Catch-22

18 April 2017 Puerto Rico is ready to make a comeback after several years of pain. Marina Formoso reports that P3s are a central part of its plans for prosperity, but asks whether the private sector is ready to lend a hand

Puerto Rico is thinking big once more. After years in the economic doldrums, the territory has identified infrastructure – and P3s in particular – as a critical pillar of its roadmap to rise from the ashes.

So far, 25 projects have been earmarked for development in the coming years, although not much more information has been revealed yet about the type of projects planned. This will change in April, when the new government, led by Ricardo Rosselló, will present more details of the P3 pipeline during the Puerto Rico P3 Summit.

“The summit is more than a regular project-specific industry day; it is a comprehensive view of benefits and challenges of P3s and specific project opportunities as a platform for the entire island’s economic development,” explains Omar Marrero, executive director of Puerto Rico’s P3 Authority. “It presents an interesting opportunity without parallel in the US.”

The first move towards the reactivation of P3s on the island came from the US congress in June last year, with the approval of the Puerto Rico Oversight, Management and Economic Stability Act – more commonly known as Promesa. The original idea behind this law is to provide new tools to help Puerto Rico to overcome its tough economic situation.

Years of economic instability have driven the country into a deep recession leaving a huge debt, which some experts predict is bigger than that of Detroit or even Greece. In fact, Puerto Rico’s economic black hole has become so deep that in 2015 Alejandro García, Puerto Rico’s then-governor, told the New York Times in a famous statement that the country’s debt simply wasn’t payable. “This is not politics, this is math,” he insisted.

Therefore, Promesa includes severe cuts to fulfil the fiscal goals. But it also includes, under Section V, “Puerto Rico’s infrastructure revitalization”, which establishes a process to provide an expedited permitting and review process for certain infrastructure projects. This section includes the availability of immediate private capital for projects considered critical for the country, which will be determined by the Fiscal Supervision Board, a team appointed by the US government.

After Promesa was approved, the next step for Rosselló’s administration was to upgrade the territory’s P3 law, which had effectively been abandoned since the start of the island’s recession around 2006 – despite a number of attempts to kickstart a pipeline in the intervening years.

The new law foresees the complete involvement of the private sector in all stages from planning, through to financing and operating projects.

“The biggest challenge that the government has towards P3s is that there is no money to do them,” warns Myrna Lozada, a capital member at the law firm Goldman Antonetti & Cordova.

“Money is a limited good now. However, we believe that this scheme is the only real alternative to develop certain infrastructure that will report profits to the country.”

Another way the revamped law will involve the private sector is through unsolicited proposals. “An express authorization in a law allowing unsolicited proposals as an alternative procurement process would not have been possible years ago, as Puerto Rico was traditionally opposed to private sector operation of public services and very jealous of competition and transparency in procurement by government,” says Miriam Figueroa, partner at DLA Piper.

“But this shows the political will towards advancing P3 with a sense of urgency. Puerto Rico can’t wait and we have to be open to new proposals, new ways of doing business and efficient ways of contracting with government.”

Figueroa also warns that a big challenge will be giving confidence to investors that their money is safe. “Since the Government Development Bank for Puerto Rico (GDB) is no longer available to guarantee the obligations of the government counterparty in a P3 due to its own liquidity constraints, another challenge is how such obligations will be guaranteed. Who will substitute the role of the GDB as backstop in P3 projects?”

And this is where Puerto Rico runs into its Catch-22 moment. “I believe that the consequences of the current fiscal constraints that the Commonwealth is facing is two-fold: from the point of view of the government, it creates a sense of urgency and enhanced interest in using P3s as an alternative to traditional municipal finance sources to develop infrastructure,” begins Figueroa.

“But, from the point of view of possible investors, it may cause them to pause and require more security or guarantees as part of their contracting structure.”

As a result, she believes that the government will need to be more creative when generating guarantees for the private sector. “Under these circumstances, the government and our society will have to make policy choices that probably under other circumstances they wouldn’t have made.”

Her colleagues in the industry are more optimistic.

“Fiscal uncertainty doesn’t have to be a limitation,” argues her fellow partner at DLA, Jose Sosa. “Experience tells us that if the legal framework is solid and projects are well structured, the private sector will invest. Puerto Rico has the framework and we anticipate it will structure the projects to make them attractive.”

To help the government get the private sector interest it desperately needs, Gonzalo Alcalde, CEO at Metropistas, and Agustín Arellano, CEO of Aerostar, have formed the ‘Asociacion de Alianzas Público Privadas de Puerto Rico’, a non-profit organization that seeks to boost the development of infrastructure in Puerto Rico.

“Our goal is to promote, together with the government, the new legal framework and its security to future investors. As we are CEOs of the principal concessionaires of the country we want to show private investors that projects can also be successful here in Puerto Rico,” says Arellano, who is also chief of international affairs for Asur, a Mexican airport operator.

“We will need political will and the collaboration of the private sector to develop good long-term projects,” he adds.

Promisingly, some interest is already known to be building in the market, with two proposals for new deals already being considered.

Also, the energy sector has seen particular interest from private firms mainly because the Puerto Rico Electric Power Authority (PREPA) has made a lot more progress in negotiations with creditors to restructure its debt and operations.

Part of the conditions of that arrangement is for PREPA to modernize its generation fleet. An additional driver of interest and urgency is the environmental compliance projects that PREPA has to implement, which require significant investment.

Now that the amended P3 program is in place, the agency’s next move will be to finalize its internal structure. “Having a well-staffed P3 Authority and a board of directors in place are critical steps to move projects forward. Also, the P3 Authority has recently issued a request for qualifications seeking a P3 advisor that will assist it in moving forward projects included in Puerto Rico’s certified Fiscal Plan,” says Marrero.

The next step for the authority will be to restore communication and contact with the infrastructure investment community.

“There are two specific and immediate goals at the P3 Authority,” he continues. “First, we need to inform the market about specific steps being taken to re-launch the P3 Authority’s program, its project pipeline and planned strategies to deal with Puerto Rico’s fiscal challenges. Second, the P3 Authority needs market feedback about Puerto Rico’s P3 projects, the challenges ahead and the level of interest.”

It is likely to be a long road, but each step taken will be watched closely by an interested investor community.

This page was last updated on:
15 June 2017.

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