The regulatory axis as a step toward development

This article was also published in El País de Uruguay.

From 2003 to 2019, Uruguay experienced the longest period of growth in its history. At this stage, the Gross Domestic Product (GDP) per inhabitant increased 67% at constant prices, while inequality was reduced, according to the Gini index. This cycle was abruptly interrupted by the arrival of the pandemic in the first quarter of 2020, which led to a 5.9% contraction in the GDP.

The decline in productivity largely explains the slowdown in economic growth. While productivity accounted for 33% and 46% of the expansion in the periods 2003-2007 and 2008-2012 respectively, its incidence became practically zero between 2013 and 2017 (Challenges and Opportunities for Development, CAF, 2020).

There are several factors that explain the low productivity of the Uruguayan economy. One of the most important is access to quality inputs and services that firms have. The productivity of a company and the quality of the goods and services it produces depend on the intermediate goods it accesses. In particular, Latin America has a marked deficiency in the quality of some essential services for the operation of companies, as explained in CAF’s Economy and Development Report in 2018.

This may be due to inefficient management as a result of tariff controls or decision-making structures that negatively impact the administration of the sector. It might also be due to less competition brought about by lower transferability, natural market status or the existence of legal barriers to entry, or to corrupt practices. A typical example is logistics, which harms the overall competitiveness of regional goods.

This regional reality is no stranger to Uruguay. At the domestic level, there are markets with low competition, such as fuels, and a high participation of public companies, where prices are affected by relations between executive power and the service providers. Of course, this limits the possibility of reflecting the provisioning conditions under efficiency criteria. For example, water and electricity tariffs are not cheap in regional terms. This is worsened by the limited role of regulators in setting prices or other competition conditions or controls in markets.

One of the ways to modify this structure is to establish regulatory frameworks that promote competition and trade, discourage illegal practices and favor public-private partnerships. For this to happen, the presence of autonomous regulators with commensurate structures is a necessary condition. The Uruguayan government took a step in this direction in July 2020 when, through the approval of the Urgent Consideration Law, it ranked regulators, giving them a role in pricing, established the need for a review of the fuel chain and import parity rules used so far and promoted greater transparency (Ceres, 2020).

The willingness shown by the local authorities has motivated CAF to support the Energy and Water Services Regulatory Unit (URSEA) through a non-reimbursable technical cooperation of USD 180,000, which will be implemented for 18 months. The main objective of the operation is to strengthen the role of URSEA as a regulator.

To that end, it is proposed, on the one hand, to assist URSEA in the establishment of new liquid fuel distribution regulations and on the other, to support the regulator in its digital transformation. With regard to fuel regulation, CAF specialists are working with national authorities on a regulation for the secondary distribution and marketing of fuels, in order to provide space so that in the future there may be greater competition in the market.

With regard to the digital transformation of URSEA, the regulator will be supported in defining a data interoperability strategy between the unit and the companies providing the service. This is a very important step for the agency, since it will improve its role in monitoring service quality in a more efficient and effective manner. This policy will make it possible to face the main challenge of any regulator, which is to reduce the informational asymmetries between the agency and the regulated organization.

CAF will thereby consolidate its position in the country, contributing with interventions that incorporate the best practices of the region and that are focused on eliminating the frictions that hinder the path to development and thus improve the well-being of all Uruguayans.