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 URUGUAY 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 Telecommunications 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