РефератыИностранный языкCoComparative Analysis Between Puerto Rico And Rupublica

Comparative Analysis Between Puerto Rico And Rupublica

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


agreements with two multi-national corporations, Wartsila Diesel and


Mitsubishi, for the generation of electrical power. In addition, a


Spanish firm was contracted through the CDE that provided technical


and administrative support to the CDE for a year (1994-1995) in


hopes to turn things around.


The government’s last attempt to solve the problem was through


legislation. Law 14-90 was a government promotion the sale of


electricity generated by private plants and creating the National


Council of Power Development [Aristry, Dominican Republic]. This law


was later revoked by a tax code passed in 1992. Privatization is still desired for the CDE.


-Compania Dominicana de Aviacion (CDA): this is the national


airline. It was at one time a high priority on the privatization plan


because neither the airline had the necessary equipment to cover the


routes nor the funds needed to pay its debts. Fortunately, the CDA


signed an agreement in 1993 with Air Europe. This private group


operates five flights per week. It has also received an offer by the


Russian airline, Aeroflot, but nothing definite.


Included in the privatization of the national airline was the


Aeropuerto Internacional de Las Americas (AILA). This is the


country s largest airport. This achieved privatization of the ramp and maintenance services. They were bought by a subsidiary of American Airlines in 1991. Other services that have been privatized are baggage handling, ground transportation and airplane maintenance.


-Garbage Collection: this service was sold to the private company


Attwoods Dominicana, S.A., a subsidiary of a British company.


Nevertheless, the government due to problems with the company and


the Santo Domingo City Council again seized control of this service.


The mayor of the city accused the private enterprise of deception and


Mafia techniques”. Thus, the company was not paid several monthly


quotas agreed upon for garbage collection [Giraldez, J.].


The privatization process has begun in the Dominican Republic


but at a very slow, unorganized rate. It seems like it has been


occurring spontaneously, without any planning or future agenda.


Their first step towards the ability to privatize is the development of a concrete plan. Included in that agenda is a total restructuring of the government to facilitate a growing and efficient economy. This will necessitate legal reforms and regulations. Without them public monopolies will be replaced by private ones having the same


difficulties and inefficiencies.


Puerto Rico is much farther in the privatization race as well as total industrialization and development. They have both voiced a


desire for it and have instilled plans to attain it. Its future


privatization focus will be on improved lines of communication


between the public and private sectors. This governmental shift will


then allow an alternate source of capital, less responsibility for the


country s GDP status, free market competition, and increase


employment. The government will be able to focus on public and


socioeconomic responsibilities.


The Dominican Republic has only acknowledged the concept of


privatization and had signs of it without intention. They have more


constraints due to its stage of growth. The country must also reform


legislation to include the reduction of foreign investment restrictions to allow equal treatment to domestic and foreign investors, the deregulation of the transfer of public assets (currently rigid limits), and the creation of anti-trust laws that will stimulate private ownership.


Corporate Acquisition and Merger Policy


The conditions for foreign investment in Puerto Rico follow


those of the United States. Of course they are not identical, but


without certain bank policy differences, it compares with the United


States by not placing restrictions on foreign investor actions.


International investors are given the same general rights as domestic


ones.


The Dominican Republic, however, regulated foreign investors


by Law Number 861, also known as the Foreign Investment Law, until


1995. This law required foreign businesses to register themselves


with the Central Bank before official approval to invest [Mera, O.]. It also contained other regulations including a twenty-five percent limit on profits accrued from registered foreign investments, which can be repatriated [Gomez, R.]. The new law encourages greater investment in the country by allowing foreign investment in all areas of economic activity, not requiring investors to register with the Central Bank.


This law also expands the ability to withdraw funds from the country in freely convertible currency. Another enhancement is the easing of previous restrictions on technological transfer agreements.


Puerto Rico has a corporate law mandating corporations to


register by filing a sworn statement, a balance sheet, and a corporate


charter. In order to do business on the island, enterprises have to


keep business records and file an annual report with the state


department.


The only time there have been difficulties in entering Puerto


Rico was with foreign banks. Licensing requirements exist mostly for


financial enterprises. Otherwise foreign investors have minimal


barriers to entry in the market for both corporate acquisitions and


formation of new organizations. However, banks have usually been


denied applications to operate in Puerto Rico unless the bank sets up


conditions where it will contribute to the nation’s economy. Other


licensing rules are present for mortgage lenders, small personal loan


and personal property leasing companies.


Mergers in Puerto Rico are achieved through the approval of


shareholders and board of directors of each of the participating


corporations. The revamped or new corporation can be either a


domestic or a foreign business. If the surviving company is foreign, it must be qualified to do business in Puerto Rico to continue its


operation. Besides the corporate law, no other special regulations


regarding mergers exist.


Laws on acquisitions vary based on if the company acquired is


private or public. The public acquisition is a rather complicated


procedure. Looking at the process of the government who has been


attempting to sell many public enterprises it owns, the government


starts the selling process by requesting bids. That is followed by


separate negotiations with the bidders. The sale cannot just go to the entity with the highest bid. The authorization of legislature is


required. Because of the many factors that are included in the


business deal (employment levels, etc.), both delays and even denials


are likely.


The acquisition of private businesses can be done through the


purchase of stock or assets in that company. The buyer can be


anyone from a single individual to another company or business.


Only foreign corporations have to register in Puerto Rico. Generally,


the government does not play a role in private acquisitions unless the


conduct of business requires a license (financial enterprises). The


exception to this rule is with hotel operated casinos. These hotels


mandate a complete investigation by the Puerto Rico Justice


Department to ensure illegal connections do no exist.


The Dominican Republic does not place specific regulations on


business mergers besides what is listed in their Code of Commerce.


A minimum of seven stockholders is required in the starting of a


business by law. Also, there are fiscal and advertising requirements


that must be agreed upon or the merger process is terminated.


The most common mergers take place in the banking sector. In


this sector, a merger requires the union of two or more banking


organizations as a condition for the provision of multi-banking


systems. If the merger is with two bank entities, they must each have


U.S. $5 million in capital available; three or more entities require U.S. $3 million each [Mera, O.] In addition, the banks to be merged as well as the resulting bank must be identified in some kind of


documentation which contains a description of the manner in which


the merger is being done. Other minor things are needed such as


audited financial statements, business transaction records, and


stockholder meeting information.


Acquisitions in the Dominican Republic involve the purchase of


the entire stock of the corporation on sale. The agreement also


identifies all parties involved, includes the total corporate worth, the purchasers commitments as far as the new corporations liabilities and the court’s role in the case of default.


Another way of acquiring a company is to purchase the


corporate assets only. This way the purchasing party is not liable for the corporation. Buying just the assets involves organizing a


company to purchase the assets and an agreement that in case of a


purchase of a well-known company, that the name can be changed to


avoid public confusion. Once bought by way of either stocks or


assets, there are not any legal ties to publishing or recording the


transaction.


Special considerations exist in both the Dominican Republic


and Puerto Rico regarding corporate acquisitions and mergers. First,


labor laws must be reviewed and accepted. There may be difficulties


with enterprises being able to follow or adhere to the labor laws in


Puerto Rico because they are very protective of its people. Employees


are granted rights to severance, vacation, sick and overtime pay [Work


Force]. In the Dominican Republic, businesses are faced with the


employees’ ability to unionize and collectively bargain.


Taxation is another vital issue. Under the taxation code in the Dominican Republic, two percent of the value of shares assigned


trader will be retained as tax [Mera, O.]. Therefore it will be deducted from the total amount of the sale of the stock. The submission of a retention statement to the internal revenue department must follow this. In Puerto Rico, the tax laws are similar to the U.S. and control many factors of an acquisition. Concerns would be with the liabilities of the intended company, the tax base of the stock or asset being acquired and other taxes (income, excise, property, license, etc.). It should be recognized that Puerto Rico uses U.S. currency and corporations operating in Puerto Rico only have to comply with U.S. taxation on income deriving from the U.S. or connected with business operations in the United States. Puerto Rican corporations and businesses do not pay U.S. tax as well as foreign companies that do business in Puerto Rico.


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