Prudent entities responding to Requests for Proposals (RFPs) from the Government of Puerto Rico will exercise additional caution when determining how to demonstrate their economic fitness, after the Puerto Rico Supreme Court (PRSC) ruled that an administrative agency is not allowed to consider the financial statements of proponent’s parent company and other affiliates when evaluating the financial condition of the subsidiary.
In this alert, we take a closer look at the opinion and set out key takeaways for entities interested in participating in procurement processes in Puerto Rico.
Background
The opinion in the case Transporte Sonell, LLC v. Junta de Subastas de la Autoridad de Carrerteras y Transportación de Puerto Rico, First Transit PR, Inc., issued on July 24, 2024, states that, since the company’s subsidiary was the entity that sought to obtain an RFP award and would be liable in an event of non-compliance under a future contract, the economic capacity to assume the contractual obligations must be demonstrated by the subsidiary proponent itself.
The majority opinion, delivered by Justice Mildred Pabón Charneco, indicates that agencies must confirm the proponent’s financial soundness, regardless of the economic capacity of its parent company or other affiliated entities within the conglomerate to which proponent belongs, but which did not participate in the RFP process as part of a consortium of proponents. Note that this opinion relates to procurement processes through RFPs, not formal bid processes.
In the case, the Puerto Rico Highways and Transportation Authority (PRHTA) published an RFP for the operation and maintenance of eight bus transportation routes. The proponents were required to submit a statement of financial capability, including audited financial statements under GAAP for the preceding three fiscal years. First Transit PR, Inc. submitted a proposal, including the audited financial statements of its parent, and was selected as the successful bidder.
The defeated proponent claimed that First Transit PR failed to demonstrate independent financial capacity because it submitted financial statements of an entity or entities that did not appear as proponents. In opposition, First Transit PR argued that the RFP did not expressly forbid considering the financial information of the bidder’s parent company and that its proposal explained that it belonged to a conglomerate of companies.
The PRSC determined that consideration of the parent’s financial information was not reasonable. It revoked the award and remitted the file to the agency, which could then conduct a new RFP process, if it found such process to be necessary.
The PRSC highlighted that First Transit PR acted as the only proponent when submitting its proposal, and not as a consortium of proponents, so it could not request the agency to consider information from other companies within the conglomerate to which it belonged. The opinion suggests that a parent or related company’s information could be considered if the RFP allows submitting proposals by consortia or joint ventures, and if the proponents submit a joint proposal, complying with any requirements outlined in the RFP. The opinion also indicated that deviations in complying with requirements with respect to financial statements and financial capacity of proponents cannot be treated as formalities that the Board of Awards could disregard or waive, which RFP and PRHTA regulations generally allow with respect to informalities or insubstantial irregularities in proposals that do not hinder the objectives of the procurement process.
Additionally, the fact that First Transit PR submitted a bid bond, with the effect of demonstrating that an external guarantor supported the proponent’s financial capacity, was deemed inconsequential by the Court. Rejecting the argument of the existence of a bid bond to support the award to First Transit, the PRSC understood that the criterion of the administrative agency should prevail when determining the financial capacity of a bidder and not that of an insurer, which may consider other factors in granting the bond. The court did not distinguish the fact that bid bonds are submitted to guarantee that a proponent will enter into a contract under the terms of the proposal if the award is given to it. Bid bonds are not performance bonds and, therefore, do not cover contract performance once the contract is signed. Reference to the bid bond may have been deemed irrelevant for that reason.
Justice Luis Estrella Martínez, joined by Chief Justice Maite Oronoz Rodríguez, issued a dissenting expression of the opinion, stating that he would have deferred to the administrative agency’s expertise and experience in the evaluation of its RFP processes, particularly because public funds were protected to the extent that First Transit PR was the lowest bidder and PRHTA had a certified public accountant evaluate the financial soundness of the awarded proponent.
Going forward
Puerto Rico’s administrative agencies have been altering their approach to the financial soundness requirements in RFPs in recent years. The PRSC’s decision may further move agencies to take a different approach when structuring the requirements of future RFPs. In the future, they may explicitly require financial information exclusively from the appearing proponents or opt to specifically accept and establish that a related company’s financial information may be considered to strengthen the financial capacity of the proponent.
In the latter case, however, the agency will likely also require that, if the award is granted, the related company that supported the financial capacity of the proponent provides a corporate guarantee or another form of financial backup, even if the related company did not appear as an additional proponent or as part of a consortium in the RFP process.
Alternatively, agencies may take the approach of requiring all affiliated entities that provide financial information to appear in the RFP as members of a consortium. The agency will likely demand each such company to submit all other documentation required of a proponent – otherwise, they will likely be disqualified. This approach could have other consequences for such affiliates in a winning consortium, such as needing to be party to the contract or becoming a subcontractor, if permitted by the agency. In those cases, the affiliated entities may also need to register to do business in Puerto Rico and comply with additional registrations and requirements to participate in procurement processes and become a government contractor.
It remains to be seen how agencies may apply the PRSC’s opinion with respect to requirements related to the proponent’s experience and expertise. It is not unusual to see conglomerate members’ credentials being presented as part of a proponent’s expertise, particularly given the current influx of new foreign companies participating in RFP processes and creating new Puerto Rico companies for these purposes. Such participants – as entirely new corporate entities without any history – must include the financial information and credentials of their parent companies or other relevant affiliates.
Potential participants to Puerto Rico RFP processes are encouraged to evaluate their options in light of an RFP’s language, applicable regulations, and the recent opinion. Although it will additionally depend on the clarity of the RFP instructions and how the agencies manage the process, the opinion may lead to an increase of challenges to awards and litigation.
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