Services

Some recent events are highlighted below:

  • Abertis, the international group in the telecommunications and infrastructure sector, inked a collaboration agreement with University of Puerto Rico (UPR) to promote research and knowledge transfer in the area of infrastructure. The program will be implemented in UPR’s Mayagüez campus where civil engineering professor Benjamin Colucci will hold the Abertis chair. Creating these chairs is an initiative that already exists in Spain, Chile and France.
  • After two years of intensive work and $414 million investment, the Ritz Carlton flag inaugurated the first Ritz Carlton Reserve of the Americas on 12-12-12. The high-end hotel has 115 rooms and 13 luxury suites in 32 acres of beach land in Dorado, with 303 employees. In addition to the coastline, the hotel has a botanical spa and a golf course by designer Robert Trent Jones. Room rates fluctuate between $1,200 and $1,600 per night and the restaurants are in charge of the well known Spanish chef José Andrés.
  • The regulators’ approval of the Oriental-BBVA $500 million transaction was announced in mid December 2012. According to Oriental, the agreement was approved by NY Federal Reserve and the FDIC, as well as by the local Commissioner of Financial Institutions. Oriental raised $161 million in stocks and will provide $350 million from its own resources.
  • According to consulting firm Estudios Tecnicos, Inc. (ETI), the export of services is considered as an area of opportunity and Puerto Rico should strengthen its efforts in promoting knowledge exports. In a workshop held on November 29, 2012, ETI senior staff made the point that there are service export opportunities in 2013 in the areas of health, education, construction management and technology, among others.
  • New airlines have joined the Puerto Rico market, including Southwest Airlines that recently purchased Air Tran and announced an increase in routes and frequency of service. American Airlines, in the meantime will bring American Eagle services to an end and Iberia has announced that it will discontinue its San Juan-Madrid service early in 2013.

An overview

The economy of Puerto Rico has decreased at -0.5% rate between 2001 and 2011, and at rate of -2.8% from 2007 to 2012. Official Fiscal 2012 figures are not yet available, but local consulting firm Estudios Técnicos, Inc. (ETI) projects a modest contraction. The most recent scenario, calculated as of December, 2012, places 2020 as the year in which Puerto Rico will return to the 2006 level of real GNP.

Considering the most recent available figures on employment, the unemployment rate has settled at around 14.0%, but the Labor Force Participation Rate is at its lowest ever in November, 2012, 39.2%. What is of concern is the fact that comparing November 2012 with the same month in 2011, manufacturing employment went down by 5.2%.

The Service sector, that generates 34% of total jobs, is the one with the smallest reduction in jobs during last five years, something that is also reflected in the composition of enterprises in Puerto Rico. The trend has held up in the last quarter of 2012, with services such as education and health basically holding their own in terms of employment.

In 2004, the Service sector had 21,550 establishments, or 46.2% of total establishments; while in 2009 Services accounted for 22,954 units or 50.4% of the total. The total number of Service enterprises between 2004 and 2009 experienced a 6.5% increase. ETI anticipates that this trend will be maintained through 2012 and the following three years. Firms in health care, technical and professional services and Information technologies experienced the fastest growth.

In the time period after 2007, great emphasis has been placed on the service sector as a whole and its possibilities both for the local and exports markets. The Island’s service sector is made up of a great variety of activities that deserve detailed analysis. The following section addresses trends in some of its components, some of which are the subject of separate treatment in the Business Register.

Four Key Service sector components

Banking

The banking industry in Puerto Rico has undergone a major consolidation in the last three years with the assisted sale of Westernbank, R &G and Eurobank, and in 2012 the acquisition by Oriental Bank & Trust of BBVA’s Puerto Rico operations for $500 million. This transaction reduces the number of banks in the Island to seven (Popular, First Bank, Scotiabank, Doral, Santander, Oriental and the newcomer, Banesto). Banks continue to be affected by economic conditions that in the last quarter of 2012 has meant a reduction in deposits for the banking sector as a whole, very high delinquency rates of close to 15% in mortgages and 60% for construction loans. The mortgage delinquency rate is at a historically high level, and is way above the average of the last two decades, below 3.0%. At the end of 2012, the banking system had close to $20 billion less in assets than in 2008. Loans fell in the same period from $60 billion to $48 billion and mortgage originations fell from $6.6 billion in 2008 to a bit over $4.0 billion in 2012. All in all, 2012 closed with a much smaller banking sector.

Leisure and tourism

At the end of 2012, preliminary figures from the Puerto Rico Tourism Company announced indicated that hotel occupancy in the San Juan Metro Area was 100%. Likewise, towards the end of the year a number of hotel projects were announced, including Hyatt Place establishments in Bayamón and Manatí and new municipally sponsored hotel projects in Guaynabo and Camuy. Red flags have been raised concerning the multiplicity of hotels in locations with no particular attractions. In the case of Manati and Bayamón, both are large and growing medical services sites and have potential for medical tourism. The industry was optimistic that the new Administration would submit legislation to create a Destination Marketing Organization (DMO). Although the above would seem to indicate continued growth in the sector, there are some negatives to contend with. One is the announcement by Iberia that it would discontinue the San Juan-Madrid route. Nevertheless, the optimism concerning prospects for the tourism sector are at a high point, notwithstanding the risks present in the local, global and regional context.

Technology

Three companies in Puerto Rico were chosen to be part of a pilot project sponsored by the Federal Communications Commission (FCC) to promote adoption of broadband by low income individuals. The announcement made in December mentioned that the three firms are Claro, T-Mobile and Open Mobile. INTECO, a regional initiative that incudes eight municipalities had received a multi-million dollar grant from the federal government to install broadband in the region. The project was launched in December of 2012, although much preparatory work had been done earlier. New studies carried out by local consulting firm Estudios Técnicos, Inc. continued to show a faster than expected growth in Internet access, making it possible to reach 55% penetration among the adult population in the next two years. Liberty Cable finalized its acquisition of One Link Communications for $585 million.

Health services

There was a huge sigh of relief in the health services industry in Puerto Rico when President Obama won the elections in November because it makes it much more probable that Puerto Rico will receive $600 million annually for health programs beginning in 2014. Industry analysts have a consensus that hospitals stand to benefit from the Affordable Care Act, reflected in the fact that hospital stocks increased soon after the election. Locally, the hospital industry has been hurt by increased energy and labor costs and the implementation of the Affordable Care Act will provide much needed relief. Local election results will almost certainly bring about an examination of the government’s health reform. Dr. Jorge Sánchez, who was instrumental in the implementation of Governor Rossello’s health reform initiative and subsequently chaired Governor Acevedo Vila’s Commission that evaluated Puerto Rico’s health services system, has been appointed Senior Adviser on health issues by Governor Alejandro García Padilla. He will oversee the implementation of the PDP’s health platform that includes integrating the different components that make it up: The Department of Health, The Health Services Administration, The Mental Health Services Administration, the Medical Center and various other health services in different agencies.

Perspectives

The Fortuño Administration approved legislation to promote the export of advanced services. This initiative responds to global trends towards increasing importance of intangibles in trade. It also recognizes that Puerto Rico has a significant competitive advantage in the region with respect to services in a broad array of areas, including the four mentioned and other such as insurance, environmental services, construction management and validation and automation. The García Padilla Administration, although providing manufacturing with a higher priority than at present, will continue the efforts to promote the export of advanced services.

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