The country has great potential for future growth in the logistics sector if both infrastructure and service quality are improved, and if ongoing dialogue is maintained between private operators and public entities to coordinate actions and strategies that promote and position Uruguay as a regional distribution hub.
Since the return to democracy in 1985, logistics has become a key driver of exports in the Uruguayan economy, representing a significant source of revenue both during boom times and in times of turmoil, as this sector has not declined even during periods of crisis.
The logistics sector is strategic because it generates competitive advantages that benefit the rest of the country’s economy. It is innovative because it takes advantage of the opportunities offered by new technologies. In turn, it supports industrial activity and foreign trade, and also exports services. Its importance is reflected in the fact that it accounts for between 4% and 5% of the country’s GDP. Today, it employs more than 20,000 people in the non-free trade zone, in addition to another 2,000 in the thirteen free trade zones. The sector’s momentum is evident, for example, in the trend of export figures for transportation services, which are itemized in the balance of payments and rose from US$280 million in 2003 to US$600 million in 2012, reaching US$140 million in the first quarter of this year.
Among the main advantages Uruguay offers as a transit hub for international trade in the region is its strategic location relative to the Mercosur countries, Bolivia, and Chile. Thanks to the country’s excellent river, land, sea, and air transport connections, goods can be delivered within a maximum of 96 hours by land and three hours by air, including customs clearance. Furthermore, the country has very favorable regulatory framework, notably including the Investment Promotion Act, the Free Trade Zone Act, the Free Port and Free Airport regimes, the Customs Warehouses and Temporary Admission regimes, and the Public-Private Partnership Act.
While it is acknowledged that logistics is on the government’s agenda, there are some critical areas that need improvement if Uruguay is to compete and establish itself as a regional distribution hub. The expansion and modernization of its infrastructure—particularly ports, roads, and railways—constitute the sector’s main challenge. High labor, energy, and government service costs also act as negative factors, as does the shortage of skilled human resources, especially for projects involving new technologies.
These topics were discussed on August 1, 2013, at the Conference on the Logistics Sector in Uruguay, held as part of the Public Policy Discussion Series organized by ORT University–Uruguay and CAF–Development Bank of Latin America, which took place at the university’s campus in Montevideo.
This symposium featured the participation of Gaston J. Labadie, dean of the School of Business and Social Sciences at ORT University–Uruguay; Antonio Juan Sosa, an economist and vice president of Infrastructure at CAF–Development Bank of Latin America; and Gladis Genua, an economist and CAF’s representative in Uruguay. The current state and future prospects of the logistics sector in Uruguay were analyzed by a panel of experts comprising Rafael Farromeque, Director of Europraxis–ALG Consulting for the Andean Region; Beatriz Tabacco, President of the National Institute of Logistics (INALOG) and also National Director of Planning and Logistics at the Ministry of Transport and Public Works (MTOP); and accountant Daniel Carriquiry, president and founding partner of Costa Oriental S.A. and president of the Chamber of Free Zones of Uruguay. The panel was moderated by engineer Juan Opertti, logistics director at Costa Oriental S.A., logistics director for South America at Kuehne+Nagel, and professor at ORT University–Uruguay.
In addition, economists Mariana Ferreira, manager of the Competitive Intelligence Department at Uruguay XXI; Ariel Cancio, an analyst in the same department; and Juan Ignacio Villalba of INALOG presented the report “Investment Opportunities in Uruguay: The Logistics Sector,” recently prepared by Uruguay XXI—a public-private institute dedicated to promoting investment and exports of goods and services—and INALOG.
Uruguay as a regional hub
There are currently at least 300 companies operating as regional distribution hubs in Uruguay, employing 14,000 people, of whom 9,600 are permanent employees and the remaining 4,400 are seasonal or contract workers, according to a study based on data from a survey conducted by the consulting firm Cifra in late 2012. This sector generates more than US$1.2 billion in annual revenue, which generates approximately US$750 million in added value, and invests US$133 million annually. More than 75% of the companies linked to the hub carry out activities associated with traditional logistics, such as transportation, cargo handling, and warehousing. Twenty-five percent of the companies engage in “mini-factoring” processes, and nearly 40% of them provide professional consulting services.
“Uruguay’s development as a regional hub is an unavoidable goal, since the expanded Mercosur is an attractive market for international companies, given that consumption in this region—which relies heavily on imported goods—has continued to grow,” stated Daniel Carriquiry. He added that demand will continue to rise as exports of primary products provide greater income to the region’s economies while simultaneously driving higher consumer demand. Indeed, Uruguay’s opportunity to become a regional hub lies in capturing that flow of consumer goods from countries outside the bloc into Mercosur.
Many international corporations have decided to establish a regional operational base in Uruguay’s free trade zones (FTZs) because the country more than meets the necessary requirements: essentially, the level of legal certainty and its proximity to regional markets, where these companies’ subsidiaries operate or where their end customers are located.
Undoubtedly, Uruguay’s main advantage is its geographic location, which helps reduce distribution times. For example, a company can deliver a product stored in a Uruguayan free trade zone to the Argentine market within a maximum of 72 hours, including customs clearance—a timeframe that is reasonable and accepted internationally. “In short, Uruguay is on the radar of international companies when it comes to regional distribution logistics operations. When a company wants to develop a hub in the region, I have no doubt that our country is one of the options, and that is why they visit us,” said Carriquiry.
Public-private partnership
Rafael Farromeque notes that, in Latin America as well as in the rest of the world, countries are beginning to approach the management of their national logistics systems in a comprehensive manner. It is not just a matter of managing conventional problems—for example, if infrastructure is an issue, then more investment is needed in projects in this area—but also of managing other elements in which the private sector plays a leading role, as is the case with services.
He added that in recent years, several Latin American countries, including Uruguay, have committed to creating spaces for public-private dialogue to promote and boost the sector’s activity. He emphasized that it is essential to create an institutional framework that enables ongoing public-private dialogue. “In this regard, Uruguay is at the forefront in the region, having created INALOG, where there is an ongoing dialogue between the public and private sectors to discuss a national logistics policy as well as concrete actions and strategies regarding the needs of the national system,” he said.
“Logistics is a matter of national policy in Uruguay,” added Mr. Carriquiry. “The collaboration between government agencies such as INALOG and private companies to analyze various challenges facing the sector is an invaluable tool. We will continue to achieve great success in the future because we share ideas and carry out concrete projects.”
Competitiveness
The director of Europraxis–ALG Consulting for the Andean Region, Mr. Farromeque, stated that companies no longer compete on their own, but rather as part of networks or logistics chains, where, although they operate as independent entities, they are also interdependent in terms of achieving common goals. Today they operate in a context that encompasses various regulatory aspects, economic stability, a climate of business confidence, and the availability of infrastructure and services; and where actions by external actors could significantly affect the company’s competitiveness. This is where comprehensive logistics management techniques—which is essentially “supply chain management”—introduce new elements. These aim to align the capabilities of all actors in the network and consistently guide them toward common competitive criteria, whether tangible—such as quality improvement, cost and time reduction, etc.—or intangible—such as the harmonization of the subcultures present in each link of the logistics chain, trust among chain members, security, etc.
In an international context of network rivalry, characterized by many overlapping international logistics distribution chains, we must visualize the network from end to end and understand it thoroughly to determine what value the network adds for the benefit of end consumers, explained Farromeque. It is necessary to measure logistics costs in order to position our territory as a competitive advantage for the transit of certain goods, but to do so with concrete metrics on costs and time, efficiency improvements, reductions in losses, damage, risks, etc.
"The other new development in the global competitive landscape," Farromeque continued, "is that it is no longer the products themselves that compete. In reality, competitiveness is the combination of the product and the services associated with it." As the process of globalisation has imposed greater distances and travel times, more borders, and more controls, a product may cease to be competitive if there is no facilitation package covering the end-to-end journey within supply chains. This adds significant complexity to network management, meaning that greater professional coordination is required to efficiently and effectively manage the comprehensive logistics process.
Finally, it is impossible to manage logistics systems effectively without visibility into what is happening throughout the entire logistics chain. That is why integrating information systems is what allows us to bring together all the independent stakeholders, who are sometimes geographically dispersed, he concluded.
Investments
Economist Antonio Juan Sosa, Vice President of Infrastructure at CAF–Development Bank of Latin America, explained that investment in logistics can be highly profitable, but it carries many risks because it is a complex activity that essentially involves the operation of a vast supply chain for the delivery of millions of goods.
Every country, whether large or small, has the potential to develop a logistics sector, but it must proceed with great skill to avoid failing in the attempt. In a highly competitive world, the chances of success fluctuate greatly depending on the evolution of major centers of purchasing power, which leads to changes in supply chain routes.
In that sense, large countries have half the problem solved. For example, the United States, China, India, Brazil, and others have had to make significant investments to organize their domestic logistics according to their respective sizes and needs; but once that effort is made, it becomes easier for them to “expand” into other regions by providing the same types of services. In general, logistics operations in smaller countries are not very sophisticated. However, if these countries are located in strategic locations, they have the potential to capture neighboring markets through more advanced logistics operations, as is the case with Singapore, Panama, the Netherlands, etc. This requires great vision and a lot of ambition because significant long-term investments must be made to become a global logistics service provider, said Sosa.
Logistics parks. “Today , all countries are interested in developing logistics parks because the activity carried out there is just as important as road, port, airport, and rail connections,” said economist Sosa. The establishment of a logistics park should aim to incorporate value-added services at an intermediate or advanced stage, allowing owners to generate higher profits. This ensures the project’s survival because, eventually, some of the companies operating in that park might move their storage facilities from one country to another. However, to the extent that value-added services (research, innovation, etc.) are available, such moves become more difficult, and consequently, there is a greater likelihood that the logistics park will continue to operate for many years.
Challenges
The main challenges facing Uruguay’s logistics sector in the short, medium, and long term were identified based on the results of a survey conducted by INALOG, according to economist Mariana Ferreira. First and foremost is the need for infrastructure improvements. Although the private sector has made significant investments in recent years—which have accompanied economic growth, particularly in the agricultural and timber sectors—this strong development requires the construction of better roads to ensure adequate connectivity between the shipment of raw materials and their delivery to industrial processing facilities. There is also a need to develop the railway system to reduce freight transport costs and expand port capacity, particularly in Montevideo Bay, the dry port of Rivera, and the deep-water port project in Rocha, which has already been enacted into law.
For the logistics sector to continue making progress, several projects currently in the planning stages must be implemented, such as the development of the Uruguay-Brazil Waterway, the border crossings at Fray Bentos, Paysandú, and Chuy, and the Montevideo Logistics Zone, which is overseen by the Municipality of Montevideo, the National Customs Directorate (DNA), and the National Ports Administration (ANP).
Likewise, changes need to be made to the regulatory framework to enable the development and consolidation of this activity. For example, some projects are already underway, such as the reform being carried out by the DNA, the parliamentary review of the new Customs Code, the creation of the Single Window for Foreign Trade, which will significantly facilitate export, import, and transit operations, the recent submission to Parliament of the draft Special Economic Zones (SEZ) Act, and the Industrial Parks Act, which is currently underutilized and needs to be revitalized, Ferreira stated.
Weaknesses
According to the president of the Chamber of Free Zones, Uruguay’s logistics sector has some notable weaknesses in infrastructure, IT systems, and operating costs. Mr. Carriquiry recommended investing in the construction of high-quality facilities to improve logistics operations and securing long-term financing for such projects to ensure their viability.
He cautioned about the quality of the IT systems. “We need to implement state-of-the-art systems that ensure operational accuracy. This applies to inventory management and, furthermore, to providing information to customers. Without a robust and powerful IT system to facilitate logistics operations, we will not be able to meet deadlines or maintain the competitive edge we have over other regional centers.”
Finally, he expressed concern that operating costs—including both wages and internal procurement—have risen sharply in Uruguay, primarily due to exchange rate fluctuations, even following the recent devaluation of the peso against the dollar. “We must recognize that Uruguay is not the only country with distribution centers in the region. Therefore, if our economy does not have competitive prices, high costs will hinder our ability to compete.”
Threats
Among the most serious threats facing the logistics sector, the president of the Chamber of Free Trade Zones cited the international economic crisis, which is having a detrimental effect on logistics activity, and the protectionist measures adopted by neighboring countries. He stated that barriers to the entry of imported products into the Argentine market have led several corporations to cease logistics operations from Uruguay due to the sharp decline in trade volume with the neighboring country.
Mr. Carriquiry placed special emphasis on the threat posed to Uruguay by the so-called “cargo reserve” for the international transport of goods among Mercosur countries, established by the bloc’s Multilateral Maritime Transport Agreement, which was approved by Argentina, Brazil, and Paraguay in 2005 but has not yet been ratified by Uruguay. “We oppose [its ratification] because it would mean a massive increase in operating costs, longer logistics times, and isolation, since Uruguay does not have a merchant marine,” he noted.
Under this agreement, only shipowners—that is, any natural or legal person who commercially operates a vessel, whether owned by them or by a third party—from member states may provide services between Mercosur ports. The rejection since 2005 is based, first, on the fact that Uruguay grants the same navigation treatment and port facilities to its partners’ flags as it does to vessels flying its own flag, while the Uruguayan flag is considered a third flag in countries within the bloc; second, because the respective cabotage laws remain in force, whose administrative hurdles generate additional costs, such as pilotage fees on the Paraná and Paraguay Rivers within the Waterway. If the current bill is approved, maritime freight rates for Uruguay’s international trade will be at the mercy of a limited group of shipowners from Mercosur member nations, with a single, insufficient, and bureaucratic escape clause. This would affect operations at the Port of Montevideo, since more than 50% of its activity consists of handling cargo in transit, according to data from the Navigation Center (Cennave).
Uruguayan free trade zones would come under customs control under a new law
Uruguay’s Free Trade Zone Law not only permits commercial, industrial, and service activities, but also allows industries to alter the nature of goods, and permits goods to remain in storage for an unlimited period of time. These activities are exempt from corporate income tax, dividend tax on shareholders domiciled abroad, and any other national tax.
“An important step for Uruguayan free trade zones would be to amend Mercosur Resolution No. 8 of 1994,” said Mr. Carriquiry. Under that regulation, when any goods of Mercosur origin enter a Uruguayan Free Trade Zone, even if they are not processed or have no added value, they lose the tariff benefits enjoyed by products originating in member countries. Since then, the logistics of the Free Trade Zones have operated exclusively with non-zone products.
Carriquiri noted that in December of last year, Economy Minister Fernando Lorenzo pledged that, under the new Special Economic Zones Act, the Special Economic Zones (SEZs) would cease to be “exclaves” and become “enclaves” (Editor’s note: A territory within another with different political, administrative, and other characteristics), which means they would be subject to customs control. “This change is essential to amend Mercosur Resolution No. 8 and free Mercosur from the ‘penalty’ of goods losing their origin if they enter Uruguayan Special Economic Zones. It represents a major opportunity because there are international companies that have products of non-Mercosur origin and products of Mercosur origin, making it complicated and costly to manage two separate logistics systems. In many cases, customers end up ceasing operations in Uruguay or separating them, which results in higher costs for them,” he said.
Legal certainty. The new legislation under consideration by Parliament does not repeal the 1987 Free Trade Zone Act, but it does change the name from “free trade zones” to “special economic zones,” thereby introducing new possibilities for the development of these activities. “The Free Trade Zones Chamber participated in drafting the bill, having succeeded in ensuring that all rights acquired by logistics operators—both operators and users—were maintained. While we still disagree with some aspects of the regulations, we intend to address them in upcoming negotiations,” noted the president of that entity.
Advantages. Mr. Daniel Carriquiry outlined the advantages for companies of centralizing their regional inventories in a Uruguayan Free Zone because, in this way, they reduce partial inventories in each country of the expanded region (Mercosur plus Bolivia and Chile). Consequently, first, there are financial cost savings since the inventory is stored in a free trade zone where no customs duties have had to be paid because the goods are in transit. Second, there are operational savings since stockouts are avoided because, when sales are budgeted, companies generally experience either oversales or sales declines. Thus, through the regional distribution center, it becomes easier to meet additional product demand, which is very important from a commercial standpoint.
He also emphasized that a regional distribution center allows companies to achieve significant flexibility in their inventory management. “By maintaining inventory at the hub, companies can carry out value-added activities to adapt products to the technical requirements, which vary significantly from country to country in the region. There are also other value-added services that enhance inventory flexibility, such as packaging, quality control, and the assembly and disassembly of kits, among others.”
While corporations generally aim to have a regional distribution center, they prefer to outsource this type of operation. They do not want to invest in fixed assets or maintain a workforce under their own name to avoid fixed costs. In these cases, the role of efficient logistics operators is to provide high-quality facilities and offer IT services with international interfaces that allow companies to communicate easily with their headquarters, Carriquiry concluded.
Logistics operators rely on a highly unstable region
In response to two questions posed to the panel of experts by Gaston J. Labadie, dean of the School of Business and Social Sciences at Universidad ORT Uruguay—regarding the institution’s vision of the core capabilities that need to be developed in the logistics sector over the next 25 to 30 years, and the factors that could boost logistics activity in Uruguay—the following answers were given:
Mr. Daniel Carriquiry stated that planning is a fundamental issue in logistics. “Uruguayan operators should be planning for the long term—between 10 and 25 years—but we don’t dare to do so in our organization because we depend on a very unstable region and on countries within Mercosur that impose restrictive measures overnight. A year and a half ago, we had planned to build a state-of-the-art 10,000-square-meter facility, but the project has been put on hold because the requirement for sworn statements in Argentina has caused a diversion in trade flows and a reduction in storage needs in Uruguay’s Free Trade Zones.”
“Actually,” Carriquiry continued, “we make logistics plans for two or three years at most. Obviously, a logistics operator can’t run out of storage capacity, but they have to tread very carefully due to the unpredictability of the regional market. Often the solution isn’t to build a new warehouse, but to upgrade technology so that the occupancy-to-available-cubic-meter ratio is higher. That’s why we operators have to gradually explore investment opportunities in line with our clients’ growth potential, while also factoring in regional uncertainties.”
He added that “it is possible to plan for the long term when it comes to training. In Costa Oriental, we are offering courses for first-time employment in partnership with an IDB project. We train young people in basic logistics skills (loading and unloading, operating forklifts, managing systems, etc.) so that graduates can enter the job market with foundational training. In addition to the benefits for the community, these training courses allow us to have a pool of workers we know well. Our next step will be to create intermediate and advanced training courses—that is, for supervisors and logistics coordinators—which are not offered at educational institutions in the country.”
Engineer Beatriz Tabacco replied that INALOG, a public-private entity that began operations in 2012, is making a significant effort to collect existing data that has not yet been analyzed from a logistics perspective. As a first step, the various supply chains will need to be analyzed to identify which “drivers” can boost the sector’s activity. She described the Institute’s initial efforts to alleviate truck traffic congestion at the ports of Nueva Palmira and Montevideo. Both cases were successfully resolved thanks to public-private coordination as well as smooth communication between INALOG and various government agencies, primarily the ANP, the DNA, and the MTOP.
He predicted that, within five to ten years, INALOG will become a hub where all stakeholders from the various logistics chains will come together so that they can quickly sound the alarm if difficulties arise in specific areas. He also hopes the institute will become a leading center for investment and problem-solving in the sector. He further reported that INALOG has just commissioned a study to analyze the supply and demand for training in the logistics sector so that, with a five-year outlook, the results obtained will provide guidance on the steps to take and thus facilitate collaboration with academic institutions.
In turn, Rafael Farromeque outlined a series of recommended strategies to strengthen the logistics sector.
- To establish a nationally agreed-upon logistics policy that is technically and economically viable and supported by a stable institutional framework—that is, a regulatory and institutional framework that enables the implementation and execution of a series of concrete actions in the sector.
- Investing in specialized infrastructure—an area in which Uruguay is quite active—such as the creation of international air cargo hubs, urban distribution centers, and final-stage processing facilities where value is added to goods before they are shipped to other destinations.
- Promote the establishment of free trade zones and support the relocation of international companies.
- Improve the quality of transportation and financial services to support logistics operators.
- Help logistics operators expand internationally so they can grow stronger and build a global network that enables them to attract and handle shipments from large international companies.
- To professionalize logistics sector operators through university-level training, for which the academy must offer master’s degree programs, establish research centers in the field, and connect with a national logistics observatory where issues related to costs, timelines, and quality can be monitored; the latter through surveys designed to gauge how users perceive the quality of logistics services.
- Align the capabilities of the public sector to coordinate logistical support and facilitation functions; and those of the private sector to invest and direct that investment toward the overarching objectives of the national logistics policy.