In addition to addressing the public health emergency related to the COVID-19 pandemic, the government of Puerto Rico has an agenda full of pending issues. Among these are the restructuring of the central government’s debt; setting in motion the reconstruction of the infrastructure that was damaged by the 2017 hurricanes and this year’s earthquakes; and the modernization of the Puerto Rico Electric Power Authority (“PREPA”), among other matters.
Before the global outbreak of the SARS-CoV-2 virus, the government had reached an agreement with a group of central government bondholders and the Financial Oversight and Management Board (FOMB) had presented a Plan of Adjustment in accordance with the requirements of Title III of PROMESA. Recently, the government of Puerto Rico has recognized, correctly in our opinion, that this adjustment plan will have to be modified since it is not feasible given the current economic circumstances.
According to the baseline economic scenario presented in the most recent iteration of the Fiscal Plan for the Government of Puerto Rico, the Puerto Rico economy is projected to contract by 3.6% and 7.8% during fiscal years 2020 and 2021, respectively. These two years of contraction would be followed by a modest rebound of 1.5% in 2022; another contraction of 0.3% in 2023; and small rebound of 0.8% and 0.7% during fiscal years 2024 and 2025, respectively. And that is taking into account the positive impact of the influx of federal funds to address the pandemic and reconstruction.
The impact of the pandemic on the economy will negatively affect government revenues, which in turn will reduce the primary surplus available to service the debt. And this means that the terms and conditions of the debt restructuring will have to be renegotiated. In theory, the FOMB could require the government of Puerto Rico to cut expenses to increase the “surplus,” but that would be the equivalent of requiring it to commit economic suicide given the current and foreseeable state of the economy, since the impact of budget cuts would be a further reduction in aggregate demand and an increase in unemployment.
As Martin Guzmán, Argentina’s Minister of Economy, recently wrote in the Financial Times: “Forcing further austerity to pay more would not only be economically disastrous but also politically and morally unacceptable – and ultimately unsustainable.” Beyond ideological differences, the validity of this five-year financial planning exercise must also be questioned at a time when “we have no idea what can happen,” in the words of Ben van Beurden, CEO of Royal Dutch Shell.
On the reconstruction side, the headway that had been made has slowed down due to the pandemic, which should not be surprising. What should be cause for concern is that access to CDBG-DR funds is still essentially halted. Of the $20.2 billion legislated by Congress and allocated by HUD to Puerto Rico, the bureaucratic process to disburse $9.7 billion has been completed. Of that amount, HUD has made available $1.5 billion, which has been used mostly for the R3 (Repair, Reconstruction and Relocation) housing program, which began in August 2019. Of the other $8.2 billion that are theoretically available, HUD has disbursed only $1.7 billion to the Puerto Rico Department of Housing (PRDH).
Regarding the rest of the funds, the PRDH is drafting an Action Plan to use another bucket of $8.2 billion for mitigation projects according to the guidelines published by HUD in January of this year. The PRDH plans to have a draft of that Action Plan ready by September. After that it will available for public comment, then submitted to HUD for its approval, and then a grant agreement would have to be executed to gain access to those funds. Finally, HUD has not taken any action regarding the $1.9 billion allocated for the modernization of the Puerto Rico power grid.
And on the PREPA front there are many things going on. The public corporation’s Integrated Resource Plan (IRP) is still under review by the Puerto Rico Energy Bureau (PREB); in addition, PREPA is trying to modernize and reconfigure Puerto Rico’s electricity grid; the FOMB has certified a Fiscal Plan for PREPA; the terms and conditions of PREPA’s debt with its bondholders are being renegotiated under Title III of PROMESA; and the government of Puerto Rico has started negotiations to transfer the management and operation of the electricity transmission and distribution network to a private entity.
To the best of our knowledge, the PREB should issue an order on the IRP in the near future; the grid’s modernization is on hold due to a lack of funds; the FOMB has not determined whether PREPA’s Fiscal Plan will have to be revised given recent events; the debt restructuring has been postponed until later in the summer; and the government of Puerto Rico continues to negotiate behind closed doors with a private company to manage and operate the transmission and distribution grid.
We are concerned that in the best-case scenario, implementing that onerous agenda would require a high level of state capacity for analysis, planning, and execution. Unfortunately, we are not in the best of times, and the state’s capacity has been eroded, for some time now, by partisan politics, public malfeasance, and austerity policies. It is up to civil society to demand openness and transparency from the government to avoid corruption, fraud, and political favoritism in these processes that are so important to the people of Puerto Rico.
This column was originally published in Spanish on May 10, 2020 in El Nuevo Día.