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End of 936 could hurt Caribbean telecom investment
Telephony / January 8, 1996

By Larry Luxner

MIAMI -- Low-cost financing for tens of millions of dollars in future Caribbean and Central American telecommunications projects could be endangered if Congress eliminates a complicated tax incentives program aimed at creating jobs in Puerto Rico.

Under Section 936 of the U.S. Internal Revenue Code, companies that manufacture in Puerto Rico are partially exempt from income tax on profits earned from those operations. This clause is the backbone of Puerto Rico's manufacturing sector, which accounts for 40% of the island's gross domestic product.

Some members of Congress, however, say the program is a $3 billion-a-year drain on the U.S. Treasury. Both Puerto Rico's pro-statehood governor, Pedro Rosselló, and the island's non-voting delegate in Washington, Carlos Romero Barceló, view Section 936 as an impediment to making Puerto Rico the 51st state, and have openly called for its elimi-nation -- sparking outrage from groups such as the Puerto Rico Manufacturers Association.

Yet in Dec. 6 speech in Miami, Francisco J. Uriarte, Rosselló's assistant secretary of state for Caribbean affairs, concedes that the death of 936 "would immediately affect the ability of Puerto Rico's financial system to extend additional CBI financing" through the Caribbean Basin Initiative.

"We understand that the Caribbean Basin countries are gravely concerned with the apparent loss of such a valuable financing mechanism," said Uriarte, speaking to several hundred executives attending the 19th annual Miami Conference on the Caribbean and Latin America. "We are thus asking your assistance and support in conveying to Congress and the Clinton administration the importance of not terminating Section 936 without providing Puerto Rico and the Caribbean Basin with the necessary tools to continue working towards economic prosperity."

Rosselló's alternative plan, he suggested, "would maintain those provisions of the heretofore applicable Section 936 which allow the lending of low-cost funds to eligible Caribbean Basin countries" that might otherwise have no access to such loans.

Some regional leaders aren't convinced. They say don't want the 936 program tinkered with in any way.

"It's been a very important program for us, and it's critical that it be retained in its present form," said Richard Bernal, Jamaica's ambassador in Washington. "We have had significant funds from this program, and interest rates have been favorable. To remove that would retard investment in many sectors" including telecommunications.

Added Edison James, prime minister of Dominica: "The end of 936 funds will have serious repercussions on Dominica's economy. This comes at a time of lower U.S. development aid, which we can ill afford."

Jamaica and Dominica are two of 10 countries throughout the Caribbean and Central America which have signed Tax Information Exchange Agreements (TIEAs) with the U.S. Treasury. That qualifies them for so-called "936 funds," which are generally available at one or two percentage points below prevailing interest rates -- thus resulting in up to 20% savings in finance costs.

Since the program's inception in 1987, Puerto Rico's CBI financing program has promoted 181 projects of all types, including a dozen or so projects involving $462.3 million worth of telecom investment in smaller Caribbean and Central American nations.

In Barbados, for instance, three 936 loans totaling $50 million helped finance the expansion and modernization of the small island's telecom infrastructure. In the Dominican Republic, two loans totaling $36 million paid for part of the $105 million Telepuerto San Isidro S.A. in Santo Domingo, as well as expansion of the company's cellular telephone network. An $8 million "936 loan" to Grenada Telecommunications Ltd. was crucial in expanding the phone system on that tiny island.

In Jamaica, three loans totaling $33.5 million helped finance $82 million in telecom improvements, and a $17 million loan covered the cost of Jamaica's portion of an AT&T submarine fiberoptic cable linking the United States with the Caribbean and Latin America.

Perhaps the biggest recipient of 936 money for telecom, however, has been Honduras. Two loans to state-owned, corruption-plagued Hondutel -- for $76 million apiece -- have generated more than their share of controversy.

The first loan, obtained from Chase Manhattan Bank N.A., enabled the German industrial giant Siemens AG to begin work on installing 110,000 phone lines in the cities of Tegucigalpa, Choluteca and Comayagua. The second loan, backed by Citibank, is financ-ing AT&T's efforts to add 110,000 lines in San Pedro Sula, the country's second-largest city and center of the Honduran garment export industry.

"We're putting in new lines and switches that are faster, more reliable and have more capacity," said AT&T spokeswoman Heddy Peña in Miami. "This will improve call completion rates and allow Hondutel to offer additional functions and features. People have already begun to see an improvement in service."

Remarked one U.S. Embassy official in Tegucigalpa: "This is one of the best telecom projects in Latin America. The competition [between Siemens and AT&T] will be great for the country."

But when QPSII -- qualified possession source investment income -- is eliminated by Congress on Jan. 1, 1996, "even loans that were granted three years ago will cost more in interest," says politician Antonio J. Colorado Jr., who spent more than a decade defend-ing 936 and was recently named executive director of Caribbean/Latin American Action, a Washington lobby. "The government of St. Lucia, for instance, had to amend its laws to be able to sign the tax exchange agreement. Without 936 funds, they'll have to pay about 1% higher interest. When you're talking about a $100 million project, it's very significant."

Yet labor activist Charles Kernaghan won't be sorry to see the 936 funds go.

"That we would give a subsidized loan, based on U.S. corporate tax write-offs in Puerto Rico and not even available in American inner cities, to Hondutel -- which is run by the military -- seems insane," said Kernaghan, executive director of the New York-based National Labor Committee. "These loans are going to grease the pockets of the corrupt military men responsible for the disappearance of hundreds of Hondurans, and for the illegal wiretapping of private lines."

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