Puerto Rico fiscal board holds hearing on ease-of-doing-business reforms
Says incentives are not enough
BY MARÍA MIRANDA and
MARÍA SOLEDAD DÁVILA CALERO
SAN JUAN – The congressionally established Financial Oversight and Management Board for Puerto Rico held an economic development hearing Thursday at the Puerto Rico Convention Center, where the panel urged officials to go beyond offering incentives to see a boost in local investment.
The hearing was attended by several private sector representatives and Economic Development and Commerce Department (DDEC by its Spanish initials) officials, who presented the agency’s new structure in compliance with the fiscal plan.
During the hearing, DDEC Secretary Manuel Laboy and other heads of departments or offices attached to the agency, explained how permitting processes have been transformed in accordance with the fiscal plan to make it easier to open or expand a business in Puerto Rico.
Private sector representatives discussed the obstacles that prevent business from expanding. They said these have resulted in the loss of millions of dollars in investment and thousands of jobs.
Taking into account the steps taken by the government, the private sector representatives made recommendations on how to further improve the business climate and incentivize investment.
“The subject of this hearing should be seen in a much broader context today, in light of the upcoming filing of the plan of adjustment for the territory,” Chairman José Carrión said. “For this plan to release Puerto Rico from its fiscal past, it is crucial to put to action the structural reforms outlined in the Fiscal Plan, including the ease of doing business reforms, sooner rather than later.”
“We need to work together to improve the business climate, be it by accelerating the permitting process, improving the property registration procedures or improving the tax administration process at the Puerto Rico Treasury Department, and we have to do it urgently. It’s a race against the clock. Puerto Rico has no time to lose,” Carrión added.
Carrión acknowledged that DDEC has made progress in its efforts to improve the services it provides.
“We know this, not only because of the measured results, but because the private sector representatives here today have confirmed it. There is progress. Now it’s a matter of keeping the focus on accelerating and broadening the effects,” Carrión said.
Laboy, as well as officials from the Puerto Rico Tourism Co., Industrial Development Co., Planning Board and Department of Justice outlined the strategies that have been implemented, and others in the works, in support of further improving the ease of doing business. The heads of Invest Puerto Rico and Discover Puerto Rico, who also participated in the event, offered a report on the progress of their respective organizations and offered their take on moving forward.
“The multiple fiscal initiatives directed to make better use of the people’s money are only part of the equation,” said Natalie Jaresko, the board’s executive director. “Improving the business climate and incentivizing investment are vital aspects for Puerto Rico to finally be able to exit bankruptcy, return to the capital markets, and improve conditions for all its residents.”
At the beginning of the hearing, Chairman Carrión said discussion would center around topics related to two core issues for Puerto Rico’s economic development strategy. The first is how the government offers its services to the commercial sector and the second is how the government addresses the island’s competitiveness.
Carrión said the agency consolidations proposed in the fiscal plan seek to simplify and expedite government services by reducing or eliminating redundant operations, and that the process must be carried out to meet economic development goals.
During the hearing, Laboy stressed that the labor-force participation rate in Puerto Rico stood at 41 percent, a number that business leaders tell him is the greatest impediment to development on the island.
“In 2006, the Center for the New Economy and Brookings Institution, published a book; they identified five mayor policy areas that if addressed would serve as a prescription for economic growth, raising employment rates, promoting a more dynamic private sector that would create additional jobs and opportunities,” Laboy said, while listing measures to tackle going forward such as “improving the skills of the workforce, investing in greater resources in the economic infrastructure, reforming government with a more efficient tax system and targeted expenditure programs.”
The official said the government needs to create a local culture of entrepreneurship for companies to then scale globally.
“The efforts toward the reorganization began in October 2017 with a thorough diagnostic study of the organizations; their structures, programs and costs,” Laboy said about the integration of several agencies under the Economic Development & Commerce Department (DDEC by its Spanish acronym) under Act 122. In July 2018, House Bill 1403 was enacted, enabling the first reorganization plan that regulates the integration of several agencies under DDEC.
At the time, the creation of the new DDEC was expected to produce savings of nearly $80 million within the first five years.
DDEC’s organizational chart integrated the Tax Exemption Office, State Office of Energy Policy, the Regional Center Corp. and the Permits & Endorsements Management Office as programs or offices within the department, as well as the Trade & Export Co. and Tourism Co. The Puerto Rico Industrial Development Co. and Roosevelt Roads Redevelopment Authority remain attached to DDEC, with the Planning Board ascribed to the department.
“The initial study showed that entities under the reorganization have an unintegrated structure, redundancy of services, diverse culture and approach to clients, and there was not an optimal use of physical spaces, costing misuse of public funds and different communications through different channels, which causes misinformation and confusion for customers,” Laboy explained.
According to the fiscal plan, reforms to “improve conditions for economic activity, job creation, and business vitality” aim to reduce the obstacles of starting and sustaining a business by improving the ease of paying taxes, importing and transporting goods, registering property, and obtaining permits.
“This new organization will help with the ease of doing business, by creating a single point of contact for clients, unified systems and an integrated digital platform that will improve effectiveness by strengthening essential programs,” Laboy assured. “Consolidating services optimizing physical spaces and restructuring current contracts will help us maximize efficiencies in order to accomplish economic development and commerce plans an objectives under one vision.”
“We are moving toward [becoming] a client centered agency, customer service oriented agency,” he said.
The secretary said the reorganization was in its last stages, but a lack of communication remains a challenge.
“In terms of the oversight board. We believe you can play a role by supporting this reorganization,” Laboy added.
Fiscal Board member José González said that going back to the 1970s, “all of the [economic development] reports are remarkably consistent in terms of what they identify as things that need to be done,” adding, “The issue has always been one of execution, the inability to actually execute…. It is a question of will; it is a question of being organized in a project management structure…. So tell me why you think it will be different this time,” González asked.
“I have to concur 100 percent about your assessment,” Laboy said. “I have been very vocal for the past 32 months, that Puerto Rico’s problem has not been the lack of plans or studies, or assessments… It has been the lack of execution, plain and simple.”
Meanwhile, board member Andrew Biggs said tax incentives were “useless if you can’t make money,” stressing, “You need to have a competitive structure.”
Executive Director Jaresko underscored that the Treasury Tax Expenditure Report “is an important step that provides transparency.”
Laboy argued, however, that the Incentives Code already establishes that the agency can compile information on the effectiveness of the tax credits awarded by the government.
The economic Development secretary did acknowledge that there was still room for change in the way incentives are managed. Among the economic sectors he said are practically dependent on subsidies are the agriculture and tourism sectors.
“Almost every aspect of society is subsidized by the government,” Laboy said. “We are promoting diversification and decentralization of the economy.”
Carríon said the board was using the ease-of-doing-business classification as a measure as defined by the World Bank, seeking to compare Puerto Rico with other jurisdictions as to “time, cost and convenience,” to establish and maintain a business on the island.
According to the World Bank’s Doing Business Index, Puerto Rico ranked 64. It combines several categories with large numerical gaps between them. For example, Puerto Rico is ranked 22 in terms of getting building permits and 159 in terms of property registration.
The position on the World Bank is consistent with the panorama presented by the administrative director of the Puerto Rico Property Registry, Joaquín Del Río Rodríguez, who argued that property registration is significantly backlogged because of a lack of personnel. After losing more than 100 employees, the registry only has 314 to handle documents and will lose four more by October.
For his part, Brad Dean, the CEO of Discover Puerto Rico, said the island’s destination marketing organization has a rigorous hiring process underway and that it was frequently engages with the industry, which has already conferred the nascent firm a dozen awards.
Looking ahead, he said the DMO’s role was expanding and that a synergy was being created with Invest Puerto Rico, whose CEO, Rodrick Miller, said that part of the progress of the nonprofit entity to attract business has been establishing a solid baseline of companies interested in Puerto Rico expansion, “raising global awareness of our value proposition, and participation in more than 15 trade shows in the last six months.”
To grow Invest Puerto Rico, Miller argued that its budget, which is around $10 million, needs to grow, but via injections from the private sector.
“If all of our funding is from the [government], at some point we are a public entity,” Miller explained about why attracting private funding was necessary.
Real estate mogul and Paulson & Co. partner Fahad Gaffar said that obtaining permits on the island was an ordeal and suggested that provisional ones be awarded similar to those in New York, which allows construction to begin before awarding final permits.
Representing the Estudios Técnicos think tank, Roberto “Bobby” López argued that the problem on the island was not the number of permits required but the time it takes to receive them. Despite stricter regulations stateside, there is proportionally more investment, he said.
Although the comparison made with regard to permitting was with the U.S. mainland, Puerto Rico is ranked 22 in that category by the World Bank, while the United States is No. 26.
During the government panel, Carrión argued that the board was using the ranking to measure the status of doing business in Puerto Rico. Estudios Técnicos’ López, however, warned that the indicator is more appropriate for industrialized economies, because for information-based ones “connections not [outside] investment” are more important.
Also in the panel was Puerto Rico Builders Association Chairman Emilio Colón, who said that a strong workforce development and certification process was needed.
“This is important in order to secure manpower for economic drivers needed to achieve a sustainable environment. It is important to focus incentives on affordable workforce housing, knowledge, economy, agriculture and tourism in order to grant access to our workers to better housing possibilities.”
In terms of reconstruction, Colón said that the delay of the recovery aid’s disbursement was a challenge “we need to overcome,” adding, “It is important to ensure compliance with the requirements of the federal Robert T. Stafford Act, by accepting the submission of project cost estimates prepared by licensed professional engineers for government agencies and municipalities.”
On Friday, the board will hold its 17th public meeting at 9 a.m., in the Puerto Puerto Rico Convention Center’s rooms 208 and 209. During the open meeting, the board will address issues related to the restructuring of Puerto Rico debt.