Report No. 54939 - UY URUGUAY Public Disclosure Authorized Policy Notes: Challenges and Opportunities 2010-2015 June 22, 2010 Argentina, Paraguay and Uruguay Country Management Unit Poverty Reduction and Economic Management Latin America and the Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized CURRENCY AND EXCHANGE RATE (As of June 22, 2010) Currency Unit = Uruguayan Pesos US$1.00 = UR$20.95 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ACCE Agency for Contract Hiring and State Purchases Agencia de Contrataciones y Compras del Estado AFAP Pension Funds Administrators Administradoras de Fondos de Pensión AFE State Rail Administration Administración de Ferrocarriles del Estado ANP National Ports Administration Administración Nacional de Puertos ANTEL National Telecommunications Administration Administración Nacional de Telecomunicaciones BCU Central Bank of Uruguay Banco Central del Uruguay CEIBAL “One Computer Per Child” Program Programa “una computadora por niño” CFU Rail Corporation of Uruguay Corporación Ferroviaria del Uruguay CIER Commission for Regional Power Integration Comisión de Integración Energética Regional CPS Country Partnership Strategy Estrategia de Alianza con el País CVU Road Corporation of Uruguay Corporación Vial del Uruguay DGI Internal Revenue Service Dirección General Impositiva DINASA National Water and Sanitation Board Dirección Nacional de Aguas y Saneamiento DNETN National Nuclear Energy and Technology Board Dirección Nacional de Energía y Tecnología Nuclear DNH National Hydrography Board Dirección Nacional de Hidrografía DNV National Roadways Board Dirección Nacional de Vialidad EE Energy Efficiency Eficiencia Energética ETC Full-Time Schools Escuelas de Tiempo Completo GDP Gross Domestic Product Producto Interno Bruto GEF Global Environmental Facility Fondo para el Medio Ambiente Mundial GEI Greenhouse Gasses Gases de Efecto Invernadero HOI Human Opportunity Equality Index Índice de Igualdad de Oportunidades Humanas LNG Liquified Natural Gas Gas Natural Liquado RE Renewable Energy Energía Renovable IADB Inter-American Development Bank Banco Interamericano de Desarrollo IFRS International Financial and Reporting Standards Estándares Financieros y de Divulgaciones Internacionales ILD International Long Distance Larga Distancia Internacional IMF International Monetary Fund Fondo Monetario Internacional INCO Institute for Computing Instituto de Computación IRAE Income Tax on Economic Activities Impuesto a la Renta de Actividades Económicas KTEP Kilo Equivalent Tons of Petroleum Kilo Toneladas Equivalentes de Petróleo MGAP Ministry of Livestock, Agriculture and Fisheries Ministerio de Ganadería y Agricultura MIEM Ministry of Industry and Mining Ministerio de Industria y Minas MTOP Ministry of Transport and Public Works Ministerio de Transporte y Obras Públicas MW Mega Watts Mega Watts MWh Megawatt hour Megawatt hora PACC Support Program for Business Competitiveness Programa de Apoyo a la Competitividad de Conglomerados PMEGEM General Measures for Mitigation and Adaptation to Medidas Generales para la Mitigación y la ACC Climate Change Adaptación al Cambio Climático PPP Public-Private Partnership Asociación Público-Privada PPR Natural Resources Management Project Proyecto Producción Responsable UNFCC United Nations Framework Convention on Climate Naciones Unidas sobre el Cambio Climático Change TABLE OF CONTENTS PREFACE ........................................................................................................................................ I EXECUTIVE SUMMARY .......................................................................................................... III CHAPTER 1. EQUALITY OF OPPORTUNITY AND EXCLUSION IN URUGUAY ............... 1 CHAPTER 2. URUGUAY EDUCATION SECTOR ................................................................... 17 CHAPTER 3. SOCIAL PROTECTION SYSTEM IN URUGUAY ............................................ 37 CHAPTER 4. INFRASTRUCTURE FINANCING AND REGULATION ................................. 47 CHAPTER 5. TRADE AND LOGISTICS: AN OPPORTUNITY FOR URUGUAY ................ 63 CHAPTER 6. THE TRANSPORT SECTOR ............................................................................... 77 CHAPTER 7. THE ELECTRICITY SECTOR ............................................................................ 95 CHAPTER 8. AGRICULTURE IN URUGUAY – CHALLENGES AND OPPORTUNITIES .............................................................................................. 109 CHAPTER 9. CLIMATE CHANGE AND AGRICULTURE ................................................... 119 CHAPTER 10. MACROECONOMIC AND FISCAL FRAMEWORK .................................... 127 CHAPTER 11. CAPITAL MARKETS IN URUGUAY ............................................................ 151 CHAPTER 12. SELECTED TOPICS IN PUBLIC SECTOR ADMINISTRATION ................ 163 CHAPTER 13. LESSONS AND OPEN QUESTIONS IN TWO SUCCESSFUL URUGUAYAN INDUSTRIES: FORESTRY AND SOFTWARE .................... 183 Vice President Pamela Cox Country Director Penelope J. Brook Sector Director Marcelo Giugale Sector Leader José R. López Cálix Sector Manager Rodrigo A. Chaves Task Team Leader David E. Yuravlivker i LIST OF FIGURES Figure 1: Uruguay in 2010 ............................................................................................................. iv Figure 2: Future Challenges ............................................................................................................ v Figure 3: Priority Action Areas ...................................................................................................... vi Figure 4: Institutional Framework .............................................................................................. xvii Figure 1.1: Evolution of Poverty and Inequality in Uruguay ......................................................... 2 Figure 1.2: Benchmarking Uruguay – Education and Technology Access .................................... 3 Figure 1.3: Distribution of Poor Individuals by Age (Official Moderate Poverty Line) ................ 4 Figure 1.4: Equality of Opportunity in Uruguay and Latin America — Aggregate HOI ............... 6 Figure 1.5: Disaggregated HOI, National ....................................................................................... 8 Figure 1.6: HOI: Geographic Disparities in Education Indicators (by Department) ...................... 9 Figure 1.7: HOI: Geographic Disparities in Health Indicators (by Department) ......................... 10 Figure 1.8: Geographic Living Disparities ................................................................................... 10 Figure 1.9: Evolution of HOI in Uruguay and Latin America, 1996-2006 .................................. 12 Figure 2.1: Gross Enrollment Rates in Uruguay (2000 – 2008) ................................................... 17 Figure 2.2: International Comparison of Net Enrollment Rates (2006) ....................................... 18 Figure 2.3: Average and Standard Deviation in PISA Reading 2006, By Country ...................... 19 Figure 2.4: Comparative Public Education Spending in Latin America as a Share of GDP (2006) ....................................................................................................................................................... 20 Figure 2.5: Labor Market or Education Insertion for Uruguayan Youth, 17 to 24 Years Old ..... 22 (1991-2008)................................................................................................................................... 22 Figure 3.1: Poverty and Income Distribution Indicators, Uruguay 1989-2008 ............................ 38 Figure 3.2: Labor Market Indicators, Uruguay 1989-2008........................................................... 39 Figure 3.3: Unemployment Insurance-Coverage and Structure of Beneficiaries, Uruguay 2001- 2008............................................................................................................................................... 41 Figure 4.1: Public Investments in Infrastructure – Uruguay ......................................................... 49 Figure 4.2: Public Investment in Telecommunications in Uruguay ............................................. 50 Figure 4.3: Total Investments in Electricity - Uruguay ................................................................ 51 Figure 4.4: Public Investments in Water and Sewerage – Uruguay ............................................. 52 Figure 4.5: Residential Electricity Tariffs in Latin America ........................................................ 54 Figure 4.6: Private Investment in Infrastructure ........................................................................... 57 Figure 4.7: Worldwide Governance Indicators: Regulatory Quality – 2008 ................................ 58 Figure 5.1: Uruguay’s Port Hinterland ......................................................................................... 66 Figure 5.2: Containerized Cargo Traffic in the Port of Montevideo, in Thousands of TEU ........ 67 Figure 6.1: Container Movement — Port of Montevideo (TEU) ................................................. 82 Figure 6.2: Road Investment by Category .................................................................................... 84 Figure 6.3: Road Sector Investment March 2005 - December 2009 ............................................ 85 Figure 9.1: Contribution of Agriculture