D)ocumentof The World Bank FOROFFICIAL USE ONLY Public Disclosure Authorized

Report No: 18056

Public Disclosure Authorized IMPLEMENTATION COMPLETION REPORT

U:RUGUAY

PUBLIC ENTERPRI:SEREFORM LOAN (PERL) (Loan 3517-0 UR) Public Disclosure Authorized

June 30, 1998

PovertyReduction & Economic Management Latin America& the CaribbeanRegion Public Disclosure Authorized

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwisebe disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit - New Uruguayan Peso (UR$)

UR$I = US$0. 1002 US$1 = UR$9.98 (as of December 18, 1997)

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ANC National Postal Administration ANCAP - State Petroleum, Alcohol and Cement Entity ANP - National Port Administration ANSE - National Stevedoring Services Association ANTEL - State Telecommunications Entity GARE - Advisorv Group for State Reform GDP - Gross Domestic Product ,MERCOSUR - "Conimon Market of the South", a customs union of Argentina, Brazil, Paraguay and Uruguay, with Bolivia and Chile as associate members. MGAP - Ministry of Cattle. Agriculture and Fishing MTOP - Ministry of Transport and Public Works OPP - Office of Planning and Budgeting OSE - State Water and Sewerage Company PCU - Project Coordinating Unit (assumedby GARE) PERL - Public Enterprise Reform Loan PLUNA - State Commercial Aviation Company PPF - Project Preparation Facility UTE - State Power Entity UNDP - United Nations Development Program

8 ~~~~~~VicePresident: Shahid JavehdBurki Director, SMU:- Guillerrno Perrv Director, CiMU: Myrna Alexcander Task Manager: Luis-Jos_eMeiia FOR OFFICIAL USE ONLY

IMPLEMENTATIONCOMPLETION REPORT

URUGUAY

PUBLICENTERPRISE REFORM LOAN (PERL) (Loan3517-0 UR) TABLEOF CONTENTS Paue No.

PREFACE EVALUATIONSUMMARY ...... i-viii

PARTI: PROJECTIMPLEMENTATION ASSESSMENT ...... 1

A. ProjectObjectives ...... 1 B. Achievementof Objectives...... 2 C. MajorFactors Affecting the Project...... 6 D. ProjectSustainability ...... 7 E. BankPerformance ...... 7 F. BorrowerPerformance ...... 8 G. Assessmentof Outcome...... 8 H. FutureOperations ...... 9 I. Key LessonsLearned ...... 9

STATISTICALTABLES

1. Summaryof Assessments...... 10 2. RelatedBank Loans ...... 12 3. ProjectTimetable ...... 12 4. LoanDisbursements: Cumulative Estimated and Actual ...... 12 5. Key Indicatorsfor ProjectImplementation ...... 13 6. ProjectCosts ...... 18 7. ProjectFinancing ...... 19 8. Statusof LegalCovenants and Conditionally ...... 20 9. BankResources: Missions ...... 23

APPENDIX

Map of Uruguay

Thisdocument has a restricteddistribution and may be usedby recipientsonly in the performance of their officialduties. Its contentsmay rLototherwise be disclosedwithout world Bank authorization. IMPLEMENTATrIONCOMPLETION REPORT URUGUAY

PUBLIC ENT7ERPRISEREFORM LOAN (]Loan3517-0 UR)

Preface

This is the ImplementationCompletion Report (ICR) for the Public Enterprise Reform Loan (PERL) to Uruguay (Loan 3517-0 UR) in the amountof US$11 million equivalent, which was approved in September 1992 and made effiectivein November of the same year. During implementation,US$3.2 millionwere canceled from the amount originallycommitted by the Bank.

The PERL was closed on June 30, 1997, six months later than originally scheduled. Final disbursementsoccurred on November 26, I1997,and the balance of US$1.18 millionthat remained undisbursed was canceled. Thus, total disbursementsunder PERL reached US$6.62 million. Cofinancingfor the Project was provided by two Japanese grants (PHRD) for 318.2 millionyen, of which 245.8 millionyen were actually disbursed.

This ICR was prepared by Luis-Jose Mejia, PovertyReduction and EconomicManagement Department of the, Latin America and the CaribbeanRegion, assisted by ClaudioPardo (consultant), and reviewed by Aura Garcia and Alfredo :Dammert.

Preparation of this ICR began during a Bank missionthat took place in May/June 1997. It is based on material in the project files and on perspectives gained during the Bank's extended involvementin structural reforms and associated activitiesin Uruguay. ii

IMPLEMENTATION COMPLETION REPORT ILJRUGUAY

PUBLIC ENTERPRISE REFORM LOAN (Loan 3517-0 UR)

EVALUATIONSUMMARY i. Statement/Evaluation of Objectives. TheUS$11 millionequivalent Public Enterprise ReformLoan (PERL)to Uruguaywas a technicalassistance operation geared to support the Government'spublic enterprise reforfm/privatization program. The assistancefrom PERL was aimedat supportingits initialphase, specifically"To support, the Borrower's efforts to: (a) improveservices and reduce the size of the public sector,specifically the areas of telecommunications,transport and power; fb) developsectoral policies and appropriateregulatory frameworksin such areas; and (c) implemejitrestructuring and privatizationof PEs." To implementthe Project the Governmentcounted on the PublicEnterprise Law and the Port ReformLaw. The first was for the partialprivatization of ANTELand PLUNAand to include privateparticipation in futurepower systemexpansions by UTE. The secondpermitted private concessionsinstead of the direct servicesprovided by ANP and implementthe deregulationand demonopolizationof stevedoringservices. ii. However,the PE reformmomentum was lost followingthe December 1992 referendum that voidedthe clausesin the PublicEnterprise Law allowingthe partialprivatization of ANTEL and the transfer of its managementto a private operator. Thisweakened the reform effort since the Governmentconcluded that it had marg;inalsupport amongthe population,and there was a retrenchmentand slowingdown privatizationin particular. Cancellationsand reductionsin Project componentsfollowed -only US$4.23 millionout of the $11 millionapproved for PERL were used for originalcomponents. Of the originalaims onlythe PLUNAprivatizationand the Port Reform achievedtheir originalmain objectives.However, other componentswee added: a) the partialprivatization of the insurancebusiness, b) the redefinitionof the sanitationsector strategy,c) the improvementin the state postal services,and d) the rationalizationof the medical facilitiesof the armed forces. iii. Achievement of Objectives PERI, had muchmore narrowlydefined objectivesthan the ambitiousprogram it supported. It providedfunding for a specificset of technicaltasks. Assistanceunder PERL in many instanceswvas provided as expected,even thoughthe privatizationsand restructuringit supportedultimately did not take place -as in the case of ANTEL,UTE and ANCAP. The slow pace and lack of depth of the PE reformalso limitedthe ultimatesuccess of PERL. On balance,though, perceptionis that the Project was marginally satisfactoryin wining its objectives. iv. Assistancefor the strengtheningof OPPwas by and large satisfactorywith the help of consultantsOPP's Project CoordinatingUnit (PCU) contributedmuch to the design and day-to- day administrationof the Project. The responsibilitiesof both the OPP and the PCU were satisfactorilymet. iii v. The politicaldifficulties encountered by the telecommunicationssector reform did not stop the assistancefor the privatizationof ANTELfrom being implemented,except for the consulting necessaryto completeits partial sale. Loan funds were also spent in the developmentof the regulatoryframework. However,the latter remainsextremely weak and practicallyunchanged, while state-ownedANTEL remains basically the sole providerof telecommunicationsservices, except for cellulartelephony. ANTEL traditionally has shown reasonablygood operating standardsand its performancehas continuedto improvein recent years. However,the test is whether telecommunicationsin Uruguaywill remaincompetitive in the mediumand longrun, in the increasinglyintegrated regional context and in this rapidlyevolving, technologically and capital-intensive sector. vi. The airlinessector reform componentprovided assistance for the developmentof a regulatoryframework and the partialprivatization of PLUNA. Legal and technicalproblems delayedthe actualtransfer until 1995. Today,PLUNA operating losses are much smallerand its financialaccounts appear to be headingin the right direction.On the other hand, some 1,700 formerPLUNA employees still remain on the publicpayroll. Moreover,lack of agreementwithin the Governmenton transferringregulatory responsibilities from the Ministryof Defenseto MTOP led to the cancellationof the componenton the regulatoryframework. vii. The support providedto the port sectorreform was the most successfulof the seven originalcomponents it effectivelyassisted in the preparationof a new regulatoryframework for Uruguay's port systemand allowedthe introductionof a successfulsystem of privateconcessions for most commercialservices. The port reformis still in process. However, good results are alreadyevident, e.g., the averagedollar cost-per-ton of merchandisemoved through the MontevideoPort, was cut by more than halfbetween 1992 and 1997.But there was little progress adaptingand modernizingANP and MTOPto the supervisoryand regulatoryfunctions requiredfor the privatized,modernized port system. viii. The power sectorreform componentprovided assistance for the establishmentof a new sector regulatoryframework, and the privatization/franchisingof the Constitutionpower plant. Therewas progressinitially on the regulatoryframework until the attempt by the Lacalle Administrationin 1993-94to installit via decree failed. The issue was revivedby the incoming Sanguinettiadministration, which won approvalof a new ElectricityLaw in July 1997. The Governmentnow is usingthe technicalwork financedunder the Project to write the regulations and norms that give a practicalcontent to the new Law. ix. PERL includedassistance to reformthe MGAP followingan action plan preparedby this Ministryfor its restructuring. After an initialattempt to advanceon these reforms, a change in the MGAPteam stoppedthe momentumbehind this component,for which the remainingfunding was canceled. x. PERL assistedin an assessmentof the privatizationoptions for ANCAP's cementand alcoholplants but the Borrower decidednot to carry out the recomnmendationsfavoring divestitureof the plantsto the privatesector. Resistancewithin ANCAP was crucial.Privatization is not an optionpursued today but 1996 legislationeliminated ANCAP's monopoly in the iv productionof alcohol. Also, now it can close loss-makingoperations (it closedits sugar mill).Its monopolyover oil and naturalgas, expiresby 2002 under MERCOSURrules. xi. Small-scaleprivatization was not an optionactively pursued by the Borrowerfollowing the December1992 referendum. Limiteda,ssistance was providedto facilitatethe concessionof the Montevideogas distributionsystem to a private operator (not includedoriginally). xii. New Components Added The insurancesector reformwas geared to introduceprivate competitioninto the life and generalinsurance businesses, until then monopolizedby the State InsuranceBank. Legislationenacted in 1993 eliminatedthe monopolyand createdthe Superintendenceof Insuranceand Re-insurance.Project supportwas instrumentalfor the substantialprogress made in putting in place the new regulatoryframework. Many new participantscoming into the market,who offer an ever-wideroption of servicesand at substantiaflylow premiums.An assessmentof the restructuringoptions for the State Insurance Bank was completedin 1996. xiii. The reform of the sanitationsector aimed at promotingdecentralization and rationalizationof water and sewerageservices across the country. Since 1996,OSE can grant concessionto privatecompanies for sanital:ionservices in definedregions of the country,including sewerageservices in Montevideo. The Prcject assistedin the definitionof the strategyfor the sector, includinga separationof the functionsof policyformulation, regulation and the provision of services. However,progress is likelyto be slow,as the new regulatoryframework requires new legislationwhile the total concessionof sanitationservices appears to be politicallyinfeasible. xiv. The 1995Budget Law transformedthe NationalPostal Administration(ANC), into a decentralizedstate agency. Assistanceunder the Project helped to bringtechnological improvements.Also, PERL financeda marketstudy and an economicand financialassessment of ANC, so as to significantlyimprove the price settingmodel for the its differentservices, and made possiblethe formulationof the first 5-yearbusiness plan. xv. The rationalizationof the armed forces health servicescomponent assisted with the decentralizationof medicalservices through the contractingout with regionalproviders and the eliminationof expensiveduplications through more intensiveuse of specializeddiagnosis and treatmentcenters. Second, the Project assistedin the consolidationand transferto the Central Governmentof the externaldebt of these nnedicalfacilities. xvi. Maior Factors Affectins the Proiect. The December1992 referendumwas the central factor affectingProject implementation.PIE reform and privatizationhad been at the core of the economicprogram of the LacalleAdministration, which was bipartisansupport for the approvalof the PublicEnterprise and the Port ReformLaws. The referendumtook place after initial problemsin obtainingenough voter support. PERL went to the Board with the knowledge,that the referendummight set back the program,which was identifiedas a majorrisk. In hindsight,the Governmentdefeat by a wide marginhad a much more profoundpolitical impact than expected Thismade the case for PE privatizationvery hard to sellpolitically and limitedthe Government's degreesof freedom. But the Project movedahead with the MontevideoPort and PLUNA,which were perceivedby the publicas inefficientand moneylosing enterprises.Also, those sectorswith v clear reform-mindedleadership were able to make considerablemore progressthan those that did not (e.g., reformsof ANCAPor MGAP),except for telecommunications. xvii. Delayswere another importantfeature of Project execution. Procuringconsulting services was slow and cumbersomeand prone to a certain degree of frictionwith the Bank. Thiswas owingto the traditionalpractices and proceduresfor publicsector procurementin Uruguay. Implementationappears to have sufferedalso from a lack of continuityin supervision,as well as changeof administrationin the middleof Project execution. Therewas also insufficient coordinationwithin the Bank. xviii. Proiect Sustainability.The Project was useful in developinga higherdegree of awarenesswithin the CentralGovernment of the changestaking place in other countriesand of the urgencyfor PE reform.Also, the Project provideda formulafor the CentralGovernment to deal effectivelywith PE reform,whenever this is politicallydesirable and feasible. However, wideningthe PE reformwill requiremore effectiveways to resolvelabor redundancyand organizationalissues, and showingthat PE reformbrings better, more reliablegoods and services,and at lower prices. xix. Bank Performance. The Bank performancewas satisfactorybut also somewhatuneven. It was right to have supportedthe Government'sPE reform programwith a technicalassistance operation, whichprovide useful flexibilityfor the numerouschanges required. The Project allowedthe Bank to contributeimportant and timelyadvice to the Borrower. Bank supervisionof the Project becameirregular over time and, after September1995 was reducedsignificantly. xx. BorrowerPerformance. There was a strong will and commitmentby the Government demonstratedduring preparationand appraisalbut problemsarose duringimplementation. And the usual paralysesproceeding presidentialelections started to early. Then, more time was needed to put in place a new action plan, which did not give priorityto privatization,that was at the core of the originalProject design. Althoughlegal covenantcompliance was satisfactory, somewere compliedlate or partially. xxi. Assessmentof Outcome. On balance,the Project's overallperformance was satisfactory. Despite the fact that the overallobjectives of the Government'sPE reformwere not met, it made someheadway in redressingthe publicsector's excessiverole in the economy. The projectwas vi instrumentalin putting in placethe preparatorygroundwork required for the broader, longerterm reform effort,which has continued.to progress.Moreover, the unschedulednew components materiallyadvanced the objectivesof PERL, and the Project's accomplishmentsare largely sustainable. xxii. Key Lessons Learmed. The followingcan be highlighted:

* In countrieslike Uruguay, a broad politicalconsensus is also needed in additionto the politicalconunitment of the Borrower. Governmentcommitment clearly was presentin the case of PERL, but it was not enough. This illustratesone of the reasons that structuralreform in the past in Uruguayhas been slowerthan in many other Latin Americancountries involving contentiouschanges. In addition,the commitmentto PE reformhas particularlyto be present in the managementof PEs being targeted for restructuringor privatization.

* Borrowers and the Bank tend to overestimatethe capacityto absorbtechnical assistance and this appears to have been the casewith PERL. Even in the contextof a projectwith a sound administrativestructure, there is frequenttlylimited capacity,for example, to hire all the serviceproviders requiredfor a large list of project components,especially with a rigorous implementationprogram plan.

* This Project's experiencejibes with the indicationsfrom other Bank activitiesin Uruguaythat the process of making sensitivepolicy changes in countrieswhich dependson the attainment of broad consensuscan be exceedinglyslow paced--andmay not be greatlyinfluenced by the choice of lendinginstruments. IMPLEMENTATICONCOMPLETION REPORT

URUGUAY

PUBLICENTERPRISE REFORM LOAN (Loan3517-0 UR)

Part L: ProjectIfinplementation Assessment

A. ProjectObjectives

1. The PublicEnterprise Reform Loan (PERL)to Uruguaywas a technicalassistance operation geared to supportthe 1990-94Lacalle Government's public enterprise reform/privatization program. Public enterprises(PEs) in Uruguaythen accountedfor about 12% of GDP,a figure similarto that in industrialand other LatinAmerica nations. However,their low investmentlevels and entrenchedmonopoly positions often hamperedthe developmentof other sectors.Moreover, their goods and servicesfrequently distorted. prices and were often of poor qualityor reliability. 2. At the time of PERL'sdevelopment, the Governmentwas seekingto extend the process of public sector reforminitiated by the previousadministration. It aimedto spur privatization initiativesand other measuresto open competitionin sectors dominatedby PEs, rather than to continuepressing for internalmanagement improvements. The Lacalleadministration felt that the public sector was over-dimensionedand outdated. It also foresawthat MERCOSUR,the customsunion that the country was going to join, requiredthe Uruguayaneconomy to prepare itself to competeeffectively within an expandedmarketplace. Therefore,the Governmentdefined a strategyfor reform that encompassed:(i) strengtheningof Government'sregulatory functions, separatingthem from parastataloperations; (ii) delimitingthe role of the publicsector and rescindingits monopolypowers in key fields;and (iii)providing for private sectorparticipation in activitiesto be demonopolized.PERL assistancewas aimed at supportingthe initialphase of this strategy. This concentratedon improvingthie attractiveness of Uruguay's regionalservices in transportation,telecommunications and power, and enhancinginternational trade capabilitiesby overcomingMontevideo Port's inefficienciesand shortcomings. 3. Project objectiveswere to: (a) improveservices and reduce the size of the public sector, specificallyin telecommunications,transport and power; (b) developsectoral policies and appropriateregulatory frameworks in these areas; and (c) implementrestructuring and privatizationof PEs. To help effect these changes,the Governmentwon Congressionalapproval of the PublicEnterprise and Port ReformLaws beforethe PERL was approved. The first law madepossible the partialprivatization of ANTEL,the state-ownedtelecommunications company, and of PLUNA,the main airline. It also allowedprivate participation in futurepower system expansionswithin the state power company's(UTE) network. The secondLaw allowed concessionsto provideport services,as well as the deregulationand demonopolizationof stevedoringactivity. Furthermore,the Governmentintended to assist smallscale privatizationand the demonopolizationof alcoholand cementproduction then underANCAP, for which the Governmentrequired additional legislative sanction. 2 4. However,the reformmomentum was set back by the December1992 referendumthat abrogatedthe publicEnterprise Law's sanctionof ANTEL'spartial privatization and the transfer of its managementto a privateoperator. The referendumshowed that there was onlymarginal popular supportfor privatizationof telecommunications.The Governmentfelt that this was also true with respect to those other major companies,(such as ANCAPand UTE), which had positive images. Thus, the administrationfelt its sole option was to slow the pace of privatization. This was the mainfactor behindthe reductionmade in some of the project components, ultimately resultingin onlyUS$4.2 millionof the $11 millionLoan funds beingused for them. Of the main PE reformtargets, onlythe PLUNAprivatizationand Port reformwere achieved. Fortunately, PERL'sflexibility permitted some redirectionof the Loan funds to support other reform efforts, which were addedto the project scope. Theseincluded the partialprivatization of the insurance businessand the redefinitionof the sanitationsector strategy. The revisionsalso providedhelp for the restructuringand rationalizationof state postal servicesand the armedforces' medical facilities. In total, US$2.4million was used for these new items., B. Achievementof Objectives 5. PERL had much more narrowlydefined objectives than the ambitiousreform programit supported.Disbursements were not dependenton the implementationof policy actions. Rather, the Project providedfunding for specifictasks designedto advanceGovernment efforts in the definitionand implementationof its PE reforms. (PERL'sobjectives and their outcomesare shown in Table5). Thus at the end, the plannedassistance was providedbut the privatizations and restructuringthis aimed to help ultimatelyaccomplish did not take place. Thiswas the case with ANTEL,UTE and ANCAP,the three lead cases in the reformprogram. For example, beforethe referendum,significant amounts of PERL funds and associatedJapanese grants were spent in effectivelybringing ANTEL almost to the point of sale.

6. The institutionaldevelopment component that providedassistance for the strengtheningof the Planningand BudRetinzOffice (OPP) was by and large satisfactory.Its project coordinating unit (known by its Spanishacronym "GARE") contributedmuch to the design and day-to-day administrationof the Project, for which it also developedand maintaineda useful information system. GARE also processed79 contracts to secureconsulting services for the implementation of the differentcomponents.

7. Telecommunications.An analysisof ANTELand the developmentof proposalsfor sector restructuring were carriedout successfullyprior to Board presentation. The other components calledfor assistancefor the establishmentand stafftraining of a telecommunicationsregulatory authorityand Governmentsupport on the privatizationtransaction. All except advisoryservices on the actual sale of ANTELwere provided. However, the sector regulatoryframework remains extremelyweak and practicallyunchanged. AndANTEL is stillthe sole providerof telecommunicationsservices save for a smallcellular competitor. To be sure,ANTEL traditionally has shown reasonablygood operationby Latin American-standards, having one of the highest coverageratios in the continent. This might appear to be acceptable,and ANTEL'sperformance has continuedto improve. But, beyondthe Project's objectives,Uruguay's telecommunications have to remaincompetitive in the mediumand long run in the now more demandingregional market. Moreover,there is a technologicalrevolution in this field across the world which is highlydemanding . The prospectsfor the future also are cloudedby the continuedweaknesses in the regulatoryenvironment in Uruguay and the difficultiesentailed in overcomingthem. Therefore,there remainsconsiderable scope for further sector improvement. 3 8. Airlinesreformn. Besides the developmentof a sector regulatoryframework and the adoption of policiesto stimulatecompetition, the Project includedresources for preparingthe way for privatizationof PLUNAandtransferring its control to a private operator. PLUNAwas a big moneyloser and it was difficultto justify its continuedpresence in the public sector. Fortunately,its transfer to the private sectorwas not affectedby the referendumand its privatizationactions continued. Followinga, fruitless first attempt,the objectiveof selling51% of PLUNAwas achievedwhen a group of privateoperators took over the companyafter winninga secondbidding process -in which they were the onlyparticipants. (The Bank distanceditself from this transactionsince it did not agreewith the scheme.) However, completionof the sale took much longerthan scheduledas legal and technicalproblems delayed the transfer until 1995. Also, formerPLUNA employees were giventhe optionto stay or return to the publicservices. Today,PLUNA's operating losses are much smallerand its financialaccounts appear to be headingin the right direction. On this account, and consideringthe airline'slimited commercial attractiveness, the privatizationof PLUNAcan be considereda success. However,the cost of maintainingsome 1,700former PLUNA employees on Government'spayroll continues to impose a major publicburden. Another shortcominlgwas the lack of agreementwithin the Government for transferringregulatory responsibilities from the Ministryof Defenseto MTOP,which led to the cancellationof this sub-component.In addition,sector regulationsstill retain many normsthat were supposedto be changedby the Project, whichthe Bank hoped to see form the basis of a new "open skies" policyframework.

9. Port reformwas the most successfulcomponent. The Project effectivelyassisted in the preparationof a new regulatoryframework ifor the port systemand facilitatedthe introductionof a successfulsystem of privateconcessions for most commercialservices. In fact, the complex port reform process is stillunderway but there alreadyare good results. The main Montevideo Port has shown substantial,broad-based peiformanceimprovements, e.g., the averagedollar cost-per-ton of merchandisemoved through it was cut by more than halfbetween 1992 and 1997. Thiswas the result of both a sharpincrease in the tonnage handledand a significant reductionin the averagestay of ships in the jport,derived from substantialreductions in system personneland labor productivityincreases. The initialrestructuring of Uruguay's port agency, ANP,and the demonopolizationand privatizationof cargo and stevedoringservices were crucial in this respect. The Project was instrumentalalso in providingthe necessarytechnical expertise to ANP for the design and implementationof the reformsput in place. On the other hand, more progress shouldhave taken place in the modernizationof the administrativestructures and the functionalorganizations of ANP and the TransportMinistry (MTOP). This is essentialto adapt fully these two entitiesto the needs of the reformedsystem, in particularthe supervisoryand regulatoryfunctions required now that many activitieshave been privatized. In the case of ANP,a first downsizingand reorganizationtook place (supportedby the TransportI Project Loan 3021) at the beginningof the port reform. However,these did not enableit to operate optimallywithin the new environment.Thus, the modernizationof ANP and MTOPremnains a priority on the sector's developmentalagenda. The same is true of the divestitureof some additional servicesto private operators,which did not advancebeyond the assessmentstage under the Project.

10. Power reformambitiously aimed at increasingprivate sectorparticipation in generation, transmissionand distributionactivities. Its first component--providingassistance for the establishmentof a new regulatoryframeworik--was essential to the process. The secondprovided trainingfor Governmentand UTE officialsivolved in the reform and the new framework. 4 The third componentwas designedto assist in the preparationand executionof the privatization/franchisingplan to be adoptedby UTE.

11. There was initialprogress in the formulationof the new regulatoryframework. PERL and an associatedJapanese grant providedthe basic elementsfor a first attemptby the Lacalle Administrationin 1993-1994to approve the frameworkvia presidentialdecree. However, politicaldifficulties, opposition from within the sector and legal impedimentsaborted these efforts. This led to the cancellationof most of the funds allocatedfor this component. However,the issue of sector power reformwas revivedby the successor SanguinettiAdministration which presented a new ElectricityLaw to Congress. This departed somewhatfrom the originalProject intent in being less ambitiousabout the envisagedprivate sector role. After some difficulties,the Law was finallyapproved in July 1997and incorporatedmany of the originalconcepts that had been supportedby the Bank. The Governmentnow is usingthe technicalwork performedearlier under the Project to write the regulationsand norms to effectthe Law, movingin linewith PERL goals. And under the Power ModernizationLoan (Loan 3949), the Bank can further assistthe Borrower on some of the outstandingitems on the PERL agenda. Unfortunately,on the issue of greater privateinvolvement in the sector,there is stilla great deal of resistanceto the privatizationof UTJEplants. However,more privateinvolvement is expectedin futureinvestments in generation and transmission,particularly in those projects linkedto MERCOSUR. Further,although the new regulatoryframework is expectedto be helpful,the inefficienciesin a sector dominatedby a state companyare likelyto keep electricityrates abovethose in neighboringcountries. The slow reform and transformationof the power sector,which frustratedthe goals of the Project,could contmue to hurt the competitivenessof the economyin the future ,as well as the sector 's possibilitiesof smoothintegration within the regionalmarket. 12. PERL includedfunding to assistthe Governmentreform the AgricultureMinistry ^aIGAP). Before PERL'sapproval, the Ministryhad prepared a diagnosisand an action plan for its redimensioningand streamlining,including divestiture to the privatesector of extension services.Unfortunately, after an initialattempt to advancethese reforms,a change in the MGAP team stoppedthe momentumbehind this plan which was never regained,. Consequently,most of the PERL funds and associatedJapanese grants allocatedto this componentwere canceled. 13. PERL also calledfor a diagnosisand assessmentof the privatizationoptions for ANCAP's cement and alcoholplants. Althoughthe diagnosiswas successfullycompleted, the Borrower decidednot to carry out the recommendationsof the study,which favoredthe divestitureof the plantsto the private sector,because of ANCAP'sopposition. However,there has recentlybeen some progressin the directionexpected under the Project. Legislationwas enactedin 1996to eliminateANCAP's monopoly in alcoholproduction. Also, the companycan now enter into joint ventureswith privatepartners for productionof some alcoholicbeverages, and close its loss- makingoperations (indeed, ANCAP already closed its sugar mill). Similarly,its monopolyover the oil and naturalgas businessmust expireby year 2002 in line with the MERCOSUIRpacts.

14. No fundingwas actuallyused for the activitiesset out for the small-scaleprivatization component(local airports. ambulanceservices. etc.) after the referendum.However, a limited amountof PERL resourceswere used to assistin the concessionof the Montevideogas distributionsystem to a private operator,which was not includedin the originalcontents of the Project. 5

15. Severalnew componentswere addedduring the executionstage in line with the main objectivesof the Project,for which 36% of E'ERLdisbursements were made. This assistance concentratedon reforms of the insuranceand sanitationsectors; improvement of postal services, and the rationalizationof the armedforces mledicalservices. 16. The insurancesector reform scheme wasgeared to introduceprivate sector competitionin the life and generalinsurance businesses monopolized by the State InsuranceBank. New 1993 legislationeliminated this monopolyand created the Superintendentsof Insuranceand Re- insurance,the new regulatorybody. The Project concentratedon establishingits new framework, includingthe provisionof trainingfor the Superintendent'smanagement and staff. Significant progresswas made in the implementationof the new framework. Now there is real private competitionin the provisionof insuranceservices and re-insurance,with many new participants continuingto come into the market. They tend to offer an ever wider option of servicesat lower cost than before. The pressureis thus now on restructuringthe State Bank in order to effectively compete,for whichan assessmentwas prepared under PERL. Thiswas completedas scheduled in April 1996 and consultingservices were securedto implementits recommendations.It is too early to say whether these effortswill be successfulin restoringlong-term viability to this state company,which requires substantialgains in labor productivityand majorimprovements in managementinformation systems and practices.

17. The assistanceprovided to the reform of the sanitationsector aimedat promoting decentralizationand rationalizationof water and sewerageservices, which (save for water for Montevideo),are providedby OSE, a state company. Since 1996,OSE was authorizedto concessionprivate companiesfor sanitationservices in definedregions, includingsewerage servicesin Montevideo. OSE lacked enoughfunds to carry out the investmentsneeded to satisfy demand,was overstaffedand had highwateir losses and rates. It was expectedthat the introductionof a systemof concessionswould induce competitionand improvethe overall efficiencyof the sector. For the decentralizationand rationalizationof sanitationservices, it was necessaryto definea new sector strategy,including separation of policyformulation, regulation and the provisionof services.

18. PERL assistancewas arrangedto obtainconsultants to assess the situationand propose optionsfor the institutionalreform. The first reports coveringanalysis of the sector conditionand reformoptions were consideredunsatisfactory. New consultantswere then hired to revisethese studiesand, mostly,to prepare new recomffmendations.This effort is now completedand its results are beingreviewed. The Bank is now assessinga new water sector reformproject to furtherthe process,which is likelyto be slow becauseof the need for more new legislation. Meanwhile,concessions in Maldonado,Punta del Este and Costa del Sol are expectedto be under privatemanagement soon, which shouldprovide good tests of the potentialbenefits to be derived from privateservices.

19. The process to improvestate postal servicesstarted with 1995 legislation,which transformedthe NationalPostal Administraltion (ANC), into a decentralizedstate agencywith independentfinancial accountability. The effort under PERL, to improveits financialcondition and services,began late during projectimplementation but there has alreadybeen healthy progressmade. Technologicalimprovement were introducedinto ANC operations,particularly 6 in the area of trackingand tracingpostal pieces., e.g., bar codes are now used for about 70% of the pieces handled. Also, PERL financeda market studyand an economicand financial assessmentof ANC in order to improvethe price settingmodel for the differentservices offered, as well as the formulationof its first 5-yearbusiness plan. Further efforts are aimed at implementingthis plan so as to achievea greater degree of decentralizationand autonomyfor ANC, and at least a balancein ANC's financialaccounts. To further improveits efficiencywould require a significantretrenchment in staffand in-depthorganizational restructuring to adapt the organizationto the new technologicalrealities. Anotherimportant issue is the need to enhance the regulatoryframework for the sector. 20. The Borrower also requestedhelp duringthe projectperiod for rationalizationof the armed forces health services. The goals were to consolidate hospital and other medical facilities' services, and to resolve their debt overhang to normalize their finances. An assessment recommendedthe decentralizationof services by contracting out services to sundry providers, eliminationof expensiveduplication and more intensiveuse of specializeddiagnosis and treatment centers.Many of these recommendationswere implementedwith important cost reductions and improvementsin efficiency.The Project also assistedin the assessment,consolidation and transfer to the Central Government of the external debt of these medical facilities,which has brought about more financialtransparency and predictabilityfor budgetingpurposes. It resultedin an improved cashflow for thesefacilities, as well.

Major Factors Affecting the Project 21. The central factor that affectedproject implementation was the 1992referendum., compoundedby the LacalleGovernment's loss of power after its defeat in the simultaneous midtermelections. Their adverse effectsalmost entirely undermined the momentumfor public enterprisereform. In this connection,PERL went to the Board after passageof the Public Enterpriseand Port ReformLaws but before the referendumtook place. The President'sReport signaledthe possibilityof its damagingthe privatizationmovement as one of the major project risks. However,it stated that the Governmentand the Bank felt that an adversejudgment in the referendumwould only affectthe proposed ANTELtransaction. It also arguedthat it was worthwhileto proceed,notwithstanding these risks, preciselyin order to strengthenthe Government's reform capability.In the event though,the Government'sdefeat substantially reducedits degrees of freedomto undertakePE reforn and privatization.The process was thereby considerablyreduced in scope and depth. However,it continuedon track for Montevideo Port and PLUNA, and later the reforn of the insurancesector also made considerableprogress. In the process incidentally(apart fromwhat transpiredre: ANTEL), the greatest successeswere accomplishedby the institutionswhose leaderswere most committedto reform,unlike those in ANCAPand MGAP. 22. Implementationdelays, even for those componentsless affectedby the adversepolitical climate,also markedproject execution. The underlyingfactors were generallysubject to governmentcontrol. In particular,the process of procuringconsulting services was slow and subjectto cumbersomeadministrative procedures and prone to delays(as well as the cause of some frictionwith the Bank.). Thesereflect the traditionalpractices and proceduresfor public sector procurementin Uruguay,which badly need to be revisedfor improvedefficiency and transparency. 7

23. Numerous Project components required substantial coordination between GARE and the different executing agencies. Project implementation and supervision accordingly were hampered by the many staff changes that took place in OPP and GARE, as well as the 1995 change of administration and the subsequent lag in putting new officials in place. Sadly, the Project also suffered from inadequate coordination among the Bank's different units involved in sectoral work in Uruguay, some of which preferred other priorities than the Project's. On these and other counts, the Project lost some of its original focus over its term. Towards the conclusion, Loan 3517 resources were partly used to provide a ready source of funding for other constructive Government ventures. D. Project Sustainability 24. Project sustainability is likely. Thei-eis little reason to expect the Uruguayan state to again become the main actor and service provider in the sectors which PERL helped transform. Moreover, the Project created greater appreciation within the Central Government of the public enterprise reform and privatization changes taking place in other countries, which contributed to GARE's continuing activity to advance related measures, e.g. road concessions. This too favors the prospects of sustainability of the Project's accomplishments.

25. The Project also provided a serviceable formula and instruments for the Central Government to deal effectively with PE reform. OPP is now in a better position to maintain a technical dialogue for change with the PEs and other public sector entities. This is particularly relevant for the needed development in Uruguay of more robust, comprehensive regulatory frameworks. And the Project successfully created an awareness at the highest levels of the need to accelerate progress on this front, particularly for telecommunications, aviation, energy, the port system and the insurance sector.

26. This is quite important as Uruguay's PE reforms lag behind those in other countries in the region and much remains to be done. Accordingly, as this experience indicates, further advances on these lines will depend to an important degree on the Government's ability to achieve and maintain a much broader and deeper consensus for PE reform than that it had under the Project. To this end, more effective ways will have to be found to resolve labor redundancy and organizational issues that normally are part of comprehensive PE reforms. The public has to be convinced that PE reform not only brings better and more reliable goods and services, but also that it will benefit directly from ensuing eifficiencygains. Only in this fashion can Uruguay's leaders and shapers of influence persuade this somewhat tradition-bound population of the need for basic changes in their "social contract," which too long relied on a dominant public sector. E. Bank Performance 27. The Bank's performance was satisfactory but also somewhat uneven. It was right in designing the Project to support the Government's program through a technical assistance operation which provided the considerable flexibilitythat proved necessary. It was also appropriately constructed to meet the coIrectly defined project risks. Further, the Bank contributed important and timely advice to the Borrower on the PE reform program issues, consistent with the Bank's country strategy. 8

28. The fact that the PE reform program was well advanced prior to Board approval was partly due to the Bank's active preparatory support. As noted, much progress had been made towards preparing the privatization of ANTEL and PLUNA, thanks to the PPF and Japanese Grant as well as some 17 staff/weeks of Bank work and broad range of expertise provided. To be sure, there was an underestimate during appraisal of the impact on the reform program of a conceivable negative referendum vote --although few foresaw the large opposition to ANTEL's privatization (some 72%). But then again, the Project was well advanced towards approval by the time it was confirmed that the referendum was to take place. At that point, the Bank feared that postponing the scheduled loan would send an undesirable signal.

:'9. Conversely, it was unfortunate to have had different segments of the Bank failing to .oordinate their positions on public sector reforrmin Uruguay. Furthermore, loan 3uperFvisionlacked continuity, especially after the Bank grew increasingly concerned over tne implementation delays. When the Sanguinetti Administration came into office, the new authorities confirmed their desire to proceed with PE reform. Subsequently though, the delays in project execution recurred, the new team's approach departed from the original intent, and so Bank supervision was reduced significantly in late 1995.

F. Borrower Performance 30. The Lacalle Government exhibited strong will and comrnitment in undertaking PE reform as a central element in its overall program. It was particularly commendable for an administration which had limited recent executive experience and only minority legislative power to tackle such a sensitive issue: rationalizingan overstaffed, often inefficient public admninistrationexcessively shielded by constitutional guarantees. Moreover, even after the referendum and towards the end of its term-, the administration retained some zeal in the effort: it began examniningthe even trickier issue of civil service reform. However, the Government's performance during project implementation was less satisfactory. Not all the difficulties experienced were political or beyond the scope of the Borrower (e.g., delays and disputes with the Bank on procuring consultants). The administration moreover permitted a paralysis in project activity to set in much too soon before the national elections midway in the project period. The new Government took considerable time to develop a new action plan, partly because of the limited parameters set by the 1992 referendum's defeat and the appreciation of possible fuirther political costs. Understandably as well, it opted for a more gradual pace. On the other hand, its approach gave less priority to privatization that was at the core of the original Project design, electing instead to promote concessions and curb PE monopoly powers. Finally, GARE performed its role responsibly, including helping to ensure reasonable satisfaction with the legal covenants, although some were ffilfilled belatedly or only partially (Table 8). G. Assessment of Outcome 3 1. PERL's overall perfornance was satisfactory despite the fact that the Project failed to accomplish all its objectives. The Project contributed some headway towards correcting the previous imbalance between the private and public sectors' roles in the economy. It was instrumental in providing the groundwork for the implementation of the PE reform program even where the envisaged privatization measures were aborted. And where it was possible to proceed as planned, the results were--and still are--very creditable. The performance gains at Montevideo Port and initial PLUNA rationalization accomplishments are just two of these. In addition, there 9 were efficiency improvements made in some PEs, which stemmed directly from the technical support and other assistance provided under loan 3517. These included a signigicant drop in the cost of telephone services, along with UIJE's and other PEs' increased atteniveness to service delivery effectiveness and cost accountirngquality. In addition, the Project pioneered in the devlopment of more independent and appropriate Government regulatory machinery which, despite its shortcomings, created a foothold for future enhancement. Moreover, the new components added the Project led to unanticipated, quite positive improvements in a broader range of government functions than the original Project design entailed. Unfortunately however, no approach was made to resolve the basic problem of labor redundancy which still burdens the economy..

H. Future Operations

32. The changes made remain in place. And the authorities continue to pursue further public enterprise reforms and encouragementof more private enterprise participation, as evidenced in the recent loan to UTE. A proposed follow-up lending operation with OSE is geared to implement institutional improvement measures there, following on the diagnosis of the water and sewerage entity carried out under PERL. In additon, Bank assisstance in 1997 enabled a group of Government officials and other key Uruguayans to visit New Zealand for a first hand apperciation of that country's pioneering changes in the public sector. In tandem with these activities, the Government has obtained IDB support for reforming the central administration civil service reform, departing from the studies carried out under past IBRD assistance. Currently however, there are no plans for any new MIRDoperation related to the findings of that mission.

I. Key Lessons Learned

33. Broad popular consensus is needed in addition to Borrowers' political commitment Especially in such demoracies as Uruguay, where a broad consensus is essential to move forward on controversial economic issues, Government political commitment alone is insufficent. This is one of the reasons why structural reform is Uruguay has been slower than in most other counties in the region. Consequently, the need to make a strong case for PE reform and to educate the public on its benefits should be explicitly addressed in any project design that involves such controversial issues as privatizations. In addition, the commitment to these reforms has to be particularly present in the management of the PE that is proposed to be restructured or privatized (ref. para. 21).

34. Borrowers and the Bank tend to overestimatethe capacity to absorb technical assistance. Even in a project with a sound administrative structure, there is often limited capacity, for example, to hire in a short period all the service providers required for a large list of activities, especially within a demanding Implementation Program Plan. Also, there are many fractions in a system trying to coordinate the simultaneous implementationof a long list of tasks, particularly when procurement issues tend to be complex and hiring mechanisms cumbersome. Unfortunately, transactional costs and administrative risks tend to be overlooked at the time of project design, so they end up being solve on an ad-hoc basis during implementation.These are particularly critical elements to be addresed in designing technical assistance operations, which are management intensive. 10

IMPLEMENTATION COMPLETION REPORT

URUGUAY

PUBLICENTERPRISE REFORM LOAN (Loan3517-0 UR)

Part II.: STATISTICALTABLES

Table1: Summaryof Assessments

A. Achievement of Objectives Substantial Partial Ne2ligible Not applicable

Macro Policies E] 5 E Sector Policies 5 E 5 Financial Objectives [ S [J IA InstitutionalDevelopment [ 5 5 Physical Objectives [ 5 5 Poverty Reduction 51] EA5 Gender Issues 5 E] [ Other Social Objectives 5 5 ] IA EnvironmentalObjectives 5 5 5 IA Public Sector Management 5 IA 5 5 Private Sector Development 5 [3 5

Other (specify) 5 5 5 IA

B. Proiect Sustainability Likely Unlikelv Uncertain 6") 6") 6") IA O 5 11

(Continued)

C. Bank Performance Hlhly satisfactor Satisfactory Deficient (1) (1) (/) Identification D (0

Preparation Assistance []J

Appraisal (J

Supervision Q (J

D. Borrower Perfonnance HiahbI siatisfactory Satisfactory Deficient (1 ) (1) (1) Implementation El Covenant Compliance El Preparation 0 E 0

E. Assessment of Outcome Highly satisfat -r Satisfactory Unsatisfactory unsatisfactory (0 ) (210) (0) O 12 Table 2: Related Bank Loans

Loan Purpose Amt Yearof ______I______(US$M) Approvalk StatusFY98 Precedng Operations 1798-UR MontevideoPort Project 50.0 1980 Closed 2836-UR SAL I (structural adjustment) 80.0 1987 Closed 2843-UTR TALI (technicalassistance) 1.0 1987 Closed 2921-UR Water SupplyRehabilitation 22.3 1988 Disbursing 3081-IR SAL II (strutal adjustment) 140.0 1989 Closed 3082-UR Second TechnicalAssistant Loan 6.5 1989 Closed 3021-UR Transport Project I 80.8 1989 ClosingDate 12/31/97 3221-UR Power Modernization 62.5 1990 Closing Date 12/31197 3323-UR Support of Extemal Debt & Debt 65.0 1991 Closed l ______ServiceReduction Subsequent 0perations 3949-UR Power Transmission and 125 1997 Disbursing Distribution. ,

Table 3: Project Timetable

Steps in Project Cycle Date Planned Actual Date/ or Duration Identification (Initial Executive October 1991 Project Summary) Preparation 18 months Appraisal May 1992 Negotiations July 1992 Board Presentation September 1992 Signing September 1992 Effectiveness October 1992 November 1992 Loan closing December 1996 June 1997

Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ million)

FY93 [ FY94 FY95 FY96 FY97 FY98- Appraisal estimate 4.06 1 7.0 9.5 11.0 -- 6.62 Actual 2.59 3.57 4.49 5.54 6.03 I Actualas%ofestimate 65% 51% 47%/o 50%

* Andi..edtamoutof1.18 waacanceletlosing. DateD & amountof 1otcancellton: June 1994 -US$1.5 M I Date af sanot ofd2adb atmen n: Septmbe2 1995 - USS7.7 M |Dateof final dibu"_mt Novmbr26, 199.7. 13 Table 5: Key Indicators for Project Implementation

L MainObjectives ExpectedOutput Outcome Part A: Strengtheningthe oPP A PCU staffedfor the durationthe Project,that: (i) GARE effectivelycarried out the functionsof the PCU. participatesin the designand implementationof the It processed79 contractswith local(42) and foreign A.l A unitto assist in the designand reformactivities; (ii) managesthe hiringof consultantsthat werefinanced. administrationof the PE reform. consultants;and (iii) implementthe Project.

A2 Marketingcampaigns of the privatization (i) presentationsin main internationalfinancial (i) no fundswere used for this purposeafter the programand seminarsand visitsto other centerspromoting the PE reformprogram and the Goverment abandonedprivatization of ANTELand countries. invwstmentopportunities to foreigninvestors in state somepower generation plants; (ii) a small sumwas companiesto be privatizedor franchised;(ii) visits to used, mostlyto financea fact-findingmission abroad relevantcountries and attendanceto seminarsby (whichmet the desired)educational goal and seminars Governmentand PE representativesinvolved in PE on the Port component reform and privatization.

Part B: TelecommnicationsSector Reform out as scheduledand provided B i 'ys QfAX'r I -x88,L- An assessmentcovering: (i) an analysisof the Thesetasks were carried telecommunicationssector and proposalsfor telecommunicationsector, including ANTEL's a goodbasis for the envisagedactions. their unr 4ng. financial,legal, technical and organizationalaspects; (Ji)the marketdemand and pricingenvironment; (iii) a marketvaluation of ANTEL; (iv) optionsfor the sectorresrfcturing; (v) recommendationsfor ANTEL'sprivatization; and (vi) a proposalfor a new legal and reglatory framework.

B.2 Create,organize and train staff of the (i) the regulationsapplicable to thereformed Reductionof the designfor a new regulatory telecommunicationsregulatory authority. telecommunicationssector; and (ii) the creationand framework.However, the latter telecommunications developmentof the telecommunicationsregulatory sectorremains weak. Furthermore,the authority. recommendatonsof the studyfor a new sectorstrategic plan have had litde impacton ANTEL'sbusiness practicos.

B.3 Assistingin the partialprivatization of (i) issuanceof tenderdocuments; (i) tenderdocuments were prepared according to ANTEL. (ii) financialadvisors design the plan for the partial schedule;(ii) the sale of ANTELdid not proceedafter sale of ANTEL,promote it and carryout the the 1992referendum voided the authorizationin the operationto its successfulclosure. PublicEnterprises Law. 14 1. MainObjectives Expected Output Outcome Part C: Airlines Sector Reform C.1 Assistancefor the creationof an appropriate A revisedAviation Code to facilitateprivate sector This sub-componentwas canceled,for lack of consensus regulatoryframework for the sectorand participation. withinGovermment on a new policyregime. adoptionof policiesfor stimulating competitionwithin the airlinessector.

C.2 Developmentof the financialinformiation (i) auditedfinancial statements for PLUNAfor the Thesetasks were providinguseful data for the 1995 necessaryto supportthe privatizationof 1989-91period; (ii) a valuationof its fixed assets; salestransaction. PLUNA. and (iii) an assessmentof PLUNA'smarket value. C.3 Assistancein the processof the partial sale (i)preparation of biddingdocuments for the partial Theproducts helped privatize PLUNA and its of PLUNA. saleof PLUNA;(ii) establishmentof contactswith managementtransfer to the privatesector. Afiera potentialbuyers of PLUNAshares; (iii) secondbidding PLUNA's Board acceptedthe onlyoffer implementationand closingof the sale of equity in 1994;legal and technicalproblems delayed the sale participation's;and (iv) provisionof legalcounsel to until 1995. There wasno activeBank assistancefor the PLUNAin the implementationof its privatization. secondbidding.

Part D: Port Sector Reform D.1 Preparationof the newregulatory framework The PortReform Advisory Commission has: (i) By and large, all these topicswere addressedas planed for the port systemto increaseefficiency and preparedthe regulatoryframework for the entireport and a new regulatoryframework was put in placeunder allowprivate enterprise participation system,(ii) definedthe technicaland economic the TransportProject I (Loan3021-UR),. This throughconcession of core port services. requirementsfor privateenterprises interested in facilitatedthe introductionof private concessionsfor obtainingconcessions, permits, authorizations and port services,and contributedto MontevideoPort contractsto provideport services;(iii) analyzedthe productivityhikes. viabilityof transferrngANP's shiprepair and port equipmentrepair and maintenancefacilities to the privatesector; (iv) analyzedthe optionsfor the administration,operation and maintenanceof the statedredging fleet; (v) preparedtechnical and administrativeguidelines for port administrationand captaincies,in accordancewith the new PortLaw; and (vi) monitoredother technical assistance related to the port sectorreform.

D.3 Assistancein the optimizationof port services (i) Reviewand improvementof the cargo-handling Thisobjective was achievedsuccessfully. Further and operations. methods;and (ii) newregulations and proceduresto actionsunder implementation that will promote conduct,coordinate and superviseport operations additionalefficiency gains would be: (i) the concession and related activities. of the containerterminal to; and (ii) the contractingout with the privatesector of dredgingservices. 15 L Main Objectives Expected Output Outcome D.4 Provisionof consultingservices to assistin the (i) divestitureby ANP's of non-commercialport (i) Littleprogress in this frontwith furtherassessments, divestitureof additionalport servicesand the activities;and (ii) seminarsand practicaltraining particularlyon the futureof dredgingservices, still trainingof staff on port operations. providedto the staff of the newlycreated port pending;and (ii) this sub-componentwas not captaincies. implemented.

Part E: Power Sector Reform E.1 Establishinga newregulatory framework for (i) the bodyof regulationsfor the reformedsector All these actionswere delayed until the new Electricity the sectorto increaseprivate sector and the developmentof the functionsand Law was enactedin July 1997.Govenment is now participationin powergeneration, organizationof the new powerregulatory authority; usingthe technicalwork performedto write the transmissionand distribution. (ii) a newpower sectordecreeulaw; and (iii) Regulationsrequired to implementthe new Law. definitionof a methodologyand an actionplan for settingelectricity rates basedon marginacost criteria.

E.2 Traininggovernment officials and UTE staff (i) trainedgovernment officials for assigment to This activitywas canceledbecause of the delaysin the on the new regulatory frameWork andthc regulato.r rcsponsibilitie ( iii) semnarsgiven on definition and implementationof the new regulatory reformprocess. powersector regulation and reform;(iii) trained framework. UTE's managementand highlevel staff on the new law and regulations;and (iv) purchasingof training equipmentand materials.

E.3 Prfeaation of a plan for privatizingor Plansfor privatizing/franchisingUTE's Constitution The Borrowercanceled this activityas it desistedfrom franchisingselected UTE power generatimn powergeneration and otherplants. privatizing/franchisingthis bydro-powerplant platsu. I 16 1. MainObjectives Expected Output Outcome Part F: Reform of the MGAP F.1 Effortsto divestand reorganizeactivities (i) establishmentof a unitto carryout reorganization After an initialattempt to carry outthese tasks.,this sub- withinMGAP. and divestituresactivities within MGAP; (ii) studies componentwas canceledby the Borrowerdue to lack of showingthe optionsopen to MGAP,including acceptanceand changein priorities. As a result,most of privatization,transfer to otherentities or closingof the budgetedfunding from PERLand a Japanesegrant servicesbeing offered; (iii) the implementationof were canceled.Partial reform in this sectorhas suchstudies; and (iv) an actionplan for the continued-although supported by finacing fromother reorganizationof MGAPafter divesting MGAP of a sources. numberof its functions.

Part G: ANCAP's Cement and AlcoholPlants G.1 Diagnosisof the two plantsand optionsfor Diagnosisof the cementand alcoholplants consisting The diagnosticwork was performedbut the Borrower theirprivatization. of: (i) an analysisof theircompetitiveness; (ii) a decidednot to carryout the recommendations.Thus, financialanalysis and assetsvaluation; and (iii) divestitureof ANCAP'scement and alcoholplants to optionsfor theirprivatization. the private sectoris notbeing consideredat this time. Second,the de-monopolizationof cementand alcohol But its alcoholproduction monopoly recently was activitiesand the streamliningof ANCAP's rescinded,permitting private participation in the productionlines based on the recommendation industry. derivedfrom the diagnosismade.

Part H: Small Scale Privatization H. 1 Supportof small scaleprivatization Privatizationof localairports, hospital services, oil Small-scaleprivatization was not activelypursued by schemes. tankersand the GovenmentPrinting Office. the Borrowerduring Project implementation. However, limitedfunding was usedto facilitatethe private concessionof Montevideo'sgas distributionsystem, and 1991-92auditing of the financialstatements of the Gas Co. II. New ActivitiesAdded Expected Output Outcome Insurance Sector Reform Reformof the sector,the eliminationof the (i) Establishmentof a regulatoryframework for the (i) Requiredregulations are now in placeand there is an monopolyheld by the State InsuranceBank, insurancesector; (ii) creationof a Superintendentof activeprivate completion presence in insuranceand and promotingprivate sector competition in the Insuranceand Re-insurance;and (iii) an auditof on business;(ii) the Superintendentis now operative;and provisionof insuranceservices. the State InsuranceBank, as a first efforttowards its (iii) an initial assessmentwith recommendationsto reform. improvemanagement practices and efficiencyat the 17 I. MainObjectives Expected Output Outcome StateInsurance Bank was finalizedas scheduled. Its implementationis pending. SanitationSector Reform Decentralizationand rationalizationof water (i) Definitionof a strategyfor the sanitationsector (i) Workdone provided an adequatediagnosis of the and sewerageservices provided by OSE across and OSE, includinga separationof the functionsof sector,but it was unsatisfactoryin the definitionof a the cotmtry. sectoralpolicy formulation,regulation and the strategy,so the pace of reformslowed down: (ii) other provisionof services;(ii) designof a regulatory consultantsretook the task and prepareda preliminaty frameworkfor the water and seweragesectors; and proposalfor the regulatoryframework, which remains to (iii) establishmentand strengtheningof the new be translatedinto a formal/legalframework; and (iii) a regulatoryagency for the sanitationsector. regulatoryagency is yet to developed. Improvementin State Postal Services Improvingthe performanceof the National (i) the statepostal service improved technologically, Therewas progress on all threetasks but, this activity PostalAdministration in particularin the area oftracking and tracing startedlate in the implementationof PERLand work still postalpieces, and with a broaderline of products; remainsto be donein the three areas. (ii) a marketstudy and an economicand financial assessmentof the statepostal service that significantlyimproves the price settingmodei for postal services;and (iii) a 5-yearbusiness plan aimedat achievingdecentralization and greater autonomyof statepostal services and at least a break-evenadministration in the mediumterm. Rationalizationof the Armed ForcesHealth Services (i) Rationalizationand consolidationof the health (i) Theretionalization is implementedproduced gains in Betterdelivery and efficiencyof the health servicesoffered by hospitalsand othermedical efficiencyand reductionsof costs throughcontracting services. facilitiesof the armedforces; and (ii) a resolutionof out servicesand the eliminationof duplications--;and the debt overhangof armedforces' medicalfacilities (ii) the externaldebt of the medicalfacilities was, and the normalizationof theirfinancing regime. consolidatedand transferredto the CentralGovernment, whichsignificantly improved their cash flowposition and financialaccountability. 18

Table 6: Project Costs

Item Appralal etimate (USS'000) Actual (USS'000) Bank Japanese Govern Bflak Japanese Govern Grants ment Grants Mene I. InstitutionalFramework for 1,268 0 645 875.5 525.7 Implementation II. RegulatoxyRefoxms 2,645 955 1,910 1026.6 968.6 261.7 A. Tlcoommunications 1,045 655 1,100 705.0 755.2 154.0 |B. Aviation 500 200 C. Ports 900 400 321.6 60.8 D. Power 200 300 210 213.4 46.9 m. Implementationof Reforms 5,537 905 2,280 1,790.2 1,105.8 433.9 A. Telecommunications 1,600 905 300 1,105.8 327.8 B. Aviation 1,137 230 879.6 106.1 C. Ports 2,400 1,550 765.6 D. Power 400 200 145.0 IV. Other Assistance 1,550 506 799 535.0 98.8 3.5 Reform of the MGAP 600 506 344 135.0 98.8 3.5 ANCAP's cement & alcohol plants 350 200 400.0 Small scale privatization and other 600 255 New Items Added during 2,393.5 4.8 Implementadon V. Insurance SectorReform 1,030.6 VI. Sanitation SectorReforn 418.7 VII. State Postal Services 428.3 VII. Aimed Forces Health Services 347.3 IX. Other 168.6 4.8 Gas Co. 19.7 4.3 Deregulation 28.0 Extnal Auditing 14.1 05 Equipment 4.4 PPF - Refinancing 102.4 Ttlj..... 100..... , 21 .2 1,229._ Total | 100 2,6 5,634 |6,620.8 2,173.2 1,229.6 19 Table 7: Project Financing

Source Appraisl estimate (USS'OOO) Actul _(USS'OOO)

Local Forein Total Total costs costii

IBRD 1,000 10,000 11,000 6,621 Japanese Grant 200 2,166 2,366 2,173

Govemment 5,634 - 5,634 1,230

Total 6.834 12,166 19,000 10,023 20

Table 8: Status of Legal Covenants

Section of Loan Type of Present Descriptionof Covenant Comments Agreement Covenant Status Section3.01 (a) 5 C The BorrowershaU carry out the Projectthrough OPP,the Officeof Plamiingand Budget,a OPPwith due diligenceand efficiency and in dependencyof the Presidencyof the Republic,was conformitywith appropriateadministrative and the executingagency for the Projectand was in financialpractices. chargeof coordinatingthe processof reformof public enterprises. Section3.01 (b) 5 C TheBorrower shall maintain in OPP,until the ThisUnit -- knownas GAREunder its Spanish ClosingDate, a ProjectCoordinating Unit (PCU) acronym--was createdin OPPprior to Project withfunctions and responsibilities satisfactory to the effectivenessand it has been operationaleven after Bank. the ClosingDate. Althoughmuch reduced in size, GAREnow is concentratingon issuesrelated to public concessions(ports, roads, etc.). Section3.01 (c) 5 C TheBorrower shall ensure that the PCUis at all Theexperts working in GAREwere hired with timesheaded by a qualiiedprofessional and assisted fundsfrom PERL under an agreementbetween the by qualifiedand adequatepersonnel. Governmentand UNDP, which acted as facilitator. Section3.01 (d) 10 CP TheBorrower shall carry out the Projectsubstantially Only3 of the 11 itemsin the Implementation in accordancewith the ImplementationProgram in Schedulewere complied with within the timetable Schedule5. set in the originalSchedule 5. Thiswas amended twice,following the June94 mid-termreview and in October1995. Section3.03 9 CP The Borrowershall prepare and furnish to the Bank, Therewas a continuousdialog between GARE and by notlater thanJune 30 andDecember 31 of each the Bankthroughout Project implementation, year, startingin June 1993,a reportsatisfactory to althoughprogress reports were not alwaysprovided the Bankconcerning progress in the implementation in the systematicand orderly fashion agreed upon of the Project. in the Loan Agreement. 21

Sectionof Loan Type of Present Descriptionof Covenant Comments Agreement Covenant Status Section3.04 10 C The BorrowershaU canry out jointly with the Banka Themid-term review was carriedout in June 1994 comprehensivemid-term review, not laterthan June andresulted in a reallocationand cancellation 1994,on theprogress of the achievementof the (US$1.5milion) of loanfunds. objectives of the Project. Section3.05 5 C TheBorrower shall maintain an informationsystem Themformation system was maintainedby GARE in OPPsatisfactory to the Bankto providethe PCU itself. with full informationon the executionof the Project. Section3.06 (a) 10 C TheBorrower shall carry out,under terms of GARE,as the Govermment'scounterpart to the referencesatisfactory to the Bank,all plansand Bank,regularly exchanged views andrequested the studiesincluded in the Projectand shaUpromptly Bankthe no objectionfor consultingassignments. furnishto the Banka copyof the findingsand Also,it providedthe Bankwith copies of the I______I______recommendations. reports with the findingsof these assigmnents. Section3.06 (b) 10 CP TheBorrower undertakes to ake ino accounttheu TU..e ilstalusttedb, the-acs-e n Bank'scomments on the plansand studiesreferred in taken in connectionwith the Aviationand ANCAP Section3.06 (a). components,the positiontaken by the Borroweron the implementationof somereforms differed from

______that of the Bank. Section4.01 (b) 1 CD The Borrowershall fumish to the Banknot laterthan Auditreports were sentto the Bankwith delays. (ii) four monthsafter the end of the fiscalyear an Also,some of the audit reportsinitially sent to the appropriatelyaudited report, by independentauditors Bankreceived comments that werelater on acceptableto the Bank,on accountsand records of correctedby the Borrower.The final auditreport the Project. (for year 1997)is expectedto be receivednot later

- ______th a nw p i 199 8. Cm.mtm Types 1 =AccountsAndits S = Indigenouspeope 2 - Funcial periace/t rvme fiom 9 = Mootoing, reviewand repoting Paeent Status: ben ficiarm 10 P=rject implanentatiounot C = covenat complied 3 Flow and utilizationoPrqject funds covwed by catgories 1-9 CD = compliedwith afterdday 4 Comtawt fnding 11 = Sectolalor suusectoal CP = compliodwithpastially 5 = Manag*_nt aect ofoh pnect budgetaryor ohrr moure NC = Not compliedwith or WcoNingagey allocation 6 = EAvirmnea conans_ 12 = Sector or cros-setoral policy/ 7 = Jluy uaotdnsnt reltoyrnatituiol action 13 = Other

23 Table 10: Missions

st 4e orProject cycle MontW Number Spodeled yeu of Daysin deaffddi Prformancer ting Peon field epeentedJ/ Implementatlon Development pre of

______S_A______v _ problem

Throughppilul January1992 1 4 I M h1992 1 2 J Apprail through Mby1992 7 11 A,B,DAEF %H Board approval Boardapprol through effeete_ October1992 2 8 A B 1 Concenover Supervlwn r mendnwhether

______~~~~~~~~~ANTILpMdvaid. May 1993 2 4 A. B 1 ANTELnot privatized.Fmds to beused to devlop telemmmWastions reglatossteL Rei4brMOfMinitry of Apiculn behind schedule. November19 2 10 A.C 2 1 Prqeot ______Implementetionslow. Marh 1994 2 4 A,B 2 2 LoanImplmntadtn albutedby eledon

inAdminatradLo Fsbrury 1995 2 4 A,HD U HatnrdeosmI Felb September1995 1 4 A u a Disbursemesslow July1996 1 2 A 9 S Slightdelays in ______~~~~~~pr,iect exeutio n Completion MAsy/June1997 1 a D I/ Keyto specialition: A. TaskMnger B. PortSpecialist C.Private Sector Specialist D. Consutant E Lepl Counsel F. Natunl Gu Specialid G PowerSpeialist H.Regulations Specialist L Sr.Teoommwltio Specialist 3.Division Chief MAI ECTION 53'.- ,5' 55-6X

AMER Aj R Z I L

V ' A s ,Xf '%@ V uge7 k / i A~~~~F AI-> \ Sonl > t- v } > 5 hsndebsT 9 J_-/<2>w/~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~32

\ do _>~/< id {bnYle Roqualb ( v

Fruz tiW$F q *;9 _4; ulsFwe/ht u3 <

.4 2 -l> i-$Die } /3E1NTAYT3E5 kJk j \~~cl

v _ / .,, tan i nO AVqer < * 5 /\ _ At}.' t~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

-~~Jvl .- naGPeo<8bv\. .. >

58' Sr /, 54 -X

__ ~~~~~~~~~~~~~URUGUAY

SOU TH ru- 5 30 AMERICA -- dR

| U3uGUAY .FX3hlDSST= _ _, ,_ * ~~~~~~~~~I- - _,RAi---

i, _ 5e t3 0 5D 1t t S3r S 5t __ W~~~~~~~A,