Thursday, October 19, 2017

The Long Road to Recovery Driven by P3s

By on August 24, 2017

Editor’s note: The following article originally appeared in the August 24 print edition of Caribbean Business.

SAN JUAN — The Public-Private Partnerships Authority (PPPA) is working with Revitalization Coordinator Noel Zamot on defining which of the current administration’s 22 “priority” projects can be classified as “critical” so their permitting can be expedited through Title V of the federal Promesa law.

Zamot’s responsibility under Promesa is to determine which projects, whether public or private, can be qualified as critical, using certain criteria provided under the federal law. “We already met with Zamot to determine which of our priority projects and those of other agencies can be qualified as critical so they can be expedited,” said PPPA Director Omar Marrero.

Omar Marrero, chairman of the Public-Private Partnership Association. (Juan J. Rodríguez/CB)

While Marrero declined to reveal which ones are being discussed, Zamot said he is evaluating all 22 projects. This week, Zamot will have a clearer picture following a financial oversight board meeting to discuss the island’s energy future and determine which projects could have private funding.

He did reveal that he has received numerous proposals from the private sector for renewable projects, including the waste-to-energy plant for Arecibo, whose developers wish to have the project classified as critical to secure low-cost financing. While the government has not discussed putting the Aguirre Offshore GasPort through Title V with the revitalization coordinator, he said, “I would not be surprised if they do.”

Although the proposals must be officially submitted through the board’s website, Zamot said that among the projects slated to be submitted through Title V are private initiatives to expand Puerto Rico’s current energy capabilities through the use of powerplants that can use natural gas and propane gas.

Back in June, during the Business MatchMaking event, organized by the Associated General Contractors of Puerto Rico (AGC-P.R.), Marrero had said the first group of priority P3 projects to be put out for bids were going to be smaller projects such as automating traffic fines, privatizing public parking lots, establishing intelligent water meters and managing the concessions for ports and regional airports. He also mentioned a proposed student housing facility at University of Puerto Rico’s (UPR) Mayagüez campus and another for medical interns at the UPR Medical Sciences Campus.

Another P3 project would entail providing ferry transportation to Vieques and Culebra, a proposal that supposedly would help determine the feasibility of making a shorter transportation route between Ceiba and the municipal islands. Another entails the extension of highways PR22 and PR5, and the creation of reversible lanes on heavily congested highways.

Details remain vague and cost estimates are currently unavailable. The Puerto Rico government has said it wants investment in infrastructure to represent 3% of the island’s gross domestic product and has thrown around the figure of investing $5 billion in P3 projects in 10 years, creating an estimated 100,000 jobs.

As of April, the P3 projects would involve 43% energy; 22% transportation; 7% social infrastructure; 20% waste treatment; and 8% water.

At the time, Marrero said the first projects were expected to go out for bids this August, something that has not happened. Asked by Caribbean Business, he insisted the projects are “right on schedule” and that what he had said was that during the summer months, the government was going to be doing viability studies on seven of the projects. By March 31, all agencies had submitted to him a total of 80 projects, not including the 22 his agency has identified as a priority.

“Some are more advanced than others, and some will go out for bids soon,” he said.

In response to questions by Caribbean Business, he provided a status report on some of the proposed projects. He noted that the proposed management concessions of ports and airports will take place sometime next year. The proposed P3s for highways will also be part of a second group of projects that will be put out for bids next year, in part because of the Highways & Transportation Authority’s (HTA) ongoing bankruptcy process.

In an interview in April, he said companies such as MD Anderson and New York University had expressed interest in managing the UPR Comprehensive Cancer Center. Asked about the status of this project, Marrero mentioned that certain companies from Spain also had expressed interest, but said “there is nothing concrete yet.”

Says plenty of interest, enticing investors

Despite the mistrust and uncertainty generated by the bankruptcy petition filed by the Puerto Rico government, Marrero insisted private investors are interested in forging public-private partnerships on the island. “The best example of that were the 900 firms or so that participated in our P3 summit in April,” he said.

Pressed to provide names of some of the firms that have expressed interest, Marrero merely said the government has been approached by “local, national and international firms.”

There are local private groups, such as the Associated General Contractors, lobbying for Puerto Rico to be used as a pilot project or launching pad for President Trump’s trillion-dollar infrastructure initiatives, which will rely on public-private partnerships. If the effort becomes a reality, the AGC-P.R. is betting it will bring federal funds to Puerto Rico for infrastructure projects.

For his part, Carlos Mercader, the director of the Puerto Rico Federal Affairs Office in Washington, D.C., who has been promoting investment to Puerto Rico and writing articles on the island’s P3 efforts, noted that Marrero spoke at an activity in the White House and at New York to officials from other states about the island’s P3 Act, which is serving as a model for the mainland U.S.

Mercader insisted that private investors are not deterred by Puerto Rico’s bankruptcy process, as he is constantly following up on leads of companies expressing interest in P3 projects.

The PPPA’s Marrero is betting on the benefits of the 2009 P3 Act, which has been amended twice, because it contains certain tax incentives to entice investors. For example, the P3 Act provides property-tax exemptions for facilities subject to a P3 contract. The private partner could also enter into agreements with municipalities to establish exemptions from municipal license fees, excise taxes and/or municipal taxes.

“It is a very attractive regulatory package,” Marrero said.

Regarding the AGC initiative and Trump’s infrastructure bill, however, Mercader said that when Congress convenes in September, it will deal first with the federal budget and then with tax reform before tackling infrastructure.

Importance of managing risk

What kind of projects will attract investor interest to engage in a P3? According to executives from Berkeley Research Group (BRG), which is on the list of authorized advisers on P3s that examine if a project is feasible, investors want to manage risk. A decision to invest in Puerto Rico has more to do about the kind of project that is being evaluated for investment rather than the fact that Puerto Rico is under bankruptcy, they indicated.

“They are looking for successes, and successes are the ones that have minimal risks,” said Michael Athanason, managing director & senior valuation specialist leading the BRG’s Finance Fund Services.

He said projects like intelligent water meters and a traffic automation system provide easy ways to collect money in an efficient and modern way. Other projects, like the Comprehensive Cancer Center, would require more creativity to become a P3.

Athanason foresees problems with energy projects that seek to convert powerplants to using natural gas because of supply problems. Complicating matters, these projects also would require the island to provide a guaranteed payment structure.

“If the government cannot afford to pay and you want someone else to bring the capital, there has to be a safe return,” he said.

How much trust do investors have in Puerto Rico, given the fact that the island has declared bankruptcy? He told Caribbean Business that it boils down to the type of P3 project involved.

“Some projects are not high risk…. If you give me the right to run a parking lot, I’ll give the government a revenue percentage of my profits on a regular basis and I’ll keep the rest…. It has nothing to do with Puerto Rico’s bankruptcy,” Athanason said.

He described the P3 Act as proper legislation. “People should look to this as an example of how a P3 Authority can be set up,” he said.

However, he said Puerto Rico needs to get started with the “small and smart” P3 projects and be successful in those before it can attract investors for large-scale projects because there has to be risk minimization.

Athanason declined to say which projects under the purview of the PPPA are viable because this requires feasibility studies, but noted that those in which the investor and the government get paid will be the most viable. “The most important thing I want to convey is that the entire P3 project has to be supported by the people and the politicians,” he said.

It is wrong for Puerto Ricans to view P3 projects as stripping the island from its national assets or “national jewels” because these are short-term arrangements. “What you don’t understand, you are against,” he said.

In that regard, Athanason also stressed the need to have an open and transparent process that allows investors to analyze the risks through a detailed feasibility study.

BRG Managing Director Ben Nolan said that as Puerto Rico grapples with bankruptcy, it needs to ensure there is no inappropriate risk transfer to the private entity involved in a P3 project, as the company seeks to get value for its money.

“A P3 [project] is an opportunity for a government to transfer risk to a private entity…. But not all the risks can be transferred to the private sector…. There has to be a balance,” Nolan said.

AGC-P.R. President Francisco Díaz Massó stressed the need to hasten P3 projects, with the entity recently unveiling its own list.

“P3s are a key piece for the development of vital infrastructure projects for Puerto Rico. In this sense, Puerto Rico has an advantage over other states of the United States, since it has a structure of P3s with experience in the execution of projects,” he said.

AGC-P.R. has developed its own list of 20 Vital Critical Infrastructure Projects that are feasible and executable, including energy, roads and water. Some of them could be candidates to be built and operated under the structure of P3s that exists on the island, Díaz Massó said.

“Not all infrastructure projects are candidates for this structure. We agree that the government will monitor the funds allocated to study the feasibility of P3 projects to ensure they are used for the purpose of carrying out works and services,” he said.

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