Changing government's course in Puerto Rico.

Q: First of all, can you explain your plan to reinvent Puerto Rico's government?

A: We have, in Puerto Rico, developed for decades along the lines of a model of an ever-enlarging government, getting into all sorts of sectors and enterprises and ending up with a huge government which accounts for about one in three workers in Puerto Rico.

It also has given us a very clear picture of what happens when government goes into certain businesses that are competitive businesses. A major example is our shipping line, which is government-owned and which, over the course of 20 years, had multi-million dollar losses, which the people had to absorb and which put the fiscal situation of the government in a precarious position.

What we mean when we say we want to reinvent government, we are talking about, one, a restructuring of government into a more compact, responsive, and redefining role as a facilitator, not as a competitor, with the private sector, and also not as an obstacle to development.

It means divesting our huge government of many of the activities that it was doing, particularly those that have to do with enterprises in the competitive private sector, for example, shipping our agricultural enterprises like pineapple and sugar. We also see no need for the government to be involved as an additional competitor in the hotel business.

In addition to that, we're looking at reinvention of government in the way it does what could be conceived as traditional public functions. For example, we have embarked on a privatization process for our correctional facilities, form the design, building, and operations of correctional facilities in Puerto Rico.

We are even looking at private management of our major public corporations like our sewer and water utilities.

Q: In your reinventing of government, do you foresee merging some of Puerto Rico's authorities?

A: While we are not looking at this moment at a process of merging those authorities, we are looking at areas where they can collaborate.

For example, in the billing process, we think we can get the billing through the same system, one system; we're looking at the service aspects, the offices. Each one of the authorities have different offices for services.

Q: How do you see the future of Section 936? Are you concerned about what might be coming from the United States in the next few years?

A: I'm not concerned because we have redefined our economy and we will be able to develop our economy in a different context. I would suggest a major change in our vision.

Our economy has been overly dependent on a single tax benefit, which is Section 936. What we're saying is there are many factors that influence that bottom line. One of them is tax incentives, but Puerto Rico can no longer depend exclusively on what could become a crutch if used indefinitely.

That means that we have to develop our physical and human infrastructure, which is our educational system, and train our people for what is going to be a very competitive global economy. We have to look at local incentives similar to what we're doing in our tourism industry. So 936, fine, it's there. We will use it but we will not be caught in a situation where we're dependent on 936.

Q: Is Puerto Rico's credit rating fair?

A: I think so. We're pleased with the ratings that our bonds have.

Q: Is your plan to reinvent government designed to improve the credit rating?

A: Absolutely. We feel that as we build this new concept of government, that government will be less vulnerable to major losses or major burdens from nonproductive types of endeavors that the government has acquired along the line.

For example, when we lop off a complete health system, which is government-based, and instead go through the private market in a competitive fashion to get insurance for our people, we feel that will strengthen our fiscal situation and therefore have a very positive effect on our bond rating.

Q: What's the best way that a governor can improve the economic life of the state?

A: I think every state comes from a different baseline. If we compare, for example, Hawaii to Puerto Rico, we're starting with a gross product contribution to our budget from tourism which is 6% and in Hawaii it's close to 90%, so our emphasis on tourism would make sense here because we feel that we have a potential to grow.

We feel Puerto Rico has a major competitive advantage when you're looking at trade within the American hemisphere because here in Puerto Rico we have a confluence, not only geographically, but culturally and linguistically.

Part of our strategy has been to open up offices which establish the presence of Puerto Rico stateside in Chicago, New York, Washington, Philadelphia, New Jersey, Florida, and also in some of the Latin American countries like the Dominican Republic, Mexico, and Panama and some others that we're considering.

Q: If an investor wanted to find out from you what is the best reason to invest in Puerto Rico bonds, what would you tell them?

A: The best reason is that historically and as a projection of the future, you have [financial] instruments that are very safe, that have very high yield, and that Puerto Rico has demonstrated an incredible stability.

Q: The big news this year, one of the big stories in Puerto Rico, has been the drought. How bad have the commonwealth's finances been hit by it?

A: It undoubtedly will happen again -- the drought, not the water rationing, hopefully. There's no question that this had some effect in the general economy, but a very minimal one. In the year ending June 30, we had a decrease of 1% from what our growth was projected. So we feel there was some influence there. It was projected by the board also that if the rationing continued the projections for the next year would have to be revised downward 4%.

But in actual practice, we haven't seen a decrease in our projected income for our treasury.

Q: How do you see the role of Government Development Bank changing in the next five years, or will it change?

A: The bank is now our umbrella agency for the whole fiscal sector, and we've put under that umbrella the other governmental agencies.

On the development side, we've done the same with an umbrella department for economic development and commerce.

Q: It seems that the Government Development Bank and the government seem to be working a little more closely than in the past, is that accurate?

A: We're very fortunate that, in addition to the structural changes, which I think have helped, we do have a very good group of individuals that are heading those groups, and I think there's tremendous interplay and confidence between the major players.

Our Treasury Secretary, for example, doesn't see himself as just a tax collector, and I think that's a major change. He sees himself as a partner in the economic development of Puerto Rico, and so I think that observation about the relationship is a very astute one because it's not obvious but is true.

Q: Lastly, do we get to see in our lifetime a 51st state in Puerto Rico?

A: I'm very confident that will happen, and I'm confident that will happen before the end of this century.

Why am I confident? I'm confident because, one, it's a historical movement, that if we look at it, step a few steps back and look in 1952, the commonwealth had 85% support, statehood had 1%.

We had another point in that road in 1967:; Commonwealth had 60% and statehood had 39%. In 1993 we had our plebiscite and it was a two-point difference, 48% to 46%. I also feel that in a sense we were too native when we designed our plebiscite. We allowed the political parties to define their own formula.

I'm confident that we will get that opportunity, and the people of Puerto Rico will petition for statehood.

Q: AND A: with Pedro Rosello, Governor of Puerto Rico

Most of the news out of Puerto Rico this year has dealt with one topic, the weather.

Since May, the island has experienced one of the harshest droughts in its history. Fortunately, some rain has freed Puerto Rico from the rationing that had to be imposed this summer, and Gov. Pedro Rossello says the island will be ready the next time something like this happens.

He also hopes that by the time the next drought occurs, Puerto Rico will be a state -- not just a territory -- of the United States.

Rossello was elected in 1992 by one of the widest margins any governor in Puerto Rico has won in the past 20 years. Since 1991 he has served as the chief spokesman and leader of Puerto Rico's prostatehood party.

Last November, the island held a plebiscite to decide whether it would remain a possession or become a state. Statehood lost, but Rossello is hopeful that the issue will be quickly resurrected.

The commonwealth faces some other issues as well. For example, there are questions about the U.S. tax code's Section 936, which helps corporations doing business in Puerto Rico. Rossello was known on his island long before he got into politics. He first gained acclaim when, as a student of the University of Notre Dame, he won the men's national collegiate tennis championship in 1966, the same year that he graduated magna cum laude.

In 1970 he graduated cum laude from Yale University's School of Medicine and was the president of his class.

At the first Puerto Rico Tax Exempt Credit Review Conference, Rossello spoke about his plan to reinvent government in Puerto Rico. Following his speech, he spoke to Boston bureau chief Patrick M. Fitzgibbons about his vision of Puerto Rico.

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