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High hopes for low-interest loans.

WHAT COULD A CORRUGATED box factory in Dominica, a pharmaceutical plant in Costa Rica, a bauxite extraction facility in Jamaica and a luxury hotel in the U.S. Virgin Islands possibly have in common? Besides creating jobs and pumping cash into the Caribbean Basin's recession-plagued economy, each of these projects - and a dozen more throughout the region - has been financed through Puerto Rico's uniquely creative and highly sought-after 936 program.

Conceived in 1985 by Puerto Rico's Governor Rafael Hernandez Colon, the program has made available more than half a billion dollars in low-interest loans to eight Caribbean Basin Initiative (CBI) member countries. It is based on Section 936 of the U.S. Internal Revenue Code, which exempts companies from paying U.S. income tax on profits earned by their Puerto Rican subsidiaries. In order to qualify, countries must sign and ratify tax information exchange agreements (TIEAs) with the United States government.

Initially, the 936-CBI link took a long time getting off the ground because of bureaucratic confusion in both Washington and San Juan. But in the last two years, thanks to a much streamlined process and the forthcoming North American Free Trade Agreement, Caribbean governments have rushed to sign TIEAs in order to reap the benefits of low-interest money. "Despite all the obstacles," says Carlos Ubinas, executive vice-president of Paine Webber's Puerto Rico operations, "for projects that meet the requirements, 936 is the cheapest private-source funding in the world."

Because of Section 936, it is estimated that from $8 to $10 billion is deposited in Puerto Rican banks by U.S. and foreign companies manufacturing there. Antonio J. Colorado, Puerto Rico's affable 52-year-old secretary of state, remarks "the CBI connection has been a very important factor in saving Section 936." Some critics in Congress have claimed that the program is a drain on the U.S. Treasury. Colorado refutes this, pointing out that without the tax incentives many companies would have moved their operations to the Far East.

In addition to preserving jobs at home, Puerto Rico has promoted 92 production-sharing or "twin-plant" projects in 12 CBI countries which have created more than 20,000 jobs and generated $800 million in investment. At least a dozen of these projects have received 936 financing to date and Colorado says that by the beginning of next year, more than $800 million in 936 funds will have been approved to finance tourism, telecommunications, food processing, manufacturing and infrastructure projects throughout the Caribbean Basin.

So far, the CBI countries which qualify for 936 funds are Barbados, Grenada, Jamaica, Dominica, the Dominican Republic, Honduras, St. Lucia, Costa Rica and Trinidad and Tobago. In addition, the U.S. Virgin Islands, an unincorporated territory of the United States, is eligible. Nicaragua, El Salvador and Guyana are said to be on the verge of signing TIEAs as well.

The program got a big boost in February, when the first bond issue of the Caribbean Basin Projects Financing Authority (CARIFA) was sold to finance a $200 million modernization of the Alcan bauxite extraction and alumina refining plant in Jamaica. In addition, the largest 936-funded project to date, the $80 million Phoenix Park methanol and petroleum plant, recently won approval in Trinidad and Tobago. Four other projects totaling $177 million are now in the process of being approved by the CARIFA board of directors. "We should end 1991 with around $250 million in 936 funds disbursed this year alone," said the Puerto Rican secretary of state, Colorado, who estimates that the actual cost of 936 funds varies between 80 percent and 82 percent of the London Interbank Borrowing Rate (LIBOR), an international benchmark for determining world interest rates.

Projects already utilizing 936 funds range from the tiny to the immense. One of the smallest projects already utilizing 936 funds is a $2.1 million carboard box plant on the island of Dominica. The factory, a production-sharing venture between the Dominica Banana Growers Association and Puerto Rico Container Corporation, will provide 35 jobs in Dominica and up to six million corrugated boxes annually for Dominica's export-based banana industry. Roberto Valentin, president of Puerto Rico Container, said his company is saving $100,000 a year by using 936 funds at around eight percent interest rather than borrowing the money from a commercial bank at ten percent interest.

The same concept, but on a much larger scale, was recently used to finance $17 million of the total $183.5 million cost of AT&T's TCS-1 fiberoptic telephone cable linking Florida, Puerto Rico, Jamaica, the Dominican Republic and Columbia. Section 936 funds have also been used to buy two used aircraft for Air Jamaica, build the Sapphire Beach hotel resort in the U.S. Virgin Islands, modernize the telephone network of Barbados, assemble 754 prefabricated houses for low-income Jamaicans and finance the construction of a 40-megawatt floating power plant to supply electricity to Puerto Rico's westerly neighbor, the Dominican Republic.

U.S. State Department spokesman Peter Whitney commented, "I'm puzzled why more countries haven't signed the TIEA. It's only a instrument to go after very large tax evaders. TIEAs are also a boost for tourism. If a CBI country has a TIEA, the expense of a business conference there is tax-deductible under U.S. law."

Costa Rica, which ratified its TIEA with Washington earlier this year, currently has 11 twin-plant operations with Puerto Rico and, for the first time, the potential to receive 936 funding for future projects. "Now that Costa Rica has signed and ratified the TIEA," said Costa Rican Muni Figueres, a leading official of the Inter-American Development Bank, "the possibility looms forth for other Central American nations to do the same."

Despite access to 936 funds, not all CBI countries think low-cost funding is worth the price. Some are reluctant to share any tax information with Washington, while others are service economies that would have little to gain from Puerto Rico's 936 funds. Nevertheless, the availability of funds under such programs as Section 936 seems to be taking on increasing urgency, as many Caribbean and Central American nations worry about shifting priorities in the face of changes in Eastern Europe and the formation of a North American Free Trade Agreement between the United States, Canada and Mexico.

At a recent conference organized by the Puerto Rican government, representatives of the 13-nation Caribbean Community (CARICOM), as well as the presidents of Honduras and Jaimaca, warned the region's many "microstates" that they could soon be forgotten in the rush of current events, unless leaders take real steps towards economic integration. "Restructuring of a fundamental nature is taking place around the world," said Don Brice from Jamaica, director-general of the West Indian Commission. "Over the last two years, the world has seen events which could hardly have been envisioned by the Commission two years ago - the Gulf War, the North American Free Trade Agreement and, of course, changes in the Soviet Union and Eastern Europe. Against this background of historic change, the Caribbean is in danger of becoming a backwater. If we are to survive the decade of the 90s and move into the twenty-first century, we have to move closer together - not just the English-speaking Caribbean but all countries of the region." Muni Figueres of the Inter-American Development Bank added, "Small countries will be wiped out unless they integrate. It is not just a choice; it is a necessity."

Even Puerto Rico, with its U.S. Commonwealth status and per capita income of $5,000 (the highest in Latin America), recognizes the need to integrate. In the last few years it has joined CARICOM as an associate member while becoming more active in other regional organizations. Most importantly, through the CBI-936 link, Puerto Rico hopes to maintain its hard-won prosperity and at the same time improve the standard of living for all of its Caribbean basin neighbors.

Larry Luxner s a freelance journalist based in San Juan, Puerto Rico.
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Author:Luxner, Larry
Publication:Americas (English Edition)
Date:Sep 1, 1991
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