Amid the hype of Puerto Rico’s economic challenges, some lawmakers and special interests are lobbying for extreme measures, like Chapter 9 bankruptcy, to purportedly help the island’s recovery.
New York Federal Reserve President William Dudley, for example, last week endorsed the idea, saying “it could help facilitate an orderly restructuring of their debt which is probably going to turn out to be necessary.”
That’s a mistake. A bankruptcy by Chapter 9 or otherwise will permanently harm the island by damaging its credibility with investors and raising the cost of borrowing.
Chapter 9 focuses solely on debt, not the policies and structural issues that Puerto Rico knows it must correct to improve public services and economic growth.
Chapter 9 kicks the can, which is in part the cause of Puerto Rico’s challenges. Bankruptcy also guarantees years of very costly litigation, further credit instability and no public or private investment on the island. That’s exactly the opposite of what Puerto Rico needs and can afford.
For any solution to be effective, it must help regain private investment and restore economic credibility.
Fortunately, there are common-sense solutions at hand.
For example, Puerto Rico can expand its Public Private Partnerships (known locally as P3). Since enacting its P3 legislation in 2009, Puerto Rico successfully completed transactions for toll roads, schools and an airport that collectively eliminated billions of dollars of debt and future spending.
P3s offer the government the ability to privatize public assets. This eliminates the day-to-day costs of operation while improving local services and infrastructure.
There remain significant opportunities for future P3s that could collectively eliminate up to a quarter of their debt. These include other roads, airports, seaports and utilities. Privatizing just the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority would eliminate $15 billion of government debt alone.
Puerto Rico can also improve tax collection. The island’s sales-tax collection rate is roughly 56 percent, which is well below the average mainland rate of 83 percent. Even a modest improvement could produce annual revenues of half a billion dollars or more.
The island must also cut the red tape strangling development. The World Bank Group ranks Puerto Rico 158th out of 189 economies in permitting and construction regulations.
It takes six years to get all the permits necessary to start a large-scale development. And just getting a standard construction permit can take six months. Anyone can see there is room for improvement. Best of all, it can be achieved quickly via executive orders from the governor.
The government can also reform how it buys goods and services. Right now it isn’t centralized, transparent or competitive, which means the government pays more than it should. In 2011, legislation was passed to modernize the process, but it was never implemented. It should be implemented immediately; even a small improvement could save over $1 billion annually.
The point is, there are clear short-term steps that Puerto Rico can take with immediate long-term benefits. These alone are worth over $3 billion in new revenues and savings requiring no legislation, bailout, debt restructuring or Chapter 9.
New Yorkers have a stake in Puerto Rico’s future and avoiding Chapter 9. City pension funds are invested there. City Comptroller Scott Stringer and Bronx Borough President Ruben Diaz Jr. recently said: “We cannot advocate for a change in law that could adversely affect the value of the pension holdings, and, by extension, the retirement security of New York City workers.”
And no one has more at stake than those who live, work and pay taxes in Puerto Rico.
Ours is not a crisis, but an opportunity to develop needed reforms to better serve our taxpayers, help our most vulnerable, ignite economic growth and meet the government’s obligations with “investors,” which include hardworking Puerto Ricans that have their life savings in local credit unions.
It’s a question of will, not of ways. Puerto Rico has the wherewithal, we just need to get it done.
Jorge San Miguel is a capital member of the law firm Ferraiuoli LLC in San Juan, Puerto Rico, where he is chair of the firm’s Energy and Environmental Law Practice Groups.