WordBank - Uruguai

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2010 - 2015August 18, 2010

COUNTRYPARTNERSHIP

STRATEGYFOR THE REPUBLICOF URUGUAY


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Document o The World Bank | FOR OFFICIAL USE ONLY | Report No. 55863-UY | INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIPSTRATEGY FOR THE ORIENTAL REPUBLIC OF URUGUAY FOR THE PERIOD 2010-2015 | August 18, 2010 | Argentina,Paraguay and Uruguay | Country Management Unit | Latin America and the Caribbean Region

The last Country Assistance Strategy or Uruguay was discussed by the Executive Directors on June 9, 2005, (Report No.

31804-UY), and a Progress Report on the implementation o that Country Strategy was noted by the Executive Directors onApril 1, 2008, (Report No. 42789-UY).

CURRENCY AND EQUIVALENT UNITS (As o June 30, 2010)Currency Unit = Uruguay Peso US$1 = 21.12 Uruguay Pesos

WEIGHTS AND MEASURES Metric SystemFISCAL YEAR: January 1 December 31


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2010 - 2015August 18, 2010

COUNTRYPARTNERSHIP

STRATEGYFOR THE REPUBLICOF URUGUAY


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AAA Analytical and Advisory ActivitiesAPL Adaptable Program Loan

CAF Andean Development Corporation(Corporacin Andina de Fomento)

CAS Country Assistance StrategyCASCR Country Assistance Strategy Completion

ReportCBU Central Bank o Uruguay

(Banco Central de Uruguay)CC Climate ChangeCEM Country Economic MemorandumCFAA Country Financial Accountability AssessmentCPAR Country Procurement Assessment ReportCPI Consumer Price IndexCPS Country Partnership Strategy

DINAMA Direccin Nacional de Medio AmbienteDPL Development Policy LoanEMBI Emerging Markets Bond IndexESW Economic and Sector WorkFBS Fee-Based ServiceFDI Foreign Direct InvestmentFA Frente AmplioFMD Foot & Mouth DiseaseFX Foreign ExchangeGAC Government and AnticorruptionGCR Global Competitiveness ReportGDP Gross Domestic ProductGEF Global Environmental FacilityGHG Greenhouse GasGoU Government o UruguayIADB Inter-American Development BankIBRD International Bank or Reconstruction

and DevelopmentIBTAL Institutions Building Technical

Assistance LoanICR Implementation Completion and

Results ReportIDF Institutional Development FundIFC International Finance Corporation

IFIs International Financial InstitutionsIFRS International Financial Reporting Standards

IMF International Monetary FundLCR Latin America and the Caribbean RegionMDGs Millennium Development GoalsMEF Ministry o Economy and FinanceMERCOSUR Mercado Comn del SurMGAP Ministry o Livestock, Agriculture

and FisheriesMIC Middle-Income CountriesMSP Ministry o Public HealthM&E Monitoring and EvaluationNCD Non-Communicable DiseasesNGOs Non-Governmental OrganizationsNLTA Non-Lending Technical Assistance

OECD Organization or Economic Co-operationand Development

OPP Oce o Planning and BudgetOSE Obras Sanitarias del EstadoPEFA Public Expenditure and Financial

AccountabilityPFM Public Financial ManagementPIU Project Implementation UnitPPIAF Public-Private Inrastructure Advisory FacilityPPP Public-Private PartnershipPRIDPL Programmatic Reorm Implementation

Development Policy LoanR&D Research and DevelopmentSINARE National System or Registering CompaniesSMEs Small and Medium EnterprisesSWAp Sector-Wide ApproachUNDAF United Nations Development Assistance

FrameworkUNDP United Nations Development ProgramUNICEF United Nations Childrens FundUTE National Administration o Power Plants

and Electric Transmissions WBG World Bank Group WHO World Health Organization

Regional Vice President Pamela Cox Regional Vice President Thierry TanohCountry Director Penelope Brook Regional Director Vincent Gouarne

Country Representative Peter Siegenthaler Country Manager Salem Rohana

Task Team Leader Andrew Follmer Task Manager John Barham

Abbreviations and Acronyms

IBRD IFC


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The World Bank Group greatly appreciates the

collaboration and contributions o the Government

o Uruguay in the preparation o this Country

Partnership Strategy (CPS). The leadership o

President Jos Mujica during the policy notes

discussions provided invaluable direction, and

key participants included Mr. Danilo Astori, Vice

President; Mr. Fernando Lorenzo, Minister o

Economy and Finance; Mr. Ricardo Ehrlich, Minister

o Education and Culture; Mr. Tabar Aguerre,

Minister o Livestock, Agriculture and Fishery; Mr.

Roberto Kreimerman, Minister o Industry, Energy

and Mining; Mr. Daniel Olesker, Minister o Public

Health; Mr. Eduardo Brenta, Minister o Labour and

Social Security; Mr. Enrique Pintado, Minister o

Transport and Public Works; Ms. Liliam Kechichin,

Vice Minister o Tourism and Sports; Ms. Graciela

Muslera, Minister o de Housing, Territorial Orderand the Environment; and Ms. Ana Olivera,

designated Minister o Social Development.

In particular, the World Bank Group thanks Mr.

Fernando Lorenzo, Minister o Economy and

Finance, and Mr. Michael Borchardt, Head o

Budget Unit, Ministry o Economy and Finance

(MEF). In addition, we thank the ollowing

government ocials or their contributions to

the CPS: Pedro Buonomo, Vice Minister o

Economy and Finance; Pedro Apeztegua, General

Director; Andrs Masoller, Head, Macroeconomic

and Financial Advisory Department, and Martn

Vallcorba; Azucena Arbeleche, Public Debt

Management Unit; Mariella Maglia and Santiago

Moldes, Relations with International Organizations;

Adriana Rodrguez, Advisor (MEF); Gabriel

Frugoni, Director, and Diana Marcos, Coordinator

o Public Budgets, Oce o Planning and Budget

(Presidency o the Republic). Further, the

World Bank Group extends a special thanks to

representatives o Government, private sector,

the NGO community, and other stakeholders

who participated in CPS consultations in July and

August, 2010.

Other contributors to the preparation o this CPS

include Messes./Mmes: Marcelo Acerbi, Pedro

Alba, Sylvia Albela Russo, Keisgner Alaro, Diego

Ambasz, Amparo Ballivian, John Barham, Valeria

Bolla, Paloma Aos Casero, Carla Ctolo, Luis de la

Plaza, Franz Drees-Gross, Norbert Fiess, Geraldine

Garca, Ana Lariau, Jos Roberto Lpez-Clix, Maria

Luisa Masutti, Milagros Mosteirin, Javier Pereira,Susana Prez, Raael Roman, Felipe Saez, Eduardo

Urdapilleta, and Eduardo Wallentin, who, together

with the Country Director, Country Representative

and CPS TTL, comprised the Core Team. In

addition, Yanina Budkin, Francisco Carneiro,

Michael Carroll, Diego Cerdeiro, Bruce Courtney,

Ivanna Echegoyen, Hermann von Gersdor, B.

Koshie Michel, Barbara Mierau-Klein, Juan Martin

Moreno, Reynaldo Pastor, Luis Prez, Andrs

Pizarro, Tatiana Proskuryakova, Ana Carolina Saizar

Renart, Vernica Salatino, Alejandro Solanot, and

David Yuravlivker provided valuable inputs.

Acknowledgements


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EXECUTIVE SUMMARY 9

I. INTRODUCTION 13

II. COUNTRY CONTEXT 17A. Political Developments 17B. Economic Perormance 18C. Poverty 19

III. DEVELOPMENT CHALLENGES & GOVERNMENTS VISION 21A. Strengthening the Business Climate and Competitiveness 22B. Improving Social Inclusion & Equity 24C. Consolidating Agricultural Sector Growth and Bringing its Benets to Family Farms 27D. Protecting the Environment and Mitigating the Eects o Climate Change 27E. Reorming the Public Sector 28

IV. URUGUAY WORLD BANK PARTNERSHIP 31A. Perormance under the 2005-2010 Country Assistance Strategy (CAS)

and Evolution o the Partnership 31B. The Ongoing Portolio 33C. The WBGs Indicative Program (2010-2015) 34

Strategic Approach & CPS Pillars 34Fiduciary Products 41IFC Activities 43

D. Development Partners 43

V. RISKS

TABLESTable 1: Access to Public Services 23Table 2: Indicative lending program or 2010-2015 35Table 3: AAA program or FY11 and FY12 37Table 4: CPS Program Objectives and Select Activities 42

91317

21

31

44

Table o Contents


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BOXESBox 1: Uruguays PLAN CEIBAL One Laptop per Child 26Box 2: CPS Consultations 32Box 3: The First Programmatic Public Sector Competitiveness and Social InclusionDevelopment Policy Loan (DPL) 38

FIGURESFigure 1: Long Term Poverty Trends 19Figure 2: Uruguay Investment Portolio Diversication 34

ANNEXESAnnex A: CPS Results Framework 49Annex B: CAS Completion Report 55Annex C: Macroeconomic Framework 82Annex D: Debt Sustainability Analysis 88Annex E: Banking Sector Update 93Annex F: IBRD and GEF Program Summary 103Annex G: IFC Program Summary 113Annex H: Proposed GEF Program 115Annex I: CPS Consultations 117

STANDARD CPS ANNEXES:Annex A2: Uruguay at a Glance 120Annex B2: Selected Indicators o Bank Portolio Perormance and Management 126Annex B3: IBRD Program Summary 127

IFC Investment Portolio Operations Program 128Annex B4: Summary o Non-lending Services 129Annex B5: Key Social Indicators 130Annex B6: Key Economic Indicators 132Annex B7: Key Exposure Indicators 135Annex B8: IFC Committed & Disbursed Outstanding Investment Portolio 136

Operations Portolio (IBRD/IDA and Grants) 137

49


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Executive Summar [ 9 ]

rugua as a strog istor o broad-

based socia weare ad soid democratic

istitutios buidig o a deep igraied

preerece or euait ad poitica cosesus.

The country enjoyed the highest human developmentstandards in the region during the last century, and

Uruguays society is still among the most equitable inthe region in terms o income distribution and social

indicators. Like many o its neighbors, recent decades

were marked by successive domestic economic crises,the most recent accompanying the Argentina crisis o

2001-2002. In 2004, in the atermath o the crisis,the Uruguayan electorate brought orth an important

shit in the political landscape by voting into power a

center let coalition (theFrente Amplio -FA).

Eorts to decrease te ecooms vuerabiit

ater te 2001-2002 crisis resuted i it provig

more resiiet to te recet goba recessio ta

ma oter emergig maret ecoomies. This wasdue to a generally solid macroeconomic ramework,

greater exchange rate fexibility, rising international

reserves, and improvements in the banking system.

Te rst FA admiistratio ed b ormer Presidet

Vzuez successu cosoidated te restoratio

o macroecoomic stabiit, icreased itegratio

ito iteratioa marets, ad improved te

ivestmet cimate. These eorts paid o with anunprecedented economic growth rate (6.6 percent on

average rom 2004 to 2008). The ocus on promoting

economic growth was accompanied by a desire toensure that all Uruguayans shared in the countrys

success. Thus, expanding social protection programs,

as well as health and education services, was centralto the policies o the Vasquez Administration. These

combined eorts resulted in poverty declining bynearly 35 percent; and extreme poverty by 50 percent,

between 2003 and 2008, with unemployment alling

rom 16.9 to 7.9 percent.

Te secod FA Govermet too power i Marc

2010, ad te ew Presidet, Jos Mujica, decared

tat e woud cosoidate te positive ecoomic

ad socia outcomes acieved b is predecessor.The new Government recognizes the importance or

Uruguay to look beyond the region when setting its

Executive Summary

U


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reorm agenda or the next years. The country indeedhas a unique opportunity to reach, in the medium

term, living standards and quality o institutions thatare comparable to those enjoyed by advanced OECD

economies.

Te impemetatio o te 2005-2010 Coutr

Assistace Strateg (CAS) was arge successu,

ad Ba-aced activities cotributed sigicat

to te Govermets deveopmet objectives,

with Bank support structured in three pillars: (i)reducing vulnerability; (ii) sustaining growth; and (iii)

improving living standards. This period witnessed a

marked strengthening o the Banks partnership withthe Government o Uruguay (GoU). The Bank opened

an oce in Montevideo in 2005, which strengthened

relations with the Government and acilitatedsuccessul CAS implementation. Further, the Bank

was able to customize its nancing innovatively inorder to disburse a Development Policy Loan (DPL)

in local currency. Finally, the Bank demonstrated an

ability to shit the ocus o its collaboration to areas inwhich the Government was prioritizing critical reorms

and initiatives which required important knowledgetranser to move orward with innovative approaches.

Tis Coutr Partersip Strateg (CPS) aims to

ep Urugua tae te ext steps i cosoidatigecoomic reorms, ad eacig socia outcomes,

tereb more cose aigig wit OECD stadards.

It will build on the positive experience o the previous

CAS period, when the Banks nancial assistancewas signicantly increased and the policy dialogue

extended to a wide array o critical components o

the countrys development strategy. This positiveexperience entailed a fexible and responsive stance

by the Bank characterized by nimble and eective

responses to evolving needs. This enabled the Bank to

expand its support to the Government into new areas like promotion o innovation, public sector reormand health reorm and thus support emerging key

government priorities.

Te proposed CPS icudes a Ba edig program

o approximate US$700 miio, togeter wit

a active Iteratioa Fiace Corporatio (IFC)

program ad a strategic joit Govermet-Ba

program o Aatica ad Advisor Services

(AAA), structured aroud te oowig our

piars: (i) Reducig Macroecoomic Vuerabiit

& Stregteig Pubic Sector Admiistratio; (ii)

Competitiveess & Irastructure; (iii) Agricuture,Cimate Cage, ad Eviromet; ad (iv)

Icreasig Socia Icusio & Euit. Refecting thelessons o the CAS Completion Report, the strategy

will be fexible to accommodate the Governments

potential need to adjust course in the event ounoreseen domestic or external developments,

and it will buttress the administrations eorts toachieve consensus on its ambitious reorm agenda.

Indicative support or this strategy is proposed to

include a series o two DPLs totaling US$200 million

(late 2010 and late 2011), investment lending totalingapproximately US$500 million, and a well-ocused

and demand-driven AAA program. The proposedstrategy places a heightened emphasis on supporting

Uruguay in accessing international expertise and bestpractices, as well as sharing its own experiences with

other countries through South-South exchanges.

Te IFC strateg i Urugua or te CPS period

compemets te Bas strateg b ocusig

o te oowig our mai areas: (i) acia

services, (ii) agribusiess, (iii) competiveess,ad (iv) educatio. In the nancial sector, IFC aimsto support banks and non-banks that ocus on the

mid-market corporate and low-income retail banking

segments. In agribusiness, the ocus is likely to remainon export-oriented enterprises with deep linkages to

small- and medium-sized arms. All three o IFCsactive investment projects in Uruguay are in export-

oriented agribusiness companies. The Corporation

also aims to reinorce the countrys competitivenessby nancing inrastructure projects, especially those

in the renewable energy, logistics, and water sectorsonce appropriate regulations are in place. Finally, IFChopes to support private sector education institutions,

particularly those that oer technical and vocationalcourses or low income students.

Wie Uruguas resiiece i te ace o te recet

goba ecoomic crisis demostrates tat it is muc

[ 10 ] Executive Summar


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Executive Summar [ 11 ]

more strog positioed ta it was 10 ears ago,

sigicat riss remai. Despite declining as a

source o risk since 2005, debt sustainability remainsthe main economic risk, ollowed dollarization and

exposure to global and regional shocks. Political risk

is low, though signicant social risk arises rom thetensions between pressure to expand government

programs and the need or a prudent scal stance in

order to urther reduce macroeconomic vulnerabilities.Finally, natural disasters and climate change have

already had a major impact on rural income, as wellas important scal implications, in recent years.


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I. Itroductio [ 13 ]

1. Urugua as a strog istor o broad-based

socia weare ad soid democratic istitutios

buidig o a deep igraied preerece or

euait ad poitica cosesus, wic is sti ver

preset toda. The country enjoyed the highesthuman development standards in the region during

the last century. While the country has aced adversedevelopments in recent decades, these standards

remain high, and Uruguays society is still among

the most equitable in the region in terms o incomedistribution and social indicators.

2. Tis coutr o 3.3 miio peope as set its

ow distict deveopmet pat i a cotext o a

deep ecoomic iter-coectio wit its arge

eigbors, Brazi ad Argetia. In Uruguay, thestate is widely recognized as trustworthy and eectivein the delivery o public goods, and the society has

explicitly voiced its preerence or having the state play

an active and expanded role in most public servicesectors. This trust is a refection o the countrys

tradition or consensus-based policies and o the

strong perormance o the public sector in ensuring

nearly universal coverage and adequate quality andtransparency in the provision o services.

3. Uruguas traditioa deveopmet mode

combies a damic primar export base ad a

weare state resposibe or te distributio o

ecoomic beets. This model came under serious

pressure in the latter part o the twentieth century, dueto unavorable commodity price developments and a

weaker perormance in public sector management.

This triggered a gradual social and economic decline,leading to high unemployment rates and chronic

scal and balance o payments imbalances, and

compromised opportunities or economic expansion.

4. I te ear ieties, te coutr embaredo a ecoomic turaroud based o ecoomic

opportuities oered b expadig is wit

regioa parters, aciitated b ecoomic

Introduction


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[ 14 ] I. Itroductio

itegratio troug te Mercado Comn del

Sur (Mercosur) ad wit a te beets ad

vuerabiities tus impied. This strategy producedencouraging early results, with high growth rates,

progress on economic diversication, and substantial

poverty reduction. However, the increased reliance onregional economic relations made Uruguays economy

highly vulnerable to the perormance o its neighbors,

as was dramatically demonstrated when Argentinassevere political and economic crisis broke out in

2001. This had a devastating eect on all dimensionso Uruguays economy and society. Unemployment

and poverty rates rapidly increased to 20 percent and

over 30 percent, respectively. Real wages plummetedas the Peso was devalued and the economy went into

a deep recession. The Government aced a mounting

scal decit and an exploding external debt, placingthe country on the verge o insolvency.

5. Urugua maaged te crisis ver we, witout

deautig o its debt. The Government rapidly put

together a comprehensive recovery program basedon respecting contracts and commitments, while

mitigating the adverse social consequences o thecrisis. In particular, the authorities reused to deault

on the debt, and worked hard to reach agreement

with creditors on a debt restructuring plan consistent

both with the repayment capability o the country andwith the rules o the game. This recovery program

enjoyed broad political and social consensus, andthe authorities managed to mobilize the international

community to help saeguard scal solvency andaddress structural issues that were critical or return

to high growth levels. Eventually, as the economy

recovered much aster than expected, Uruguay wasable to repay the multilaterals emergency loans well

ahead o schedule.

6. I 2004, i te atermat o te crisis, teUruguaa eectorate brougt ort a importat

sit i te poitica adscape b votig ito power

a ceter-et coaitio (te Frente Amplio -FA). In

a refection o the stability o Uruguays consensus-oriented democracy, the loss o the executive branch

by the two parties that had dominated the politicalscene or 170 years did not generate signicant

disruptions in the post-crisis recovery agenda. The

FA ensured remarkable institutional continuity while

gradually consolidating a reorm agenda around whichit shaped an unprecedented political consensus.

7. Te rst FA admiistratio, ed b ormerPresidet Vzuez, successu cosoidated

te restoratio o macroecoomic stabiit

ad udertoo determied eorts to icrease

Uruguas itegratio ito iteratioa marets

ad improve te ivestmet cimate. These eortspaid o with unprecedented economic growth (6.6

percent on average rom 2004 to 2008). Basedon its conviction that sustained and broad-based

economic growth require policies that go beyond

stable macroeconomic conditions, the Vzquez

administration took a proactive stance on promotinginnovation, inrastructure development and

institutional reorms or increased competition andconducive conditions or private sector development.

8. Pairig tese eorts i promotig ecoomic

growt wit expadig socia protectio programs,

as we as eat ad educatio services was cetra

to te poicies o te Vzuez Admiistratio. The

Government ocused on promoting universal accessto key benets and services by vulnerable groups.

This included the expansion o the amily allowanceprogram, the introduction o a pioneering programto provide every primary school student a personal

computer (Plan Ceibal), and the launch o a major

health reorm aimed at gradually increasing coverageto ultimately reach the totality o the population.

These combined eorts in the economic and socialronts generated positive outcomes that went beyond

recovering ground lost in the 2002 crisis. Between

2003 and 2008, poverty declined by nearly 35 percent;and extreme poverty, by 50 percent. Unemployment

ell rom 16.9 to 7.9 percent.

9. Te secod FA Govermet too oce i

Marc 2010, wit Presidet Jos Mujica promisig

to cotiue te soud poicies impemeted i

recet ears, wit a view toward cosoidatig

te positive ecoomic ad socia outcomes. Hecommitted his administration to urther increase


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I. Itroductio [ 15 ]

the eectiveness o public policies such as urtherexpanding social sector programs with an increased

emphasis on enhancing their impact. The newGovernment has committed itsel to studying global

best practices in setting its reorm agenda or the

coming years. In the medium-term, the country hasa unique opportunity to achieve living standards and

quality o institutions comparable to those enjoyed by

advanced OECD economies.

10. Tis proposed Coutr Partersip Strateg(CPS) covers te ears 2010-15 ad is aiged wit

te coutrs deveopmet visio. It proposes

a Bank lending program o approximately US$700million, together with an active International Finance

Corporation (IFC) program and a strategic joint

Government-Bank program o Analytical and AdvisoryServices (AAA). The CPS will provide or fexibility to

enable the program to respond to emerging needs.Rather than providing a detailed blueprint o the

terms and scope o the partnership between the

Government and Bank, the CPS aims at laying out theguiding principles or shaping this partnership. While

it species the programs identied or the initial yearso the partnership, sucient fexibility is built into the

CPS to allow or responding to evolving government

priorities and needs.


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A. POlITICAl DEVElOPMEnTS

11. Wit te eectio o Mr. Jos Mujica b a

ampe margi ad te FAs cocurret acievemet

o a majorit i bot ouses o Pariamet, te

Uruguaa eectorate as edorsed te poic

ramewor iaugurated i 2005. There seems tobe a growing consensus in the country that, ater

overcoming the challenges resulting rom the 2002-

03 crisis, the country now needs to develop a broadnational consensus on a development agenda that

will put the country on a path o sustained growth

and high standards o human development.

12. Presidet Mujica as cosistet expressedte eed to articuate state poicies tat wi

stad above te da-to-da poitica debate.

From his rst days in oce he has reached out toopposition parties in seeking consensus in critical

areas such as education, inrastructure, environment,security and public sector reorm. In successul intra-

party negotiations, Mr. Mujica approved having non-

members o the ruling coalition invited to the board

o directors o some o the government-controlledinstitutions and corporations, a strong departure rom

past political practices. He is currently benetting romstrong approval ratings, leaving him well-positioned to

pursue his political initiatives and legislative agenda.

Maintaining this support will depend on his capacityto translate the populaces strong expectations into

a concrete development agenda that will eectively

improve living conditions.

13. I its rst mots, te Govermet aouceda umber o importat ew reorm iitiatives, most

notably a renewed commitment to customs reorm,

the introduction o a public-private partnershipramework or investment in the inrastructure sector

and, urther consolidation o social protection transerprograms. It also managed to complete some reorm

eorts initiated under its predecessor government,

such as the May 2010, launch o the Empresa en

II. Te Coutr Cotext [ 17 ]

The Country Context


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[ 18 ] II. Te Coutr Cotext

el Da initiative, a one-stop-shop or rm creationwhich constitutes a signicant improvement in

Uruguays business environment. The Governmentalso changed the presentation o its budget rom an

administrative to a program-based ormat, which will

enable preparing the new 5-year budget in way thatbetter refects policy objectives.

B. ECOnOMIC PERFORMAnCE

14. Eorts to decrease te Uruguaa ecooms

vuerabiit ater its 2001-2002 crisis resuted i it

provig more resiiet to te recet goba recessio

ta most oter emergig maret ecoomies. This

refects a generally solid macroeconomic ramework,

greater exchange rate fexibility, rising internationalreserves, improvements in the banking system, and

an improved investment climate that lessened theimpact o the crisis and positioned the country well to

benet rom a recovery.

15. Prior to te goba recessio, Urugua ad

ejoed severa ears o impressive ecoomic

perormace. Real GDP growth averaged 6.6 percent

rom 2004 through 2008 and largely resulted roma rebound in both domestic demand and exports.

Growth reached 8.5 percent in 2008, the highest levelin the last 20 years, despite a slowdown in the lastquarter o the year due to the crisis. International

trade expanded signicantly, though Uruguays

trade structure remains highly concentrated, bothby product and geography. Export growth averaged

13 percent per year in 2004-2008. Unemploymentdeclined to its lowest level in over a decade, alling

rom 13.1 percent in 2004 to 7.9 percent in 2008.

Although economic activity slowed with the crisisand the economy contracted in the rst quarter o

2009 (-2.9 percent), growth resumed in the secondquarter and reached 2.9 percent or the year. Currentprojections anticipate an increase to 5.5 percent in

2010, and -- in subsequent years -- revert back tolong-run growth o 4 percent. Annexes C and D

contain more detail on the economic context and

debt sustainability, respectively.

16. Pubic debt maagemet as acieved

cosiderabe success i terms o reducig debt

ad improvig its compositio. Gross public debtdeclined rom 79.3 percent o GDP in 2005 to 60percent in 2009. With the increase in oreign reserves,

net public debt declined about 20 percentage points

o GDP over the same period.1 In terms o debt

composition, 78.9 percent o total public debt isheld by private creditors, compared to 55.7 percent

by end-2004, refecting restored access to market

nancing. The oreign currency share o total publicnon-nancial sector debt ell rom 76.6 percent in

2004 to 56.7 percent by December 31, 2009. Debt

sustainability continues to pose a risk, albeit one thathas been greatly reduced. Medium-term government

borrowing requirements are manageable, despite aconcentration o maturities in 20112. A conservative

estimate o the gross borrowing requirements or2011 amounts to US$2.9 billion or 6.5 percent o GDP.

With less than a third o this amount expected rom

International Financial Institutions (IFIs) (see SectionIV), Uruguay will likely need to seek substantial

additional unding rom capital markets.

17. Te baig sstem cosoidatio processtat occurred i te atermat o te 2002

crisis ad proactive Cetra Ba itervetio

ad supervisio ave cotributed to greater

acia sstem stabiit. Since the outbreak o

the international nancial crisis, the nancial system

has managed to navigate the storm without majordiculties. Prudential requirements have been

improved and banking regulation and supervision

has been strengthened. The accumulation o oreignreserves by the central bank contributed urther to

the condence in Uruguays currency, which has beenfoating since mid-2002.

18. Despite a sigicat decrease over recet ears, te degree o doarizatio remais ig.

1. Public debt-to-GPD ratio is calculated using end-o-the-period exchange rate2. A large share o the maturities are owed to local markets and are denominated in indexed local currency units


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II. Te Coutr Cotext [ 19 ]

Since the 2002 crisis the level o dollarization in

the nancial system has allen rom 83 percent to

55 percent or credits, and rom 92 percent to 77percent or deposits. However, it remains high,implying a substantial exposure o the banking sector

to oreign currency risk rom corporate balance sheet

mismatches.

C. POVERTy

19. Uruguas og-stadig ocus o sociaeuit maes advaces i te reductio o povert

ad ieuait a cetra poic priorit. However,successive economic crises at the end o the last

century weakened the social model, and today poverty,

extreme poverty and inequality levels remain relativelyhigh despite recent improvements. Exacerbated

by the 2001-2002 crisis, both poverty and extreme

poverty began a downward trend in 2004, and in2008 both neared the lows o the previous decade

(20.9 percent or poverty, 1.5 percent or extremepoverty). Uruguay has not suered the degree o

impact experienced by some o its neighbors that o

having a longer-term trend o increasing poverty as aresult o successive crises.

20. Improvemets i euait were more modest.The Gini coecient declined rom its highest level o

0.44 in 2004 to 0.42 in 2008, a slight improvementrom its pre-crisis level (0.43 in 2000). Uruguay ranks

high among Latin American and Caribbean Region

(LCR) countries in the provision o basic opportunities

or children according to an equality o opportunity

principle across ve very basic goods and services orwhich there were comparable data across countries

circa 1998 and 2008 (access to water, sanitation,electricity, completing sixth grade on time, and school

attendance or children 10-14). As detailed later,

implementation o the National Plan or Social Equity,as well as health and education reorms, is hoped to

urther improve equity in these areas.

Figure 1: Long Term Poverty Trends in Uruguay

50

45

40

35

30

25

20

15

10

5

0

1985 1987

Argentina Crisis

Mexican Crisis Argentinaand Brazil Crisis

Domestic Crisis

1989

PovertyRate%

1991 1993 1995 1997 20011999 2003 2005 2007


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21. I its rst mots i oce, te Govermet

as coducted itesive itera ad extera

cosutatios or deig its oger-term

govermet program. This consultative process

centered on the preparation o a new ve-year budget,which will cover the period up to the end o the

Governments mandate (2010-2015), and is expected tobe presented to parliament at the end o August 2010.

In parallel, the authorities are preparing partnership

programs with their main development partners, mosto which coincide with the ve-year budget period.

22. Wie o orma Govermet program as

bee issued, te autorities ave aid out at

dieret occasios teir poic priorities. These

priorities, which are still in process o being netuned and translated into concrete legal and policyinitiatives, are as ollows:

Theauthoritieshavecommittedtoadheretothe

prudent scal and economic policies o the last

administration and continue expanding coverage

o social program and basic services.

They have identied the followingkey priorities

to deepen reorm achievements: (i) strengtheningcompetitiveness through increased coverage

and better quality o inrastructure and a moreconducive business environment; (ii) expanding

and improving the impact o social service delivery,

with an emphasis on education; iii) enhancingproductivity and income and job generation in

the agriculture and ood sector; (iv) protecting

the environment and mitigating and adapting tothe eects o climate change; and v) improving

security o citizens.

Theyexpressed a keen interest in gettingmore

value or money in public programs; and theGovernment has launched a number o important

cross-cutting reorm initiatives. Most notable

in this regard are the introduction o a policy

III. Deveopmet Caeges & Govermets Visio [ 21 ]

Development Challenges& Governments Vision


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[ 22 ] III. Deveopmet Caeges & Govermets Visio

ramework or public-private partnerships ininrastructure investments, and a renewed eort

on public sector reorm.

23. Te proposed CPS as bee desiged to

support impemetatio o tis ageda. In intensiveconsultations with authorities, strong expectations

emerged towards Bank support in acilitating transero knowledge and experience in specic reorm areas.

As the country enters this new development phase,

there will be a need or fexibility and innovation inthe denition o the specic lending and non-lending

support rom the Bank.

A. STREnGThEnInG ThE BUSInESS

ClIMATE AnD COMPETITIVEnESS

24. As Uruguas macroecoomic growtrecovered, te autorities recogized te

importace o improvig te eviromet or

private sector deveopmet or embarig o a

sustaied pat o ig growt. In particular, they

have stressed the need to upgrade inrastructureservices -- critical or both enhancing economic

productivity and meeting social policy objectives. Theauthorities have also stated their intent to improve

other aspects o the business environment andinvestment climate, such as regulation, tax policy,licensing and other procedures.3 The Government

hopes to build on substantial progress already made,including the eective implementation o a new

Bankruptcy Law in 2008 which eases the process

and reduces the costs o closing a business, and theintroduction o a one-stop-shop or rm creation in

May 2010 that simplied procedures or starting abusiness. In this context, the new Administration has

made enhancing the acilitation o logistics one o the

top priorities o its reorm agenda. Finally, there is astrong emphasis on supporting the deepening and

extension o capital markets, so as to enhance access

to nance by private sector rms.

25. Coverage ad uait o irastructure services

i Urugua is ig compared to te regio ad

oter midde icome coutries (MICs); owever,

to maitai tese stadards, urter improve

eciec ad uait, ad exted coverage, tere

is a eed or more ivestmet, better reguatioad eaced corporate goverace. Uruguayhas achieved an impressive degree o access to basic

inrastructure (Table 1), and good overall qualityand coverage o its inrastructure. However, one

weak link is the railway system, with nearly hal o

the 3,000 km national rail network abandoned andcargo volumes on the remainder that are a raction o

regional standards. The railway system, as in many

other countries, has suered over the last thirty yearsdue to competition rom road reight transport and

lack o investment, as well as several fawed reormattempts which urther delayed key investments. The

non-unctioning rail system threatens to lead to rapid

degradation o the road network (especially givenincreasing transport o heavy orestry products) and

hence high maintenance and rehabilitation costs.

26. Growig eerg caeges are aso uodig

as domestic demad is expadig rapid. TheGovernments energy sector strategy includes: (i)

diversiying energy sources to reduce costs and

emissions, as well as increase energy security; (ii)increasing private participation in new renewable

power generation; (iii) increasing regional energytrade; and (vi) acilitating availability and acquisition

o energy ecient goods and services, including

eorts to raise public awareness regarding demandside management interventions. Despite eorts to

increase energy eciency, demand has increased

by over 4 percent per year since 2002. In addition,there have been repeated instances o drought (2006

and 2008 in particular), insucient thermal back-up

capacity, and diculties in importing electricity romneighboring countries. This has led to high supply

costs and scal pressure as the Government sought toavoid passing on cost increases to end users. Supply

challenges are compounded by weaknesses in several

3. According to the Global Competitiveness Report 2009-2010, the ve most problematic actors or doing business are 1) restrictive laborregulations, 2) inecient government bureaucracy, 3) tax rates, 4) access to nancing, and 5) inadequate supply o inrastructure.


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sections o the transmission and distribution network.

The Government recognizes these challenges and hasrearmed its commitment to (i) establishing a new

500 MW interconnection with Brazil and upgradingthe existing transmission and distribution systems;

(ii) increasing energy eciency; and (iii) creating a

larger role or non-traditional renewable energies(wind, biomass and small-scale hydro in particular) in

Uruguays energy matrix.

27. Te Govermet o Urugua (GoU) as set a

target o combied pubic ad private ivestmet

o 3-5 percet o GDP or te irastructure sector,

up rom less than 2 percent or public investment over

the past years. It was thereby clearly stated that giventhe limited scal space available, this would require

mobilizing signicant levels o additional resourcesor inrastructure investments outside the budget. In

particular, there is a need to promote private sector

investment in inrastructure, which is currently very lowin regional comparison. The Global Competitiveness

Report (GCR) 2009-2010 or Latin America and the

Caribbean identied Uruguay as the most dynamiccountry during 2009, with signicant progress

achieved in inrastructure, macroeconomic stability,

higher education and training and technological

readiness.

28. Give te eed or icreased privateivestmet, te Govermet is exporig ew

orms o pubic-private partersips (PPP) ad

is preparig a ew PPP ramewor aw. PPP

opportunities are being explored in areas such asreight rail transport, additional port terminals and

access channel dredging, as well as in social sectorinrastructure provision.

29. Te ew Govermet as sow a strog

commitmet to compete te busiess eviromet

reorm ageda iitiated b its predecessor. Thisar-reaching reorm program (National System

or Registering Companies, SINARE) was initiatedseveral months ago to streamline and centralize all

public procedures related to the lie cycle o a privatecompany and create a single registry or businesses.The ocial launch in May 2010 o the initiative,

Empresa en el Da, a key dimension o this reorm

program, was one o the rst reorm breakthroughs

4. Data rom World Development Report (2009), WHO/UNICEF Joint Monitoring Program 2006 and International TelecommunicationUnion data, 2008.

Tabe 1: Access to Pubic Services4

Country Percent o population

withsewerageservice(2006)

Percent opopulationwith in-

house accessto potable

water (2006)

Electricity(percent opopulation

withaccess

in 2009)

Fixedtelephone

linesper 100people(2008)

Mobiletelephone

subscribersper 100people(2008)

Internetusers

per 100people(2008)

Roaddensity

(kmper 100km2 in2009)

GDPper

capita,PPP,

in 2008

Argentina 44 79 95 24 117 28 15 14,333

Brazil 45 79 97 21 78 35 21 10,296

Chile 78 91 99 21 88 33 11 14,465

Colombia 74 86 87 15 89 37 n/a 8,885

Mexico 64 90 97 19 70 22 18 14,495

Uruguay 53 98 100 29 105 40 34 12,734


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accomplished by the new Government. It establisheda web-based, one-stop-shop or rm creation that

signicantly reduces the number o steps, time andcosts to start a business.5

30. Te Govermet as recogized te ogisticssector as a promisig source o growt i itse as

we as a importat dimesio o te coutrs

competitiveess. Over the last two decades, due to

its central location, ecient port services and modern

nancial system, Uruguay has emerged as a regionalhub or services and logistics. In 2008, exports o

services in this sector have reached US$1 billion. To

urther exploit this potential, the new Governmenthas highlighted the importance o reviving the

comprehensive customs reorm, which has made

only limited progress during the last administration,and indicated a shit in emphasis o the reorm to

enhancing the trade acilitation unction o customsand moving to a risk-based control system.

31. Access to iacig b Uruguaa irms is asoa e costrait to private sector deveopmet,

and increasing the sophistication, transparencyand stability o the Uruguayan inancial market is

a key Government objective.6 Pension unds haveaccumulated sizeable assets, yet these are largely

channeled to investments in government securities.The authorities have taken important steps inrecent years to strengthen local inancial and capital

markets, such as the adoption o a new capitalmarket legal and regulatory ramework in 2009, the

2008 bankruptcy law, the 2009 law on payments

system and securities settlement, and the 2008establishment o a deposit insurance institution.

The challenge ahead now is to build capacity and

promote market development to acilitate access toinancing or the private sector.

B. IMPROVInG SOCIAl InClUSIOn &EqUITy

32. Te Govermet is committed to cosoidatigte progress acieved o socia protectio ad to

urter improvig pubic eat care ad educatiooutcomes, wit a specia empasis o providig

or te basic eeds tose ivig i extreme povert

ad urter eacig socia icusio. In 2000,the Government introduced amily allowances or

poor amilies and has modied the program in theyears since to expand coverage, increase benets and

provide an incentive structure or secondary school

students. By 2009, over 500,000 children werereceiving benets rom the expanded program. These

eorts eectively included the poorest households

into the social protection systemthe percentage ohouseholds in the poorest quintile not receiving any

income transer declined rom 50 percent in 2003 toabout 20 percent three years later, and more than

85 percent o children living in poverty reside in

households that received amily transers in 2008.

33. Te GoU as committed to cotiue socia

protectio iitiatives wie seeig to icrease

teir impact, placing special emphasis on non-

contributive schemes. The authorities have declared

their intention to reach the remaining non-coveredamilies and enhancing the eectiveness o the amily

allowances system. They consider the ollowing to bethe principal challenges in this regard: (i) to better

identiy and incorporate potential beneciaries not

yet covered; (ii) to more eectively use the transerprograms to advance social policy objectives, such as by

identiying adolescents at risk and providing incentivesor them to complete secondary education; and (iii) to

improving the capacity or monitoring and evaluation

o transer programs, such as by institutionalizing andbroadening the scope the centralized beneciaries

registry ( Sistema de Inormacion Integrada para el

Area Social).

5. Uruguay ranks 114 o 183 countries in the 2010Doing Business Report, and 132 in the starting a business category.6. The World Bank Investment Climate Survey(2008) indicates that, on average, enterprises retained earnings account or 82% oxed assets and 73% o working capital nancing, respectively. The report highlights the low use o bank credit by Uruguayan rms -- itaccounts or only 6% o working capital and even less o asset nancing.


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34. Presidet Mujica as aso igigted teimited decet ousig opportuities or ow-

icome amiies as a critica socia caege. Inresponse the Government has launched a housing

initiative (Plan Juntos) to expand such opportunities

by acilitating access to housing nance and promotingsel-help initiatives or housing construction and

rehabilitation.

35. Educatio is a strategic priorit as part o te

GoUs objectives o raisig ivig stadards ad

better itegratig ito te word ecoom. Uruguay

has been implementing reorms in recent years to

improve the equity and quality o the educationsystem. Uruguay has achieved universal access to

early education or 5-year olds, universal primary

education (grades 1-6) and early secondary. However,these enrollment rates hide important dierences in

the quality o education among students o dierentsocio-economic backgrounds. At the secondary level,

there remain challenges in terms o coverage --net

enrollment rates or the lowest quintile o the studentpopulation is 37 percentage points below that or the

highest quintile. In addition to the gaps in coverage atthe secondary level, a key challenge or Uruguay is to

address the learning decits o its students, particularly

in terms o cognitive abilities.7 Bank support to the

sector has been ocused on the expansion o theull-time school program, the main initiative o the

Government or improving the quality o education or

lower-income primary students. Thus, they propose tocontinue expanding early childhood education and ull

time schools, and enhancing the educational impact

oPlan Ceibal(Box 1) at the pre-school and primaryschool levels. With regard to education quality at

the secondary level, the Government will ocus onstrengthening technical education and its linkage to

labor market demands, and expanding thePlan Ceibal

to secondary school students.

36. A compreesive eat sector reorm

program was approved b Pariamet i 2007

te competio ad impemetatio o tese

reorms is a importat egac o te previous

admiistratio. While it remains among the top-

ranked LCR countries on health indicators, Uruguaysrelative position has slipped in recent years.8 Fity-

two percent o urban Uruguayans report havingcontributory health insurance, and 97 percent report

having either some type o insurance or a regular

source o care. The prevalence o inectious diseasesis low; importantly, Uruguay has experienced a

transition in its demographic structure over the lastdecades, and its epidemiological prole has changed

to one o a high prevalence o Non-Communicable

Diseases (NCD). The ambitious reorm programaims to provide universal health insurance coverage

and to shit the prevailing heath care model rom high

cost treatment o acute illnesses to preventive care orNCDs. As nine percent o GDP is devoted to the health

sector, a key concern or the new administration is tocontain the increasing cost o the health system while

putting available resources to more ecient use.

37. Tese reorms ejo a ig eve o positive

socia acceptace, ad to date isurace coverage

as bee expaded to reac ear o 300,000

iabitats, mai cidre o poor ouseods.

The reorms range rom regulation and policy

stewardship to health promotion and the improvemento health care, and rom eective prevention policies

to epidemiological surveillance and monitoring.

38. Uruguas societa orietatio toward icusio

ad euit is refected i a arge positive picture

o geder issues. Education standards are amongthe highest in the region. Female participation in

labor markets is high: the ratio o emale to malelabor orce participation (0.75) is higher than the

average or upper middle income countries (0.69)and the LCR countries (0.66) or year 2008. InUruguay 82.5 percent o women are employed by

the services sector, exceeding the norm or upper

7. In the 2006 Program or International Student Assessment (PISA) in language, mathematics and science or 15 year-old students,Uruguay outperormed other LCR countries (excl. Chile), but was below the OECD countries8. In Uruguay today, lie expectancy at birth is 75 years, the inant mortality rate is 10.5 per 1,000 live births, and 99 percent o births aredelivered in a hospital or clinic.


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Created by Presidential decree in April 2007, Plan Ceibalprovides all students and teachers in public primaryschools with a laptop computer and internet connectivity through the schools ree o charge. The main objectivewas to reduce the digital gap, not only with respect to other countries but also within the Uruguayan society to

oster equitable access to education, inormation and culture. The Plan is based in three pillars: (i) equity o access

to computers, (ii) learning, and (iii) connectivity. The combination o these elements is intended to promote equalopportunities; enhance the development o new tools or learning and teaching; and encourage new relationships

in an interconnected society. Policies and strategy or the program are decided, in close collaboration with the

Education Committee, by a dedicated committee comprised o representatives o relevant government agencies.The Technological Laboratory o Uruguay (LATU) is in charge o the implementation o the program.

This Plan was accompanied with connectivity inrastructure to primary schools (80 percent o schools now have

at least one access point, covering 95 percent o public primary school students). Equally impressive is theocus on the non-equipment aspects o the program. These are covered in detail on the Plans webpage (www.

ceibal.edu.uy), which includes educational materials or teachers and students and the Ceibal Channel, which

connects classrooms to a TV studio that showcases student-teacher interaction across the country to acilitatepeer learning or teachers. There is also a virtual Campus Ceibal where teachers can access training on didactic

topics and take virtual classes. Finally, the Plan includes an online ormative evaluation mechanism that enables

simultaneous evaluations with immediate eedback on student results.

By 2009 all 380,000 students and teachers in public primary schools had received their computers. The Planinitially aced resistance rom teachers. However, there are recent indicators that this resistance has been reduced

and that the Plan is now widely accepted. The teachers received training and machines beore the deploymentto students. Students bring the laptops to class and use the machine during classes; parents are requesting to

be e-trained; and in many localities the schools have become the center o the community activities. The Plangenerated an interesting interaction between teachers, children and parents with plenty o potential or studentlearning; however, there has not yet been an evaluation o the Plans impact on student learning or household

welare. Such studies are now underway, and the Bank has been asked to support the development o an

evaluation o the preliminary educational and other social welare impacts.

GoU aims to expand the Plan as ollows: (i) complement connectivity with digital training or education personnel;(ii) gradual expansion to public secondary schools; and (iii) using connectivity to increase the scope and quality

o other social services (e.g. remote medical consultations and nutrition checks).

Box 1: Uruguas PlAn CEIBAl Oe laptop per Cid



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MICs (71.7 percent) and or the LCR region (74.6percent). Women occupy 12.1 percent o seats in the

parliament (2008), below the average or both uppermiddle income countries (19 percent) and the region

(22 percent). In the context o an otherwise positive

reproductive health context with 99.3 percent oall births being attended by skilled health sta and a

contraceptive rate above the norm or upper MICs

Uruguays adolescent ertility rate is an outlier. Whileit has shown a steady decline rom 66.9 births per

1,000 women ages 15-19 in 1998, it is still higher (at60.9 in 2008) than the average or upper middle

income countries (51.5), but lower than the average

or LCR countries (72.2).

39. Te Govermet as recet ocused eve

more attetio o geder euit. In its economicdimension, this would mean to increase emale labor

orce participation in non-traditional sectors, reducethe high concentration o women in inormal and

domestic jobs, and decrease gender wage gaps. In its

social dimension, key challenges are recognized as thereduction o gender-based violence and prevention

o adolescent pregnancies.

C. COnSOlIDATInG AGRICUlTURAl

SECTOR GROWTh AnD BRInGInG ITSBEnEFITS TO FAMIly FARMS

40. Te ew Admiistratio as stressed teimportat potetia o te agricutura ad ood

sector, as a source or growth, in general, and or

increasing income and job opportunities in rural areas.This sector continues to be an important and dynamic

part o the national economy, having grown at almosttwice the rate o the overall national economy since

2001 and now representing almost 10 percent o total

GDP9.

41. Te Govermet as recogized as aparticuar caege te act tat ami arms are

aggig beid te productivit ad prosperit

gais associated wit arge-scae armig. These

amily arms are much more limited in exploitingopportunities oered by markets and remain strongly

exposed to external price or climate shocks10. For

President Mujica, reversing this trend is critical toretaining more o Uruguays younger population in

rural areas, as there has been a trend o young people

moving away rom amily arming.

42. Tere is a ee iterest i deveopig amoder ad we targeted agricutura ad rura

deveopmet poic. President Mujica used the term

agro-inteligencia to describe his vision on this. Sucha policy aims at consolidating the integrated approach

practiced in recent years, which promoted sustainable

use o natural resources while ostering comparativeadvantages o the agricultural and ood sector. For

example, Uruguay distinguished itsel as a reliableexporter o bee to standard-sensitive markets and

as the only country in the region to achieve 100%

traceability o cattle. Such policies are critical orremaining highly responsive to increasingly rigorous

international ood saety and quality standardsand thereby maintaining competitiveness. In this

context, the Government is interested in expanding

the innovative tracking system, which now enables

tracking all cattle in the country, to other livestock.

D. PROTECTInG ThE EnVIROnMEnTAnD MITIGATInG ThE EFFECTS OFClIMATE ChAnGE

43. Te ew Admiistratio as expressed its

commitmet to urter stregteig atura

resource maagemet ad sustaiabe use

o soi ad water at te arm eve, as we as

maistreamig biodiversit coservatio i

productio. This is in response to rising concerns on

environmental degradation caused by expansion oagriculture and intensication o livestock production.

9. Agriculture and orestry account or 12% o national employment, given the prevalence o labor-intensive SMEs.10. There are about 19,400 larger and medium-sized armers (~715 ha in size on average) that arm about 85 percent o Uruguays land.Production in these arms is strong linked to export markets and has proven relatively resilient to shocks (i.e. drought, input prices, marketfuctuations). The about 32,700 amily arms (~77 ha in size on average) have been less capable o seizing market opportunities and havebeen more strongly exposed to these shocks.


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More sustainable production is also necessary toprotect the countrys reputation as a green producer

(Uruguay Natural), a eature valued highly by tradingpartners.

44. I additio, Urugua as recet setcear targets o Cimate Cage ad Poutio

Maagemet issues. Uruguay has been seriouslyaected by climate change, most notably through a

higher climate variability observed in recent years.11

Repeated and severe inundations and droughts havehad a strong negative impact on rural livelihoods

and production. Thus, in 2010, GoU prepared and

launched a National Response to Climate ChangePlan that includes strategic guidelines on climate

change adaptation and mitigation. Regarding cleaner

production in the industry sector, the GoU has alsopresented aNational Action Plan on Production and

Sustainable Consumption . This plan seeks to identiy,coordinate, integrate and potentiate a set o actions,

programs and projects targeted to prevent andminimize environmental impacts rom production

and consumption. Both plans oer partnership

opportunities to identiy and prepare projects notonly with IBRD resources but also with trust unds.

45. Te Govermet is ee to reduce Uruguas

et emissios o gree ouse gases (GhGs), wicto a arge extet is te resut o emissios caused b

agricuture ad ivestoc productio. Through the

new strategy, the Government intends to put in place

an integrated approach to mitigation and adaptation.

46. Tere is aso a great eed to improve

evirometa compiace i Uruguas idustria

sector. The GoU recently launched a Sustainable

Industrial Development program to help smalland medium enterprises improve compliance with

environmental regulations through investments incleaner production processes. As in many othercountries, Small and Micro Enterprises (SMEs) in

Uruguay are typically more polluting than larger

companies as they lack resources, knowledge orincentives to adopt newer, cleaner technologies.

47. Water resources maagemet i te cotext o

a cagig cimate is a cear caege i Urugua.This is a key issue in that this resource is aectedby climate variability and change, and it relates to

hydropower generation (hence impact on energy

or industrial and other activities). The country hasa new water law which promotes the creation o a

water council (in the Direccin Nacional de Medio

Ambiente - DINAMA) and promotes integrated waterresources management and basin planning. Since the

end o the last century, rainall in Uruguay has shownan increase, together with temperature and sea level.

Current projections conrm this increasing tendency.Finally, the occurrence and severity o foods has beenincreasing, with large events occurring annually.

E. REFORMInG ThE PUBlIC SECTOR

48. I is iauguratio speec, Presidet Mujicaaouced tat is Govermet woud udertae

a ar-reacig pubic sector reorm ( Reorma delEstado). The new Government has advanced switly

on several ongoing reorm processes in the publicsector, such as deepening the e-government agenda,strengthening tax administration, and improving

targeting and eectiveness o social protectionprograms. At the same time, consultations are beginning

on how best to tackle those reorm aspects that have

not yet progressed, such as enhancing customsadministration, modernizing public procurement to

improve quality and reduce costs while strengthening

transparency and competition12; and making the

national statistical system more user-riendly.

49. Te exact scope, cotet, ocus ad

seuece o pubic sector reorm uder te ew

11. Climate change models or Uruguay point to a moderate increase in temperatures combined with greater volumes, intensity andvariability o rainall over the next several decades.12. Uruguay is unique in the Latin American and Caribbean region or its absence o an agency responsible or public sector procurementthat can issue executive norms, promote automation, monitor eciency, train public ocials in charge o procurement, overseecompliance, handle disputes and, in general, act as the lead government agency.


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admiistratio is et to be aid out i detai. Therewas an initial announcement that this reorm will

contain our pillars: human resource management,administrative restructuring, improved management

o public resources and enhanced use o technology

in public sector management. In any case, two keyobjectives have clearly emerged:

Asimprovingqualityandimpactofpublicspending

is at the heart o the Governments priorities,

there is a strong emphasis on enhancing capacityon budget ormulation and evaluation o results o

public programs and budgetary spending. For the

new 5-year budget, the Government has movedrom an administrative to a program-based budget

presentation, which sets the basis or linking

output indicators to budgetary allocations. Thisshould acilitate evaluation o public programs

and allow or better inormed budget decisions.

The Government recently tabled for discussion

sweeping changes to the civil service legislationdesigned to proessionalize and streamline the

civil service by harmonizing civil service careersacross dierent government units, simpliying

and uniying the process o attaining positions,

clariying labor relations between civil servants and

the State, and modiying the legal status o publicservants and political appointees.13 Preliminary

reactions indicate that the political opposition is

in avor o the announced changes, but the publicsector unions are strongly opposed.

13. Proposals are detailed inLos Ejes e Instrumentos de Fortalecimiento Institucional del Estado discussed and approved at the Consejode Ministros on July 16, 2010.


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A. PERFORMAnCE UnDER ThE 2005-2010COUnTRy ASSISTAnCE STRATEGy (CAS,REPORT nO. 31804-Uy) AnD EVOlUTIOnOF ThE PARTnERShIP

50. Te Vzuez Admiistratio came to power

wit a ucertai opiio o te Ba et eded

up ormig a cose ad productive partersip

wit te Ba i a umber o e areas. The

preparation o 2005-2010 CAS through extensiveconsultations and in response to demands rom the

authorities laid the ground or this partnership. Therewere several other key actors that helped strengthen

relations between the Bank and the Government

and acilitated successul CAS implementation. First,the opening o a Bank oce in Montevideo in 2005

enabled a more swit and eective response to local

needs and a more eective engagement with the mainsegments o Uruguays society. Second, the Bank was

able to customize its nancing to specic needs o theGovernmentthe disbursement o a Development

Policy Loan (DPL) in local currency stood out in this

regard, as described below. Third, the Bank showed

fexibility in adapting its lending and non-lending

program to align it with the Governments emerging

prioritization o critical reorms and initiatives, andprovided timely and eective knowledge transer in

this regard.

51. Tis positive evoutio o te reatiosip

i recet ears provides a great opportuit or

te Word Ba Group (WBG) to cotribute to

Uruguas ambitio to tae te coutr to te ext

eve o deveopmet. It will thereby be critical tocontinue to respond timely and eectively to the

countrys needs. The new Governments keen interestin urther enhancing its partnership with the Bank has

emerged consistently during CPS consultation process

(Box 2).

52. Te 2005-2010 CAS was structured aroud

te oowig piars: (i) reducig vuerabiit;

(ii) sustaiig growt; ad (iii) improvig ivig

stadards. The March 2007 CAS Progress Report(Report No. 42789-UY) conrmed the general thrust

o the 2005 CAS and concluded that the Bank program

IV. Urugua - Word Ba Partersip [ 31 ]

Uruguay - World BankPartnership


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The consultations on the CPS (as summarized in Annex I) commenced in February 2010, beore the inauguration

o the new administration, when discussions were held on a set o Policy Notes between the Bank and thenewly elected authorities. These discussions were ollowed by presentations to the main opposition parties.

These discussions were attended throughout by the President-elect, Mr. Jos Mujica, the elected Vice-president,Mr. Danilo Astori, and uture cabinet members. These interactions were appreciated both by the Government

and the opposition, and enabled the Bank to gauge the relatively high degree o consensus that exists today in

Uruguay on the policy agenda and development challenges. A consultation on the CPS with broad stakeholderparticipation was held in August, and the Government is leveraging the opportunity provided by CPS preparation

to plan an extended series o stakeholder consultations that will not end with the nalization o the CPS but

rather continue into implementation.

In April 2010, the dialog on the main priorities or the collaboration between the Bank and Uruguay over thenext ve years was deepened. The Bank Vice President met with President Mujica, Vice-president Astori, the

economic and social cabinet, as well as with representatives rom the legislative branches, private sector andcivil society. These discussions generally conrmed as valid the proposed orientations o the DPL and, more

generally, the orthcoming Country Partnership Strategy. In May 2010, consultations on the DPL, specically, and

the ramework o the strategy, more generally, were held. Another round o more detailed discussions on the

results matrix and the program under the CPS was held July 1, 2010.

Finally, systematic stakeholder consultations were kicked o in early August, 2010, and will continue through the

rst year o CPS implementation. Given the multi-sectoral objectives o both the CPS and the Governmentsown development strategy, this series o consultations is generally organized around the ollowing themes rather

than individual ministries or sectors: (i) Modernization o the Public Sector; (ii) Strengthening Competitiveness

and the Business Climate; (iii) Strengthening the Inrastructure Sector; (iv) Environmental Protection and ClimateChange Adaptation; and (v) Social Protection and Equity. The outcome o the consultations is summarized in

Annex I.

Box 2: Coutr Partersip Strateg Cosutatios

[ 32 ] IV. Urugua - Word Ba Partersip


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had achieved substantial success over the previous twoyears. A central ocus o the assistance was provided

through a programmatic series o DPLs supportingthe consolidation o macroeconomic reorms and the

advancement o critical structural reorms. This was

complemented by a comprehensive renovation othe investment project portolio rom 2005-2007. This

resulted in gradual yet marked shit in the investment

lending portolio towards the support o morecomplex and reorm-oriented operations, in areas

like tax reorm, nancial sector and capital marketdevelopment, health and education, innovation,

inrastructure and public services, natural resources

management and state modernization.

53. Te attaced CAS Competio Report (CASCR)

cocudes tat te 2005 CAS was broad successui meetig its targets. For example, the ollowing

achievements illustrate how the Bank was able torespond in timely ashion to specic demands rom

the country:

The First Programmatic Reform Implementation

Development Policy Loan, approved in May 2007and disbursed in local currency, marked the rst

time the World Bank issued a local currency bond

or the purpose o a back-to-back disbursement

o a specic loan. It was also innovative in thatthe Bank became the rst oreign issuer to launch

a public bond in Uruguayan pesos, lowering thecost o nancing and increasing diversication o

public debt and pension unds portolios.

In agriculture, the Bank was instrumental in

supporting GoU eorts to eradicate oot-and-mouthdisease and to introduce individual traceability o

cattle. This led to a major breakthrough in theprevention o animal diseases, and signicantly

enhanced Uruguays image as a regional leaderand reliable exporter o bee products to standard-sensitive markets. Uruguay is the only country in

the region to achieve 100% traceability o cattle.

54. Te CASCR ds tat te fexibe desig o te

CAS ad te programmatic ature o deveopmet

poic edig aowed te Ba to react uic

durig te goba acia crisis ad to adjust its

support to provide Urugua te eeded cotiget

acig. Moreover, the 2008 CAS Progress Report

envisaged a plan or dealing with global nancial

turbulence. By contrast, the 2000 CAS proposed

a more rigid program, strictly linked to countryperormance and, when the Argentine crisis arose

in 2002, the Bank had to resort to Special SALs toprovide short-term relie, at the expense o creating

medium-term payment problems.

55. Aoter importat esso eared was tat

te cosesua ature o Uruguas poic maig

eviromet aects te pace o impemetatio

o e reorms. In Uruguay reorms can take a long

time to mature, but they tend to be sustained once

implemented. The programmatic structure o theprogram under the 2005 CAS, providing support orkey reorms through the DPL series, was in retrospect

the right one, allowing time or reorms to come to

ruition, while ocusing largely on implementationo measures or which the Government had already

obtained approval. The CASCR also highlights the

need or the Bank to mobilize sta with the requisiteskills. In the Institutions Building Technical Assistance

Loan (IBTAL) customs component, which was notimplemented or broader political reasons, the Banks

lack o in-house expertise slowed implementation.

B. ThE OnGOInG PORTFOlIO

56. Te Ba is supportig a diversied portoio o

ie ivestmet projects i Urugua, icudig two

Goba Evirometa Faciit (GEF) grats totaig

US$257.2 miio. Institutional strengthening is across cutting dimension o the investment portolio,

accounting or an average o 30 percent o each

loan. The portolio is supports a number o criticalgovernment reorm initiatives, such as the ollowing:

Strengthening the national innovation system

(Promoting Innovation to Enhance Competitiveness

Project),

Expandingthefulltimeschoolmodeltoincrease

equity in the provision o preschool and primary



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education (Third Basic Education QualityImprovement Project),

Strengtheninghealthdeliveryservicesandhealth

policy ramework or non communicable diseases(NCD), including implementation o a pilot

program (Previniendo) to enhance NCDs controland risk actor prevention, (Non Communicable

Diseases Prevention Project),

Promoting the adoption of economically and

environmentally viable, integrated agriculture and

livestock production systems (Integrated Natural

Resource and Biodiversity Management Project),

Facilitating investments inimprovingenergyuse

by creating an enabling policy and regulatoryenvironment (Energy Eciency Project),

57. I geera, portoio perormace remaispositive, bot i terms o acievemet o

deveopmet objectives as we as impemetatio

progress. There are currently no projects at risk in the

portolio. The disbursement ratio or Uruguay in FY10

was a solid 30.2 percent. However, the most recentportolio review reveals that there is some lag in

disbursements which can be attributed to the type o

operations that the portolio is supporting (institutional

strengthening, technical assistance) and the act thatUruguay has not yet explored aster disbursement

instruments and modalities in support o these types

o projects such as Sector-Wide Approaches (SWAPs),

results-based disbursements components. It isexpected that under the Government and the Bank willexplore using such instruments under the new CPS.

C. ThE WORlD BAnk GROUPSInDICATIVE PROGRAM (2010-2015)

Strategic Approac & CPS Piars

58. Te overa objective o te WBGs edig ad

o-edig program or te ew CPS period is toep Urugua cosoidate ecoomic reorms, ad

eace socia outcomes, ad tereb get coser

to OECD stadards. First o all, this means to build

on the positive experience o collaboration betweenthe country and the Bank during the previous CAS

period. But the new CPS will be even more tailored

to the specic needs o this advanced middle-income country, in order to contribute eectively to

implementing Uruguays reorm agenda.

59. I tis sese, te ew Govermet as sowa ee iterest i usig te Bas support i a

strategic wa, sitig to a partersip tat adds

importat vaue to te Govermets ow program

ad tat stresses te roe o owedge ad ow-

ow trasers. In line with this, the government

counterparts expressed a desire to engage in a newprogrammatic DPL series and move to investment

operations that have expanded institutional reorm

content and ocus increasingly on results. It has alsosought a more demand-based system or identiying

and delivering o analytical and technical assistance.

60. Te mai strategic orietatio o te CPS

is aiged wit te Govermets priorities, as

preseted i te previous capter. The 2010-2015

CPS ocuses on the ollowing our pillars: (i) Reducing

Macroeconomic Vulnerability & StrengtheningPublic Sector Administration; (ii) Competitiveness &

Figure 2: Uruguay Investment PortfolioDiversification

EnergyUS$ 6.87M

2%

EducationUS$ 71.9M24%

TransportUS$ 70M24%

Agriculture &EnvironmentUS$ 37M12%

InnovationUS$ 26M9%

InstitutionalStrengtheningUS$ 28.1M (*)9%

WaterUS$ 34M11%

HealthUS$ 25.3M9%

(*) Includes stated modernization under the institutionalStrengthening TAL (US$ 12.1M) and modernization of watercompany under the OSE System Modernization and RehabilitationProject (US$16M)


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Inrastructure; (iii) Agriculture, Climate Change, andEnvironment; and (iv) Increasing Social Inclusion &

Equity.

61. Refectig te essos o te CASCR, te

strateg wi be fexibe to accommodate teGovermets eed to adjust course i te evet

o uoresee domestic or extera deveopmets.

Indicative support or this strategy is proposed toinclude a series o two DPLs totaling US$200 million

(late 2010 and late 2011), investment lending totalingapproximately US$500 million subject to IBRDs

overall lending capacity, and a well-ocused and

demand-driven AAA program. This lending mix mightbe adjusted to prepare or or respond to domestic or

external shocks. This being said, in the likely event

o a urther strengthening o Uruguays position ininternational nancial markets, and i the Government

maintains its keen interest in a more strategic andsystematic orientation on knowledge services, there

might be a declining emphasis on lending in the

medium-term.

62. Beod te eed or cotiuit i existig areaso support to maitai mometum o reorms,

te Govermets guidig pricipes or seectigew edig activities is iovatio ad ocus

o resuts. The Government intends to use Bank

resources or adding important value to interventionswith strong expected development impact, contributing

best practice technical know-how in the respective

areas and helping build strong institutional capacity,in particular in reorm program design and managing

or results. As a consequence, the Government is

interested in introducing results-based and sector-wide lending instruments or new operations like the

planned transport loan and possibly or a new loan inthe social sectors. This is expected to consolidate the

Banks role in most areas where it is already active,

such as education, health or innovation, and at the


Tabe 2: Idicative edig program or 2010-2015

Lending (US$ millions) by Calendar Year

Loans 2010 2011 2012-2015Loan amts TBD

Development Policy Lending (DPL) 100 100

Investment Lending 120 380

Improvement o Primary Education 40

Integrated Agricultural Devt. & Natural Resources Management 40

Transport Inrastructure Modernization

Innovation and Competitiveness

Drinking Water Systems (OSE) 40

Health Sector SupportIBTAL (additional nancing)

Output-based Loan or Social Sectors and Human Opportunities

Sustainable Industrial Development

Energy Sector Strengthening

Energy Eciency

TOTAL 100 220 380


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budget, as well as or the monitoring and evaluationeorts to continually strengthen the budget process.

In addition, the Bank program will support the

adoption o a new computerized system o budget

management and improvements in the statisticalsystem. Since the public sector reorm agenda is stillto be dened in detail and the IADB is also involved in

several reorms, other areas or Bank support will be

dened later, but these may include: strengtheningo controls in tax collection agencies, support or

an agency responsible or regulating public sector

procurement and the reorms to the civil service.

Pillar 2: Improving Competitiveness &Infrastructure

68. Te Govermet sees to stregte

competitiveess troug icreased coverage ad

better uait o irastructure ad estabismet

o a more coducive busiess eviromet.

Beyond the strong demand or Bank expertise inthe area o public-private partnerships, with PPIAF-

nanced activities already launched, sector dialogue

has shaped a proposed inrastructure programunder the CPS to achieve: (i) improvement o the

Tabe 3: AAA program or Fy11 ad Fy12

Activity Description

Reorm o housing policies Consider policy options to increase the supply o social housing (ocusedon creating incentives or sel-initiative)

Strengthening o Plan Ceibal by means o

international best practices

Support exchange o experiences with similar programs in other

countries, and study pending challenges.

Impact assessment o social polices Analyze the impact o social policies, in particular amily transer programs

on social indicators.

Review o public expenditures on the

social sectors

Evaluate the eectiveness and eciency o public expenditure, particularly

in the social sectors and key social programs.

Monitoring social policy results with the

Human Opportunity Index

Develop an internal mechanism to monitor and evaluate the impact o

social policies on human opportunities (NLTA)

Health reorm Complete analytic work and technical assistance (NLTA)Mitigation and adaptation to climate

change eects in the rural sector

Diagnosis o challenges and identication o adaptation and mitigation o

climate change eects in the rural sector

Integration o public policies on risk

management or threats o water origin

Complete technical assistance to support DINASA's institutional and

technical strengthening throughout nancial and technical assistance in a

specic eld.

Further strengthening business and

investment climate

Assessment o reorm priorities or urther strengthening the legal,

regulatory and administrative ramework or business and investment

activities.

South-South exchanges Exchange o experiences and knowledge with other developing countries,

with initial ocus on strengthening institutional capacity on economic,

debt and public nance management.

Note: The exact content o the AAA and details like method o cooperationstudy, knowledge transer or technical assistancewill bedened jointly in a ormal agreement to be signed on this new joint AAA program modality.


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The proposed DPL supports the implementation o reorms which have been identied by the new Government aspriorities or obtaining Bank support. The DPL series supports implementation o the Governments agenda in threemain areas: (i) public sector management, (ii) competitiveness, and (iii) social inclusion. In particular, the maindevelopment objectives o the new loan are to strengthen the eciency o the public administration while promotingmacroeconomic stability, improve competitiveness through measures such as, acilitating trade, strengthening the

business environment and development o nancial markets. It also seeks to improve social inclusion throughmeasures targeted at enhancing the equity and eciency o health, education and social protection systems.

The program is expected to consist o a series o two loans, each amounting to US$100 million. The approach takenby this loan series refects the fexibility requested by the Government to best address evolving challenges. Theproposed loan also targets the consolidation o reorms supported by the Programmatic Reorm ImplementationDevelopment Policy Loan (PRIDPL) series (approved May 2007), and bolsters Government eorts in other areaswere not supported by the PRIDPL series. Specically, the loan recognizes recent achievements in public sectormanagement, business climate and social service delivery (prior actions or DPL-I). The indicative triggers or DPL-I Irefect broad policy areas o support, anchoring the new Governments reorm agenda through 2011.


Box 3: Te First Programmatic Pubic Sector Competitiveess ad Socia IcusioDeveopmet Poic loa (DPl)


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condition o key land transport inrastructure; (ii)eciency improvements in Obras Sanitarias del

Estado (OSE) to ree up resources or additionalinvestment; (iii) improvements in the quality o

the electricity supply by expanding, upgrading and

rehabilitating the transmission and distributionnetworks; (iv) energy eciency improvements

to slow the growth o electricity demand; and (v)

improved international trade logistics support.Among the means o support are an ongoing Energy

Eciency GEF Grant, an ongoing OSE Modernizationand Systems Rehabilitation project, a proposed

Transport Inrastructure Modernization Loan, and

possibly an Energy Sector Strengthening Project (seeTable 2). Inrastructure and SME nancing are prime

candidates not only or local currency nancing, but

also or customized nancial solutions conducive toreducing nancial vulnerabilities and providing access

to competitively priced, fexible products with longmaturities. IBRD and IFC have a lengthy track record

in such types o operations globally, which could be

applied to the specic case and needs o Uruguay.

69. Te WBGs cosiderabe experiece i providig

assistace o acia marets ad busiess

cimate-reated caeges trougout te regio

coud prove ver epu i urter stregteig

te busiess cimate i Urugua. The Bank hasalready deployed a series o lending and non-lending

instruments in Uruguay to tackle these ronts andpreliminary eedback rom these activities is promising.

Thus, a range o WBG support is proposed to urtherstrengthen the business climate in the ollowing ways:

(i) promotion o the new one-stop shop or rm

creation; (ii) support GoU actions to acilitate increasedavailability o credit to the private sector; (iii) support

GoU eorts to increase market capitalization, and (iv)

strengthen GoU actions to improve inrastructure. In

addition to the DPLs, the achievement o these outcomeswill be supported through AAA on competitiveness andcapital markets, an investment climate assessment, and

support rom the IFC. Dialogue with the Government

includes the potential or IFC to provide longer-termdollar nancing to the private sector through onlending

acilities channeled through local commercial bank

partners.

Pillar 3: Protecting the Environment,Mitigating the Effects of Climate Change,and

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