Uruguayans, unlike most Latin Americans, do not love to criticize the state. In 1993, when governments across Latin America were laying off workers and selling state-owned enterprises at a feverish pace, Uruguay held a referendum to determine, in essence, whether it should join the trend. Fully 70 percent of all Uruguayans said “No.” That landmark vote is often invoked by Uruguayans to illustrate what they describe as a unique national attitude toward the public sector.
There are good reasons for this attitude. Uruguayans enjoy one of the highest standards of living outside the industrialized world, and many of them believe the welfare state is the reason why. “Uruguayan society is profoundly statist,” says Eduardo Cobas, who runs the Uruguayan government’s Executive Committee for the Reform of the State. “Uruguayans believe in the state and believe the state can do things well.”
Yet if you talk to Héctor Morales, a senior official in the federation of trade unions that represents Uruguayan government workers, it is clear that things aren’t entirely well in the public sector. In a surprisingly candid assessment, Morales makes it clear that despite its accomplishments, the Uruguayan state has problems similar to those of most other Latin American countries. “We’ve known for years that the Uruguayan state needs to be reformed and modernized,” Morales says during an interview at the federation’s headquarters in Montevideo. “For decades, public employees were hired through the mechanism of political patronage,” he explains. “If I worked for a given political party and helped get a certain number of votes, I had access to a government job.” Morales says this situation contravened Uruguay’s constitution, which requires all public posts to be filled through open competitions that reward merit—not political influence. It also encouraged the constant creation of new public agencies and divisions, with little regard to the costs and benefits of doing so.
Since Uruguay’s constitution makes it extremely difficult to fire a civil servant, the state tended to grow with each new government, until it became “disproportionately large,” according to Morales. Today, some 230,000 Uruguayans, or nearly one out of every four working-age adults, has a government job—one of the world’s highest ratios. The distribution of government workers is skewed, however. According to Morales, the military and the diplomatic services are proportionately much larger in Uruguay than in many countries, while there are not nearly enough police officers or public health nurses to go around.
Ironically, though public sector salaries can be reasonable for low-skill jobs, they are infamously low for professional ones. The gap between public and private salaries for highly skilled staffers is so large that in order to retain qualified people, most ministries allow them to work only a few hours per day. That way, these employees can supplement their income with a second job in the private sector. Worker training is woefully inadequate, according to Morales, and investment in information technology lags far behind the private sector. As a result, he says, many transactions take far longer than they should and customer service tends to be poor.
Morales is scathing on the subject of upper management. “In 99 percent of the cases, the managers and directors of public institutions do not have a detailed understanding of the area they are asked to lead,” he says. Instead of awarding management jobs to dedicated public servants with years of experience in a particular sector, the system has traditionally bestowed such slots as consolation prizes to “failed political candidates” regardless of their qualifications, he says.
Underpaid, undertrained and ignored by their bosses, many civil servants feel besieged, according to Morales. Naturally, they are suspicious of any politician who might jeopardize their already precarious situation in the name of modernization or reform.
What kind of reform? Morales’ analysis of the public sector is echoed by Uruguayan private sector executives, government officials, scholars and journalists. Although they are proud of what Uruguay has accomplished, these observers worry that inefficiency in the public sector is holding the country back and hurting its ability to compete. Gualberto Rocco, president of the Chamber of Industries, says Uruguayan businesses made enormous efforts to cut costs and increase productivity in the 1990s, when the government dropped many trade barriers in order to join the Mercosur customs union. But he says the state, despite some notable improvements in areas such as customs, ports and telecommunications, has not reduced the burden that bureaucracy places on businesses. “Instead of having one of our employees out on the street for two days trying to complete a single official transaction, we should be able to do it in two hours,” Rocco said. “This makes our products more expensive.”
If union officials and industry leaders agree on the need for reform, why haven’t these problems been solved? According to Juan Manuel Rodríguez, a labor relations expert and management professor at Uruguay’s Catholic University, it comes down to jobs. Any serious effort to streamline and rationalize the public sector would require layoffs, according to Rodríguez, and in a country where nearly everyone has a relative who works for the government, that prospect is frightening to many people. “Civil servants have very few incentives , but they do have an incentive to not lose their job,” he said. Indeed, public opinion surveys conducted by the Uruguayan government in 1995 found that people supported public sector reform—but only if it would not result in layoffs and social conflict.
So when the newly installed government of Julio María Sanguinetti set out to modernize the public sector in 1995, it opted for a two-stage approach that emphasized incentives and voluntary participation instead of job cuts. In essence, the government invited executing agencies within Uruguay’s central administrative services to voluntarily conduct an assessment of what they were doing. Each participating agency was asked to define its “core competencies,” or the services that it uniquely and irreplaceably performs. Agencies were also asked to find activities that could be eliminated, transferred to other more-qualified agencies, or contracted out to private companies. Once the core activities were defined, each agency would identify staff positions that were unnecessary, and the whole “restructuring” would be submitted for approval to experts in the Executive Committee for the Reform of the State (known as CEPRE). The program was largely financed with $115 million in IDB loans.
Let’s make a deal. Agencies whose restructuring proposals were accepted, were offered a unique kind of reward. First, they were given access to special funds to cover the severance, early retirement, or transfer costs of employees found to be in redundant positions. These funds also included technical support, business training, and small loans for civil servants that opted to start their own businesses in the private sector. More importantly, each agency was allowed to keep the savings generated by the restructuring. These savings could then be used to raise the salaries of remaining staff, invest in training and equipment, and pay performance-based bonuses–all things that were practically impossible to do in the past.
The results were remarkable. Of a total of 108 executing agencies that participated in the program, 82 (representing some 80,000 public employees), successfully restructured their operations. In many cases, this involved eliminating or merging overlapping agencies, so that when the process was completed there were 46 percent fewer agencies than before. A total of 9,221 redundant positions were identified during the restructuring. More than a third of the employees holding redundant jobs received training and assistance in finding private sector employment (others retired or filled vacancies in other parts of government). Many of these ex-civil servants now provide services to the government—at lower cost—as private contractors (See From paper pusher to business owner, at right). Altogether, the overhaul is saving Uruguayan taxpayers $56 million per year; $25 million is going to the national treasury, while the rest is being returned to the restructured agencies for the incentive programs described above.
Remarkably, the entire restructuring process took place in less than three years and without a single strike or labor protest. A key reason, according to CEPRE chief Eduardo Cobas, is that the program was supported by the agency chiefs themselves, who had never been given discretion over the use of funds for hiring or rewarding their staffs. “They saw it as an opportunity,” recalls Cobas. The chiefs were able to recruit the highly qualified people they had needed for years or simply gave raises to staffers who they risked losing to the private sector. The result was leaner, more motivated, and better-qualified staffs that produced a net savings for the government.
Another reason for success was the fact that the financial aspects of the reform plan were embedded in the national budget that was passed in the first year of the Sanguinetti administration. According to Cobas, this gave the program immediate political credibility and ensured that the remainder of the government’s time in office could be devoted to implementing the reforms, instead of squabbling over money.
Now, Uruguay is embarking on a second phase of reform that emphasizes the actual performance of public services. Starting with the federal budget that is scheduled for approval later this year, all public agencies are being required to define their products and services and come up with specific performance indicators and goals. “We want to change the way we formulate and execute the national budget,” says Cobas. “We want to be able to distinguish between services that are doing things well and those that aren’t, and to allocate public funds accordingly.”At the Uruguayan government’s request, the IDB is preparing a new loan to help finance the continuity of the modernization program. In addition to activities described by Cobas, the new program will finance deregulation to improve the business environment, a new Internet-based government procurement system, and the creation of “one-stop” customer service centers where citizens can take care of numerous official transactions.