Thursday, February 27, 2020

Invest Puerto Rico banks on attracting overseas knowledge services firms to grow economy

By on December 23, 2019

In an overseas direct investment attraction strategy formulated by a private investment promotion agency (IPA), the government of Puerto Rico is shifting its focus away from traditional manufacturing to promoting highly skilled labor on the island to lure fast-growing companies in the so-called knowledge services and industrial value chain sectors.

The strategy—part of the promotional plan devised by Invest Puerto Rico, the commonwealth’s IPA—deemphasizes the promotion of a sunshine-filled, low-wage location and touts a high-quality talent pool residing on an island that is rich culturally and is reinventing itself economically. Tax breaks are still in the mix but are aimed at attracting companies providing better-paid, highly skilled work.

“We have to be surgical on how we target companies in sectors that make sense for Puerto Rico,” Invest Puerto Rico CEO Rodrick Miller said, noting that the island can no longer compete with low-wage locations such as Mexico and the Dominican Republic. “We want to go beyond this to aspire to a better economy. The generic pitch does not work; we have to refine the message.”

Last week, Miller unveiled a promotional plan based on research and analysis of global trends, economic data, perceptions, disruptive factors and Puerto Rico’s existing competitive advantages. The plan, which is being used to attract investment from key U.S. and foreign markets instead of looking for investors in all economic sectors, he said, noting that “global megatrends” such as the spread of artificial intelligence are “critical mass” sectors being targeted.

Invest Puerto Rico CEO Rodrick Miller said the IPA “has been a driving force in the recent surge of new business investments,” noting that IPAs in the states as well as Ireland and Singapore have helped the countries compete globally and create thousands of jobs. (Screen capture of Invest Puerto Rico)

Best bet for investments

The research yielded that Puerto Rico has the best chance in attracting overseas businesses involving knowledge services such as consulting, technical and business support services, including computer and software development and programming, as well as finance and insurance. These sectors include media services, professional services such as engineering and accounting, blockchain technology and web hosting, as well as investment firms, including hedge funds.

Another area of opportunity is overseas businesses involving the industrial value chain, including automation infrastructure, utility innovations, engineering testing and resiliency building.

“About 60 percent of promotional efforts are being concentrated in these core areas,” he said, noting that this strategy is targeting burgeoning companies in these sectors that are growing 20 percent to 30 percent a year. He added that jobs in these sectors are easier to bring to the island than for new manufacturing operations, which can take up to 18 months to open.

“We need to impact the economy today,” he said, noting that key selling points to attract investors include the island’s bilingual and highly educated workforce as well as lower wages in these professions compared to the U.S. mainland. 

Selling points for financial sector investors include U.S. market stability on the island, access to New York and Latin America, quality of life with high-end-living potential, and the Opportunity Zone program.

Investment is also being sought in “building industry capacity,” including “logistics enhancement” and “reinvention opportunities,” Miller said. This involves bringing in financing to shore up air and sea cargo systems, cover supply chain gaps, and ensure maintenance, repair and operations supplies. He said reinvention opportunities exist in the use of technology to grow agriculture and in a sustainable ocean-based economy.

According to the IPA’s study, the economic impact of Hurricane Maria included a loss of $100 billion in economic output and up to a 20 percent decline in economic activity. The catastrophic event prompted the immediate closing of 2,400 small businesses, while more than 5,000 small businesses are estimated to have closed permanently.

“Puerto Rico has very good incentives which are a critical part of its promotion, but the primary purpose of these incentives is to offset disadvantages in manufacturing, economy and infrastructure,” Miller said. (Screen capture / Invest Puerto Rico)

“This will make up 30 percent of our efforts, and involves the long-term health of the community, the rebuilding of the entire island-nation again, and not looking back,” he said, acknowledging that the success of this effort will rely largely on the flow of federal post-hurricane reconstruction funding to the island.

All in all, these promotional efforts target “high-tax” U.S. states and Europe, where investors are looking for lower tax jurisdictions and have been affected by the U.S.-instigated trade wars, Miller said, adding that long-term strategies include Latin America and Asia, which he pointed out as having a rapidly growing middle class. Invest Puerto Rico plans to open two business advisory council offices in New York and San Francisco, he said.

Invest Puerto Rico is part of a three-pronged strategy by the Puerto Rico Economic Development & Commerce Department (DDEC by its Spanish acronym) to attract and retain overseas business investment on the island. It includes Discover Puerto Rico, the island’s tourism destination marketing organization, and DDEC’s efforts to accommodate and retain businesses on the island.

Hand needed to reach economic goals

DDEC Secretary Manuel Laboy said that the task of attracting overseas investments was outsourced to Invest Puerto Rico because the commonwealth government was not being able to provide the “consistency and continuity” needed in this area due to changes in policy with every new government administration.

Invest Puerto Rico has a $4 million yearly budget provided by DDEC’s Special Fund for Economic Development (FEDE by its Spanish acronym) and the Act 22 Fund.

“It takes one to two years to design and implement a new promotional plan…so this can’t be subject to the political cycles,” the DDEC chief said. “To sell Puerto Rico is very difficult. Its image and credibility has been affected by such events as the Zika outbreak, the government bankruptcy and the 2017 hurricanes. Few people know about Puerto Rico. We need a group of people to amplify the message consistently. This is a long-term plan.”

Laboy said the strategy allows DDEC to focus on facilitating the local establishment of companies and retaining existing businesses, as well as working with looming threats such as the possible elimination of the federal creditability of Act 154’s 4 percent excise tax. Having an IPA is needed to reach the administration’s goal of raising the labor-force participation rate from 40 percent to at least 50 percent.

“We need to triple the number of investments,” he said. “There’s no way the government can do that [alone].”

Invest Puerto Rico is part of a three-pronged strategy by the Puerto Rico Economic Development & Commerce Department (DDEC by its Spanish acronym) to attract and retain overseas business investment on the island. (Screen capture / Invest Puerto Rico)

Invest Puerto Rico results

So far, Invest Puerto Rico’s initial efforts following this strategy have yielded some 2,000 leads, Miller said, noting that the entity has “engaged in direct contact and servicing” with more than 80 companies considering the island as an investment destination. About a third of these companies are in the knowledge services sector, he said, adding that 19 percent constitute retail or construction investments, 16 percent are healthcare companies, 13 percent are advanced manufacturing operations involving pharmaceutical and aerospace companies, and 19 percent involve agricultural and food services.

“Invest Puerto Rico has been a driving force in the recent surge of new business investments,” he assured, noting that IPAs in the states as well as Ireland and Singapore have helped those countries compete globally and create thousands of jobs.

Between fiscal year 2017, when Invest Puerto Rico was established, and fiscal 2019, the number of decrees for incentive Acts 20, 22, 73, 273 and 399 increased 1.4 times, rising from 593 to 1,434, according to a recent Estudios Técnicos Inc. report commissioned by the DDEC. In contrast, such incentive decrees rose 13.6 percent between fiscal years 2015 and 2017.

Most of the decrees were issued under the Export Services Act (Act 20) and the Act to Promote the Relocation of Individual Investors to Puerto Rico (Act 22).

(Screen capture / Invest Puerto Rico)

Miller was president and CEO of the Detroit Economic Growth Corp., the public-private partnership charged with leading the economic revitalization of that city, which filed for Chapter 9 bankruptcy in 2013. Miller helped the city exit from bankruptcy by negotiating the sale of key public assets to pay creditors. He also brokered the transaction to bring the Detroit Pistons back to downtown Detroit.

Previously, Miller served as founding president and CEO of the New Orleans Business Alliance, the official organization responsible for ensuring the long-term economic development of New Orleans, which was devastated by Hurricane Katrina in 2005. Since its establishment in 2011, the entity helped devise targeted tax incentives that attracted more than $720 million in new investment and 7,500 new jobs to the city.

Miller said that surveys involving business people and potential investors found that tax advantages are not as important to them as the quality of the workforce, logistics and infrastructure, quality of life and cost of construction.

“Puerto Rico has very good incentives, which are a critical part of its promotion, but the primary purpose of these incentives is to offset disadvantages in manufacturing, economy and infrastructure,” he said. “Puerto Rico is a complicated place but not a difficult place. [The problem is] it’s not functioning as an ecosystem.”


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