Puerto Rico Faces a New Crisis Lacking Public Infrastructure Investment

Years of broken promises and failed strategies have left Puerto Rico's infrastructure in its most vulnerable state in decades in the face of hurricanes, earthquakes and now, a pandemic. Although a need to carry out capital improvement work has been widely trumpeted and promised, the numbers reflect that little has been done in this area in this past decade. Today, the government and the Fiscal Control Board lack enough resources and an integrated plan to accelerate and execute the capital investment that the island sorely needs.

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The lack of infrastructure investment in Puerto Rico is not a new problem. It’s been going on for decades.

Photo by JaxStrong on Visualhunt

The Puerto Rico government named the Ramón Ruiz Arnau University Hospital (HURRA in Spanish) in Bayamón as the lead hospital on the island for critically ill patients affected by the new coronavirus, but just a few weeks ago, 23 of its isolation rooms awaited for funds to fix their negative pressure system. The latter helps control air pressure and flow in these rooms, minimizing the risk of contagion.

As of Thursday afternoon, the government continued to make last-minute improvements and work to HURRA, including its isolation rooms, the Center for Investigative Journalism (CPI in Spanish) found. Two sources said the institution is not fully prepared to be the main hospital in the emergency, despite it already treats suspected COVID-19 cases.

HURRA also awaited for repairs to the air conditioning system, the installation of a new power generator, water heaters and an electrical circuit for X-ray, CT scan and MRI machines, electrical improvements to the clinical laboratory, rooms renovation and the rehabilitation of an entire hospital floor, among other projects. In a document for next fiscal year’s budget, the Health Department identified the need for more than $14 million in pending structural repairs for HURRA.

Diagnostic and Treatment Centers (CDTs in Spanish) across Puerto Rico, clinical laboratories and public health centers such as the University Hospital and the Pediatric Hospital also awaited for physical improvements. In total, more than $144 million under the Health Department’s umbrella. This is in addition to the more than $300 million in pending construction and equipment at the Comprehensive Cancer Center, the second hospital identified by the government to care for critically ill patients with COVID-19.

These projects were scheduled for next fiscal year, which begins July 1, 2020, and would take months to complete. In the face of the coronavirus emergency, Gov. Wanda Vázquez Garced said Thursday the administration was making improvements and last-minute equipment purchases for hospitals such as HURRA and the Comprehensive Cancer Center.

Hospital isolation rooms, the construction of new roads and bridges, the renovation of the energy system, the rehabilitation of schools: For more than 10 years, Puerto Rico has failed to meet the needs of infrastructure investment on the island. Last year, Puerto Rico was the jurisdiction that invested the least money in its infrastructure among 149 countries, according to the World Bank. Since 2007, year after year, Puerto Rico has fought for the last positions along with Eritrea, Guinea Bissau, Cuba and Zimbabwe. The World Bank index examines fixed capital investment as a percentage of GDP, including investment from both the public and private sectors.

It is not only that the government fails to spend enough in infrastructure improvements to roads, bridges, hospitals and schools. It has also not been able to spend all the money that has been budgeted for these improvements, leaving hundreds of millions of dollars on the table.

Upon taking office in 2014, the Alejandro García Padilla administration left unspent a quarter of its capital improvements budget. In fiscal years 2017 and 2018, the Ricardo Rosselló Nevares administration spent just under $900 million on capital improvements, less than half of a $2 billion budget, according to Office of Management & Budget (OGP in Spanish) data.

Government financial reports show more than $70 million unspent money in capital improvements for agencies in fiscal 2019. The Puerto Rico Highway Authority, for instance, had not used more than $400 million in annual budgeted funds for infrastructure work, with two months left until the end of the fiscal year, according to the entity’s fiscal plan. With only 1% of Puerto Rico’s state highways in good condition, the public corporation blamed the problem on delays in procurement and a shortage of labor to carry out the work.

Despite the dire state of Puerto Rico’s public infrastructure, particularly after Hurricane María, the government admitted that it did not spend its entire capital improvements budget, which includes new construction or projects that improve the condition and prolong the life of existing public physical assets.

“Unfortunately, there has been years when capex [capital expenditure] has been budgeted, but it’s not used, the year closes, and basically you had an unused multimillion line item, which could have been directed to another project or for other essential services or other agencies,” Government Chief Financial Officer Omar Marrero told CPI.

Photo by Gabriel López Albarrán | Center for Investigative Journalism

Omar Marrero told the CPI that for years there has been money budgeted for capital improvements and it has not been fully used.

He added: “So this year, since I took over this role in August, we’ve been monitoring very closely how agencies are spending that capex and ensuring, for example, that they obligate it. That’s being monitored. La Fortaleza’s lead infrastructure adviser is helping the agencies to monitor that.” CPI requested in January an interview with lead government infrastructure adviser, María Palou Abasolo, an attorney with no academic background or professional experience in planning. La Fortaleza did not respond.

Marrero said that through December, government spending of its capital improvement budget was on target. Yet reports published by his own agency say otherwise.

As of December — half way through the fiscal year — the Vázquez Garced administration had only used $4 million of the $228 million available in the General Fund for capital improvements, less than 2% of the total assigned, according to the Fiscal Agency & Financial Advisory Authority (AAFAF in Spanish).

Despite having classrooms shut down for mold and dozens of buildings with cracks, the University of Puerto Rico (UPR) had spent just over $650,000 in capital improvements from an $8.7 million budget for the first three months of this fiscal year. The UPR is still behind in the use of its infrastructure improvements budget, the Fiscal Control Board confirmed to the CPI.

In the case of the island’s Health Department, the agency had no direct earmarks for capital expenditure in the current government budget. The OGP controls more than $150 million in capex funds that it distributes among agencies to carry out this type of work. The CPI asked how much of these funds, if any, has been allocated for improvements to the Health infrastructure, but the OGP did not respond to the request.

The lack of investment in infrastructure on the island is not new. During the 2000s, the Puerto Rico government invested nearly $3 billion annually in infrastructure improvements and capital expenditure. Administration after administration—Sila María Calderón, Aníbal Acevedo Vilá, Luis Fortuño Burset, Alejandro García Padilla and Ricardo Rosselló Nevares—, the figure touched bottom in 2017, when it barely exceeded $1 billion, a third of what was spent 10 years earlier.

“In the time that I have covered Puerto Rico, they have never addressed their deferred maintenance,” said Matt Fabian, an analyst at Municipal Markets Analytics who has been covering the island for more than 20 years.

Unsuccessful bets

The Rosselló Nevares administration vowed to increase investment in capital improvements to at least 3% of annual gross domestic product (GDP), which is the average among member countries of the Organization for Economic Cooperation & Development, Marrero said.

Meanwhile, the secretary of Economic Development, Manuel Laboy, recalled that the government declared an emergency in infrastructure, established two committees dedicated exclusively to this issue, expedited the permitting process for “critical projects,” made it easier to establish Public Private Partnerships (P3s) by allowing unsolicited proposals, and signed a new permit law that establishes strategic projects.” At the federal level, Laboy mentioned Title V of PROMESA and its expedited permitting process for “critical projects,” as well as the 2018 federal tax reform that declared more than 95% of the island as an “opportunity zone,” with reduced tax rates to attract private investment.

None of these initiatives has met expectations and as of 2018, the government invested only 1% of Puerto Rico’s GDP in infrastructure. Expedited permitting processes, the designation of priority projects and the use of P3s have been announced by various administrations without major results in increasing the level of infrastructure investment.

None of these managed either to get the Health Department’s hospitals in optimal conditions to face hurricanes, earthquakes or a pandemic such as the new coronavirus.

The CPI asked Laboy when was the last time that the Infrastructure Council, one of the two dedicated groups established by Rosselló Nevares, met. He could not specify a date because of the large number of boards of directors, commissions and working groups in which he participates and is part of.

Photo: Facebook/La Fortaleza

From left, ex-Governor Ricardo Rosselló and Economic Development and Commerce Secretary Manuel Laboy

The expedited permits process for critical projects at the local level is idle and there are only “five to seven strategic projects,” of which some “may have begun the permitting process,” the secretary of Economic Development admitted, unable to specify which ones. The Department of Economic Development & Commerce (DDEC in Spanish) did not respond to a follow-up request for details of current strategic projects.

Title V has been used only once, for a housing development that came under fire for alleged conflicts of interest among some of the individuals involved in the transaction. While the Rosselló Nevares administration has stated that Title V is unnecessary, the executive director of the Fiscal Control Board, Natalie Jaresko, who now also serves as “revitalization coordinator” after the abrupt departure of Noel Zamot, defended the mechanism and hopes that it works once the Puerto Rico Electric Power Authority (PREPA) emerges from bankruptcy and more private investment reaches the island.

P3s, a pillar of the Rosselló Nevares administration’s political campaign, were to be used for critical infrastructure projects. Initially, the government hoped to attract more than $10 billion in private investment in ten years, through a preliminary list of 22 projects.

Over the past three years, the government has announced over and over again a handful of initiatives as P3s, but so far, it has yet to finish any of them. This list includes the operation of the ferry service to Vieques and Culebra, the replacement of water meters and the privatization of PREPA’s transmission and distribution systems.

Marrero, who was in charge of the P3 program, insisted that despite having identified a schedule of more than 20 projects, the fiscal plan never included that investment as part of its projections. “An expectation was created that the 22 [projects] were going to be 22 privatizations. That was never said. There were 22 projects that we identified as projects that could be possible P3s,” the official said.

One of these “possible P3s” that never came to fruition was the renovation and reconstruction of the Medical Center, which hosts the island’s main health installations.

Jaresko said that although the government has shown some improvement during this fiscal year, it will continue to face problems when using its capital improvement budget until it reforms the way it purchases goods and services, such as medical equipment for hospitals. A Rosselló Nevares campaign proposal was signed into law in 2019 to centralize government procurement. But its implementation has not gone beyond paper, according to Jaresko.

“It’s far behind. The law has been adopted. But the regulations… We just received the draft regulations,” said Jaresko. “That procurement process is not only critical for anti corruption, transparency and best pricing, but it’s also critical to get the money out,” she added.

Photo by Leandro Fabrizi Ríos | Center for Investigative Journalism

Natalie Jaresko, executive director of the Board

New fiscal plan, same formula

The Vázquez Garced administration’s new proposed fiscal plan would create a fund of at least $1 billion to finance infrastructure projects pending reimbursement of federal recovery funds.

But the Fiscal Board has other plans. While the government seeks to allocate additional local funds to cover the gap, the Board doesn’t see the need to do so, Jaresko told the CPI in early February.

The Board’s new fiscal plan will reflect a greater delay in the arrival of federal recovery funds, after federal funding projections under the current fiscal plan came short once again, this time by more than $3 billion. The entity imposed by the U.S. government has said it will not reduce the austerity measures, which have revealed the risk of indiscriminate cuts, as was the case with the school closures without considering the condition of their structures.

The CPI asked the Board how the new fiscal plan is affected by the coronavirus pandemic.

“The preparation of the new fiscal plan is underway and will take into account the most up to date information, including how this global crisis will affect Puerto Rico finances,” the Board stated. A day later, it pushed the government’s deadline to deliver a new draft of the document, without setting a date to certify a new fiscal plan, after being initially scheduled for April 30.

The current fiscal plan states that the government would invest in infrastructure just over $400 million annually from its own money during the next 10 years. This does not include the Puerto Rico Aqueduct & Sewer Authority (PRASA) and PREPA, which must identify their own sources of financing to improve their infrastructure.

It was not until early 2020 that PRASA restarted its capital improvement plan—an average investment of $400 million a year—after being on hold for more than five years, while PREPA excluded capital improvements from its current budget because, according to the bankrupt public corporation, they will be fully financed with federal funds that have yet to be approved, .

“I can guarantee you that in the next fiscal plan that we are already working on, it will consider the need to support Puerto Rico’s reconstruction in a more significant way with greater resources, either through cost-sharing or by launching projects before [federal funds] are obligated,” Marrero told the CPI just before the Vázquez Garced administration revealed its first draft of the new fiscal plan.

On the other hand, the Board’s decision not to allocate more local funding to reconstruction efforts comes at a time when the government has a surplus that tops $10 billion, largely due to the austerity measures imposed over the past years. But far from meeting the island’s immediate infrastructure needs, the Board will use this surplus to pay bondholders and cover future deficits, according to the fiscal plan.

This is part of a new debt restructuring plan agreed to by the Board, which favors certain bondholder groups through an average debt cut of around 30%.

From a financial standpoint, if the government doesn’t cut enough debt, it would be stuck paying for it in the future and without enough money to cover new debt to help pay for major infrastructure projects.

“One of my major concerns is that I think that current debt should be scaled even lower, the haircut should be increased, so as to give Puerto Rico room to pay for new bonds to finance the recovery, not only the deferred maintenance, but also the new damage that has happened [with the earthquakes]. And then going forward, to finance the cost of climate change, adaptation and mitigation,” analyst Matt Fabian told the CPI during a meeting in January with journalists organized by the City University of New York’s Graduate School of Journalism.

Historically, the government paid for much of its capital improvements issuing debt, similar to other jurisdictions in the United States and the rest of the world. But when the island began to use its borrowing capacity to finance budgets rather than infrastructure projects, it brought on problems, according to Fabian.

A planning and execution problem

The government addresses infrastructure investment in a fragmented way through almost a dozen plans. Public corporations such as PREPA and Highways, for example, have their own infrastructure investment plans. That is coupled with parallel reconstruction plans developed by the central government such as the one used with the Federal Emergency Management Agency (FEMA), or the action plans for the use of the federal Department of Housing & Urban Development’s CDBG-DR funds.

The Planning Board’s Four-Year Investment Plan (PICA in Spanish) — a document that steers everything related to government capital improvement programs, including the annual capital expenditure budget — only includes 13 entities because these were the only ones that provided the data to structure the plan.

In the area of health, PICA identifies an investment of just under $150 million over the four years, but only for the Mental Health & Addiction Services Administration and the Solid Waste Authority. Neither the Health Department nor the Comprehensive Cancer Center have projects in the current PICA.

An interview with Planning Board President María Gordillo was not granted.

As for reconstruction efforts after María, the entity in charge of much of the federal funds, COR3, told the CPI that it uses the recovery plan submitted to Congress in August 2018, which it jointly developed with FEMA, as a “guide to ensure an orderly and organized recovery” and “a path to help guide capital investments.”

“With regards to [the government’s] capital improvement plans, the [Recovery] Plan establishes priorities, but it is the subgrantees [agencies, municipalities, nonprofit organizations], as owners of their assets, who must comply with the internal plans and parameters established in their plans,” COR3 said in response to CPI questions about how recovery funds are aligned with capital improvement plans across the government.

The Recovery Plan only presents a list of “principles on how the government of Puerto Rico and all the sectors involved will work together” and establishes priority areas for recovery funds, according to COR3.

“We don’t see a plan — that vision of all these things, how they work together — in the reconstruction plan because it is a list of solutions that are not really like a plan: this goes first, this goes after,” said Juan González Moscoso, an engineer and project manager of ReImagina Puerto Rico, a program of the Center for a New Economy that drafted a report with recommendations on how to address infrastructure needs after Hurricanes Irma and María.

Part of the group’s recommendations were included in the recovery plans, but the organization doesn’t know their implementation status. One of the main proposals, according to the engineer, was to identify the critical infrastructure or define how they relate to each other.

“That we understand that a hospital depends on having access through bridges, that it depends on the electrical system, that it depends on the transportation of diesel for its emergency capacity, that it depends on water,” González Moscoso said as an example.

Federal funds that aren’t disbursed

After Maria, the government and the Board put all their eggs in one basket: federal recovery funds would be the main — and sometimes only — source to finance improvements to the island’s infrastructure. More than $80 billion in federal funds would pay for reconstruction efforts, although the government and the Board don’t know when the disbursement will occur.

That bet has failed. The money has not arrived as projected, delaying improvement projects for roads and bridges, public facilities, hospitals, schools and the power grid, among others. According to official data, Puerto Rico has more than $48.7 billion in federal recovery funds assigned, of which more than $8 billion would go directly to infrastructure improvements, risk mitigation and resiliency projects. Of this amount, just over $150 million has been disbursed, less than 2% of the money allocated.

With the arrival of the coronavirus, the Puerto Rico government warned that the emergency may jeopardize the arrival and availability of federal funds, since the island will have to compete with other needs in the U.S..

Puerto Rico receives federal recovery money from three main sources: FEMA, HUD, and other federal agencies including Agriculture, Health, Education, Transportation, Homeland Security and the Army Corps of Engineers.

Under its Public Assistance program, FEMA covers what it calls “permanent work” through five different categories. These are projects to rebuild roads, bridges, aqueducts and sewers, the power grid, schools, hospitals and even national parks, among other public assets. But before FEMA gives out a penny, the federal agency and the government must agree on an estimated cost for each project, as established by Section 428 of the Stafford Act, FEMA’s charter law.

“You already know the story with federal funds and the process that was chosen. It had never been used after a hurricane. They say it was an agreement between the local government and FEMA over this Section 428 process due to Puerto Rico’s fiscal situation, but the truth is that this process takes a long time, because the government of Puerto Rico has to define the project, make an estimate, FEMA chooses its own resources to make the estimate, they have to meet and agree on a quantity,” said Malu Blázquez, executive director of CNE’s ReImagina Puerto Rico project.

At the operational level, the government has also been unable to coordinate and integrate efforts to expedite the arrival of federal funds. The Vázquez Garced administration has not released the cost estimate for permanent work projects that it wants to execute with FEMA funds, although the original deadline expired last October. Without the estimates, the negotiation process on a final figure cannot start and money cannot be disbursed.

A report by the U.S. Government Accountability Office issued in February confirmed the delay in the disbursement of recovery funds and revealed that local government employees are sometimes unaware of the rules that apply to complete the process and receive the FEMA money. The audit also found that FEMA must improve the assistance it provides to the Puerto Rico government to streamline the process and accelerate the disbursement of funds for large reconstruction projects.

In the case of HUD CDBG-DR funds, in addition to financing home reconstruction, more than $1.4 billion would be available to match FEMA’s Risk Mitigation program. As of today, not a cent has been received from these funds, while they continue to wait for every municipality to adopt or update their mitigation plans, one of the requirements for the use of this federal program.

For engineer González Moscoso, the urgency of receiving federal funds has led the government to “hunt for projects,” or come up with projects based on available federal funds.

“Federal funds are attached to some requirements. So, you are going to change your project needs or what you want to achieve, to comply with FEMA funds, to get the money and then invest. Instead of saying, ‘I want to do this, let me see how I look for an approach to achieve it.’ And that is another big concern that we have: that the municipalities and institutions are ‘hunting for federal funds’ instead of first defining their needs and then looking for how to do the project,” he said.

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