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Puerto Rico faces possible 936 funding loss
Hotel & Motel Management / January 22, 1996

By Larry Luxner

MIAMI -- Low-cost financing for tens of millions of dollars in future Caribbean hotel 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 recent 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.

Also under Rosselló's plan, tourism would gradually replace manufacturing as the mainstay of Puerto Rico's economy, with the number of island hotel rooms doubling from the present 8,000 to more than 15,000. At the same time, better government incentives would be offered to potential hotel developers.

Yet leaders of the opposition Popular Democratic Party -- which supports continued Commonwealth status for Puerto Rico -- aren't convinced, arguing that the Caribbean is already saturated with hotels and that overbuilding will lead to environmental damage. They also say that in the island's most expensive properties, such as the Caribe Hilton and the Condado Plaza Hotel & Casino, half or more of all guests are business travelers connected in some way to the 936 program, and that if the program ends, factories will close and executives will no longer have a reason to visit Puerto Rico.

Many leaders on other Caribbean islands aren't convinced either. They say don't want the tax clause 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 tourism.

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 that 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, though the hotel industry has been one of the biggest beneficiaries of 936 financing. In the Dominican Republic, for instance, 936 loans have financed $22 million of the $36 million construction of the Fiesta Bavaro Hotel, a $2.5 million refurbishing project at Santo Domingo's Hotel Embajador, and $1.5 million of a $5 million expansion at the Punta Cana Beach Resort.

In Jamaica, 936 loans were involved in three large hotel projects: $28 million for acquisition of the state-owned Holiday Inn Montego Bay by private investors; $27 million for acquisition and refurnishing of the Mallards Beach and American Hotels in Ocho Rios, and $10 million towards a $35 million acquisition and refurnishing of Rose Hall Beach and Country Club in Montego Bay.

Section 936 funds have also helped finance construction of the $9 million Sapphire Beach Resort in the U.S. Virgin Islands, a $500,000 expansion of the East Winds Hotel in St. Lucia, and smaller hotel projects in Barbados, Costa Rica and Honduras.

Yet current U.S. legislation calls for the elimination of the "QPSII" -- or qualified possession source investment income -- on Jan. 1, 1996. Qualified funds refers to profits deposited in Puerto Rican banks by subsidiaries of U.S. manufacturers that have operations on the island under Section 936.

"The bill immediately eliminates QPSII, so even loans that were granted three years ago will cost more in interest," says politician Antonio J. Colorado Jr., who spent a decade defending Section 936 -- first as economic development administrator, later as Puerto Rico's secretary of state and finally as Puerto Rico's non-voting delegate to Congress.

"The government of St. Lucia amended its laws to be able to sign the TIEA," said Colorado, who was recently named executive director of Caribbean/Latin American Action, a Washington lobby. "Without 936 funds, they'll have to pay about 1% higher interest. When you're talking about a $100 million project, that's a very significant amount."

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