tender documents, which may be itemised, if requested as such. As discussed above, construction contracts may include price increase clauses that will trigger the government's obligation to pay for increases of certain itemised costs, if clear evidence can be shown that items reflecting such costs suffered an unforeseeable increase after an itemised proposal was submitted.

There are no regulations that describe what types of costs the government will reimburse the contractor for, or that identify or limit the types of costs the government will reimburse. However, under Law 22/2006 and Decree 128-2013 DMySC of 2103 Approving the Procedural Guidelines for the Control of Public Works Contracts issued by the General Comptroller's Office (“Decree 128-2013”), if after 30 days of the contract execution the order to proceed for a particular public works contract has not been issued, the contractor shall be entitled to cost increases, experienced during the period that elapses between the end of the term available to the contracting entity to issue the order to proceed and the issuance of said order, provided that the delay is due to causes attributable to the contracting entity and not to the contractor.

Also, according to Law 22/2006 and Decree 128-2013, government entities may include in long-term contracts cost variation clauses based on mathematical formulas, therefore accepting other price increases, which may be interpreted as “cost reimbursement”. Typically, such cost variances are related to specific inputs when the original cost was disclosed at the proposal submission (eg, steel bars or concrete prices) that might have occurred due to delays in contract execution or unforeseeable events not attributable to the contractor. Such cost increases are usually authorised and described as admissible or allowable in the tender documents, as well as in the project contract, and are required to be properly supported by evidence, since contracts will usually include a clause whereby changes related to the contract price will be subject to the conditions and specifications established in the tender documents.

With respect to the ACP contracts, the ACP's Acquisition Regulation provides that when the contractor is not able to start the execution of a contract for reasons attributable to the ACP, said contractor will also have the right to be reimbursed for the duly documented cost increases incurred by reasons of the delay. Also, if an ACP contracting officer suspends the execution of a contract, for reasons not attributable to the contractor, the contractor is also entitled to collect increases in costs that occurred during the contract suspension.

There are no price increase clauses allowed or provided for in AITSA's Concessions Regulations, nor under the CSS Acquisition Regulation.

Applicable statutory and/or regulatory bases for these price increase requirement are Articles 85, 94 and 91 of Law of 22/2006; Decree 128-2013 DMySC of 2103 Approving the Procedural Guidelines for the Control of Public Works Contracts issued by the General Comptroller's Office; and Articles 124 and 125 of the ACP's Acquisition Regulation.

Decree 128-2013 DMySC of 2103 Approving the Procedural Guidelines for the Control of Public Works Contracts issued by the General Comptroller's Office providing the right to request cost increases due to delays in issuance of an order to proceed applies only to public works contracts.

As a matter of general application, there are no special rules governing how government contractors must accumulate, record and report their costs, hence general accounting principles apply to any Panamanian or foreign entities doing business in the country, either in the private sector or with the government, and the ones normally followed are IFRS, as directed by Law No 6 of 2005, and IFRS for SMEs. All companies, whether selling to the government or not, must keep their required accounting records in the country, as well as the correspondence and other supporting documentation. Although the use of a twelve-month fiscal year may be permitted by the DGI in certain cases, the standard fiscal year begins on January 1st and ends on December 31st of the same year and according to Panamanian fiscal regulations, and accounting documents shall be kept for five years. However, there is a specific, but very narrow, regulation for ACP contractors regarding accounting records. According to the ACP's Acquisition Regulation, contractors are required to retain all contract documentation on paper or on electronic files for five years after having received final payment. All documentation related to the contract — as well as spreadsheets, accounting records and accounting practices used in negotiations after the award of the contract — shall be made available to the Office of the Inspector General of the ACP.

In general, failure to comply with rules regulating the requirements for electronic accounting registries applicable to any business or natural persons might lead to a monetary fine of up to USD5,000.00. Failure to comply with the requirements related to issuance of invoices through tax equipment might lead to a monetary fine of up to USD15,000.00.

Executive Decree 34 of 1998 issued by the Treasury Ministry and Resolution 201-1990 details the schedule of fines to be imposed according to the offence.

The DGI is the government agency responsible for overseeing and/or auditing contractor compliance with the requirements for electronic accounting registries applicable to any business or natural persons. ACP contractors will be supervised or audited in their respective obligations by ACP's personnel.

Foreign contractors selling goods or services to Panamanian government contractors do not need to follow special Panamanian accounting or pricing rules when located outside Panama, as local rules in force in the foreign country will apply.

Foreign subcontractors selling goods or services to Panamanian government contractors do not need to follow special Panamanian accounting or pricing rules when located outside Panama. Local rules in force in the foreign country will apply.

As a matter of general principle, tax authorities may always conduct audits for the purposes of determining compliance with tax laws, including contractor's records.

There are no specific provisions under Law 22/2006, the CSS Acquisition Regulation, or AITSA's Concession Regulation providing for the government's rights to access a contractor’s records. However, under the ACP's Acquisition Regulation, ACP personnel do have a general right to access the ACP's contractor records.

If a contractor, however, intends to enforce the contractual equilibrium principle contained in Law 22/2006, the contracting entity will request proper support for the price increase and, as a consequence, contractors’ records might need to be released, at least partially, in order to support the request.

Despite the fact that, according to numeral 4 of Article 280 of the Constitution, the General Comptroller of the Republic may carry out inspections and investigations (audits) to determine the correctness or incorrectness of the operations that affect public funds and, where appropriate, present the respective actions, in the few instances where such audits to specific government contracts were conducted, the inspection was made to the government records regarding the specific contract, to determine public servants' responsibilities regarding management of government funds, and not to a contractor's records.

Under the ACP's Acquisition Regulation, all documents related to the contract — as well as spreadsheets, accounting records and accounting practices used in negotiations after the award of the contract — shall be made available to the ACP's Office of the Inspector General.

Although under Article 140 of the ACP's Acquisition Regulation (included under Chapter XIII — Contract Administration/Section Four — Auditing of Contractor and the Contract-Related Documents) all documents related to the contract shall be kept by the contractor for five years after final payment and made available to the ACP's Office of the Inspector General, no specific provision can be found in the ACP's Acquisition Regulation as to what specific event triggers an inspection or audit.

Apart from auditing rights to confirm compliance with tax laws, the government has no audit rights in connection with the negotiation of fixed-price contracts, neither under Law 22/2006, the CSS Acquisition Regulation, nor AITSA's Concession Regulation.

When contractors intend to pursue a contract price increase due to increase of costs, the government will review the request and all the relevant information submitted by the contractor supporting the claim. It is not clear whether information not initially submitted might be compelled by the government for further submission and analysis, but in any case submission of additional information is to the contractor's benefit when requesting a price increase.

The government’s audit rights will differ based on the contract type, since an audit will only be triggered when a contractor requests a price increase.

According to Law 22/2006, the government has no specific right to perform audits on a contractor's records related to government contracts. Only audits on a company's records related to tax compliance are allowed under Panamanian tax law and such audits can be conducted at any moment, covering not only the particular government contract but a complete financial analysis of the last three years for taxpayers that submitted income tax declarations (seven years for taxpayers that failed to submit income tax declarations). As discussed above, when a contractor requests a price increase in the contract due to variation of costs then the government will likely perform the corresponding audit.

Under the ACP's Acquisition Regulation, due to the contractor's obligation to make available to the ACP's Office of the Inspector General all documents related to the contract — as well as spreadsheets, accounting records and accounting practices used in negotiations after the award of the contract — it seems that any authority to audit the contract is restricted to the post-award phase.

According to Law 22/2006, the government has no specific right to perform audits to a contractor's records related to government contracts, therefore no statute of limitation applies. Under the ACP's Acquisition Regulation, a contractor's obligation to make available the documents related to the contract is limited to five years after final payment is delivered to the contractor; the five-year period will be the implied statute of limitation since after such term there might be no documents to review.

Audits conducted under regular tax law can be performed to include the last three years for taxpayers that submitted income tax declarations (seven years for taxpayers that failed to submit income tax declarations).

Article 140 of the ACP's Acquisition Regulation is the applicable regulatory authority related to audit rights of ACP contracts. Audits related to tax law are governed by the Tax Code.

There is no concept of “unallowable” costs under Panamanian Law, neither under Law 22/2006, the CSS Acquisition Regulation, the AITSA's Concession Regulation nor the ACP's Acquisition Regulation.

For contracts regulated under Law 22/2006, the Public Procurement Tribunal is only competent to solve disputes between a contractor and any government entity regarding awards or termination of the contract, hence disagreements between the government and contractors related to cost and pricing issues in connection with the performance of a government contract (mostly related to cost increases) will be solved according to the process agreed upon in the contract. Usually, in construction contracts, arbitration clauses are included to solve any issues that are outside the scope of action of the Public Procurement Tribunal according to Law 22/2006.

On the other hand, the situation is unclear regarding disagreements between the government and a contractor related to cost and pricing issues in cases where the contract does not provide for arbitration clauses. In theory, in such cases, the regular administrative procedure will apply due to the fact that Law 22/2006 provides for application of the general administrative procedure contained in Law 38 of 2000 (“Law 38/2000”) or, as a last resort, the principles and rules of civil procedure, when there are gaps in the contractor's selection procedure.

As Law 38/2000 only deals with situations where the administration issued a specific Resolution or Order, triggering the regular administrative procedure under Law 38/2000 will require a request or petition to the administration in order to receive an answer by way of a written resolution. If denied, or not replied to at all, contractors may petition for reconsideration before the responsible person in the contracting unit. If the dispute continues, an appeal might be submitted to the head of the contracting entity. Lastly, if the petition for reconsideration and the appeal are both denied, contractors might resort to the Third Chamber of the Supreme Court of Panama trough an “autonomous action”, which, as of today, has no pre-established procedure.  According to a proposal for a new code that will regulate disputes with the administration (“Administrative Disputes Project Code”), which is still being discussed at the Cabinet level as this article is prepared, there are provisions specifically designed to deal with such contractual disputes. The Administrative Disputes Project Code will need to be approved by the Cabinet and submitted to the legislative branch for discussion and subsequent approval to become law of the land.   

Regarding ACP contracts, the ACP Acquisition Regulation specifically provides that"should the parties to an ACP contract fail to agree in the performance, interpretation or termination of the contract, the contracting officer submits the matter to an administrative process for the resolution of controversies as agreed in the contract". Hence, every ACP contractcovers issues related to disputes with contractors trough predetermined claims mechanisms included in the contract, either through (i) an independent arbitration tribunal designated in an arbitration clause, if any; or (ii) an internal claims mechanism before the ACP contracting officer, as a first instance, and before the executive manager of the Purchasing, Warehousing and Inventories Division if the initial resolution is appealed.

The following agencies and/or courts have responsibility to solve disagreements between the government and contractors related to cost and pricing issues in connection with the performance of a government contract: (i) if there is an arbitration clause, the arbitration tribunal named in the contract (usually the Centre for Conciliation and Arbitration of Panama — CECAP for Law 22/2006 contracts or the ICC for ACP contracts); or (ii) if there was no arbitration clause included in the specific contract then (a) the responsible person in the contracting unit within the contracting entity will hear the reconsideration under Law 38/2000, (b) the head of the contracting entity will hear the appeal under Law 38/2000 and (c) the Third Chamber of the Supreme Court of Panama will hear the autonomous action under the stipulations of the Judicial Code. 

Although the World Bank registers around 88 Public Private Partnership (“PPP”) type contracts, with an investment of more than 9 billion dollars since 1994, in Panama there is no clear and uniform legal framework applying to such instruments, hence the negotiated terms of each individual contract will determine the contractual rights and obligations of each Party. Since 2011, the Panamanian Private sector has pushed for the discussion and approval of a legal framework related to such PPP´s allowing the development of public infrastructure and public services, however public opposition to the then proposed legislation number 349, stopped the legislative process in 2011. The Private sector has recently renewed it´s interest and lobby efforts to boost the discussion and subsequent approval of PPP´s legal framework in Panama, an effort that should be monitored by all interested parties.

Lastly, several heavily regulated sectors like telecommunications, ports and electricity have their own legislation to regulate concession contracts. Each one has their particular set of regulations dealing with invoicing, pricing, auditing rights by the government, claims from consumers as well as dispute settlement mechanisms with the regulator, which will apply to the particular contract once awarded to the contractor.   

Galindo, Arias & López

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PO Box 0816-03356
Panama, Rep. of Panama

+507 303-0303

+507 303-0434

gala@gala.com.pa www.gala.com.pa
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Law and Practice

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Galindo, Arias & López has a public procurement and public contracts department comprised of eight members that works closely with the litigation and energy departments, and provides advice to private clients on procurement regulations applicable to all sectors; gives advice on procurement regulations to public entities, including the Panama Canal Authority; reviews and analyses tender documents; prepares and presents bid proposals on behalf of private clients; reviews and negotiates public contracts on behalf of clients and the administration; and submits bid protests and challenges to awards or termination of contracts. The firm’s partners regularly participate in the drafting of new legislation, including the Administrative Disputes Code, the recent amendment to the Government Procurement Law and the USD5 billion arbitration process related to the Panama Canal Expansion project.

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