Home This Week Front-Page Story García Padilla: ‘I’m competing to win’
Issued : Wednesday, November 6, 2013 12:00 AM
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García Padilla: ‘I’m competing to win’

By : JOHN MARINO, PHILIPE SCHOENE ROURA & ROSARIO FAJARDO
Edition: November 7, 2013 | Volume: 41 | No: 43

Governor pledges to do ‘everything within the law’ to attract investment to Puerto Rico


Governor discusses job-creation plan

Puerto Rico must refocus on traditional strengths, break new ground in economic-development fight

Everyone remembers being taught this refrain in school: "It's not whether you win or lose, but how you play the game."

That is one lesson Gov. Alejandro García Padilla doesn't believe in; in fact, he said he always found it "pathetic."

"I am not in this to compete to lose, I'm competing to win," García Padilla said, as he discussed his administration's multifaceted plan to create jobs by jolting the local economy, increasing exports of local goods and services, and attracting foreign investment.

"When I am fighting for companies to locate here, I'm not fighting to lose, I'm fighting to win. I will do everything within the law so they come to Puerto Rico. Period," he affirmed.

During a wide-ranging interview with CARIBBEAN BUSINESS, the governor expressed confidence that he will not only fulfill his pledge to create 50,000 jobs during his first 18 months in office, but will also lift Puerto Rico's economy from its decade- long slide and put it on the path to sustainable growth once again.

"If we achieve everything that we have projected, we are going to create the 50,000 jobs we had planned for the first 18 months without a problem. The goal now is to reduce [the] unemployment [rate] down from double digits by 2020," the governor said.

The García Padilla economic fix is a potent recipe, aimed at strengthening traditional industries such as tourism and agriculture, while taking the economy into new directions through the development of life sciences, pharmaceutical research & development (R&D) and the export of professional services.

The governor said Puerto Rico must retake its traditional role, stemming back to the days of Operation Bootstrap, of aggressively promoting its attributes to its U.S. investor base, while establishing new direct contacts in flourishing economies across Latin America and Europe.

At the same time, he is pushing ahead with government restructuring and tax reforms that will address fiscal challenges, while providing the appropriate framework for sustainable economic growth. And the administration is attacking longstanding structural problems—such as high energy costs—to improve the economic-development landscape for the long term.

"What we are doing is taking our competitive advantages and maximizing them," García Padilla explained.

BROADENING PUERTO RICO'S INVESTMENT BASE

Right now, Puerto Rico is competing against other Latin American and European countries as an investment site for companies looking to make large investments in the manufacturing and services fields, the governor said.

"We can't discuss details because we are competing against other countries so big companies come to Puerto Rico to make multimillion investments. In some cases, our competitors don't even know we are in the competition," García Padilla said. "I am competing to win."

As it looks to attract offshore investors, the administration is working to diversify and broaden Puerto Rico's industrial base. "We need to add to our pharmaceuticals, we need to add to our R&D, we need to add to our aerospace. And we need to add new types of industries," the governor said.

He added that a bid for the construction of the new Anderson Cancer Center will be issued in the next several weeks, and the administration would also push to develop the Science City on the grounds of the former Oso Blanco state penitentiary.

"We need R&D. We need to diversify our offer," the governor said.

However, he emphasized that Puerto Rico's existing industrial base is among its greatest strengths.

García Padilla said he uses a map of Puerto Rico showing the island's industrial concentration when making presentations to investors and government officials from other jurisdictions about the island's attractiveness as an investment site.

"When I tell them that Puerto Rico measures 100 miles by 35 miles and has this much concentration of biotechnology, their jaws drop. Then I show them a similar map with the concentration of electronics. Then I show them a similar map of aerospace. They say, 'what is there on that island that I haven't seen before? Why does 80% of Amgen's revenue touch Puerto Rico at one point or another? What does Amgen know that we don't know?' I was told by an industry CEO that the map is the most important part of our presentation. Right now, we have a who's who of the pharmaceutical industry, but I want to diversify," García Padilla said. (See graph on page 19.)

The administration's plan is to build on its successful pharmaceutical, electronic components, medical devices and aerospace industries to push economic development in the future. It also wants to breathe new life into traditional industries such as agriculture.

"Biotech-agriculture, we are just getting started there. That is a huge field through which we can add a lot of jobs and a bunch of investment," the governor said.

A unique competitive advantage is that Puerto Rico is one of only a few destinations in the U.S. that offer four crop seasons, instead of two, while maintaining the protections of U.S. copyright laws and federal government regulations. The island's existing life sciences and biotech facilities just add to the appeal.

"There is no other jurisdiction in the U.S. that can offer this. This is very valuable for companies such as Monsanto and Pioneer," the governor said, pointing to two industry leaders with extensive operations in Puerto Rico.

García Padilla sees similar potential in other life sciences and biotechnology initiatives, including R&D.

"We will be successful. Fact No. 1, Latinos are the biggest and fastest growing minority in the U.S. Fact No. 2, Latin America is developing economically, becoming an increasingly important market," he said.

Because there are genetic differences between Latinos and other groups, it is important to undertake research to fight certain diseases on this particular population, and Puerto Rico can serve a leading role in this area, he added. "We have human capital and the industrial base to do this."

A NEW PARADIGM

Puerto Rico was once the poorest nation in the hemisphere; in 1940, it was even poorer than Haiti is today, the governor said.

Six decades ago, in the wake of World War II, Europe was devastated while Latin America was "absolutely poor."

"Puerto Rico's trajectory in the post-war era [was connected] with the development of the U.S. Puerto Rico went from the poorest to the most prosperous in the region," García Padilla said. "That was the paradigm. Europe was still picking itself up after the war. Latin America was divided. There were dictatorships."

While Puerto Rico retains its rock-solid ties with the U.S., the world surrounding this partnership has changed dramatically, he noted.

"Europe is flourishing. Latin America is flourishing. This is very important. We have the U.S., and the U.S. has us. There is no doubt about that. Nobody is talking about Puerto Rico distancing itself from the U.S. That is discarded as a possibility," the governor said.

"We have to understand that we have to expand our commercial capacity not only with the U.S., but also with Latin America so we can serve as a natural bridge to the U.S. To do that, we have to develop more direct ties with Latin America," he explained.

The García Padilla administration has pounced on economic opportunities across the region, signing memorandums of understanding (MOUs) to bolster economic ties with both Colombia and Peru, while pitching Puerto Rico as the perfect place to invest to U.S. firms as well.

The governor said establishing more direct ties and strengthening existing ones with the Caribbean and Latin America is essential for Puerto Rico's economic success.

"We have to diversify our economic- development strategy. We have to expand our ties with Latin America and Europe, not only so that we can be the natural, cultural bridge to the U.S., but also because the south is flourishing and Europe is flourishing," he said.

In June, García Padilla signed an accord with Peruvian President Ollanta Humala to "strengthen and promote business development, knowledge transfer and cooperation in medical services, education and infrastructure" between the island and the South American country. A working group was created to follow up on the pact, which includes agricultural and cultural projects.

A similar accord was signed with Colombia in July, and Puerto Rico also sponsored a trade mission there. The government has also been extremely active in drumming up business opportunities with the neighboring Dominican Republic.

Meanwhile, he has met with officials from Brazil and Spain, which has also reaped rewards. For example, the University of São Paulo and the University of Puerto Rico may team up to do research on dengue.

The accords are producing results, the governor said. "We have Puerto Rico entrepreneurs signing contracts with the government of Colombia by virtue of this MOU. We are doing the same with Peru."

García Padilla said one of the first results was that Avianca established direct service, three days a week, between San Juan and Bogotá that is reportedly 85% full. Avianca is planning to expand it to five times a week.

JetBlue has added direct flights between San Juan and Chicago, while eyeing flights between San Juan and Bogotá.

The governor said the U.S. State Department has no problems with any of the accords between Puerto Rico and its Latin American neighbors.

"[The State Department] told us, 'go ahead. No problem,'" he said, adding that U.S. government offi- cials were present during the signing of the agreement with Peru.

A BRIDGE TO THE U.S.

In many cases, investors want to establish in Puerto Rico to access the larger U.S. market, García Padilla said.

"We offer lower costs compared with the U.S., and we have the protection of U.S. laws—copyright, U.S. Department of Agriculture— all the protections under the U.S. flag with a separate tax structure. When it comes time for a company to look for access to the top market in the world while having a separate tax structure, Puerto Rico becomes very attractive," he affirmed.

One success story earlier this year was the entrance into Puerto Rico of Neolpharma, a Mexican company specialized in the manufacturing of generic drugs.

In February, Neolpharma took over Pfizer's manufacturing facility in Caguas in a move that saved hundreds of jobs. The Caguas initiative was Neolpharma's first plant in the U.S. or its territories. Company officials said they see Puerto Rico as a springboard to the U.S. market and a center for development of new generics. Neolpharma started its local operation with a portfolio of 20 products, including some Pfizer drugs. The company also retained 270 jobs at the plant, including management.

"What does Neolpharma want? To enter the top market in the world. They are entering a jurisdiction here on the island that has the highest density of pharmaceutical sites per square mile, where their language is spoken, there is a separate tax structure and we have Food & Drug Administration regulations. And our labor costs—say an engineer in Puerto Rico compared with one in the mainland U.S.—are much lower," the governor explained.

"You will see the incursion of other Neolpharma-type companies coming from South America," he added.

However, García Padilla was clear that Puerto Rico's promotional efforts need to be reinforced with the U.S.

"Puerto Rico has become isolated during the past 20 years. And you know what? They don't know us. We thought everyone knew us. Not anymore. The generation that Manuel Casiano [chairman & CEO of Casiano Communications, parent company of CARIBBEAN BUSINESS] belongs to, or the generation of Antonio 'Tito' Colorado [former resident commissioner], or before that, dating to Teodoro Moscoso [the architect of Operation Bootstrap]—that generation is in retirement. They don't know us anymore. The new players out there didn't know about us," the governor said.

Positioning Puerto Rico within a bicultural framework was important in bringing Neolpharma to the island, García Padilla said. A key part of his administration's vision for economic development is to promote Puerto Rico's competitive advantages.

The governor's participation in the SelectUSA investment forum last week in Washington, D.C., led to several meetings with companies that had already been targeted by the administration to set up operations in Puerto Rico. "We wanted to be a part of this event so we could participate as dynamically as possible, and we have accomplished that," García Padilla said. "My team and I are focused on job creation. That is why we continue to work hard to get investors to set up shop in Puerto Rico.

"We have already used our experience interacting with some of the very same companies that participated in the event. We have already contacted consulates and companies through their operations' officials, some of which have plants in Puerto Rico. We have already established contact with some of the companies participating in SelectUSA. I myself have written letters to the CEOs of those companies," the governor said.

During the event, García Padilla also met with Chinese diplomat Lu Kang to discuss commercial and investment ties, educational exchanges, energy initiatives and environmental issues. The Puerto Rico government team also met with more than a dozen companies' representatives, including biotech manufacturers, aerospace firms, financial companies and insurers.

SelectUSA is an Obama administration initiative that seeks to promote and facilitate investment in the U.S. SelectUSA's first Investment Summit was held in the nation's capital Oct. 31 to Nov. 1, connecting domestic and foreign companies and investors with local, state and regional economic-development organizations in an effort to promote investment and support jobs in the U.S. At least 47 states, the District of Columbia and three U.S. territories, including Puerto Rico, participated in the event, and companies representing nearly 60 markets were also in attendance, according to the SelectUSA website.

WHITE HOUSE HELP ON THE ECONOMY

As part of its efforts to jumpstart the local economy, the García Padilla administration has met with several officials from the U.S. State Department to express its interest in becoming a partner in that agency's initiative to help foster economic development in Latin America.

Puerto Rico offers an element of diversity in the North American market that is attractive to many companies, the governor said.

"We believe the Obama administration has a true interest in helping Puerto Rico and knows that the island can be a partner as well. We are the U.S. jurisdiction that can compete with Ireland, New Zealand, Singapore, whomever. We can compete with those jurisdictions in a way the states can't," he added, in reference to tax breaks the island offers that would help the Obama administration in its efforts to reshore manufacturing operations that have taken their plants to foreign soil.

The administration has also been meeting with the White House Task Force on Puerto Rico since taking office in January.

"What I have discussed with the president's team even dating back to last year is not to forget that two-thirds of the task force's report on Puerto Rico is dedicated to economic development, not status. Although a majority of the discussion in Puerto Rico centers on status, the report is dedicated mostly to economic development," García Padilla said.

"Here on the island, politicians seeking to distract public discourse from their shortcomings don't want to talk about economic development. I have been asking the White House not to forget that this effort is all about helping Puerto Rico move forward, whether it is under independence, statehood or commonwealth," the governor said.

He noted that his discussions with the White House focus on economic development and crime fighting.

"What we have done is to use President Obama's willingness to help Puerto Rico and his eagerness to make good on his word to help the island. In fact, the last time I was in Washington, D.C., I met with the members of the task force handling the issue of Puerto Rico's economic development. They want to help Puerto Rico and they are very enthusiastic," the governor said.

BOOSTING COMPETITIVE ADVANTAGES

Competing to win also means improving Puerto Rico's competitive landscape. The administration is also pledging to do this, with a big focus on improving electricity service and lowering power costs.

Puerto Rico's energy costs, more than twice that of the U.S. average, is one of the biggest barriers to economic development, as the high cost of power is one of the main operating expenses for most businesses, from industrial plants to fast-food restaurants and retail stores.

A sweeping plan to overhaul the Puerto Rico Electric Power Authority (Prepa) was presented by the governor earlier this month, a plan for which he said he originally advocated while serving as the secretary of the Consumer Affairs Department during the administration of former Gov. Aníbal Acevedo Vilá.

The plan aims to cut power costs in half during the next 12 years. A key component is the establishment of a regulatory entity that would oversee the rates Prepa charges, as well as its operations and contracts.

Prepa will also have to publish its rates monthly and provide details on its finances and operational costs. Prepa also would have to revise rates every two years and take public input into account. Meanwhile, it would be ordered to provide live transmission of its board meetings and post all contracts online. The governor is also proposing to create incentives for the installation of solar panels on buildings.

New legislation to be filed before year's end will overhaul Prepa's organic law and give the public corporation a new mandate, García Padilla said. This includes diversifying income sources in other lines of business, such as the fiber-optic telecommunications network that operates on the backbone of Prepa's power grid. The legislation will also create the new regulatory entity.


However, the governor is against opening Prepa up to competition, which he said was a form of privatization. This stance contradicts the position of Senate President Eduardo Bhatia, who has said that opening the door to private power producers to compete against Prepa would lower electricity costs.

The governor said he supports the two private plants on the island, the Applied Energy Services Corp. (AES) coal plant and the EcoEléctrica natural gas plant, because they sell power to Prepa, but reiterated his opposition to third parties selling electricity to customers.

"Puerto Rico is an isolated energy market because of its condition as an island. When AES and EcoEléctrica operations began, they first signed a contract with Prepa committing to supply it more than 90% of their production. If not, they wouldn't have invested," the governor said.

"Getting a business to come here to invest a billion dollars and then wait and see how many clients it can get will be very difficult to achieve. If they don't have a guaranteed purchaser for the energy, they will have to raise prices. That is why privatization of the sale of energy will increase prices," the governor said.

In the mainland U.S., the situation is different because different utility- power generators are connected through a massive power transmission grid. "You can develop a plant in Colorado, and people in Wyoming, Utah or North Dakota can buy electricity from you if the competitor in Colorado is very strong," he explained.

García Padilla said his administration would support the development and operation of private powerplants through public-private partnerships and power-purchase agreements, such as the existing AES and EcoEléctrica plants, but that today, there is a huge surplus of electricity on the island.

"Right now, we have a capacity of more than 5,000 megawatts [MW] and our peak consumption is 3,200 MW. Stable consumption is around 2,500 MW, half of our installed capacity. That's the situation," the governor said.

He also said his administration is "on or ahead of schedule" in lowering energy costs.

Meanwhile, he added that a draft environmental-impact statement should be released shortly on an offshore liquefied-natural-gas terminal that will enable the gasification of the Aguirre powerplant in Guayama, which is Prepa's largest plant. It should begin producing energy with natural gas in the first quarter of 2015.

At the same time, 600 MW of renewable-power projects will be approved shortly and by the end of 2014, about 6% of the power produced in Puerto Rico will come from renewable sources.

"In 2015, we should be producing 60% of our energy from natural gas, coal and renewables," García Padilla said.

DESPITE TOUGH ECONOMIC & FISCAL CLIMATE, NO LAYOFFS ON THE HORIZON

While the governor's main focus is on economic development, he has also kept his eyes on the government's fiscal health. Despite the tough times, there are no expectations of layoffs in the public sector, even though credit-rating agencies remain concerned.

In October, Standard & Poor's Ratings Services (S&P) left its rating on Puerto Rico's general-obligation (GO) bonds at one notch above junk level and affirmed its negative outlook, citing "ongoing negative demographic, economic and fiscal trends."

On the plus side, S&P pointed to "a recent willingness to tackle some long-term structural issues, as indicated by enactment of substantial pension reform, elimination of subsidies for its water and sewer authority, and large recent tax increases, which Puerto Rico projects will enable structural balance by fiscal 2016, when combined with restrained increases in spending."

The Wall Street credit-rating agency also noted Puerto Rico's strong ties to the U.S. economy, resulting in a significant flow of trade and income transfers.

S&P pointed to a range of negatives including structural deficits in the commonwealth's general fund for more than a decade and high levels of debt and retirement liabilities.

Meanwhile, the rating agency touted a governmental framework that constitutionally places repayment of GO debt ahead of other expenses, and broad legal authority to adjust revenue and expenditures. However, reducing expenses further are constrained by the administration's position of no public-sector layoffs, S&P said.

García Padilla reaffirmed to CARIBBEAN BUSINESS that layoffs aren't on the horizon. "We have reduced payroll expenses by 10% without firing employees. This is a lot." In La Fortaleza alone, the governor said expenses have been reduced by about $2 million a year. "All the governors alive have been here [at La Fortaleza] and they all have said to me, 'you have to bring more people, you people are alone here."

The expense reductions are from the "sublime to the ridiculous," he added. Advertising expenses have been reduced by double digits, while the governor's official car is a used 2010 Chrysler Turin, which was confiscated by the police and sold at auction for $2,000.

"The government doesn't pay for my cellphone, that of my wife or La Fortaleza employees," he said. "We are cutting costs wherever we can."

García Padilla also reaffirmed that the government has a policy of replacing 40% of vacancies that are deemed essential services, such as teachers, social workers and police. "We can't freeze everything, but there is a 40% headcount replacement," he said. "You can't have classrooms without teachers, you can't reduce social workers in the Family Department. These are positions that must be filled."

For example, in the Education Department, the number of employees decreased by 7,071 from January to August 2013, due to attrition, but 5,743 "positions" were rehired. This represented a net decrease of 1,328, according to the Office of Management & Budget (OMB) data.

In terms of other central government agencies, there was a decrease of 5,841 employees from January to August 2013, also due to attrition, while 1,859 positions were filled again, leaving a net decrease of 3,982 jobs.

NUMBER OF PUBLIC WORKERS DOWN, GOVERNMENT RESTRUCTURING IN PROCESS

According to OMB figures, the number of public employees (excluding municipal and federal workers) has decreased by 19% since 2005. In fiscal 2005, there were about 183,125 public workers, including the University of Puerto Rico, police, teachers and judicial employees.

Today, there are about 148,149 public workers, representing the 19% drop.

Among the agencies that have reported the biggest drops in employment since 2005 are the Education, Health, Treasury and Family departments and the OMB.

Because of the decrease in public employees, García Padilla said his team is focused on restructuring government in a way that maximizes available resources and improves cost efficiency.

As part of this effort, the governor signed an executive order in August, establishing a task force to analyze and implement initiatives that will reduce spending in the executive branch. The task force is headed by OMB Executive Director Carlos Rivas.

Among the potential cost-efficiency initiatives being evaluated are integrating the information-technology systems for all central government agencies; consolidating agencies' expenses in such areas as real estate, utilities, purchasing, transportation and payroll controls; and in the long term, consolidating agencies. Rivas and other officials have also spoken of the need to consolidate classrooms and public schools, as Puerto Rico's population—including the number of students—continues to go down.

Rivas said the task force is keeping a close eye on continuing to trim nonpayroll expenses. Of the government's $9.77 billion budget for fiscal 2014, half is for operational expenses, according to OMB figures. Payroll expenses comprise $3.653 billion, while purchasing and administrative functions (nonpayroll expenses) comprise $1.782 billion. The nonpayroll expenses include $214 million for rent; $149 million for Prepa and the Puerto Rico Aqueduct & Sewer Authority; $257 million for purchased services; and $146 million for transportation.

Meanwhile, García Padilla stressed that the government must be restructured correctly. "We can't have a restructuring in which the Economic Development secretary is also the head of Commerce & Export. That is too much, and one person can't do it well," the governor said. "It's not about saving money by [consolidating] salaries for two agency directors."

Instead, what the government has to do is to pool its resources together, he said. For example, García Padilla noted that the municipality of Carolina has a state-of-the-art solid-waste landfill and recycling center.

"Municipalities can pool their efforts. Coamo can't do this because it requires capital and is expensive," the governor said. "But Coamo, Villalba and Juana Díaz can get together, do something similar and save money. Juana Díaz has a landfill; with capital, they could achieve this." The same could be done in other areas, such as security, transportation and road maintenance.

García Padilla emphasized that restructuring the government isn't about consolidating municipalities. "That is culturally impossible. We have to understand the reality here," he said.



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