Puerto Rico’s Small Businesses Are Still Hurting From Hurricane Maria

(Bloomberg Businessweek) -- After Hurricane Maria destroyed the roof of her artisan business incubator in the Santurce area of San Juan, Puerto Rico, Carla López de Azúa spent about $14,000 to rebuild it. Her insurer covered just $9,000 of that. It hasn’t yet paid her business continuity claim, though López de Azúa believes it eventually will. Her monthly electricity bills have been erratic, sometimes spiking above $2,000 for reasons the utility can’t explain.

López de Azúa is experiencing a mix of frustration and optimism about the future of Puerto Rico’s small businesses. Demand for the spaces she rents to young designers and fledgling startups is increasing. Seven tenants have expanded from her location to open their own independent stores since Maria touched down. The government wants to help, but López de Azúa believes officials don’t fully grasp the obstacles faced by people like her tenants. “There are a lot of people 35 and under who are willing to stay in Puerto Rico and work, but the environment doesn’t cater to them,” she says. “That’s the talent that is leaving the island. Those are the people who will pay the taxes, buy the houses and cars, whose kids will go to school.”

Nearly a year after Hurricane Maria devastated Puerto Rico, many of the island’s roughly 44,000 small businesses that haven’t benefited from reconstruction spending are still struggling. About 2,400 businesses closed in the fourth quarter of 2017, more than double the amount that closed during the same period in 2016, U.S. Bureau of Labor Statistics data show. In total, 5,000 to 8,000 small businesses may have closed permanently since the storm, estimates Nelson Ramírez, president of the Centro Unido de Detallistas, a small business advocacy group in San Juan. The toll could climb to more than 10,000, he says, if insurers keep dragging their feet, energy costs keep increasing, and large numbers of Puerto Ricans keep relocating to the mainland. Because small employers represent about 80 percent of the private sector workforce, their health is crucial to the economy.

Mike Soto-Class, president and founder of the San Juan think tank Center for a New Economy, says the environment for small businesses may get even worse. “Anecdotally, some are barely hanging on,” says Soto-Class, noting hurricane season is under way. “Given the situation, I wouldn’t be surprised if there are a significant number that are unable to hang on,” he says. “I’m very concerned because they are the principal job creators for the island.”

The migration acceleration is “one of the most significant hurdles for future economic recovery,” according to a report released in March by the Center for Puerto Rican Studies at Hunter College in New York. “Puerto Rico could lose the same population in a span of a couple of years after Hurricane Maria as the island lost during a prior decade of economic stagnation.” From Sept. 20, 2017, when the storm hit the island, through the end of this year, the total could reach about 200,000, Edwin Meléndez, the center’s director, estimates.

In rural areas, where small businesses account for a larger share of employment than in cities, the outflow has a disproportionate effect, says Arnaldo Cruz, director of research and analytics at the Foundation for Puerto Rico, a San Juan nonprofit that has been instrumental in the relief effort. “If more of them start closing in these communities, you’re going to have more people without a job and more dependent on the government,” he says. “If we don’t act now, we might get to a point where some are at a point of no return.”

In Orocovis, a mountainous municipality in the center of the island where the median household income is below $15,000, Cruz’s nonprofit has been conducting a pilot program to fortify the community. Héctor Rosario, who got a $3,000 grant he credits with helping his restaurant stay in business, says it’s the only help he’s received. Feeling abandoned by the government, Rosario contemplated moving his family to the mainland after Maria, but reopened his business in October.

Power wasn’t restored to his restaurant until February. His landlord wouldn’t let him use a generator, so he drove ingredients to and from his parent’s refrigerator, which was connected to generator power. Local customers he depends on are still moving out of the area, he says—sales are 60 percent to 70 percent below what they were before Maria. The foundation is hoping its efforts to attract more tourists to Orocovis will result in new customers for business owners like Rosario to replace lost revenue when locals leave. “The real question now is, how long can small businesses here hang on until the next phase of the economic cycle?” says Rosario.

The Foundation for Puerto Rico is expanding its Orocovis pilot to two more rural areas. It’s also tracking 200 businesses in other parts of the island to which it has awarded just over $500,000 in grants. Fewer than 5 percent of the grantees have failed, says Cruz. In late August the U.S. Department of Commerce granted nearly $5.6 million to the foundation to bolster its work.

The U.S. Small Business Administration received 10,292 business disaster loan applications from entrepreneurs in Puerto Rico and the U.S. Virgin Islands after Maria. After loan modifications and cancellations, the agency approved 2,704 applications for a total of about $201 million in loans and had disbursed about $91 million as of Sept. 9, according to spokesperson Carol Chastang. Low approval numbers for business disaster loans after hurricanes such as Maria “are par for the course,” Chastang writes in an email. “Typically, more than 80 percent of SBA disaster loan approvals go to homeowners and renters,” not business owners, she explains. The program didn’t appeal to Rosario: “If you’re dealing with a recession and the aftermath of a natural disaster, you don’t want loans because you’re unsure you’ll remain in business.”

For Representative Nydia Velázquez (D-N.Y.), whose legislation to encourage federal agencies to contract with more small firms in Puerto Rico was enacted last month, the recovery hinges on entrepreneurs. “Puerto Rico’s economy was already badly wounded before the hurricanes struck,” she says via email, noting she’s pushing other legislation to improve the flow of capital to small businesses after disasters. “If the economy there is going to recover, we need this sector to thrive.”

To contact the editor responsible for this story: Dimitra Kessenides at dkessenides1@bloomberg.net

©2018 Bloomberg L.P.