Rethinking the Governance of State-Owned Enterprises in Puerto Rico

Rethinking the Governance of State-Owned Enterprises in Puerto Rico

Published on January 13, 2012

Sergio portrait
Policy Director


The executive branch of the government of Puerto Rico carries out its operations through two distinct sets of administrative structures. On the one hand, there are the agencies and departments, such as the Justice and the Treasury departments, which constitute the “central government” of the Commonwealth. On the other hand, there are the state-owned enterprises, commonly known as “public corporations” in Puerto Rico, which constitute what we may call the “other” central government of Puerto Rico.

Historically, the use of public corporations offered several political advantages. Prior to the enactment of the Commonwealth’s constitution in 1952, the public corporation device prevented the Washington-appointed governor from interfering with programs under its jurisdiction. According to Charles Goodsell, public corporations were usually located outside government departments; their boards of directors were appointed by a group and not the governor alone; and their managers were appointed by the boards of directors and not by the governor. Therefore, the Puerto Rico legislature in effect created a whole administrative structure independent of and parallel to the established executive departments.

Public corporations were also used to avoid the restrictive debt limit that Congress had imposed on Puerto Rico. The Jones Act of 1917 limited the borrowing authority of the central government and the three largest municipalities to 10 percent of the assessed property valuation. The debt issued by public corporations, however, was not considered a pledge of the full faith and credit or the taxing power of the Commonwealth. Therefore, public corporation debt was excluded for purposes of calculating the limit under the Jones Act. To this day, in fact, the debt of public corporations is accounted for separately from central government debt and the debt service of public corporations is not counted toward the constitutional debt service limitation currently in effect.

Furthermore, according to former governor Roberto Sánchez Vilella, “it was felt that the red tape and political intervention that often hinders governmental activity could be best avoided by a corporation having its own board of directors, able to finance its expenditures from its income, make its own purchases, with the power to borrow for capital needs, in short possessing the legal powers and flexibility of a private corporation yet subject to control on matters of policy by the legislature.”

Since the 1940s, therefore, public corporations have been an important feature of the island’s government. The public policy rationale was to create entities that were legally incorporated, financially self-sufficient and administratively apart from the regular departments and agencies of the executive branch bureaucracy. Public corporations, in sum, were conceived as a vehicle for government technocrats to efficiently address some of the most pressing problems facing Puerto Rico.

Today public corporations are a significant component of the machinery of government in Puerto Rico. Currently there are 51 public corporations in operation which generate revenues of $8.9 billion, equivalent to approximately 13 percent of Puerto Rico’s GNP. Unfortunately, it appears that notwithstanding early successes, public corporations have failed to live up to the standards set forth by Sánchez Vilella. Instead of reducing red tape, public corporations have added dozens of new bureaucratic layers to government and instead of limiting political intervention in government, public corporations have become important sources of political patronage as they provide ample employment opportunities for loyal party members and generous contracts for politically-connected suppliers.

Financial self-sufficiency has also turned out to be a chimera as many public corporations rely on the central government to help them cover their operational deficits and in some cases the central government has been obligated to assume their debt servicing obligations in order to avoid a default. In addition, most public corporations suffer from a severe lack of accountability, oversight and transparency at all levels. The recent shenanigans at the Puerto Rico Electric Power Authority are a good example of this lack of accountability.

In our opinion, the government of Puerto Rico should undertake a comprehensive analysis of the management and operations of its public corporations and establish a new governance framework and regulatory structure for its state-owned enterprises. In this policy brief we propose that the OECD Guidelines on Corporate Governance of State- Owned Enterprises, which were adopted in 2005, be implemented, with certain modifications, in Puerto Rico. In specific, we analyze how they may be applied to the governance and regulation of the Puerto Rico Electric Power Authority (“PREPA”).