Puerto Rico wages are lower that the lowest state, Mississippi. An argument can be made that Puerto Rican wages are TOO HIGH, based on the low productivity and inefficiencies in conducting business with the government in PR.
Bureaucracy is the enemy of growth
Puerto Rico dropped a place in the World Bank’s Ease of Doing Business ranking.
Sunday, October 27, 2019 – 8:52 AM
He was 26 when he decided to try his luck as a businessman and opened a restaurant. He pooled his savings with those of his parents and rented a place in San Sebastián that had already housed a business like the one he was interested in opening. That way, he thought, it would be easier to get the permits needed to operate his small business.
His strategy, however, resulted in eight months of bureaucratic juggling, dubious offers and “unnecessary” expenses that nearly wrecked the business venture.
“We ended up spending about $6,000 on permits alone and lost many months because we couldn’t open until everything was done,” said the businessman, who preferred not to be identified.
As part of the long and complicated process, the government prohibited him from using gas for the restaurant’s stoves and ovens, even though most of the food businesses nearby- all with similar infrastructure – did not have the same restrictions in that sense.
However, right after gas was restricted for his restaurant, a man showed up offering “a solution to the kitchen problem” and that called the attention of this entrepeneur.
“Then, I learned that if you don’t have a godfather here, things don’t move forward,” said the businessman who later opened two other restaurants. He said that according to his experience, at best, the permit process takes four months.
“If you don’t need a special request, there’s no reason for the process to take more than a week,” said former Chamber of Commerce President Kenneth Rivera.
Such a situation is far from being an exception in Puerto Rico. Usually, the island’s economic development is trapped in layers of complicated and costly bureaucratic processes, based on outdated information systems and amid government requirements that date back to the times without the internet or modern computer systems.
These problems are widely portrayed in the World Bank’s Ease of Doing Business report on 190 jurisdictions around the world. Puerto Rico ranked 65th in the last report released last Thursday. This means Puerto Rico dropped one place down in the ranking since last year. This ranking serves as a guide for many companies to determine where to invest when they want to expand their businesses.
“We’re not satisfied with that at all. It shows us there is still a long way to go,” reacted Economic Development and Commerce Secretary Manuel Laboy in an interview with El Nuevo Día.
“We may think that the island is in the first third of the ranking and that is good, but we have to think that, when looking for a place to invest at international level, companies don´t generally look at the country that is 60 in the ranking, but they look at those in that top thelist,” Rivera said.
The island’s position in that ranking comes from a system of scores on specific issues such as the ease of starting a business, obtaining construction permits and registering a commercial transaction, among other issues.
The good and the bad of Puerto Rico
In recent years, Puerto Rico showed a substantial improvement in the indicator that measures the ease of claiming a breach of contract due to the digitization of the filing and administration systems. Also, the island shows good rates in the accessibility to credit and in those processes to solve insolvency problems. However, Puerto Rico shows limited competitiveness in the rest of the factors evaluated by the World Bank.
For example, according to the World Bank, the island’s power grid shows a deterioration compared to other jurisdictions. The island ranked 69 in the energy area in 2018, but the report released Thursday places the island at the 92 place, mainly due to the cost of energy in Puerto Rico.
Despite alleged attempts to simplify the tax system and streamline processes in the Land Registry, the island shows the worst indicators in these areas among the 190 countries evaluated.
And the deficiencies are serious. On average, registering a real estate transaction in Puerto Rico takes just over six months. Singapore does the same in five days. Recently, representatives of the Department of Justice explained to the Oversight Board members that updating this system could take more than a decade.
Similarly, an entrepreneur has to pay contributions in 16 instances during a regular year, he or she invests about 218 hours in the process and pays rates that represent 63.4 percent of the company’s profits. In contrast and according to the World Bank, in New Zealand, a company only has to make seven payments, invest 140 hours and pay fees equivalent to 35 percent of its profits.
For Rivera, the tax system is extremely complex. The island’s Internal Revenue Code has more than 300 exclusions. That’s more than a hundred over those in the U.S. federal system, which is globally considered as a complicated tax scheme.
As for permits, there are also many differences. A construction permit in Puerto Rico requires 22 processes and takes about 165 days. Hong Kong, on the other hand, requires eight processes that take 69 days.
A permit process with a special requirement, for example, a zoning change, that´s understandable, Rivera said. “But if you’re going to open a business in the right zone, it shouldn’t be so slow. One week should be more than enough,” he insisted.
The problem is not in the human resources the government has to provide services and help move the economy. According to estimates based on the Census Bureau community survey, by 2017 Puerto Rico had 6,473 public employees per 100,000 inhabitants, while in the U.S., the sixth most competitive economy on the planet, is 6.442 per 100,000.
“The problem is that over the years there have been layers of bureaucratic processes that undermine the possibility to provide fast services while complying with the regulations,” Laboy said. “I think the most important thing is to re-engineer processes and change the way things are done.”
The other big issue to overcome is that culture in certain government offices where they resist the changes that need to be implemented. Laboy did not mention specific agencies and just noted that, sometimes, they face reluctance to new systems or changes.
“There is also a culture that we have to transform. There are excellent officials, but in certain instances, there is a culture that has to be changed to respond better,” Laboy said.
Economist José Alameda said that in the re-engineering process it is important to see the detail of the changes because sometimes bureaucratic processes seek to protect or prevent issues that might be environmental, social or associated with planning. For example, some of the processes seek to avoid constructions close to the sea, such as those affected by coastal erosion problems.
“If the government is very permissive and you have construction or planning issues, correctly, then eventually you will have more problems and more expenses due to the consequences of those bad decisions… Economic development cannot distort the social value of natural resources,” said Alameda.
Others move faster
Rivera said the problem of competitiveness does not necessarily affect the way public services are provided in Puerto Rico, but that other jurisdictions have found ways to be more efficient and more competitive than the island.
For example, over the last three years, Puerto Rico has barely registered changes in importing or exporting processes. However, during this period, the island has gone down six places in the category that measures the ease of doing business internationally.
“Other countries are improving and we are not. That’s what’s frustrating,” he said.
He recalled that all government administrations, in the last two decades, have announced ideas or projects to solve bureaucratic and administrative problems in critical areas -such as property registration, the permitting system, the power grid, among others- without achieving major transformations.
“Politicians think in the short term… They just pretend they do things and that’s it. There is no intention to change things. For them, what is important is publicity and projecting that it works, even if it doesn’t work. That leaves us in the same predicament without changes,” said Alameda.
Improvement on the horizon
Laboy, however, hopes that this will change and that next year, Puerto Rico will be in a better place in the World Bank´s report since they are implementing new processes, especially in the area of permits. The World Bank will start evaluating countries for the 2021 report in a few months, the official said.
According to Laboy, changes that would allow licensed engineers and inspectors to certify part of the permitting process without the intervention of government officials will soon come into effect. This will reduce the time it takes to get a permit, Laboy said.
Similarly, the 18 municipalities with the autonomy to handle their own permitting system adopted the joint regulation along with the state regulation to administer the processes. Similarly, these municipal offices are joining the Unified Information System (SUI, Spanish acronym) of the Permits Office. This way, all the cases will be under the same platform. This will facilitate the transition to a portal that will result in a faster process for applicants.
Laboy also stressed that the revitalization of the Electric Power Authority (PREPA) is underway, despite significant increases in energy costs as a result of renegotiation with the utility’s creditors. The cost of energy was one of the factors that caused the loss of competitiveness of Puerto Rico.
Part of these initiatives respond to the fact that, in the fiscal plan that directs the government’s finances, there is a specific section with goals to improve the business climate in Puerto Rico.
The goal set by the Board is that, by 2023, Puerto Rico will be at least 57th in terms of ease of doing business in the World Bank report. This goal seeks for initiatives to focus on construction permits, property registration, tax system, and improving and reducing the cost of the power grid.