Puerto Rico Plan Aims To Reboot Island's Economy

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The Puerto Rico government's recently released four-year economic plan is about more than dollars, cents, and GDP.

It's an effort to tackle fundamental problems that are seen as contributing the commonwealth's long economic malaise.

In addition to specifying policies for particular economic sectors, the plan urges reforms to the commonwealth's education system, government structure, electrical system, policies on debt, and efforts to retain young workers.

Some of the Agenda for Economic Recovery, 2014-2018, restated initiatives in the commonwealth's October 2013 economic plan, April 2014 Growth Taskforce action plan, and April 2014 budget. But some initiatives in the plan, released April 30, are new.

The goal is to complement October's economic development strategy with parallel structural reforms needed to achieve economic growth, said Ingrid Vila, chief of staff to Puerto Rico Gov. Alejandro García Padilla.

The 116-page agenda laid out six areas for change.

First, the government will seek to diversify the economy, aggressively encourage local production, and promote sustainable economic development and infrastructure.

Second, the government will seek to aid agriculture, tourism, and new business development. Third, the government will diversify the island's energy sources to reduce electricity prices.

Fourth, the government will transform the educational system to reduce costs and better prepare students for the world economy. Fifth, the government will streamline itself to become more efficient and operate on a balanced budget. And sixth, the government will reform the tax system to extend compliance, make it more just and promote economic development.

Analysts familiar with the plan were generally positive. Advantage Business Consultants president Vicente Feliciano said the plan's emphasis on export sectors is good. These sectors have room for growth, he said. The plan's skepticism about new debt is also a plus, he said.

The plan's projection of real economic growth to reach 2% in 2018 seems modest, Feliciano said. By comparison, to March 2014 from August 2013, the commonwealth's economic activity index grew at a 3.1% annual rate.

Joaquín Villamil, chairman of economic consultant Estudios Técnicos, was generally positive. The proposed changes to the educational system are a good thing, he said.

Standard & Poor's senior director David Hitchcock said it is important that Puerto Rico has an economic plan and that its content is of less importance. "It's almost impossible to judge economic plans except by their results," he said.

Hitchcock said he and fellow analyst Horacio Aldrete-Sanchez were still looking at the recently proposed budget. There will be implementation risks for both the budget and the plan, and S&P will not be able to judge how they are working out until many months have passed, Hitchcock said. However, the budget's reduced structural deficit was encouraging, he said.

The government's plan laid out an array of measures to promote growth in knowledge services, life sciences, agricultural biotechnology, export services, aircraft repair and maintenance, tourism, and industries like defense manufacturing that must be located within the United States. Also included are measures to attract global companies to Puerto Rico.

For example, Puerto Rico's government is helping to finance the creation of a "City of Science" project in San Juan over the next 20 years. The plan also includes tax and financial benefits for small and medium sized enterprises. These enterprises are said to be essential to the economy.

The island's economy is hindered by high electrical rates, the plan said. Oil prices are at high levels and oil is the primary means to generate electricity.

The plan sets a goal of getting 80% of its electricity from natural gas and renewable resources by 2017. To do this the Puerto Rico Electric Power Authority is planning to build a natural gas port and convert several power plants to natural gas from oil.

According to the plan, the government will eliminate 25 agencies and fold their duties into existing departments.

The commonwealth government is planning to shift school transportation, road maintenance, and some security services to municipalities. While the commonwealth will pay for these services, it believes the local governments can do them for less money.

The government plans to create an Integrated Transportation Authority to take over public transit responsibilities from the Highway and Transportation Authority. Since San Juan's Tren Urbano rail system is subsidized, this would provide some financial relief to the HTA.

The maritime transport and metropolitan transit authorities will be merged into the ITA and it is believed this will reduce expenses, Vila said.

The plan also envisions major changes to the island's educational system. Public school enrollment has declined by 40% since 1980 as the school-age population declined. During the last 30 years, the amount of money spent per student has tripled, the report stated. Puerto Rico ranks below all 50 U.S. states in the percent of school department budget devoted to teaching and education, at 50%.

Many schools are well under capacity and are expected without changes to become further underutilized. In response, the government is planning to close about 100 schools, which should lead to better education and lower security and maintenance costs, according to the plan.

The plan also called for the expansion of pre-kindergarten to all elementary schools by 2018 and an increase in bilingual and vocational schools.

The plan is on the right track by urging on cutting of the size of government and transferring responsibilities to local governments, Villamil said.

The government wants to reduce Puerto Rico's migration of residents to the continental United States. Young workers should get a 0% income tax their first year out of school and a stepped increase to full income taxes in the following years, the plan said. The government is eliminating another tax credit that mainly affected young taxpayers, so introducing this new tax benefit would have little revenue impact on the general fund, Vila said.

The plan also called for the University of Puerto Rico to have a program for some students who have received financial aid to be required to do two years of service to Puerto Rico.

Finally, the plan called for changes to government debt policies. The governor has announced some of these in the past: that the public corporations must operate independently from the general fund and the Government Development Bank of Puerto Rico, and that borrowing should not be done to pay operating expenses or to pay back earlier debts. The plan called for debt to be used for the financing of infrastructure. It said Puerto Rico's municipalities should be encouraged to end the practice of deficit financing.

It stated that Puerto Rico will sell a $500 million municipal sales tax backed bond in fiscal year 2015 to allow the GDB to refinance municipal debts.

Puerto Rico's four year capital improvement plan, which started Jan. 1, 2014, is for $12 billion in public and private works, the agenda stated. Of this, the commonwealth will provide $5.43 billion, Vila said. Public-private partnerships will provide an additional $2 billion. The government will repay some of this over the long term, Vila said. The private sector will provide the remaining $4.57 billion.

"The government will seek to limit the increase in the level of public debt to the growth of the economy," the plan stated.

The government's debt was 68% of gross domestic product and 100% of gross national product, according to the plan.

"We believe the size of our public debt is too large vis à vis the level of economic activity," Vila said. "We, therefore, need to engage in a strategy of reversing the level of growth in our debt service to below that of our real economic growth .... We believe a starting point in reversing the trend is balancing the budget."

The government plans to do further actions in the future to reduce its dependence on borrowing, Vila said.

"Most actions in the agenda will be enforced through legislation and regulations," Vila said. "We already have submitted bills and are working on others to be considered by this legislature." The governor will be able to institute some of the other proposals without legislative action, Vila said.

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