Puerto Rico Turns to Surgical Staplers for Economy After Cut

Facing 15 percent unemployment, a shrinking economy and junk grades from the three largest credit raters, Puerto Rico sees a way out with surgical equipment, contact lenses and warm beaches.

An hour and a half south of San Juan, 1,200 employees at Covidien Plc make staplers used in hospitals and the Dublin-based company plans to add 200 more by early 2016. Nearby, CooperVision, a manufacturer of contact lenses, wants to boost its staffing by 350 workers. On the northwestern part of the island, a Johnson & Johnson-owned plant that makes blood-testing devices for diabetics seeks to add 308 people.

The expansions are part of Governor Alejandro Garcia Padilla’s goal of increasing medical manufacturing and the pharmaceutical industry, while also boosting tourism, to stem a population exodus and revive an economy that’s shrunk 14 percent since 2006. The government has limited resources to fund the efforts: The commonwealth and its agencies are already $70 billion in debt as the island moves to raise $2 billion by mid-March through a bond offering.

“To turn around an economy that’s been in a recession for eight years, you’re going to need significant new investment from outside Puerto Rico over a long period of time,” Sergio Marxuach, policy director at the Center for a New Economy, a research group in San Juan that focuses on economic development, said in a telephone interview.

Junk Ratings

While dating back eight years, Puerto Rico’s challenges have worsened with Standard & Poor’s cutting the island’s general-obligation debt to speculative grade on Feb. 4, followed by similar moves from Moody’s Investors Service and Fitch Ratings. Without economic growth, the commonwealth will face difficult choices through rising borrowing costs and pension expenses, according to Moody’s. The ratings company cut Puerto Rico to Ba2, two steps below investment grade.

“We do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends,” Emily Raimes, a Moody’s analyst, wrote in her Feb. 7 report.

The island’s debt has doubled since 2004, according to the Government Development Bank, which handles bond offerings. Officials used borrowing to balance budgets, mostly through sales-tax bonds, while its population, now 3.6 million, declined in every year since at least 2005, U.S. Census data show.

Bond Sale

Garcia Padilla, 42, and lawmakers are working on legislation that would enable the commonwealth to sell as much as $3.5 billion of general-obligation debt to balance budgets, Representative Rafael “Tatito” Hernandez said last week, including $2 billion in its next sale. As a territory, ceded to the U.S. in 1898, Puerto Rico can’t file for bankruptcy protection.

The commonwealth’s job market took a hit in 2006, at the end of a 10-year phaseout of an incentive that had offered businesses outside Puerto Rico tax-free U.S. income for operations on the island. The recession on the mainland that began in December 2007 also hurt Puerto Rico.

Garcia Padilla’s plans to increase job opportunities include a goal of creating 58,400 positions by 2017 in the life-sciences field, tourism and agriculture.

“There’s just enormous manufacturing capacity,” Richard Carrion, president of Popular Inc., Puerto Rico’s biggest bank, said in an interview at his office in San Juan. “Not just on the plant and equipment side, but on the human-capital side.”

Business Incentives

Last year, lawmakers passed measures to encourage hiring by giving small and mid-sized businesses partial reimbursement of salaries paid to certain workers who were previously unemployed; a two-year property-tax exemption for businesses that operate in a building that had been vacant; and energy credits against electricity costs, according to the GDB.

A 2008 tax-incentive law allows Puerto Rico to reduce the levy on large-scale companies to as low as 4 percent from 39 percent to help retain those business and attract new manufacturers to the island, said Antonio Medina, executive director of the commonwealth’s Industrial Development Corp. The government agency works with manufacturing and knowledge-service businesses.

“We have been very aggressive going to the companies, seeing how we can make them grow and what we can do to increase their production in Puerto Rico,” Medina said in a telephone interview.

Government Jobs

Through the jobs act and the island’s corporate-tax incentives, new businesses and companies that are expanding committed in 2013 to create 21,700 positions in the next few years in manufacturing, tourism and small and mid-sized enterprises, Medina said.

Including construction and retail employment, businesses created about 41,000 jobs in the past year, Garcia Padilla said yesterday. Even with those new positions, non-farm payrolls in December shrank by 2.6 percent from the same month in 2012, according to the GDB.

Even though former Governor Luis Fortuno cut the government’s payroll by 17 percent from when he took office in 2009, the government remains the island’s largest employer. There were 256,067 local and federal public workers in fiscal 2013, according to the GDB. That’s more than double the level in the education and health industries, the next-biggest group. Puerto Rico’s median household income in 2012 was $19,515, less than half the U.S. figure, Census data show.

Tourism Opportunity

Tourism accounts for 6 percent of the island’s gross domestic product and the administration wants to bring more visitors to the island by promoting its El Yunque National Rainforest, a half-hour drive from San Juan, and its white-sand beaches dotted with colored umbrellas and palm trees.

Cruise ships originate and dock in Old San Juan, a corner of the city that retains its colonial architecture, cobblestone streets, pastel-colored buildings and 16th-century forts built when Puerto Rico was a Spanish colony.

Expanding tourism will bolster the economy and tap assets that the island already has, Jose Alvarez, 36, a co-owner of Segway Tours Puerto Rico, located in Old San Juan steps from where cruise ships dock, said in an interview at his shop. The company has offered tours through the area for six years.

“It’s probably one of the most important ways to get us out of the economic crisis,” Alvarez said. “We should be using our natural and historical resources.”

Challenging Puerto Rico’s tourism ambitions are all-inclusive resorts in the Dominican Republic and Mayan ruins along Mexico’s Caribbean coast, said Carlos Vargas-Ramos, a research associate at the Center for Puerto Rican Studies at Hunter College in New York.

“It’s a highly competitive market,” he said.

Pfizer, Merck

Puerto Rico’s pharmaceutical industry began in the 1950s, when J&J set up operations, Medina said. Production of medical devices on the island took off in the 1980s, Medina said. While some companies such as New York-based Pfizer Inc. and Merck & Co., based in Whitehouse Station, New Jersey, have reduced operations in Puerto Rico by consolidating plants, the administration is working on finding new tenants for the vacant facilities, Medina said.

“If we do our jobs right, we can turn around our economy by focusing on these areas that are natural fits for Puerto Rico, where we have the human capital to grow quickly,” Medina said.

Bilingual Pool

The commonwealth’s biggest asset is its bilingual labor force skilled in the life sciences, Vargas-Ramos said.

“You have a highly capable and experienced workforce that can definitely provide a lot of talent in those areas,” Vargas-Ramos said in a telephone interview. “It behooves the government to pursue that strategy. It’s also an opportunity for the government to maintain that talent by keeping it in Puerto Rico.”

The commonwealth’s business incentives, including some established under Garcia Padilla, aided Covidien’s decision to invest $3 million and promise to add 200 new jobs at its Ponce facility in the southern part of the island, according to John Jordan, a company spokesman.

“Our footprint is already established there,” Jordan said in a telephone interview. “We already have an employment base that is committed and takes pride in making quality medical devices.”

The Ponce facility helps make the company’s most successful product, a range of surgical staplers designed to better fit different tissue sizes.

About a half-hour outside of Ponce, CooperVision, part of The Cooper Companies Inc., is constructing a building and will boost its headcount by 350 workers, Medina said.

LifeScan, Lilly

Further north in Aguadilla, J&J unit LifeScan Products LLC is renovating a facility and plans to add employees as part of a $226 million expansion, Medina said.

In November, Indianapolis-based Eli Lilly & Co. said it would expand its insulin-producing operations in Carolina, on the northeastern part of the island. The $200 million development will create 400 jobs, Medina said.

Puerto Rico’s growing medical manufacturing industry lured Hector Toro, 24, back to the island after he graduated from Rensselaer Polytechnic Institute in Troy, New York.

Born and raised in San Juan, Toro makes $60,000 a year and receives health-insurance benefits and paid vacation as a product-development engineer at Medtronic Inc.’s facility in Juncos, in northeastern Puerto Rico. The Minneapolis-based maker of medical technology plans to add 150 jobs at its two facilities by the end of 2016 as part of a $6 million expansion.

While Toro, who helps design insulin-infusion sets, could’ve made more money on the mainland, he said he wanted to give back to his community and also be near his family.

“It’s a great opportunity,” Toro said in a telephone interview. “Plus, it’s something that could eventually help the economy in Puerto Rico.”

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