Puerto Rico economics chief advocates 'sovereign fund' for island

NEW YORK (Reuters) - Puerto Rico's top economic official on Thursday said the island should form an investment fund to help attract business as it struggles under $73 billion of debt.

Alberto Baco, the island's economic development minister, said in an interview he will advocate for the creation of a "sovereign fund" to promote development, which he said should be financed at least in part through negotiated concessions from the island's financial creditors.

"My project is to make people buy into the idea that concessions (from creditors) are not used for expenditures but investments," Baco said, calling a sovereign fund "the best way to invest."

Such funds are typically used by sovereign nations with excess wealth, and the practicality of an investment fund in the struggling U.S. commonwealth is unclear. Baco said he believes the fund should be effected through legislation to ensure it survives multiple political administrations.

The idea was among a handful Baco suggested to help secure Puerto Rico's long-term stability, saying he believes the island can add 100,000 new employees and $5 billion in additional tax revenue in five to seven years.

He also said he will continue to fight for a value-added tax (VAT), which legislators on the island considered this spring before opting instead to raise the sales tax to 11.5 percent from 7 percent.

"I am pushing for" a VAT, Baco said, adding that an island with as large an underground economy as Puerto Rico's needs a way to tax its consumption. "The Puerto Rican underground economy is bigger than what anyone is willing to accept," he said.

Puerto Rico's debt crisis has reached a fever pitch, with Governor Alejandro Garcia Padilla last month saying the island could not afford to pay its debt. The island has a debt service payment due Aug. 1.

Meanwhile, the island's economy has been flat or shrinking for close to a decade, in part because of a decreasing population and the expiration of federal tax incentives.

Jumpstarting the economy, Baco said, requires a cohesive approach that uses savings from financial concessions to invest in business development and infrastructure.

One key, Baco said, is giving a package of economic development laws, including tax breaks for services and on certain types of income for individuals new to the island, time to mature. Baco said the breaks will eventually lead to an economic transformation on the island.

(Reporting by Nick Brown; Editing by Meredith Mazzilli)