Garcia Padilla Administration seeks full
Jones Act exemption to grow Puerto Rican Economy
The
new administration of Governor Alejandro Garcia
Padilla through
its cabinet secretary for economic development indicated
earlier this month that they would seek a full Jones Act
exemption for the Commonwealth of Puerto Rico as recommended
last year in a report by the Federal Reserve Bank of New York,
commonly known as the New York Fed.
The multisectorial plan involves 15 initiatives, many
of which depend upon more efficient transportation arrangements
for the island including seaborne transportation. The
Secretary Bacó’s Department was formerly the Administracion de
Fomento Economico and still popularly known as Fomento (Spanish
meaning promotion).
The
Jones Act is the popular name for Section 27 of the Merchant Marine Act of
1920, which requires that
vessels be U.S.-built, U.S.-flag, U.S.-crewed and U.S.-owned to
transport cargo between two domestic points.
2012
Election Results
Gov
Garcia Padilla won a closely contested election in November
2012 defeating the incumbent former Governor Luis Guillermo
Fortuño Burset by a
narrow 0.6% margin and assumed office less than three months
ago on January 2, 2013.
The legislative election results
were far more definitive. Gov Garcia’s party, Popular Democratic Party
of Puerto Rico, PDP
(in Spanish, Partido Popular Democratico de Puerto Rico, PPD),
and commonly known as “Populares,” won majorities in both
chambers of the Commonwealth’s Legislative Assembly.
The PDP has a supermajority of 66.67%
in the Senate with 18 out of 27 seats, and a simple majority of
55% in the House with 28 out of 51 seats. Gov Garcia is also a
member of the national Democratic Party.
The
PDP supports an enhanced commonwealth political status for
Puerto Rico similar to that of the Commonwealth of the
Northern Mariana Islands (CNMI), which among other things is exempt from
the Jones Act by the international treaty that led to its
annexation.
Former
Gov Fortuño is a member of the New Progressive Party of
Puerto Rico, NPP
(in Spanish, Partido Nuevo Progresista de Puerto Rico, PNP) and
popularly known as the “Progresistas.” The NPP supports
Statehood for Puerto Rico. Gov Fortuño is a member of the
national Republican Party and while in office advocated a full
exemption from the Jones Act for Puerto Rico.
It
would seem reasonable to assume that any federal legislative
measure to exempt Puerto Rico from the Jones Act, either in
full or in part, would, during the near to medium term, likely
have to be introduced by Rep Pierluisi in the U.S. House of
Representatives in order to achieve any success.
Especially as the other members of Congress will look to the
resident commissioner for leadership on the Jones Act issue as
it applies to Puerto Rico.
Among
the other unique features of Puerto Rico’s political system is
that all members of the Commonwealth’s bicameral Legislative
Assembly – Senate and House alike – serve concurrent four year
terms. As such, the current 17th Legislature of Puerto
Rico will remain in office until January 8, 2017. Candidates
for governor and the resident commissioner traditionally stand
for election together as “running mates.”
The second-in-command
administrative position typically held by an elected lieutenant
governor elsewhere in the U.S., in Puerto Rico is the Secretary
of State, who is appointed by the governor and approved by both
chambers of the Assembly.
There
are a total of six registered local political parties in
Puerto Rico.
After the two main local parties, i.e., the PDP and NPP, the
third most important political party with only a single member
in the Assembly is the Puerto Rico Independence
Party (Spanish
Partido Independentista Puertorriqueno, PIP) popularly known as
the “independenistas.”
Economic
Background
Puerto
Rico’s modern economic history begins after the end of World
War II in 1945 with the sharp decline of the centuries-old and
once mainstay sugar and coffee agricultural industries.
To transition the economy away from agriculture, in 1948 the
U.S. federal government launched “Operation
Bootstrap,”
which invested heavily in the island’s infrastructure and
achieved initial success with introduction of labor-intensive
manufacturing industries.
After the low wage
industries first attracted to the island began moving to lower
cost countries and causing significantly higher local
unemployment, the federal government granted several tax
incentives in the late 1960’s. Those incentives led to
Puerto Rico becoming a haven for the manufacturing operations
of the U.S. bio-pharmaceutical, medical device, electronic and
textile industries.
Those
1960’s incentives and the additional tax breaks added later
were terminated by 2006 leading to the so-called “Puerto Rico Economic
Crisis”
that began in 2005. As reported by Jesse Drucker in Bloomberg on December
19, 2011, “In 1976, Congress added a tax credit that
effectively exempted from federal income taxes the profits that
U.S. companies attributed to Puerto Rico.
The combination of
the break, proximity to the U.S. and plentiful industrial sites
prompted multinational companies to flock to the island, with
medical-device and pharmaceutical makers leading the way.
Companies separately negotiated tax holidays from the Puerto
Rican government.”
“By
the mid 1990s, critics attacked the break as too expensive,
costing the U.S. about $3 billion a year. In some industries,
the tax subsidy was costing the U.S. as much as $72,000 per
job, according to a study by the federal agency now called the
Government Accountability Office. After a lobbying battle in
1996, the tax break was repealed, with a 10-year transition
period for companies already benefiting from the credit.
‘It pulled the rug from under our feet,’ said William Riefkohl,
executive vice president of the Puerto Rico Manufacturers
Association.”
When
former Gov Fortuño took office in January 2008, the
Commonwealth was suffering from the so-called Puerto Rico
Economic Crisis as termination of the manufacturing tax credits
and very large budget deficits. Gov Fortuño and the
NPP-controlled Assembly addressed the crisis with austerity
budgets. During the single Fortuño term, local
unemployment rate rose to 17.2%, approximately 20,000
government employees were laid off, and the total population of
island declined as a result of out-migration.
Garcia
Padilla Administration’s Economic Plan focuses on Shipping
As
Gov Garcia Padilla and the PDP ran in 2012 on a platform
critical of Gov Fortuño and the NPP’s austerity budgets with
the support of the public worker unions and promising to grow
the economy and create jobs; putting their economic plan in to
effect and achieving tangible results over the next four years
is a political imperative.
They also need to deal with the
Commonwealth’s structural budget deficits – the current deficit
for 2013 is estimated to be $1.2 billion, and the solvency of
the Government’s Employees Retirement System that has $37.3
billion in unfunded liabilities. (See Puerto Rico’s pension
system in peril, Fox
News, February 1, 2013.)
In
his interview with Caribbean Business, Secy. Bacó endorsed the
York Fed’s June 29, 2012 Report on the
Competiveness of Puerto Rico’s Economy, which identified the Jones Act is a major
impediment to revitalizing the island’s economy. The New York
Fed recommended Puerto Rico be exempted from the Jones Act’s
for a trial period of five (5) years in the same way the U.S.
Virgin Islands are.
Further
echoing the New York Fed, Secy. Bacó explained that future
economic growth in Puerto Rico will depend on more efficient
transportation. And, he said an important focus of the
Governor’s 15 point economic plan is port development and
capitalizing on the Panama Canal Expansion
Project. The Panama project is now scheduled for completion in 2015 and
will allow for the introduce very large – approximately 13,000
TEU (twenty-foot equivalent unit) capacity –post-Panamax
containerships into
the Caribbean for the purpose of transiting between Asian and
Atlantic ports.
Secy.
Bacó emphasized that the Garcia Administration will move aggressively
to complete development of the languishing Rafael Cordero Santiago
Port of the Americas in
Ponce on the South Coast of Puerto Rico to become a significant
regional port – sometimes referred to as a “megaport,” after the Rotterdam and Singapore
models. In addition, Secy. Bacó mentioned there is also
potential to develop the former Roosevelt Roads Naval Base for
maritime and aviation facilities as part of their economic
plan.
Secy.
Bacó told Caribbean Business, “What we have to aspire to is
making the Ponce port work as fast as possible, so by the time
post-Panamax ships start going through the Panama Canal in
2014, we may have a fully operational port. That will bring
economic activity to Ponce and the whole island. It's not just
a ‘Ponce solution’ because if it is a Saudi Arabian investor
group, for example, they will bring money for manufacturing
facilities. I see so much potential there that we must
not look at it strictly as a port. It's an issue in which we
may be left completely out of the map if something isn't done
quickly, and time is running out.”
In
respect of developing the Port of Americas, Secy. Bacó
continued, “I've already met with the Korean group this past
week in their New York office. They came from Korea with the
sole purpose of meeting with us and they reiterated their
interest, which I found odd. I asked further because I
wanted to delve deeper into the matter, and it turns out time
is running out.”
Then
Secy. Bacó referenced the New York Fed’s recommendation in
respect of the Jones Act, “There are some very important
[points] recommended by the Federal Reserve in a study. These
[include] giving a five-year moratorium on the Jones Act
shipping laws. When I met with the Koreans and asked them what
is the most negative part of operating the Port of the
Americas—that is one of the negatives—the U.S. shipping laws. I
think we are close to the federal government understanding it
is a restriction that has us drowning in certain dimensions.
Therefore, we will push for that in Washington.”
Implications
of Gov Garcia Padilla Administration’s Jones Act Policy
The
five-year Jones Act moratorium for Puerto Rico proposed by the
New York Fed and endorsed by Secy. Bacó on behalf of the Garcia
Padilla Administration would be modeled after the exemption for
the Virgin Islands of the United States since their annexation
on March 31, 1817 and subsequently exempted from cabotage by
Section 21 of the Merchant Marine Act of 1920.(OTR correction: the annexation was by purchase from one colonial power to another, and took place in the year 1917, not 1817)
If
such a temporary exemption from the Jones Act and related
cabotage laws were to be enacted by the U.S. Congress for
Puerto Rico, it would in all likelihood result in a permanent
exemption, as it would be very difficult to re-extend cabotage
laws to the Puerto Rico trade as conditions would have changed
so substantially after the five year period. It is very
likely that after such an exemption were to come into effect,
the domestic trade between the contiguous U.S. and Puerto Rico
would come to be dominated by new entrant international
carriers operating foreign flag ships completely displacing the
incumbent Jones Act operators.
The
only probable exception among the incumbent Jones Act carriers
would be Crowley Maritime, which is one of the four mainline
carriers currently operating in the domestic Puerto Rico trade.
Crowley operates eight large Roll-on/Roll-off (R0/Ro)
trailerbarges on the domestic trade lanes from Jacksonville,
Florida, and Port Elizabeth, New Jersey, to San Juan, Puerto
Rico. In addition, Crowley operates several liner
container services from the contiguous U.S. to other Caribbean
ports employing foreign flag containerships charging significantly
lower and much more competitive freight rates on those
international trade routes.
Although
Crowley would be extremely unlikely to support a full Jones Act
exemption for Puerto Rico, if such an exemption were to be
enacted, they could cover Puerto Rico by expanding their
existing foreign flag services and calling at Puerto Rico in
conjunction with their other ports. As all the Crowley
trailerbarges employed in the domestic Puerto Rico trade were
built between 1970 and 1979, they are well past what is
customarily considered their useful life and therefore would
not represent a large sunk cost if they were to be made
redundant by a Jones Act exemption.
The
New York Fed quantified that the freight rates between the
Contiguous U.S. and Puerto Rico are twice the cost for the same
movements to nearby islands, especially the Dominican Republic
and Jamaica. Additionally, while Puerto Rico’s cargo volume
fell more than 20% over the decade of 2000-2100, there was a
corresponding doubling of volume at Kingston, Jamaica, implying
that cargo is moving from Puerto Rico to Jamaica for onwards
shipment.
The
concept of a establishing a regional port on Puerto Rico to
cover the Caribbean is dependent on achieving the equivalent of
foreign flag freight rates between the Contiguous U.S.
and Puerto Rico, which could only be achieved with a full Jones
Act exemption.
Recognizing the comparative advantages of
Jamaica as a location for a hub port for the reasons identified
by the New York Fed, the World Bank in February 2013 extended
their support to a major regional port development project in
Jamaica.
The
Korean group, which Sey. Bacó referred to in his interview,
also recognized the high cost of Jones Act freight rates as a
barrier to any plans they might have to base their regional
operations on Puerto Rico and possibly participating in the
development of the Port of Americas.
This
is the source of Secy. Baco’s warning that “we may be left
completely out of the map if something isn’t done quickly, and
it turns out time is running out.” Because transshipment
cargo has already moved from Puerto Rico to Jamaica, and
Jamaica is moving ahead with development of a megaport facility
with World Bank support.
However,
at this point in time, It is very difficult to see how the
Garcia Padilla Administration will overcome the U.S. cabotage
barrier to establish the Port of the Americas as a regional hub
port or magaport. Congress is very unlikely to enact a
full Jones Act exemption for Puerto Rico. This despite
Secy.Bacó’s optimism saying “I think we are close to the
federal government understanding it is a restriction [the Jones
Act] that has us drowning in certain dimensions.
Therefore, we
will push for that [a full Jones Act exemption] in Washington.”
The
federal Government Accountability Office (GAO) should release
before the end of March 2013 their report on the economic
impact of the Jones Act on Puerto Rico, which Rep Pierluisi
requested in late 2011. However, the GAO report is
expected to focus on the U.S. built requirement of the Jones
Act and not recommend a full exemption from the Jones Act for
Puerto Rico. Rep. Pierluisi has said that he would be
guided by the results of the GAO report, which may mean he
would be reluctant to support a full Jones Act exemption for
Puerto Rico.
There
is a similarity between the Garcia Padilla Administration’s
approach to economic development and that of Governor Eddie
Baza Calvo (R) of Guam, who assumed office on January 3, 2011.
Gov Calvo announced through his Council of Economic Advisors
his economic development plan on April, 1, 2012, which included
in point (2) “seeking an exemption from the Jones Act to make
the price of everything on the island cheaper.”
Another
alternative for the Garcia Padilla Administration might be to
support the Hawaii Shippers’ Council’s noncontiguous trades – Alaska, Guam, Hawaii
and Puerto Rico – Jones Act reform proposal. In a nutshell, the proposed reform
would exempt the noncontiguous domestic shipping trades from
the U.S. build requirement of the Jones Act for deep draft
self-propelled ships. It does not propose to change the
other Jones Act requirements in respect of the noncontiguous
trades, i.e. that vessels must be U.S.-flag, U.S.-owned and
U.S.-crewed.
---30---
The
Hawaii Shippers Council (HSC) is a business league organization
incorporated in 1997 to represent cargo interests – known as
“shippers” – who tender goods for shipment with the ocean
carriers operating the Hawaii trade.
|
