3. Uruguay in transition – Ongoing reform of the state
Efficient management of state-owned enterprises (SOEs) and reform of the public administration can be a crucial element of future political and economic reforms in Uruguay. This chapter reviews recent reforms to increase oversight of and transparency in the use of resources by SOEs in Uruguay. It also discusses the progress in encouraging private participation in infrastructure projects. Finally, it reviews overall progress in public administration reforms, including to prevent misconduct in the public sector, fight corruption and minimise the risk of undue relations with business.
Efficient management of state-owned enterprises (SOEs) and reform of the public administration can be a crucial element of future political and economic reforms in Uruguay. In particular, addressing the socio-economic and political-administrative challenges and achieving the ambitious long-term strategic vision of a more inclusive and sustainable Uruguay for all citizens outlined in the Estrategia Nacional de Desarrollo Uruguay 2050 require a state that is capable of steering the country’s development and making it more inclusive. The 2019 electoral campaign showed there is today a broad political consensus across party lines that good public governance is key to build a better future.
In the past, reforms were implemented in response to emerging needs and/or in response to commitments assumed by the government in the context of economic and financial crises. Since the restoration of democracy more than three decades ago, there has been a genuine attempt to pursue a more pro-active approach to public governance reform (Ramos and Casa, 2018). Successive governments have committed to reform public administration in order to pursue a number of important policy objectives at the national and subnational levels. A major component of these different reforms has been nurturing a consensual whole-of-government and holistic vision for the country's public sector which is shared by all ministries, secretariats, SOEs)and decentralised agencies. The coordinating role of the Office of Planning and Public Budget (Oficina de Planeamiento y Presupuesto, OPP) has been very important in this respect.
SOEs play a central role in the national economy and the potential implications of their actions for national competitiveness are non-trivial. Unlike in other countries in the region, the incidence of corruption in SOEs (and in the public sector more broadly) has been low. This does not, however, diminish the importance of reducing undue administrative burdens and reforming the state apparatus, including the management of SOEs, given the opportunity cost associated with underperformance and lost opportunity to mobilise private capital for project delivery.
The importance of state-owned enterprises
As is the case of many emerging economies in Uruguay, state-owned enterprises (SOEs) have played a central role in the process of economic catch-up and productive transformation. In the early 1990s, SOEs and other government agencies had sales equivalent to 40% of GDP and were employing 20% of the country’s work force. Today, SOEs continue to play a very important role in the Uruguayan economy. It is estimated that over the past 10 years, on average SOEs have accounted for 5.5% of GDP, 7.5% of total investment and 2.4% of employment (Munyo and Regent, 2015). Goods and services they supply also represent 14% of the consumption basket (Zipitría et al., 2019). Total SOE employment, which had fallen by 30% between 1995 and 2001, has remained stable since then, increasing slightly to reach 36 000 in 2018 (OPP, 2019). The efficiency of SOEs, therefore, clearly has implications for the country’s overall economic performance.
As shown in Table 3.1, state ownership is prevalent in public utilities (electricity and gas, water and sanitation, telecommunications and postal services), as well as transport, and finance (both banking and insurance). This is typically the case in developing and emerging economies, but different approaches exist in the LAC region as illustrated by the examples of Chile and Costa Rica in the table above. In manufacturing, SOEs have played a much less prominent role in Uruguay (with the exception of meat packing until the 1970s). The above-mentioned OPP, overseeing public planning and budget, publishes online relevant statistics on the corporate structure and performance of SOEs, including information on the ties among SOEs (Figure 3.1) The six largest ones include UTE in electricity; OSE in water and sanitation; ANTEL in telecommunications; ANCAP in petroleum; BROU in commercial banking; and ANP in ports.
Source: OPP (2019), www.transparenciapresupuestaria.opp.gub.uy
Further scope for SOE reforms
In line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOE Guidelines) and international experience, various steps should be taken to improve SOE governance and performance and, when appropriate, prepare companies for privatisation. In particular, greater consistency is needed with regard to ownership and control of state assets; more resources should be devoted to financial oversight; efforts should continue to professionalise SOE boards; public-private competition should be promoted; and regulators should be given enhanced powers (Böwer, 2017). As discussed in Chapter 8, the SOE Guidelines also recommend that SOEs observe RBC standards and publicly disclose expectations established by the government in that regard, as well as mechanisms for their implementation. Implementing RBC principles and standards in SOEs contributes to enhancing SOE governance and performance while improving the quality of the overall business environment.
Improving oversight and control
In Uruguay, the Constitution governs the establishment and functioning of SOEs. In fact, already at the start of the XX century, Uruguay’s 1918 Constitution distinguished between different types of state assets.1 The current Constitution sets forth the various provisions regarding the creation of autonomous bodies and decentralised services, appointment and removal of directors, disclosure of financial information, and other requirements (Art. 185-201). The number of such semi-autonomous public bodies has increased in Uruguay over time (Figure 3.2).
Source: OPP (2019), www.transparenciapresupuestaria.opp.gub.uy
Oversight functions are exercised by the Public Enterprise Department (Departamento de Empresas Públicas – DEP), within the Planning and Budget Office (Oficina de Planeamiento y Presupuesto – OPP) of the Presidency, mentioned already, and the Macroeconomic Advisory Unit, under the Ministry of Economy and Finance (MAU/MEF). OPP/DEP and MEF/UAM oversee all SOEs owned by the central government. There is a formal policy for dividend pay-outs to the executive power, which follows a specific calculation process. For commercial and industrial companies, the dividend pay-out is negotiated as part of the Financial Programme and is proportional to the profits earned in the fiscal year (OECD, 2015d). As highlighted in the section on infrastructures, some monopoly rights have been relaxed and independent regulatory bodies have been established.
Since 2015, SOEs have been given precise annual and medium-term performance targets as part of the national budget allocation. Indicators are aligned with sectoral policies and are meant to quantify management improvements, guarantee investment returns, and facilitate internal and external evaluation by outcome. These agreements also contemplate a system of results-based compensations and penalties. The targets are not strictly comparable and the aggregation of the results over this short, three-year period should therefore be interpreted with caution, but some common features can be identified. A cumulative total of 438 indicators have been set, of which 82% have been met. Although there is no clear trend in the average number of targets per company, there seems to be a decline in the success rate (from 85% in 2015 to 75% in 2018). If the indicators are to be used in the future for performance monitoring of SOEs, as well as an instrument in a potential system of results-based compensations and penalties, an in-depth evaluation of the adequacy of the currently used indicators will need to be undertaken. At any rate, this approach should be consistent with the OECD Guidelines on Corporate Governance of State-Owned Enterprises, which call on the state to “develop consistent reporting on SOEs and publish annually an aggregate report on SOEs” as well as publish the results online to facilitate access of the public.2
Improvements in corporate governance
The general contours of corporate governance in Uruguay are set by the Company Law No. 16.060 of 1989 and Regulated Financial Markets Law No. 18.627 of 2009. The former introduced new forms of guarantees for minority shareholders and raised disclosure and accounting standards. The latter included provisions on tender offers, new financial instruments (such as fideicomiso, a form of trust) and corporate governance – such as the obligations to treat shareholders fairly and equally (art. 81) and to publish audited financial results (art. 80 and 86). Nonetheless, the domestic stock exchange remains very small – there are only eight listed companies and, to take but one example of global best practice that has yet to prevail in Uruguay, there is not a single woman director.
As far as SOEs are concerned, Article 185 of the Constitution establishes that board members shall be appointed by the President, in consultation with the Council of Ministers, and approved by the Senate. SOE boards were previously all composed of five members, but some companies have recently modified their bylaws to reduce this number to three (and ANCAP, BROU, BSE and UTE plan to do it in the near future). Under the current legal framework, there is no separation between chair(wo)man and the CEO, and board intervention in operational issues remains frequent. In the past, political considerations shaped the appointment of SOE board members, hindering effective accountability arrangements. The level of professionalism of company chairs, as proxied by educational credentials and business expertise, has markedly increased in recent years, even if the appointment process remains relatively opaque (Zipitría et al., 2019). Also rising is the presence of women in SOE boards and executive teams. Although the gender balance remains skewed (81% of senior management positions are occupied by men, at end-2018), there are four women Secretary Generals (out of nine) and three Chairs (out of 12) (see Table 3.2)
SOEs are audited by the public sector auditor (Auditoría Interna de la Nación) and, most of the time, by a private audit firm, on a voluntary basis. The review of the IFRS 2003-based financial statements of the four largest SOEs (for 2004) found that the presentation of these financial statements was good, although in one case the auditors reported a number of issues that put in question the reliability of the information presented (Fortin et al., 2010). Since 2015, the Auditoría has also monitored improvements in SOE governance, notably through on-site visits, and in 2019 alignment of corporate practices with the SDGs has been added to the list of relevant criteria.
Nonetheless, there is scope for further improvements. In 1991, Parliament authorised SOEs, upon prior authorisation from the Executive, to temporarily or permanently enter into a partnership with other companies. As no reform has addressed the fact that SOEs are subject to public sector law, several of them have created subsidiaries operating under private law to achieve their objectives. Examples include the construction of a sanitation and rainwater system in Ciudad de la Costa, a regasification plant, and an energy conversion project with Brazil. This option may seem prima facie effective to bypass the constraints and rigidities of the public sector, but leaves the flank open to cross-subsidies and other financial inconsistencies. The ultimate risk is that of jeopardising the accountability requirements that should be expected when public resources are at stake.
A possible solution may come from transferring ownership rights from the Treasury to a separate government entity that would be responsible for coordinating all SOEs, monitoring the attainment of performance goals, appointing (and firing, if appropriate) the members of the board, and deciding upon strategic matters that exceed the sole responsibility of the management. It would also ensure that significant issues raised by auditors (internal and external) are properly and promptly addressed by SOEs. Similar institutions operate in Chile and Paraguay (Box 3.1).
Going forward, increasing board professionalisation and accountability (e.g. through the use of eligibility requirements for SOE board nomination) and better oversight will be critical elements of reform in Uruguay. Several recent publications draw on the examples of best practices from OECD countries and suggest specific options for reform open to the authorities (IDB, 2019, World Bank, 2014)
The desire to improve the performance and efficiency of state-owned enterprises (SOEs) without relinquishing public control of the underlying assets is not unique to Uruguay. Other countries in the region – notably Chile and Paraguay –have also experimented with institutional solutions to improve oversight and control of SOEs in their economies.
The Public Enterprises’ System (Sistema de Empresas Públicas, SEP) in Chile is a committee of CORFO (Production Development Corporation). It acts as a technical advisory body, with authority to centrally oversee management of the majority of CORFO-owned SOEs (23 out of 33 SOEs). Some of them are profit-seeking entities, for others the mission is at least partly to pursue social goals. SEP over-arching task is to appoint and remove SOE directors, on the basis of the corporate governance code, a specific code of conduct, and the annual assessment of directors’ performance. SEP itself is overseen by a nine-member governing council and is managed by an Executive Director recruited from the private sector.
In Paraguay, the National Council of SOEs (Consejo Nacional de Empresas Públicas, CNEP), was created by Law 5058/201. CNEP centralises the supervision and control of SOEs and advises the President of the Republic on the nomination of CEOs (in Paraguay only a few companies have a board of directors) and their removal in case of underperformance.
The current state of play
There is a broad consensus that a country’s endowment with quality infrastructure represents a critical factor to sustain inclusive growth, attract FDI, and promote trade (Revoltella et al., 2016). At the global level, Agenda 2030 underscores the importance of infrastructures in delivering sustainable development through the inclusion of various specific targets. For Uruguay, with a small population (roughly a third as large as in the Czech Republic) in a relatively large surface area (roughly twice as large), the development of physical infrastructure, primarily railroads, has always been a fundamental element of national integration. This effort was particularly important in the second half of the 19th century – already in 1874 the railways network reached 205 kilometres. The 1889 law set the scene for the two major developments – the construction of a railroad that crossed the country, by-passing Montevideo, and the interconnection of the Uruguayan system with those of Argentina and Brazil. Private, and especially foreign, capital, played a crucial role in this phase, which came to an end on 31 January 1949, with the formalisation of the nationalisation of Compañías Británicas de Ferrocarriles and Compañía del Puente del Cuareim.3 Private participation in infrastructure was halted for several decades.
This background may contribute to explain the relatively poor quality of infrastructure in Uruguay according to international rankings. According to the Global Competitiveness Report (WEF, 2019), Uruguay ranks 65th place worldwide for the quality of infrastructure, in between Kuwait and India and below both Chile and Costa Rica. The scores are relatively good for some indicators, notably seaport services (39th), but significantly poorer along other dimensions such as airport connectivity (110th) and road quality (86th). The poor state of infrastructure is similarly revealed by the 2018 World Bank’s Logistics Performance Index, where Uruguay is ranked 85th, well beyond its regional peers that are OECD members (Chile at 34th, Mexico at 51st, and Colombia at 58th) but also less developed countries such as Ecuador (62nd) or Paraguay (74th). In fact, Uruguay has the fourth-lowest LPI score in South America.4
When comparisons are made at the global level, it is clear that there is still a huge gap between Uruguay and the best-performing countries. In addition to the indicators reported in Table 3.3, it is crucial to note that the average cost of a ton-kilometre transported by road is estimated at USD 0.19, at least twice as expensive compared to best performers. This a serious hindrance, considering that in Uruguay about 95% of cargo (in ton-kilometres) are transported by road and that the associated transport costs represent up to 70% of total logistic costs in some of the most relevant logistic chains (World Bank, 2017). Meanwhile, Uruguay fares better on indicators of information and communications technologies infrastructure. For example, it was ranked 42nd out of 176 economies worldwide on the ICT Development Index of the International Telecommunication Union, and has improved its ranking by six positions from last year (Table 3.4).
In telecoms, Antel, the state-owned incumbent, has a monopoly in the provision of local and fixed broadband services. Segments of the telecom market that have been opened to competition include international long-distance telephony, mobile telephony, and fixed-wireless broadband and are regulated by an independent authority (URSEC, Unidad Reguladora de Servicios de Comunicaciones). Antel dominates the mobile market (53% of total services in December 2017), ahead of Telefónica’s Movistar (32%) and América Móvil’s Claro (15%) (URSEC, 2017, Fig. 60). All three operators offer mobile broadband through 3G and LTE networks.
However, Uruguay is one of the few countries in the world with no broadband access via cable modem. Although cable networks are well equipped technologically, and digital cable TV is widely available, data transmission over pay TV networks is prohibited. There are ongoing discussions over the need to change regulations and permit cable TV providers to offer broadband services. Cable broadband would help strengthen the pay TV market, make bundled solutions more widely available, and give customers the freedom to choose their internet provider. Nevertheless, there is a fast developing market for OTT (over-the-top) video-streaming services. Netflix has been available since September 2011, and other providers also compete.
The examples of investment in the renewable energy and transport sectors are a testimony to potential dividends paid by reforms that combine a gradual opening of segments of the market and proactive efforts of the government to attract private investment into the sectors and promote a certain policy stance through its SOEs (Box 3.2-3). Notwithstanding these positive signals, the reform in the electricity sector are far from complete and electricity prices remain high in certain market segments relative to other countries in the region, even according to the government’s own estimates.5 Total investment in infrastructure as a percentage of GDP fell between 2008 (when it stood at 2.5%) and 2013 (2%) (Serebrisky et al., 2018). In addition, Uruguay fares poorly on most indicators of public investment management and public procurement efficiency, and has one of the lowest levels of private investment in the LAC region (Serebrisky et al., 2018). Problems are concentrated in the pre-investment phase of the infrastructure project cycle, in particular project selection, and are probably contributing to cost overruns and delays (Alberti, 2015).
In electricity, Law N° 16.832 of June 1997 (so-called MMEE Law) removed the long-standing monopoly of state-owned UTE in power generation and allowed any authorised agent to operate on the electricity power wholesale market (Mercado Mayorista de Energía Eléctrica, MMEE). UTE remains the sole transmitter and distributor and under a public service obligation it is expected to offer to independent producers the same access conditions to the national interconnection system (Sistema Interconectado Nacional, SIN). Oversight over the sector (as well as fuel and water) is in the hands of URSEA (Unidad Regúlatoria de Servicios de Energía y Agua).1 In addition, in 2010, the Ministry of Energy, Mining and Industry approved Decree 354 on the Promotion of Renewable Energies meant to increase dramatically the share of electricity generation from renewable sources.
Uruguay has received significant investment in its renewable energy sector, in particular several large wind farms were built in the early 2010s (Table 3.5) by a number of international companies. According to the Global Wind Energy Council (GWEC), Uruguay entered the exclusive 1GW-plus club in 2016, adding 365MW for a total of 1,210MW, although new installations dropped to 295MW in 2017. The first tenders for solar energy projects were issued in 2014. In January 2018, wind and solar generation reached 44%, the second-highest share worldwide after Denmark. The share of wind has grown from 2% in 2013 to 33% in 2017. Windpower Intelligence expects to see 2.3GW of capacity in place by the end of 2024 (compared to 24.2GW in Brazil and 7.1GW in Chile). These developments have allowed Uruguay to reduce its reliance on imported oil-fired thermal generation to top up hydro generation. In fact, Uruguay has now turned into a net energy exporter.2
The government has boosted the sector through subsidies, public-private partnerships and long-term agreements with the domestic electricity distributor. The 2008 national energy policy aimed to achieve diversification of Uruguay’s energy matrix, mainly by promoting the use of indigenous renewables, and set specific renewable goals for the short, medium and long term (2015, 2020, and 2030). Decree 354 on the Promotion of Renewable Energies, issued in 2010, established aggressive 20-year power purchase agreements and tax exemptions (20-100% of income tax, depending on the project). Because wind and solar power are variable, Uruguay has allowed grid operators to participate in auctions for wind off-take contracts of up to 20 years, incentivising flexible back-up generation and using cross-border interconnection (especially with the Brazilian state of Rio Grande do Sul) to export generation surpluses. When curtailment led to the spot prices falling very low, generators in Uruguay were compensated (while this is not the case in Chile, for example).
In addition, an environmental indicator has been used to award tax benefits to corporations. Decree No. 455/007 of 26 November 2007 states that foreign investments must be consistent with the country’s strategic objectives, including that of cleaner production, to be eligible for the tax benefits laid out under Law No. 16.906. Furthermore, as described in Chapter 6 and 7 of this Review, in 2012 the government introduced a new methodology for the evaluation of FDI projects. Among others, investors are assigned one point for every 5% of the total investment that is allocated to cleaner production and may also benefit from sector-specific support.
← 1. See Law 17.598 (13 December 2002), modified by Law 18.719 (20 December 2010).
← 2. The first export deal was signed in May 2016 between Uruguayan wind farm developer Ventus and Argentinian energy trader Saesa. Electricity produced by wind turbines in Uruguay is competitive against the mix of conventional power generation that dominates supply in Argentina.
Note: Other sources includes generation from chemical heat and other sources. Hydro includes generation from pumped-hydro power stations. Coal also includes peat and oil shale where relevant. Gigawatt hour (GWh) is a unit of energy representing one billion (1 000 000 000) watt hours and is equivalent to one million kilowatt hours.
Source: IEA, Electricity Information (2019)
In transport infrastructure, too, the private sector plays an increasingly extensive role:
Puerta del Sur (controlled by Argentine airport concessionaire Aeropuertos Argentina 2000) won a 20-year contract to operate Montevideo’s Carrasco international airport in 2003. The USD34 million offer was more than double the USD15 million asking price. The bidders committed to invest at least USD75 million for works such as rehabilitation of paved surfaces, a drainage system, a new passenger terminal with parking, a new cargo terminal, new airport rescue and fire fighting facilities and extension of the runway. The consortium went through a difficult phase following the collapse of the national carrier, Pluna, in July 2012. Some 60% of operations at Montevideo were ceased and Iberia temporarily cancelled its flight from Madrid because of the loss of feeder traffic. Despite losing half of its revenue, the airport operator managed to meet its obligations and continue capital spending. The concession was renewed in 2014 (until 2033) and Puerta del Sur committed to invest more than USD30 million. In 2018 Carrasco became the first airport in Latin America and the fifth worldwide to install a biometric facial recognition system for departing passengers, from customs and passport control to boarding the plane.
Montevideo is the 17th busiest port in Latin America and the Caribbean, ranked by container throughput; it has climbed two positions since 2014 and has recorded the sixth-fastest growth rate, in particular well ahead of the two closest competitors of Buenos Aires and Paraguas in Rio Grande do Sul. This growth has been driven in part by the increase in foreign trade, but mostly by outsized growth in transit and transhipment (especially for refrigerated containers). Katoen Natie of Belgium has managed an important container handling facility (Terminal Cuenca del Plata, TCP) since 2001 and is positioning Montevideo as a regional hub in the South Atlantic. In Nueva Palmira, private investment is estimated at USD100 million for the grain terminal (the country’s largest) and at least USD60 million for other purposes.
The BOT (Build Operate & Transfer) model for highways was introduced in 1995 and resulted in four concessions, of which two still exist, before its termination a few years later. In 2002 a public concessionaire – the Corporación Vial del Uruguay (CVU, Uruguay Road Corporation) – was established to manage a new programme for 1,300 kms of roads (roughly half the total network extension) was launched and. Since then, the CVU reach has been expanded, both in size (it now manages 2,600 km of highways) and in its capacity to leverage funds. Finally, 1,630 km of national roads were identified for PPP arrangements, where levels of traffic are high enough to interest private investors. Road quality, however, remains poor (Uruguay ranks 86th out of 140 countries in WEF, 2019).
Given the current state of play, the government can, on the one hand, undertake actions to make the delivery of public investment projects more efficient and, on the other, facilitate the entry of private investors into certain infrastructure markets. To assist with the latter, progressive removal of entry barriers in some sub-markets and proactive attraction of investment in selected market segments may be an optimal strategy, coupled with a more dynamic take-up of PPP projects – discussed next.
Improved efficiency of public procurement
While the take-up of PPPs is increasing in certain countries, including in Uruguay, traditional public procurement remains the predominant means of investing in public infrastructures. Sound public procurement management can lead to substantial savings, enhanced productivity and improved services. In Uruguay, general government public procurement accounts for approximately 6.3% of GDP and 19.1% of general government expenditure, which is below the OECD average of 12% and 29% respectively (Izquierdo et al., 2018).
In collaboration with multilateral development banks, the CPAR (Country Procurement Assessment Report) methodology was used in the early 2000s to design a better-functioning framework, leading to the creation of ACCE (Agencia de Compras y Contrataciones del Estado) in 2008. Law 18.834/2011 gave additional powers to ACCE, in particular as refers to assisting procurement bodies. In order to further diminish corruption risks, TOCAF (Texto Ordenado de Contabilidad y Administración Financiera) has been amended substantially on several occasions, with each version making the process more rigorous, better controlled, more transparent and overall more business friendly.6 An e-procurement system is now used by most contracting parties and there is a legal obligation to allow e-submission of tenders.
Unfair or opaque procurement processes may send negative signals to businesses cause delays, increase projects costs, and reduce business opportunities for investors. In order to minimise these risks, there may be value in using available OECD materials for training and illustration purposes. For example, Uruguay has used the Methodology for Assessing Procurement Systems (MAPS) to evaluate the quality and effectiveness of its public procurement systems.7 All in all, the proportion of businesses that regard corruption as very or fairly widespread in Uruguay’s public procurement is low. Yet, Uruguay is encouraged to continuously address these issues in the legislation governing public procurement and further integrate responsible business conduct (RBC) standards within SOEs.
Increasing the efficiency of PPP management
In 2015, the government announced the 2015-2019 public works plan, which entails total investments of USD12.3 billion, with the bulk directed toward the energy sector, USD 4.2 billion, while roads will account for the second biggest slice (USD 2.4 billion) and social infrastructure for USD1.9 billion (Serebrisky et al., 2017). The plan opened opportunities for PPPs, that are regulated by Law 18.786 adopted in 2011 and a series of Decrees (number 17/012, 280/012, and 251/015).8 PPPs in Uruguay can be pursued only when prior analysis has determined that no alternative form of procurement is better suited to achieve public policy goals. Besides national defense and other matters of national security, the regulatory framework explicitly prohibits PPPs in water and irrigation and restricts them to specific segments in education, health, and security and convict rehabilitation. The regulatory framework also includes a PPP Project Unit (Unidad de Proyectos de Participación Público-Privada) and provides for a specific tax regime for PPP transactions (i.e. tax incentives, special tax depreciation treatment, etc.).9
At end-2018, the plan was 72% complete, and was expected to reach 87% at the end of 2019, according to the 2018 budget report to Parliament. Out of 15 PPP projects, 13 have been tendered and, of the contracts for which tenders have been launched, one is already in operation (Punta de Rieles penitentiary), one is under construction (rehabilitation of the Ruta 21 and Ruta 24 highways), five others are in the stage of financial closure, and the bidding processes still underway for other six. The energy and communications sections of the plan are the most advanced, with both having reached 73% completion. Meanwhile, port investments have progressed 72%, roadworks 63%, housing 54%, social infrastructure 53% and water and sanitation 45%. As regards financing, 66% of the funds come from public sources, like the government budget and state-owned companies, while the remaining third comes from private entities.
A frequent criticism is that PPPs take too long to achieve financial closure, hence delaying the start of works. An USD 350 million financial trust was created to support companies investing in infrastructure works over a five-year period. This instrument (that in the Americas only exists in Colombia) brings together the need for funding of companies that participate in investments in public-private partnerships with those that have the ability to put up funds. Latin American development bank CAF, through the company CAFAM, will be responsible for the structuring of the fund and following up projects during development. The resources were made available by Uruguayan investors through the stock exchange and will be administered by a CAF trust. The development bank will contribute an additional 10%. Other projects are partly financed by Mercosur's Focem fund. The potential involvement of Uruguay's pension fund managers (AFAPs) in the financing of projects is also being discussed.
The investments required to improve infrastructures provide an opportunity to promote quality infrastructure investment projects which can have direct positive impacts on Uruguay’s economy and society, including higher economic efficiency, increased safety, decreased environmental impact, more effective delivery of public goods and services, and improved well-being of the local population. From this standpoint, independent regulatory agencies can play an important role – and this has been the case of Uruguay (e.g. URSEC in telecommunications and UREE in electricity and gas). Yet, as the financial resources of those institutions and the scope of their responsibilities decline, so may their capacity to play a proactive role in this regard. Certain infrastructure projects may have negative impacts, which can range from conflicts with communities over land, water, and resettlement, to unsafe working conditions during construction or significant environmental (including climate change) impacts during operation. In line with the OECD Guidelines for Multinational Enterprises, enterprises should conduct due diligence with a view to identify, prevent, mitigate and account for how they address their actual and potential adverse impacts. The OECD Due Diligence Guidance for Responsible Business Conduct provides practical support to enterprises on the implementation of the Guidelines by providing explanations of its due diligence recommendations. In addition, the Policy Framework for Investment and the Principles for Private Sector Participation in Infrastructure (OECD, 2007) encourage governments to clearly communicate responsible business conduct expectations to their private partners.
Last but not least, besides improving the quality of public contracting via traditional means as well as the take-up in PPPs, the government can also continue pursuing proactive policies to attract private investment into certain infrastructure sectors, as has been the case with the renewable energy sector. In this context, the role of the national investment promotion agency, Uruguay XXI, which also aims to promote investment into infrastructure projects (and is described in more detail in Chapter 7) may be important. For example, Uruguay XXI provides investors interested in investment in infrastructure with information on the available investment opportunities as well as the applicable regime, including the overview of the PPP procedure.10 In addition, investment incentives under the COMAP regime can also serve that purpose (Chapter 6).
One of the most effective policies to improve the functioning of the state administration is to draw and apply clear and transparent rules. If rules are unclear, administrative procedures are opaque and procedures for hiring public officials, as well as their interaction with the public, lack transparency, the quality of public services may suffer and corruption increase.
In comparison to other emerging economies, in Latin America but also globally, in Uruguay corruption is not perceived as a major issue. According to Latinobarómetro 2017, only 1% of the population considers it as the gravest problem facing the country, as against 31% of Brazilians, 13% of Mexicans, and 12% of Chileans. Uruguay was ranked 23rd among 180 countries in the Transparency International’s Corruption Perception Index (CPI) in 2018: when Uruguay was first included in the CPI in 1997, it ranked 35th among 52 countries. Uruguay is above all non-OECD countries that are Adherents to the OECD Declaration, as well as various OECD countries such as Chile, Israel, Poland, Italy, Turkey, or Mexico. In the 2019 Global Competitiveness Report, incidence of corruption is the institutional component where Uruguay has the second-best global ranking (23rd) out of 20 indicators. Similarly, foreign firms have not identified corruption and bribery solicitation as a problem for investment. Although the sum lost in illicit financial flows from 2004 through 2013 is far from insignificant, USD956 million per year on average, it is dwarfed by the estimated figures in other developing and emerging economies (GFI, 2015).
Explanations for this positive accomplishment in Uruguay are manifold. In the first place, the quality of political institutions, including parties, has mitigated clientelistic practices in politics and encroachment in the management of state resources (Buquet and Piñeiro, 2016). The authorities have also adopted a holistic approach that recognises that corruption comes in different forms (including small bribes to perform routine services) and that fighting each of them requires a zero-tolerance approach and credible follow-up actions.
Further public sector reform
Yet, there are still other costs associated with deficiencies in the state apparatus and elevated administrative procedures. As highlighted in Chapter 6 when analysing investment promotion and facilitation policy in Uruguay, the reduction of administrative burdens can help liberate the entrepreneurial forces in the economy and remains a point of complaints of the private sector. Indeed, as indicated in all major international rankings, red tape is an issue in Uruguay and certain procedures, such as obtaining construction permits, can dissuade economic activity. The series of initiatives led by Transforma Uruguay to map out and streamline certain underlying administrative procedures is, hence, an important step forward, given the apparent lower level of attention paid by the government to this issue (see Chapter 6 for more detail), The recently approved project with the IDB that identified over 500 administrative procedures in different sectors to be reformed as well as sped-up through the use of digital means is also highly opportune in this regard.11
The authorities have also taken some substantial measures to improve the country's public management system, consistent with the overall objective of immunising the public administration against undue interference. One step is this direction has also been the more universal use of information technology to provide an ever-expanding number of on-line public services to the public – an approach often referred to as e-government and which aims at depersonalising administrative processes and reduce instances of close and regular public-private contacts, as they may give rise to unjustified preferential treatment and the solicitation of bribes.
Since 2007, AGESIC (Agency for the Promotion of the Electronic Government, Information and Knowledge Society) has been responsible for implementing the Digital Agenda for Uruguay (ADU), a multi-stakeholder agreement between representatives of government, academia, the private sector and civil society organisations through a National Council for the Information Society. The Action Plan for Open Government in Uruguay supplements the ADU strategy. A dedicated portal works as a gateway to every piece of information and procedure than can be found on the web pages of government offices and agencies. These initiatives have led to the integration of Uruguay in the network of the world’s most advanced digital nations with a shared goal of harnessing digital technology and new ways of working to improve citizens’ lives. Initially composed of Estonia, Israel, New Zealand, South Korea and the United Kingdom, the Digital 9, or D9, groups countries with a consistent track record in leading digital government, including designing services around users’ needs and sharing open source solutions with other countries.
Notwithstanding such progress, Uruguay suffers from additional complications for business operations associated with the fragmentation of administrative procedures and institutions, which may hinder the delivery of public services and the provision of quality regulation. Over the past two decades, there has been an exponential increase in the number of institutions vested with public powers to perform specific tasks. Uruguay has three levels of public governance: central, regional (departments) and local level (municipalities) (see Box 3.4). At times, it is procedures that depend on the cooperation of departmental authorities that are responsible for the largest delays in the delivery of investment projects- the issue of construction permits being a case in point.
Uruguay is a unitary state with three levels of government: central, regional (departments) and local (municipalities).
Structure
The administration at central level consists of 13 ministries, seven decentralised services (including ANTEL, ANP, Correos and OSE that can be considered SOEs) and 12 autonomous entities (including BROU, BSE, ANCAP, UTE, AFE, BPS, and BCU).
In addition to the central level of government, Uruguay has 19 departments and 112 municipalities (foreseen by the 1996 Constitution, Articles 262 and 287, although created only in 2009 by Law No. 18.567 on Decentralisation and Citizen Participation).
Competencies
The state administration has jurisdiction over areas such as economic affairs and management of state assets; finance, tax and customs; regional development and policy; energy and electricity; water policy and management; public transport (e.g. highways, railways, air traffic).
Departments have jurisdiction over regional affairs, including planning, economic development and tourism, and issuance of construction permits. Municipalities have jurisdiction over local affairs, such as maintenance of public roads and green spaces.
Last but not least, high-quality human resources are fundamental for establishing an administration that is focused on peoples’ needs, as opposed to one where public servants believe that they are the owners of public resources. Generally, Uruguay has been moving towards a modern, merit-based, transparent recruitment system for public servants.
In particular, the creation of Uruguay Concursa portal, launched in April 2011 by the National Civil Service Office (Oficina Nacional de Servicio Civil, ONSC) (OAS, 2014) has been the step in the right direction. The portal provides centralised diffusion to all civil service vacancies within the central administration and their management from the start to the end of the selection process. The benefits have come in terms of shorter delays (reduced by 80% from 2011 to 2014), transparency (everything is made public on the portal), and privacy (applicants’ names are not made available to recruiters). In the case of top positions, there has also been an attempt at reducing the incidence of political appointments and introducing a preference for career civil servants. This has coincided with the adoption of clear criteria for advertising government hiring opportunities, more transparent procedures for the selection of contractors in case of direct contracting and the implementation of electronic bidding (OAS, 2016).
However, while recognising this progress, the OAS identified priority actions, too. In particular, the country should consider taking the appropriate steps to make the National Civil Service Office competent to declare null or invalid an irregular selection process for all the hiring mechanisms covered by Uruguay Concursa; collect and analyse relevant information on hiring competitions being carried out by agencies not part of the central administration; periodically update the threshold for the formation of bid evaluation committees for abbreviated bids; review the provisions that require the rotation of procurement officers, in order to determine if they are beneficial or not; and establish administrative protection measures that protect the identity of public servants that must report any irregularities or corrupt practices.
Effective prosecution and sanctioning of corruption
Significant progress has been achieved over the past 20 years as regards adoption of civil and criminal legislation and establishment of agencies and law enforcement mechanisms specifically dedicated to the detection, prosecution and sanctioning of corruption. Uruguay’s actions have been guided inter alia by its obligations under the UN Convention against Corruption and other relevant Pan-American instruments to which it is a party. Modern legislation has been in place for several years, largely meeting the standards of the Organisation of American States and the United Nations.
Various articles in the Constitution defines expectations and duties regarding civil servants.12 In addition, Uruguay enacted a law against corruption in the public sector in 1998 (No. 17.060, better known as Ley Cristal) and made the acceptance of a bribe a felony under the penal code. Illicitly-acquired goods and assets can be seized; three new felonies were introduced (influence peddling, illicit use of insider information, and passive and active bribery); and personal enrichment was made an aggravating factor (Acosta Casco, 2014). An Ethics Code for Public Officials was introduced through Law N° 19823/2019/
At the international level, Uruguay signed and ratified the UN Anticorruption Convention, the International Convention for the Suppression of the Financing of Terrorism, and the Inter-American Convention against Corruption. The legal framework against anti-money laundering (Laws 17.835/2004 and 18.494/2009 and Decree 226/10) includes corruption as a preceding crime. Money laundering is penalised with sentences of up to ten years. Tax evasion, however, is still not considered a predicate offence of money laundering. A 2017 law against money laundering and terrorism finance (No. 19.574) brings Uruguay into compliance with OECD and UN norms and sets threshold values on the amounts of defrauded taxes.13
In addition, an ecosystem of anticorruption institutions has been set up. The public prosecutor’s office (Fiscalía) is independent from government and is considered as one of Uruguay’s most professional public institutions. It prosecuted some high-level Uruguayan officials from the executive, parliamentary, and judiciary branches for corruption in recent years. Courts have ample faculties to seize and confiscate goods or financial instruments involved in money laundering and in offenses involving this felony and the country juridical and regulatory framework against money laundering satisfies the basic requirements of the 40 GAFI recommendations.
Established in 2015 by Law No. 19.340, the Office for Transparency and Public Ethics Committee (JUTEP, by its Spanish acronym) is responsible for dealing with public sector corruption.14 Its board is composed of three members, appointed by the President of Uruguay for one five-year term, who are assisted by 12 staff. Senior civil servants (roughly 50 000, including SOEs employees) are required to present under oath an assets ownership statement, of which JUTEP is the custodian, and may be punished for failure to do so. It is also tasked with the promotion of appropriate policies, norms and actions. A dedicated portal allows to monitor the state of advancement of public budget commitments, at a detailed level.15 The most recent follow-up report produced as part of the OAS Anticorruption Mechanism (MESICIC) acknowledges the continuous efforts made to upgrade the fight against bribery and solicitation – such as the establishment of Uruguay Concursa as a portal for Central Administration hiring, mentioned earlier.
Measures to strengthen anti-corruption institutions and introduce remedies to address wrongdoing when it occurs are also important. Deterrence can take many forms beyond criminal sanctions, including administrative and civil penalties. Education is fundamental towards improving behaviours, norms, and standards needed to sustain anti-corruption efforts. In the business sector, every effort must be made to meet corruption at the gate, putting in place appropriate institutional systems and incentives to mitigate and detect potential risks. In this context, the most recent Review of implementation of the UN Convention against Corruption recommended that non-monetary advantage be taken into account and that it should be criminalised along with economic advantage (UN, 2014). In addition, it recommended to consider the possibility of criminalising bribery in the private sector and of adopting comprehensive legislation on the embezzlement of property in the private sector.
Actions have indeed been taken to tackle and deter corruption, including confiscation of assets, which is being carried out both permanently and temporarily. It is widely acknowledged that the confiscation of the proceeds and instrumentalities of a crime constitutes an additional deterrent that may have as great an effect as a fine or prison term; the threat of confiscation is also a preventive measure, as it makes bribes solicitation less attractive to public officials. In this regard, Uruguay has modern legislation in place, which makes it mandatary to confiscate the proceeds and instrumentalities of crime and largely complies with both the international and Western Hemisphere standards concerning the asset recovery process.
Protecting sources of information
Reporting of wrongdoings can play a role in the detection of violations of anti-corruption legislation and public integrity standards (OECD, 2015c). Hence the importance of establishing or expanding legal provisions to encourage and better protect both witnesses and whistle-blowers (public servants, but also employees and citizens, that report acts of corruption) as an important source of information leading to the detection of corruption and other forms of illegal conduct.
Law 18.494 established a witness protection regime for proceedings that fall under the competence of the Specialised Magistrates and Prosecutors on Organised Crime. JUTEP is working on a new whistle-blowing portal to improve the actual procedures. Uruguayan civil society organisations and the public in general have nevertheless been critical of the current legal framework, which has been seen as not providing adequate protection (Galeano, 2019). The overall view has been that employers can retaliate against whistle-blowers with impunity. The OAS has also found that Uruguay's whistle-blower protection system requires improvement (OAS, 2016).
Fear of retaliation is widely recognised as the main disincentive to report on other's misconduct. The effectiveness of any whistle-blower mechanism depends on public confidence that people who make bona fide reports about wrongdoings receive proper protection against retaliation (OECD, 2016a). Continuing efforts to improve the protection regime for whistle-blowers will not only benefit Uruguay’s overall anti-corruption system but also increase pressure on companies to set-up internal compliance programmes, discussed below.
Preventing misconduct in the public sector and preventing undue relations with business
As discussed above, Uruguay has made important strides in strengthening safeguards against corruption and other forms of misconduct in the public sector and has now a fairly developed, albeit imperfect, ethics infrastructure with regards to public officials and civil servants. As observed in the section on the governance of SOEs, there is still scope for strengthening the transparency and accountability mechanisms in place, in order to manage corruption risks. The OAS, in particular, suggested to establish an online registry of interests for public officials and the need for a formal code of conduct for politicians and public servants and new lobbying regulations.
Yet, the issue of undue relations between business and politics may need the authorities’ attention. Uruguay’s political life has traditionally been characterised by a fair degree of integrity and this may have it made relatively less important to introduce specific norms and measures to preserve this situation. As such, there are no regulations aimed at enhancing the integrity of politicians and elected officials and the transparency of political parties’ finances. With no disclosure laws around private funding, but with both direct and indirect public funding, Uruguay has a similar regulatory system to a number of medium-sized countries, such as Paraguay and South Africa. It is of course open to scholarly debate whether these interventions are as important as shared values of ethic and honesty, but Uruguay would benefit from developing the legal framework for party funding. A law was promoted by the government in 2019, but did not gain the approval of Parliament before the October elections.
With regard to conflicts of interests, Decree No. 30/2003 lists all the duties, prohibitions and incompatibilities that concern civil servants. An Ethics Code was approved in 2019 (Law 19.823) Nonetheless, there is a perception, authoritatively expressed by JUTEP (2019), that the law does not go far and deep enough in tackling the sources of conflicts of interest. Although there is no official Electoral Code of Ethics, all main political parties have developed their own codes for the 2019 elections. Experience in other countries in setting up a modern integrity policy to uphold ethical standards for members of parliament and of other bodies of legislative authority, and thus in ensuring they perform their functions without undue interference, may provide good examples to Uruguay to act in this regard. For example, Australia and Korea require parliamentarians to disclose their financial interests before debating an issue related to those interests and Australia prohibits MPs from voting on issues that could give rise to conflicts of interest. Australia's code of conduct also requires parliamentarians to disclose gifts exceeding a certain value limit, as well as sponsored travel.
Finally, Uruguay does not regulate lobbying activities either. Despite some discussions at government level on the need for regulation in this area, no such initiative has materialised to date. As a result, no transparency standards are set in this field, potentially increasing the risk of policy capture. In this regard, Uruguay could make use of the Principles for Transparency and Integrity in Lobbying adopted by the OECD in 2010, which are international principles addressing concerns raised by lobbying and providing guidance on how to meet expectations of transparency and accountability in the public decision-making process.
Uruguay has made significant progress in improving the legal framework to ensure a stable and high-quality institutional environment. However, efforts should be maintained to make sure that the public administration continues to be at the service of the general public (citizens and investors) and that Uruguay remains an attractive investment destination.
As such, given that SOEs are still present in many sectors of the economy, fostering their integrity as well as improving the level of their oversight and transparency in use of resources in line with the OECD Guidelines on Corporate Governance of State-Owned Enterprises deserves particular attention. This will include corporate governance reforms and greater use of performance indicators to monitor SOEs activities and incentivise managers. Further progress in reducing administrative burdens and increasing the regulatory quality – discussed in more detail in Chapter 7 – should also be at the forefront of future government efforts.
Mobilising investment in infrastructure will also require concentrated government action. Uruguay has seen relatively modest levels of private investment in infrastructure. Further improvements in the efficiency of government procurement practices and the take up of PPP projects can be helpful in this regard. The government also has proactive investment attraction tools – including the activities of its national investment promotion agency and the use of investment incentives (described in Chapters 6 and 7) at its disposal to aim to reduce information asymmetries that may be reducing the pool of interested businesses, and encourage more investment.
The effects of reforms to strengthen the integrity and transparency of public institutions are reflected both in high levels of public trust in public institutions and in the low ranking of corruption among business concerns. Ethical principles and rules of conduct are mostly in place; obligations to report personal assets and liabilities are now the prevalent rule. The development of eGovernment services and other approaches that reduce opportunities for corruption and limit discretion in public decision-making is progressing, and this includes public procurement.
Enhancing ethics in the private sector is also important for Uruguay’s success in combatting corruption. The Uruguayan economy is largely based on SMEs and micro-enterprises. The development of these firms on the domestic market and their integration into GVCs require them to meet international standards. The OECD Guidelines on Multinational Enterprises provide guidance on processes and systems - such as internal controls, ethics and compliance programmes - that companies can implement. The OECD Good Practice Guidance on Internal Controls, Ethics and Compliance can be a useful reference for promoting, designing and implementing strong corporate compliance programmes, in particular for SMEs active or seeking to be active on foreign markets.
Deepen the SOE reform programme to improve performance, in particular through improvements and more widespread use of SOE performance indicators and further corporate governance reforms that will strengthen and increase the professionalism of Boards and management of incentives.
Increase efforts to mobilise private investment in infrastructure, including through more efficient public procurement processes, greater take-up of PPP projects as well as active investment attraction policies in the sector (discussed in Chapters 6 and 7)
Bring to fruition reforms aiming to reduce administrative burdens, including for regulations and procedures stemming from sub-regional bodies. In particular, implement planned projects for administrative simplification and digitisation, such as those led by AGESIC and Transforma Uruguay.
Build on successful long-term efforts to fight bribery and improve integrity in the public and private sector by further clarifying applicable rules. In particular, enhance measures relating to hiring of civil servants, lobbying and financing of political parties as well as promoting corruption prevention in the private sector.
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Notes
← 1. The 1918 Constitution distinguished between autonomous entities (such as UTE, ANCAP, BROU, BSE, BHU) and decentralised services (AFE, OSE, ANTEL, ANP).
← 2. For an overview of practices in state aggregate reporting on SOEs in 52 OECD and non-OECD countries, see the OECD stocktaking: http://www.oecd.org/corporate/Ownership-and-Governance-of-State-Owned-Enterprises-A-Compendium-of-National-Practices.pdf
← 3. The government acquired Ferrocarril y Tranvía del Norte in 1915 and in the following 25 years it built 460 kms of railways and bought 100 kms more from private investors. By 1952, Administración de Ferrocarriles del Estado was managing a network of 2950 kms. In the remainder of the century, less than 100 kms. were built and the network reached a historical peak in 1984 (3005 kms). Currently the extension is only 1903 kms.
← 4. Ahead of Bolivia, Guyana and Venezuela (Suriname is not included in the LPI ranking).
← 5. Information available on the website of the Ministry of Industry, Energy and Mines: www.miem.gub.uy/sites/default/files/analisis_comparativo_de_tarifas_electricas_1ooctubre_2018.pdf
← 6. See Laws Nos. 18.996 (Rendición de Cuentas Ejercicio 2011), 19.149 (Rendición de Cuentas Ejercicio 2012), 19.438 (Rendición de Cuentas ejercicio 2015), 19.355 (Ley de Presupuesto Nacional para el ejercicio 2015-2019), 19.535 (Rendición de Cuentas ejercicio 2016) and 19.670 (Rendición de Cuentas ejercicio 2017).
← 7. All the tools and illustrative country case studies, as well as templates of useful documents, are available online as part of the OECD Public Procurement Toolbox at: www.oecd.org/governance/procurement/toolbox.
← 8. In addition, for taxation benefits decrees number 43/016, 20/016, 326/015, 181/015, 75/015, 357/014, 127/013 and 045/013 were issued, plus the Guide for Recommendable Practices issued by the Ministry of Economy and Finance.
← 9. The main responsibilities of the PPP Unit include regulation and policy guidance, capacity-building for other public authorities, promotion of PPPs among the public and/or private sectors in national and international forums, technical support in implementing PPP projects, project approval and oversight of PPP implementation. The Unit is not involved in the identification and selection of PPP projects from the pipeline, revision of the fiscal risks borne by the government, and consultation with affected communities on the potential impact of PPP projects.
← 10. Information for investors interested in infrastructure projects by Uruguay XXI can be found at: http://www.uruguayxxi.gub.uy/uploads/informacion/e47ff3e6aff73ad27b44ccd02cc7f4b7491cadb9.pdf
← 11. For further information, see the project’s website: http://www.iadb.org/es/project/UR-L1159
← 12. In particular, Art. 58 states that “public officials are in the service of the Nation and not of a political party” and Art. 59 that “the official exists for the office and not the office for the official”.
← 13. At end-2018, Banco Central del Uruguay issued guidance regarding risk factors and alert signals that facilitate detection of suspect transactions (Comunication 2018/294).
← 14. Law 17.060 (art. 4) had established the Advisory Office for State Economic and Financial Issues (Junta Asesora en Materia Económico Financiera del Estado), that changed name into JUTEP in 2010 (Law 18.362).
← 15. See the website: http://www.transparenciapresupuestaria.opp.gub.uy