Does Uruguay merit its pro-investor reputation?
by Robert Jackman (Robert Jackman writes on investments, stock-markets and finance for the Daily Mail and UK Investor Magazine, as well as contributing to The Spectator and Daily Telegraph.)
In a region where political risk weighs heavily, Uruguay has long styled itself as a pro-business outlier – earning the nickname of ‘the Switzerland of Latin America’. A decades-long diplomatic blitz has seen the 3-million strong country tout its commitment to the rule of law as central to its investment case.
Does Uruguay merit its pro-investor reputation? This October a French commercial court will consider that very question, when it hears an appeal from an investor seeking compensation for the failure of what would have been the country’s biggest ever foreign direct investment.
The case harks back to 2006, when Indian mining tycoon Pramod Agarwal began talks with Uruguay’s left-wing government to mine a deposit estimated to contain some 2.5 billion tonnes of high-grade iron ore. Agarwal committed his privately-owned mining company (Zamin Ferrous) to investing some $3 billion into the project (via a subsidiary).
Agarwal claims the investment was derailed by political interference, as the Uruguayan government’s changing demands (including on the port location) rendered the work unfeasible – but only after he had spent some $300m on the project. Agarwal’s lawyers have taken particular aim at a 2013 law that required mining projects to pay 38 percent tax on profits, as well as raising environmental standards. They claim that – since Agarwal’s project was the sole mining endeavour in Uruguay – the law amounted to a targeted attack on his business.
After an unsuccessful attempt to launch a dispute under a bilateral investment treaty in London, Agarwal is now hoping a Parisian appeal court will grant him jurisdiction to seek more than $3 billion in compensation for the project’s failure.
The dispute has surprised many Uruguay experts, who point to the country’s track record for cultivating foreign investment. Likewise, the country scores higher than most of its neighbours in World Economic Forum’s Global Competitiveness Report – finishing behind only Chile and Mexico in the Latin America region.
Still, its scores aren’t entirely unblemished. Uruguay ranks 112th for shareholder governance, for example – and 97th for trade tariffs. The country also has higher trade union membership than its neighbours, with 30 percent of its workforce belonging to a union (almost twice the regional average). Collective bargaining is common in both the private and public sectors.
Meanwhile, a dependence on neighbouring Argentina to provide electricity has also caused occasional bottlenecks for industry. A major outage in 2019 – caused by a failure in the Argentine grid – left both countries entirely without power for much of the day. Argentina’s energy ministry insisted the situation was ‘unprecedented’ – although smaller blackouts are frequently observed.
Overall foreign direct investment in Uruguay has faltered in recent years – albeit against a turbulent economic backdrop. Data from the country’s central bank shows FDI falling from a high of $33.4 billion in 2014 to $29.6 billion in 2020. Though next round of figures may well be boosted by the country’s strong performance during the pandemic (thanks to a speedy vaccine take-up Uruguay largely avoided the punishing lockdowns seen in neighbouring Argentina).
From time to time, Uruguay’s government has found itself at odds with multinational investors. In 2010, it was the subject of a legal complaint from Phillip Morris – as the tobacco major took aim at strict new packaging laws which, it claimed, left its brands unfairly disadvantaged against its competitors. The claim was dismissed in 2016.
After the case was thrown out, Uruguay’s then president Tabaré Vázquez blasted Phillip Morris for attempting to subvert ‘the fundamental right to health and life’ of Uruguayans. A former oncologist who continued to practice medicine part-time during his time in office, Vázquez had long styled himself as an anti-smoking president – even as his government oversaw the legalisation of recreational marijuana.
After 15 years holding the presidency, Vázquez’s party – the left-wing Broad Front – lost favour in March 2020, as Uruguay elected the centre-right politician Luis Pacalle Pou. Having campaigned on the promise of tax and fiscal reforms, Pacalle Pou has set out his ambition to make his country an even more appealing destination for foreign investors – winning plaudits in the Western press.
Can his administration make good on this bold promise? Initial signs show cause for optimism – as voters narrowly approved a package of pro-business reforms that had been put to a plebiscite this March. As the president himself has acknowledged, though, there is still more to do. At least one big investor will agree with him on that front.