Interview with Diego Licio, President of the Chamber of Free Zones of Uruguay
In the opinion of the new president of the Chamber of Free Zones of Uruguay, Diego Licio, labor regulations in Uruguay must be modernized to address issues such as productivity. As he said in an interview with Empresas del Uruguay, labor "rigidity" in the country means that companies' margins are shortened and, in a challenging situation, most businessmen are "obsessed" with reducing their workforce. In addition, he stated that, if Uruguay remains expensive compared to Argentina and Brazil, the real salary should not be maintained: "it must be lowered, if we want people not to be left without work."
Licio is a public accountant and has a master's degree in tax law. His link with the free zones arises from his work at Guyer & Regules and Grant Thorton, from where it offers professional advisory and consulting services to companies that operate in free zones. He has been linked to the Chamber of Free Zones for 10 years, first as an advisor, then director and since October 2018 as president of the union. Furthermore, from a professional point of view he studied the regime in depth, wrote a book on free zones (“Free Zones in Uruguay”. Legal and tax regime. Current Regulations and Practical Cases), their operation and the gray parts from the point of view from a technical point of view that they coexist. In a complementary way, it has also been linked to other systems such as free ports and airports.
From that role, he is permanently close to entrepreneurs who develop businesses, those who manage the free zones and from that place he observes the business.
What follows is the interview he had with Empresas del Uruguay.

At what point are the free zones in Uruguay?
One thing is the general economic situation of the country, and another thing is the free zones. We still don't have the numbers for 2017 and 2018. To have them, an annual survey is carried out by the National Institute of Statistics, which is mandatory and has penalties if it is not answered by all users of free zones and developers. There, a lot of economic data, employment and others are polled.
Recientemente transmitimos modificaciones legislativas y reglamentarias, y en ese evento el Ministerio de Economía adelantó algunos números sobre el relevamiento de 2016.

Y esa diferencia que hace entre la economía en general del país y las zonas francas, ¿es de más prosperidad a favor de ese régimen?
The panorama may or may not be more prosperous inside or outside the free zones. It all depends on the industry, the type of goods or services being sold, and the customers you have. The free zones are focused on working towards the world and not towards Uruguay. There are some, especially from the interior, that focus more on working inward, importing products from different parts, taking them to distribution centers, sending them to free shops and to the interior of the country. Therefore, they depend more on the domestic market. But others like the World Trade Center, Aguada Park or Zonamérica which export many services to the world, and also goods in the case of Zonamérica.
When you are linked to the world, sometimes you are not so restricted by local economic variables and the ups and downs of the local economy. It is possible to diversify much more in this system, just as Uruguayan exporters can do it in other markets. But sometimes, like exporters who buy and process in the local market, they have another tax burden.
There is some competitive advantage there and free zone companies depend on how they move. Because tax is one of the "N" factors that affect investment. You have to manage things very well, not only because having a much lower tax barrier means that you are going to do well.

How do you see the regional and world conjuncture in 2018?
The world is quite complicated right now, for different reasons. Because the international interest rate is rising and that is why investors become much more demanding when it comes to coming into developing markets like ours, because they have an opportunity to invest at zero risk at the ten-year rate of the treasury. from the United States, at a rate of 3.2% that to do it in Uruguay you basically have a thousand headaches. And while that rate goes up, the more they pay abroad, the less attractive we become. That is one of the variables that play against bringing investments to these countries.
Otra es que los principales productos exportables, que son más commodity en la composición relativa que en otros países, no están en precios de los últimos 15 años, sino mucho más bajos. Ya desde 2014 esto se viene desacelerando.
Today in Uruguay, in general, the profitability of Uruguayan businessmen is very tight, to say the least and some are even losing money. Obviously there will be those who win, but in general terms the situation is complicated. GDP growth in Uruguay, if decomposed, says it is 2.5, but in reality it is 2.1 and that figure is explained in telecommunications at 1.1. In other words, there are many sectors that employ more people, that are more complicated in terms of profitability, that is, growing at zero, or some decreasing. And those are the ones that provide the most employment, because Whattsapp does not provide employment, telecommunications grow at 6% but that is not what generates income for Uruguayans.

There are many sectors that are holding on as best they can until the storm passes, do you see it that way?
It's like that, but those who can do it.

In that context, how do free zones fit?
By having a diversification of more relevant markets, or by being multinationals that set up shop in the country to distribute in the region and so on, they are not so dependent on the Uruguayan economy. Therefore, if you are exporting products to China, which is growing at 6%, you will still do more or less well.
In short, there is a greater diversification that implies less risk and less pressure. In any case, the trade war between the United States and China, another great cloud in the world in the current economy, which is good for the United States, but bad in the short and medium term for the world economy. Free zones are not exempt from the risk of complicating the exit of their products.

What local situation favors or harms free zones? For example, the dynamism of the labor market and the supply of personnel, can the companies of this regime take advantage of it?
Yes of course. The free zones are governed by everything and everything, by the laws and regulations of Uruguay's market economy, and this is important because there are people who think that the free zones are like outside the country, when in reality they have a tax exemption. to the importation of merchandise, as long as the products do not enter Uruguayan territory, if they do, they are taxed.
The same regulations of the Central Bank are applied for financial, Public Health for those of the sector, labor, laundering even intensified, the regulations of presenting balance sheets and audited financial, which are bureaucratic burdens and costs that local companies do not have. .
In short, they have a control burden equal to or greater in some cases than the companies that operate in the country. There are people who call me to ask if the salary advice applies in free zones. Of course yes, just like in any other part of the country. Are there unions? Of course. The same applies to all of them.
And if approximately 63 thousand jobs have been lost in the local market since 2014 until now, they are obviously looking for work and the free zones will be one more place that they may or may not hire. The question we must ask ourselves is whether these 63,000 people are low-skilled, high-skilled, or medium-skilled.
In general, free zones demand qualified talent, because they generate satellites that they put into orbit, to give an example. The same with drugs and others with high added value. And they all demand highly educated people, who in general are not the ones losing their jobs in Uruguay.

Does the immigration phenomenon impact in any way on the workforce of the free zones?
I do not have statistics available, but I understand that the vast majority of people who come from countries with difficult situations are quite qualified people, and if they are, they will have a much greater chance of not being reached by robotization and the substitution that technology makes more vulnerable to it.
En Uruguay hay una gran masa de la población, cerca de 70%, que solamente tiene primaria, y eso las hace muy sustituible por la tecnología. Entonces si Uruguay no ataca ese problema, vamos a tener problema de qué trabajo le damos a esas personas. Vamos a tener que generar oportunidades en la construcción y en áreas donde esas personas puedan ocuparse y resolver ese problema social.
I believe that skilled immigration is always good, and all successful countries in the world have received immigration. Immigrants are a leverage for the country to grow, up to a certain limit and with regulations. But if we face the automation, substitution and inflexibility of the labor system, every businessman who opens a business the first thing he says is: “I want to hire the smallest number of people.” As qualified as possible, and as little as possible, automate as much as possible.
Today it is preferable to invest in technology than to hire people, that is the completely unanimous reasoning of the businessman. That marks the path for the next five or ten years where it will go. We must train and retrain all the people we have to employ them in industries that are as less replaceable as possible.

Do the labor laws of Uruguay collide in any case with the free zone regime?
Not worse or better than another company in the country. 28% of Uruguay's exports, including goods and services, leave the free zones (2016 figures), and 34% of the services that Uruguay exports, leave the free zones. Of that 34%, services are much more qualified than the average of 66% services that come from the rest of the national territory.
So, free zones demand qualified people to export services to the world. That's great, because otherwise those talents might be leaving the country, which is a great difficulty that we've had all our lives. This helps contain an economic and social problem in the country, which is retaining human capital.
The most important thing in the world today is not physical capital, it is not having a million dollars, it costs more for the world in general to get people trained to handle a million dollars, than to get it. And we could be losing more of these people if the free zones did not exist, which retain part of that talent.
I believe that Uruguay suffers from serious labor rigidity, which must be corrected so that jobs are not lost, because it may be that those who have jobs are better off, but there will be more and more those who do not have jobs.

What do you observe this “rigidity” in, for example?
Labor regulations, collective bargaining. We have to “upgrade” it, modify it, because when we talk about productivity it cannot be in a sector but in the company.
How do you talk to employees about competitiveness at the sector level with your competition sitting at the table? It has to be done at the company level, we should attack that issue.
If there was a delay in wages, it was corrected in this period, etc. I do not disagree that there is a collective bargaining, but it could be a collective bargaining that attacks the problems that it has to attack, not only the real salary. Why maintain the real salary when productivity does not grow, or when productivity decreases, or when the world stops hiring you because you are expensive in relative terms... today we are 30% more expensive than Argentina and Brazil. So if we are expensive, we must not maintain the real salary, we must lower it, if we want people not to be left without work.

That sounds controversial
Yes, yes, again controversial, I'm not saying it's easy, but one of the things that Uruguay must do is there, without a doubt.

But do you think there is support in the government and political leaders to lower the real salary? Nobody imagines a candidate coming out to say that.
It is likely, until you look at the unemployment rate, which today is at 8% and is very high. In the United States it is at 3%. How did they do it? They lowered taxes, they lowered the burden on the State, they have immensely greater labor flexibility than ours, and they are already at 3 or 3.5% in the unemployment rate.
It has an economic boom that it did not have 70 years ago. Trump will be what he will be, but he is giving their economy an incentive, he is heating up the economy. I think there are things that could be done to improve and give greater flexibility to entrepreneurs so that they can hire more people, use more resources, and not be obsessed with getting rid of people at the top.

Do you feel that Uruguayan companies want to get rid of staff?
Yes, they say that the fewer people you have the better, because it is quite a problem. That is true and it has to change for the good of the country and the employees.

Returning to the situation of the free zones, has 2018 been a good year?
It has been stable, I don't have figures. I think it's been good, and I'd be surprised if it isn't.

It means that there are no signs of a very positive or very negative year
Much less than extraordinarily good. The world is complex and Uruguay is expensive. Free zone companies have to hire resources in Uruguay, and if Uruguay is expensive, its equation goes down and its margins go down, then I don't think it has been a good year for anyone.

Looking at 2019, what opportunities and threats do you see?
What happens in Uruguay, including in the free zones, is what happens in the world, the region and a small percentage of what happens in Uruguay.
We must closely monitor the trade war between China and the United States, which can hit international trade and free zones and Uruguay in general. We have to see if the reference rates continue to rise, and everything indicates that they do, and, what is more, they are holding up, which is not auspicious for investments.
We have to see what happens with Argentina and Brazil, which are in a delicate situation. The growth estimates for Uruguay in 2019 are very moderate, it does not exceed 1%, that is, there is stagnation. I am not seeing a boom in free zones.

In the next year there are elections and in March 2020 the government changes. Do you think that in the electoral offer there are those who can carry out some of the changes that you propose as necessary for the country?
Hopefully, I don't know. Much depends on the seriousness and ethics of the politicians who end up leading the country after these elections, which are going to be very close as it seems, and that relevant political agreements are going to be needed in Parliament, and that those relevant politicians really start to think about the long-term country, to think about the things we have to do in order to grow. Because if the country does not grow there is no welfare to distribute among the citizens, you cannot distribute what does not exist.
I believe that every country, to improve the living conditions of its people, has to be in continuous growth. And to generate growth opportunities and for the country to grow again in a very adverse international scenario, we have to do many of the tasks that the Keys are going to pain us.
It hurts, but it has to be done.

For example, there is persistent talk of a fiscal adjustment
I don't know if it's a fiscal adjustment, because the country can't stand one more tax. If a fiscal adjustment comes, it must come from the spending side. It has to come from the spending side, a fiscal adjustment would have to come from the social security side, adjustment for labor regulations, a much greater trade opening would have to come, detaching from Mercosur and signing FTAs ​​with relevant countries that would compensate for what we would lose to Mercosur, and seek to improve education.
Also improve the infrastructure to generate labor for that entire mass of people who are more replaceable and may lose their jobs due to automation and technology.
Through the construction industry, many of these people could become employed, some of them at least.

How do you evaluate the government's management?
I prefer not to make political comments. I think I already mentioned things to improve

What was the best thing this government did?
Maintain certain macroeconomic balances and an image of a country that respects legal security and institutions, that is, a certain care to maintain Uruguay in the position of a serious country that has given us the investment grade rating, having the reserves that we have for the deficit that we have and will continue to have.
These types of things have been achieved, without prejudice to the fact that there is room for improvement.

And what was the government's worst mistake?
It is not from this government, but it was a mistake not to have signed an FTA with the United States. It was also a mistake not to have signed one with China. You would have had to do whatever it took to sign it, and if that meant leaving Mercosur, you had to leave.

What three measures should the new president take?
Make the labor market more flexible, invest a lot in education and open the economy through the signing of FTAs ​​with relevant countries such as China, the European Union, the United States, to start with and do it quickly and very well, and regardless of whether we have to leave Mercosur.

Regarding education, a lot of money has been invested, what would you do?
It is not a question of a lot of money. I am not an expert in education, I only know that we are bad and getting worse. And I think there are educational systems even in Uruguay that prove to be successful managing private funds in very needy populations and they are very successful. There are ways of doing things, doing them well, you simply have to manage better.
Uruguay's budget is enormous compared to those of any of the previous governments, and anyone would have loved to have it. With the collection that there is today, it must be possible to do things, because we are the same number of people, and it must be possible not to have a deficit, and to make relevant changes by better managing health, safety, and education.

And what is the common problem on these issues?
Management.

And why is there a lack of management, because it is not known, it is not wanted or cannot?
Because it is complex, it is not easy. There are many interests that must be arbitrated and managed, and managed professionally.
Public companies is another example. Public companies are the largest in the country, by far, and in management they should be super professional, with the best managers in the country or abroad, we have to put them to manage these.
How much does the best health manager that exists in Uruguay cost me? Well, you have to put him in charge of managing public health, and then give him political support. I am not giving solutions, I am not easy, I do not want to simplify the problems. I think that these are things that Uruguay has been dragging for decades, and it is necessary to improve.
The time has come when, if we do not make those internal adjustments, we will not prosper. I'm not talking about privatizing either, but about improving management. It may be competition. How much has the State Insurance Bank improved since it opened to competition? How much has insurance improved and how much cheaper is it? You have to see those examples, because there is competition and everything is balanced.
You become more efficient when there is competition, all of them, the new ones and the existing ones, and I'm not talking about privatizing. Today, for me, the way management is designed can be perfected.

Do you think there are people qualified and willing to take on this task?
Without a doubt, qualified? Yes, and if there isn't any, it is brought from outside. It is much more expensive to have people who are managing poorly than to take those same funds and put in one or two who manage well. There is plenty of money with the State's budget. The thing is that you have to put in people who are competent. Nothing else. And I am not saying that the people who do it now are incompetent, that is understandable, I am saying that it can be perfected, and that there will be more or less competition depending on where you look in the State, which is gigantic. You have to go place by place to review the management everywhere, and especially perhaps in the central administration.

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