IDB launches first loan program targeted at outsourcing services in LatAm
By Patrick Haller
The Inter-American Development Bank (IDB) will provide a loan of ten million dollars, plus three million dollars that will be contributed by the Uruguayan government, in order to foster further development of the nation’s services sector. The IDB office focused on integration and the trade sector in the Southern Cone is based in Montevideo and this helped to promote the regular and fluid interaction between Uruguayan authorities and the IDB representative, and established a permanent dialogue from the very beginning of the loan process.
One of the strongest aspects of the country is that the government had been actively growing the services industry since the 1990s. In order to determine if Uruguay was able to further grow this sector, the IDB, in cooperation with the Uruguayan government, conducted several market studies of the country. Once it was concluded that Uruguay was a viable candidate, a local validation study was done to understand which services Uruguay would be able to provide.
Strong Business Climate
The IDB found that Uruguay also has one of the best business climates in the region, reported Ady Beitler, Integration and Trade Specialist at IDB. Additionally, it was determined there is a strong regulatory framework and a very good level of education within Uruguay. As we reported in a recent article, scaling up operations is a challenge because of the limited population of just over three million people, “But within that limitation is the availability of a qualified workforce and a favorable business climate,” said Beitler.
Uruguay has satisfied all requirements, and the government is in the process of setting up the project execution unit and the IDB plans to start the disbursements in December 2011. As sated on an IDB Press Release, the loan is for a term of 25 years, with a four-year grace period and a variable interest rate based on the London InterBank Offered Rate (LIBOR).
Considering the country’s size, the program has been designed to target high-potential market niches, as opposed to pursuing a wide-range of business opportunities. An analysis was conducted to identify priority sectors that took into account 17 factors grouped into four categories (promotion, infrastructure, regulation, and human resources). The results dictated that four sectors were most viable for growth in Uruguay:
- Logistical Services;
- Services associated with the Pharmaceutical Industry;
- Back-office and Processing Services; and
- Services Associated with Information Technologies.
Another important aspect of this initiative is the establishment of a skills/capacities registry. After passing a standardized industry exam, and a test of English language proficiency, candidates will be able to enter their information into the database which companies can access and search by skill type. If someone doesn’t do well on the exam, they can apply to attend a finishing school at an approved educational institution.
“We will fund programs that promote employment in the services sector but they have to be agreed upon and designed between educational institutions and the companies,” Beitler explained, “We expect the private sector to give a market basis to the finishing schools. On one hand the country has grown the industry, it is now an attractive destination and we want to make sure that they are able to scale up.”
Uruguay XXI, the executing agency, will be required to complete several filings and reports which are the standard requirements of any IDB investment project and no additional requirements are being imposed upon them. The monitoring process has several components, including:
- Submission of Annual Operational Plans;
- Submission of Audited Financial Statements;
- Submission of the Disbursement Plan;
- Follow-up Plans;
- Inspections; and
- Reports on the Semesteral Progress
“An effort will also be made,” reported Pablo M. Garcia, Integration and Trade Senior Economist at the IDB, “to provide Uruguay XXI with the capacities to offer services at the company level in order to facilitate successful startups and the ongoing development of new investments by foreign firms establishing operations in Uruguay.” It is expected that additional investments and exports in the sector will increase the demand for Uruguayan services.
Garcia added, “Uruguay boasts obvious advantages for development of its global services sector, but it needs to make an effort to position itself internationally as a center of excellence if it is to consistently attract more and better investments.”
“This is the first project ever of the IDB focused exclusively into the global services sector,” explained Garcia, “and it was designed with a very innovative approach, combining export and investment promotion activities, capacity building activities (finishing schools), providing access to certifications and promoting improvements in the regulatory framework for global services. We think that these kinds of projects can be a game changer for the global services development in LAC.”