Docwu.uzof TheWorld Bank

FOR OmaAL USE ONLY

Public Disclosure Authorized Rqeot No. P-5831-lUR

NMORAIIDUNANID RECOIMENDATION

OF THE

PRESIDENT OF THE

TNTERNATIONALBAINK FOR RECONSTRUCTIONAND DEVELOPIMET

TO THE Public Disclosure Authorized 5ECUTIVE DIRECTORS

ON A PROPOSED

PUBLIC ENTERPRISEREFORK LOAN (PERL)

IN AN AMUNT EQUIVALENTTO US$11 MILLION

TO THE

REPUBLIC OF Public Disclosure Authorized

AUGUST 11, 1992

Ml CRF 1 CHE COPY

Repport No. P 5631-UR Type: (PR) Title: PUPL1C ENTEXPRISTE REFORM LOAN Author: DAMMWiRT, ALFREDO Ext. :30142 Roorn:I6140 Dept.;:LA4TF

Public Disclosure Authorized Country Department IV Latin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of their offcial dties. Its contents may not otherwise be disclosed withoutWorld Bank authorizadon. RuaNCYUNIT

The currency of Uruguay is the new Uruguayan peso which is managed by the Central Bank within a crawling peg system. As of July 30, 1992, the exchange rate stood at 3,110 new pesos to the U.S. dollar.

FISCAL YEAR January 1 to Decembei 31

GLOSSARYOF ABBREVIATIONS

AFE - State Railway Company ANCAP - State Petroleum, Alcohol and Cement Entity ANP - National Port Entity ANSE - National Stevedoring Services Association ANTEL - State Entity BHU - State Housing Bank BOD - Board of Directors BROU - Bank of the Republic CONTEL - National TelecommunicationsCommission CTM - Salto Grande Technical Commission DDSR - Debt and Debt Service Reduction DNH - National Directorate for Hydrography DNE - National Directorateof Energy FY - Fiscal Year GDP - Gross Domestic Product GNP - Gross National Product NERCOSUR - 'Common Market of the South" involving Argentina, Brazil, Paraguay and Uruguay MIE - Ministry of Industry and Energy MTOP - Ministry of Transport and Public Works NEL - National Electricity Law OPP - Office of Planning and Budgeting OSE - State Water and Sewerage Company PC Unit - Project CoordinatingUnit PE(s) - Public Enterprise(s) PERL - Public EnterpriseReform Loan PLUNA - State Aviation Company PPF - Project Preparation Facility UTE - State Power Entity TOE - Tons of Oil Equivalent TOR - Terms of Reference

Ths report bh be prepared by AlredoDammert (Task Masge) with the celaborallonof the Team emars Chakih Kheil (IATIE).Rturdo Klockner,Gsao Unda (L4AE), MarweloAnloin (CFSPS),Eloy Vidal (ASTlE), jlse caiho, ReynaldoPastor (LEGLA),Fernando Vinl ad AntonloMatnetto (eonsulants), ad Peer rvew John Ndlls (CECPS),Nelson de Franco(IA41E). FOR0MCUL Us ONLY

- ii -

11=C 3uT I NM0 noT Lh AND C03T UMIRY

1211 1wos Rep6blicaOriental del Uruguay

*b flcisriess Officeof Planningand Budgeting(OPP)

_n&$ US$11 millionequivalent lomtrfifteen years,including a five-yeargrace period,at the Bank'sstandard variable interest rate.

GVoernment US$ 5.6 million IBRD US$11.0million Japanese Grant USS 2.4 mili n Total US$19.0million

EconomicRate of Return:n.a.

StaffAnnraisal *Ioort:n.a.

Thisdocumet has & uesuicted ibudonand may be used by cipientsonly In te pomam of theic W dudeLIts coa1n1 may notot1hewiOe be 4iscloed wbtout Wol Bank&u&tM1wo MEMORANDUMAND RZCOIND^ATION OF TUEPREsIDEwT O0 TsE INTERBATIONAL BARR FOR REONSTRUCTIOI AND DEVELOPRENT TO TmEEXECUTIVE DIRECTORs ONA PROPOSEDPUBLIC ENTERPRISEREFORM LOAN (PERL) TO TMEREPUBLIC OF URUGUAX

1. I submitthe followingmemorandum and recommendationon a proposedloan to the Rep6blicaOriental del Uruguayfor the equivalentof US$11 millionto help finance a Public Enterprise Reform Loan (PERL). The loanwould be on standard IBnD terms repayableover 15 years, including5 years grace, at the Bank's standard variable interest rate. This Technical Assistance Loan will support the Government'spublic enterprise reform/privatization program.

2. Aackaround. PublicEnterprises (PEs) in Uruguayaccount for about 121 of GDP, similarto that in industrialcountries and otherLatin American countries. However,their monopolyposition and low investmentlevels have led to the provision of low qualitygoods and servicesand distortedprices. Thishas often constrained the developmentof productiveactivities in othersectors. The prior Uruguayan administration sought improved public sector efficiency,eliminating railwaypassenger services, implementing performance contracts for key PEs, and reducingarrears among PEs and the publicsector. The presentGovernment is seekingto deepenthese reformsboth at the centralgovernment and PR levels, althoughthe formeris slowedby legislativeand constitutionalrestrictions. 3. GovernmentStrategv. The proposedreforms stem from the administration's beliefthat the publicsector is overdimensionedand outdated.The authorities also considerthat if Uruguayis to competeeffectively within the proposedfree trade union with Argentina,Brazil and Paraguay (HERCOSUR)and other markets, private enterprise must have much broader opportunities to invest and operate in sectors restrictedto statemonopolies. The resultingstrategy calls for: (a) strengtheningthe Government'sregulatory functions, separating them from parastatalcontrol; (b) delimitingthe role of the publicsector, terminating its monopoly in key fields; and (c) explicitlyproviding for private participationin these sectors. The initialphase of this strategy,to be supportedunder the proposedproject, aims at: (a) improvingthe attractiveness of Uruguay'sregional services in transportation, telecomuunications and power; and (b) enhancingUruguay's international trade capabilitiesby overcoming MontevideoPort'sa inefficiencies and shortcomings. 4. To implementits program, the Governmenthas obtainedCongressional approval oft (a) a PublicEnterprise law allowinginter alia the saleof stockto private capitalin the telecommunicationscompany (ANTEL) and the main aviationcompany (PLUNA),and for privateparticipation in futurepower systemexpansion within the state power company's(UTE) network; and (b) a Port Reform Law that permits private concessionsby the port administration(ANP) and deregulationof stevedoringservices. The Governmenthas alreadyhired legal and financial advisors to assist in the privatizationof ANTELand PLUNA,which is expectedto take place by end-1992. During 1992, th4 Government will also issue new regulations for telecommunications, aviation and power to ensure sector -2- competitivenessend officiency. Once thesereforms are underway,the Government tutendsto addressother sectors, such as water and sewerageservices, railways, and the domainof ANCAP,which holds the monopolyof oil and gas activities, alcoholand cement. This, however,would requirefurther legislation.

S. Ratinale for Bank.I nolvement . The Bank h8s provided structural adjustment loans (SALo) to Uruguay to bolster policy changes in trade, social securityg,public investment,and the legal end financial systems. The authorities also have expanded trade and banking reforms under the recent DDSR loan. With thesechanges well advanced,the focusof the Uruguay.npolicy agenda has now shifted to reducing the role of the state and stimulating greater private participation in productive fields. The proposed project is designed to remove significent constraints to Uruguayan economic growth within the context of the Bank's extendedsupport for structuralreforms, and supportsthe Government's intention tc create opportunities for greater private initiative in economic development. The Bank has already played a key role in the designand promotion of publicenterprise refo-m in Uruguay and channeled US$3.86 million for project preparation, including an advance of US$1.5million from the PPP sad US$2.36 million from the Japanese Grant Facility. The proposed project constitutes a major step towards reforming important PEs and related sectors that represent 462 of revenuesand 602 of employmentof all non-financialPEs. The Bank's experience worldwide in dealing with reform/privatization cases should help ensurean adequatelyconceived, transparent, end well implementedprocess.

6. Prolect Objectives. The proposed loan would support the Government's efforts to improve services and reduce the size of the public sector, under a transparent and competitive process, focussing on telecommunications, transport, and power. It would finsace the external expertise necessary to develop sectoral policies, appropriate regulatory frameworks, and implement PE restructuring/ privatization programs. 7. Proiect Descrivtion. This technical assistance project is fully described in Annex 1. Detailed cost estimates are shown in Schedule A. The matrix of project activities (Attachment 1, Annex 1) includes information on activities, outputs, impact andtiming. Sectoral profiles on telecommunications, aviation, ports and power are provided in Annexes 2 to 5. The project will finance expenditures (mostly for consultants) to assist the Government in the following activitiess (a) Institutional Framework for ImvlementatIon. (i) Strengthening the Government's capacity for executing and supervising its PR reform program through the staffing and training of the State Reform Executive Committee (US$663,000); and (ii) developilg marketing csapaigns to promote private investment in Pgs and seminars to learn from similar privatization processes in other countries (US$605,000). (b) Telecommunications. &Reulatorv Framework: (i) Preparinga diagnosis and strategic plan for restructuring the telecommunications sector (US$700,000; already implemented with PPF funds); and (ii) designing a regulatory framework for telecommunications and setting-up a regulatory entity (US$1,000,000; including US$655,000 under Japanese Grant). PE Reform: (iii) privatizing the telecommunications enterprise (ARIEL) (US$2,505,000; including US$905,000 under Japanese Grant). (c) lilnos RegulatorXFramework: (i) Revlewingand revisingthe AviationCode to facilitateprivate sector participation (US$500,000). PE Reform:(iW) auditingPLUAL's finascial statements and preparing a marketvaluatioui (US$114,000; under implementation with PPF funds); and (iii)privatizing PLURA (US$1,023,000).

(d) Ports. RegulatoryFXsaevorks (i) implementingthe new regulatory framework(US$900,000). PE/Sector Reform: (ii) Implementingthe new organizationof the NationslPort Entity (ANP), the Port Captaincyand port relatedagencies (US$1,300,000); (iii) developingoperational methods and proceduresfor the port, includingcoordination with privateoperators (US$700,000); and (iv) providingother assistance for divestitureof selected ANP non-commercialactivities and practicaloperational training (US$400,000).

(a) Power. Reaulatorv frameworkt (i) developinga regulatoryframework to allow private operators within the national power system (US$400,000; including a Japanese Grant for US$300,000);and (ii) establishinga regulatorycommissiun for power (US$100,000). PE Reform: (iii) studying privatizationoptions and subsequent implementationstrategy for UTe's selected generation plants (US$400,000).

(f) Other Assistance. This componentwill provideassistance for: (i) reformingthe Ministryof Agriculture(KGAP) through redimensioning andlor divestitureof extensionand other services(US$1,106,000, includingUS$506,000 under the JapaneseGrant); (ii) preparinga diagnosisof ANCAP*scement and alcoholplants including options and assistancefor theirprivatization (US$350,000); and (iii)peripheral privatizationsof publicentities such as localairports and ambulance services(US$600,000).

8. ProsectImplementation and Financina. The Borrowerwould be the Government of Uruguay, with the Office of Planning and Budgeting(OPP) as the executing agency. The latter's Executive Committee for State Reform would serve as the project coordinating unit, which will be considerably strengthened for project implementation and supervision. The Government has appointed three full time members to it and is in the process of hiring additional staff. The total project cost is estimated at US$19 million equivalent, of which US$11 million equivalentwould be financedby the Bank, approximately US$2.4 million by JapaneseGrants (alreadyapproved), and the remainingUS$5.6 millionby the Government.Approximately 1,000 man-months of consultantswill be financedunder the Project, with Government counterparts estimated at 1,900 man-months.Taking account of previous experience in Uruguay, project completion has been prudently targetedat June 30, 1996, with the loan Closing Date of December 31, 1996 althoughwe anticipatethat the projectwill be completedearlier. Retroactive financingof US$1 millionfrom March 1, 1992would be providedto: (a) finance advisoryservices to assistthe Governmentin the privatizationof ANTEL and PFLUM;and (b) financeconsultants to developthe regulatoryframeworks for the telecommunications and aviation sectors. The amounts outstanding from advances of US$1.5 million under the Project Preparation Facility will be refinanced under the Loan. A Special Account for US$1 million will be established in the Central - 4 - Bank to facilitatepayments under the Loan. Methods of procurementand disbursementsare shownin ScheduleB. A SupplementaryLoan Data Sheetand the Status of Bank Group Operationsin Uruguayare given in SchedulesC and D respectively. 9. DetailedTerms of Reference(TOR) for all majoractivities and generalTORs for all othor activities have been agreed during appraisal; theae TORs are availablein the projectfile. Issuesdealing with onvironmentalaspects have been includedin the terms of referenceaddressing the designof policiesand regulationsfor esah sector. Laborredimensioning schemes for PLUMAand ANP are included in the respectiveTORs for reform/privatizationof those PEs. Procurement of goods and selection of consultants will follow Bank guidelines. Separate accounts will be kept for all expenditures made under the project. The accountsand statementsof expenditureswill be auditedeach year by auditors acceptableto the Bank, in accordancewith the Bank'sguidelines. 10. ProiectSustainabilitv. The projectdesign supports the Government'sPR reformprogram. The likelihoodof successhas been enhancedby the President's personal success in winning bipartisan support for Congressional approval of the : ana Port reform la*w.. There io nonetheless the possibility that the Public Enterprise ~t or its provisions regarding the privatization of ANITELmay be repoaledthrough a public referendum.An initialattempt to requiresuch a referendumwas unsuccessful.A secondand finalopportunity has been grantedfor October1, 1992, which if successful,would lead to a referendumwithin 90 to 120 days of suchdate. The referendumwould effectively determine whether parts or all of the PublicEnterprise Law would be repealed.The authoritiesconsider that,at most,the referendumwould concernonly the privatizationof ANTEL,and thatthere is littlepossibility of any referendumeventuating. Therefore, with the provisionof appropriatesafeguards in the unlikelyevent that the law is overturned(ref. para. 12),we proposeto proceedin orderto promptlystrengthen the Government'scapacity to undertake reforms. The proposedtechnical and financial assistancevould build the requiredsupporting policy framework, and help ensure effectivemanagement of the reform/privatizationprocess. The preparationsfor the sale of AUNTLand PLUNAhave effectively begun. The Government has appointed a Port Reform Advisory Comnission which is implementing the Port Reform Law. 11. LessonsFrom Previous Bank Involvement.Desigr. of the projectincorporates the followinglessons (see Annex 6)s (a) the needto ensurean appropriatepolicy frameworkand a thoroughimplementation and supervisionprocess; (b) focus on specificenterprises under committedmanagement instead of an across-the-board strategy;and (c) the need to have well definedcomponents, in order to avoid major departuresfrom projectdesign.

12. Issuesand Actions. Duringnegotiations, agreements were reached with the Government on time-boundperformance criteria for implementingeach activity, (ref., Attachment 1, Annex 1); and that -he project will be carried out substantially in accordance with main compmaents of the timetable(Annex 1, section D). Failure to implement appropriately project componentsdue to suspension, abrogation, or amendments of the PR, Port Laws, etc., may result in the Bank's exercising its right (under the Loan Agreement) to suspend the pertinent loan funds, and thus exclude from the project the affected components. The project coordinating unit established in OPP has been appropriately staffed to carry-on the reform; it was agreed during negotiations that OPP will onsult periodically with the Bank on the staffing of such unit. It was also agreed that the Port Reform Advisory Coumission should function in a mamer satisfactory to the Bank. As a condition for effectivmese,a system will be establisbedin OPP to ensure that ths project coordinating unit is kept fully informed. Normal reporting requirements (semiannual reports) including a mid-term review, and annual audits of Project accounts are also covenanted. The draft Loan Agreement providesas well for consultationwith the Bank on the resultof studiesto be carriedout under the project. 13. Benefits.The projectis expectedto contributeto economicgrowth through enhancingproductivity gains that would enhanceUruguay's competitiveness in the production of goods and services. Specifically,the projectwould increase private participation ao as to: (a) improve and modernize teleco=unuications under a new policy framevork; (b) improve air transport services and eliminate the fiscalpressure of PLURA'sloesse; (c) reducedeterrents to international trade by improving port services; and (d) continue improvements in performance and ensure financing of capacity expansions in the power sector. 14. Rasks. Apart from the possiblereferendum discussed in para. 10, the major risks and the preventivemeasures that will be taken are: (a) chanaesin gubDroiectdesian andtor delays in imnlementation- this risk will be reduced throughGovernment's continued actions to buildconsensus among political parties and their constituents;in some cases if unsurmountableproblems arise, a subprojectmay have to be excluded; (b) risks of a technicalnature - internationalexpertise and in-houseassistance provided by the projectwould min4imsethese risks; (c) administrativedeficienciea in execution- close supervisionconcerning progress achieved and subprojectcosts would ensure successfulimplementation; and (d)modest interest by votentialinve tors due to limitedand uncertainmarkets - the designand implemeatationof each project component, including international promotion,would address this issue to maximize possibilitiesof success. 15. Recomendatio I am satisfiedthat the proposedloan would complywith the Articlesof Agreementof the Bank, and I recommendthat the Executive Directorsapprove it.

Lewis T. Preston President

Attacbments August11, 1992 Washington,D.C. -6- 8CEDULB A Page 1 of 3

_PIICING US$'000 PROJBCTCOkPONES Japanese covernm Total Grants ant

1. 8trengthen Privatization 663 600 1,263 Unit 2. Promotion TrIps and 605 45 650 seminars 8UBTOTAL 1,266 0 645 1,913

A.T.0U1UUG1W ______, ___, 1. Diagnosis and Strategic 700 | 100 800 Plan______2. Design of Regulatory 345 655 1,000 2,000 Framework ___ I_ . _ B. AVYIhON 1. Development of NeW 500 200 700 Aviation Policies C. POaTM 1. U plentation of New 900 | 400 1,300 RerulatoryFramework J D. PO___ 1. Developmaet of 100 300 110 510 Beapitosy Yrsmewosk _ 2. Batablisbmat of 100 100 200 Begulatory Comission SUBTOTAL 2,645 955 1,910 5,510

1. Privatization of AN= 1,600 905 300 2,805 B. AV=011 1. lnaneal Analyslsof j 114 ,0 184

2. Privatationlof PLl A 1,023 160 1,183 -7- SVMUDUIA

fROJRCTCOCPOURRT Book Japanese GoveruM T?tal

0. PamTS 2_of_3

1. AdiitaieReform of 1,300 000 2,100 Port RelatedTraining Mgend.l___s_~ ~ -~ Gas- - 2. Organiaation of Port 700 S00 1,200 Serve nd Operatios - - - S. Other Assistavce and 4 0 650

¢. Pam

1. Privatizatlon of 1 400 2200 600 Sorected UT4 Powerf

SUBTOTAL 5,537 j 905 2,280 8,722

1. Reform of Ag Pictltural 600 506 344 1,450 Extension aAd Othror Sertvices

2. Diagnostic==~a- of A4C0P's 350 200 550 Cement aind Alcohol Plants 3. Otber 600 255 855 SUBTOTAL 1,550 506 799 285 TOTML 11,000 2S30 5,634 19,000 -8- SCOBRDJLUA PaR0 3 of 3

URU_U_T- P,RL

BAN 1,000 10,000 11,000 JAPARESLGRANT 200 2,166 2,366

__VZR_ _5,634 T -- 5,634

TOTAL 6,834 12,166 19,000 Page l pf 1

S~~~~~~~~VIA - PL

___ i- - -- ~~~~~~. ,... w_... Inim TL TOTAL o

1. Consultant Service. and 13,336A -_ 13,336 TrainnLg (10,970) (10,970)

2. Aqisent and 3 0k 30 Eaterial 9(30) (30) 3, Local Inputs -6_ ,3451 5,634 TOTAL 13,366 5,634 19,000 (11,000) (11,000) Notes me parethesis are the reIpectiVe mounts fin aced by the Bank.

- Coftinaced uader the Japanes Grant Facility. Administered by the Bank; procured in acordance with the World Bank Guidellne.: Use of Consultants by World lank Borroweroaad by the World Bank as Executig Agency (August 1981). h/ Local or Iaternational shopping under the Bank May 1992 Guidelines. si The Governmont's contribution of approximtely US$5.6 millon consists largely of counterpart staff, local consultants, computer and their maintenance, secretarial services and supplles.

i _ ' 1~~~~~~~~~~~~~~~~N

1.* Consultants Services and 9,470 100S net of taxes

2. Equipment and Naterials 30 1001 foreign expen- dituras atd 85X local .,_____nditures ______

3. Refunding of PPP 1,500 TOTAL , , ,,, , ...... _11,000

1193 1194 M15 1S96

AIUAL_ 4,000 3,000 2,500 1,500

CUUL&VTIV 4,000 7,000 9,500 11*000 - 10 - eson* c

' UR~~vUCUo- PRRL

(a) Time tWi0 to IpreotQtERta"n

WIbt eprdby: CvrmndtbaRnk assistanCe (ct First Zsaikmisojoks October 1990 (dt Wpralsallisoto dbprturet LWy 1992 (a) Noeotlatlonalt July 1992 _____ (f) Board preoentatlovt September1992 ( 8) Planseddate of effectivweaess October1992 (b) Llst of s.elevnatPCRs and PPABess Not a!plicable - 11 - SCHEDULED Pea. 1 of 1

URUGUAY

LOAN FISCAL | BOtROWER PURPOSE AMOUNT LESS UNDISBURSED NO. YEAR CANCELLATIONS

Fuly disbursed bum (14) 372.1

2622 1987 Adrnn. Ntckwn de Usina PoWe Sector Rehab. 45.2 41.83 2802 1987 AMm. Nao. Corubus. Alaoho Refinery Modwnban 24.4 18.34 2921 1988 Pep. Orient del Uugway Watw Supply Rehab. 22.3 14.68 3021 1989 Rep. Odentd del Uuguay Tasport I 80.8 68.36 3081 1980 Rep. Oriental d Uuguay 2nd Stuctura Adjust. 140.0 50.19 3082 1989 Rep. Orintal del Uruguay 2nd Technical Assist. 6.5 4.02 3131 1990 Rep. Odit del Uruuay 2nd Agrdcultral ev. 86.0 35.76 3221 1990 Admin. Naclbn de Usna Power ModemIzation 62.5 30.61 3323 1991 Rep. Odntal del Uruguay Debt & Debt Serv. Reduct. 65.0 86.004

TOTAL mm

of whkh has been repaid 206.1

Total now outstandIng 677.7

Anmunt Sold 0.1 of which has boon repaid 0.1

Tota now held by Bank 677.8

Total Undlsbused 327.38

^FU amount dIbed on Jul 27. 1092. - 12-

Page I of 14

T6CMIIICA AM

A. BACKGROUND

Overview of Public Enterprises.

1.1 Uruguay has a long tradition of extensiveGovernment interventionin the economy. Generally this has taken the form of laws and regulations affecting productive and commercial activities,with limited direct state ownership and management of these activities eompared to many other countries. Uruguay possesses only seven Pis and a few financialinstitutions, including Banco de la Republica Oriental del Uruguay (BROU),Banco Hipotecariodel Uruguay (BHU), and Banco de Segurosdel Estedo. The state also administersa small gas distribution company (Compafia del Gas), acquired as a consequenceof the financial failure of the private owners. The non-financialPEs operate in the followingsectors: (a) transnort--airline(PLUNA), port system (ANP), and railways (AFE); (b) enerZX--thepower company (UTE) and the petroleum, alcohol, and cement company (ANCAP);(c) telecommunications--thetelephone and telegraphcompany (ANTEL); and (d) the water and sewerage company (OSE) (ref. Table 1).

1.2 The Government of Uruguay decided to increase the state's role in infrastructureand services to promote economic developmentin the early 19008. The result was the evolution of several large PEs. In 1909, the Port Authority (iANP)was created to develop and operate the Port of . In 1912 the nationalpower company (UTE) was set up to promote industrialdevelopment through cheaper substitutes for imported petroleum products. UTE's activities were expanded in 1931 to include telecommunications. Under import substitution policies, a holding company (ANCAP)was established in 1931 for the national administrationof combustibles,alcohol, and Portland cement. Its establishment was coincident with the promulgation of regulations that still govern the caparticipationof political parties in the boards of PEs. The Government nationalizedBritish companiesin 1948 in exchange for large financialdeposits in London that could not be repatriatedafter the Second World War, thus creating the national railways (APE) and the water and sewerage company (OSE). In 1952, in the aftermath of the bankruptcy of the mixed state-private airline, the Government assumed the private sector share, establishingthe national airline (PLUH). Although the Government followed a protectionistcourse until 1973, there were no additional Pgs established. Subsequently,the only major change has been the separationof telecommunicationsfrom power operationsunder UTE in 1974, ihich led to the creation of the national telecommunicationcompany (ANTEL). In 1985, the first post-militaryadministration initiated a series of measures to improve public sector efficiency, in which the Bank was partly involved, eliminating railway passenger services, implementing performance contractsfor key PUs, and providingfor automaticmonthly clearancefor payments of arrears among PUs.

Characteristicsof PRs.

2.1 Orgnzatio PEs in Uruguay are supervised by Boards of Directors appointedby the Executive branch followingapproval by Congress. The Chairman of the Board is also the Chief Executive Officer and usually represents the - 13 - page ruling party. In practice,the Chairmanholds most of the decisionmaking authority,with the generalmanager mainly deciding administrative matters. The politicalnature of the Board of Directors impairs its coemercial orientation, whilethe rulesand regulationsto whichPrs are subject--immobilityof staff and procurementTestrictions--reduce flexibility in decisionmakingand lead to operationalinefficiencies. There are minor differences in legalclassifications amongPgs, which accordingto the Constitutioncan be eitherautonomous entities or decentralizedservices. However, independentof their legal status, significantdifferences between P8s originatein the Constitutionor sectorlaws concerning their monopoly status, the possibility of providing concessions,or the possibilityof associatingwith privatecapital, among others. 2.2 Cgnrol. The followingministries control the respectivePEs: (a)Ministry of Defense--ANTELI(b) Ministry of Transportand PublicWorks--PLUNA, ANP, 088, and APE; and (c)Ministry of Industry,Energy and Mines--UT!and ANCAP. PEs are also subjectto strongcontrols from other governmentbodies. The Officeof Planningand Budgeting(OPP) approves annual budgets for operatingand investment expendituresand thoseprices/tariffs considered to have a major socialimpact. The State Auditor (Tribunalde Cuentas)is responsiblefor ensuringthat PEs complywith budget and procurementlaws. The Ministryof Economyauthorizes investmentprograms relative to externalindebtedness implications. The Office of CivilService governs their personnel policies. 2.3 Bmplosment. The public sectoris an importantsource of employmentin Uruguay,accounting for 222 of totalemployment at end-1988.Total public sector employmentincreased from 213,000 employees in 1969to 264,000employees in 1990. However, this increaseoccurred at the centralgovernment level, while PR employmentdecreased from 55,000 to 42,000employees during that period (fig. 2.1). The decreasein PR employmentwas the resultof the eliminationof APE's passengerservice (1988), and the reorganizationsof ANP and ANCAP,the latter of which included franchisingits retail services. However, since the Constitutiondoes not allow the firing of civil servants (includingPR personnel),most of thesereductions resulted in reassignmentswithin the Central Governmentand (to a lesserextent) to other P8s. An additional10% reduction in PU employmentoccurred during early 1991 followinga voluntaryretirement programenacted by the Governmentfor all publicsector employees. 2.4 1P FinancialImnact. In 1991,the revenuesof non-financialPBs were US$1.7 billion,with tax paymentsat US$319million and governmenttransfers US$28.7 million. These data obscuresignificant differences among the Pgs. ANCAP provided the governmentUS$285.1 million in taxes (mainly from petroleum products),representing 112 of governmentrevenues. Government transfers to AUE were US$21.6million (2372 of APE'srevenues) and to PLUNA US$7.1million (132 of PLURA's revenues). The Treasury serviced the external debt of UTZ and PLUNA withoutcontributions from thesePUs. The PUs representa relativelylow share of public sectorexternal debt: in 1980, US$377million, which increasedto US$732million by 1990,or 161 of totalexternal indebtedness. UTZ's debt alone accountedfor 802 of total PR externaldebt. By contrast,PR investments decllned after the crisis of 1982 from an annual average of US$220 million in 1980-82 to an annual average of US$125 million in 1983-90 (fig. 2.2). During the latterperiod, most PE Investment took place in ANTEL(382) and UTZ (411). - 14-

Page3 o 14 2.5 Telecommunicaions Servlices (ANTEL). The telecommunications sector ha4been the most dynamicin Uruguay's economy, reaching growth rates of 7.5S a yeas. However, ANTEL's monopoly,which is not commerciallyoriented and operatesunder a poorly defined regulatorysystem, has the following technical and managerial shortcomings:(a) unmet demand is estimated at over 100,000 backlogged lines and excessive installation delays (3 yearsor more); (b) poor servicequality, with trouble rates four to five times above world standards; (c) antiquated technology,with a high number of manualswitches and few enhancedservices; (d) lack of specializedbusiness-customer attention; and (e) high international tariffs(about 501 higherthan the main countriescommunicating with Uruguay).

2.6 The NationalAirlines (PLUNk). PLUNk transportsapproximately 320,000 passengersa year, with an annualgross incomeof about US$70 million. PLUNA operatesits regionalflights with three Boeing 737s covering multiple daily flightsto BuenosAires (the"air bridge" it shareswith AerolineasArgentina.). Daily flights also go to Brazil, seasonal flights fromBuenos Aires to Puntadel Sote, and occasional flights to Asuncion and Santiago; it is temporarily operating its Madrid flights with a leased Boeing 707. Domestic flights are in the hands of small private companies and of TAMU,which is operated by the air force. In the cargomarket, PLUNk competes with privateUruguayan air transport companiessuch as AerolineasUruguayas, Aero Sur, and Aero Uruguay. Becauseof an inappropriateroute networkand inadequatefleet planning,as well as poor management,PLUNA's operationsare unprofitable,requiring government transfers of aboutUS$7 milliona year,and face difficultprospects in view of increased worldwidecompetition. Its long-termdebt of about US$38 millionwas partly consolidatedin 1991with Governmentaid. PLUNA'spoor performancealso stems from politicalinterference in routinedecisionmaking, lack of incentivesfor managersto improveperformance, and no clearmarketing strategy. 2.7 The Port System. ANP is responsiblefor administeringand operatingall commercialports in Uruguay.Montevideo, the country'sbest deepwater port,is by far the most important,handling 70S of total exportand importtraffic by volume. In spite of its strongnatural advantages, productivity at the Port of Montevideois nearlythe lowestin the region,with cargoperformance (net time shipsload and unload)602 that of otherports, overall hourly productivity about 62S that of developingcountries, and idle time of ships alongsideberths 601 versus301 for the world average. A majorreason for the port'sunsatisfactory performanceis the stevedoring:a politicallystrong union (NationalStevedoring ServicesAdministration) (ANSE) is the sole providerof stevedoringservices on board ships, while on-shorecargo handling servicesare providedby AQP's workers. ANSI negotiatesworking conditions and salarieswith the Ministryof Labor without the participationof ANP or ship agents,resulting in marked differencesvith those of ANP's workers,making coordinationdifficult, and Impedingproductivity. To avoid delays and obtain the requiredservices, shippingagents and otherport usersmust frequentlyresort to extrapayments. Otheroperational deficiencies arise from inappropriate port operational planning and unsuitable cargo-handlingmethods, coupled with physical constraints (difficultaccess to the containerterminal, inner trafficproblems, obsolete sheds,narrow quay aprons,and poor equipmentmaintenance). A Bank studyon trade expansion prospectsfor Uruguayfound that most significantbarriers to internationalprice disciplineare due to administrativeimport deterrents and - 15 -

Page

exorbitant landing costs resulting from inefficient port operational systems and facilities. The Bsank's Trausport Sector Project (3021-UR) provides assistance to overcome some aspects of these problems, which the proposed project would supplement.

2.8 Water anW Sewerage Services (OS!). OSE plan., constructs,and operatesall urban and rural water supply and sewer systems in Uruguay (except for the Montevideo sewerage system controlled by the Municipality), and is in practice the major policymakerfor the sector,which is officially the responsibility of the Ministry of Transport and Public Works. In 1986, 83 percent of the urban and 27 percent of the rural population had domesticwater connectionsathe rest of the population had access to alternative systems. At present, coverage and service quality are sufficient, but the infrastructure is deterioratingdue to insufficient maintenance, and water losses and unbilledwater are high and still growing (average of 20 percent of supply in 1952 to 40 percent in 1987). These are being remedied with the help of the Water Supply Rehabilitationloan (2921- UR). These problems, however, also reflect OS!'s non-commercialorientations according to company statutes, all profits must be distributedto the workers; staff selection is done by a Work AllocationCommission; promotions are based on seniority,with layoffs, as in other PEs, practicallyimpossible.

2.9 The National Railways (APE). In 1988, APE had an 8X share of domestic freight transportation(ton/km) and a 52 share of non-urban passenger traffic (passengerlkm). APE's services underwent a drastic transformation at the beginning of that year when the Government implemented a far-reaching restructuring program aimed at reducing subsidies (an averageUS$20 million per year for current expenditures) and improving freight services with commercial potential. The program accomplishedthe followingt (a) restructuringof APE as a commerciallyoriented enterprise, including the developmentof a contractplan and an incentive system for personnels (b) eliminatingall passenger services (330 million passenger/kilometersper year); (c) reduction of personnel from 9,109 employeesto 4,226; (d) privatizationof ancillaryservices such as parcel services, medical services for railway employees, and the main station restaurant; and (e) deregulation of freight railway tariffs. Government subsidiesfor current expendituresare being significantlyreduced over a period of time necessary to disengage effectively personnel transferred to other entities: in 1991 these subsidies decreased to US$17 million, and by 1994 a further decrease to US$7.1 million is expected. However, subsidies for AFE's investmentswill be maintained at US$4-5 million.

2.10 The Zlectric Power Comnan3 (UTE!. UTZ was establishedin 1912 as the sole entity responsiblefor power generation,transmission, and retail distribution of electricityin the country, as well as for telecommunicationsservices. As of 1991, total installedcapacity in Uruguay amountedto 1,708 MW, of which 1,196 MW (70 percent) was hydro, and 512 MW (30 percent) conventionalthermal plants. Installatiomsowned by private industry to meet its own needs are estimated at 40MN. Power supply has been increasingduring the last decade with the startup of two large hydroprojectesSalto Grande (1,890 MW, binationalwith Argentina) and El Palmar (now named Constitucift, 330MW). The installationof two gas turbines (115 MW each) at the end of 1991, reduced the risk of unmet demand in the event of droughts,from over 30 percent of demand to about 92. In the 1980., - 16 - AN 1 PagSeof 14 to lessenreliance on importedoil products,UT! embarkedon a programto develop hydroprojectsby undertakingsignificant borrowing, vith subsequentinvestments reaching4.7 percent of GDP; however,by th, end of the decade, its hith indebtednessprecipitated a declinein investmentlevels to only 3.1 percentof GDP. The volumeof debt and its disproportionateshort-term maturity structure, coupledwith a severedrought which led to substantialincreases in fuel oil purchases,also droveUTE into financialarrears with the CentralBank in 1989, which was finallyrepaid out of an energyfund financedfrom taxes on gasoline and electricity. Additional increasesin power supply could arise from improvementsin efficiency.Currently, the totalelectricity loss levelof UTE power is high (21 percent) due both to old installationsand inadequate commercialand customer-relatedprocedures. Losses are expectedto be reduced to 152 by 1996 as a resultof an InstitutionalDevelopment Program to improve informationas well as billing and collectionsystems with a Spanishpower utility, and other segmentsof a Bank-supportedprogram to improve UTE's managerialcapabilities (Loans 2622 and 3221-UR). 2.11 The Alcohol.Cement. and PetroleumState Entitv (ANCAP). ANCAP has the monopolyfor importing,exporting, refining, and sellingcrude oil and its products.It is also responsiblefor producingand sellingalcoholic beverages and industrialalcohols, Portland cement, and refinedsugar. Its most important activityis oil refining(over 90 percentof the company'sturnover). ANCAP collectsabout 20 percentof indirecttaxes for the Governmentthrough highly taxed gasolineand otherpetroleum products. Its secondmost importantactivity is cementproduction, where it enjoysa monopolyon publicsector sales and an overallmarket share of about 50 percent. Some importantproblems in the petroleumsector are: (a)ANEAP servesas both producerand de factoregulator; (b)differential taxation among petroleum products creates market inefficiencies; and (c) ANCAP has no incentivesto improveefficiency since any profitsare immediately recovered by the Government. The positionof ANCAP is expectedto change in the wake of Argentina''srecent petroleumand gas liberalization; moreover,in 1995 the establishmentof NERCOSUR is expectedto hasten the eliminationof monopoliesin the region.

B. REFORM PROGRAM 3.1 Stratety. The LacalleGovernment decided to broadenthe reformof the PE sectorinitiated by its predecessor,the objectiveof whichwas to createa more competitiveenviroment in Uruguay,reducing the role of inefficientPEs, and providingbroader opportunities for privateenterprises to investand operatein activitiespreviously unavailable to them. The Government'sstrategy is to: (a) establishappropriate sector policies and regulations,independent of parastatal control,to fosterthe developmentof competitiveand efficientoperations; (b) reduce the role of the public sector in productiveactivities through privatizationof PEs and eliminationof state monopolies;and (c) createand promoteprivate participation in all sectorsof the economy. Its initialphase, to be supportedunder the proposedproject, aims at creatingappropriate sector regulationsin telecommunications,air transport, port operations,and electricity,as well as securingprivate participation in these sectors.To achieve these objectives, the Government obtained congressional approval - 17- Page 6 of 14 (September1991) of a law that allows:(a) sale of real estateassets as well as contractingout and licensingof servicesfor all PEfu (b) participationof privatecapital in the state airline(PLUM) and the telecommunicationscompany (ANTSL) and (c) privateparticipation in futurepower systemexpansion within the UTE network (UTE'sstatutes already permitted the sale of existingpower generationplsnts). With regardtc the port sector,the Governmentobtained congressionalapproval of a new PortLaw (April1992), that allows private sector participationin the provisionof port servicesand deregulatesstevedoring services.

3 .2I nstitutionalSetu. The Governmenthas createdan ExecutiveCommittee (EC),which reportsto the Directorof OPP, with the mandateto providethe guidelinesfor, and proceed with implementationof the PE law. The EC participatesin working groups for each PE/sector, which include PE representativesand ministry officers, that are to develop detailed reform/privatizationplans for the EC's finalapproval.

3.3 Estafblishmentof New ReWulatory Frameworks. At present, Pgs are dominant in sectorsthat are eithernatural monopolies or possessa hi8h degreeof market concentration.Policy-making and the determinationof regulationsfor these sectorshave been sharedby Pgs and the respectivesectoral ministries, with the formernot clearlydistinguishing between their roles as producersversus their participationin policy setting. As part of its PS reform program, the Governmenthas decidedto separatethese functions,establishing appropriate regulatory frameworks,leading to independentpolicy-making and to the provision of goods and servicesunder efficientconditions (see descriptionbelow under each sector). In addition, this should serve to facilitate the entry of private sector participants. 3.4 TelecommunicatiMns. The objectives of telecommunications reform are to allow for the modernization of the sector to emphasize Uruguay's role as a regional financial center, to improve quality of services, and to expand rapidly the availability of telephone services in a cost-effective manmer. As detailed in Annex 2, these objectives encompass developing Montevideo as the international telecommunications gateway for the "Southern Cone" states, introducing greater competition in services (with full competition by year 2000) and expanding telephone penetration internally. To achieve these objectives, the Government strategy is tot (a) create a new telecommunications company for domestic and international telephone services, with ANTEL contributing a minimum 40 percent of the shares, private investors 52 percent of the shares--of which at least 3 percent must be national--and ANTEL'sworkers with up to 8 percent of the shares; (b) open value-added services to competition; and (c) establish an appropriate regulatory framework and a regulatory authority to (i) ensure the new meets its service obligations, (ii) approve tariffs for the new entity, and (iii) ensure equal access to all operators in those areas open to competition. 3.5 A4ljjjns. The objectives of the privatization of PLUNkare to stimulate private investment and competition, and to increase the efficiency of airline services in Uruguay (see Annex 31. A Presidential Decree issued on December 31, 1991, established that a new company will be created of which PLUNAwill hold - 18 - Page 7 of 14 sharesof 49 percent(including employee shares of up to 8X) and privatecapital of 51 percent. The privateconsortium should include Uruguayan investorsto ensuremajority participation of local capital(including the State'sshare). The private investorswill be responsiblefor companymanagement, while PLUNA's directors must approve company borrowing, sale of assets, and capital increases. To attractprivate interest In the creationof the new company,it will be given firstoption during the first 10 yearsfor new authorizationsor concessionsfor air transportrights to which Uruguayis entitled.Simultaneously, an in-depth reviewof Uruguay'sAir TransportCode is being consideredby the Government, which will be carriedon under the proposedproject in conjunctionwith the planned sale of PLUNA,and the establishmentof the regulatoryagency. The objectives of the new regulatory framework will be to eliminate PLURAL'sspecial advantages over time and stimulate private investment and competition through a clear definition of air transport policy and the role of the regulatory agency, simplificationof procedures for the creation of new airlines, and designand implementationof a transparent and flexible procedure for route designation. 3.6 Port System. The objectiveof the new PortLaw is to providemore efficient port servicesat competitivecosts so as to reducetrade barriers. The plan for the Port of Montevideois to: (a) assign port authorityand administration functionsto ANP; (b) assigndirection, coordination, monitoring and supervision of port operationsand relatedactivities to the MontevideoPort Captaincy establishedunder the Law; (c)transfer port services to private companies, under free entry conditions,allowing them to employtheir own equipmentand workers; (d)deregulate the restrictivestevedoring agency and uuifyon-board and on-shore cargo handling labor, leaving their organizationand control to private employers;(e) allow unrestricted transit of cargowithin the port of Montevideo, without customs interference;and (f) divest/privatizeANP's unessential/ unprofitablebusinesses. Similar arrangements will be made at otherports, which will be under the directjurisdiction of MTOP (seeAnnex 4).

3.7 The ElectricPower Sector. The Government'sobjective is to promote private investments in new power generationplants, with the Governmentincreasingly playing a subsidiary role, while strengthening regulatory functions. It intends to privatizeUTIE's Constituci6n generation plant, and to allowthe privatesector to connect to UTIE's transmission and distribution lines. The Government intends to: (a) prepare and forward to Congress a new electricity law that removes from UTE all responsibilityfor policyformulation, energy planning, and regulatory functions;and (b) definea concession regime for the private sector, with serviceresponsibilities and rulesfor the calculationof electricitygeneration and distributionrates and their adjustments. Given the Government's support to the ongoing institutional improvement program being implemented by UTI, and its expectations that it would produce substantial benefits, it does not plan to carry out a comprehensive privatization program in tie near future (see Annex 5). 3.8 Other Reforms. The Governmentintends to carry out a series of other reforms and minor privatizations to complement its program. A modernization unit which was established in the Ministry of Agriculture (MGAP) has prepared a diagnosis of MGAP and an action plan for its redimensioning/streamlining includingdivestiture of extension services and restructuring of its main, essential functions. A series of small-scale privatizationsannounced in 19 - Page February1992 (localairports, hospital services, oil tankers,and the National StationeryRouse, etc.) are alsoon the Government'sagenda. The Governmentalso plansto preparestudies leading to the reformof othersectors, among which will be alcoholproduction and cement.

C. PROJECTDESCRIPTION0 (a) General PE Framework

4.1 StrenItheninuthe StateReform Executive Committee. The Executive Committee would constitute the project coordinating unit with the help of technical and administrativestaff to facilitatethe design, administration, and implementation of the PE reformprocess. The ExecutiveCommittee has two distinctroles: (i) to participatein the design and implementation of the reform activities at the institutionaland enterpriselevel; and (ii) to manage the financingand participatein the contractingof consultantsand implementationof projects under the program. As part of thesefunctions, the ExecutiveCo=nittee would oversee processing and expediting of the Project. For thesepurposes, the loan would financea team for about 135 staff-monthsover 3.5 years,extending its initialactivities under a ProjectPreparation Facility (PPP). Totalcost would be US$663,000.The technicalstaff would be hired accordingto detailedterms of referencewith clearlydefined outputs and timetable.

4.2 &arketin Camnaians and Seminars. For successful privatization/ restructuringof Pfs, the Government needs to: (i) develop marketing campaigns that will disseminate its privatization progrsm through major financial centers; and (ii) obtain first-hand knowledge from similar privatization experiences in other countries through visits and attendance at seminars. The project will provide US$605,000 for these activities. (b) TelecomiusaniLtions

4.3 Diagnosis and Strategic Plannins for the TelecommunicationSector. A diagnosis of the telecommunications sector and recommendations for sector restructuring hsve already been carried out under PPF advances. The study covered: (i) an analysis of the sector, including ANTEL's financial, legal, technical, and organizational aspects; (b) the market demand and pricing environment; (c) a market valuation of ANTEL; (d) options for sector restructuring; (e) recommendations for ANTEL'sprivatization; and (f) a proposal for a new legal and regulatory framework (US$700,000).

4.4 Design of Reaulations for Telecommunications. The loan will finance consultants to assist in drafting regulations and creating and developing the telecommunications regulatory authority (US$Imillion; including US$655,000 under the Japanese Grant Facility).

/ Activities under paragraphs 4.3 and 4.7 were financed under the PPF advances. - 20 -

Page9 of 14 4.5 Privatizationof ANMEL. Two types of consultantsare requiredto ensure the partial privatizationof ANTEL. These ares Cl) financial advisors (investmentbank) and otherexperts to designthe s8lesplan, promote the sale among potentialbuyers, implement the sale, and close the transaction. The commitmentfee to be paid from the loan will be US$1.3millionl a successfee (fromwhich the commitmentfee would be deducted)will be paid from proceedsof the saleg and (ii) legaladvisors to assistthe Governmentin draftingtender documents,contracts, regulations, and provision of legal advice to the Governmentin the closing of the transaction(US$1.205 million; of which US$905,000will be paidunder the JapaneseGrant Fund). For bettercoordination, the legal advisorswill also assist in the establishmentof the Regulatory Authority.

(C) Airlile8 4.6 PolilcyFramework for Aviation. To create an appropriateframework for PLUNA's privatizationsand at the same time the appropriatepolicies for stimulatingcompetition, a consultingcompany will be requiredto revisethe Aviation Code and simplifyprocedures for the creation of new companies (US$500,000). 4.7 FinancialAnalysis of PLUNA. A financialanalysis of PLUNA is neededto providethe Governmentwith a basis for preparingits privatization.It would include:(i) preparation of auditedfinascial statements for the period1989-91; (ii) determinationof PLUNA'smarket value and valuationof differentroutes; (iii)valuation of fixed assets;and (iv) simulationstudies of the company's marketvalue at differentdebt levels(US$114,000; under implementation with PPF financing). 4.8 Privatizationof PLUNA. Two kindsof consultantswill be required:(i) a financialadvisor to assistin preparingbidding documents, contacting potential buyers,implementing the sale, and closingthe contract(US$200,000); and (ii) legal advisorsto review,the work undertakenby PLURA'sLegal Departmentto facilitateprivatization (US$823,000; of which US$447,450is alreadybeing financedunder the PPF,with the remainderunder retroactivefinancing from the proposedloan). (d) Ports

4.9 Implementstion of New Regulatorv Framework. Consultants will be hired to assist the Port Reform Advisory Commission to: (i) prepare the regulatory framework for the whole port system; (ii) define technical and economic requirements for private enterprisesinterested in obtaining concessions, permits,authorizations and contractsto provideport services;(iii) analyze the viability of transferring ANP's ship repair and port equipmentrepair and maintenancefacilities to theprivate sector; (iv) analyzeoptions to administer, operate,and maintainthe Uruguayandredging fleet; (v) preparetechnical and administrative guidelines for port administration and captaincies, in accordance with the new port model; and (vi) monitor all other technical assistance components(US$900,000). -21- Page 10 of 14 4.10 AdministratlveReform. Mnasgemontconsult4nts will be hiredto design and lmplementthe administrativestructure and functionalorganization of ANP,MTOP's Port Directorate,Moutevideo Port Captaincy,and ANSE in accordancewith the requirementsof the Port Law and the new port model (US$1.3million). 4.11 ReorU&nizationof PortServices and Qperations.Port operations consultants will be hired tot (i) reviewand optimizecargo-handling methods to be used by privateoperators and ARPI/TOP;and (ii)develop operational and monitoringnorm and proceduresto conduct,coordinate and superviseport operationsand port- relatedactivities (US$700,000). 4.12 Other Assistance. It will includes(i) fundingfor specificadvisory servicesthat may be requiredfor divestitureof ANP's non-commercialport activities(US$200,000); and (ii) financingof seminarsand practicaltraining for staff of the new port captainciesto improve their skills to direct, coordinate,and superviseport operationsand relatedactivities (US$200,000).

(e) Poway 4.13 Develoomentof ResulatorvPramework for the Power Subsector. Assistance would be requiredtot (i) draftregulations, develop functions and organization of the regulatoryentity, and draft a new electricitylaw takinginto account futureprivate participation in powergeneration, transmission, and distribution; and (ii) definethe merhodologyand proposean actionplan to set electricity ratesbased on marginalcost criteria (US$400,000; including US$300,000 under the JapaneseGrant Facility). 4.14 etablishmentof a ReaulatorvCommission. The establishmentof the RegulatoryCommission requires mainly the implementationof a trainingprogram whichwould include:(i) training of governmentofficials that would be assigned regulatoryresponsibilities; (ii) seminarson powersector regulation and reform of the power sector;(iii) training for UTE's managementand high-levelstaff about implicationsof new law and regulations;and (iv)training equipment and materials. Total estimatedcost, including seminars and trainingequipment and materials,is US$100,000.

4.15 Priv&tizationof UTE'. Constitucionand Other SelectedPuwer Generation Plants. Assistancewill be providedfor the preparationof a detailedplan for privatizing/franchisingMi's Constituci6nand other selectedpower generation plantsincluding: (i) organizational, operational, and financialstructure; (ii) procedures for implementation;and (iii) assistance in implementingthe privatizationplan (US$400,000).

(f) Other Assistanem 4.16 Dvestiture /Modernization of MGAP'sServices. This component will provide support for privatizationand reorganizationactivities within MGAP, including the financingof : (i) a modernizationunit to carry-outthe reform; (ii) studies to determine options for MWAP's services concerningtheir privatization, transferenceto other entities, or closing down, followed by their implementations and (iii) development of an action plan for reorganization of - 22 - Page11 of14 MGAP after its redimensioning,which couldbe implementedunder a futurePublic SectorReform project, currently under preparation. US$600,000 would be financed under the loan, in additionto US$506,000which are being financedunder the JapaneseGrant Facility. 4.17 Dianoslic of ANCAP'sCemet andAlcohol Plants. Financing will be provided to preparediagnostics for ANCAP'scement and alcoholplants, leading to their sale to the privatesector and assistin implementingthe recommendations.The diagnosticswill covercompetitiveness of the plants,financial analysis, asset valuationand optionsfor privatization(US$350,000). 4.18 PeritheralPrivatizations. This componentwill be for assistanceto the Governmentin small scaleprlvatizations such as local airports,some hospital services,and the Government'sStationery House among others(US$600,000).

D. PROJECTADMINISTRATION AND IMPLEMENTATION 5.1 Prolect Organizationand Imnlementatgon. The Borrower will be the Governmentwith OPP as the ExecutingAgency. The Directorof OPP would be in charge of the administrationof the project. He will be assistedby the ExecutiveCommittee (described in paras. 3.2 and 4.1), which will enact and implementthe measuresrequired to reform/privatizethe PEs. OPP also will be in chargeof implementatingspecific project components in coordinationwith: (a) the sectoralMinistries for the developmentof sectorpolicies and regulations (i.e.,Ministry of Transportand PublicWorks, Ministry of Industry,Energy and Mines, and Ministryof Defense);and (b) the PR. for implementationof the restructuring/privatization programs. 5.2 Actiog Atrmad. Duringnegotiations, the Borroweragreed to consultwith the Bank on the staffingof the ProjectCoordinating Unit. It also agreedthat the Port ReformAdvisory Commission should function in a mannersatisfactory to the Bank. As a conditionof effectiveness,an informationsystem will be establishedin OPP to ensurethat the ProjectCoordinating Unit is fullyinformed on the statusof each activitybeing implementedunder the Project. Agreement was reachedwith theGovernment on performancecriteria with a detailedtimetable for implementingeach activity,according to Attachment1 to this annex,which will be used by OPP to produce semiannualreports on progress in Project implementation.The Projectwill be carriedout substantiallyin accordancewith the followingimplementation program for main activities:(a) biddingdocuments issuedfor the sale of ANTEL by end-December1992 with contractawarded by mid- 1993; (b) biddingdocuments issued for the sale of PLUNA by end-December1992; (c) draft of new aviationregulations prepared by mid-1993; (d) new port regulations prepared by end-1993, proposal for new port structureincluding options for non-core services presented by third quarter 1993, and overall design for the port system (ANP,MIOP and Port Captaincy) prepared by first quarter 1994; (e) draft of new regulatory system for the power sector presented by mid- 1993; (f) plan for privatizing selected UTE power generation plants prepared by mid-1994;and (g) diagnosticfor ANCAP'scement and alcoholplants prepared by third quarter1994. In addition,should the PublicEnterprise or Port Laws be smended,repealed, etc., in a mannerwhich would preclude fulfillment of project - 23 -

rage 12 a 1 objectives,it was agreedthat the Bank could limit the Government'saccess to loan proceeds pertinent to the componentsinvolved. Normal reporting requirementsincluding a mid-term review(June 1994)will be includedas loan covenants,along with provisionsfor consultationwith the Bank on the results of studies to be carriedout. 5.3 Procuremnat.Consultants employed under the Projectwill be retainedusing terms of referer.cepreviously agreed by the Bank, selectionprocedures in accordancewith the August1981 Bsnk Guidelineos, and underemployment conditions satisfactoryto the Bank. Unless the Bank otherwiseagrees, the selection procedureswill includethe use of shortlists of firmswith qualificationsand experiencefound satisfactory to the Bank,and a letterof invitationdescribing the selectionprocedure and the evaluationcriteria to be used,which shouldbe acceptableto the Bank. The procurementof contractsfor officeequipment and materialsvalued at US$30,000in aggregate,will be awardedon the basis of comparisonof price quotationsobtained from at least threeeligible suppliers under the Bank May 1992 Guidelines. 5.4 Proiect Costs. Financinaand Disbursements. Total project costs are estimatedat US$19million, of whichUS$12.2 million (641) represents the foreign exchangecosts. A loan of US$11million (57.91 of totalcosts) is proposed.The loanincludes US$9.47 million for consultantservices and trainingrelated to the institutional,regulatory, and privatizationtransaction components and the projectecooidiating unit, US$30,000for trainingequipment and materials,and US$1.5million to repay the PPF advances. US$2.4million of cofinancingare providedunder the JapaneseGrant Facility. The Government'scontribution is calculatedat US$5.6million (29.51 of total project costs),consisting of counterpartstaff, local consultants,office space, supplies,secretarial aervices,and vehicle operationto be provided in the differentproject components.Retroactive financing of US$1 millionfrom March 1, 1992 will be providedto: (a) pay the legaladvisors assisting in PLUNA'sprivatization; and (b) finance consultants to develop the regulatory frsmeworks for the telecoimnun=cationsand aviation sectors. To facilitatepayments under the loan, a specialaccount will be establishedin the CentralBank in the amountof US$1 million. The projectwill be completedby June 30, 1996,with the ClosingDate of the Loan December31, 1996. Disbursementsagainst contracts valued less than US$50,000would be made on the basis of statementsof expenditurescertified by OPP. All otherexpenditures would be fully documented. 5.5 Accounts and Audits. A separateaccount will be maintainedfor all expendituresunder the project. OPP will maintainrecords and accountsfor all project activities. The accountswill be audited each year by auditors acceptableto the Bank in accordancewith the Bank'sAuditing Guidelines. The auditingreports will be submittedto the Beankno lsterthan 4 monthsafter the close of its fiscalyear. - 24 - Page 1 of 14

Table 1

RUGIAY CHRTERISTIC8 OP PUBLIC ENTERPRISES- 1991

REVENUES 1 TAXES GOVERNfT 1 CAPITAL EHPLOYMENT I TRANSPERS I EXPENDITURES (US$ MILLION) (THOUSANDS) NATIONALAIRLINES PL 53.1 0.02 7.1 0.1 0.8

NATIONALPORTS AMP 55.9 O.7 _ 0.3 3.4 NATIONALRAILWAYS APE 9.1 . 21.6 1.2 3.8

POamR UTZ 403.6 - - 160.5 10.6

PETROLEUMAND CEMENT ANCAP 813.2 285.1 _ 11.5 5.1

TELECOMMUNICATIONS ANTEL 291.2 33.9 __ _ 76.9 7.6

SANITARYWORKS OSE 92.9 - _ 20.1 6.0

_T .L 1,719.0 1319.72 28.72 270.6 37.3

Table 2

URUGUAYPUBLIC ENTERPRISEEHPLOYMENT

______(THOUSANDS) - 1991 1 ~~~~~PERCENT 1973 | 1985 | 1990 1991 DISTRIBUTION 1. TRANSPORT 16.8 ] 14.5 9.7 8.0 21.4 -PLURA 0.8 0.8 _ 0.9 0.8 2.1

-ANP 7.6 4.7 4.1 3.4 9.1 -APE 8.4 9.0 4.7 3.8 10.2

2. ENERGy 22.4 18.1 17.3 15.7 42.1

-UTZ 11.0 11.1 11.4 10.6 28.4 -ANCAP j 11.4 7.0 5.9 5.1 13.7 3. TSLECONNMUNCATIONS 6.7 8.2 [ 8.1 7.6 20.4 -ANTEL 6.7 8.2 | 8.1 7.6 20.4 4. OT f 5.4 6.4 6.6 6.0 16.1 - -0SE 5.4 6.4 6.6 6.0 16.1 TOTAL 51.3 f 47.2 41.7 37.3 100.0 - 25 -

Pasg 14 of 14 Figure 1 URUGUAY - Pubtlc Sector Employment emloyment .000 300.

250 -

200 -1' ______

150-- - -

100 - - -

1985 1982 1985 1988 190 years

pEa non financial Provincial ovts. E3 Financial Institut. W Central covernment 3 Tobta

sources OPP

Figure 2 URUGUAY - Public Sector Investment

USS millions 800 700

600 C_

400

300

200

1982 1984 1986 1988 1990. Years

central covernment municipalities @ PEa mon-Financial Pinanqtal Institut. Total Public Sector sourcet OPP URUGUAY PUUC ENTERPRISEREFORM LOAN MATRIX OF PROJECTACTIITIE

MAIN OBJECTIVE PROJECTCOMPONENT ACTIVTIES EXPECTW OUPUTMrPACT TiMNG TARGETS _ _ _ l l~~~~~~~~~~~~~~~~~~~~~~~STARTIcWEnON

1. Strengthen 1. Conadwo for CommIiindIttOdettondoaoitttlI 1ovenwwWs uAdm1wtratliReetCnptnto adminar th PE r r mote. (a) Ssoam to desIM adminiterationalefnaia Febcnrwy 1992 PF. bthedowneet FUbSo E EwpriesE eestUS$0.60 nilon. program aneduo. Refo.. Program. lb) Adprtwilo for p the betwon GoDecnter 199. ard Sank. Comwf wi woc

Effbisent ad attendan at onn b d of n f ttb h prora eadkf. dr TORb.

2. Mexri scoe f 2. I _k" C snapto eatst poteta kvto 2. 20 SW PI*d of PEs. and seWninato i-n f trw exp_ne. (a) Roadsho Innin mntn rin fwbln D owrbw 1992. E cUwoWiO.805 nillon. oenwer aboutth PEnrnw prnW nd oppoesn for priat wbim_n. Decernbe 1994. (b) Vif fd at ne_ at wJeby Govemn and PE rpstatves Inolvod In PE reform.

Iceaed numbe of poteiad pivat Inwstors nmo effeatwPE re,m onPrs.

t . D4noSiN t1. Analze ANTEL nd t telecommunicationssector I. Taleonwtwiosta Sector and dlop proo"a for retructu . Stud covedng: (a) sector enalys; (b* marot JNaav 1991 (PPM. StnatAxe. C2: US4.? mllion. vlaion of ANTELJ(a) ption fow restdruorn (d) oommerdadon.efor ANTELCs priveizatios; end (ci proposal for new reuaoryo Decanter 1991. frerwwork.

Prvides soun bads for sectorstrategy. 2. Eotablish Effoodw 2. Designof--.-- foode 22. f_2 R"Mwdone for n_-oganizatn of reuay authort and trinino. Estashmnt of Reguatory Auoriy wi Aprl 1992 (fst phase Telooonwriunirtiones Seator Estiated cost US81 million(US80.345 millon under capabllity to deelop and bnw (a) reuatory under lon; US0.655 nmillionunder Jap s Gran Funds). polides; (b) pice, cost and finandial ases; (t) Japnes Grt. quality of sevc. investm t pmr a:mg Commio technicl stadards; and Id adminlstrat.. l"e en June 1993. iformaton system. iT: d9ff Ensure claw ftdbsand regAadontlto emrsu Doemb¢ 1995. oompedtivebehavio and co tplncewith serice obigionsof cono_ssnalesllces. URUGUAY PUBUCENERPRISE REFORM LOAN ______MATRIXOF PROJECT ACTIVITIES MAIN OBJ ES PROJECTCOMPOENT ACTIVITIES EXPECTEDOUTPUTIIMPACT TIMINGTA

3. ParI Sal of ANTELto 3. Assstan for Patal Puivatizationof ANTEL 3. &VW Qaliied Opeator os.ost Osioa lm biddin do _mntfor the ode of ANTEL, ApfO1992 la)finaia adviors to designsals pan. and pmot ib) pmote the interestof ponttualified Cal fo P on andImplment te sa. invewtorsin ANTEL; nd ofa C retainerfees to ivestment bankUS81.3 million c contracttor sae of ANTEL May 1992. (sum feeto bepidd fromn proeeds);and O-, Do- um (b) loga advWIsorsto asist In drfting tender Sedl oprators that wouldmoderize the sector ld: documents,contac nd ldosingof transton. nd improe ervics. Novmbe 1992. Cg US$1.205mIlon (of whichUSWO.905 million Aw underJpanese Grant. First Quarter1993.

1. StimulateCompetition In thw 1. RevIsonof AviationCode and simplification of 1 V -. _ Avition Sector. proceduresfor creationof new companies. Newaviation regtduaons end procedures. Fourth Quarter1992. Egsimaed cost US80.5million. mDect: Co ba. Increasedcompetition In air transportIn Umuguay. SecondQuarter 1993. 2. DevelopFinancoi Informaion 2. Assistancoto OPPIPLUNAIn: (a) preparationof 2. 9utput. 2.1g1S for Prvatiuon of PLUNA. PLUNA's uditedfinancia saem nts for 1989191,(b) Updatedfinanciad information on PLUNAand market Feruafy 1992(PiF). valuationof PLUNA'sflxed assets:a (i) estimatonof va on. n: PLUNA'smart vue. : June 1992. WM"pateqeQgt US$0.114nillion. Providesinformstion required to negotiatePLUNA's sale. 3. Paal Saleof PLUNA. 3. Assitnco for pardalsale of PLUNAconsisting of: 3. Oun 3. law: (a financialadvso to asist in prerfr bidding (a) Issuebidding documents for the saleof PLUNA; April 1992WM documents,and promote and Implmnt the sado. lb) promotethe interestof qualifiedinvestrs in Canfor Proauala"on Jost retainr foesof US$0.200mIllon; and PLUNA;and -2afl to! (b) lea advisorsto rewvw biddingdocuments. (c) contractfor PLUNA'ssae. July 1992. contractsand other documents prepared bv PLUNA's kat BWdin _ s Lea Deparbt Selectinvestors for PLUNAto rduce Government's 11: Cos: US$0.823mIlion. directinvovmnt andexpenditures. Novenmer1992. FirstQuarter 1993. URUGUAY PUBUCENTERPRISE REFORM LOAN MATRIXOF PROJECT ACTIVMES

MAIN OBJECTIVES PROJECTCOMPONENT ACTIVITIS EXPOCTEDOUTPUTJiMPACT TUNG TARGETS l | g~~~~~~~~~~~~~~~~~~~~~~StARTJCMLTON)

1. deveproanof NMwot 1. Asta ge I. Reguaton . to Inrease EffIncy (a) prspar rguato frameworkfor th nw port Oall reguto d admins i framewokfor Wn Allo De"": Pate Parilpetlon Sytm. the new port ystm andconceion regimes. Fou r 102. (b1defnig reqrmen for privateoperators;I t (*1anyn the viily of faing shipand pont Ellnates restdive port praot; and etablhes FourthOuar 103. equipmentand repir facItoes; roleof goverrwnentas polCYnwand regulat (d) analyzIngoptions for divesiure of the dredg wih nw rob of prvate tor as fleet; ownerloonceelonaend operator. (I prepring tehnicl an adrnIstrative guidelinesfor port adrdnistrationand oaptainde; wnd (fl moiortino allother port rformncomponets. Esfma2ed US$0.9mlon. 2. ModenIze Port Admnistration 2. Mnagemn consultnts wia be hied to design snd 2.1O: 2. A .: in Accordance with NewPort Implmnnt the adrinistive structureand hftonal Dedgnand nplentadonof new admfnistrativ RretQuartew Model. 1993. oVeranationof ANP,MTOPs Ports Directort, stueture, organifton endmethod for eachport Comde: Montevido Port Captaincyand ANSE. agency. irst Quarter1994. g US$1.3milon. h ______,______Allowsdeelopment ofnew portpot_od molde. l ____o_nw 3. OptimIzePort Service and 3. Assistanceto: 3. OA1Dut: 3. S: Operatons. (a) optimkzcrgo-handling methods to be usedbV Designand implemetn of tho ports operational First Quarw 1993. prvat operrs andANPIMTOP; stucture, oranizaton andmethods. Gomn: (bhdevelop operatn normsand procedures for ImeS: Tldrd Quartr 1993. superisionand coordinatonof port-elatedacdvities; Effiient basicport servicesat competiv costs. and (a) coote funtons of ANPand the Port Captincy. Esd..2tod US$0.7nillion. 4. Oher Assistane for 4. Consutat sevicesto: 4. Outjut: 4. : Complion of the Reform. (a) anay feasbit of pthvazaon of port equipet (a) Optios for ptvadtton of non-coreport FourthQuarter 1992. andmantene, dredgingtowage, port warehousing servies; and andother sves; and (b Developmentof professionalgroups capable of Third Quater 1993. lb) tring of staff for port opations. operaftngunder nw pgortsystem. fed"Ited oot;US$0.4 mMilion. kn 1t Moreeompetve andefficent port service under

private operatots. ______URUGUAY PUBUCENTERPRISE REFORM LOAN MATRIXOF PROJECT ACTIVIES MAINOBJECTIE PROJECTCOMPOIENT ACTIVITES EXPECTEDOUTPUTJIMPACr TUMINGTARGETS | STARTICOPLrOtN)

1. Establsh New Regulaon. to 1. Desin now regulaoryfamework Includin 1. Out: Allw for lno_sed Pdiva or_ganind of reguato entity dNwing pivate Regulaorysystem defning gts andobligations of PartIcpation, Thid Quarter1992 in paatponpogn oraon, trsnnsbn Go nt w publicand p rd. t seend Grnt.

Esd eost US80.4nil on {inckidesUS#X millbOn AUowsfutre devaopm ofthe secto bds on Swond Ouwwr 1993. undr t Japanes GrantFaclity). pdvatesector fforts.

______.Fourth Ouste1993. 2. Establih Reguatory 2. Trninr proaramfor govrnmen offiials an UTE 2. Cenoutin. 1 on powersetot reforman rultldon. Govenmentoffimcers with experdseto enfso Seond Quafter1993. E si"BWooUS$0.1 Mnion. sctor egulationsand UTE maagement with capabiityto applynew sector directves. FourthQuuter 1998. Effiientreguatory syns.

3. Pdvetizaon of SeletoedUTE 3. Detailedplan for pivangl franchisin UTE's 3. oZ Por Pbnots a. : n Coneudol6npower generation plnt including Detiled planfor sdeetionand implementation of SecondQuarter 1993. oranizio a financialstuoture, ond pdrvatitton of ELPsimer. including bidding f Irnplornentatiom documents. SecondQuarter 1994. Es0medeose LUS$0.4 miNion. in-18¢t Providesbasis for successfulplvatlzaton.

1. ReduceDhimenon and 1. AsIstance to MGAPto finance: 1. Increae 1. : Efficiencyof the (a) creationof rnodernizationunit, Ation plans ollowedby mplem on concerning Ministry of Agricultre. FirstQuarter 1991 (b) studiesto determinedivtre option for MGAP's eliminationof functions,divesiture of extensionan (underJapanese Grant). services; nd other services,end reorgnition of MGAP. Com (c) ation pla to reorWnizond inrse efn of t: FourthQuart 199S. MGAPaftwf redinvonsoning. (a) Reduttionof Expendituresand improved ESdgW c US$1.106 milRIon(US$0.6 million effiiency of sevin eccording to mrret demand; underWoan US40.606 nigion under Japes Grentl. (bl wOilserve as pilot projectfor future reforrnof othercentral govennt entities. 2. DefineOptions for Divestiure 2. Preparetionof diegostics andoptions for 2. Owu 2. taret of ANCAP'sCement and Alcohol pivaletion for ANCAP'scement and licohdpla. Acfionpans for divestre of ANCAP'scement and ThirdQuartor 1993. Plbnts. E e US$0.35mnirion. alcoholplants. Gemolion: 4 | IrBct TtdrdOuarter 1994. IL Demonopolizadonof cementand alcohol aeVtie Tr Q andstreamdiring of ANCAP'sproduction lines. URUGUAY PUIUC ENTERPRISEREFORM LOAN l______MATR1XOF PROJECT ACT T MAIN OBJECTIES PROJECTCOMPONENT ACIVMES | EXPECTEDOUTPUTjIMPACT TIMIN TARGETS l l . I ZI;~~~~~~~~~~~~~~~~~~~~~~~~~(TART}COMPLETION

3. ProVId Tedhnisa Support to 3. R neg of consutant for oter Go eminet 3. 3. To be determined for the Govelrmnt hI Othr p_datton fforts Ibncldionsm*sal pdvatz_ons Sudbe andIWinlmstton pan for smhall-scae eah Sub.monent. Pdvaltlon Effors. Ood diepots.hospit servces GownmwntPrintn endothe pudvatlon sohtes. Hote etc.). Eoost: s US90.6mWn. fIreasedeffeoatinses of Govewnent ______un l ______P,lvstlzetlon sjndertaldngs.d .

tA - 31 -

MM 2 Paso I of 8

A. SECTORPROFILE

Backtround and Re Sector Issues

1. The development of Uruguay's telecommunicationssector is impeded by fundamental problems: an inadequate regulatory framework, high backlogged demand, overall poor quality of service, distorted tariff structure,ANTEL's deficient commercial orientation, and low productivity.

Sector Oranizxation and Reaulatorg Framework

2* The existing industry structure in Uruguay positionsAdmlnistraci6n Nacional de Telecomunicaciones(ANTEL), a state-ownedpublic enterpriseof the Government, as a monopoly serviceprovider in most segmentsof the TelecommunicationsSector (see Table 1). Law 14325 of July 1974 granted ANTEL monopoly on local, long distance, and international telecmmunication services, and regulatory control over interconnection, tariffs and market entry. ANTEL bas the dual role of regulator and service operator. Law 15671 of November 8, 1984 gave Direccion Nacional de Comunicaciones (DNC) the administration and regulation of radio and broadcasting services and the radio-frequency spectrum.However, in practice, since all services are ANTEL's monopoly, DNC will not grant licenses to new operators without ANTEL's approval.

Demand ansd xistinA TELEPHONE PENETRATION, LINES/100 INHAB. Facilities so 3. ANTEL provides telephone, telex and telegraph services throughout the country. 40 ANT$L had 415,000 lines in service on January 1, 1991, which makes Uruguay a country with one of the highest telephone densities in Latin Americas 13.4 lines/lOO population (soe Pig. I). However, unmet demand is estimated at 100,000 lines at January 1, 1991, am uI tInl bourtoo ChIl ,=It OUPaWom Rt and there are protracted installationdelays (more than three years is Flame I common). Uruguayan demand exceeds that expected by its level of GDP development. Low local tariffs have overstimulated residential demand relative to GDP. Existing plans for line growth should be reviewed to - 32 - ARMs 2 tgo 2 of 8

avoid futurereduced revenues, and to permitinvestments in advanced business services. Ouslitvof Service 4. As of January1, 1991,581 of the installedlines were connectedto digital exchanges,providing high call completionrates to subscribers,mostly in Montevideo.On the average,however, completion rates were 501, as comparedto 651 to 702 for good networksin developedcountries. Quality of servicein the rural areas is lower than in Montevideo,since the majorityof servicesare providedby manualexchanges or ruralmultiaccess radio telephones.There are many smalltowns with no serviceat all. Seventypercent of subscribersfaults are repairedin less than two vorkingdays, which is good comparedto the best performancenetworks of developedcountries (902); however, trouble rates are 4 to 5 times the number in woll-maiatainednetworks, with many "repeat" troubles. Montevideohad 3,750and the interior1,450 public coin telephoneson January1, 1991,or a penetrationof 1.7 telephones/1000population, which is low compared with developedcountries (US 7, Japan 6.7, France3.4 tel/1000pop.). Tariffs. EVOLUTION OF DOMESTICTARIFFS -5. A N T S L 8 internationaltariffs are high. The weighted average of the ratio of *" calling prices to and from Uruguay shows that it costs US$1.50 to call 70. from Uruguay for every US$1.00 to call to s Uruguay. In contrast, inflation has eroded domestic local exchange tariff s in real terms by 401 since 1985, since tariff adjustments in e a 46 6 that period were lower than inflation (Fig. II). Local exchange tariffs in Uruguay are low when FigureII compared to similar economies. As shown in Fig. III, while it took 8.1 hours of work in Mexico to pay for monthly local charges, it took only 1.4 hours in Uruguay, and 0.4 in the US (1990 data). A consultant study recommended raising tariffs enough to restore losses caused by inflation, in the absence of demand elasticity studies. Commercialization 6. ARTMLis deficient in providing specialized customer attention for business users. ANTEL does not differentiate between business, professional, and residential subscribers for provision of repair service. Businesses perceive - 33-

Page 3 of 8

ANTIL'a service as slow and inefficiout.International direct long-distance dialing is availableto most subscribersin Montevideo and the main cities, and long-distance subscriber dialing is available to all but the rural manual exchange subscribers(3.51 of lines).However, because of the high international tariffs, there are more incoming thsn outgoing calls, and these high rates discouragethe introductionof value-addedservices by corporatesubscribers. The financial center of Montevideo is served by old electromechanical exchanges. ANTEL does not commercialize other services that are available in the digital exchanges and only sells a very limited set of value-added or advanced services. ANTRLprovides basic services to all business customers, and processes their bills every month. However, ANTEL does not have an operations support system (08) based on a computerized database of subscribers that could provide fundamental business information, improve quality of service, and develop the marketing of advanced services.

Pinances and Productivity

7. ANTEL had US$186.4 million revenues in 1990, or a revenue on average of US$484 per line. The most important revenue source was telephone operations at US$124.9 million, and within that, the international traffic. Long-distance traffic reached 78 million calls in 1990 and internationalcalls 67 million minutes in 1990. More revenueswould be obtained from internationalcalls if tariffs to the customer were lowered, because of the reversal of traffic (more outgoing traffic, and less incomingtraffic). On average, a 50X reductionwould bring the internationaltariffs on a par with other countries. The majority of ANTIEL'srevenues comes from basic services, and very little from value-added services.

8. ANTEL expenses were US$186.1 million in 1990. Major expenses were operational at US$79.2 million and exchange losses at US$49.3 million. The operatingcosts were $309 per line. The largestshare of operationalexpenses is related to staff salaries and social charges.There were 7,600 staff in the work force, or 17 staff/100 lines, as compared to 4 staff/1000 lines in efficient telephonecompanies of developedcountries, and an average of 20 staff11000 lines in Latin America. ANTEL has not taken the opportunityoffered by new digital technology to improve efficiency and reduce operating costs.

9. The Government hired the services of a reputed accounting firm to audit ATEL's 1991 accounts and present them in internationallyaccepted format.With the assistanceof consultants,ANTEL prepared financialprojections, for 1991 to 2000, under differentscenarios. Projectionsfor 1991 indicatea revenueof $484 per line, and operating costs of $288 per line, for an operating result of $210 per line. The debt/equity ratio is projectedat 521 in 1991. ANTELwill provide a return of 18.3Z on fixed assets and 23.1Z on equity. Under various scenarios the value of ANTEL could be increasedby the followings (a) tariff alignment;(b) business-lineemphasis; (c) introductionof an 08S (a computer database system to keep track of plant, service ordors, trouble reports, and billing information);and (d) introductionof value-addedservices (cellular,toll-free calling, informationservices, custom calling and local-area signalling). - 34 - AI 2 Paso 4 of a B. REFORMPROGRAM WORKING HOURSREQUIRED TO PAY Objectives mmmcvL waSA a

100 The reform program objectivesare tot (a) 7 establishUruguay as an 1 n t e r n a t i o n a 1 ay telec ommunications gatewayor servicecenter for the Southern Cone; 4 (b) introducecompetition in the provision of services;(c) hold prices a at reasonablelevels; (d) increase private __7 investment in the

uetwork; (e) increase 'a", ,,_. .. tnI WIg4y n U.8. telephone penstration; (f) improve the overall quality of service; and Figure III (g) develop and preserve the national endowment.

New Rexulatory Framework

11. With the assistance of consultants the Government identified the options for restructuring the sector and decided to choose the ones listed in Table 1. The recommended sector structure has three configurations; near term, medium term and long term. The near term refers to the day that the concession contract with the new *ANTELO is signed. The medium and long term refer to 2 and 5 to 7 years after this event.

12. Public Swltched services. The rationale for near-term basic public switched services (as vwll as telex and telegraph) remaining a monopoly is to allow time for a competitive network to evolve. The size of the Uruguayan economy will not likely support competition in basic services in the near term. The current size of the wireline network requires a single provider for economies of scale. Disruptive pricing structure changes will be required under a competitive environment if the cross-subsidies built into the tariff structure were eliminated in the near term. Duplication of wireline subscriber plant would be unproductive, requiring a lengthy construction program and large capital investments. The telegraph system must remain as a government concession to satisfy the conditions established by the Constitution. Nevertheless, in the long term, the natural evolution of the sector will allow for competition at the public services level. Technical advances will allow wireless service providers to provide public switched services in competition with the single wireline service provider. The increase in the number of subscribers and the traffic volume increase will support more than one service provider of public switched - 35 -

Pate 5 of a servicesin the future. Telex and telegraphservices will be displacedby competitive value-added services, such as facsimileand electronicmail. 13. Sevvices under limited competition. Public non switched services, special networks and private customer networks will be under limited competition. These services will increase their overall penetration, promoting qualityof service and reasonablepricing. Competitivepressures would increasethe quality of leasedlines, and the innovationand scope of advancedofferings (i.e., high speed digital), providing greater choice of providers for the customer, and reducing the need for market regulation. However, competition will create the opportunity to bypass the public network if not properly controlled, requiring overview by a regulatory body to assure no infringement on switched services. 14. Services under full competition. Customer premises equipment, value-added services, and mobile radio will be open to full competition. This will increase the overall quality of equipment in the network, increase the options to users, maximize potential for innovation and scopeof servicesand lower service prices through competitionfor market share. However, there will be an increased need for technical regulationof interconnectionand equipment certification.

TASBLB1. CU1UWNT AND PROPOSED TEBLCOI(IC3TXON8 SECTOR BTRUCTR

INDUSTRY CURRENT RECOMMENDEDSTRUCTURE SEGMENT STRUCTURE . NEARTERM MIDTERM 11 LONGTEM V 'PublicSwtedw Servic FulFull Lbmtd FulI .8asbcSwtctwd Servies Monopol Monopoly Compeion Co_m -EnhancedSwitched Serices _ 'PublicNon SwitchedServies Full Lidted Likted Fuli -Analog/DigitalLeased Unes Monopoly Comptition Compettion Co _m 'CustoMe PretmisE imited Full FUl Full -Primaryand Secony StationEqmt. Compeon Comptition Competio Cmpeotin -POXand Key Sets -InsideWiring and Maintenance I _

SpecialNetwoSIS _ _ p ,WM

*TesrTlesgraph Monopoly MonopolY d .. 4WJ Cea Telephone Full Uirited Lmited Linte

*MeblibRadio Monepoly Compen ComPetion Comen

Full Full Full Full Competion Competitn Conition Comtiton

ValueAdded Servies Fuli 7 ul -PacketSwitched Soevices Lbmted Full Compen Competitio -inormationServices Competon Coptitio -Messagefofansacton-basedServices _ *PdvateCustomer Networks Allowed Alowed A towed Allowediwithout (withoutResale) (withoutResale) (wFthoutieale Resale)

1/ Less than 2 years after the concession contract.

2J 5 - 7 years after the concession contract. - 36 - A 2 Page 6 of 8

15. Congressapproved the PublicEnterprise Reform Law (No. 16,211of October 1, 1991),which definesthe new industrystructure, assigns the regulatorypowers to the Executive,and permitsthe State to associatewith privateinvestors to operateand developtelecommunlation services. New kemulatorvEntity 16. The Governmentissued Decrees 718 and 1075 on December30, 1991,creating the "Comisi6n Nacional de Telecomunicaciones"(CONTEL) to regulate the telecommunicationssector. Specifically COUTEL will: (a)approve agreements with foreignentities relative to the establishmentof telecommunicationsservices; (b) authorizeinstallation of new services,either for commercialpurposes or its own use or controll (c) authorizeand control prices and tariffsfor telecommunicationservices provided by ANTEL or other suppliers,with the exceptionof those supplementaryor derivedservices: (d) controlthe quality, regularity,and scope of authorizedtelecommunication services; (e) formulate norms for technicalcontrol of telecommunicationsystems and networks;(f) establish industrialrules and standardsto ensure the interoperabilityof networks;(g) approve equipment types; (h) manage and controlthe radio-frequency epectrum,with the exceptionof broadcastingand Ministryof NationalDefense frequencies;(i) authorizeoperation of servicesby privatecompanies; and (j) protectconsumers. CONTELalso will be responsiblefor the preparationof the TelecommunicationsSector National Plan and its update. 17. Consultantshave startedworking in Montevideoto assistthe Governmentin the implementationof CONTEL. It is expectedthat the commissionwill be fully operationalbefore the new "ANTEL" concessioncontract is signed. The consultantswill also assistthe Governmentin the preparationand draftingof the detailedsector regulations and norms.

Timetable

18. The Governmenthas establisheda timetablefor all activitiesrequired to privatizeANTEL (Pig. IV). This Governmenttimetable calls for work to be completedbefore the end of 1992.Decree 720, of December30, 1991,establishes that ANTELwill be privatisedthrough a processof internationalpublic tender, which will invite reputable international operators to bid for the 52X share of the new enterprise-- 402 of the shareswill belongto the State,and 82 to the formerANTEL employees.The new law requiresmajority (512) national ownership, which effectivelyrequires a miniw' 1% privatenational capital. Decree720 alsoestablishes the procedure for prL.ialification, the preparation of the terms and conditionsof the privatization,as well as the procedures for evaluation and award, the terms for the transfer of assets and liabilities of ANTELto the new company, and the conditions for the transfer of staff, including the option of voluntaryretirement or relocation. FIGURE6. TIMETABLEFOR THE PRIVATIZATIONOF ANTEL

Dec.91 Jan.92 Feb. Mar. Apr. Ma Jun. Jul. 6Au Sep OcL Nov. EGULATORYFRAMEWORK Dec.

1.Regatory Commission

2 Re"guatMework

L FINANCIAL.ACCO_UNT r ANDAUDOI 1.FIancusi Saents FIN.STATEENTS AUDIT Prepaationand Audk t

TFP1/ AWARDCONTRACr 1.Financial Advisor FINALREPORT RFP AWARD ,CT 2.Legal Advir - FIAL REPORT RFP PRE-0 &Preualfetlon OMRAFl AP RE 4. BldDocumentfenderes OFFERS

5.Award/ContactTransfe AADCONTRACT ______

Note 1. APP- Reques for Propos

U.| o - 38 - Amt 2 Par a of 8

Intenational Biddinf Process

19. In June 15, 1992, AMTEL invited internationaloperators to prequalifybased on: (a) good quality of serviceprovision to customers; (b) a minimum number of tolephonelines I(c)evidence of financialsolvency; and (d) managerialcapacity.

20. After prequalificacionby the end of July 1992, ANTEL will distribute the terms and conditions of the privatization,which will include:

(a) The minamum tivestment levels, in terms of new lines, for the next 5 years; (b) The minimum levels of service quality; (c) The terms and conditionsof the concession,including the exclusivity periods for basic services; (d) The geographicarea of the concession and the services included; (e) The tariff review procedure and the lnitialtariff levels; (f) The yearly fees to CONIEL, and the proceduresfor reportingto CONTEL; (8) The interconnectionpolicies among operators; (h) The dividend policies; (i) The renewal and terminationmechanisms for the concession; (j) The rights of subscribersto non-discriminatorypractices in service provision.

21. The Board of ANTEL, with the approval of the Executive,will appoint the members of the evaluation committee. The committee will select the best qualifiedbidder and the firm chosen will be invited to participate in the new company (now "SociedadAnonima"). The new company's Board will have 7 or 11 members, of which 3 or 5 will be given Series 'A' shares (491 of capital) representing ANTEL and including staff participation, and 4 or 6 members (including the president) will be given Series 'B' shares (512 of capital), representingthe selectedprivate firm.

Concession Contract

22. The concession contract will set the exclusivity period for each basic service. After expirationof this period, any supplier can request the granting of a licenselconcessionto operate this service, on a competitive basis. Services not included in the concessionwill be open to competition. Examples area direct lines, provision of terminal equipment, data lines, value-added services, private-branch exchanges, and international business services, including the operation of small-aperture satellite antennas.

Technical Assistance

23. The Government will prepare the bidding specificationeand evaluate the offers, with the assistance of Financial and Legal Advisors. The Financial Advisor, an InvestmentBank, was selected on March 31, 1992, and will lead the privatization tasks. The Legal Advisor, an International Law Firm, was selected on May 31, 1992, and will assist in the legal matters of the privatization of ANTIL and the regulatory framework and implamentation arrangements. - 39 - MMs 3 fta 1 ot 4 AIR TRANSPORTSECTOR A. SECTORPROFILE 1. In 1989,approximately 600,000 passengers travelled between Montevideo and other countriestapproximately 501 involvingArgentina (BuenosAires), 161 Brazil, 112 Europeancountries, 92 the UnitedStates, and 141 other countries. In addition,many regular and non-regularflights connecting Punta del late with BuenosAires accountedfor an additional140,000 passengers, mostly during the summerseason (late December through March).

2. A restructuringproposal, currently being evaluated,will transferthe responsibilitiesfor the designand implementationof the air transportpolicy from the Ministerof Defenseand Air Force to the Ministerof Transport. PrimerasLineas Urutuavas de NavexacifnAerea (PLUnA)

3. General Information and Fleet. PLUNAis the national airline of Uruguay created as autonomousentity by Law No. 11.740in November1940. PLUNA transports approximately 320,000 passengers a year, which provides the company with a gross incame of approximately US$70.0 million. Total assets amount to approximately US$47.0 million. It has 1,000 employees, which is excessive given its relatively smll size. PLUNAoperates regional flights with its three 737-200 advanced, with an average age of approximately 9 years. The Madridflights were performed with one Boeing 707 (approximately 25 years old), which has been temporarily replaced by a leased Boeing 707 due to technical problems. 4. Piancial Condition. The financial information about PLUNAhas not been audited and is of poor quality. The financialstatements for 1988 and 1989 have not yet been approved by the board; the financialstatement for 1990 has been approvedby the board,but its accuracyis uncertain.Following an evaluation prepared by consultants, the management of PLUNMis updating and improving the quality of the company's financial information and has recruited external auditors. An audited financial statement for 1991 will be completed by end-July 1992. PLUNAhas started to restructure; a voluntary retirement program has led to a reduction of 60 employees. 5. In 1988, PLUNA showed an operational profit of US$669,370, which corresponds to 1.122 of its operational income; its profit in 1989, US$2.9 million, represents 4.11Z of operational income. In 1990, it ran a deficit of US$4.2 million, or 5.832 of the operational income. The net result of the financial operations, including debt service, indizates heavy losses, resulting in a total deficit of US$23.6 millionin 1988, US$21 million in 1989 and US$24.5 millionin 1990, or 39.631, 29.711, and 33.93X, respectively, of the operational income. The total assetsof the companyin December1990 were approximately US$ 47.6million, including US$27.2 million in fixedassets (including aircraft and real estate).

6. PLUNA's liabilitiesin December 30, 1990 were approximatelyUS$47.2 million, including long-term debt of US$38million. This long-term debt has been partly consolidatedin 1991 through agreementsnegotiated by OPP. (After - 40 -

Pgo 2 of 4

rescheduling,PLUNA's arrearage grew to US$2.0 million). The remaininglong-term debt is represented in purchase of three aircraft originally bought by the Government in 1983 and initially donated to PLUNA. The administration is planning to consolidate the transfer of the aircraft to PLUNA, opening simultaneouslya credit from the CentralBank denominated in Nuevos Pesos in the amount of the remaining debt.

7. PLUNA'eShare in the DifferentMarkets. PLUNA shares the Argentinemarket with AerolineasArgentinas (each companyhas 4 flights a day), and the Brazilian market with Varig (PLUNA makes 7 flights a week and Varig 10 flights a week). In the case of Chile, the market is shared with two airlines, Lan Chile and Ladeco,which offer 3 and 2 flightsa week, respectively,while PLUNA offers only 2 to Santiago. In the case of Paraguay (Asunci6n),Lineas A6reas Paraguayas (LAP) is operating alone ( 1 flight a week). The European market is shared with South American airliness AerolineasArgentinas, Varng and LAP from Montevideo, and Lineas AAreas Bolivianas (LAB), and VIASA (the Venezuelan airline) through Buenos Aires; and the European airlines,Lufthansa (1 flight per week through Buenos Aires), RLM (2 flights per week) and Air France (3 flights a week). The US market is supplied by Aerolineas Argentinas,Varig, LAN Chile, Ladeco, and LAB. American Airlines is now schedulingdirect flights to Montevideo. In the cargo market, PLUNA also competes with private Uruguayan airline companies specializedin freight transportand operating leased aircraft like Aerolineas Uruguayas,Aero Sur, and Aero Uruguay. There is no need to increase the number of flights to Uruguay, which is at present considerable.

B. REFORM PROGRAM

8. Obiectives of the Reform. The reform effort would transfer PLUNA's ovnershipto the private sector in the interestof increasingthe country's air transportefficiency.

9. Establishmentof a Joint Venture. Law No. 16.211 and the implementation decree for PLUNA, issued on December 30, 1991, authorize PLUNA to establish a partnershipwith private investors. An AdjudicationCommittee will be in charge of implementingthe partial privatizationof PLUNA. This partnershipwill be establishedas a joint venture in which PLUNA will contributewith its assets; the new partnerswould compensatePLUNA in cash for the purchase of their shares. The joint venture will be constitutedas follows: PLUNA will take preferential shares correspondingto 491 of the new capital (includingup to an 81 share for its employees),and will be representedat board meetings by three directorswith veto power over company borrowings,sale of assets, and capital increases.The private consortiumwill hold 51Z of ordinary shares,with majority participation by the operator, and will be representedat board meeting by four directors, includingthe chairman, and should be conformed to ensure a Uruguayanmajority in the company'scapital stock. A Fiscal Commissionfor the new companywill be establishedcomprised of three members, two appointedby PLUNA, and one by the private consortium. The joint venturewill have the preferentialtraffic rights accorded to Uruguay for a period of 10 years from the date of issue of the implementationdecree. It will also be empowered to participate in charter operations for air transport of passengers and freight. The decree provides options for the transfer of staff, voluntary retirement or relocation. - 41 -

Pag.3 of 4 10. PolicyFramework for Aviation. The transfer of nUNU to the privatesector represents a major change in Uruguay's air transport policy. For this reason, the privatization of PLUMAwould be preceded by a detailed review of the Air TransportCode, which constitutesthe laws and rules affectingthe sector. The new regulatoryframework would eliminateall of PLU'sa advantagesand stimulate private investmentand competitionthroughs (a) a clear definitionof air transportpolicy and the role of the regulatoryagency; (b) simplificationof proceduresfor the creationof new airlines;and (c) design and implementation of a transparent and flexible procedure for route designation. 11. IWm,lementationProcess

(a) &uditinxof FinancialStatements. The firststep, already taken by PLUNA,has been the recruitmentof externalauditors to auditthe company's1991 financialstatements, includings

(i) review of the financial statements for 1989 and 1990, (ii) updating of the market value of PLUNA's assets to increase transparencyof the company'sfinancial situation before privatization, (iii)identification of all liabilitiesof PLUNA to reduce the futurediscussion of hiddenliabilities, (iv) valuationof the companythrough present value of discounted cashflow,and marketand replacmentvalue of tangibleassets minus liabilities, 2v) projectionsfor routes available to PLUMA in bilateral agreements,and (vi) simulationsregarding long-term debt to definethe amountof debt compatiblewith the size and profitabilityof PLUNA's operations.

(b) PrLvatizationof PLUM. The Governmenthas issueda timetablefor the privatizationof PLUNA (Fig. I), which establishescalls for prequalificationof potentialbidders by July 1992, issuingof bidding documentsby November 1992, and privatizationof PLUMA duringthe firstquarter of 1993. The Governmentwill preparethe biddingspecifications and evaluatethe offerswith the assistance of Legal and FinancialAdvisors, which were selectedon May 1992. The LegalAdvisors will also define main aspects on aviation policy to be consideredin the biddingdocuments. FIGURE1. IIMETABLEFOR THE PRIVATIZAMON OF PLUNA

'______I______Dec91 JaL.92 Feb. Mach Jgla Jl Au S Oc. NM.Dec92 Jan Feb. March L REGULATORY FRAMEWORK . . DE____

2. ReguhsytEOwmlsIa

W.FINANa, .lACCOUNTNG, ANDAUDIT

t. pinancialSatemen FIN.SIAEMS AUDIT Prepat" nd AU.

III. ThANSPORMATION PROCESS L . RFI n AWARD RACT FPINAL REPORT tv 1.FIrancI Advsor RFP AWARD co*.Acr FINALREPORT 2. Legl Adlism RFP IRe

Da Gjo HVRFr OFFRS 4.Bid AWARDODNACr Nte Rw PReque, P,,p_,,,,,_ .. ,,or _,,__ ,___,,___',

Noto1. RFPmR.quost Sor Pmposl __ - 43 - AMY 4 Paso 1 of 4 PORTS A. SECTORPROFILE 1. Commercialports in Uruguay are administeredby the National Ports Administration(ANP), an independentorganization run by a Board of Directors, whose presidentie appointedby the Presidentof the Republic,and othermembers appointedby the main politicalparties, as establishedby the Constitution. Other non-commercialports (nautical,etc.) are administeredby the National Directorateof Hydrography(DUB), a governmentdepartment under the Ministryof Transportand PublicWorks (MTOP).

AP 2. Ortanizationand Functions.ANP is a decentralizedentity established in 1916 (Law 5495), and still functioning in accordance with DecreeLaw 8988,dated April 23, 1933.According to the abovementioned laws, ANP is not an autonomous entity,and does not have the monopolyfor port services.However, in practice, ANP is the sole providerof maritime,on-shore cargo handling and port storage servicesat all portsunder its jurisdiction(except at theprivately-owned grain terminalat NuevaPalmira). The NationalAdministration of StevedoringServices (ANSE)is the sole providerof cargo-handlingservices on-board ships. ANP is alsoresponsible for maintenance of Montevideo'saccess channel and port basin. As a resultof the above,ANP owns all cargo-handlingequipment and a fleet of tugboatsand dredgers,as well as workshopsand ship-repairfacilities for their repair and maintenance. 3. Productivity and Labor situation. Montevideo is the most important port of the country; in 1990, it handled almost 901 of total port cargo and 451 of all international passengers. Port efficiency, however, is one of the lowest in the region; cargo-handling productivity compares most unfavorably with other regional porte not known by their efficiency, on a ratio 3 to 1; and with well-known ports of industrialized countries on a ratio of 15 to 1. 4. Overstaffing has been endemic at ANP. Although recently its Board of Directors took advantage of government initiatives to modernize its administration, creating mechanisms to induce voluntary retirement (about 930 positions, including all categories were eliminated), payroll costs still represent about 751 of total costs. Although some efforts have been made to modernizing AMP'soperational and administrative methods and procedures (cargo handling and information systems are now being modernized), port labor and administrative personnel have not yet been rationalized. 5. Institutional Problems. ANP's current organization and operational features are based on its initial concepts all services are to be covered from internally generated funds. However, the services and activities in which ANP is engaged include ship repair services, towage, dredging, large medical services, etc., that once institutionalized have proven difficult to abolish due to union pressures. These problems plus the rigidity of ANP'Isinternal structure have prevented structural changes to reduce or transfer services that are unnecessary or that could be provided more efficiently by others. - 44 -

MMlK4 Pogo 2 of 4

6. Although ANP's current board has made some administrativeimprovements, ANP's organization and its administrative procedures are inefficient and obsoletel reliable and timely informationand data are inappropriate;port and investment planning capabilitiesare weak; and quality and cost controls are not well established.

7. Financial Condition. Net operationalrevenues were about US$3.7 million in 1990, but due to interest charges and foreign exchange differences total losses registeredabout US$20 million. AMP's debt servicecould not be covered in 1987 and 1988 from its internally-generatedfunds, requiringfinance from the Treasury.

8. Port Tariffs. Port tariffs are not cost-related,import tariffs are ad valorem, exports are subsidized,and none of the tariffs have provisions for depreciation.In addition, they have remained unchanged since 1986 (in dollar terms). Imports in 1990 amountingto about 640,000tons generatedmore than 50S of total revenues from on-shore services charSing ad-valorem tariffs; in contrast, exports amounting to about 550,000 tons generatedonly 16S for the same services.

9. Problem Areas. The Port of Montevideo's advantageous position is yet to be fully exploited; in terms of depth of the access channel, port basin, and alongside quays, the port could attractmore trafficwith more acceptable levels of efficiency. The recently createdCommercial Department will obtain technical assistance under the ongoing loan 3021-UR to develop a commercial policy and promote efficient port services at more competitive costs. The Commercial Department needs to pay special attention to: (a) simplification of port documentationand procedures; (b) coordinationof the port serviceswith those provided by others; and (c) coordination of the activities of all other participantsin port-relatedmatters.

10. Actions to reduceANP's port costs (estimatedat less than 112 of the total transportcost for Uruguayan exports, and, due to ad-valoremtariffs applied to all imports, at about 17% for these) are importantto reduce/avoidship waiting times and reduce ship-servicetime to prevent penaltiesto the ports in the form of higher conference freight rates, which in turn would then be transferred to the Uruguayan economy.

11. DNH is responsiblefor: (a) port development,construction, maintenance and administration, except commercial ports and the Port of Montevideo; and (b) maintenance of navigable waterways and navigation aids, except the Montevideo access chanesl and port basin.

12. Fishing and commercial ports are supposed to be administered by ARP; however, the current legal ports framework is unclear, and currently some of those ports (for example, La Paloma) are still under DNE's domain. This should be resolved by port regulations, to be prepared when the new port law is approved. Efficiency of dredging services for the whole port system is below - 45 - P&S 3 of 4 desirable levels; therefore, this activity vill have to be carefully revieved.

B. REPORMSTRATEGY The Mew Port Law

13. The Government'sconcern with Uruguay'sinefficient port system, which had negativerepercussions for the country'sprogram for trade liberalization,led to its submittinga Port Reformlaw to congressin early 1991. Due to extensive discussions,the law was only approvedon April 7, 1992 and becameeffective on May 4, 1992. The main aspectsof the law are: (a) the centralGovernment will be in charge of designing port policies replacing the previouslack of definition in the matter;(b) ANP and TOP will Implement such policies at the ports under their respective juriedictiong (c) the provision of port services will be transferred to the private sector, on a free-entry, competitive basis; and (d) port captaincies will be established to direct, coordinate, supervise and monitor efficiency of port operations and services. The following paragraphs describe the strategy which will be adopted by the Government to implement the reform. Strategic Aporoach 14. While the aforementioned law was being -viewed and discussed in Congress, AMP undertookpreparatory measures intended t ,facilita.e the port reform. These measureswere:

(a) an initial restructuringof ANP's internal organizationwhich althoughappropriate under the new port model would also improve efficiencyof ANP under the previouslegal regime; (b) implementationof the Government'sinitiative to reduce labor redundancyin the publicsector (Decree Law 16727,issued in 1991), leadingto a reductionof over 700 employees; (c) reformulationof the technicalassistance and trainingprogram financedunder the Bank'sLoan 3021-UR,allocating US$2 millionfor the following preparatory activities for port reforms (i) establiebmentof a ProjectDirection Unit (UDP) to implementthe port reform program; (ii) developmentof data bases on human resources,equipment and fixed assetsto facilitaterestructuring; (iii) developmentof cost-relatedtariff structures,inventory controland procurementprocedures for the new port system;and (iv) training of top management and personnel on procedures and operationsunder the new port system.

15. Imediatelyafter the port lawwas approved,its implicationswere analyzed by ANP, MTOP and the Bank, to identifypriority areas to which the port reform, shouldbe gearedto. These ares

(a) eliminationof de factocargo-handling monopolies, allowingfor the creationof privatestevedoring companies, under conditions of free - 46 - AM4 Page 4 of 4 entry,which will utilizethelr own andlorleased equipment,and theirown laborforces

(b) deregulation of the restrictive etevedoring regis!.ry, allowing it to include workers from private companies,and/or the establishmentof separateregistries; (c) unificationof all cargo-handlingservices (on-board and on-shore);

(d) improvementof other port services (towage,equipment maintenance, etc.) with the participationof the private sector, through concessions,authorizations, permitsand/or contracteg and (e) restructuring of all port-related agencies in accordance with their new functions and responsibilities under the port lav.

16. An ActionPlan for the implementationof the port reformhas been discussed and agreed, in principle,by the Goverament;a copy of it is includedas Attachment 1 to this Annex. 17. To carry out the Plan of Action, the Government has established a Port Reform CoordinationCommission (PRCC), which would receive political directives from,and report directly to higher Government levels responsible for the reform. 18. The proposedproject would financethe technicalassistance and training requiredfor the reform'simplementation, that would includethe followings(a) developmentof port regulations;(b) analysisof port operations option., inluding concessionary alternatives; (c) establishment of mechanismsand procedures to improve other port services,with participationof privatesector enterprises through concessions,authorizations, permits and contracts;(d) restructuringof all port agenciesconcerned; and (e) trainingof port captaincy staff. 19. On July 13, 1992,the Governmentissue a decreeproviding incentives for the reductionof the stevedoresat ANSE,which has led to the retirementof 588 stevedores,or most of ANSI's peru.anel. This measure will allow private stevedoingcompanies to freelyselect their own labor force.

20. The Bank bas agreedto use proceedsfrom Loan 3021-URto financeshort-term international advisors to assist in the initial phaseof the port reformprogram until the proposed loan becomes effective. This financing would be additional to the tecbnicalassistance and training sumarized in paragraph 14(c) above, which is already being financed under said loan. - 47 -

Attahment I P&eO 1 of 2

PLANOF ACTION- PORTREEC'M l ACTION TASKSTO BE PERPORMEDAS RESULTOF ACTION 1. Establishment of a Port (a) Develop port policy framework; ReformCoordination (b) defineANP and MTOPports, and their Commission(PRCC) boundaries; (c) activateappointmemt of Port Captain; (d)make arrangementsto retainconsultants for all technical assistance component.; and (e) develop interim mechanisms to unify port labor and allow private cargo-handling services.

2. Integratea Consulting (a) Developport functionalmodel and AdvisorGroup (PhaseI) priorityport regulations; tb) definetechnical and economic requirementsfor stevedoringcompanies; (c) developinterim concessionary fees for above companiestand (d) advisePRCC in all mattersunder its li ______responsibillty. 3. ObtainStart up support Ca) Coordinateongoing ANP Technical fromANP's UDP team; Assistanceand TrainingProgram wirit the ReformPlan of Action; (b) assistPRCC and ANP in the migrationof the existingport systemto the new one; sad (c) preparebid docs. for all other technical assistancecomponents. 4. Retain Consulting a) Analysefeasibility of transfering each AdvisoryGroup (Phase-II) .ue of the port services, other than cargo- handlingto privatecompanies, and assess interestof potentialbidders; (b) developprocurement documentation, includingprequlification parameters and evaluationcriteria; (c) developcomplete port regulations by activityand service; (d) assistPRCC on monitoringprogress of the reform;and (e) based upon tariffstructures and cost data preparedby other, reviewand reviseas necessary concessionary fees for stevedoring companies; and recommend fees for other port services provided or to be provided by private companies. - 48 -

MMIF 4 Attacbmtt I Page 2 of 2

PLAN 0 ACTION - PORT REFORM_ ACTION TASKS TO BE PERFORMEDAS RESULT OF ACTION S. Retain Management (a) Design administrativestructure and Consultantsto restructure functionalorganization for ANP, MTOP, CP and the port agencies ANSE; and (b) assist these agencies in the implementationof the above, supportedby ANP's human resources database inventory, and provide administrativemanuals, and required software. 6. Retain Port Operation (a) Design port operationplanning methods Consultantsto assist MCP and procedures to plan, conduct, coordinate, and other CPs superviseand monitor port operationsand related activities;and provide manuals and required software;and (b) assist MCP and MTOP9s CPs in the implementationof the above. 7. Retain additional (a) Based on database inventoriesprepared by consultantsservices study other, assess feasibilityof characteristics alternative schemes to and physical conditions of ANP's floating divest ANP from and/or craft and port equipment, including enter associationcontracts correspondingrepair and maintenance with private entrepreneurs facilities-and for non-comercial (b) canvass the market to assess the interest activities of private sector in entering these territories. - 49 -

vase I of 6

POWERm A. SECTORPROFILE

Power Sector Oraanigatiot 1. Since 1912, the Administraci6nNacional de Usinas y Transmisiones El6ctricas (UTE) has been the sole entity responsiblefor generation, transmission, and retail distribution of electricityin Uruguay. UTEreports to the Ministry of Industryand Energy(MIt). UTEis managed by a five-memberBoard of Directors, which is appointedby the Government.The Board approves major investment plans, borrowing proposals,and corporatepolicies, and recommends power rate changes to the Government. The scope of UTE's services is prescribed in the NationalElectricity Law (BEL) and UTE's organic law. The MELregulates the generation, distribution, exports, and importsof electricity.Law No. 16211, enacted last October 1, 1991,allows the participationof privateinvestors in generation activities, after previous approval and recommendationby UTE. 2. There is a high degree of intervention from the Government in the power sector and there are several agencies responsible for energy activities. UTEis also subjected to various state legal and administrative restrictions. The sector lacks an independent body to establish energy policies. On paper, MXE, through the DireccionMacional de Energia (DNE), is responsiblefor the formulation of pover policies, long-term planning and formulation of prices. Electricity rateadjustments proposed by UTE are approvedby Presidentialdecreet the Ministryof Economyand Financeand the Planningand BudgetingOffice (OPP) intervenein theirdetermination, with primarydecision-making powers vested in the latter. The annualbudget is approvedby OPP, which imposesceilings on investmentssad expenditures;procurement activities are controlledby the Tribunalde Cuentas(Auditing Agency), which is also responsible for ensuring that UTE complies with budget legislation; and staffing and recruiting polices are subjected to the civil service regulation. 3. The only other entity that now operates in the power sector is the Comisifn T6cnica Mixte del Salto Grands (CTH). CTI, which reports to the Mnistry of External Affairs, is a binational entity owned by the governments of Uruguay and Argentina in charge of the operation of the Salto Grands hydro power plant (1,890 MW). CT01sBoard is composed of five Argentine and five Uruguayan members, all appointed by their respective governments. - so -

Page2 of 6

mcmrgvResources and Consumntion

4. Uruguayhas no known oil or gas reserves, small reserves of coal (with a high ash contentand low calorificvalue), and smalldeposits of oil shale and peat.Hydropower resources are, by and large, already in use with the remaining potentialnew hydro capacitynot economicalto developat presentfuel prices. The country'senergy use in 1990 is estimatedat 2 millionTOE, or a per capita consumptionof 0.66 TOE per year,which is lowerthan the LatinAmerican average of l.0TOE per year. Uruguaywas oue of the LatinAmerican countries hardest hit by the oil crisesof the 1970s.As a result,the sectordevoted its resourcesto the developmentof hydropowerplants to reducethe country'sheavy relianceon importedfuel. Sincethe commissioningof the Constitucai6nhydro plant (330 NW) in 1982,the supplyof electricityhas been satisfactory,although the electrical systemfaces the risk of supplydeficits during dry seasonsdue to the lack of sufficiantregulatory storage capacity (Para. 5). Power Facilitiesand Market

5. In 1991,UTE's installed capacity was 1,708MW, of which 1,196MW (701) was hydro,and 512 MW (302) conventionalthermal plants. Installationsowned by privateindustry to meet its own needsare estimatedat 40MW. ActualUruguayan share of installedcapacity of Salto Grandehydro plant is 630 MW, already included in the above total. Salto Grandehydro plant is interconnectedto UTE's systemby 500 kV lineswhich providea link to Argentina'spower network. In 1992,UTE will increasethe shareof SaltoGrande capacity to 765 MW in 1992and 890 in 1995 completingthe shareof 501 accordingto the Treaty. Accordingto the agreement,412 of the totalgeneration should be sold to Uruguayin 1992and 501 in 1995. Beforethe installationof the two gas turbines(115 MW each) at the end of 1991,UTZ's power balancestudies showed that in the event of dry conditions,UTE's thermalgenerating capacity was insufficientto meet the expectedload, with deficitsthat could reach over 301 of demandduring the period1991-1995. The extremelydry seasonof 1989confirmed these predictions. After commissioningof the gas turbines,the deficitrisk was reducedto 91 by 1992. The expansionplan includesalso an additionalgas turbineof 100 MW in 1996. 6. The degreeof olectrificationin Uruguayis high (972) comparedto the averageof 701 for LatinAmerican countries. Gross power generation amounted to 3,882GWh, of which 3,066GWh (792)Was hydro,and 816 GWh (211)thermal. During 1980-1991,sales growth was 4.71per year,but duringthe period1988-1991, sales grew only by 21 p.a.,which reflects the economicstagnation experienced by the country.

Performanceof UTE

7* UTE is implementingan InstitutionalDevelopment Program (IDP) aimed at improvingthe overall efficiencyof its operationsand strengtheningits distributionand commercializationactivities. As a firststep, UTZ enteredinto a twinDingcontractual agreement with a Spanishpower utility(Union El6ctrica Fenosa) to gain access to the commercial,administrative and engineering - 51 - AM=E 5 Pate S of 6

technologyof a more developedutility. A new organizationalstructure Vas implemented and a new economic/financialinformation system is under implementation.Some ancillaryservices (maintenance of some thermalplants, cleaning,and transportof personnel)are carriedout throughservice contracts. Under loan 3221-UR,the Bank is assistingUTE to improvesector efficiency by improvingUTE's managerialcapability and reducingtechnical losses. The implementationof the IDP is on schedule,as followss(a) a new organization structureis underwvy and is expectedto be completedby March 19931 (b) the purchasingand the distributionmanagement system are under design;(c) a new annual budget system has been satisfactorilyimplemented; (d) the power exploitation,personnel, economic information, and commercialmanagement systems have been also implementedsatisfactorily. A new billingsystem has been put in place duringthe last quarterof 1991, exceptfor large industrialcustomers (16,000);the billingperiod (from measuringto deliverthe bill) has been reducedfrom 45 days to 30 days in the Montevideoarea and from 75 days to 30 days in the rest of the country. S. Staffin. In 1991,the laborproductivity indicator, measured as customers per employee,was at very low levels,i.e.: 10,550employees serving about 1 million connections,or 105 connectionsper employee. This figure is significantlybelow the averagefor the LatinAmerican countries (145). As the resultof a personnelretirement program, UTE's staffdecreased by 7.51 in 1991 as comparedto 1990. This program,together with a freezeon staffhirings, are expected to improve labor productivity.

9. Losses. Currently, the total loss level is high (211) due to high technical and non-technicallosses. The high technical losses in the Montevideo distribution network result from inadequacies of old installations. The high non- technical losses result from inadequate commercial and customer-related procedures. Technical losses would be reduced with the renovation of the distribution network in the Montevideo area, which are partially financed with a Bank loan.Under the implementationof the IDP,with the assistanceof the Bank and the twinuingutility, non-technical losses would be also reducedthrough the implementationof new commercializationprocedures and the MIS for the distributionnetwork already started in the Montevideoarea at the end of 1991. As a resultof the above,total losses are expectedto be reducedto 151by 1996.

ElectricityPricing

10. The NationalElectricity Law of 1977 definesthe tariffregime in Uruguay (based on agreements with the Bank under loan 1779-UR). It provides that UTE's electricity rates be set on the basis of a targetrate of return(not lower than 61) on a base rate consisting of sveragerevalued net assetsin operationplus a provision for working capital. The tariffpolicy, which includesbi-monthly adjustments,is based on the need to compensatefor the effectof inflationon UTE's costs.It also permits UTE from time to time to obtainelectricity rate adjustmentsto accountfor changesin fuel costs.Up to 1990, a fuel surcharge was appliedto accountfor changesin fuel expenses*The present average retail electricity rate, which includes a special tax of 101, is about 8 US centsikWh. This is in line with the expected long-range marginal cost updated in December - 52 - AN 5 Page 4 of 6

1990. UTZ is also implementinga plan of action,agreed with the Bank under loan 2484-UR, to have the largest customersmetered with multiple tariff meters to apply marginal cost principles.Currently, 580 industrialcustomers (of a total of 3,000) consuming over 100 MWh per month are metered under this method. As defined in the binational agreement, CTI's bulk rates for the sale of electricity to UTZ (2.3 US cents/kWh) are based on its financial requirements, and are expected to decrease starting from 1992.

Finances

11. Past Financial Performance. UT! has maintained an acceptable financial performance,although some years UTZ facod financialconstraints. Early 1980s rates of return were low (less than 2.7Z) due to the Goverrment'sreluctance to increase tariffs. In 1989, the rate of return also deteriorateddue to a larger share of thermal generation. Because of Government's commitment to hydro projects in the 19808, UT! indebtednessincreased significantly. In 1983, the "Constituci6ln"hydro pswer plant, a project that turned out to be expensiveand poorly financed, was incorporated into UTE's assets, deteriorating UTE'a liabilities. Despite this, UTE's debt equity ratio has remained at a reasonable level, about 50150. Since 1984, debt servicecoverage ratio has been around 1.0, except in 1989 when fuel costs increased. Between 1983 through 1989, the Government assisted UTZ with Central Bank's loans to help finance debt service payments. During the last decade, investments have been financed on average by borrowings (30S) and internal sources (702). During the early 1980s, UTE's investments reached 14.11 of total country investment or 4.72 of GDP. Due to the decline of hydro investments and neglected distribution facilities and constraints imposed by the national budget, UTZ's investments declined to 3.12 of GDP at the end of the decade.

12. During 1973, an energy fund was created to f±iiance investments in the energy sector. This fund is composed of a tax of 1022 and 942 on unleaded and lead gasoline bills, respectively, of which 252 and 172, respectively, should be transferred to UTE, although the Government never transferred the corresponding fund to UT%. As a result, the Government accumulated arrears to UTZ between 1973 and 1991 amounting to about US$ 170 million. Starting in 1992, UTZ will not receive transfer of funds from the tax on gasoline bill. Additionally,a tax of 102 on electricitybills has been appliedsince 1973. This tax has been retained by UTZ, but starting in 1992, it should transfer 502 of collections to the Tressury.

13. A major accomplishment of the Government and UTlE's management was the successful rescheduling of the entity's external debt during the period. Agreements were reached between UTZ and the Central Bank on the conditions of the last debt rescheduling in 1991 (maturity: 16 years plus 7 days of grace, interest rate: Libor + 7li). Additionally, UTE had financial arrears with the Central Bank due to unpaid debt service on foreign debt, which was paid with the retained energy fund owed by the government (US$170 million).

14. Future Financial Performance. During the period 1992-2000, UT!'s future financial performance is expected to be satisfactory assuming that the average - 53 -

Pae 5 of 6 electricityprice Is maintainedin real terms. This would resultin a rate of returnaround 4.52, a debt servicecoverage around 1.5, an averageself-financing ratioof 502, and a debt equityratio of 40160. Status of Imulementation of BSak Loans 15. The Power Plant Rehabilitation Project, whose loan (2622-UR) became effectivein March 1987,has been longdelayed on accountof assortedprocurement and bureaucraticconstraints. The most recentand severedifficulty among these factorsover the past few years was the need to obtain additionalexternal finance in order to ensure adequate funds for completionof the GabrielTerra hydroplant.After a delayof almosttwo years, the authoritiesfinally succeeded in gaining French Government credits for this purpose, whose loan agreement was signed on February 28, 1992. It is expected consequently that more rapid implementation of the project will ensue. By contrast, the Power Modernization Project,whose loan (3221-UR)became effective in October 1990, has been advancingmore rapidlyand satisfactorily.As a resultof UTE'simproved project implementationarrangements (applying the lessonsof the earlierproject), the new thermal plant was installedone year earlier than scheduled,and the institutionaldevelopment component is on schedule.

D. R30ORNSTRATEGY

Sec&gr,Reform 16. The Governmentrecognizes the strategicrole of the power sectorand its contribution to the economy. To promote the development of the sector and improve the quality of services, the Government intends to develop a regulatory capacity and play an active but subsidiary role in the power generation expansionsfor the sector,allowing the participationof private investors. Accordingly,the Government0sactions are focussingon: (a)maklng institutional and legalreforms with the objectiveof separatingclearly the State'sregulatory functione from its role as owner of public utilities; (b) facilitating private sector participation in power generation;(c) facilitatingprivate sector participation in the power sector in rural areas; and (d) basing pricing policies for bulk sales on economic principles (marginal cost). 17. The Government intendsto graduallyreform the powersector. Specifically, it is considering to issue a new electricity law removing from UTE a number of responsibilities regarding policy formulation, power energy planning and regulation of the sector. For this purpose, a regulatory agency, under the Presidency of the Republic, would be set up. The major functions of this agency would be to: (e) study and propose major sector legislation and regulations for the power sector; (f) plan and coordinate major sector investments; (g) approve major sector investments together with OPP; and (h) strengthen the capability of the sector for dealing with enviroraental matters. The proposed loan includes technical assistance tot (i) draft regulations governing the power sector, develop a detailed proposal for the functions and organization of a regulatory body, propose an action plan to carry out the reforms, and draft a new electricity law taking into account future participation of private sector in - 54 -

fpae6 of 6 popr genoration around the country, and in goneration, trasuission, and distributionactivitles In rural areasi and (ii) definethe methodologyand propose an action plan to set electricityrates based on marginal costcriteria. 18. Planed new legislation for the electricity sector is cousidered a key condition to attract greater private sector participation. The legislation would includes (i) the concession regsime for the private *ector In power ganeration, with defined service responsibilities andcancellation provisions In cage of poor service, or other violations of the law and regulations; and (j) clear rules for the calculation of generation and distribution electricity rates and their adjtastments to take into consideration inflation, exchange rate variation, or other cses. 19* The Government is considerinsg the possibility of franchising or sellfng the Constitucionw hydro power plant (330 MW)after implementing the new regulatory framework. This should reduce the financial pressure on the company arising from high debt service. As of December 1991, the net fixedassets of the Constitucifn bydro power plant amounted to US$628 million, with financial liabilities linked to these assetsrepresenting 692 of UTE's total liabilities.Because UTZ is Implementingthe IDP, the Government is not consideringthe possibilityof designing a comprehensive privatisationprogram for the distributionsystem. The proposedloan includestechnical assistance to help the Governmentprepare a detailedplan for the concessionor sellingof the Constitucilnhydro power plant. - 55 -

paP6 I of 2g

=ESONS8LEANE. StAE. AID -RfIOUAl

1. BOJcground.Developing and developedcountries are increasinglyrelying on reform/privatization of public onterprises (PBo) to achieve improvement, ln sectorperformance and to reducethe size of the governmet in the economy. The Dank's participation in supportof these reformsba been extensive,with 70 londingoperations in 67 countriesas of December1991. 2. Althoughthe lessonsfrom past experienceare useful for establishing general guidelines,the Bank cannot subscribe to a unique design and implementationblueprint for PB reform because of differences among countrias/regionsconcerning: (a) Institutionalsetup of the PE sector; (b) extentof public sectorinvolvement In productiveactivities; and (c) market dimensionsand economicsituation. In addition,because most of the projects alreadycompleted by the Bank have taken place in African countries,it is difficultto extract valuable lessons applicableto Uruguay from project completionreports (PCRs),although recent exporiencein Argentina has been instructive.However, given the increasedimportance of PE privatizationunder Bank operations,several reports have been preparedby the Bonk analyzingpast experiences and proposing strategies for design and implementation. For this reason,matters of a generalnature have been obtainedfrom such publications, while more specificaspects have been extractedfrom SupervisionReports for projectsunder implementationin LatinAmerica and the Caribbean.11

3. Anerience and Lessons Learned. An overviw of Bank experience on PE privatization, draws the followinglessons: (a) reform/privatizationof PEs should be viewed as part of a broader program of reforms designed to promote a better allocation of resourcest encourage competition, and develop the capital market,to avoidpotential undesirable results, such as concentrationof economic power; (b) efficiency enhancement considerations should prevail over those of maximizing short-term governmentrevenues (c) strongprivate mangementand controlthrough concentrated ownership are essentialto turn-aroundtroubled PEs; (d) althoughdesigning an overallstrategy for divestituremay be a usefulstep in clarifying a government's objectives and approach, these preliminaries may delay the processconsiderably; (a) for privatizationto be successful,policy responsibilities must be centralized in a strongfocal pointwith autonomyand ready accessto top decisionmakers, while implementation should be decentralized to accelerate the processand reducethe workloadof the centralunit; (f)

1/ See: WB DiscussionPaper 119, "PublicEnterprise Reform" by Abmed Galal, 1991 WIBWorking Psper, "Bank Lending for Divestiture",by Sualta Kikeri,1990; LATPS Occasional Paper Series,"State-Owned Enterprise Reformin LatinAmerica" ,by Antonio Martin Del Campo and Donald Winkler,19911 EDI Development Studies,"Public Enterprise Reform - The Lessons of Experience",by Mary Shirleyand John Nellis;Country Econamics Department,"Privatization: The Lessonsof Experience",April 1992; and LATTI, "Reporton the PrivatizationWorkshop with LAlEl, LA2IE, LA3TF and LA4TF",1992. - 56 - M6 Peo 2 of 2 transparencymust be ensuredfor each privatizationtransaction through: clear and simple selectioncriteria for evaluatingbids, clearly definedbidding proceduree, disclosure of information, well defined institutional responsibilities,and adequate supervision;(g) since social costs of privatizationmay be severe,a realisticassessment of interimlabor dislocations and, if necessary,a feasiblefinancing plan for layoffsbefore sale must be madet and (h)public confidence, which shouldbe achievedthrough an information programshowing expected benefits and costs,is essentialto ensuresupport and sustainabilityof the program.11

4. The Bank is currently involved in extensive PR reform/privatization programs in several countries in LAC, including Mexico, Argentina,Jamaica, and Venezuela.Developments to date in implementationof theseprojects show that resultsare best when: (a) focus is on specificenterprises under committed management,either through a projectconcentrating on few PEs (Argentina)or a comprehensivePE reformproject complemented by specificoperations (Mexico); (b) attentionis paid to carefuldesign and implementationof appropriatesector regulationsand to preparationof PEs for reform/privatixation;and (c) the projectis closelysupervised. In countrieswhere past reformmeasures have not been successfuland/or vested interests are powerful(Argentina), the Government foundit necessaryto proceedrapidly with privatizationof at least one large PE to demonstratecommitment to reformand gatherpublic support; while in other countries(Mexico) the programproved successful by employinga gradualapproach, i.e.,starting with small firms.

S. IncorDoratint LessonsLearned. Uruguay has only sevennon-financial PEs of significance,which operatein the basicservices sectors, most with significant monopolypower. The relativelylarge size of thesePEs and the sectorsin which they operate emphasizethe need to considera reform/privatizationprogram focussinaon the 2olicvframeworkc and a detailedreform--strategy with attendant eMhasis on early startupof a suitableregulatory framework. Because of the decline in capital formation and depletion of some capital stock in these sectors,the Government'sconditions presented to potentialprivate buyers of these Pes are likely to includeup-front, large investmentrequirements to fulfill public objectives. The underdevelopedlocal capital markets and constraints on raising tariffs to increase cash flow proceeds will limit funds available to carry these investments, other than equity financing. The proposed loan would provide adequate funding for preparation and implementation of the reform. Other lessons learned incorporated in the proposedproject design ares (a) grogect manamement--followingthe Bank's recommendation,the central coordinating unit under the presidency(OPP) has been appropriatelystaffed to carry-on the reform;in additionthe Bank will check throughout the process continuous commitment to reform by PE management;(b) proiectsupervision-- extensive project supervision will be provided during implementation; and (c) comliance with vroject objectivesand desian--projectcomponents are well defined in order to avoid major departures from project design.

2/ "Public Enterprise Reforms The Lessons of Experience", and "Privatization: The Lessons of Experience", op.cit. rn-i1-1 '' 11 ------

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