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Comparative Analysis Between Puerto Rico And Rupublica (стр. 1 из 2)

Dominicana Essay, Research Paper

The first economic evaluation for this class was on the

Commonwealth of Puerto Rico. In keeping with the Caribbean theme,

the country that was selected for comparison was the Dominican

Republic. The policies that will be examined are privatization policies and corporate acquisition/merger policies in the two nations. In order to provide a quality analysis of the two countries economic policies, a general description and basic comparisons of the two nations are provided.

Geographically, the Dominican Republic (48,730-sq. km.) is

much larger than Puerto Rico (9,104-sq. km.)[Puerto Rico][Dominican

Republic]. For a more tangible perspective on size, the Dominican

Republic is twice the size of New Hampshire and Puerto Rico is less

than three times the size of Rhode Island [Puerto Rico][Dominican

Republic].

The two nations are climatically identical. They both have

tropical marine climates with little seasonal temperature changes.

The two also have natural resources of metals with Puerto Rico having

the potential for oil mining.

The Dominican Republic s population (over 7 million) is bit less than double the amount in Puerto Rico (about 3.8 million)[Age

Structure][Dominican Republic]. Their birth rates are similar as well

but the Dominican Republic s is slightly higher.

Culturally they share similar backgrounds. Both countries

have Black and Hispanic origins and the official language spoken in

each is Spanish. They also share Roman Catholicism as their

dominant religion.

There are vast differences in each country s economy. Puerto

Rico has one of the best economies in the Caribbean; being the only

island in the region where its industrial sector has surpassed the

agricultural sector as the primary source of income. The Dominican

Republic still has heavy emphasis on agriculture and the economy

relies heavily on trade. Tourism is very big and lucrative in Puerto

Rico, and the Dominican Republic has only recently begun to

increase its importance. Puerto Rico has a very strong, reliable and

productive work force while the Dominican Republic fights with both

underemployment and unemployment. Lastly, Puerto Rico has the

U.S. dollar for currency and the Dominican Republic has the

Dominican Peso. The exchange rate as of March 1996 was $13.50 D.

Peso per U.S. $1 [LatinFinance, March 1996].

In terms of legislation, Puerto Rico s has been shaped by the

United States and is based on the Spanish Civil Code while the

Dominican Republic s structure is based on the French Civil Code.

Both countries are democratic in nature but the Dominican Republic

has more political parties. Universal suffrage is at age 18 for the two nations but although Puerto Ricans are U.S. citizens, they are unable to participate in the United States presidential elections. Dominican Republicans can also receive suffrage if married before 18 but members of the armed forces and police cannot vote.

Privatization Policy

To understand the history of state ownership and privatization

in Puerto Rico it is important to know certain basic facts about them. Its history has strongly influenced its economic existence and

position regarding public/private ownership.

Puerto Rico s unique social, economic and political

circumstances distinguish its privatization capabilities from others in Latin America. The island is tied to the U.S. both economically and politically. Puerto Rico was officially part of the U.S. in 1898 and their people have been U.S. citizens since 1917. Although being an U.S. citizen has great international benefits, there has been a

constant struggle with the U.S. to become independent. It was not

until 1948 that the people of Puerto Rico received the power to elect

their own governor. Although still part of the U.S., Puerto Rico s chief of state is the President of the United States and everyone is

protected under the U.S. Constitution as well as Puerto Rico s own

constitution which was adopted in 1952. Since that time Puerto Rico

has become unofficially self-governing.

Businesses that were state owned in Puerto Rico have just been

utility and other public service companies and facilities that

contribute towards the industrialization of the island. The start of

state ownership was due to the consolidation and operation by the

government of electrical power, water, and sewer facilities during the

early to mid 1900 s.

Puerto Rico had not been a primary sector economy (sugar

cane) since the 1940 s. From that point, manufacturing has been its

main industry. The industrialization of the island began in 1942

when the Puerto Rico Industrial Development Company was created.

This commenced a program of state ownership of factories for the

manufacturing of glass, cardboard, shoes, ceramics, and cement

[LatinFinance, Jan.-Feb. 1993]. The only successful state-run

business was the cement business. Consequently, most of these

factories were sold to local businesses and thus spawned privatization

of government business.

With the industrial era came changes that assisted in its

maturation like the creation of tax breaks and incentives, and projects that attracted private investment. These strategies focused towards businesses in the U.S. Tax benefits existed such as Section 936 of the U.S. Internal Revenue Code which permitted subsidiaries of U.S. companies to operate in Puerto Rico and repatriate their earnings

entirely free of U.S. tax [ Puerto Rico Firms Carve Post-936 Strategies].

Minimal changes have been made in policies that affect state

ownership. This does not mean there were not any major acquisitions

of private companies by the government. They just were not in

association with a government policy. If the government made an

acquisition, it was for the intention of ensuring job protection or

heightening services made available to the mass public. In 1993,

government was the third largest sector of the economy, which was a

significant amount of GDP and total employment [LatinFinance,

March 1994]. Government purchases included the Puerto Rico

Telephone Company and the main shipping lines serving Puerto Rico

which were bought in the 1970 s. The shipping lines were later

distributed to the Puerto Rico Maritime Shipping Authority. Other

notable acquisitions made by the government in the recent past

included being the sole operator of the sugar and pineapple industry

of the island.

The Puerto Rican government also owned businesses in

competitive industries like hotels and fruit processing. It was also

providing services in competition with other enterprises such as

construction and the operation and maintenance of housing/penal

institutions, operations of tourist attractions, medical and insurance

services, hospitals, and service administration services. The

government also operated a plant that processed excess milk products

into dairy products too.

A privatization program was never formally adopted but a

movement gearing towards privatization had been in effect. In 1992,

the Puerto Rican government sold a company that handled overseas

telephone operations to Telefonica de Espana, but maintained a

minority interest in the enterprise. Also at this time legislation was passed allowing the construction of public works (bridges, highways, etc.) by private enterprise. In addition, negotiations took place with private companies that provided co-generation facilities to the Electrical Power Authority, and private operators for the main truck lines of San Juan s Metropolitan Bus Authority. It was also decided that the utilities would be privately contracted at the management level. There was not a specific schedule or order of privatization in regards to any government business.

The present government, which came into power in 1993, had

intentions to take government out of business by privatizing all

government businesses except basic utility services like power

generation and distribution, water and sewer, and basic telephone

communications services. The initial goal was to disown businesses

that competed with private enterprises and allow the private sector to

run these operations more efficiently. This was the primary

motivation of privatization.

In 1994, Governor Pedro Rosello established a goal to reduce

the government s share in total employment and GDP to less than

15% by allowing the private sector to undertake incremental

investment in infrastructure and services, and by transferring certain

government activities and institutions to the private sector

[LatinFinance, March 1994]. To assist in the government reaching

this goal, the Puerto Rico Privatization Task Force was established. Its basic role was to coordinate the privatization of government owned

businesses in competitive markets and promote private ownership of

these enterprises. It consisted of leaders of government agencies and

public corporations. The integral players involved in this group are

the Secretary of Treasury, the President of the Government

Development Bank for Puerto Rico and the Executive Director of the

Task Force.

Although the main goal of the task force is privatization, it is actually just a piece to a bigger puzzle to restructure the

government s activities and responsibilities. The government s role is switching from provider of the island to facilitator. This shift provides a long-term stable economy as opposed to just focusing on one

aspect- the quick fix.

The Government Development Bank for Puerto Rico (GDB) also

is an essential player in the government s efforts to privatize. It not only maintains fiscal stability of the government but also assists the government and private sector in the privatization program by assessing and negotiating proposals to make sure the government gets the best deals.

Looking at the basic objective of the Privatization Task Force, privatization is viewed as the sale of business in competitive

industries, greater involvement in government services by the private

sector, a reorganization of government structure and the revision of

the rules and regulations that affect both government and private

sectors. Based on these four objectives, the task force identified the businesses that it felt needed to be sold to allow the government to reduce its spending so that it may distribute its resources to more

traditional public responsibilities (i.e. health care, education,

housing, drug prevention, job training, etc.):

- Puerto Rico Maritime Shipping Authority: the main shipping line

servicing Puerto Rico and the U.S. The GDB finalized the sale to BT

Investment Partners, Inc., a subsidiary of Bankers Trust in March of

1995. This was purchased for $29.5 million in cash and assumed

$102.9 million in leases and other liabilities. The government

assumed responsibility for approximately $283 million in outstanding

indebtedness from the previous twenty years [Westland, R.].

-Pineapple Operations: one pineapple canning plant is the sole

producer of pineapple products in Puerto Rico. The land used for

growing the fruit is included in the deal. The products are produced

under the Lotus brand. Terms are in negotiations with bidders.

-Sugar Corporation: This is comprised of four sugar mills and one

sugar refinery. This too is the sole provider of refined sugar for the Puerto Rican market. Since the 1970 s, the government has been

operating at a loss. This sale is currently being negotiated.

-Hotels: there are seven government owned hotels located in

different parts of the island. However private companies manage

these. One hotel, the El Convento in Old San Juan, has been sold.

Others are in negotiations.

-Highways and Bridges: legislation was passed in 1990 to improve

the ground transportation facilities (highways and bridges) and to

allow the Highway Authority to enter into contracts with private

businesses for the construction, maintenance and operation of these

facilities. The island s most visible symbol of privatization is the

Teodoro Moscoso Bridge that was built in 1994 at a price of $83

million. Ninety percent of it was financed by tax-exempt special

revenue bonds issued by the Puerto Rico Highway and Transportation

Authority and ten percent with private capital from the Autopistas de

Puerto Rico (APR). APR is a partnership of local and foreign firms,

one of Europe’s largest construction firms and Puerto Rico s largest

contractor. The bonds are being repaid from toll revenues [Paretta, E.]

-Telecommunication Facilities: the telephone manufacturing

facilities as well as the cellular phone company are both government

owned and are for sale.

Dominican Republic s distribution of property that is state or

privately owned can also be explained looking at history. In the

1970’s, Latin America went through a movement advocating state

ownership of industry. By mid 1980 s most of the governments in

Latin America believed that financial stability and low levels of

inflation were necessary to spark investment and economic growth;

marking privatization as the means to achieve this desired prosperity. Therefore, some countries directed their efforts towards privatization. Unfortunately, the Dominican Republic did not follow that school of thought. The government owned a sizeable amount of companies but it was more due to the dictatorship rule of Rafael L. Trujillo than economic policy.

With a dictatorship government, the ruler or dictator controls all aspects of the government and the lives of the people. Thirty years of dictatorship rule in the Dominican Republic ended in 1961 with the death of Trujillo. After his death, the government confiscated Trujillo s estate, which totaled 56 commercial and industrial companies accounting for a substantial amount of the assets of their country. The state became the majority shareholder in 35 companies and the minority shareholder in 18 others. As of 1993, companies owned in full or in part by the government generated forty percent of the GDP of the Dominican Republic [Guerrero, C.].

The commercial enterprises were liquidated leaving the

industrial companies which formed three governmental organizations

in 1966: the Corporacion Dominicana de Electricidad (CDE), which is

the state electric utility company; the Consejo Estatal del Azucar

(CEA), which is the sugarcane company; and the Corporacion

Dominicana de Empresas Estatales (CORDE), which is the holding

company for the state owned enterprises.

The previous governmental policies and the change of rule

definitely caused the country to be in debt and economically

inefficient. Yet, despite the knowledge that other Latin American

countries had taken steps to incorporate industrial policies, the

Dominican Republic did not officially direct its efforts towards

privatization. During the 1980’s, the CEA relinquished some of its

land to diversify from the sugarcane industry. An example would be

Dole Dominicana, S.A. that gave up a pineapple plantation in order to

plant African palm trees. This contributed towards a joint investment

project of the CEA and a private enterprise in building a free zone

park.

In 1990, the President of the Dominican Republic, Dr. Joaqun

Balaguer, had expressed support of privatization. Meanwhile the

country did not implement a formal program. In fact, some state

owned businesses were forced to shut down due to financial

struggles, with many others in serious debt.

In addition to the president s support, two other factors

encouraged this school of thought. One factor was the Stand-By

Agreement with the International Monetary Fund (IMF) signed in

August of 1991. This was a letter of intent for a new agreement sent

by the IMF that included a condition stipulating the privatization of

state enterprises. This agreement never materialized. The second

condition was the Framework Agreement with the U.S. that took place

in 1991 and included an immediate action agenda acknowledging the

need for domestic and foreign private investment.

In October of 1992, the Economic and Development Foundation

(or Fundacion Economica y Desarrollo) gave the Dominican Republic

government a privatization proposal of the government s CEA, CDE,

and some of the CORDE businesses [Guerrero, C.]. The contents of

this study were never publicly disclosed. Progress has been made in

the following Dominican Republic state companies since Balaguer s

leadership:

-CDE (electric utility): privatization has been growing since the

deterioration of the Dominican Republic government s ability to

provide sufficient service of electricity. The government signed

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