1. Assessment and recommendations
This chapter documents the overall development context in Uruguay, describing the current economic situation and the main investment policy reform efforts, and identifies specific challenges that hinder investment, economic growth, and well-being. It summarises the key findings in each policy area covered by the Review and provides tailored recommendations.
With a small (3.4 million), long-living, yet aging, population, a gross domestic product (GDP) per capita of USD 17 278 in 2018, and some of the brightest social indicators in Latin America, Uruguay faces similar challenges to those of many OECD countries. How to achieve economic growth that is driven by innovation, sustainable, and inclusive – i.e. is distributed fairly across society and creates opportunities for all? How to ensure that economic growth actually improves lives, preserves the Planet, and let people earn the wages they need to thrive? How to create a business environment that attracts new firms and boosts communities, while also making the tax system fairer and more effective? How to maintain competitiveness in the face of a shrinking population (projected to fall to 3.2 million in 2100)?
Investment is a critical component in finding relevant policy answers to this riddle. The OECD Investment Policy Review of Uruguay, based on the action-oriented analytical foundations of the PFI aims to provide a roadmap for further improvements and reforms in support of the country’s strategic objectives. The IPR identifies key aspects in different areas of public policy that impact on investment outcomes that the government has deemed important to achieve its long-term vision and that need to be addressed in order to translate business investment into inclusive growth.
The Policy Framework for Investment (PFI) helps governments mobilise private investment in support of sustainable development, thus contributing to the prosperity of countries and their citizens. It offers a list of key questions to be examined by any government seeking to create a favourable investment climate. The PFI was first developed in 2006 by representatives of 60 OECD and non-OECD governments in association with business, labour, civil society and other international organisations and endorsed by OECD ministers. Designed by governments to support international investment policy dialogue, co-operation, and reform, it has been extensively used by over 25 countries as well as regional bodies to assess and reform the investment climate. The PFI was updated in 2015 to take into account this experience and changes in the global economic landscape.
The PFI is a flexible instrument that allows countries to evaluate their progress and to identify priorities for action in 12 policy areas: investment policy; investment promotion and facilitation; trade; competition; tax; corporate governance; promoting responsible business conduct; human resource development; infrastructure; financing investment; public governance; and investment in support of green growth. Three principles apply throughout the PFI: policy coherence, transparency in policy formulation and implementation, and regular evaluation of the impact of existing and proposed policies.
The value added of the PFI is in bringing together the different policy strands and stressing the overarching issue of governance. The aim is not to break new ground in individual policy areas but to tie them together to ensure policy coherence. It does not provide ready-made reform agendas but rather helps to improve the effectiveness of any reforms that are ultimately undertaken. By encouraging a structured process for formulating and implementing policies at all levels of government, the PFI can be used in various ways and for various purposes by different constituencies, including for self-evaluation and reform design by governments and for peer reviews in regional or multilateral discussions.
The PFI looks at the investment climate from a broad perspective. It is not just about increasing investment but about maximising the economic and social returns. Quality matters as much as the quantity as far as investment in concerned. It also recognises that a good investment climate should be good for all firms – foreign and domestic, large and small. The objective of a good investment climate is also to improve the flexibility of the economy to respond to new opportunities as they arise – allowing productive firms to expand and uncompetitive ones (including state-owned enterprises) to close. The government needs to be nimble: responsive to the needs of firms and other stakeholders through systematic public consultation and able to change course quickly when a given policy fails to meet its objectives. It should also create a champion for reform within the government itself. Most importantly, it needs to ensure that the investment climate supports sustainable and inclusive development.
The PFI was created in response to this complexity, fostering a flexible, whole-of government approach, which recognises that investment climate improvements require not just policy reform but also changes in the way governments go about their business.
For more information on the Policy Framework for Investment, see: www.oecd.org/investment/pfi.htm
A democracy, capable of reforming and with strong economic fundamentals
Any analysis of Uruguay’s achievements and challenges must start from acknowledging the solidity and resilience of its institutions, as well as overall macroeconomic and political stability. For example, in its 2018 edition, the Economist Intelligence Unit’s Democracy Index ranked it 15th out of 167 countries, as one of only two “full democracies” in Latin America. Similarly, recent progressive social reforms (such as the legalisation of same-sex marriage and the approval of the law that regulates the cannabis market) have received wide praise. The World Bank’s World Governance Indicators, the Transparency International’s Corruption Perception Index, and other authoritative sources also point in the same direction. Another positive indication is that, in the age of popular scepticism towards representative democracy, Uruguay is among the Latin American countries with the highest public trust in the political system and belief that the population on the whole benefits from public policies (Latinobarómetro, 2017). These institutional achievements underpin the recognition of the capital city, Montevideo, as the Latin American city with the highest quality of living (Mercer, 2019).
In the past three decades, successive governments have declared and proven their long-term commitment to political and economic stability, in a regional environment characterised by strong volatility. Between 2004 and 2014, GDP per capita grew at an average annual rate of 5.4% in real terms, before decelerating markedly when the external environment turned sour. This ‘golden decade’ also saw gross fixed capital formation reach unprecedented levels (19.6% of GDP on average) and grow almost twice as fast as GDP. The country’s main economic sector is services, accounting for 61% of GDP in 2018. While agriculture is considered of strategic importance to the country, and does indeed form part of the national identity and a lion’s share of the country’s exports, it only accounts for 5.1% of GDP (more if beef processing and wood pulp are also included).
The last few years have been less impressive in terms of economic performance. The end of the commodity boom has brought a sharp correction. Mirroring their mutually-reinforcing dynamics in the boom years, since 2014 GDP growth and capital formation have moderated in tandem. External forces, such as progressively tighter global financial market conditions and the slowdown of the Chinese market for animal proteins, of which Uruguay is an important supplier, have played an important role in this respect. Currently, the macroeconomic situation is relatively sound, with single-digit inflation levels since 1998 and prudent monetary and debt management, but vulnerabilities persist on the fiscal side and decelerating growth may also be related to factors endogenous to policies such as low productivity and rigid regulation, and hence requires government’s attention. The demographic bonus, which was reaped as the number of young people joining the workforce increased, is now mostly spent and the working-age population will start shrinking in the 2030s. Nonetheless, even as the economy has faltered, poverty has continued to edge down (from 11.5% in 2013 to 8.1% in 2018).
Against this background, the government needs to undertake several in-depth structural reforms to revive growth and mobilise investment, domestic and foreign. The capacity of an economy to attract investment depends on a number of factors, including market size, macroeconomic stability, the regulatory environment, the skills base, the quality of infrastructure and the business climate. Due to its limited market size relative to industrial powerhouses of Brazil and Argentina, Uruguay has positioned itself as a service-based economy that relied on relative economic stability as well as developed financial services to attract capital flows from its unstable neighbours and European investors. While it has proven a winning strategy in the past, investment in the financial industry targeted at non-residents has been more timid recently. In addition, over-dependence on few sectors may have increased the vulnerability of Uruguay to external shocks, as evidenced by the impact of the Argentine crisis in 2002-2003. In the aftermath of the global crisis, pressure also mounted to better fight harmful tax competition and money laundering. Thanks to strong political commitment, credible actions have been taken both to reduce the risks of contagion and to align the country to the best global standards and practices. Against this background, Uruguay is currently at crossroads rethinking its approach towards most effective and sustainable strategy to attract and retain investment in the economy.
The role of FDI in the economy of Uruguay
Traditionally foreign investment has been a critical element in Uruguay’s economic development. Despite the small size of the domestic market and higher production costs than in the two much larger neighbours (Brazil and Argentina), fast GDP growth and the absence, or at least marginal incidence, of most de jure and de facto hurdles to foreign investment also attracted the interest of multinationals.
As a result, foreign direct investment (FDI) accounts for a large share of the economy. The FDI liabilities reached USD 48.8 billion (or about 82% of GDP) and FDI assets USD 26.7 billion (or 45% of GDP) in 2018, the latest available year. In relative terms, Uruguay is one of the most open economies in the LAC region, having some of the highest shares of inward FDI stock to GDP. The recent announcement of a second mega paper and pulp project by a Finnish company (UPM) signals investors’ confidence and interest in remaining and growing their business in Uruguay to serve global markets. The general attractiveness of Uruguay as a location for foreign investment is also reflected in relatively strong FDI inflows. Inward FDI flows reached, on average, 4.4% of GDP since 2012, and have generally been above the LAC average. In addition, since the mid-2000s, a few Uruguayan companies have begun to invest abroad, although so-called multilatinas from Uruguay are far less numerous than foreign-owned companies operating in the local economy, continuous internationalisation support can help domestic firms establish and expand presence abroad. In terms of their composition, services have attracted the bulk of new foreign investment, in particular in special economic zones (SEZs). Uruguay has also managed to attract a few resource-based greenfield FDI projects of considerable size in certain sectors, and has seen a progressive increase in the M&A activity over time.
Evidence on the effects of FDI on the economy is scarce, but largely positive. Multinational enterprises account for the lion’s share of Uruguay’s exports (Uruguay XXI, 2019) and have contributed to diversify the trade potential in terms of products and markets, and create quality jobs, both in the traditional resource-based sectors, such as agriculture and forestry, and in non-traditional commercial services (e.g., Carballo et al., 2019, Carbajal et al., 2014). For example, involvement of foreign investors has contributed to the expansion of the renewable energy, tourism and agro-food sectors. Multinational firms also benefit from size and labour productivity “premia” relative to domestic firms (IDB, 2019), and have been found to increase wages in (Peluffo, 2015) as well as export probability of local domestic-owned firms (Carballo et al., 2019). Still, the effects on innovation and productivity of local firms have been more mixed (e.g., De Elejalde et al. 2018; Peluffo, 2015; Carbajal et al., 2014); and there is an ongoing debate about changes in investment attraction and facilitation policies, and to their specific instruments, required to support growth and productive transformation.
Privatisation, which in other emerging economies has been a popular mode of entry and led to considerable FDI inflows, has been very limited in Uruguay, following popular concerns expressed through referenda in the 1990s. Recent opinion polls show continuous support for public ownership. Still, in telecommunications and finance, the entry of foreign investors has stimulated competition with the state-owned incumbents and contributed to modernisation, in particular leading to more diffuse provision of these services and improvements in their supply, price and quality.
Uruguay’s investment regime and the OECD National Treatment instrument
Uruguay is open to foreign investment, with relatively few formal ownership restrictions, and the key standards of investor treatment and protection are guaranteed under the Constitution and other laws. With a view to enhancing FDI inflows and remain competitive in a very competitive global landscape, continuous efforts have been made to reform the regulatory framework under fair terms in line with international experiences and standards. Using the methodology of the OECD FDI Regulatory Restrictiveness Index, which is based on statutory measures, Uruguay is found to be substantially more open to FDI than the averages for both emerging markets and the LAC region.
All enterprises have the right to organise and develop their activities under the form they deem appropriate. There are no pre-establishment screenings of foreign investment and very few restrictions on foreign investment (see list of exceptions to national treatment in Annex A). They are limited to a handful of sectors (i.e. media, domestic transport, and commercial fishing in territorial waters). In addition, the only provision currently in place for national security reasons concerns foreign governments and sovereign wealth funds (SWFs), which are not allowed to own any rural land and cannot own more than 49% of the shares in agricultural companies.
National treatment of foreign investors in the post-establishment phase is guaranteed, which means that foreign investors, when incorporated in Uruguay, are subject to the same rights and obligations that are applied to domestic investors.
The government also does not impose performance requirements or mandate employment requirements on foreign-owned established investors, nor are senior management or board of directors positions mandated in private companies, while there may be a local incorporation- or licensing requirement in some sectors.
The Uruguayan authorities have also indicated that they accept the commitments under the other two elements of the Declaration: the Decision on International Investment Incentives and Disincentives by which adhering countries recognise the need to give due weight to the interest of other adhering countries affected by laws and practices in this field and endeavour to make measures as transparent as possible; and the Decision on Conflicting Requirements, by which adhering countries shall co-operate so as to avoid or minimise imposition of conflicting requirements on multinational enterprises.
The domestic framework provides investor protection aligned with international standards
The protection of investors from improper treatment, combined with effective enforcement mechanisms, is an important pillar of a sound investment climate and can lower the perception of risk for new investments. The quality and efficiency of the justice system is a key determinant in this respect. A well-functioning judiciary ensures stable conditions for business activities; its efficient functioning is also necessary for the competiveness and development of the economy.
Uruguay has pursued a comprehensive reform agenda encompassing protection of ownership and other rights. Property rights and regulations on acquisition, benefits, and use of property are well defined. Expropriation of property has been rare in Uruguay. Steps to streamline the workings of the judicial system include rationalising the courts’ network, making capital investment and deploying modern information technologies, developing tools for ensuring the integrity of the judiciary, and promoting mediation as an alternative method of dispute resolution. Of particular importance has been the 1989 General Procedural Code (CGP) that introduced the principles of orality and immediacy (i.e., all evidence shall be produced directly before the court) in civil, commercial and labour proceedings, the right to bail, instead of the courts remanding individuals into custody to await trial, and opened up hearings to the public. In December 2014, Uruguay passed a new criminal procedural code (Law No. 19.293) that transformed the process, granting more protection to the accused.
Overall, the judicial system in Uruguay is generally well-functioning: courts are relatively faster in processing cases and judicial procedures are easier, on average, than in other LAC economies. For example, according to the World Justice Project (WJP) Rule of Law Index, Uruguay’s civil justice (as measured through a survey to more than 120 000 citizens and 3,800 experts in 126 countries) is the best in Latin America (and the 16th-best in the world), while for criminal justice the rankings are tenth and 40th, respectively. Individual components of the WJP index paint a diverse picture, with good marks in those that measure civil justice and less flattering marks in those of criminal justice.
Uruguay is also implementing changes to reinforce judiciary independence. Building on recent reforms, further improvements in the capacity of the courts to deal with commercial disputes can boost confidence of businesses and the general public in the judiciary. Further digitalisation of court procedures, promotion of out-of-court settlement, and continuous training for judges in emerging areas of law, such as the digital economy, may be useful in this regard.
Uruguay has also a modern system of intellectual property rights (IPRs) protection that is aligned with the best global norms and standards. There have been substantial improvements in the application of the laws, albeit there are still some concerns of trading partners relating to enforcement. There is however still scope for further strengthening the country’s attractiveness by better protecting IPRs and combatting counterfeiting and piracy, including of digital products.
A selective network of investment treaties adds protection for investors
As many other countries, Uruguay grants additional and preferential protections based on investment treaties to foreign investors from a number of countries. The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) entered into force in 1983 and the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) in 2000. The country has signed 31 international investment agreements (bilateral investment treaties and investment provisions in preferential trade agreements) with most North and South American nations and a number of European and Asian countries, covering a large share of Uruguay’s inward and outward FDI stock. As member of Mercosur, Uruguay also engaged in negotiations with other regional groupings (in particular with the EU and the European Free Trade Association, EFTA, concluded in June and August 2019, respectively).1
Most of the investment treaties that Uruguay has concluded so far bear the hallmarks of agreements concluded at a time when belief in benefits of treaties was greater than it is today, treaty-based claims were few, and overall awareness of implications of certain treaty provisions was low. Although only three concluded treaty-based claims against Uruguay are known – all three won by the state, two additional cases have been opened more recently. In addition, authorities have sharpened their understanding of the implications of such treaties, including the risks associated with often loose drafting and generous provisions, the potential restrictions of policy space, and the fiscal costs associated with effective defence against such claims.
The review of the investment provisions suggests that Uruguay should consider – to the extent possible given objectives of both negotiating parties – updating its international investment agreements with a view to ensuring that they fully reflect government intent and emerging trends in investment treaty policy. While Uruguay remains committed to its treaties, it also endeavours to better balance investor protection and the right to regulate in the public interest through renegotiation. Recently-renegotiated or under-negotiation treaties (in particular with Australia and China, respectively) reflect these goals.
Investment incentives remain generous and the framework has become more transparent but requires further monitoring and evaluation
Uruguay provides generous corporate tax incentives that differ significantly across sectors. Free Economic Zones (FEZs) offer a full tax holiday to users for the duration of their contracts. In addition, since 2007 the use of the COMAP regime, a specific tax incentive scheme under the Law on Investment, has significantly increased.
In order to enhance investment in certain targeted activities and in line with Uruguay’s broader socio-economic objectives, efforts have been made in recent years to better define eligibility criteria for investment incentives. In particular, those for the COMAP regime were clarified and have been amended twice since then. Upon request from the Forum on Harmful Tax Practices, the FEZ regime was amended in 2017 and 2018 and substantial activities requirements (i.e. definition of core income generating activities, adequate number of full-time skilled employees, adequate amount of operating expenditures and monitoring and enforcement mechanisms) are now in place. In addition, since June 2019 goods entering a FEZ from a MERCOSUR country retain their regional origin and are therefore exempt from the Common External Tariff (Decisión N° 33/2015).
Overall, investment incentives offered to investors remain generous and have multiplied. The approach of exempting profits from the corporate income tax has proved less effective in promoting investment than reducing the cost of capital (i.e. cost-based incentives such as the COMAP regime).
As such, several areas of improvement exist in this area, including in particular further consolidation of the various incentives in the underlying laws (e.g. income tax, VAT law, customs code). Furthermore, in order to enable adequate parliamentary scrutiny, tax incentives should be provided exclusively by law. More broadly, the focus of tax incentives policy should shift towards reducing the cost of capital, while phasing out tax holidays.
The OECD instrument on International Investment Incentives and Disincentives encourages Adherents to make incentives and disincentives measures as transparent as possible so that their scale and purpose can be easily determined. While Uruguay has made strides towards enhancing the transparency of its tax incentives system, monitoring and reporting of tax incentives for investment should be strengthened to improve accountability.
The overall approach to investment attraction has been strengthened but will require continuity...
Since the mid-1990s, attracting investment has been a top priority of successive governments, as evidenced by Uruguay’s strategic plans and the use of various investment attraction instruments – not least that of FEZs and the COMAP regime. For example, the current Plan on Productive Transformation and Competitiveness (2017-2019) and the recently-developed National Development Strategy (Visión Uruguay 050) explicitly acknowledge the role of investment in economic development, identify priority sectors and outline the goals of public policies in this domain.
By involving several institutions and proposing a number of horizontal projects, the Plan on Productive Transformation and Competitiveness can help improve the level of intra-governmental coordination in the area of investment promotion and facilitation. Stakeholders consulted for this Review note that Transforma Uruguay – the agency set up in 2016 in charge of strategic planning– has played a useful role in this regard. In addition, by proposing projects in the area of investment facilitation and streamlining of administrative procedures, it can help broaden the scope of investment attraction policy that relied predominantly on the provision of investment incentives. For example, a pilot project mapping out relevant regulations and the establishment of a Single Window for Investment (VUI) can be an important step in the right direction.
Going forward, it will be important to ensure that projects conceived under the current Plan are implemented and the planning exercises continued in the future. In order to play effectively its role, Transforma Uruguay will also require adequate resource and political support. Considering the specific needs of investment promotion and facilitation policies and their horizontal nature, continuity in the government’s focus and support will be critical to reap tangible benefits. The identification of key priority sectors as part of the process should also be capitalised on to ensure greater coherence in the activities of various institutions, and a more defined approach towards prioritisation.
One example of continuous reform momentum of relevance to investment and trade policy has been the creation and expansion of the single window for trade (VUCE), currently operated by Uruguay XXI (i.e. the national trade, investment and country brand promotion agency). The lessons from a successful VUCE implementation could inspire the ongoing reflection on the design of a single window for investment. The growth in the capacity of VUCE, and the accompanying shorter time spent at the border by traders, mentioned earlier, have accompanied the progressive growth in activities and resources of Uruguay XXI itself. The overall budget of the agency increased and over time it has added a wider set of activities and services to its portfolio. For example, the recent absorption of the Global Services Programme by Uruguay XXI (within the newly-established aftercare unit) is a step in the right direction that can help the agency provide more tailored assistance to firms. In addition, the ongoing improvements in the agency’s monitoring and evaluation systems as well as better prioritisation can also help yield positive results (see Volpe Martincus and Sztajerowska, 2019 for a benchmarking of OECD and LAC agencies).
The gradual improvements in these various dimensions could be built on while the government also rethinks and reforms its approach towards investment incentives.
…and greater focus on investment facilitation and a wider regulatory reform
The quality of public governance has a significant influence on the climate for business and investment. Poorly designed or loosely applied regulations can slow business responsiveness to shocks, divert resources away from productive investments, hamper or delay entry into markets, reduce job creation, and generally discourage entrepreneurship and risk-taking. Nothing contributes more to investor confidence in regulation than predictability and evidence that rules achieve their stated objectives. In this context, addressing the underlying regulatory bottlenecks will become increasingly important as the traditional armour of investment attraction policies (i.e. investment incentives) is being progressively reformed in Uruguay.
Existing business surveys, including those conducted by Uruguay XXI (Uruguay XXI, 2018), point to a relatively important level of investors’ dissatisfaction with the administrative procedures. Timid progress is also reflected in the available international rankings. For example, Uruguay was ranked at the 76th place (out of some 141 economies) on the WEF’s Global Competitiveness Index and 95th (out of 190 economies) on the World Bank’s Doing Business. In particular, the number of procedures and the time it takes to obtain construction permits and registering property remain above the OECD and LAC averages, and will require government’s action. The important progress in speedy business establishment as well as improving the efficiency of border procedures could meanwhile be built on when addressing other bottlenecks that may hinder the establishment and expansion of business activity more generally. The pilot project, mapping out regulations affecting a selected sector and those issued by one Ministry, conducted by Transforma Uruguay, as well as the work towards the establishment of the single window for investment (VUI), led by Uruguay XXI, can be positive steps in this regard.
Going forward, the government need to pay more attention both to a systematic reduction of the administrative burden and to improvements in the quality of new regulations. In view of other institutional and policy features of the country, there is room for rendering administrative procedures speedier, more transparent and effective, and for improving the overall quality of public governance. While Uruguay shows high levels of transparency and access to information on the applicable laws and regulations, it lacks an overarching legal basis and institutional solution to ensure regulatory practices are respected across different institutions (e.g., provisions on prior stakeholder consultation and regulatory impact assessment). Awareness regarding good regulatory practices is also low and no single institution has an oversight role in this regard. Conducting a dedicated OECD Regulatory Policy Review could help the government outline possible reform options.
Accelerating state-owned enterprises reform may increase competiveness
Uruguay has made a societal choice, in the mid-1990s, not to pursue an ambitious privatisation campaign. State-owned enterprises (SOEs) are a very significant part of Uruguay’s economy. SOEs provide most essential services such as electricity (which is distributed by UTE), water and sanitation services (provided by OSE), oil and gas (supplied by ANCAP and its subsidiary DUCSA), and telecommunications (a de facto State monopoly in fixed lines through ANTEL). The retail banking sector is dominated by the two state-owned banks, BHU and BROU; and Banco de Seguros del Estado (BSE) enjoys a quasi-monopoly in insurance activities.
The reform agenda for SOEs has emphasised improvements in corporate results (financial and operational alike) through “programmecontracts” that establish the intentions and reciprocal commitments of the State and the enterprises management. The ultimate goal is to set out a framework for the SOEs consistent with national development plans and to provide full management autonomy to the companies within these rules of the game.
To a large extent, SOEs have managed to break away from political interference, improve governance and management, and boost efficiency. Still, to the extent that SOEs use public resources and provide critical services, they influence the quality of growth and competitiveness. Their record in reaching the goals set in management contracts is mixed and there is no hard evidence that it is improving over time. Major reforms require changes to the Constitution and this makes it difficult to raise private investment as an important economic stimulator and source of capital for Uruguay’s innovation, job growth, and competitiveness. Given the dominant role of SOEs in Uruguay’s economy, there is value in adopting best-practice models of financial transparency and managerial professionalism, as those identified in the OECD Guidelines on Corporate Governance of State-Owned Enterprises. Indeed, better SOE governance could also prove a catalyst for improving the governance of private companies and boosting underdeveloped local financial markets.
Building on strong performance on public integrity and fight against corruption
Public integrity is another crucial determinant of a favourable investment climate. Mechanisms are, in this regard, important to reduce potential and existing obstacles faced by companies, either when they decide to invest or in their day-to-day operations, and this includes the risk of corruption when interacting with government officials.
Uruguay is constantly ranked among the least corrupt countries in Latin America and indeed across the universe of emerging economies. The country has made significant progress in strengthening its fight against corruption and can claim a good success rate in bringing many reforms into concrete results. The cornerstone of the anti-bribery fight is Law 17.060, also known as Ley Cristal, approved in 1998, two years after the signing of the Convención Interamericana contra la Corrupción (Caracas, 29 March 1996). Criminal law against corruption is largely in place, meeting the standards of the Organisation of American States and UN.
The Office for Transparency and Public Ethics (Junta de Transparencia y Ética Pública, JUTEP was established in 2015. More recently, in response to calls by public opinion and the international community, national authorities have developed a wide-ranging strategy (National Strategy for the Fight against Money Laundering, Terrorism Financing and Proliferation of Massive Destruction Weapons, now in its third version). The legislation governing public procurement has been amended substantially on several occasions, with each version making the process more rigorous, better controlled, more transparent and overall more business friendly.
Investors have acknowledged these achievements. There may be value in strengthening the involvement by the private sector in the implementation and monitoring of efforts to promote business integrity. The further development of eGovernment services and other approaches that reduce opportunities for corruption and limit discretion in public decision-making is progressing, and this includes public procurement. On the other hand, in Uruguay lobbying activities have not yet been regulated and whistle-blowers’ protection is relatively underdeveloped.
Cementing progress in promoting responsible business conduct and the OECD Guidelines for Multinational Enterprises
Promoting and enabling responsible business conduct (RBC) is vital to attract and retain quality investment and ensure that business activity contributes to broader value creation and sustainable development. The OECD Guidelines for Multinational Enterprises (Guidelines), which form a part of the OECD Declaration, are recommendations on RBC addressed by adhering governments to businesses operating in or from their jurisdictions. The Guidelines set out principles and standards in all major areas related to good business practices, including information disclosure, human rights, employment and industrial relations, environment, bribery and corruption, consumer interests, science and technology, competition, and taxation.
To a large extent Uruguay has already subscribed to most multilateral instruments underpinning RBC principles and standards embodied in the Guidelines. It has undertaken concrete steps toward improving the human rights situation. It has ratified all the major pertinent international instruments, as expressed in the International Bill of Human Rights and has established the Institución Nacional de Derechos Humanos y Defensoría del Pueblo (INDDHH) as part of the Parliament.
Uruguay has also ratified 98 ILO International Labour Standards (Technical Conventions), all eight Fundamental Conventions and the four Governance Conventions. The labour market is characterised by comprehensive regulations that promote equality and inclusiveness, but also introduce some rigidities that may unwillingly discourage hiring, and at times cause disruptions in the production process. Against this background, there may be value in bringing about reforms that could reinforce non-conflictual consultation mechanism between social partners.
The environmental performance is also relatively satisfactory, as measured in the 2018 Yale Environmental Performance Index which ranks Uruguay second in South America (after Colombia), 17th outside the OECD, and 47th globally. Environmental and social criteria are given adequate prominence in public procurement.
As mentioned above, significant efforts have also been made to combat corruption. Moreover, reforms have been undertaken in the area of consumer protection since Law 17.250 was issued in 2000, thus joining the other three Mercosur members where such provisions were already in place. The Ministry of Economy and Finance, through the Directorate for Consumer Protection (Dirección del Area de Defensa del Consumidor, is responsible for checking consumer protection compliance and imposing penalties in case of violations of businesses, as well as to control advertising compliance. In 2009, Law 18.507 introduced a streamlined procedure to allow justices of the peace to receive and process consumer complaints for low-value goods. Future activities could involve supporting and promoting consumer education and information programmes in order to increase the capacity of civil society to mainstream consumer rights in the public debate, to monitor government policy, and to promote effective defence of consumer rights.
Nonetheless, RBC as such is a relatively new concept in Uruguay. There is no comprehensive national strategy on RBC or public policies targeting responsible business conduct in specific sectors. RBC-related activities so far have mostly been undertaken by the private sector and civil society. The business sector, however, has engaged in activities that are close to the spirit of RBC, without using this distinctive label.
In specific areas covered by the OECD Guidelines, corporate governance requirements in Uruguay, including on disclosure and reporting, are still evolving. The existing legislation mainly requires disclosure of financial information. Disclosure is an integral part of RBC and corporate governance. Clear and complete information on the corporation is important to a variety of users, from shareholders to workers, local communities, governments and the society at large. The government has a leading role to play in enhancing transparency and accountability in the overall market and would benefit from clarifying the requirements on disclosure, including disclosure of non-financial information.
All Adherents to the OECD Declaration have an obligation to establish a NCP, in accordance with the Decision of the OECD Council on the Guidelines for Multinational Enterprises. Uruguay has set out and consulted on the plans for establishing the NCP, both with Uruguayan stakeholders as well as OECD institutional stakeholders. Uruguay envisions an NCP consisting of an inter-ministerial commission and an Executive Secretariat based in the Ministry of Economy and Finance, assisted by a multi-stakeholder advisory body. The Government plans to establish the NCP by Executive Decree in the last semester of 2020. While this timeline is ambitious, the Government foresees a longer time frame to operationalise the NCP after its creation through elaborate consultation processes to develop the terms of reference for the multi-stakeholder advisory body and the rules of procedure for handling specific instances. This would result in the NCP not being able to handle cases until approximately one year after its creation. With the support of the Secretariat, these processes could be expedited so as to ensure that the NCP is able to fully function as quickly as possible after its creation.
Overall, Uruguay has traversed an impressive journey over the last few decades towards an economy characterised by strong democratic values, macroeconomic stability, high levels of public sector transparency and respect for civic engagement and sustainable development. Provided that political, economic, social, and public governance reforms are continued by the new administration, Uruguay has a great opportunity to successfully solidify its transition by fortifying its competitiveness, accelerating growth and prosperity and approaching the realisation of sustainable development goals (SDGs). Specific priorities are presented in Box 1.1.
As the government seeks to solidify growth and make it less dependent on the China-driven global commodity super-cycle, efforts should be made to further stimulate productive investment and attract foreign investment as well as support the expansion of Uruguayan firms abroad, including through proactive government support (e.g. in obtaining information about foreign markets, matching with potential buyers and capacity support). In this task, the government will increasingly need to balance the views of business, civil society and other stakeholders, as well as the twin goals of market-friendly liberalisation reforms and promotion of responsible business conduct.
While there are no significant formal restrictions on FDI, administrative burdens and incomplete corporate governance frameworks for state-owned enterprises present in several key sectors can negatively affect the attractiveness of Uruguay as an investment location. As such, further progress in SOE reform, aiming at improving their overall performance and accountability as well as gradual reduction of remaining administrative burdens, can help reduce costs for both foreign and domestic firms.
Uruguay should build on its efforts to update its international investment agreements with a view to ensuring that they fully reflect government intent and emerging trends in investment treaty policy. As part of this strategy, Uruguay and its treaty partners should consider specifying the language of key investment protection provisions, such as on expropriation, fair and equitable, and most favoured-nation treatment. While recognising that due to its limited size, Uruguay may often be a “rules-taker” in the field, to the extent possible, renegotiation of old treaties and more precise and consistent language in new treaties should be sought to limit the country’s exposure to new investors’ claims.
More generally, Uruguay faces the challenge of progressively moving away from promoting investment through special regimes for selected investors – notably the special economic zones – and towards an agenda of improving the overall investment climate. This will involve broadening investment facilitation efforts, i.e. reducing the costs of establishing and operating a business, continuously updating the policy and institutional framework for investment and trade promotion, making the best use of new technologies, and better targeting investment promotion efforts through continuous monitoring and ex post evaluations of public interventions.
In addition, well-targeted policy reforms can increase the quality and quantity of private investment, especially in infrastructure where it can be a significant complement to public investment. Last but not least, the authorities can face a challenge in transiting from an approach to FDI attraction based on removal of restrictions to FDI to the use of active investment policies that aim not only to maximise the investment value but also to promote sustainable development. These efforts will have greater chances of succeeding if Uruguay continued developing a coherent view on the role of foreign investment its development and productive transformation strategies and then applies it consistently and convincingly. In this context, it would be important to ensure that recent advances in strategic planning are built on and continued and organisations such as Uruguay XXI and OPP strengthened.
It is also important to maintain the momentum of anti-corruption policies. The relatively high level of integrity, in the public sector as in the corporate world, has been critical for attracting investors and for reaping the development benefits of international investment. Nonetheless, in the global economy no country can consider itself immune from this scourge. Progress in setting up a legal and institutional framework to combat corruption, including in the area of lobbying and whistle-blowers’ protection, must be matched by adequate political and financial support and accompanied by strong enforcement as well as educational efforts.
Finally, Uruguay’s newly-established NCP could serve as a valuable vehicle for ensuring policy coherence on a wide range of issues that affect the quality of the investment environment, including, for example, industrial relations and corporate governance. A robust NCP, one that has adequate human and financial resources to operate effectively and enjoys stakeholder confidence, also has the potential to shape the quality of incoming investments, contributing to a more stable and predictable investment environment based on a level-playing field. In addition, a partnership between the NCP and Uruguay XXI could be considered for the purpose of fully informing investors of Uruguay’s RBC-related expectations.
Investment protection and regulation
Consider removing remaining restrictions on FDI in the area of transport, fisheries and media.
Define the strategic sectors in which foreign investment is prohibited or subject to specific authorisation procedures, observing the guiding principles of non-discrimination, proportionality, transparency and accountability, as expressed in the 2009 OECD Guidelines for Recipient Country Investment Policies relating to National Security.
Manage existing international investment agreements, including those subject to unwanted interpretations in the investor-state dispute settlement (ISDS) system, and associated exposure, in order to update them to current standards by amendments and clarifications – or, if appropriate, terminate them by consent or unilateral action.
Engage in international efforts to balance treaty-based investor protection and the right to regulate in the public interest.
Investment attraction
Ensure continuity in, and the necessary political support for, the implementation of strategic plans and reforms for investment promotion and facilitation.
Continue strengthening the activities of the national investment and trade promotion agency.
Adequately reflect the expectations on responsible business conduct, as outlined in the OECD Guidelines for Multinational Enterprises, in these efforts.
Investment facilitation for better public governance
Focus government efforts to reduce the administrative burden, including by effectively streamlining administrative procedures and addressing specific regulatory bottlenecks.
Consider a wider reform to improve the overall regulatory quality, including by better oversight of implementing agencies and the introduction of ex ante and ex post regulatory impact assessment.
Investment incentives and disincentives
Enhance the transparency and coherence of the framework for tax incentives, including through further streamlining of existing schemes and consider phasing out some of them.
Given the numerous disadvantages of enticing investors through income-based incentives, phase out future opportunities for tax holidays.
Continue ongoing efforts to protect the domestic tax base from cross-border tax minimisation strategies and carefully monitor the effectiveness of measures recently implemented
Establish clear and uniformly applied requirements for receiving a Free Zone tax holiday until tax holidays are removed.
Monitor the operations and the outcome of the tax incentive frameworks to verify the integrity of the tax system, to review, analyse and adjust policy or practice where misalignments occur and to minimise distortions.
Use reporting tools to highlight revenue costs associated with tax incentives by providing comparable estimates of tax expenditures.
State-owned enterprises and infrastructures
Strengthen the corporate governance framework for state-owned enterprises to improve their integrity, transparency and professionalism, and broaden the use of performance indicators.
Fill future managerial and board vacancies through merit-based open competitions.
Update implementing regulations to accelerate effective application of the law on PPPs (Public-Private partnerships).
Ensure that the PPP regulatory framework is equally capable of ensuring an adequate return to private investors and maintaining fiscal discipline.
Promote and implement RBC principles and standards within SOEs, thereby setting an example for their uptake by businesses at large.
Integrity
Keep the momentum of reforms to combat corruption and promote integrity in the private sector.
Confirm the political commitment to fight corruption and bribery solicitation, in particular by introducing legislation to regulate lobbying activities and protect whistle-blowers.
Strengthen existing control mechanisms with respect to public procurement.
Responsible business conduct
Establish an NCP in accordance with the Decision of the Council on the OECD Guidelines for Multinational Enterprises, and ensure that it is fully functional as soon as possible after the issuance of the Executive Decree
Promote the use of the OECD Due Diligence Guidances by enterprises operating in or from Uruguay, actively support the use of due diligence by these enterprises, and ensure the widest possible dissemination of the various sector guidance and their use by various stakeholders.
Undertake a capacity building exercise for the NCP within one year after adherence and, in that context, report back to the WPRBC on the progress made in implementing the recommendations made to improve the effective functioning of the NCP.
Promote policy coherence and improve coordination on RBC-related policies within the government.
References
Carbajal, F. Carrasco, P. Cazulo, P. Llambí, C., A. Rius (2014) “Una evaluación económica de los incentivos fiscales a la inversión en Uruguay”. Serie Documentos de Trabajo, DT 20/2014. Instituto de Economía, Facultad de Ciencias Económicas y Administración, Universidad de la República, Uruguay.
Carballo J., I. Marra de Artiñano and C. Volpe Martincus (2019), “Linkages with Multinationals and Domestic Firms' Performance”, Trade and Integration Sector, IDB Technical Note No. IDB-TN-01746, www.publications.iadb.org/publications/english/document/Linkages_with_Multinationals_and_Domestic_Firms_Performance_en.pdf.
De Elejalde, R., Ponce, C., and Roldán, F. 2018. “Innovation and Competition: Evidence from Uruguayan Firms.” Documento de Investigación nro. 116, Universidad ORT Uruguay, Facultad de Administración y Ciencias Sociales.
del Castillo G. and D. García (2012), “Inward FDI in Uruguay and its policy context”, Columbia FDI Profiles, Vale Columbia Center on Sustainable International Investment.
IDB (2019), Trading Promises For Results: What Global Integration Can Do For Latin America and the Caribbean, eds. M. Mesquita Moreira and E. Stein, IDB: Washington D.C. www.dx.doi.org/10.18235/0001886.
Latinobarómetro (2018), Barómetro de las Américas, www.latinobarometro.org
Mercer (2019), Quality of Living Worldwide City Rankings.
Peluffo A. (2015), “Foreign Direct Investment, Productivity, Demand for Skilled Labour and Wage Inequality: An Analysis of Uruguay”, The World Economy, Vol. 38, Issue 6.
Uruguay XX1 (2019), Oportunidades de inversión, Inversión extranjera directa en Uruguay, www.uruguayxxi.gub.uy/es/noticias/articulo/inversion-extranjera-directa-mejora-en-2019/.
Uruguay XXI (2018). Segunda encuesta de inversores extranjeros en Uruguay. www.uruguayxxi.gub.uy/es/centro-informacion/articulo/presentacion-segunda-encuesta-de-inversores-extranjeros-en-uruguay/.
Volpe Martincus C. and M. Sztajerowska (2019), How to Resolve the Investment Promotion Puzzle: A Mapping of Investment Promotion Agencies in LAC and OECD countries, IDB: Washington D.C. https://doi.org/10.18235/0001767.
Note
← 1. Although those negotiations do not cover investment protection, they do include provisions relevant for investment.