The analysis to decide which industrial sector the government should invest in and what benefit it should eliminate comes from economic data that have not been updated since 2002, when the Puerto Rican economy was still growing and manufacturing had a better economic activity than today.
Yesterday, during the first day of the Senate public hearings on the Incentive Code bill, the Secretary of Economic Development and Commerce (DEDC), Manuel Laboy, admitted that deficiency, although he said that the issue was corrected by being conservative in the analysis for each industry .
"I have to work with the data I have, and that is why we were conservative in the analysis. This is going to be reviewed annually. As long as we have better data, we will have a better evaluation," said Laboy during a press conference after yesterday's hearing.
Specifically, the problem is with the Planning Board, an organization that is supposed to update the data that shows the effect one industry has on another in 5 or 10-year intervals.
The metric establishes, for example, how many direct or indirect jobs an investment in construction can create.
In addition to the fact that it´s been 16 years since the last revision of cross-industry multipliers, the Puerto Rican economy has changed substantially since then with the fall of a good part of the manufacturing, the economic depression, the emigration of hundreds of thousands of Puerto Ricans and the development of digital technologies.
This statistical failure -which could lead the government to incorrect measures regarding whether an incentive provides benefits or not- was brought to Laboy by Senators Luis Berdiel and José Rafael Nadal Power.
Berdiel, President of the Committee on Agriculture, questioned the official on how it was determined that agricultural incentives did not bring benefits to the economy and government finances.
"The return on investment was negative for agriculture, between 0.19 and 0.25," said Laboy after explaining that, according to the system they created, if the number is less than one, the incentive does not have a positive return.
"Was the added value considered?" asked Berdiel, a member of the New Progressive Party.
"The Planning Board gave us the multipliers for each sector," replied the Secretary.
"That is worrying because, as far as I was told, those numbers have not been updated for a long time," said Nadal Power, during his turn.
Laboy said that this would be one of the issues he would address once the agency reorganization is completed, which places the Planning Board under the Department of Economic Development and Commerce, headed by him.
The Board´s decision
The President of the Senate Treasury Commission, Migdalia Padilla, devoted a good part of her questions to examine the criteria used to decide which sector of the economy would get the government’s funds and which one would not.
Laboy insistently replied that the Incentive Code they designed is limited to compiling corporate welfare laws, comparing many of the benefits and providing criteria and mechanisms for their future use.
He argued that since they started with the study, they thought about reducing incentives for companies to cover the tax reform they wanted to legislate, since the statute contemplated implies a reduction in the tax burden on a large part of individuals and corporations.
According to figures published by La Fortaleza, it is estimated that by 2023 the cost of the tax reform will have reached $ 843 million.
The government did not come to the decision of what incentive to maintain and what benefit to eliminate. The Oversight Board decided on that issue, said Laboy. The changes, he added, are reflected in budget for next year, currently under the revision of the Legislature.
Heavy blow on rum
The agricultural industry, rum produced in Puerto Rico, construction, hospitals and tourism are among the industries will less incentives in the future, according to the certified fiscal plan.
Laboy said he has already met with representatives of the two main rum producers in Puerto Rico (Bacardi and Serrallés) and both companies have expressed serious concerns about the effect that the lack of incentive would have on their operations. The impact would be about $ 75 million for fiscal year 2019, which begins in July.
Berdiel stated that cuts in the agricultural sector, for example, would imply a setback in the development of this sector. The incentives, which are processed through the Administration for the Development of Agricultural Enterprises, are basically reduced to zero for fiscal year 2020.
Uniform structure
Some of the benefits that companies would maintain are concentrated in the tax area. The Code, for example, proposes a series of programs for companies to pay an income tax equivalent to 4 percent of their net income. The validity would also be limited to 15 years, with the option of renewing the term once.
Currently, the maximum rate in Puerto Rico is about 39 percent. The tax reform seeks to reduce that rate to compensate for the tax increase that multinational manufacturers in Puerto Rico would have on their federal contributions.
On the other hand, economic subsidies or cash benefits to companies would come from a fund managed by the DEDC and that would receive a tenth of the contributions that companies pay to the government.
Laboy assured that the Economic Development Incentives Fund would be beyond the reach of the government. So it could not be used to correct budget insufficiencies. The money would be exclusively reserved for of incentives.
The Popular minority spokesman, Eduardo Bhatia, criticized the lack of clear criteria in the bill, to eliminate the "arbitrariness" in the management of those funds. He understood that, according to the text of the initiative, the management of this Fund is left entirely to the head of the DEDC.
However, Laboy replied that the idea is to introduce these criteria through legislation. He added that, to a large extent, the intention behind the proposal of the Incentive Code is to remove subjectivity from decisions on the management of benefits to companies.
The official said that, in order to improve transparency, they will publish the information on the incentives and decrees that they grant under the new Code, which has prospective changes that do not affect the companies that currently receive some type of government aid.
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