Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-45980) ON A LOAN IN THE AMOUNT OF US$ 6.0 MILLION

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-45980) ON A LOAN IN THE AMOUNT OF US$ 6.0 MILLION TO THE ORIENTAL REPUBLIC OF URUGUAY FOR THE PUBLIC SERVICES MODERNIZATION TECHNICAL ASSISTANCE PROJECT June 16, 2009 Sustainable Development Department Argentina, Chile, Paraguay, Uruguay Country Management Unit Latin America and the Caribbean Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 16, 2009) Currency Unit = Uruguay Pesos (UY$) UY$1.00 = US$ US$1.00 = UY$23.25 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADME Administración del Mercado Electrico - Electricity Wholesale Market AFE Administración del Ferrocarriles del Estado - National Railroads Authority ANCAP Administración Nacional de Combustible, Alcohol y Portland - National Petroleum, Alcohol and Cement Authority ANC Administración Nacional de Correos - National Postal Services Administration ANP Administración Nacional de Puertos - National Ports Authority ANTEL Administración Nacional de Telecomunicaciones - APL Adaptable Program Loan BCU Banco Central de Uruguay - Central Bank of Uruguay BHU Banco Hipotecario del Uruguay- National Mortgage Bank CAS Country Assistance Strategy CFU Railway Corporation of Uruguay DINASA Dirección Nacional de Aguas y Saneamiento National Water and Sanitation Directorate DNC National Communications Authority DNETN Dirección Nacional de Energía y Tecnología Nuclear DNV National Roads Authority DOI Digital Opportunity Index GDP Gross Domestic Product GOU Government of Uruguay IBRD International Bank for Reconstruction and Development ICR Implementation Completion and Results Report IADB Banco Interamericano de Desarrollo - Inter-American Development Bank IP Implementation Progress MEF Ministerio de Economía y Finanzas - Ministry of Economy and Finance MIEM Ministerio de Industria Energía y Minas - Ministry of Industry, Energy and Mines M&E Monitoring and Evaluation MTOP Ministerio de Transporte y Obras Publicas - Ministry of Transport and Public Works MVOTMA Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente - Ministry of Housing, Land Management and Environment OPP Oficina Planeamiento y Presupuesto - Office of Planning and Budget (Implementing Agency) OSE Obras Sanitarias del Estado - National Water and Sanitation Company PAD Project Appraisal Document PDO Project Development Objectives PMR Project Management Report PMU Project Management Unit PS Public Services

3 PSP SAL SPBS SSAL TAL UNDP UTE URSEA URSEC VADE WSS Private Sector Participation Structural Adjustment Loans Superintendency for the Protection of Bank Savings Protection of Bank Savings Special Structural Adjustment Loans Technical Assistance Loan United Nations Development Program Administración Nacional de Usinas y Transmisiones Electricas - National Power Company Unidad Reguladora de Servicios de Energía y Agua Regulator of Energy and Water Services Unidad Reguladora de los Servicios de Comunicaciones Valor Agregado de Distribución Estandar Water Supply and Sanitation Vice President: Pamela Cox Country Director: Pedro Alba Sector Manager: Guang Zhe Chen Project Team Leader: Carlos E. Velez ICR Team Leader: Carmen Yee-Batista

4 THE ORIENTAL REPUBLIC OF URUGUAY Public Services Modernization Technical Assistance CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Risk to Development Outcome (Sustainability Rating) Assessment of Bank and Borrower Performance Lessons Learned on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2: Outcome by Component Annex 3. Bank Lending and Implementation Support/Supervision Processes Annex 4. Summary of Borrower's ICR and/or on Draft ICR Annex 5. List of Supporting Documents Annex 6. Additional Performance Indicators... 34

5 A. Basic Information Country: Uruguay Project Name: PUBLIC SERVICES MODERNIZATION TECHNICAL ASSISTANCE Project ID: P L/C/TF Number(s): IBRD ICR Date: 06/29/2009 ICR Type: Core ICR Lending Instrument: TAL Borrower: REPUBLICA ORIENTAL DEL URUGUAY Original Total Commitment: USD 6.0M Disbursed Amount: USD 4.2M Revised Amount: USD 0.0M Environmental Category: C Implementing Agencies: Oficina de Planeamiento y Presupuesto (OPP) Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/07/2000 Effectiveness: 09/13/2001 Appraisal: 01/18/2000 Restructuring(s): 05/03/ /13/2006 Approval: 03/22/2001 Mid-term Review: Closing: 12/31/ /31/2008 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Satisfactory Overall Borrower Moderately Satisfactory i

6 Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any Yes time (Yes/No): DO rating before Closing/Inactive status: Moderately Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General energy sector General transportation sector 6 2 General water, sanitation and flood protection sector 6 13 Telecommunications Theme Code (as % of total Bank financing) Administrative and civil service reform Legal institutions for a market economy Regulation and competition policy State enterprise/bank restructuring and privatization 24 Water resource management 13 E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox David de Ferranti Country Director: Pedro Alba Myrna L. Alexander Sector Manager: Guang Zhe Chen Danny M. Leipziger Project Team Leader: Carlos E. Velez Carlos E. Velez ICR Team Leader: Carmen Rosa Yee-Batista ICR Primary Author: Carmen Rosa Yee-Batista ii

7 F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) Increase the efficiency and sustainability of, and the access to, public services in Uruguay by (i) developing sector policies, strengthening legal and regulatory frameworks, and designing appropriate regulatory instruments; (ii) opening sectors to expand and deepen private sector involvement in service delivery; (iii) increasing competition among service providers; (iv) promoting, through appropriate economic incentives, a stronger commercial orientation of state owned utilities in the delivery of public services; and (v) ensuring access to and efficient delivery of services to the poor. Revised Project Development Objectives (as approved by original approving authority) (a) Increase the efficiency and sustainability of, and access to, public services in Uruguay by: (i) developing sector policies, strengthening legal and regulatory frameworks, and designing appropriate regulatory instruments; (ii) opening sectors to expand and deepen private sector involvement in service delivery; (iii) increasing competition among service providers; (iv) promoting, through appropriate economic incentives, a stronger commercial orientation of state owned utilities in the delivery of public services; and (v) ensuring access to and efficient delivery of services to the poor; and (b) increase the efficiency and sustainability of the Borrower's financial sector, especially of the public banks, by supporting the modernization and performance of BHU and other activities aimed at strengthening the Borrower's financial system. (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Effective regulatory authorities, independent of the utilities and policy makers, and with managerial and financial autonomy, are fully operational. The target value was achieved for WSS, natural gas & the WSS, petroleum products Effective electricity, natural sectors unregulated; regulatory gas, petroleum, electricity & authorities, telecommunication communications sectors independent of the and postal sectors; regulated by recently utilities and policy however, the created agencies; and makers, and with railway and ports railways and ports sector managerial and sector continues to regulated by MTOP, financial be regulated by the which is also in charge of autonomy, are Ministry of policy reform and fully operational. Transport and concessions. Public Works (MTOP). The target value was achieved except for railway and ports sector which iii

8 (incl. % Indicator 2 : Value quantitative or Qualitative) continues to be regulated by the MTOP. Increase participation of qualified private sector operators (PSO). 45,000 more water 59,144 water connections 0 water connections connections served served by PSO. served by PSO. by PSO. Zero power demand met 2% power demand At least 10% by PSO. met by PSO. power demand met 1 public inter. Long 11 inter. private by PSO. Distance Operator (LDO) LDO & 3 cellular At least 3 inter. & 1 public Cellular operators. private LDO & 3 Operator (CO). cellular operators. (incl. % The indicator was only partially achieved. Telecommunication targets were exceeded (367%LDO and 100%CO); Electricity (20%) and water (0%) were not achieved. Indicator 3 : Better quality of services. Value quantitative or Qualitative) N/A Significant improvement in service quality as measured by selected indicators. Completed. This indicator was assessed by the benchmarking tools developed and applied (incl. % under the project. Indicator 4 : Greater efficiency in the provision of services. Value quantitative or Qualitative) OSE employees/1000 water and sewerage connections: 5.5 ANTEL number of lines/employee: 166. Power losses in distribution: 14% Electricity blackouts per customer per year: 18.5 OSE employees/1000 water and sewerage connections: 4.8. Increased ANTEL number of lines/employee: N/A Power losses in distribution: 12.5% Decreased electricity blackouts per customer per year: 18.5 OSE employees/1000 water and sewerage connections: 4.16 ANTEL number of lines/employee: 250 Power losses in distribution: 14% Electricity blackouts per customer per year: 5.0 Three out of four target values were achieved. Power losses did not reach 12.5%; however, this target does not take into account the impact of the crisis. In 2003 (incl. % and 2004, this value reached 19%, yet UTE was able to recover to its baseline value of 14%. iv

9 Indicator 5 : Value quantitative or Qualitative) Greater access to public services. Population outside the Metropolitan region of Montevideo with access to a public sewerage network: 26% Number of public schools with access to Internet: 0. Population outside the Metropolitan region of Montevideo with access to a public sewerage network: 49% Increase access to the INTERNET in public schools. Access to public sewerage is 34% More than 1,000 schools with INTERNET access. (incl. % The public sewerage indicator was not fully achieved (69%). Indicator 6 : Integrated Management System for the Mortgage Bank of Uruguay is fully functioning with trained personnel. BHU lacks an integrated Value management system, System Completed and quantitative or which reduces efficiency implemented implemented Qualitative) in the financial sector performance. Date achieved 05/25/ /31/ /31/2008 (incl. % 100% achieved. The BHU operates with an integrated management system increasing productivity to the sector. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Original Target Values (from Baseline Value approval documents) MULTISECTOR People attending training on regulation N/A At least 100. Formally Revised Target Values Actual Value Achieved at Completion or Target Years URSEA and URSEC officials with training exceeds 140. (incl. % Target value was exceeded. Indicator 2 : Strategy on marketing and dissemination of information. Marketing and URSEA and Value information URSEC prepared (quantitative N/A dissemination and disseminated or Qualitative) strategies prepared information v

10 and implemented. strategies. URSEC has a marketing strategy in place, but URSEA does not. (incl. % Indicator 3 : Value (quantitative or Qualitative) Target partially completed since URSEA does not have marketing strategy in place. Private operators have assumed control of at least 2 medium-size concessions in water supply and sanitation (WSS). Private operators control At least 2 mediumsize concessions in None. one medium-size WSS concession & 2 small WSS. concessions. (incl. % Target was not achieved. On 31 October 2004 a referendum amending the Constitution determined that the State has to exclusively and directly provide water ans sanitation services. WATER AND SANITATION SECTOR Indicator 4 : Implementing decrees completed, as part of the design of a legal and regulatory framework in the sector. Value (quantitative or Qualitative) N/A Implementing decrees completed. Completed. Target achieved. Project supported the implementation of regulatory decrees and (incl. % laws to strengthen URSEA and DINASA's operation. Operational rules and licenses for private operations of WSS services completed, Indicator 5 : as part of the design of legal and regulatory framework. Value (quantitative or Qualitative) N/A Rules and licenses completed. None (incl. % Target was not achieved due to 2004 Referendum. Indicator 6 : Studies on WSS tariffs and subsidies. Value Studies completed (quantitative N/A Studies completed. and implemented. or Qualitative) (incl. % Studies were conducted and implemented by OSE with its own resources. Indicator 7 : ENERGY Prepare study on regulatory accounting in the electricity sector. vi

11 Value (quantitative or Qualitative) Absense of regulatory accounting in the electricity sector. Regulatory accounting study completed. Study completed. Target achieved. URSEA resolution 6/08 regulates the application of regulatory (incl. % accounting in the electricity sector. Indicator 8 : Develop a national electricity wholesales market. Value (quantitative or Qualitative) N/A A national electricity wholesales market (ADME) is in operation. ADME is in operation. Target achieved. ADME is operational but weak in its functions as it does not (incl. % fully operate as envisioned in the electricity legislation. Propose a system of controls and prepare a study on the cost of rationing in the Indicator 9 : electricity sector. Value (quantitative or Qualitative) N/A Proposal for system of controls and study on cost of rationing completed. Proposal on system controls and study on cost of rationing completed. Target completed. Electricity Distribution Service Quality Regulation (system of (incl. % controls) in operation. Study on the cost of rationing was approved. Indicator 10 : Define a strategy for servicing the poor with electricity. Value (quantitative or Qualitative) N/A Strategy for services to the poor completed. Proposal to create an energy basket to benefit the poor. Partially completed. Proposal to create and commence discussions on the (incl. % operation of an energy basket to benefit the poor completed. Indicator 11 : Prepare a study on performance auditing in the natural gas sector. Value (quantitative or Qualitative) N/A Study completed. Study was not conducted. Target was not achieved. URSEA did not contract specified study, but begins to (incl. % monitors operators through benchmarking practices. Indicator 12 : Prepare a study on natural gas regulation. Value (quantitative or Qualitative) N/A Study completed. Study on GNP, GLP, VADEG and distribution costs vii

12 are finalized. (incl. % Target was achieved. Indicator 13 : Prepare a study on regulatory accounting on natural gas. Value (quantitative or Qualitative) N/A Study completed. Study completed. (incl. % Indicator 14 : Value (quantitative or Qualitative) Target was achieved. Studies on regulatory accounting to be implemented in 2009 as per agreement with URSEA planning strategy. In the petroleum sector, study on market structure, regulatory practices and competition for downstream petroleum products. N/A Study completed. Study was partially completed. Partially achieved due to the 2003 petroleum referendum restricing private sector (incl. % participation COMMUNICATION SECTOR Indicator 15 : Studies for institutional framework in the telecommunication sector completed, as part of the legal and institutional framework. Value (quantitative or Qualitative) N/A Studies completed. Studies completed. (incl. % Target completed. Indicator 16 : Studies on rules & regulations for granting licenses and regulatory accounting in the telecommunications sector. Value (quantitative or Qualitative) N/A Studies completed. Studies completed. (incl. % Target achieved. Indicator 17 : Studies on implementing decrees completed. Value (quantitative or Qualitative) N/A Studies completed. Studies completed. (incl. % Target achieved. viii

13 Indicator 18 : Proposal for quality standards in the telecommunications sector. Value (quantitative or Qualitative) N/A Proposal Completed. Completed. (incl. % Target achieved. Indicator 19 : Studies on universal access in telecommunications. Value (quantitative or Qualitative) N/A Study ready. Not conducted. This was not a priority as 100% of the population in Uruguay has access to (incl. % telecommunication services. Indicator 20 : Installation of electromagnetic spectrum management equipment. Value (quantitative or Qualitative) N/A Installation completed. Not conducted. (incl. % This was not conducted. Indicator 21 : Study tariffs and financial options for universal service operation (USO) in the postal sector and define a strategy for implementing selected options. Value Selected options (quantitative N/A implemented. or Qualitative) Completed. (incl. % Target completed. Indicator 22 : Define rules & regulations for granting licenses in the postal sector. Value (quantitative or Qualitative) N/A Study ready. Completed. (incl. % Target completed. Indicator 23 : RAILWAYS AND PORTS Evaluate proposed AFE reform. Value (quantitative or Qualitative) N/A Evaluation completed. Evaluation completed. ix

14 (incl. % Target achieved. Indicator 24 : Review and complete railways and ports regulation. Value (quantitative or Qualitative) N/A Transport regulation completed. Not conducted. (incl. % Target was not achieved. G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 05/31/2001 Satisfactory Satisfactory /16/2001 Satisfactory Satisfactory /13/2002 Satisfactory Satisfactory /27/2002 Satisfactory Satisfactory /29/2003 Highly Satisfactory Satisfactory /05/2003 Satisfactory Satisfactory /04/2004 Satisfactory Satisfactory /07/2004 Satisfactory Satisfactory /03/2005 Satisfactory Satisfactory /18/2006 Satisfactory Satisfactory /18/2006 Satisfactory Satisfactory /12/2007 Satisfactory Satisfactory /13/2007 Satisfactory Satisfactory /22/2008 Moderately Satisfactory Moderately Satisfactory /30/2008 Moderately Satisfactory Moderately Unsatisfactory 3.83 H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 05/03/2004 Y S S 0.91 IP Reason for Restructuring & Key Changes Made To include the implementation of an integrated bank management system for the Borrower's national mortgage bank (BHU). The loan x

15 Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP Amount Disbursed at Restructuring in USD millions 02/13/2006 N S S 1.59 Reason for Restructuring & Key Changes Made agreement was amended to expand the PDO and reallocate funds To expand activities under the financial sector to support capital market development, bankruptcy law improvement, strengthening of the Superintendency for the Protection of Bank Savings and corporate governance at the Central Bank If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Satisfactory Against Formally Revised PDO/Targets Moderately Satisfactory Overall (weighted) rating Moderately Satisfactory I. Disbursement Profile xi

16 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. At the time of appraisal, Uruguay had already achieved relatively high levels of public service coverage and quality compared to other Latin American countries, but services were more expensive and also suffered from shortcomings with respect to efficiency and consumer protection. Public services were almost exclusively in the hands of state-owned utilities, which functioned as policy makers, regulators, and operators. The absence of competition and independent regulations contributed to relatively high prices and operational inefficiencies in service provision that negatively impacted country competitiveness and consumer welfare. In addition, the lack of independent and transparent regulations discouraged the participation of the private sector in provision of public services. 2. In the 1990s, the Government of Uruguay (GOU) initiated a process of gradual yet significant sector reforms that encouraged private sector participation (PSP). This process involved the de-monopolization of certain sectors coupled with the development of legal and regulatory frameworks: Port operations improved substantially in recent years as the National Port Authority (ANP) introduced private concessionaries in the construction and operation of port facilities. In the electricity sector, new legislation challenged the role of the National Power Company (UTE) as policy maker, regulator and operator by opening power generation to competition, regulating transmission and distribution and allowing access to the transmission system by power generators and large customers; In the natural gas sector, decrees to regulate the import, transportation and storage of gas controlled by the National Petroleum, Alcohol and Cement Authority (ANCAP) and two private concessionaires (GASEBA and CONECTA) strengthened the institutional and legal structure for regulation and competition; and In the water supply and sanitation (WSS) sector, two small private operators and one new medium size concession in the Department of Maldonado had broken the monopoly of the National Water Supply and Sanitation Utility (OSE). 3. Despite significant progress, additional work was necessary to consolidate the existing reforms and transform other monopolized sectors, such as petroleum, telecommunications, postal services and railways. Consequently, the Bank and GOU Office of Planning and Budget (OPP) designed this Technical Assistance Loan (TAL) to support the 2000 Country Assistance Strategy (CAS) on public reform focusing on government priority sectors where investment operations were taking place. The main focus was to support the development and strengthening of regulatory bodies and frameworks, the segregation of sector functions, the promotion of PSP to enhance competition, and the improvement of corporate governance in state-owned utilities. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 4. The objective of the Project was to increase the efficiency and sustainability of and the access to public services in Uruguay by (i) developing sector policies, strengthening legal and regulatory frameworks, and designing appropriate regulatory instruments; (ii) increasing competition among service providers; (iii) expanding and deepening PSP in the provision of 1

17 public services; (iv) promoting stronger commercial orientation of public utilities; and (v) ensuring the efficient delivery of services to the poor. 5. Key performance indicators presented in the Project Appraisal Document (PAD) are the following: Effective regulatory authorities, independent of utilities and policy makers, and with managerial and financial autonomy, are fully operational; Increased participation (share of the market and/or number) of qualified private operators; Better quality of services as measured by a series of quality of services indicators; Greater efficiency in the provision of services measured by a series of efficiency indicators in the various sectors; and Greater access to public services measured by increased coverage for individuals, businesses and the poorest segments of the population, particularly in sanitation, electricity and telecommunications services. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 6. The project underwent restructuring in May 2004 to include the financial sector within the design and implementation of an integrated Bank management system for the National Mortgage Bank of Uruguay (BHU). The loan agreement was amended to expand the PDO to (a) increase the efficiency and sustainability of and access to public services by (i) developing sector policies, strengthening legal and regulatory frameworks, and designing appropriate regulatory instruments; (ii) increasing competition among service providers; (iii) expanding and deepening PSP in the provision of public services; (iv) promoting stronger commercial orientation of public utilities; and (v) ensuring the efficient delivery of services to the poor; and (b) increase the efficiency and sustainability of the financial sector, especially of the public banks, by supporting the modernization and performance of BHU. 1.4 Main Beneficiaries, 7. As the consumers of public services, the Uruguayan population was expected to be the main beneficiary of the reforms to reduce cost, improve service quality, and enhance international competitiveness. While not explicitly mentioned in the PAD, the participating government agencies were also expected to benefit from activities to strengthen their institutions and corporate governance. These agencies include: Oficina de Planeamiento y Presupuesto (OPP) - Implementing Agency Unidad Reguladora de Servicios de Energía y Agua (URSEA) Unidad Reguladora de Servicios de Comunicaciones (URSEC) Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente (MVOTMA) o Dirección Nacional de Agua y Saneamiento (DINASA) Ministerio de Industria, Energía y Minería o Dirección Nacional de Energía y Tecnología Nuclear (DNETN) Ministerio de Transporte y Obras Públicas (MTOP) 2

18 Administración del Mercado Eléctrico (ADME) Administración Nacional de Puertos (ANP) Administración de Ferrocarriles del Estado(AFE) Banco Hipotecario del Uruguay (BHU) 1.5 Original Components (as approved) 8. Component 1 Multi-sector Support for Policy Definition, Legal and Regulatory Frameworks (US$1.54 million). The objective of this component was to support the development of a legal and regulatory system for public service sectors through training of regulatory and sector professionals; a marketing and information dissemination program; and the strengthening and consolidation of regulatory agencies. 9. Component 2 - Water and Sanitation Sector (US$0.37 million). The objectives of this component were to support the design of a legal and regulatory framework for the WSS sector, including preparation of implementing decrees and rules and regulations for licenses, tariffs, and subsidies, and to identify and develop projects for potential private sector participation. 10. Component 3 Energy Sector (US$1.89 million). The objective of this component was to support the development of regulatory tools, including regulatory accounting, a dispatch control center, a system of controls, and a strategy for services to the poor in the electricity subsector; the development of a legal and regulatory framework and tools in the gas subsector; and the completion of the regulatory and legal framework in the petroleum subsector. 11. Component 4 - Communications Sector (US$2.06 million). The objective of this component was to support the development of legal and regulatory frameworks and tools in the telecommunications and postal sectors. 12. Component 5 - Railway and Port Sectors (US$0.37 million). The objective of this component was to support the internal reform of AFE, based on a business oriented approach and the preparation of regulations for railways interconnection, access, service quality, price setting and customer service. 13. Component 6 - Project Management (US$1.26 million). The objective of this component was to strengthen the operational capacity of the Project Management Unit (PMU) to manage, coordinate, and audit the Project. 1.6 Revised Components 14. The first amendment (2004) to the loan agreement included a financial sector component to support the design and implementation of an integrated system for bank management, strengthening of professional management and training of BHU personnel. 15. The second amendment (2006) to the loan agreement included additional activities under the financial sector to support the strengthening of BHU s financial position, development of Uruguay s capital market, a review of bankruptcy law, protection of bank savings and assistance to the Central Bank to design and implement a new bank resolution mechanism and study alternative options for improving corporate governance. 3

19 1.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) 16. The project underwent restructuring, reprogrammed activities and extensions due to a series of economic and political events indicated in paragraph 17. The Bank provided two extensions: a two-year extension in 2005, when about 40 percent of the final loan amount had been disbursed, and an additional year in The implementing agency was not able to conclude all the programmed activities during the final year. The project had two cancellations reducing the loan amount from US$6 million to US$4.4 million. There was an undisbursed amount of approximately US$220,000 at closing, resulting in a final amount of US$4.2 million. 2. Key Factors Affecting Implementation and Outcomes 17. A series of changes beyond the project s control affected project implementation resulting in delays and restructuring. These changes included the economic crisis, the unprecedented change in government in 2005, and the 2003 oil and 2004 water referenda, which made the provision of these services the exclusive right of the state. In 2004, the project was restructured to include activities under the financial sector. Table 1 provides a summary of the key dates and events affecting this TAL operation. Table 1: Summary of Key Events during Project Cycle Actual Year Project cycle Disbursement US$ Other Key factors 2001 Project Effectiveness 210,000 Uruguay in recession after strong economic growth in the 1990's Recession deepens and Uruguay ,024 enters an economic crisis, which resulted in an 11% drop in GDP ,498 Mid-2003 Uruguay recovers from the crisis; petroleum referendum st amendment financial sector 2005 (1) 1 st extension for two years 2 nd amendment to 2006 expand financial sector activities 2 nd extension for one 2007 year with 1 st cancellation 2 nd cancellation; 2008 actual closing date 12/ month grace period 400, , , ,341 1,005,311 Constitutional amendment prohibiting PSP in the water sector (1) Original closing date (12/31/2005); revised closing date (12/31/2007) in first extension. Government Administrations ( ) Jorge Luis Batlle Administration (Colorado Party) ( Present) Tabaré Vázquez (Broad Front Union) 18. Despite these shortcomings, the project achieved its overall objective of contributing to an increase in efficiency, coverage, and sustainability of public services in Uruguay. As a result, this ICR rates the overall outcome as moderately satisfactory. As noted by the 2008 Latinobarometro index of satisfaction, Uruguay s level of satisfaction with public services is 4

20 number one in the region, with 44 percent of the population indicating a high level of satisfaction compared to a regional average of 22 percent Project Preparation, Design and Quality at Entry 19. Soundness of background analysis. Background analysis during project preparation was crucial in terms of scope, relevance, and quality for the appropriate design of the TAL. Initially prepared as a technical assistance component of the OSE Modernization & Systems Rehabilitation Project (OSE APL1), this operation was expanded to include other sectors and separated as a standalone loan to OPP during APL1 negotiations at the request of GOU for Bank support on broader policy reform in public services and infrastructure. Project preparation benefited from WSS background analyses commissioned by OSE to support the preparation of the APL1. In addition, studies from the Japanese Grant (TF02092) on WSS regulatory sector reform, an OPP study on the efficiency of public service providers and Bank analysis on operations in Uruguay provided additional background for project preparation. 2 Lessons learned from past Bank infrastructure projects in Uruguay and from regulation and PSP in Latin American were also used during preparation. The lessons that contributed to the success of the project included flexibility and diversification of the reform strategy, political commitment and ownership, and the creation of a PMU. 20. Assessment of project design. The original PDO to increase the efficiency, sustainability, and coverage of public services reflected Uruguay s essential priorities for public sector reform as identified by both the government and the CAS at the time. Also, the revised PDO reflected the Government s main concern with increasing the efficiency and sustainability of the financial sector, especially after the economic crisis. The original PDO was clear and specific, and, rather than focus on PSP as a single solution to all type of problems, it provided five complementary means of achieving improvements in public service sectors: (i) public sector reform; (ii) PSP; (iii) increased competition; (iv) strong commercial orientation; and (v) access for the poor. Its flexible design brought together a wide-range of tools to support institutional renewal. Moreover, it provided a logical cause and effect relationship based on Bank experience at the time. Nevertheless, the PDO is ambitious when analyzing the vertical link between the PDO and the various components and outputs. The project financed various activities, including training programs, equipment, international and local consultants and studies, all mainly to support the operation of regulatory agencies and the design and development of legal and regulatory frameworks and tools. Therefore, it is difficult to directly link the outputs to the PDO. To reflect a more direct and realistic relationship, it would have been more appropriate to include an intermediate objective, such as assistance to develop and strengthen institutions and to facilitate knowledge exchange. The positive flexibility feature could have remained in the project design, embedded in the components, performance strategies or in the implementation strategy. The second part of the revised PDO was clear and realistic in relation to the envisioned activities as it focused on the implementation of an integrated system for bank management at the BHU, which was directly linked to improving performance at this institution. 1 Corporación Latinobarómetro, 2008 Report, Index of Satisfaction with Basic Services by Country. 2 Bank Operations included i) Water Supply Rehabilitation Project (2921-UY); ii) Power Transmission and Distribution project (Loan 3949-UY); iii) the Uruguay Transport II (roads rehabilitation and maintenance) project (Loan 4395-UY); iv) the Forest Product Transport Loan (4204-UY) and v) the 1996 and 1997 sector studies entitled "Reform Options for Uruguay's Water and Sanitation Sector" and "Towards a New Role for the State in Uruguay's Utilities," respectively. 5

21 21. Breadth of component activities. The specific activities under each component were found to be generally adequate in relation to the project outputs; however, given the scope of project inputs and the relatively short duration of the project, it was unclear how the activities would help identify and develop opportunities for private sector participation, for example. 22. Technical capacity of implementing agency. The technical capacity of OPP for sector reform was strong. OPP produced a project proposal with a comprehensive strategy for each sector, allowing it to design a project that built on sector reform work already in progress. As a ministerial rank agency reporting directly to the Office of the President, OPP was appropriately prepared and positioned within GOU to lead public service reform as well as to ensure project oversight and coordination with all ministries, agencies, and autonomous public entities based on its experience in managing projects financed by multilateral banks. 23. Government commitment to reform. The project had the backing of the newly-elected Government during project preparation, but several stakeholder groups were not fully in agreement, especially with the PSP agenda. OPP was deeply involved with project preparation. In addition, GOU encouraged and supported the URAGUA concession in the Department of Maldonado to provide WSS services and initiated a range of regulatory studies with financing from a Japanese Grant. However, as the project moved into implementation, the risk that government ownership of the sector reform agenda would weaken became a reality. The project would have benefited from a comprehensive mitigation plan, including a more explicit stakeholder and political analysis to develop clearer strategies to support institutional change champions while at the same time engaging in constructive dialogue with those wary of reforms. 24. Assessment of risks. The identified risks were relevant and their ratings appropriate; however, the risk of an economic crisis was not included, and when it occurred it had a substantial impact on project implementation. Although it would have been difficult to predict the magnitude of the crisis, the country was already in a recession and Argentina s economy was in crisis by the end of project preparation. In this context, a risk assessment and mitigation plan would have been appropriate. 25. Some of the mitigation efforts were not fully effective. For example, the risk that PSP would fail to gain backing from politicians and the general public was correctly identified as substantial during preparation. Although at the time Uruguay had two private WSS concessions, PSP remained a politically sensitive issue that increased with the global anti-privatization movement. Given the extent of the global paradigm shift, it is unlikely that any measures implemented by the project could have prevented the backlash against PSP and the subsequent 2004 Constitutional amendment, making the provision of water the exclusive right of the state. This is especially true in Uruguay, where public utilities enjoy extensive support based on a satisfactory record of delivering services in terms of access and quality. The same applies to the 2003 petroleum referendum, which revoked the 2002 law ending ANCAP's monopoly over the import, export and refining of crude oil as well as the export of petroleum derivatives. Project design did not rely solely on high-risk PSP and included a range of alternative strategies to help mitigate the impact of this backlash once it materialized. These alternative strategies, such as sector unbundling and regulation, public accountability and benchmarking, together proved an effective contingency plan after PSP laws were made unconstitutional for both the water and petroleum sectors. However, the project could have benefited from a stronger mitigation plan, including extensive and inclusive consultations with main stakeholders, focusing on opposition groups, sector reform and the benefits of PSP. 6

22 2.2 Implementation 26. Several external and internal factors affected the original implementation strategy over the seven years of project execution. Nonetheless, timely interventions from the Bank team and OPP, coupled with a flexible project design, contributed to a relatively successful implementation. 27. Economic Crisis and Bank Response. Uruguay entered a deep financial crisis following neighboring Argentina s default on its public debt and devaluation of its currency. A contagion effect rippled throughout Uruguay s economy, causing GDP to fall eleven percent in 2002 alone and unemployment to rise to almost 20 percent by the end of the year. The 2002 CAS Progress Report determined that the previous lending scenario was no longer appropriate and concluded that additional support was required to assist Uruguay through the ongoing crisis. Two Structural Adjustment Loans (SAL) and two Special SALs totaling US$550 million were designed during fiscal year As a result, this project and a number of others in Uruguay were delayed in order to confront the economic crisis. The coordinated effort by the international community and the determined policy response of GOU helped Uruguay achieve a relatively favorable recovery. By mid-2003, Uruguay was on track to fully recover its pre-crisis level of income, and it re-embarked on the agenda of public services reform. Increased disbursement in 2003, more than four times the amount of the previous year, highlighted GOU s commitment to the project. 28. Change in Government. President Tabaré Vazquez from the Frente Amplio took office in March 2005, ending 170 years of political dominance by the two traditional parties, Partido Colorado and Partido Nacional. Project implementation and disbursements slowed that year as the new government reassessed the situation and reset its priorities. The project regained momentum in 2006 and obtained higher disbursement levels in compared to The new administration placed renewed emphasis on the public sector as a leading force in the development process and on improving the efficiency of state-owned public service providers. The government maintained the possibility of PSP in the majority of sectors but followed a cautious path after the referenda. 29. Support for public private participation weakens in some strategic sectors. The two constitutionally sanctioned referenda changed the policy framework, making the implementation of PSP activities in the WSS and petroleum sectors unachievable. With PSP no longer a viable strategy to pursue increased efficiency, sustainability and coverage of public services, the reforms now focused more on institutional, policy, and regulatory reform within the public sector. 30. Agencies support for the reform agenda weakens. A complex project such as this one greatly depended on the commitment and capacity of regulatory institutions, ministries and utilities responsible for public services. The above-mentioned external factors reduced agency support for some activities, leading to their cancellation, which slowed down disbursements and delayed project implementation. 31. Government and Bank Response. The amendments to the loan agreement to strengthen the financial sector proved to be a positive strategy to reenergize the project. This permitted a new budgetary allocation which filled the void left by cancelled activities. In fact, by the end of 3 The Bank s response was directed to introduce specific reforms ranging from fiscal measures to increase revenues and curtail spending, to bank restructuring, promotion of efficiency and competition in infrastructure, maintaining investment in human capital and strengthening measures to protect vulnerable groups. 7

23 the project, the financial sector spent 25 percent of the total project cost, the highest of any sector. Moreover, the implementation of the BHU management program was viewed as one of the most significant outcomes of the project. 32. Considering the significant delays and the restructuring process, the project was extended from December 31, 2005 to December 31, The extension enabled the project to strategically capitalize on the renewed commitment to institutional reform favored by the new administration. For example, during the preparation of the extension, GOU included activities to support the operations and technical strengthening of DINASA, the management capacity and operational capacity of ANP, as well as additional activities to strengthen the operations of URSEA and URSEC. Implementation continued to strengthen over the final three years of the project, when more than 60 percent of the funds were disbursed. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 33. M&E Design. The PAD included key performance indicators within the project design framework and M&E implementation plan. The framework included 11 outcome indicators to measure and monitor progress toward the PDO and 24 output indicators to measure component objectives. Overall the indicators were specific in terms of quantity, quality and time, except in the case of three PDO indicators that lacked target values. In addition, the selected outcome indicators were appropriate to measure and define the PDO based on its five-legged strategy for sector reform: regulations, efficiency, PSP, competition, and access. However, eleven outcome indicators were too numerous at the PDO level, and at the output level, the indicators measured the completion of studies or training but not the added value that these activities brought to the project. The project would have benefited from output indicators measuring change resulting from the completion of a group of activities. For example, rather than using regulatory accountability study completed a more adequate indicator would have been a regulatory accounting system designed, developed and operational. 34. M&E Implementation. During the supervision missions, the M&E framework was further strengthened to include baseline values, targets that were not specified during design and an output indicator for the financial sector. The Bank and OPP, in close collaboration with the participating agencies, collected baseline data and tracked indicator performance during the implementation of the project. Although the detailed M&E framework and efforts to collect information are impressive, a project with fewer indicators focusing on the outputs of a TAL would have been more appropriate as too many indicators give the impression of an overly broad project without a clearly-defined focus. 35. M&E Utilization. M&E information was used to provide feedback to OPP and the participating agencies on issues relating to project implementation and sector performance. The Bank team also used the M&E information to report progress and support decision-making and resource allocation. The involvement of participating agencies, in particular URSEA and URSEC, contributed to strengthening their capacity of gathering and disseminating sector performance information, as the M&E information included mainly industry-standard indicators. 2.4 Safeguard and Fiduciary Compliance 36. Financial management arrangements were satisfactory throughout the implementation of the project. Audit and project progress reports were received by their due dates. Procurement 8

24 under the project was conducted by OPP and UNDP. Procurement was moderately satisfactory due to procedural shortcomings and delays. 2.5 Environmental assessment: Environment Category: C (Not Required) 2.6 Post-completion Operation/Next Phase 37. Transition Arrangements. The means of sustaining reforms and institutional capacity are closely tied to URSEA and URSEC s ability to continue operating as regulatory agencies. Both agencies have adequate legal and regulatory frameworks, budget provisions and management procedures, and appropriate staffing as a result of the competitive selection process funded by this project. 38. Performance indicators. URSEA and URSEC s core operations include monitoring and evaluating public service performance through the application of industry indicators. OSE benchmarking also includes sector performance indicators that allow URSEA and OSE to measure efficiency and service coverage in WSS. 39. Follow-up Operation. The ICR team recommends technical assistance for URSEA, URSEC, DINASA, DNETN and other relevant agencies as a crucial component of public service infrastructure loans in Uruguay as this will provide an excellent opportunity to reinforce the reform process and increase coordination between agencies. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 40. Importance of project objectives. The project objectives, design, and implementation strategy continue to be relevant for national priorities and Bank assistance. GOU has maintained an emphasis on increasing efficiency, coverage and sustainability of public infrastructure services, as expressed in the government document entitled El Gobierno de Cambio La Transición Responsable and the 2005 GOU letter of understanding. Both call for state reforms, including enhancing transparency and accountability in state functions, decentralizing management and clarifying roles and responsibilities and eradicating all forms of clientelism. Public service modernization is also fully consistent with the Bank s CAS. Although the Government has emphasized the central role of the state in defining a social agenda, it also promotes investment through PSP under certain conditions and in specific sectors, namely ports, railways and telecommunications. 41. Relevance of PSP. Although the overall project objective remains fully consistent with the Government s vision for the public services sector, the two constitutional referenda on the water and petroleum sectors removed the option of expanding and deepening PSP in these sectors. While this did not affect the relevance of the overall project objective, it did affect the results of specific outputs and outcomes. The project focused on strengthening the policy making capacity of ministries and the authority of regulators. Its flexible design coupled with the fast response of the Bank team and OPP allowed the project to remain relevant and important in these two sectors. 42. The amendments to modernize the financial sector are also highly relevant. The economic crises exposed the weakness of the financial system and made its reform more significant. The sector continues to be relevant in the current government program and in the 9