How are Puerto Rican towns incentivizing small businesses?

This is a solutions journalism article, a rigorous practice that covers responses to social problems. This article was made possible thanks to the support of Solutions Journalism Network.

Juan Parra returned home from Silicon Valley, San Francisco, with the idea of starting a business. He had spent eight years away from his native Puerto Rico, when Hurricane Maria’s aftermath triggered his desire to be near his family and contribute to the economic development of the archipelago. “My mindset was that this was an experiment that I was going to do for two years, to see what it was like... Entrepreneurship was what made us say ‘We're staying’,” he said in an interview with 9 Millones, assuring that his business’ success allowed him to stay and raise his family in Puerto Rico.

The company he founded with Aldo Briano, Skootel, surpassed 3 million scooter rentals in January since its founding in 2019 and has expanded into six towns.

Parra and Briano's network of contacts became the “angel investors” who provided them with the capital needed to get started. When it was time to expand, however, Skootel knocked on the door of an unexpected ally: the Municipality of Ponce, which opened a municipal bank in 2021 and granted a low-interest loan. “For us, it meant not only staying in business, but really becoming a 100% Puerto Rican company... moving from using U.S. technology to using our own technology,” Parra said.

In contrast, Joscellyn Morell Pérez had no potential investors in her immediate network; she opened her business in Ponce with a personal loan. She decided to start her own business because her work schedule at a multinational optical store prevented her from attending church services on Saturday that bring her joy, she said. Spending more time with her family and earning a fairer salary led her to quit. “The way I stayed in Puerto Rico was opening my own optical, and not having to leave like my siblings left.”

The City of Ponce supported her by covering three months' rent, as well as the water and power bills, under their Relocation and Growth Program. This allowed her to make improvements, Morell Pérez explained during a visit by 9 Millones at her optical shop, JM Infinite Vision. 

Paying the first three months' rent—a benefit Morell Pérez received—, offering low-interest loans—which benefited Parra—and exempting companies from paying a portion of taxes are some of the incentives offered by cities, such as Ponce, to small and medium-sized companies (SMEs), in an effort to attract capital investment.

9 Millones reviewed the eight municipalities with the most new SMEs to analyze which practices were contributing to this trend. Guaynabo, Dorado, Bayamón, Ponce, Aguadilla, Arecibo, Caguas and Mayagüez are the 8 municipalities that created the most new SMEs from 2018 to 2022, according to data from the U.S. Census Bureau's Economic Surveys. Among them, six municipalities have incentive programs, which help people to become entrepreneurs in Puerto Rico.

However, the number of new SMEs does not necessarily reflect that municipal programs performed well. For economist Ricardo Fuentes, this data shows that new SMEs in Puerto Rico are concentrated in the most populated and inequitable municipalities. “A larger population implies more potential demand; inequality means that there is a segment with high purchasing power, which opens up niche markets,” Fuentes observed. 

Excluded from this list are San Juan and Carolina—both of which had net losses of SMEs and are among the most populated towns.This could be because the market is saturated, the cost of doing business is higher, their economies depend more on tourism (which was affected by the COVID-19 pandemic), or that their municipalities do not have ideal practices for SMEs, according to several sources consulted. 

9 Millones contacted both municipalities for comment, but their staff did not respond before publication. Both governments launched initiatives to promote entrepreneurship in 2024 (a time period later than the one examined by 9 Millones, which is also as far as Census data is available).

Although the growth of SMEs may be due to geographic location and demographic traits, there are other factors. Another possible reason is critical infrastructure, such as hospitals and ports. Also, each city's promotional strategies influence this growth. Five of these municipalities have a division dedicated exclusively to Economic Development, while four of them provide accessible information on business development programs.

"What we observe in this assessment is evidence of a transformative mindset in municipal government. These twelve practices represent a necessary evolution: from being a bureaucratic obstacle to becoming a catalyst for entrepreneurship," was the reaction of Denisse Rodríguez, executive director of Colmena66, a program of the Puerto Rico Trust for Science, Technology and Research.

Dahil Colón Arbelo, economist and professor at the University of Puerto Rico Mayagüez Campus (RUM), agreed that the 12 practices evaluated are positive because they reflect institutionalism. However, she made the caveat that, in order to be effective, they must promote transparency, accessibility and continuation.

Entrepreneurship: a way to remain on the island?

Starting a business can be a way of choosing to remain in Puerto Rico. Successful SMEs generally respond to the local community’s needs, generate jobs and income, and revitalize the city by attracting a greater flow of people, or by offering services and innovation that improve resident’s quality of life. 

“My options were to start a business, or leave the country and start from scratch,” said a Bayamón businesswoman. 

In total, 44 founders of SMEs participated in the convenience sampling, which 9 Millones conducted between May and July. 86% of participating founders see entrepreneurship as a way to stay in Puerto Rico. “Working for an employer in Puerto Rico is almost synonymous with working long hours and earning poor wages,” answered a San Juan resident, self-employed in the arts, leisure and entertainment industries. 

Not all participants said that entrepreneurship is something that helps them stay, especially because they could be entrepreneurs anywhere in the world, or because they have not received help from the government; on the contrary: at times, they think that the government makes it more difficult.

95% of businesses in Puerto Rico are SMEs, representing 44.6% of the country's jobs and 8.8% of the gross domestic product, according to the 2021 report on the status of SMEs in Puerto Rico, prepared by the Department of Economic Development and Commerce (DDEC, in Spanish). 

Despite their importance, SMEs are not always a priority for the government, which focuses public policy on manufacturers or large chains, “following the logic that they represent a quick and visible source of investment and employment,” Colón Arbelo said. However, in many cases, the promised volume of employment does not materialize or is not maintained long-term, while SMEs tend to have a more direct and deep-rooted impact on local development, she noted. 

“Microenterprises are a job-creating sector, but [public] policies are still not designed for them,” agreed the founder of Consultores Comunitarios, Nelson Reyes, in an interview with 9 Millones. Microenterprises have seven or fewer employees and a gross income of less than $500,000, as defined by the Law on Support for Microenterprises, for Small and Medium-Sized Business Owners (Law 62 of 2014).

The need for equal opportunities

In 2021, the City of Ponce reformed its entire incentive system. Before then, the municipality had not issued a single decree since 2013, said Carlos Santos Rosado, manager of the Ponce Onboarding program, to a group of self-employed workers and founders of SMEs participating in an orientation to open their businesses in the so-called Pearl of the South. In 2013, the municipality granted a decree of 70% exemption from construction tax to a Macy's megastore, which promised to invest $23 million in construction and create over 200 jobs. 

In a conversation with 9 Millones, Santos Rosado explained part of the motivation behind changing this public policy: “A small business would come along, and if the owner didn’t know the right people [no tenía pala], they wouldn’t receive any assistance. It was a problem because it wasn't equitable. With this program, we give everyone an equal opportunity.” 

As of mid-August, the municipality had approved 103 decrees, according to Ponce's director of economic development, Jean Paul González. Most of them were granted to SMEs. González attributed the city’s growth in gross domestic product—from $5.1 billion (in 2021) to $7.1 billion (in 2024)—to this reform. Together, the beneficiary companies committed to investing $738 million and generating 3,315 jobs. 

Medical offices, labs and hospitals are at the top of Ponce’s main priorities, along with pharmaceutical manufacturing companies, technology, and housing projects. These enjoy a 25% exemption from municipal patents, construction taxes, and  property taxes. The decree is supplemented by additional exemptions, depending on the location from which the business operates and the amount of investment involved in the project. Locations in the urban center and port area have a 40% exemption, an advantage over other areas. 

Various municipalities differ in vision and strategy when it comes to granting incentives. Guaynabo's municipal decrees benefit medium and large companies that generate over $1,000,000 in sales and will invest or make improvements for a minimum cost of $100,000. 

‍

Meanwhile, two years ago, Guaynabo resumed subsidies for micro-enterprises. “Many times, we had that approach from small business owners who have no credit or have damaged credit; who have no financing options,” said Guaynabo's Director of Economic Development, Julio Abreu, in an interview with 9 Millones. The scope of this program has been limited to about 30 businesses that have received $10,000 from the Community Development Block Grant offered by the federal Department of Housing and Urban Development.

 9 Millones requested the Municipality's analysis for limiting the decree program to medium and large companies, but did not receive a response beforepublication.

Ponce had a similar limitation in its rent and utility payment program, which was barely enough to subsidize 25 companies. However, Santos Rosado reported that they recently managed to sustain this program with their own funds to eliminate that barrier. Now, companies that receive decrees commit to transferring 5% of their tax savings to a municipal fund intended primarily to incentivizing businesses.

‍

“These large companies contribute to the fund so that we can provide incentives to SMEs,” Santos Rosado explained.

Other cities, such as Arecibo, occasionally subsidize micro-enterprises with federal funds, but the subsidies are not part of a long-term strategy integrated into an economic development plan. They generally look like donations limited to a dozen or so companies. Former mayor Carlos Molina celebrated in 2019 that these incentives had helped create 13 restaurants in Arecibo. A municipal employee assured on background that this assistance continues through individual requests to the mayor. The Press Office did not respond to our request for comment prior to publication.

When asked about this topic, Colón Arbelo commented that there is a big difference between having an incentive code and distributing assistance to businesses. "When you don't have clear criteria, you can open the door to corruption and the kind of political patronage we see so much of. ‘I'll give you a voucher or cash,’ which can translate into donations or favors. Of course, there are micro-businesses that have really worked hard and have integrity, but we are opening the door to other types of practices." 

“Many municipalities have programs that fall exclusively under the mayor's discretion,” noted González, the director from Ponce, regarding one of the most notable differences in his city.   

In an attempt to remedy the lack of clear criteria, Edward O'Neill's administration in Guaynabo approved guidelines establishing that donations to micro-enterprises will be granted in order of arrival. Goldsmith Ytalia Valenzuela, owner of Estilos by Ytalia, told 9 Millones that she heard about the opportunity from a client, and later saw the announcement of the opportunity through the municipality's social media. With this assistance, she purchased and imported stones and metals used as raw materials for her jewelry.

The municipal office of Economic Development

Only a few municipalities have prioritized business development and capital investment as they do with other departments. San Juan created an Office of Economic Development in 1997. Caguas formed theirs around the same time. The capital city was also the first one to establish an Economic Development code, with a tax incentive program. Caguas followed suit in 2012.

“We’ve had many municipalities call us, but I explain to them that it's not just about having an incentive code; it's about having a strategic vision for the sectors you are going to promote to create well-paid jobs, and transparency, because that’s how you avoid cronyism or questions about how the incentives were granted,” said Zamia Baerga, director of Economic Development for Caguas.

The so-called Ciudad Criolla approved 11 decrees between 2023 and 2024, according to Caguas' annual incentive report. In total, there have been 120 cumulative decrees since 2012. When questioned by 9 Millones, Baerga acknowledged the limitations in scope, which she attributed both to the precautions they take and to the apparent resistance of SMEs to open their books or meet the requirements. “I think there is resistance because we have a culture where people don't trust the government,” she observed, adding that the municipal government is “very specific” with the areas and sectors it wants to promote in the city.

These figures are a far cry from how Ponce has managed decree approval. The City of Ponce is on track to have approved 150 decrees in three years, an average of 50 exemptions per year. For González, this is due to the processes they have established, including an operations manager and a program manager who are 100% dedicated to this issue, information systems that automate application evaluations, and accessible information to facilitate electronic submissions. "The mechanism is key. We turned the funnel around and chose to simplify the application process," he said. 

Another municipality at the top of the list of most SMEs created is Dorado. The town, which claims to be “the cleanest in Puerto Rico,” appointed a director of economic development as recently as 2021, but 9 Millones confirmed that she was transferred to other duties. “When [entrepreneurs] call me, I give them the DDEC's information and tell them to work with them,” said special assistant Luz Torres. At the request of the DDEC, the municipality grants decrees to foreign investors who move to the city, but it does not have any business incentive programs.

“If you incentivize these other companies, you incentivize capital extraction [and] you have a problem of permanent capital flight in the country,” said Reyes, who is an expert in community economic development. Her call to action is for the government to prioritize sectors that create local wealth by offering them competitive advantages.

Bayamón, despite ranking third on the list, does not have an Economic Development office. Instead, it has an executive assistant to the mayor assigned to economic development in the city. 

In an interview with 9 Millones, assistant Jonathan Figueroa stated that the municipality lacks an incentive code for SMEs, but it does offer a special donation of $10,000 to entrepreneurs who start their business in Bayamón or who have been operating for less than two years at the time of application.

What kind of economy are we incentivizing?

In this context, “municipalities have great potential to support economic growth,” said Colón Arbelo. She immediately clarified that economic development involves improving the quality of education and health, in other words, human development, which has been precarious in Puerto Rico for decades. “Incentives are good, as long as they support growth and can translate into economic development,” she added. In her opinion, transitioning from growth to development requires creating a balance between “serving and producing.”

Just over a third of all SMEs in Puerto Rico are made up of retail trade, accommodation and food services, and healthcare and social assistance enterprises, according to the data examined. For economist Fuentes, this means that “much of the growth of SMEs in Puerto Rico comes from commercial and consumer-oriented businesses, and from services to a poor and aging population, rather than productive or export sectors such as manufacturing or agriculture.” 

“Trade and food tend to require less capital, and they benefit from areas with high foot traffic, but they generate mostly low-wage jobs and are vulnerable to changes in consumer spending,” he said.

In the eight municipalities studied, there are slight distinctions in the industries where people are starting businesses. In Guaynabo and Dorado, most SMEs are in professional, scientific, and technical services. Meanwhile, in Arecibo, Mayagüez, and Ponce, the healthcare and social assistance sector leads the way.

In Ponce’s case, there are special incentives for healthcare companies, which are granted up to 10 years of exemptions, twice the amount offered to other industries. "Ponce had a large portfolio in the healthcare sector, which was growing organically. We decided to grant incentives to create a solid cluster," explained the director of Economic Development, assuring that this sector offers well-paid salaries.  

This year, the City of Ponce has incentivized 21 healthcare projects, including new specialists or those who want to expand or open offices, according to González. Other municipalities, such as Mayagüez, are emulating this with similar initiatives, one of them signed as recently as this year.

Although retail is the number one sector for SMEs in Caguas, the municipality supports a total of 20 sectors, which they believe are ideal for offering a higher quality of life in the city, according to the Secretary of Economic Development. “I want my 20-year-old daughter to be able to stay here,” said Baerga, explaining the reason for diversifying sectors.

“Success, for me, is that in 20 years, when I'm old, my daughter will be by my side,” she added.

‍Journalists Camille Padilla Dalmau, Luis Alfaro and Valeria Román collaborated in verifying the information for this story.

This story is part of the “Así es cómo nos quedamos” [This is how we stay] series on strategies for remaining home. Support the next story by purchasing our limited edition poster in collaboration with artist Garvin Sierra Vega.

‍

‍