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The New Governor Means Business: Calderon To Focus On Technology, Manufacturing, And Regional Development


November 16, 2000
Copyright © 2000 CARIBBEAN BUSINESS. All Rights Reserved.

Gov.-elect Sila Calderon has a three-pronged approach to boost the Puerto Rican economy: promote technological advances, strengthen the manufacturing sector, and decentralize economic development outside San Juan.

"I want a strong and advanced economy. I want an economy where Puerto Rico can compete with its products and services in local and global markets, and where quality stands as the characteristic of everything coming from Puerto Rico," Calderon told CARIBBEAN BUSINESS. "My desire is to use the advantages of the Commonwealth’s fiscal autonomy to compete with other countries."

Calderon, of the Popular Democratic Party (PDP), became the first woman to be elected governor of Puerto Rico on Nov. 7. She won with 48.5% of the votes, over New Progressive Party (NPP) President Carlos Pesquera’s 45.7%. Calderon, the current mayor of San Juan, had been secretary of State and chief of staff under former PDP Gov. Rafael Hernandez Colon. She won after a long and difficult campaign that pitted her against her former mentor, as well as the entire NPP machinery.

In its effort to provide readers with the best information on the economic development plans of the incoming administration, CARIBBEAN BUSINESS is reprising parts of an earlier, five-part in-depth three-hour interview with Calderon that focused on business-related issues.

"I visualize economic development as a service, not an objective," she said. "Economic development must be a tool that provides greater justice, equality, and better opportunities for young people. The stronger, more aggressive, and proactive our economic development is, the more we can aspire to a better quality of life."

Attacking poverty

As part of her pledge to achieve greater economic justice, Calderon said she would focus on reducing poverty levels in Puerto Rico. About 60% of Puerto Ricans still live under the federal poverty line, and the island’s per capita income is half that of Mississippi, the poorest state.

Calderon said her strategy would focus on providing access to education that prepares workers to compete in the new economy, giving priority to so-called "special communities" in low-income economically deprived areas, and guaranteeing at least one job for every Puerto Rican household.

"My commitment is to more than double the number of jobs created by the present administration in four years," Calderon said.

A focus on technology

To that end, Calderon plans to emphasize technology through a program called Operation Technological Development (Operacion Manos Tecnologicas), which will seek to establish Puerto Rico as a cybernetic center, promoting electronic commerce among Latin America, the U.S., and the Caribbean.

Calderon wants to establish a Technological Development and Information Technology Unit under the Puerto Rico Industrial Development Co. (Pridco) to promote projects in technology and computer sciences.

"Simultaneously, we will introduce tax incentives to attract scientists, researchers, and tech-based companies to Puerto Rico," she said. "Special importance will be given to corporations specialized in high technology such as Internet-based enterprises, specifically those companies that are close to conducting their Initial Public Offerings (IPO) and have significant growth potential."

To establish Puerto Rico as a center of technological development and specialized manufacturing, Calderon will reduce the maximum corporate tax rate. For industries that perform essential technology-related tasks, such as research and development, she also proposes to reduce taxes.

"In addition, we propose to revise the education curricula to strengthen subjects related to technology and information technology fields," she said. "I also propose that high-tech companies with operations in Puerto Rico, have a preferential tax incentive if they decide to go public in a predetermined period of time."

Promoting small businesses

Calderon will highlight two other areas to create jobs: the retail sector and small businesses. This initiative, she said, will strengthen town centers and repopulate adjoining residential and commercial areas.

"We need to attract people to live and establish businesses in town centers. We can do that with tax incentives, construction incentives, proper illumination, additional police presence, and cleanliness," she said. "This is what people want. I propose to expand the public policies that we successfully implemented in San Juan, Santurce, Rio Piedras, and Condado."

As mayor of San Juan, Calderon implemented codes of public order regulating public behavior and businesses in major urban areas of the capital city. The key, she said, is to strike a balance between differing needs, as in the case of large shopping centers and small businesses.

With that in mind, Calderon has promised to undertake a study of the negative impact of any potential commercial center or mega-store development on a town center or nearby traditional businesses.

"The role of the government is to try to minimize the imbalance between large commercial developments and small businesses, and to help the latter without hurting larger stores," she said. "We don't want Puerto Rico's small businesses to disappear."

That’s not surprising, given the importance of small businesses to our economy. The U.S. Census has found that small businesses generate 63% of all new jobs in Puerto Rico and contribute 48% of our gross national product.

"In San Juan, we've retained and/or created more than 2,000 new jobs in town centers with incentives created through Ordinance 11, that was enacted in 1997," Calderon said. "I believe we need to speed up incentives for small business stores so they can compete with mega-stores, which are important as well. But we can't stop the development of shopping centers. Puerto Rico needs to keep going forward."

Calderon pointed to Rio Piedras as a "success story," where tax incentives, and improved security and lighting, and the added perk of air conditioning, have boosted small businesses along the renovated Paseo de Diego and in the Plaza del Mercado.

"We also need to be very proactive in educating small-business owners," she said. "We will strengthen the resources of the Commerce Development Administration to better serve the small business sector, and boost Government Development Bank small business programs, such as the micro-loans for small business entrepreneurs."

Decentralized development

Still, Calderon noted that her economic development plan looks outside San Juan to promote regional development as well, through so-called Regional Development Clusters (Polos Regionales de Desarrollo).

"This includes customized plans for development of the island's different zones–coastal regions, mountain zones and the west side–based on their strengths and needs," she said. "We can't keep following public policies that only benefit the San Juan metro area to the detriment of the rest of the island."

The mainstay of the new economic development push under Calderon will fall under her program dubbed Turning On the Manufacturing Engines (Encendiendo los Motores de Nuestra Manufactura). The idea, she said, is to make Puerto Rico an effective competitor against countries like Ireland and Singapore.

"We will give manufacturing the attention it deserves, starting by elevating Pridco to Cabinet level," she said. "We will develop a Bank of Manufacturing Projects, to offer investors viable manufacturing projects, which already have the necessary government permits and financing ready."

The federal side

When it comes to federal tax incentives, Calderon said they will continue to promote the use of Section 901 of the U.S. Internal Revenue Code to benefit manufacturing companies that previously were covered by the now defunct Section 936 tax credit.
This also will act as an incentive for foreign companies to establish themselves in Puerto Rico.

"Mechanisms will be provided for local management to acquire companies operating under Section 936, which might decide to leave the island," Calderon said. "Qualified investors will receive a 50% credit on their investment, which can be redeemed within a minimum two-year period."

Other areas the new government will fight for in Washington include making the Section 30A wage credit permanent, and exempting Puerto Rico from U.S. cabotage laws, or the Jones Act to reduce shipping costs. The plan also calls for revisions of the Puerto Rico's Tax Incentives Law, tailored to the needs of manufacturing companies that operate globally.

"These incentives can include direct subsidies for employee training, research and development, use of technology, solid waste management, and utility costs," Calderon said. "We will also develop promotional strategies for local and foreign entrepreneurs to establish alliances and/or agreements in areas including sales, marketing, financing, capital, and technology, following global trends."

This effort also includes strengthening Puerto Rico’s external trade by learning from local and international companies that already successfully manage regional operations from the island. This experience, Calderon believes, should be used to expand exports to other markets outside of the U.S. mainland, turning Puerto Rico into a regional export hub between the Caribbean, Latin America, and the States.

"We will identify the infrastructure deficiencies that limit external commerce and take corrective actions and establish alliances with the Hispanic-American market in the States to promote the exchange of products and service," Calderon said.

The PDP president also will propose the application of new federal tax credits in Puerto Rico for the creation of direct and indirect jobs in research and development. This includes an effort to promote federal legislation in the U.S. Congress to totally or partially exempt stateside companies from federal tax payments on their investments on the island, Calderon said.

The local market

But strengthening Puerto Rico’s economy can’t be all about looking outward. It also must include the development of local capital and an effort to stem the flow of billions of dollars produced in Puerto Rico that are invested abroad, Calderon said.

"We have developed a series of measures–basically tax incentives and others–to promote the investment in local assets," the governor-elect said. "We need to help and protect the new generation of local entrepreneurs. Simultaneously, we will encourage prestigious international firms to participate in the local capital market."

Calderon also wants to create a strong international banking sector in Puerto Rico through the establishment of major incentives to woo global companies into settling here.

"We will take advantage of our geographic position, our Latin culture, our fluency in both English and Spanish, and our common market with the U.S. to promote Puerto Rico as the Bridge of the Americas, to serve as a link between Latin American and U.S. capital markets," she said. "Similarly, we will develop new ways to capitalize our financial institutions."

The crafting of new incentives will involve a thorough review of the island’s Internal Revenue Laws, which will be amended to meet current economic development demands. For one, capital gains from local investments will be taxed at a reduced rate of 10%, while capital gains from investments abroad will be taxed at 18%.

"Similarly, we will reduce the tax on capital gains from stocks issued by local entities that become public companies to a 7% rate," Calderon said.

When it comes to individuals, Calderon has promised to increase certain tax deductions, such as personal exemptions and credits for dependents. These include exempting people who make $12,000 or less annually in gross adjusted income from paying income taxes through a special deduction.

The governor-elect also vowed to increase the exemption on deposit-interest income to $5,000, and reduce the 17% tax rate on such income beyond $5,000 to 10%. Individual retirement account (IRA) deductions also will be increased to $5,000 per individual and $10,000 per couple.

A boom in construction

Asked for her plans to maintain the construction boom that has benefited Puerto Rico’s economic growth for the past few years, Calderon said incentives would continue to provide for that end.

"Construction generates a large number of jobs, moves large amounts of capital, and directly affects the availability of housing in Puerto Rico," she said. "We have a deficit of about 100,000 housing units provide adequate housing."

To address this problem, the Calderon administration will develop programs to promote public housing. The plan is to declare this the Decade of Housing, with the goal of building and rehabilitating 100,000 housing units during the next four years, and another 100,000 units in the following four consecutive years.

"It is important to collaborate with industry to simplify the permitting process, which nowadays is very cumbersome and complicated," Calderon said. "For developers, obtaining the required permits is a horror story."

The laws and procedures related to permitting will be revised to facilitate processes, but caution will be exercised to protect natural resources. In San Juan, for instance, Calderon has supported a moratorium on construction in certain over-developed areas, such as Caimito and Cupey.

"Once we damage the environment, even with mitigation, it is spoiled forever," Calderon said. "Puerto Rico's size is small and our environmental resources are limited. We need to be proactive with economic development in a responsible way. We need to end the struggle between developers and environmentalists and achieve a common meeting ground. And that is where government comes in."

The Calderon administration also will revise licensing fees and taxes imposed on some types of construction, including impact fees and excise taxes. These taxes can represent up to 20% of the cost of developing a project.

"We will create a Construction Loans Financing Fund to guarantee financing through local capital markets," she said. "In addition, we will submit legislation to create an Accessible Housing Construction Special Incentives Law to provide tax credits–of up to10% of the project costs–to developers who fulfill the program's requirements."


Tourism was another area that received a boost under the outgoing administration. Calderon said there have been improvements in the sector, but the island hasn’t reached its maximum potential.

"My tourism proposals address five areas: development of tourism as a product, legislation, marketing, and improved operations of the Tourism Co. and the Puerto Rico Convention Bureau, as well as other entities, such as the Public Service Commission," Calderon said.

Aggressive efforts by the Dominican Republic to market itself as a tourism destination, as well as the imminent opening of the Cuban market–where Germans and Spaniards have invested millions in tourism developments–will create difficult challenges for Puerto Rico, she said.

"The tourism industry needs additional incentives, promotion, and a more accurate marketing and public relations strategy," Calderon said.

For one, she said local artistic figures don’t necessarily attract tourists. Not many people visit a country based on the fact that it’s the birthplace of an international figure, she said. The Rossello administration has focused their international tourism campaigns on renowned Puerto Rican artists such as Ricky Martin and Chayanne.

"We need to market the natural resources we offer," Calderon said. "The millions invested in tourism publicity need to be redefined and readjusted in a more accurate way. We need to show our beaches, natural beauty, culture, and hospitality. In addition, there is an internal tourism market of country inns [paradores] that aren't promoted enough. We need to give support to this small, but important market."

The goal, she said, is to establish a more competitive and rational tourism program to expand the number of hotel rooms available, but also to address other aspects to maintain high hotel occupancy rates.

Jumpstarting agriculture

Calderon believes that agriculture is one of the sectors that suffered the most in the past few years, mainly in the mountain zone. This is why she has proposed to relocate the Agriculture Department inland, instead of having its headquarters in San Juan.

"Also, we need to restructure the department to become a real ally of farmers, a catalyst for change, and a promoter of modern practices and the entrepreneurial spirit within the sector," she said.

Her administration has offered three basic policies to jumpstart the agricultural sector. First, Calderon plans to maintain continuous communication between the governor's office and farmers, who complain that after each election their concerns are no longer taken into consideration.

She also plans to pay particular attention to individual agricultural sectors, each with completely different problems. The development of a local market for Puerto Rico's products is another initiative proposed by Calderon.

"We need to fill our food consumption necessities before importing refrigerated food that many times–because of price–knock our products out of the competition," she said. "For instance, institutions such as schools need to consume local agricultural products. Rice and pigeon peas are healthier than a frozen burrito."

Calderon’s administration will provide assistance in product marketing, facilitate access to new markets, and promote effective competition. She also will establish an Agricultural Credit Department under the Economic Development Bank to meet farmers' credit needs, paying special attention to entrepreneurial incentives.

"We will authorize guarantees of up to $100 million to promote specific projects and to help small- and medium-size farms. Particular incentive programs will be created for the mountain zones," Calderon said.

Transportation and shipping

As Puerto Rico readies to become a major transshipment port, Calderon pledges to evaluate the role and structure of the Ports Authority, which has been plagued by poor administration and large deficits.

"I support and promote the creation of the transshipment port–I think it should be in the south of Puerto Rico–which is will be extremely important for the development of the island and its commerce," Calderon said.

She said the private sector should have a predominant role in the transshipment port’s construction and administration.

This Caribbean Business article appears courtesy of Casiano Communications.
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