History

The history of the GDB is intertwined with that of Puerto Rico and its socioeconomic development. The following is a summary of GDB’s evolution within the context of the historic events of the last decades.

Introduction
1940 1950 1960 1970 1980 1990 2000
Galery of GDB Presidents:

 

THE GDB: SIX DECADES OF SERVICE TO PUERTO RICO (1942-2004)

The Government Development Bank for Puerto Rico (GDB) has played a central role in the island’s economic and social development during the past 64 years, contributing to Puerto Rico’s transformation from a poor agrarian economy into the modern, industrialized society it is today.

As Puerto Rico has evolved, so has GDB, adapting itself time after time to meet the island’s most pressing economic and social problems. Through its history, the Bank has proven to be a dynamic institution, with the flexibility and creativity required to generate alternative solutions to the island’s ever-changing needs.

During the early years, the Bank intervened directly in Puerto Rico’s development investing in projects that were needed to get the economy moving but which private investors found too risky. In its later years, GDB has emerged as a promoter and facilitator, helping to create a favorable environment for private sector investments that will generate economic growth.

The Bank has been the catalytic agent in Puerto Rico’s transformation from an agrarian framework into an economy that is competitive in multiple and diverse areas. From promoting, during a specific time in history, an ‘entrepreneur government,’ it came to understand that the government’s role should be more that of a facilitator of processes for private enterprise.

Act 252 of May 13, 1942 of the Commonwealth of Puerto Rico created GDB “for the purpose of carrying out the complete development of Puerto Rico’s human and economic resources.” But the Bank would not acquire its final form until the enactment of Act 272 of May 15, 1945, which authorized it to act as fiscal agent and financial advisor of the central government and its agencies; and Act 17 of September 23, 1948, which includes the Charter of the Bank and established all of its duties and powers.

Initially, GDB was little more than a section of the Puerto Rico Department of the Treasury with a mere handful of employees. Today, the Bank is one of the island’s most important and prestigious institutions, with total assets of $8.9 billion and 514 employees.

As now constituted, the Bank’s primary functions are to act as fiscal agent and financial advisor for the Commonwealth and its agencies and to provide financing mechanisms to both public entities and private enterprises in order to further the island’s economic development. Throughout its history the Bank has undertaken ventures that go well beyond the boundaries we normally identify with banking institutions. When circumstances require it, the Bank has pioneered in breaking new ground to advance Puerto Rico’s economic and social development.

Undoubtedly, GDB has been one of the motors of our economic development. It financed the first efforts of our government to promote industrialization, the first restorations, the first condominiums, the first office buildings, the first hotels, and the first bond issues of our public corporations and municipalities. It has contributed to the creation of job opportunities for our families. And as fiscal agent, it has been instrumental in the task of providing our country with the infrastructure required to facilitate our economic development.

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The Forties: The Formative Years

Photo of workers of the sugarcane industry in the 1940?s.

As the 1940s got underway, Puerto Rico found itself mired so deeply in poverty that it had been labeled the “Poorhouse of the Caribbean.” Per capita income was a meager $121. Almost half of the adult population of 1.1 million persons was out of work. Those who did have jobs worked mainly in sugar cane cultivation, which was largely seasonal work. Income was unevenly distributed, with 86% of the population receiving just 29% of the total income.

But the winds of change were beginning to blow on the island. A new generation of Puerto Rican leaders, led by the late Luis Muñoz Marín, had emerged. They were determined to make sweeping changes in the country that would result in a better quality of life for all Puerto Ricans.

It was against this background that the Government Development Bank for Puerto Rico was born. GDB was one of several new public instrumentalities created in 1942 to give the island a governmental structure that would serve as the foundation for its economic and social development. Muñoz described it as the “Bank of the People,” an entity that would respond to the needs of all Puerto Ricans.

Lacking an industrial base, the Puerto Rican government decided to take the initiative and have the government invest directly in factories that would create much-needed jobs. Thus the seed of industrialization was sown as the government established new factories to manufacture such products as glass, shoes, paper and cardboard products and clay products.

During Second World War, trade with the U.S. mainland was limited and the factories had what amounted to a captive market, which allowed them to flourish. However, with the normalization of U.S. - Puerto Rico trade following the war, the government-owned factories lost their captive market and were no longer able to compete with imported products, either in quality or in price. All five government factories would end up being sold to private entrepreneurs before 1952.

This led to a fundamental change in strategy. Starting in 1946, the government changed its role in the industrialization process from that of entrepreneur to that of promoter and facilitator of private investments. The focus now shifted to creating the kind of conditions that would attract private investors to the island. The Industrial Incentives Act of 1947 was approved, offering 10-year tax exemption to companies that established new manufacturing operations on the island.

The measures enacted in the late 1940s launched the industrialization of Puerto Rico. By 1952, there were 166 industrial firms operating on the island and 18 more were in the process of starting operations. A total of 12,000 persons were employed in these factories, with an aggregated annual payroll of more than $10 million. Most of the factories were labor-intensive operations with relatively small investments in machinery and equipment. They came to Puerto Rico because of the new tax incentives and because of the relatively low salaries paid on the island.

GDB’s role as the government’s fiscal agent was also defined during the 1940s. In 1943 the Bank performed its first financial transaction: the purchase of a Water Resources Authority (WRA) bond issue. In 1947 the Bank participated in the first of a
series of housing financing transactions for the construction of 400 low-cost housing units. With this transaction, the Bank began to provide direct aid for Puerto Ricans to purchase their own homes.

In 1948, the Legislature approved a new charter for the Bank and changed its name to the one it has today: Government Development Bank for Puerto Rico. In addition to serving as the government’s fiscal agent, the Bank would also be the depository and trustee of government funds, lender to the government and the private sector and financial advisor to the Governor and the government’s agencies and other instrumentalities. This same year the GDB made its first bond issue on behalf of the government to provide for improvements to the island’s electricity infrastructure.

During the 1940s the Bank also began its policy of aiding the island’s social development, providing financial assistance in such areas as housing, education and even the restoration of historic Old San Juan.

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The Fifties: Years of Growth

Aerial photo of the San Juan Port in the 1950's

Propelled by the new investments in manufacturing, the island’s economy took off in the 1950s. Annual growth averaged 8.3% during the decade and the island’s per capita income doubled from $342 in 1950 to $756 in 1960. Meanwhile, gross investment increased 219% over the same 10-year period. Puerto Rico’s accelerated growth made it a model for economic development and visitors came from all over the world to learn about the island. Puerto Rico had been transformed from “Poorhouse of the Caribbean into the “Showcase of Democracy”.

But tax incentives and low wages would not be enough to attract and keep important industries on the island. Without an adequate infrastructure, such as good roads as well as reliable electricity and water services, Puerto Rico would not be able to retain these new investments. So the 1950s was also a period of vigorous expansion of the island’s infrastructure, including the construction of new highways, an expanded electric power system, new aqueduct and sewer systems, new airport facilities and the expansion of the island’s maritime port areas.

With GDB leading the way, the island’s infrastructure was transformed. Between 1951 and 1965 - a period during which the island achieved an extraordinary rate of growth GDB’s net disbursement and financing as the government’s fiscal agent amounted to more than $1 billion. For each year, average net disbursements and financing surpassed 20% of the government’s gross domestic investment.

Meanwhile, GDB was also increasing its loans to the island’s private sector. Many U.S. companies investing for the first time in Puerto Rico viewed government financial support as an added guarantee of the government’s commitment to the success of their enterprises. Among the large companies obtaining loans from the Bank during this period of expansion were General Electric, Caribe Mills, San Juan Intercontinental Hotels, Woolworth Photo of fishermen who received loans from GDB in the earlyStores, W.R. Grace and Molinos de Puerto Rico.

Nevertheless, two-thirds of the total loans granted by the Bank during the 1950s went to local enterprises. The commercial and industrial loans granted by GDB during this period went to a wide array of operations: laundries, car repair shops, drugstores, milk processing plants, furniture makers and candy manufacturers. More often than not, the Bank provided financing to local firms that were ignored by the private banks. Eventually, the Bank’s initiative paved the way for the private banks to begin offering them loans.

The Bank played a key role in stimulating the construction of condominiums. Puerto Rico was the first jurisdiction under the U.S. flag to resort to the condominium concept to solve the need for housing in densely populated metropolitan areas. In 1955, the GDB approved a loan for the island’s first residential condominium, the San Luis Condominium in Puerta de Tierra.

The Bank also provided financing for the construction of shopping centers in the 1950s. Following its policy of breaking ground and then letting the private banks step in, the Bank financed some of the early shopping centers and then withdrew from the market in the early 1960s when the private banks began to finance such projects.

To help preserve the island’s cultural heritage, the Bank worked hand-in-hand with the Institute of Puerto Rican Culture in restoring historic sections of Old San Juan. In 1959, the Bank initiated a loan program for the purchase and restoration of historic buildings in the Old City. The first such loan was for the renewal of the old convent that would eventually become El Convento Hotel.

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The Sixties: A Turning Point

The 1960s marked another turning point in Puerto Rico’s industrialization. During the forties and fifties, Puerto Rico Industrial Development Company (PRIDCO) had been most successful in attracting light, labor-intensive industries to the island, to the point that by 1967 Puerto Rico had become the leading clothing supplier for the U.S. market. But basing an economy on labor-intensive industries was risky, because their relatively small investment in plant and equipment meant they could easily move elsewhere.

So the Commonwealth government began to focus more on attracting heavy, capital-intensive industries anticipating that they would offer a greater element of stability. Among the industries targeted by the government were oil refineries, chemical industries, tuna canners, pharmaceuticals, electronic manufacturers, steel mills and heavy equipment manufacturers. While these industries generally created fewer jobs per dollar invested than the labor-intensive industries, they often required skilled workers that could garner higher salaries than those paid by light industry. And because of their huge investments, they were less likely to leave when their tax exemptions expired.

This effort to diversify the island’s economy proved successful. By 1968, oil firms had invested $321 million in refineries and related industries and created more than 2,000 jobs. By 1969, there were more Puerto Ricans employed in the tuna canneries than in sugar cane harvesting and processing. And by 1972, 47 pharmaceutical companies had established operations in Puerto Rico.

In 1960 GDB also led the way in promoting an amendment to the Commonwealth Constitution that set limits on the amount of public debt the island could issue. The amendment established that debt service could not exceed 15% of the average local revenue income for the two previous years. The setting of this debt limit was important to investors interested in buying Puerto Rico’s bonds.

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The Seventies: The Crisis Years

Seamstresses  working the apparel industry established on the Island in the 1960?s.

In the 1970s the island’s economy, which had grown significantly during the previous two decades, came to a sudden halt. The Arab-Israeli War at the start of the seventies and the ensuing oil embargo had a devastating effect on Puerto Rico due to the island’s strong dependency on oil for its energy needs. The cost of gasoline and electricity rose dramatically and that had a ripple effect throughout the economy. Thousands of Puerto Ricans lost their jobs and even those who had jobs had a difficult time making ends meet as the cost of living rose dramatically.

GDB once more faced the challenge of finding alternatives to help the island overcome this sudden economic downturn. And once again, the Bank came up with some creative answers.

In 1972 the Bank created the Puerto Rico Municipal Finance Agency as an affiliate. Its primary purpose was to facilitate the municipalities’ access to capital markets in order to bolster their economic self-sufficiency and reduce their dependence on central government funding.

In 1974 the Bank ventured to the bond market for the first time with a competitive bid of Tax Revenue and Anticipation Notes (TRANs) for Puerto Rico. This gave the government quick access to funds and allowed the Bank the flexibility to time the market. With the U.S. municipal bond market virtually closed, the GDB in 1975 negotiated the first Note Purchasing Agreement and gave the government access to financing. Also in 1975, the Bank participated in Europe’s bond market for the very first time in order to sell Puerto Rican debentures. The success of this sale prompted the Bank to promote a second sale a few months later.

In a fresh burst of creativity, the Bank in 1976 came up with a completely new concept of raising funds for the government: savings bonds. In 1977, the Bank established the Puerto Rico Development Fund, a subsidiary empowered to invest in capital stock and guarantee long-term loans for private businesses unable to obtain credit from private banking institutions. The following year, the Development Fund issued debt totaling $25 million to complement its original capital of $5 million, thus enabling it to expand its assistance to the private sector.

In the late 1970s the Bank launched a new initiative to help stimulate the housing sector: the Puerto Rico Housing Finance Corporation (today, Puerto Rico Housing Finance Authority), created to finance the construction and rehabilitation of low and middle income housing; to grant mortgage loans to families of limited income so that they could purchase their own homes; and to guarantee interim financing for housing construction projects.

Another important initiative was the creation in 1977 of the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority, better known as AFICA. This new entity provided an alternate, tax-exempt mechanism for financing capital investments by both public and private entities aimed at promoting the island’s social and economic development.

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The Eighties: The Recovery Begins

Phot of Expresway in construction

The economic decline that characterized the 1970s extended into the mid-1980s. Inflation continued unabated and the island’s unemployment rate reached a high of 23.4% in 1983. But a few rays of light appeared to brighten this otherwise dark panorama.

Section 936 of the U.S. Internal Revenue Code, which had been approved by Congress in 1976, began to deliver dividends in the form of new investments. This section allowed subsidiaries of U.S. companies operating on the island to remit their profits to their parent firms without having to pay federal taxes. While Congress subsequently applied some restrictions, it proved to be a valuable incentive to attract new investments to the island. Many large U.S. corporations, particularly electronic and pharmaceutical firms, were drawn to Puerto Rico thanks largely to this tax incentive.

The new wave of investments spurred by Section 936 helped put the island on the road to recovery. By 1990 the island’s unemployment rate had dropped to 14.1% as thousands of Puerto Ricans found jobs in the newly established factories.

The 1980s also witnessed other important initiatives by the GDB. In an effort to encourage more Puerto Ricans to continue their academic studies, the Bank in 1981 established the Puerto Rico Higher Education Assistance Corporation. This subsidiary guaranteed loans granted students by private banks under a federally sponsored program. Likewise, the Bank also created the Puerto Rico Student Loan Association that offered low interest loans for postgraduate studies.

The Bank also focused its attention on new ways to stimulate the construction of new homes for low and moderate-income families. In 1985 it established the First Mortgage Trust that generated more than 3,000 new dwellings for families who otherwise could not afford to buy their own homes. The success of this new trust concept led to the enactment of a new law in 1987 that allowed financial cooperation between government and the private sector to provide affordable homes to needy families.

In 1987 the Bank sold $1.6 billion in Puerto Rico general obligation bonds, at the time the largest ever in the Bank’s history and the second largest in the U.S. municipal bonds market. This sale generated savings of $80.8 million in future debt service payments.

In 1988 the GDB created the Puerto Rico Infrastructure Financing Authority (AFI for its Spanish acronyms) to provide financial and administrative aid to government entities in the development of infrastructure projects. The prime target of AFI was the island’s debt-ridden Aqueducts and Sewers Authority.

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The Nineties: A Focus on Infrastructure

Photo of the square of the center of the City of Ponce

Puerto Rico launched a massive public works program during the 1990s, with the Bank playing a central role in its financing. In 1991, the government invested $1.9 billion for the construction and rehabilitation of the island’s highways and to begin major improvements in the Luis Muñoz Marín International Airport. The Bank also provided financing for such projects as the Urban Train, the Superaqueduct, the Puerto Rico Coliseum and the Puerto Rico Art Museum. The tourism industry also received the Bank’s attention through the establishment of the Tourism Development Fund. Thanks in part to the Bank’s efforts, a number of renowned international hotel chains established operations on the island.

In 1993, the Puerto Rican government began to privatize many government-owned facilities, with the GDB playing a central role in the process. Among the government-owned entities sold to private interests were the Puerto Rico Telephone Co., the Navieras shipping line, the Sugar Corporation, the Land Authority’s pineapple processing plant and prison facilities. In addition, the implementation of the Health Reform Program led to the sale of many of the government’s health facilities to private owners.

Meanwhile, the Bank in 1990 asked for the first time that its bond issues be given a credit rating. Standard & Poor’s and Thomson Bankwatch granted the Bank’s issues an excellent rating, a distinction shared with just nine other institutions in the financial universe.

The 1990s also witnessed the demise of Section 936. In 1996, Congress enacted legislation calling for a 10-year phase-out of the Section 936 tax benefits. Thousands of manufacturing jobs were lost as plants started shutting down in the wake of the elimination of Section 936.

Some U.S. manufacturers operating in Puerto Rico adjusted to the loss of Section 936 by converting their operations to Controlled Foreign Corporations (CFC), which allowed them to postpone payment of federal taxes through the transfer of profits to overseas operations.

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2000 and Beyond

Aerial photo of the Embassy suites Dorado del Mar Hotel

The 21st century brought a renewed emphasis on responsible fiscal management to GDB. GDB management made it a top priority to strengthen the Bank’s foundations through sound financial practices and policies. During the second semester 2001, the Bank instituted a debt-restructuring plan that freed capital to invest in liquid assets. By the end of the year, the value of the Bank’s liquid assets had risen to $2.8 billion.

In another move to improve the Bank’s finances, the GDB set the wheels in motion for the approval of legislation to refinance $2.4 billion in debt over periods of 5, 10, 20 and 30 years and to restrict the practice of incurring in “extra-constitutional” debt without adequate sources of repayment and prior legislative approval.

These measures restored the Bank’s credibility in the financial markets. As a result, during fiscal year 2002 the Bank was able to structure and sell a record $8.3 billion in public financing. This move produced $6.3 billion in new money for infrastructure development, and provided the refinancing of $2.0 billion in existing debt at interest rates that, in some cases, had not been seen since the seventies, thus generating savings of $87 million.

During 2001, GDB revamped its investment and treasury operations to assure liquidity and enable to Bank to fully comply with its financial obligations to depositors and borrowers. As of December 2001, the GDB Treasury Area had successfully captured deposits from public agencies and private companies that produced a 24% increase in deposits, from $2,515 million in December 2000 to $3,125 in December 2001.

The Bank moved quickly to bring out an $800 million issue in Tax Revenue Anticipation Notes (TRANS) in October 2001 to cover General Fund obligations. It was the first time that such a large TRANS had been successfully brought to market so early in the fiscal year.

As part of the modernization drive, the island’s municipalities are being encouraged to monitor their financial requirements through the GDB website and to file their loan applications by e-mail or fax. Consequently, the financing for municipal public works projects, which used to take months to process, can now be approved in a matter of days or weeks.

With the objective of making government services more responsive to the needs of the people, the GDB has promoted reengineering processes in several agencies. The Puerto Rico Housing Finance Corporation, a GDB subsidiary, was merged with the Puerto Rico Housing Bank in February 2002 to centralize responsibility for the financing of both single family and multi-family projects within one entity. The new Puerto Rico Housing Financing Authority has the Secretary of Housing as chairperson of its Board of Directors to guarantee that it works in cue with the Department’s policies. Still, as a GDB subsidiary, the Authority has the fiscal strength and flexibility to set up tailored-made financial structures for each particular program managed by the agency.

In line with their efforts to promote sound financial practices, on May 13, 2002 the GDB announced the creation of the José M. Berrocal Institute for the Study of Public Finances and the Economy. Berrocal, who passed away in October of 2000 at the age of 43, served as the Bank’s president from 1991 to 1992 and helped define its role as a “facilitator of change and an agent for modernization.” The new institute will offer training on the theory and practice of public finances and economic development to university students and new government employees.

At the Bank, we are also working hand in hand with other government agencies and private companies to negotiate favorable terms and conditions of important projects that will continue to foster the economic development of our country. Among these are the Port of the Americas, new hotel rehabilitation projects such as La Concha and the Condado Vanderbilt in the Condado area, the new $415.7 million state-of-the-art Convention Center, and the Governor’s $1 billion Special Communities Program.

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