It has been 10 weeks since Hurricane Maria slammed into Puerto Rico. The devastation was fierce. Yet it cannot explain why almost half the generating capacity of the Puerto Rico Electric Power Authority (Prepa) is still down.
Credit for that goes to Congress, which in June 2016 passed the Puerto Rico Oversight Management and Economic Stability Act, a k a Promesa. It opened the door to debt defaults that violate the Puerto Rican constitution and U.S. law. As is always the case when the rule of law takes a back seat to politics, it has fueled chaos.
Prepa blames its disastrous post-hurricane decisions on a shortage of cash. Yet in the immediate aftermath of the storm, a group of Prepa bondholders offered the company fresh debtor-in-possession financing that included a swap of $1 billion in existing debt for $850 million in new bonds and $1 billion in new cash.
Puerto Rico rejected the offer. “The bondholders’ proposal is not viable and would severely hamper and limit Prepa’s capacity to successfully manage its recovery,” Puerto Rico’s Fiscal Agency and Financial Advisory Authority said at the time. It added that the offer had the “appearance” of “being made for the purpose of favorably impacting the trading price of existing debt.” Heaven forbid.
More unthinkable was ruining the “flat broke” image the commonwealth has been cultivating so it can write down debt and skip the matching requirements necessary to receive Federal Emergency Management Agency funds. It’s also more convenient to tap taxpayers than to borrow money from private entities asking for accountability. This is particularly true for a state-owned monopoly like Prepa, which is as much a political instrument as it is an electricity company.
When critics complained last year that Promesa would alleviate the pressure on island politicians to reform the welfare state, their concerns were pooh-poohed. Congress said Promesa’s “financial management and oversight board” would impose the discipline necessary for reform. Negotiated settlements with bondholders were to be given priority and existing restructuring agreements—like the one between Prepa and its creditors—were to be preserved.
None of this happened. According to a spokesman for the Ad Hoc Group of Puerto Rico General Obligation Bondholders, the group reached a negotiated settlement with the commonwealth in the spring. But the Promesa board nixed it. The board also vetoed an existing agreement between creditors and Prepa, in violation of Promesa guarantees.
Now the oversight board and Gov. Ricardo Rosselló are locked in a power struggle, and the board is losing.
The Prepa fiasco is instructive. Earlier this month Mr. Rosselló’s handpicked Prepa director, Ricardo Ramos, resigned amid allegations that he grossly mismanaged the hurricane recovery. As the Journal’s Andrew Scurria reported earlier this month, a $300 million no-bid contract with Whitefish Energy Holdings to restore the island’s power lacked protections for Prepa and went against the recommendations of the utility’s lawyers.
Before a House subcommittee on Nov. 14 Mr. Ramos defended his decision to hire the company, arguing that it was driven by a cash crunch. But that’s a difficult narrative to sustain.
After Mr. Rosselló canceled the Whitefish contract in late October, Mr. Ramos called on the American Public Power Association and Edison Electric Institute for help. Utility experts say that post-hurricane protocol is to go first to these industry groups, which organize “mutual assistance” from other utility companies. Mr. Rosselló has said “Prepa did not go that route . . . because they had timing issues and money issues.”
Yet mutual assistance is all about emergency response and the company could have solved its money problems by accepting the financing offer from Prepa bondholders.
Then again Mr. Ramos was a political hire and may have lacked the necessary utility experience to handle the crisis. And Mr. Rosselló almost certainly didn’t want to give creditors—whom the Promesa board has already sidelined—new leverage over an institution that, according to Puerto Rican tradition, is part of his fiefdom.
Now Mr. Rosselló is asking for $94 billion in aid from Washington for reconstruction costs. But he’s refused to implement furloughs and pension cuts mandated by the Promesa board. In August the board sued him for that. The matter was dropped after Maria hit and so was the broader board-certified fiscal plan requiring Puerto Rico to tighten its belt.
He then fought the board in court to stop it from appointing retired Air Force Col. Noel Zamot as “chief transformation officer” to run Prepa. Bondholders also objected to Mr. Zamot, citing a lack of utility experience. But Mr. Rosselló’s reasoning is that Prepa leadership must be his call. On Nov. 13 a federal judge ruled in his favor. Last week he announced the bankrupt commonwealth would pay Christmas bonuses to its employees.
And so it goes. Mr. Rosselló liked the Promesa board when it tore up contracts. But now he wants it to go away.
Write to O’Grady@wsj.com.
Appeared in the November 27, 2017, print edition.
FROM THE COMMENTS:
Puerto Rico is a great example of the ultimate welfare state. More then 20% of the population “work” for the Government with large benefits. Many others represent the 4th generation of living totally on the Government- largely the US Government. Housekeeping jobs in homes and hotels either go unfilled or to immigrants. Only those that work for the Government, or a large international company, pay any taxes- no one has ever been sent to jail for not paying them. Schools are a joke and locally referred to as “baby sitters”.
Hurricanes are a major industry where much of the money from the US ,on such occasions, finds its way into local pockets- particularly those of politicians and their friends and famillies. Soon the new cars will blossom on the roads and the large new TV’s in the living rooms while the blue plastic will continue to be substitute roofs for years and the electric infrastructure will continue to lie on the ground.
Puerto Rico should be cut loose as a U.S. Protectorate and allowed to free-run as a Banana Republic, which it is. Or it should be “gifted” to Cuba and let it albatross the Raul Castro regime like Venezuela is doing. Let the bondholders take a 95% haircut, they should have known better than to throw money into a Socialist rat-hole, see for example the State of Illinois. There is no fixing a mess like Puerto Rico, once the Socialism disease starts to spread, it is dictatorship and civil war that is the end result. The people don’t need electricity, they need a Hugo Chavez or an Eva Peron or a Daniel Ortega. Someone that will comfort them and inspire them while they starve.
Everybody should watch this short two minute clip from the Senate Energy Committee Hearing – https://www.c-span.org/video/?c4691768/ricardo-ramos-explota-prepa – 50% of PREPA employees are political appointees and PREPA has been used to provide subsidies to politically connected parties. Governor of Puerto Rico (in coordination with the Oversight Board) wants to destroy a consensual deal to restructure PREPA’s debt (whose approval was mandated by PROMESA) to continue the status quo of corruption and inefficiency. This is why Puerto Rico is in a mess and members of congress should be very careful to allow violations of due process and constitutional guarantees – these form the bedrock of the American municipal bond market and if Puerto Rico is allowed to simply walk away from its obligations while continuing a system of corruption without any reform, what will prevent other troubled municipalities from following a similar path? Borrowing costs will spike for hundreds of other issuers