PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE September 7, 2011 Report No.: AB6795 Operation Name Second Programmatic Public Sector, Competitiveness and Social Inclusion Development Policy Loan Region LATIN AMERICA AND CARIBBEAN Country The Oriental Republic of Uruguay Sector PREM Operation ID P123242 Lending Instrument Development Policy Lending Borrower(s) Ministry of Economy and Finance Implementing Agency Ministry of Economy and Finance Ministerio de Economía y Finanzas Colonia No. 1089, Tercer Piso Montevideo, Uruguay Date PID Prepared September 12, 2011 Estimated Date of Appraisal September 7, 2011 Estimated Date of Board October 25, 2011 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Key development issues and rationale for Bank involvement This document describes the Second Programmatic Public Sector, Competitiveness and Social Inclusion Development Policy Loan to the Oriental Republic of Uruguay. The proposed development policy loan (DPL) using the deferred draw-down option is the second and final of a programmatic series of two loans. The series supports the implementation of economic and social sector reforms in the following areas: (i) strengthening the efficacy of the public sector; (ii) improving competitiveness; and (iii) making further advances on social inclusion, through improvements in efficiency and equity of social sector delivery. These reform areas are at the heart of the priorities set by the new Government in the five year budget adopted in December 2010. The first loan of the series disbursed in February 2011 (US$ 100 million) and the amount for the second loan would be for US$260 million. The move from the DPL envisaged in the CPS to a DPL with a DDO is warranted by growing concerns about deteriorating international financial market conditions. The Government is following a prudent debt strategy focused on ensuring contingent financing to secure medium-term borrowing requirements, in a period with a large concentration of amortization payments and a global economic context which is still favorable for Uruguay but subject to considerable downside risks. In full accordance with the CPS, the DPL-DDO instrument would make resources available to be drawn down on request, unless the borrower has received prior notification from the Bank that one or more draw-down conditions has not been met and that a subsequent review is necessary. The Borrower also states its intention to use the draw-down option only should access to international capital markets deteriorate significantly. Considering the lessons from past global financial crises, the Government wants to ensure that it could maintain essential public expenditures and also reform momentum even during an adverse external scenario. The requested change from a DPL to a DPL-DDO is part of this Government strategy and will protect the reforms supported by the current DPL series. The reforms and policy measures supported by the operation are considered highly relevant and comprehensive. The loan series supports the implementation of a program of policy reforms in three main areas: public sector management, competitiveness and social inclusion. It assists in sustaining economic growth by further reducing macroeconomic vulnerability, improving the regulatory and administrative environment for business activities and investments, and by facilitating trade flows. It also strengthens the quality and reach of Uruguay’s social services. Uruguay has achieved universal primary education, its social protection programs have significantly increased their coverage over the past years, and the health system is under reform to achieve universal insurance coverage and enhanced cost- effectiveness of services. Going forward, the main policy reform objectives include: (i) strengthening the efficacy of the public sector; (ii) improving competitiveness; and (ii) making further advances on social inclusion, through improvements in efficiency and equity of social sector delivery. These areas of reform are at the heart of the priorities set by the new Government in the five year budget adopted in December 2010. II. Proposed Objective(s) The development objectives of the loan are the following: (i) Strengthening public sector administration; (ii) Improving competitiveness through measures seeking to facilitate trade, strengthen the business environment and develop financial markets; (iii) Improving social inclusion through measures seeking to enhance the equity and efficiency of health, education and social protection systems services. III. Description The Government has made good progress in implementing the DPL-supported reform program: • Public sector management: The Government has set the legal basis for the e- Government reform by mandating technical interoperability in the administration in Articles 157 to 160 of the 2010-2014 Budget Law (Ley de Presupuesto N° 18.719). Furthermore, output and outcome indicators have been included in selected expenditure programs and formally adopted in the Budget Law. • Competitiveness: A new system of risk management for custom inspections was launched, enhancing the effectiveness of physical inspections for fraud detection, hence cutting down on delays in customs. Furthermore, the capital markets law was implemented through issuance of enforcing regulation, which includes provisions on promoting market development, in particular tax incentives and establishment of the Capital Market Promotion Commission, and through adoption of IOSCO standards. • Social Inclusion: Social programs aimed at eradicating extreme poverty were strengthened through the increase of food allowance payments to the 15,000 poorest households as mandated in the Budget Law. Health insurance coverage was expanded to all spouses with three or more children, all workers from low income groups that retired before 2008 as well as all workers that retired after 2008. By increasing the coverage of the One-Laptop-Per-Child Program (Plan Ceibal) to secondary school students (first and second grades), equity in access to modern information and communication technology was increased. The DPL II plays an important role in continuing and deepening support to existing components of the reform program supported by DPL I. The prior actions reflect full achievement of the program triggers outlined in the DPL I document for seven out of nine policy actions. The action for e-government was reformulated, yet was met in substance. Articles 157 to 160 of the 2010-2014 Budget Law set the legal basis for technical interoperability, and hence the e-government platform. It was decided to introduce these provisions through the Budget Law rather than through a separate Inter-operability Law, as originally envisioned. The prior action related to SIIAS database construction needed to be modified to reflect a change in the implementation strategy, yet was met in substance. The operation is designed to contribute to the debt management strategy of the government. The DPL-DDO is intended to provide Uruguay with a risk management tool in the event that market borrowing is interrupted. A DPL-DDO provides the option of deferring loan disbursement for up to three years from loan signing and is renewable for an additional three years, thereby creating a contingency form of financing for Uruguay over an extended period of time. The DPL-DDO loan funds would provide alternative financing resources to meet maturing public sector debt obligations in the case of reduced market access or increased sovereign risk spreads. The Uruguayan authorities could elect to draw on the DPL-DDO loan proceeds, at any time during the three-year draw-down period, provided that: (1) the macro economic framework remains satisfactory; and (ii) Uruguay continues to adhere to the overall program set out in the Letter of Development Policy (LDP). These two draw-down conditions would be continually monitored as part of regular loan supervision. IV. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts Policy reforms supported by the DPL series appear to have produced a positive social impact, in particular for the poorer groups of society. The reforms are aimed to have a direct positive impact on poverty reduction through the expansion of coverage and increased efficiency of social services for low-income households, and an indirect positive impact, by encouraging private investment and promoting public sector efficiency. There is no evidence of an adverse poverty or social impact of the supported public sector and competitiveness reforms. Rather, it is expected that they would indirectly have a positive social impact. By seeking to improve efficiency in the delivery of key services, public sector reforms will enhance targeting and lower the costs of Government services. Competitiveness reforms (trade facilitation, logistics, business climate or capital market development) aim at fostering private investment and growth, and thereby contribute to boosting employment creation and poverty reduction. The simplification of business start-up processes has already positively affected the creation of small and medium sized companies. Social inclusion reforms supported by the DPL explicitly focus on improving equity and reducing poverty. Education and health reforms, as well as those aimed at strengthening the social protection system are geared toward improving the welfare of low-income groups. A number of measures included in these reforms have produced a positive effect on poverty reduction, as presented in the previous section. Measures supported by the DPL series are also expected to improve the targeting of existing programs and reduce the number of duplicate payments from different sources to the same beneficiaries. Environment Aspects The proposed operation is not likely to have any significant effects on the environment, forests, and other natural resources. However, to the extent that actions supported by the loan program are successful, over time, in attracting new private investment, there will be a need to continue strengthening Uruguay’s institutional capacity to identify and address environmental policy and regulatory issues. Environmental policies and regulations are in place, and implementation is improving. The Ministry of Housing, Planning and Environment (Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, MVOTMA), through the National Environment Directorate (Dirección Nacional de Medio Ambiente, DINAMA) is responsible for the formulation, execution, supervision, and evaluation of the national plan for environmental protection and for proposing and implementing national policy, harmonizing the needs of environmental protection with sustainable development. Uruguay's large new foreign-financed investments in the pulp industry have elevated the public awareness of, and Government commitment to, monitoring and compliance with environmental regulations. Uruguay was one of the first countries in the region to complete its Second National Communication on Climate Change in 2004 and has subsequently moved quickly to benefit from innovative financing through the carbon market. Carbon and GEF strategies are being implemented since 2009 to improve solid waste management in its two largest cities, as well as initiate multiple investments in renewable energy. V. Financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 260 Borrower/Recipient 0 Others (specify) Total 260 VI. Contact point World Bank Contact: Norbert Fiess Title: Senior Economist Tel: 5260+3708 / 54-11-4316-9708 Email: nfiess@worldbank.org Location: Buenos Aires, Argentina (IBRD) Borrower Contact: Title: Tel: Email: VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop