High hopes for low-interest loans.

• Author: Luxner, Larry

WHAT COULD A CORRUGATED box factory in Dominica, a pharmaceutical plant in Costa Rica, a bauxite extraction facility in Jamaica and a luxury hotel in the U.S. Virgin Islands possibly have in common? Besides creating jobs and pumping cash into the Caribbean Basin's recession-plagued economy, each of these projects - and a dozen more throughout the region - has been financed through Puerto Rico's uniquely creative and highly sought-after 936 program.

Conceived in 1985 by Puerto Rico's Governor Rafael Hernandez Colon, the program has made available more than half a billion dollars in low-interest loans to eight Caribbean Basin Initiative (CBI) member countries. It is based on Section 936 of the U.S. Internal Revenue Code, which exempts companies from paying U.S. income tax on profits earned by their Puerto Rican subsidiaries. In order to qualify, countries must sign and ratify tax information exchange agreements (TIEAs) with the United States government.

Initially, the 936-CBI link took a long time getting off the ground because of bureaucratic confusion in both Washington and San Juan. But in the last two years, thanks to a much streamlined process and the forthcoming North American Free Trade Agreement, Caribbean governments have rushed to sign TIEAs in order to reap the benefits of low-interest money. "Despite all the obstacles," says Carlos Ubinas, executive vice-president of Paine Webber's Puerto Rico operations, "for projects that meet the requirements, 936 is the cheapest private-source funding in the world."

Because of Section 936, it is estimated that from $8 to $10 billion is deposited in Puerto Rican banks by U.S. and foreign companies manufacturing there. Antonio J. Colorado, Puerto Rico's affable 52-year-old secretary of state, remarks "the CBI connection has been a very important factor in saving Section 936." Some critics in Congress have claimed that the program is a drain on the U.S. Treasury. Colorado refutes this, pointing out that without the tax incentives many companies would have moved their operations to the Far East.

In addition to preserving jobs at home, Puerto Rico has promoted 92 production-sharing or "twin-plant" projects in 12 CBI countries which have created more than 20,000 jobs and generated $800 million in investment. At least a dozen of these projects have received 936 financing to date and Colorado says that by the beginning of next year, more than $800 million in 936 funds will have been approved to...