Analysis: FirstBank acquires Banco Santander Puerto Rico

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V2A examines banking sector after development

Editor’s note: The following was published by Vision to Action (V2A), a strategic consultancy firm that analyzes industries and has been publishing reports since 2009.

On October 21st the bank holding company of FirstBank Puerto Rico, announced the acquisition of Banco Santander Puerto Rico (BSPR) for a $63M premium to BSPR’s core tangible common equity ($362M) in an all cash transaction. In this insight we will analyze the new market shares in the Puerto Rico banking sector after this acquisition and the recently announced purchase of Scotiabank operations by Oriental Bank.

The Puerto Rico banking sector has experienced a drastic consolidation process in the past ten years. Scotiabank and BSPR will be joining another five banks which operations have been absorbed by other banking entities during that period. As we have done after previous acquisitions, we are going to present how banking assets, deposits and credit portfolios will be distributed among the players still operating in the local market. Figure 1 shows assets and deposits market shares among Puerto Rico private commercial banks.

As can be observed, FirstBank will regain its second position in total assets after the acquisition of BSPR with a market share close to 23%. In terms of Deposits, FirstBank’s share could increase to 21% assuming all BSPR deposits are retained by FirstBank. With this acquisition FirstBank also strengthens its footprint in the metro area, where 16 of the 27 BSPR branches are located. Additionally, it gains a sizeable 13% deposits market share in the south region by bringing the two important BSPR branches in Ponce which together accumulate $339M deposits compared to the $211M of the two FirstBank branches in that municipality1.

Figure 2 shows the distribution of the various credit financing businesses among market players in Puerto Rico. As can be observed, local credit unions and other players have a non-negligible participation, particularly in the Auto Loans and Other Consumer Loans (mainly personal loans) segments. Their participation is welcomed, as they provide competition to the banking sector, whose consolidation is raising concerns to retail and commercial customers because they will have less options to choose from and because oligopolistic dynamics are more likely to take place.

The acquisition of BSPR provides FirstBank with a very strong commercial lending portfolio particularly in the small business and investment banking segments, and, to a lower extent, a sizeable credit cards business. FirstBank’s market share could increase from 18% to 32% in the commercial lending business and from 17% to 27% in the credit cards business2. Regarding the credit cards business, FirstBank will also be able to leverage BSPR’s relationship with American Express which brings a unique set of credit card products targeted to the affluent consumer. American Express also brings its strong merchant relations from its acquiring business, which FirstBank should leverage to offer distinctive offers to its credit card base.

BSPR’s personal loan portfolio is also an important addition for FirstBank. The personal loan business is the only one where Banco Popular has a market share below 30%. With the local credit unions share of 54%, the personal loans business represents one of the few opportunities for inorganic growth for the local banks. The Auto Loan business is another competed segment in Puerto Rico even after Popular’s acquisition of Reliable, since not only local credit unions but also federal credit unions and company financing divisions like Toyota Credit and BMW Financial Services provide financing at competitive prices. These players accumulate 29% of the auto loan business (see Figure 2).

The commercial credit business is probably the sector most impacted by the consolidation process. The share of local credit unions in this sector is small and Citibank customers are mostly concentrated in the large company segment. For the small and medium sectors, the banking consolidation process is translating into an important reduction in the available choices to apply for credit. Finally, it is curious how just two players (Banco Popular and FirstBank) dominate the auto lease financing in Puerto Rico, considering the high profitability of this business in the Island.


1 As of June 2019

2 These credit card balances and shares exclude balances from credit cards issued in the US (e.g. American Express proprietary credit cards like the Green, Gold, Platinum and Black cards)


Office of the Commissioner of Financial Institutions (OCFI), Federal Deposit Insurance Corporation (FDIC)


Accuracy and Currency of Information: Information throughout this “Insight” is obtained from sources which we believe are reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. While the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact the accuracy of the information. The information may change without notice and V2A is not in any way liable for the accuracy of any information printed and stored, or in any way interpreted and used by a user.

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THINK STRATEGICALLY: ‘What is Essential is Invisible to the Eye!’

U.S.-China Trade Deal in Works, Brexit by Month’s End; Markets, Economy Forecast to End Year on High Note

The DNA of a U.S. President

Since the United States became an independent nation, we have had as president farmers, lawyers, generals, movie stars, engineers and career politicians. One thing we have never had was a president who lacks a moral compass, does not distinguish between right and wrong, or lacks empathy, compassion and honesty. As we analyze the current situation in the United States, it is noted that the greatest presidents have been those who served during great times of crisis.

In Antoine de Saint-Exupéry’s book, “The Little Prince,” there is a brief discussion about the importance of love and friendship, while the fox asks the little prince to domesticate him, the little prince explains what friendship entails, and a more substantial part—missing someone, needing a person. The confused fox is told—“what is essential is invisible to the eye”—to describe the feelings of friendship. Presidential power and influence, in no small degree, are invisible to our eyes. It has to do with the distinct personality of each president, and for that, there is no single measurement. For example, President Washington’s integrity, President Lincoln’s fight for equality, President Truman’s principles and courage, President Kennedy’s charm and wit, President Reagan’s ability to unite the United States or the powerful connection many felt with President Obama.

If we choose to harness presidential power with a single phrase, it has to be potency of language and words. There is no better example than JFK’s inaugural address and its famous line, “Ask not what your country can do for you; ask what you can do for your country.”

These words transcend time and are as relevant today as they were in 1961.

One of the differences of President Kennedy was the fact that he rarely talked about himself using first-person singular pronouns or in the third person, in stark contrast to President Trump.

While we have an opportunity to watch each presidency, one thing that is quite particular in all presidencies is the fact that all the power, symbols, mantras and actions are synthesized by one single reaction: the ability to convey a message.

In the end, the presidency is all about character, honesty, respect, confidence, passion, clarity and caring. Qualities we can conclude are essential but invisible to our eyes.

Week in markets: Positive trade, Brexit news drive markets

Most stocks rose marginally as the news of a possible trade deal between the United States and China is in the works, and Washington officials have pointed to an agreed-upon framework that would lay the foundation for a more permanent solution. Subsequently, the United States has stated that for now, no further tariffs would be implemented. In the Eurozone, there are reports of at least a glimmer of hope that a Brexit deal would be possible by Oct. 31. Although British Prime Minister Boris Johnson pointed out there was much work needed to reach a permanent agreement, most international markets recorded significant gains, which made the period the largest weekly gain in more than 16 weeks.

While the markets’ optimism is key to these current gains, we stress there are quite a lot of moving parts for the trade deal to be a permanent agreement, and there are hundreds of hurdles the U.K. must pass or meet before the Brexit deadline. Until both are signed, sealed and delivered, there will be constant volatility.

As we review the week, we note the Dow Jones Industrial Average closed the week at 26,816.59, for a gain of 242.87 points, or 0.91 percent, and a year-to-date (YTD) return of 15.0 percent. The S&P 500 closed the week at 2,970.27, for a gain of 18.26, or 0.62 percent, and a YTD return of 18.50 percent. The Nasdaq closed the week at 8,057.04, for an increase of 74.57, or 0.93 percent, and a YTD return of 21.40 percent. The Puerto Rico Stock Index closed the week at 1,644.57, a gain of 24.33, or 1.50 percent over the previous week, and a YTD gain of 69.15 percent.

Meanwhile, the U.S. Treasury’s 10-year note rose during the week, closing at 1.73 percent, or a gain of 13.82 percent, with a YTD return of minus-0.95 percent. The U.S. Treasury’s 2-year note rose during the week to 1.59 percent, an increase of 13.57 percent for the week, with a YTD return of minus-1.03 percent.

Final word: 4Q market outlook, and into 2020

We forecast the stock markets and economy will finish 2019 on a high note and enter 2020 with solid footing. With all indices trading at YTD double-digit returns and the new trade deal framework, indications are that volatility may be curtailed during the fourth quarter.

Economic forecast: The U.S. economy will grow between 1.3 percent and 2.1 percent during 2020. This is supported by continued job growth, low unemployment of 3.5 percent and low-interest rates.

Stock markets: We are forecasting the stock markets will continue their growth and will outperform the bond markets. However, volatility will continue until the trade deal is signed.

Fixed income: With the current scenario of low-interest rates, we do not see much upside for bonds. However, every investor should maintain an adequate balance of not less than 30 percent in relationships to support periods of increased volatility.

Eurozone outlook: With the European Union (EU) economic sentiment index at 100 percent, unemployment at 6.30 percent and inflation at 1.40 percent, we note the International Monetary Fund has slashed global forecasts because of the trade wars. However, once the trade tensions have subsided, the EU’s recent quantitative easing monetary policy will allow the economy to grow faster than in 2019.

Global economic growth: As a direct response to slower growth, most central banks in the world have started to ease monetary policy in an attempt to stimulate economic growth.

Global manufacturing: After being impacted by much weaker global demand and trade tensions, late 2019 and into 2020 should be positive for the manufacturing sector.

All investors must review their portfolios and prepare them for 2020 to appropriately capitalize on opportunities. In the end, what matters is having a trusted adviser.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

Mitigation Plans for Coastal Municipalities Do Not Include Dealing with Sargassum

Mouth of Fajardo River (Center for Investigative Journalism)

Although the algae represent a health and economic problem for citizens and the tourism industry, concern over it still does not show on the radar of municipalities and agencies as an issue to be addressed.

By Rafael R. Díaz Torres |

The awareness that the governments of coastal municipalities and the central government have about sargassum and the challenges that this marine species present to communities, ecosystems and businesses has not been enough to integrate how it will be managed in the mitigation plans prepared by the Puerto Rico Planning Board (JP in Spanish), and the 78 municipalities.

After hurricanes Irma and María in September 2017, the Central Office of Recovery, Reconstruction and Resiliency, known as COR3, asked the JP to update each municipality’s mitigation plans. 

For that task, the Federal Emergency Management Agency (FEMA) approved an allocation to the JP of $3,128,916, which was increased in July 2019 to $5,396,144. With hose funds the JP hired   Atkins Caribe, LLC as an external consultant to update the municipal mitigation plans. The contract is for $1,748,786.

Mitigation plans are necessary in order to request recovery funds provided by FEMA. They include eight criteria that endanger life and property. According to the JP, the hazards considered in the risk analysis for updating mitigation plans are climate change, earthquakes, tsunamis, landslides, drought, floods, strong winds and erosion.

To this date, 11 out of 78 municipalities have delivered the final draft of their mitigation plan to FEMA. Of those, eight are coastal towns. None mentioned sargassum management strategies. This, despite the fact that in the last decade, several beaches around Puerto Rico have experienced the events of large quantities of algae reaching the shores, causing a strong stench, losses in tourism, navigation challenges for fishermen, and possible public health problems resulting from hydrogen sulfide (H2S) emissions from the decomposing sargassum. Those events in which the algae arrive in massive quantities to the beaches, coastal or estuarine areas, are known as surges.

“As part of the updates within the risks that are being considered right now, no municipality has identified it as a risk, but it could be considered (the sargassum,)” said Planner, Rebecca Rivera-Torres from the Planning Board.

“On the Board’s behalf, if the municipality expresses the interest of considering sargassum as one of the risks, the Planning Board has no objection to added. The mitigation plan is a municipal plan. So, the priorities of the municipality will be reflected,” the official said during an interview with the Center for Investigative Journalism (CPI in Spanish.)

Of the eight hazard criteria weighted in mitigation plans, two have been scientifically investigated for their possible link to the phenomenon of massive sargassum arrivals that began earlier this decade: climate change and erosion.

On the one hand, the climate crisis continues to show a trend of rising sea temperatures, which has been pointed out as an element that, coupled with the accumulation of nutrients and sediments that float toward the sea surface west of the African continent, facilitate the development of massive quantities of sargassum that subsequently reach the coasts of Caribbean territories.

On the other hand, scientists at Texas A&M University have been working for several years on experiments on the potential use of sargassum to help mitigate coastal erosion by inserting the algae in the sand and dunes. In other instances, its accumulation on the shores is associated with temporary coastal erosion events. 

One of the eight coastal municipalities that already delivered its final draft of the mitigation plan to FEMA was Humacao. As in other municipalities of the eastern coast, some beaches in this town have seen limited recreational and tourist activity due to the accumulation and decomposition of sargassum on the shore during the summer. One of the areas affected this year has been the Palmas del Mar private housing complex.

Although the Humacao municipal government acknowledges the problem that may arise from accumulated sargassum on its beaches, the issue was not included in the mitigation plan.

The director of the Humacao Municipal Planning Office, Anilda Fernández-Vega, said she complied with sending the information required by Atkins for the municipal mitigation plan, and that information did not include sargassum. Nor was it mentioned by Department of Natural and Environmental Resources (DNER) personnel in its interventions as part of the work groups in which agency representatives consulted different sectors as part of the process prior to developing the mitigation plan.  

“Sargassum is a maritime phenomenon and the municipality has no jurisdiction over it. In fact, any intervention on the coast by both the municipality and the citizens requires authorization from the DNER,” Fernández-Vega said in written statements.

“The reduction or elimination of the sargassum from the waters and coastal areas corresponds to the DNER. The mitigation plan does not show that during the workshops activities, the DNER requested that a strategy to manage sargassum events be included as a mitigation project,” added the geographer and planner, who clarified that her office has not received citizen complaints about the sargassum situation.

The municipal official also said she has no communication with the DNER to coordinate sargassum cleaning actions on the beaches of Humacao.

The DNER, says it cannot act if the municipalities and citizens do not request it.

“What they have to do is notify. That is what the protocol says,” said the director of the office that runs the DNER’s coastal zone and climate change management program, Ernesto Díaz, in reference to the document that his agency published in 2015 to handle the sargassum that reaches the coasts.

However, the absence of initiatives of the central government and some coastal municipalities to determine the uses that can be given to the sargassum collected on the coasts, leaves communities and the tourism sector devoid of strategies to deal with the situation.

In the opinion of oceanographer Jorge Bauzá stresses that including sargassum management in mitigation plans is indispensable. The inclusion of sargassum in mitigation policies can contribute to the development of recovery strategies and different positive uses that result from the use of the algae.

“When we talk about mitigation it’s about how we can reduce our vulnerability, and in the case of sargassum, studies show that it is a situation of climate change, a situation of balance, the product of human activity, and that it reaches the shore and is creating an ecological impact, an impact on public health and an impact on the economy,” argued Bauzá.

Among the best-known value-proposition strategies is turning the species into biogas, its use as plant fertilizer, and its conversion to develop products such as construction materials and notebooks, among others.

“As we prepare for the hurricane season, there are coastal municipalities that must prepare for sargassum surges. They have to integrate it into their mitigation plans by region, by coast and by community,” the PHd in oceanography said.

Bauzá advocates the use of sargassum that reaches the coasts of Puerto Rico. According to the scientist, the seaweed can be used for the development of fertilizer, food for farm animals, biofuel, bricks, biomedical products, handicrafts, among other valuation proposals.

Although sargassum has always been present on the high seas and on the Caribbean coast, its accumulation in large quantities during some seasons is a recent phenomenon. For this reason, marine scientists are immersed in research projects on the causes of the surge in parts of the Caribbean and the Atlantic as of 2011.

Also, territories of the region continue to devise strategies to deal with sargassum. One of the initiatives with an emphasis on the Caribbean emerged in late June 2019, when the Mexican state of Quintana Roo hosted a sargassum summit. A total of 12 countries and the French island of Guadeloupe participated and signed a 26-point collaboration agreement. Mitigation was one of the aspects highlighted in the regional cooperation document.

Puerto Rico did not participate in that summit.

When Ernesto Díaz was asked if the government of Puerto Rico treats the issue of sargassum as a minor issue, the DNER official denied that this was the case.

“I believe that the 44 coastal municipalities, the Puerto Rico Hotels and Tourism Association, everyone is very aware of the situation and how, sporadically, a hurricane or floods will bring these tremendous problems, because it not only affects the business owner, it affects employees, and those who serve hotel operations and businesses in that area. Nobody is going to sit on a shore or on a terrace to have a drink or eat with this situation,” said the DNER scientist.

Despite the importance that Díaz has given to sargassum for years from his post at the DNER, the researcher admitted that it is necessary to develop planning and detection strategies prior to the arrival of the algae to the coasts.

Besides a guide presented in 2015 by the DNER  for sargassum collection on the beaches, there is no public mitigation policy that integrates the management of this marine specie.

Also, the federal government has no plans to inquire about the effects of this algae. “Currently, ERDC is not carrying out research on sargassum,” said Víctor González, who spoke on behalf of the Engineering Research and Development Center of the United States Armed Forces, assigned to the U.S. Corps of Engineers, told CPI.

Some municipalities consider including sargassum in their mitigation plans
The eight coastal municipalities that have already delivered their final draft of the mitigation plan to FEMA are Santa Isabel, Vega Alta, Arecibo, Dorado, Aguada, Mayagüez, Patillas and Humacao, according to the information provided by the JP. The drafts “Natural Hazards Mitigation Plan” are available on the agency’s page.

The municipal governments that are still working on their mitigation  plans could include the management of sargassum, but it is not clear whether it should be an initiative of the JP or the municipalities. 

At least that’s what several municipal officials told the CPI.

“In the case of the mitigation plan, we do have to consider it because citizens don’t know what sargassum is used for and they always go to the municipality to look for a way to dispose of it because they see it as waste,” said Luis Rivera, special assistant to the mayor of Yabucoa.

Rivera believes the JP should consider the issue of sargassum management in the guidelines related to working on the updated mitigation plans.

“It would have to come from them (the Planning Board) because they don’t include it in the guides. Maybe because it’s not a year-round problem, but rather a seasonal issue of a little more than two months, then maybe for the Board’s purposes, there isn’t much awareness and given that it does not affect the northern area as much, but rather the southern and eastern areas, perhaps the situation goes unnoticed because it is not an island wide problem,” said the Yabucoa official, adding that the final draft of the new mitigation plan for his municipality will be ready between November 2019 and January 2020.

The CPI asked the Planning Board of Puerto Rico if the guides for the mitigation plans changed by municipality or region, depending on whether they are coastal, of the mountainous or urban area. The agency explained in an email that the mitigation plans “work in the same format, which is in compliance with the requirements of the Federal Code of Regulation.” However, “the plans address the risks according to the particularities of each municipality.”

In the southern municipality of Lajas, its mayor, Marcos Irizarry, said he considers integrating the sargassum issue into the new plan he hopes to have ready by the end of the year. For the past few years, Playita Rosada in Lajas has had to close several times due to high algae accumulations. Irizarry explained that the sargassum they collect from this beach is used as material to cover the municipal landfill, in addition to allowing farmers to use it as fertilizer.

Irizarry said he hopes the JP recognizes the importance of including sargassum in the conversations and orientation sessions related to mitigation plans.

For planner and special assistant of the municipality of Luquillo, Jardany Díaz-Salgado, any sargassum mitigation strategy must be based on the premise that this marine plant brings benefits to other species and can represent a source of income, if properly used in economic and ecological projects.

“We believe that, from the scientific point of view, sargassum is a natural process that helps with beach recovery, which helps to mitigate erosion, that delivers organisms that bring nutrients. When the sargassum arrives at night, during high tide, it traps snails that serve as food for the coastal birds,” Díaz-Salgado explained.

About  the new mitigation plan, the planner said that “the issue of sargassum is something to be included. After Hurricane María, there are many things that are being added to that plan. We are evaluating the plan we had when we met with the Planning Board to determine what the most pressing needs are.”

“Now there are issues such as climate change and rising sea levels, which we knew were happening, but were not included in the risk plans,” Díaz-Salgado said.

Lack of research on the relationship of sargassum with climate crisis and erosion
Given the rise in sea levels experienced in recent years, waves and erosion have a greater impact on the coasts.

Sargassum surges during the current decade occur on different types of beaches, including those that have been undergoing erosion for years. 

Three scientists from the University of Texas A&M presented pilot projects in which they have used sargassum to restore dunes, to try to increase coastal protection against erosion. The work raised the potential of sargassum and other marine plants in creating the natural shields that protect the coasts.

On the other hand, the coincidence of the sargassum surges with the loss of beaches in some places has motivated some scientists to inquire about the possibility that the excessive accumulation of the algae can accelerate further the erosion that these areas have already been experiencing. The impact of sargassum in large quantities can inhibit oxygen in the water and affect other marine grass. Similarly, the collection of sargassum without proper training can lead to accidental removal of sand and other seagrass from the beaches.

According to coastal geologist Maritza Barreto, the continued presence of sargassum on the Caribbean coast makes it essential to study the links between surges and coastal erosion.

“Sargassum could have two effects with respect to erosion. However, as a student of the coastlines, I have no information that it produces sand or erosion. It would be necessary to monitor the width and elevation of those beaches that are affected by the sargassum for a minimum of one year,” the professor of the Graduate School of Planning at the University of Puerto Rico said.

The need to study the possible effects of sargassum for a period of at least one year responds to the fact that the beaches are dynamic and constantly changing in terms of width and elevation. A beach eroded during a season of sargassum accumulation could be restored and have the sand back in weeks or months. These scenarios will also depend on the type of sand, the behavior of the swell, as well as the general characteristics of the beach.

For Bauzá, it is important to study the link between sargassum and erosion, based on the impact of algae on corals.

“The stain of the sargassum has a shadow effect and prevents the light that corals need. Imagine having these sargassum for months, they will affect a community of corals, corals that are already threatened by high temperatures and bleaching. Corals are natural barriers. If that natural barrier that dissipates the wave is threatened, those waves are going to reach deeper into the beach given the rise in sea levels and the beach will erode,” the oceanographer warned.

“If there’s evidence that it affects the distribution or quality of coral, we have a big problem. If I lose the coral’s capacity in distribution or quality, I have a serious problem because the coral has a function in protecting the beach,” said Barreto, who also warned about the dangers of losing seagrasses that also fulfill a function of protecting the beaches.

Rafael R. Díaz Torres is a member of Report for America

A Guide to Understanding the Bureaucracy of “Recovery” in Puerto Rico

By Cristina del Mar Quiles

When the wind slowed down on September 20, 2017, Puerto Ricans went outside their homes, walked through their neighborhoods, made their way through the rubble and began to account for their losses. Estimates in dollars and cents of what Hurricane María destroyed would take a while. A generalized sense of uncertainty and doom was everywhere.

A day later, while then governor Ricardo Rosselló assessed the conditions in which the island was left, Cándida González, a linguist, went to see what remained of the house that her first son’s father had built more than 30 years ago, and found it destroyed.

On the eastern part of the island, Josué Ruiz, a university student and part-time employee, was traveling from his father-in-law’s house in Las Piedras to Punta Santiago, in Humacao, on the eastern side of the island where he lives with his wife, Natalie Torres, and their three children. The ocean water, mixed with that of the nearby overflowing pipes, had flooded the house that they were just remodeling. It was nighttime and in the same neighborhood, Guillermo Arroyo waited on the roof of his house, with his dog Minnie, for the waters to recede. The hurricane had ripped through there. It was his granddaughter’s husband who found and rescued him.

The reconstruction of Candida’s house will cost about $42,275. If she decided to build it in cement, resistant to a new storm, she would have to invest $82,675.

A “strong and resilient” Puerto Rico, as detailed by Rosselló before U.S. Congress in 2018 when presenting his Puerto Rico Economic Development and Recovery Plan, would cost $139 billion. Of that money, two years later the federal agencies had approved $21,044,425,967 as of July 31, 2019.

Puerto Rico faces a tangle of bureaucracy for the disbursement of money from the Federal Emergency Management Agency (FEMA,) the main source of funds for the island’s recovery after Hurricane María.

Section 428

For the first time, FEMA has applied to an entire jurisdiction a provision of the Robert T. Stafford Act on Disaster and Emergency Assistance that was included as an amendment after Hurricane Sandy in 2013. Since then, it had only been applied to develop 258 projects in 28 states. Section 428 allows reconstruction in a stronger and more resilient manner, as the Stafford Act was designed so that FEMA only subsidized repairs that restore the affected facilities to the conditions they were in before the disaster, regardless of whether they were already unsafe.

The creation of COR3

The negotiation of the guidelines to apply 428 to all of Puerto Rico was mainly carried out by the Central Office of Recovery, Reconstruction and Resiliency, known as COR3, an entity that Rosselló created in October 2017 to receive and distribute federal funds available for the island’s recovery.

COR3 was created as a division of the Public-Private Partnerships Authority (P3 Authority) to guarantee “the efficient and effective use of resources available for recovery” and minimize the duplication of work among government entities, according to the executive order.

COR3’s creation preceded the fifth amendment to the disaster declaration, in which President Trump required the establishment of a grant oversight authority, with support from outside experts, to receive FEMA Public Assistance and Disaster Mitigation funds.

Rosselló appointed Omar Marrero as executive director of COR3, who at the time also served as executive director of the Convention Center District Authority and the P3 Authority. Each agency had offices in different places. He was also the governor’s authorized representative (GAR) before FEMA.

In an interview with the CPI, Marrero justified the creation of COR3.

“We had to address a credibility issue and concerns at the federal level, so we established a centralized office,” he said.

COR3 handles FEMA funds, the island’s primary source of recovery grants, which the federal agency has estimated will amount to $65 billion. Of that amount, the Government of Puerto Rico has only included $49.0 billion in the Fiscal Plan. Part of COR3’s duties are to disburse funds that will come from FEMA’s Public Assistance Program to agencies, municipalities and nonprofit organizations for reconstruction projects.

Meanwhile, the Puerto Rico Department of Housing manages HUD’s Community Development Block Grant–Disaster Recovery (CDBG–DR) Program, which, after Hurricanes Irma and María, has $19.9 billion in funds allocated to Puerto Rico.

The Rosselló administration proposed that the Community Socioeconomic Development Office (Odsec in Spanish) would oversee the CDBG-DR funds allocated to Puerto Rico, as reflected in a memorandum from HUD’s Office of the Inspector General. Under that framework, Odsec would be responsible for the planning, administration and supervision of the program, as well as for preparing the action plan, developing policies and procedures, management, environmental reviews, monitoring efforts and reports. Odsec would delegate   to three other entities: The Housing Finance Authority (AFV in Spanish), the Infrastructure Financing Authority (AFI in Spanish), and the Department of Economic Development and Commerce.

But federal agencies rejected Rosselló’s plan.

Among HUD’s concerns were that it was a new agency created in February 2017 of which there was no performance data on its management of these types of funds.

It is also mentioned that Odsec had 103 employees, 32 of whom worked in the now defunct Office of the Commissioner of Municipal Affairs (OCAM in Spanish,) against which HUD’s Office of the Inspector General made accusations for improper reporting on the use of funds and their use for ineligible purposes. It also noted that they did not adequately follow up on fund recipients.

The report highlights “Puerto Rico’s inability to spend the 2008 disaster funds in a timely manner.”

Omar Marrero told the CPI that he was unaware of this memo.

Disaster estimates

When Rosselló went before Congress for the first time after María on Nov. 13, 2017, he presented the “Rebuilding a Better Puerto Rico” report, which required $94 billion to rebuild the island.

The executive director of COR3 explained that the $94 billion figure that Rosselló included in that report corresponded to a preliminary assessment of the damages and the cost that a stronger and more resilient reconstruction would entail.

Marrero said Rosselló’s team had seen the Eye of the Storm report, which the state of Texas had published a few weeks earlier, estimating at $61 billion the damage caused by Hurricane Harvey, which entered through the Texas Gulf Coast on Aug. 25, 2017.

Texas hasa “Rainy Day Fund,” with the possibility to finance some projects, and one of the largest congressional delegations. When compared, the Puerto Rican team considered that it should raise its standards.

“Rebuilding a Better Puerto Rico” preliminarily reflected the damage that the island had suffered, Marrero said. This work was carried out with help from New York Gov. Andrew Cuomo’s Storm Recovery Office. The Ford, Rockefeller and Open Society foundations provided funds so auditing firm Deloitte — which COR3 commissioned for $31.6 million — would also provide assistance in preparing the report.

According to Marrero, the first damage report did not sit well in Congress and that was the reason why the Government of Puerto Rico was required to prepare a recovery plan within 180 days, when the Congressional Bipartisan Budget Act was signed on Feb. 9, 2018. In this law, Congress included the provision for FEMA to apply section 428 to projects in Puerto Rico, although President Trump had already required it in the fifth amendment to the Puerto Rico disaster declaration.

“Some didn’t like it in Washington, then in February they asked us to ‘Present a recovery plan.’ So, perfect, we presented a recovery plan in 180 days,” the official said.

That’s when the Economic and Disaster Recovery Plan for Puerto Rico came about, with an estimated $139 billion in reconstruction projects, which Rosselló handed in to Congress on Aug. 8, 2018.

“That is a very serious and responsible document that was created with the input of many interest groups and   reflects what the public policy is after what has been the largest natural disaster in Puerto Rico. Now, obviously, that document was much more detailed and even identifies the courses of action that have to be taken to move the scale and the responsibility the federal government imposed to identify congressional funds,” said Marrero.

The federal Bipartisan Budget Act also establishes that Rosselló must publish an update report on progress in achieving the goals established in the Recovery Plan every 180 days, in coordination with the FEMA administrator. The 180 days were fulfilled on Feb. 4 and Aug. 3, 2019.

The first 180-day status report states that the implementation of Section 428 of the Stafford Act has meant that the funding reimbursement process for construction of permanent public assistance projects has been extremely slow.

The permanent work refers to FEMA categories C through G, which includes roads and bridges, water control facilities, buildings and equipment, utilities, parks, recreational and other facilities.

“Unfortunately, the progress of permanent work projects under Public Assistance, pursuant to Section 428 of the Stafford Act, has been extremely slow and has limited the recovery from fully taking off,” the report states.

As of Jan. 31, 2019, there was not yet a single project with allocated funding. In comparison, one year and four months after Hurricane Katrina, Louisiana already had the money for 2,424 projects with about $1.4 billion allocated. Meanwhile, after Hurricane Harvey, Texas had $159 million for 2,124 projects.

“The difficulty with Section 428 is that it requires a fixed cost estimate, which, once agreed upon with FEMA, the recipient, and the sub-recipient, cannot be changed or amended,” Puerto Rico told Congress in its 180-day status report.

“Under a typical project under FEMA’s Public Assistance Program, the grant amount is estimated and if circumstances come up during the repair or replacement period changing the scope of the work or cost, the project could suffer amendments. Because of the fixed cost estimate requirement, the review of a project before the obligation of funds is very onerous and time consuming,” the report stated.

The report request Congress to ask the President for an amendment so Puerto Rico’s ability to use the Public Assistance Program outside of Section 428 is not limited. That has not yet happened.

Meanwhile, Marrero said he has asked mayors to identify their priority projects, and other small projects of less than $123,100, which can be moved forward without having to go through the process required by Section 428. The new director of COR3, Ottmar Chávez has also insisted on this.

In the second report, which Rosselló sent to Congress with an attached letter signed on July 31, two days before his resignation became effective, the dissatisfaction is similar.

“Most of the permanent work projects have not yet begun nor do they have funding assigned 22 months after Hurricanes Irma and María devastated the island,” he said.

According to Chávez, of 50,000 sites that should be inspected, only 20,000 had been inspected as of August. These 50,000 sites are expected to be grouped into some 9,200 projects, and to date, the fixed cost estimate has been agreed only for 139 projects.

What has arrived

This process has meant that to date, FEMA, the main source of recovery funds, has obligated $5,816,890,838 in Public Assistance (PA) funds, and approved $2,573,762,155 in Individual Assistance (IA,) according to the COR3 transparency portal. Between FEMA and other federal agencies, a total of $20,310,831,109 has been obligated of which $13,825,576,097 has been disbursed.

The second largest source of federal recovery funding is the HUD CDBG-DR program, which is expected to allocate about $19.9 billion to the island. Of this figure, the first $1.5 billion had not been accessible as of Feb. 2, 2019.

What has been said will arrive

The Puerto Rico Economic Development and Recovery Plan is counting on the availability of $69.1 billion in FEMA and HUD funding, as well as from private insurers. It indicates that FEMA would contribute at least $41.2 billion over an 11-year period, but that estimate has been updated several times since then.

FEMA points to grant $65 billion for the entire Hurricanes Irma and María recovery, while the Government of Puerto Rico’s Fiscal Plan certified by the Financial Oversight and Management Board for Puerto Rico on May 9, 2019, estimates that $49.0 billion will arrive from FEMA through fiscal year 2032 and $19.9 billion in CDBG-DR funds from HUD.

“That [$65 billion] is FEMA’s estimate, but you have to allocate that money. That [FEMA] estimate is based on assumptions, so, for that reason, there will be more conservative numbers [from the Puerto Rican government.] If we don’t obligate that money, it doesn’t become real. At the end of the day, the Fiscal Plan is based on assumptions, they are macroeconomic assumptions. The person responsible for the Fiscal Plan is the government of Puerto Rico, not FEMA,” said Marrero to explain the difference in figures.

The plan includes among the $139 billion needed, $24.5 billion that are available, but whose certainty and source of funds are inaccurate.

For example, the Government of Puerto Rico projects that it will receive $21 billion in funds for which it must compete with states and territories affected by hurricanes Harvey, Irma and María and by forest fires.

Two years after the hurricane, in this category, 10 federal agencies have allocated $6.8 billion, obligated about $2.6 billion and disbursed just over $1 billion, according to the COR3 website.

In limbo

The plan also warns that another $45.4 billion would have to come through, “but the success of obtaining these funds is not guaranteed.” Sources for these uncertain funds include the Government of Puerto Rico, the private sector and philanthropic contributions.

“There is little probability [about these funds.] That’s the truth. But when we were asked to develop the plan, part of (FEMA’s) requirements were to provide the total cost of Puerto Rico’s reconstruction and long-term economic development. It’s not that that’s what we need to rebuild Puerto Rico. No. It’s that they asked me — and if you look at the law — what does it take to, not just for ‘disaster recovery,’ [but also] for economic recovery, so everything was outlined there, the specific tourism initiatives, economic development, agriculture development… They asked me for everything. That’s what we presented,” said Marrero when he was asked about the uncertainty of obtaining those funds.

“However, the plan also says that in the case of not having those funds, we have to prioritize what we have. And, obviously, we have to prioritize what we have in front of us, which is CDBG and FEMA,” he added.

Marrero also pointed out that the $45.4 billion, while it is not certain where they will come from, had to appear in the plan to justify additional appropriations in Congress in the future.

The plan says that, although only $85.6 billion in federal recovery funds have been identified, most of what is left outstanding could also be obtained through a federal grant.

The uncertainty about the source of an important part of the money needed to replace what was lost is transferred to the communities and families that suffered directly from the brunt of the storm.

Cándida still don’t have all the money she needs to have a house again. Josué and Natalie are now saving to be able to move to a house they recently acquired with the help of their family. They depend on Josué’s salary, who works in a department store and in a nonprofit organization, to support them, as well as three children, because Natalie lost her job after the hurricane. Meanwhile, Guillermo and Genara remain in their home in Punta Santiago, where now, two years later, most of the rooms still don’t have furniture.

The Writing on the Wall

Editor’s note: The following was first published in the Sept. 19, 2019, issue of Caribbean Business, the Front Page report for which delves further into the threat to Act 154.

If there is any truth to the Beatles’ classic song “Taxman”—“Let me tell you how it will be; there’s one for you, 19 for me. Should 5 percent appear too small, be thankful I don’t take it all”—the administration of Gov. Wanda Vázquez ought to be counting its lucky stars that the creditability of Act 154 is going to be phased out over a three-year period and not over a fortnight.

As this newspaper was going to press, two Capitol Hill sources told Caribbean Business that the governor’s team will be working with U.S. Treasury policy wonks to prepare models to replace the 4 percent excise tax paid under Act 154 by multinationals operating in Puerto Rico—which is credited by the U.S. Treasury against certain federal taxes—for a phaseout and replacement.

Thankfully, members of former Gov. Ricardo Rosselló’s administration, led by former Treasury Secretary Teresita Fuentes, had gotten a beat on new tax models to anticipate the demise of the tax credit. Fuentes told Caribbean Business that she met with former Treasury Secretary Melba Acosta, who under the pro-commonwealth Gov. Alejandro García Padilla had spent countless hours working with U.S. Treasury teams trying to secure a permanent ruling from the Internal Revenue Service on the creditability of the excise tax. The most they obtained was a notice—not an opinion—to allow a five-year extension of the tax’s creditability.

Fuentes told this newspaper that Acosta helped her tremendously, setting the groundwork for the models she drafted.

Sadly, Fuentes was unable to conclude her work as she resigned because she had ethical concerns with the administration prior to the governor himself resigning during a summer of massive discontent when a highly offensive chat between him and his cabinet members became public.

So, chickens have come home to roost and it is time for the next man up, Treasury Secretary Francisco Parés, to make quick work of the tax craft engineered by his predecessors. Two sources close to the matter told Caribbean Business that Parés had a productive meeting with Acosta. He will have about six months to present palatable proposals to the U.S. Treasury, which would unfurl over a three- to five-year period.

Time to get cracking.

Act 154 was one of the top revenue generators for Hacienda in fiscal 2019, with some $1.83 billion collected, up from $1.68 billion in fiscal 2018. This constitutes almost one-fifth of the $11.38 billion in net general fund revenue last fiscal year.

The writing was on the wall—that the tax credit was not permanent—long before its inception. When it was first passed under the administration of then-Gov. Luis Fortuño, the governor had near corporate mutiny on his hands because large stateside companies operating in Puerto Rico—those selling more than $75 million to their U.S. mainland distributors—felt hoodwinked as the tax was passed over a weekend without debate.

During a recent interview with Caribbean Business, Fortuño expressed he might have done it differently. However, he knew that the creditability offset would be attractive to stateside companies. First, the governor needed a solid legal opinion, which he obtained from Steptoe & Johnson. With that in hand, he signed the law and jetted for Washington, D.C., where he met with Treasury officials to present the legal opinion that secured the notice of creditability.

The five-year excise tax was to have commenced at 4 percent, scaling down to 1 percent in its final year prior to phaseout. The tax, projected to generate $1.2 billion in its first year, was to have complemented the drop in revenue provoked by a very attractive tax reform.

The truth is that for all the revenue generated, Act 154’s excise tax credit has been the source of uncertainty among U.S. companies—because of the way it was first passed; because it was extended twice, in 2013 and then again in 2017. And not a single person could say for certain whether a permanent ruling would be obtained.

In fact, back during the García Padilla administration, two people close to the process with the U.S. Treasury told this newspaper the thorny issues were stuck in the labels—whether to call Puerto Rico “foreign” or “domestic.” The folks at Treasury were presented with three different options to fit the island under a territorial label, which is where we stand today.

In his work chiseling out a new formula, we wish Parés Godspeed and the vision to know that we should not put all our eggs in one basket. Figure out how to create jobs that can pay taxes. No more gimmicks—se nos va la vida.

The Long Road to Repatriate Puerto Rico’s Capital

(Screen capture of

Can Puerto Rico create the conditions for local investors to return?

Editor’s note: The following is H. Calero Consulting Group’s “Puerto Rico Economic Pulse” for September.


Long before the onset of PR’s current debacle, the economy used to generate consistent savings that in part justified its status as an attractive investment destination. In effect, personal savings ranged between 8% to 15% of personal income during the 1980s (the golden years for S.936 companies) and 1990s (the golden years of construction), most of which were channeled towards financial investment on the Island. Fast forward 15 years and those same assets under management are now almost entirely outside PR, the majority of them under tight institutional restrictions on questions such as geography, risk and return. Despite this, there is still a window of opportunity if the government is able to develop an investment plan articulated through the Opportunity Zones (OZ) initiative. Such a repatriation of capital requires an active risk-mitigation role from the government and, above all, allowing the economy to expand through stimulus rather than austerity. The final decision will have long lasting implications. 

P.R. was once an attractive destination

Since at least the 1950s, investors flocked to the Island in search of preferential tax treatment, both at federal and local levels. The value of Foreign Direct Investment (FDI) went from $8.2 bn in 1971 to $23.1bn in 1980, peaking in 2011 at $102.2 billion (estimates of private FDI are not available after 1982). The Commonwealth’s triple tax exemption on public debt led to large volumes of GOs and municipal bonds. In 2011, 55.6% of all FDI included some public debt. 

Furthermore, Puerto Rico has always had a domestic investing and savings culture. In fact, in 2006, local investors held $40.1bn in investments abroad, an amount that by 2017, had declined by 39% to $24.5 bn. Of those, $13.6 bn were held in short term investments with the majority held in bank balances. Long term investments were mostly held in Federal Government securities and pension funds. Individuals also reported over $500 million in income derived only from capital gains for tax year 2017. The total gain is much higher with other investments that are classified differently. Local capital indeed exists, it’s just not here. 

Repatriation is easier said than done…

It is not enough to say that PR has investments abroad. Assets under management everywhere are allocated to reflect management’s institutional and strategic constraints on issues such as risk, geography, activities and, debt, among others. Portfolios are created to develop a risk profile consistent with management’s ability to mitigate the assets’ exposure to risk.

PR’s fundamentals, unfortunately, have been misaligned for more than a decade. Inflation- discounted personal consumption declined by a yearly average of -0.2% during 2006-2018 due to a reduction in population (an estimated CAGR of -1.9% during 2010-2018, according the Census) while economic activity contracted by 2.2% (CAGR) during the same time. Hence, many strategic and institutional restrictions imply the Island is simply out of the question. Currently, PR is an alternative for either high risks investments, certain infrastructure projects—such as utilities related projects—or initiatives linked to external conditions and the ageing population. It may not sound like a lot, but it can open the door to other investments.

…but a tiny fraction would go a long way

The possibility that reconstruction funds may be stalled or reallocated somewhere else—wall between the US and Mexico—has put the spotlight on other alternatives to jumpstart the economy, such as capital repatriation. Economic activity has not fully gained traction two years after Maria—e.g. the economic activity index’s average monthly growth April-July was 0.03%— highlighting that public revenues have increased for the wrong reasons (higher taxes). Without the investment associated with the recovery efforts, the contraction in real GNP for FY2018 would have been around -6.7%. 

If properly capitalized, repatriating a fraction of domestically-owned capital, currently outside the Island, could go a long way in creating economic growth. The big question, of course, is how to lure it back!

A basic framework is already in place

A new tax treatment under the OZ initiative offers another starting point to allure investors back to the Island. The Tax Cuts and Jobs Act aims to attract investment to undercapitalized regions around the United States, and in PR’s case, covers 94% of the Island. The law offers tax breaks to invest in Opportunity Funds to support projects in real estate, housing, business ventures, and infrastructure projects. Investors get to defer those gains and the tax rates are reduced according to the length they forego the gain. PR adopted resolution 19-01 to guide the approval process of OZs. The government designated 4 priority areas: 1) developing low income housing; 2) investing in real estate; 3) building or improving industrial real estate and 4) substantial improvement of existing commercial real-estate. These priorities are not exclusive of other projects but are eligible to receive a 5% reimbursement in tax credits.

Looking past the initial investments

At this point, PR needs investments that can enable further investment, to create a positive feedback loop of economic activity—a virtuous cycle of economic development. Prime targets are healthcare and social services targeted to our aging population (by 2048, 27% of the population is conservatively estimated to be older than 65 years old), substitution of government services, and tourism.

Investments held in those Opportunity Funds should also be planned to maximize local impact. A comprehensive public investment plan should seek to reinforce economic activity within municipalities and undercapitalized regions. Given its current constraints, the role of the government should be as enabler and guide of what is needed to optimize growth. Regional power grids, boutique hotels outside the traditional areas (such as the new $12 mn investment in a hotel in Puerta de Tierra) and locally sourced restaurants are some examples of viable projects that could be financed.

The risk profile may be unnerving…

There are severe obstacles to any plans. The continued contraction in population, a lame- duck government and the possibility of not receiving all the approved federal recovery funds create significant risks for any investor. If all of these materialize, our pessimistic real GNP scenario, -3.6% by FY2022, could unfold.

Two important risks continue to be overlooked. First, PR’s post-Maria infrastructure has not been truly tested yet and this prevents anyone from ruling out Maria’ similar disruptions. This, coupled with very expensive utilities (cost of electricity to households, is set to increase 28% over the next five years) creates an unappetizing prospect for any long-term investment prospect. Emigration has led to loss of PR’s home-grown skills and talent, opening the possibility of importing specialized labor. Both situations, will add to the minimum required to make any investment feasible.

…but the government can do something

PR’s continued population decline has created an opportunity to transform the use of land throughout the Island. Given that the local Tax Code provides for faster approval and permits for Opportunity Fund projects, the government could facilitate and guide investment towards unproductive land. Instead of residential investments, land use could be designated for agricultural use, clean energy initiatives, healthcare, tourism, social services or any other use that might be in high demand in the future. The US Treasury’s move to end the 4% tax on foreign companies, which raised $1.9 bn in FY 2018 (21% of GF revenues) will directly affect public coffers. Since debt restructuring agreements have so far favored creditors, private sector investment is perhaps the only realistic source of investment.

Facts on the ground must change

Two imperatives are clear: external debt must be restructured, and debt repayment must be financed through economic growth, rather than pension and wage suppression, fiscal austerity and consolidation. Restructuring requires creditors to accept a bigger haircut. There is nothing unfair about not protecting reckless lenders from the consequences of their own folly. Experience has shown that debts are most effectively repaid in a context of economic growth. For ailing economies, that requires fiscal stimulus, not fiscal consolidation. Germany’s written off debt in the 1950s and cap of its loan repayment at 3% of export enabled its subsequent economic miracle. Forcing PR to implement counterproductive economic policies, in exchange for “potential” loans (or bonds) that benefit only creditors is a recipe for continued economic depression and future debt default. This is not the time to feign ignorance about what is really needed.

Alphabet Soup Disaster Aid

In the days of old, when the reps were bold and Promesa had just been invented, they placed their hopes upon the law and walked along contented. Yes, in the days immediately following the run-up to passing the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), the members of Congress were hopeful that in drafting Title V of the law—assuming that energy reform in Puerto Rico would be a net positive—they would provide the mechanism by which affordable energy would be achieved through an expedited process.

The preamble for affordable energy in Title V was on full display during Promesahearings and in the hallowed halls of U.S. Congress. The permitting process in Title V was to have stood on its own with broad powers given to the Oboard to put critical infrastructure works on a fast track. The drafters hoped that once environmental regulatory hurdles were cleared, projects certified by la Junta could be up and under construction within 30 days. The drafters had no idea how that would play out under the actual Promesa mandate. Now, nearly three years after Promesa was signed into law, the answer is: “Not very well.”

The critical infrastructure works certified by former Revitalization Coordinator Noel Zamot (see Column, p. 15), who resigned in frustration after several hundred projects worth $8 billion were put on ice by the Oboard because of philosophical differences among members of the FOMB, were treated as a throwaway option under Title V to focus debt restructuring.

In other words, because of contentiousness between the Oboard and the administrationof then-Gov. Ricardo Rosselló over structural balance in budgets and fiscal plans, it was best to let the government have its way, ignoring Title V as a tool for the construction of critical infrastructure. Instead, the Oboard allowed the Central Office for Recovery, Reconstruction & Resiliency (COR3) to run amok as the agency in charge of green-lighting infrastructure works, which has resulted in a disastrous track record and given room for the Federal Emergency Management Agency (FEMA) to drag its feet with layers of bureaucracy.

All told, only 131 projects have been certified with fixed-cost estimates, from a list of 9,200 projects. Although the holdup is multifactorial, tracing to mistrust in the vestiges of corruption in the Rosselló administration and a reported tug-of-war between FEMA and COR3, allegations by several sources interviewed by this newspaper claim the impasse resides in the disaster alphabet soup.

In fact, civil engineer Carlos Pesquera, a former New Progressive Party gubernatorialcandidate, who has skin in the disaster-recovery game with his firm, CapitalImprovements Program Management, claims FEMA is downright complicit in the trickling down of funds and approval of projects. In this edition’s Cover Story, Pesquera claims the recovery process was disrupted June 6 when FEMA assumed control of the process establishing a new business model layered with bureaucracy (see table National Workflow, pages 10 and 11.)

The sticking point is in Section 428 of the Stafford Act, which has been ignored by FEMA in granting municipalities 18 months to submit Damage, Description & Dimension (DDD) reports for fund disbursement. The deadline for submission is Oct. 11—a near-impossible milestone given that it will take collaboration between FEMA and COR3 to nail down the estimates.

And FEMA is moving at its typical glacial pace while using contractors who are not fromPuerto Rico, thus inflating costs, and worse still, selecting stateside disaster-relief capitalists who will not leave a dime in Puerto Rico.

At this writing, the Oct. 11 deadline under Section 428 seems likely to be extended.However, FEMA continues to insist on conducting site inspections although the law permits the use of local resources to conduct that work.

Two months ago, the U.S Government Accountability Office sounded the alarm over inconsistencies in FEMA’s procedures on a case-by-case basis, pointing to the federal agency’s ongoing development of a cost factor for use in the fixed-cost estimatingprocess as the culprit in slowing the pace of FEMA obligations.

If U.S. Congress has concerns over the use of funds destined for recovery, it should provide oversight without slowing the flow of disaster aid, and hold FEMA accountable for the proper use of local resources that lead to job creation and not a jumbled alphabet soup of disaster relief.

Disaster Politics

Editor’s note: The following was first published in the Sept. 5, 2019, issue of Caribbean Business.

You know there is true disdain for President Donald Trump when nine in 10 people in Puerto Rico were vehemently vocal in hoping that Hurricane Dorian had struck his Mar-a-Lago resort directly. It is unfortunate to wish such a thing because there must be some decent folks living in the area who are undeserving of the devastation wrought by a Category 5 Wind Beast. Trust us; we know. Nevertheless, the Bounty-tossing president has earned the ill will of Puerto Rico’s people with tweets and comments that our politicians—some of whom were downright corrupt and complicit in using a natural disaster for populist advantage—invited with their acts of malfeasance.

Politics is like pornography—for adults only.

Think about this: Donald Trump cancels a meeting in Poland to deal with Hurricane Dorian but ends up playing golf the day it was spinning menacingly along the coast of Florida, all the while, he snubs Prime Minister Benjamin Netanyahu even after he heeded the president’s wishes to deny his nemesis congresswomen entry only weeks before the Israeli leader’s future will be decided in elections.

Meanwhile the president takes the time to tweet such stupidity as: “Wow! Yet another big storm heading to Puerto Rico. Will it ever end? Congress approved 92 Billion Dollars for Puerto Rico last year, an all time record of its kind for ‘anywhere.’”

He goes on to tweet that Puerto Rico is one of the most corrupt places on earth, punctuating his remarks with the assertion that he is the best thing that ever happened to Puerto Rico.

In a rebuke of the president’s hillbilly elegy, actor Morgan Freeman posted the fitting retweet: “You’re shaming Puerto Rico for being in a storm path?!!! Mr. President, go F[**]K yourself with a nine iron.” We would have suggested using a Big Bertha driver.

It would not matter. Like an addict, Trump cannot contain himself from tweeting stupid remarks; he reminds us of our son when he gave up the pacifier at age 5; we suffered tremendously when he searched for hidden “bobos” with eyes glazed over in the throes of withdrawal. Hide Trump’s cellphone and see what happens.

Trump explains that Congress earmarked those $92 billion when the truth is only $40 billion are obligated. But Trump, the master of negotiation, is playing a numbers game looking ahead to the general election in 2020. He is hoping that his rhetoric will ring true in two important swing states, Pennsylvania and Florida, where 25 percent of the population has familial ties to Puerto Rico.

The strategy is as follows—play to those constituents with familial ties to Puerto Rico; tug at their heartstrings—tell them they were uprooted because of a handful of children in government who were ill-equipped to handle Puerto Rico’s recovery in the aftermath of one of the greatest natural disasters to have struck planet Earth.

Tell the dispossessed that the Rosselló administration squandered the funds earmarked for disaster relief. It does not matter that Trump is mixing a half-truth with a full lie, that nowhere near $92 billion has been given to Puerto Rico and the island has only been able to use somewhere in the vicinity of $18 billion. But few Puerto Rico politicians tell this truth.

For instance, in a recent public statement, Puerto Rico Senate President Thomas Rivera Schatz intimated that a contingent from Puerto Rico would be visiting the week of Sept. 8 to knock on Capitol Hill doors. There will be no red carpet for them at the White House. Two sources with ties to the GOP told Caribbean Business that Resident Commissioner Jenniffer González extended an olive branch to the White House, where she is trying to secure a meeting between Gov. Wanda Vázquez and Trump.

Advisers in Trump’s camp would have an interest in that meeting if the Vázquez administration were to agree to a relief number closer to $40 billion, in which case an additional $22 billion in disaster-relief funds would be released for Puerto Rico to continue infrastructure repair.

The resident commissioner, on Vázquez’s behalf, will have none of it, basing that stance on estimates that put Puerto Rico’s storm-hardening north of $100 billion. The sad thing here is that time and the truth—thanks to a small band of crooks—is not on our side. Trump will use those recent events to the hilt and Puerto Rico’s people will pay the consequences. That blue tarps are all that cover the rooftops of nearly 30,000 homes torn by torrential gusts nearly two years ago is a testament of malfeasance difficult to dispute.

Center for Investigative Journalism: Impossible to keep track of all Puerto Rico recovery contracts

A home in Salinas, Puerto Rico, remains unlivable after being destroyed by Hurricane Maria in 2017. (Center for Investigative Journalism/Gabriel López Albarrán)

Among top 20 companies known so far are 2 contracted by Trump for his border wall

By Rafael R. Díaz Torres

Although the government published the subcontracts of the COR3 after the Centro de Periodismo Investigativo inquiries, the amendments to the contracts and the agreements made with recovery funds through the other agencies still cannot be identified. Among the top 20 companies known so far, there are two companies hired by Trump for the construction of the southern wall.

Keeping track of the federal funds for recovery projects that are being granted by the Government of Puerto Rico is an impossible mission. There is no centralized place for all those contracts and, although there are some scattered on the webpages of the Central Office of Recovery, Reconstruction and Resiliency, known as COR3, the Department of Housing and the Financial Oversight and Management Board for Puerto Rico (FOMB), there are others that are not registered or are not identified as recovery funds.

For example, the COR3 webpage shows only four contracts executed in 2018. The agency that is supposed to centralize the management of these funds, but there is no information about contracts that other government agencies or municipalities have executed using recovery funds. This specificity, about contracts related to recovery funds, neither can be found in the Contract Registry of the Office of the Comptroller, where amendments to the contracts are also missing.

Despite these limitations, with the information available, the Center for Investigative Journalism (CPI, in Spanish) was able to review 20 of the main contracts awarded by the Government of Puerto Rico using recovery funds.

Two companies commissioned to build the controversial wall that President Donald Trump authorized for the southern border of the United States are among those favoured by the government of Puerto Rico.

No background check for some companies

At the top of the list of the first 20 companies is ICF Incorporated, LLC. This corporation, based in Virginia, has an allocated amount of $363 million, for two contracts. The first, awarded by COR3 was of $188 million, although in May 2019 it was amended and increased to $338 million. The amendment was approved by the FOMB which, since 2016, controls Puerto Rico’s finances under the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) approved during the Barack Obama administration.

A second ICF contract was approved on July 2019, after the Puerto Rico Department of Housing selected this company as one of four project managers to manage reconstruction, repair and relocation requests using Community Development Block Grant – Disaster Recovery (CDBG – DR) Program funds. The $25 million contract, added to the contract granted to ICF by COR3, pushes the total allocated to $338 million.

On July 2008, the Louisiana Recovery Authority fined ICF for more than $ 1 million, after the company failed to comply with the Road Home program requirements. To head the reconstruction and recovery processes after hurricanes Katrina and Rita, ICF obtained a contract for $756 million, which, as in Puerto Rico, was later amended to increase the amount. The final amount was $900 million.

In Louisiana, ICF was fined for its inability to close 116,000 cases related to Road Home claims. The company was also penalized for not complying with the agreed performance metrics. Press investigationsand state’s government claims pointed to ICF for dragging their feet in paying homeowners affected by hurricanes Katrina and Rita.

Some of ICF’s responsibilities in Road Home were similar to those the company will have as a program manager in Puerto Rico.

A CPI investigation revealed that the former Federal Coordinator for Disaster Recovery for Puerto Rico for the Federal Emergency Management Agency (FEMA), Michael F. Byrne, was senior vice president of ICF Incorporated between 2006 and 2010. On May, Byrne transferred from FEMA to Deloitte & Touche LLC, one of the companies favored with contracts by the Government of Puerto Rico.

In a written statement, Housing Secretary Fernando Gil-Enseñat told CPI that he did not know about ICF’s record in Louisiana with the Road Home program. He explained that in the selection of bidders two sources are used to validate the capacity of the entity or person to be hired.

“One of the sources is the Limited Denial Participation List, published by the U.S. Department of Housing and Urban Development (HUD). The other source is the System for Award Management (SAM), a federal government resource that is administered by the General Services Administration,” Gil-Enseñat explained, while making clear that state and federal laws were complied with in the ICF selection process.

Despite Gil-Enseñat’s defense of SAM as a validation source, a CPI investigation revealed that the good standing classification granted in this federal website does not always take into account the complaints or bad practices in which the company has incurred in the past.

The CPI found that of the 20 main companies favored by the government of Puerto Rico, two of them do not appear in the SAM website, so there is no way there was a background check done by the Housing Department. These two companies are 4 Contractors JV and Link Active, LLC.

Companies hired by Trump for the wall are at the top of the list

In the second position on the list of the top 20 companies favored by the Government of Puerto Rico with the most substantial contracts for recovery work, there is a triple tie between FR-BLDM, Yates-Bird and SLS Co, Ltd. Each was commissioned for $250 million for work connected to the Department of Housing’s questionable “Tu Hogar Renace” project. Of that trio , one is related to the work that the Trump administration has authorized for the construction of the wall on the border with Mexico. Another is a consortium in which one of the partner companies has also been contracted for construction work on the wall.

In April 2019, the Pentagon announced that it granted $789 million to SLS for construction work of part of the wall in the area of Santa Teresa, New Mexico. That amount was added to two contracts for $432 million for the construction of another 35 miles of the wall. SLS is based in Texas. It was founded in 1995 by the Sullivan brothers. One of them told Forbes magazine that hiring them to build the wall had nothing to do with politics.

However, the conglomerate to which SLS belongs, Sullivan Interests, donated $8,000 to the campaign of the Republican congressman from Texas, Randy Weber, who openly supports the Trump wall proposal. SLS also has a section specialized in recovery work called DRC Emergency Services. This division has obtained million-dollar contracts with the federal government for recovery after Hurricanes Harvey in Houston and Sandy in New York. In addition, it obtained a $60 million contract with the Puerto Rico Department of Transportation and Public Works for the collection of debris and recycling after María.

One of the Yates-Bird consortium partner companies is also related to the wall promoted by Trump. Certified by the Puerto Rico State Department to do business in Puerto Rico in November 2017, Yates-Bird appears as a consortium between Puerto Rican construction company Bird Group LLC, formerly Bird Construction, and American company Yates Construction. Chet Nadolski, executive vice president of Yates Construction and Omar López, representing Bird Group LLC. appear as authorized representatives on the Yates-Bird Organization Certificate.

In September 2017, Yates was selected as one of the companies responsible for building a prototype of the wall promoted by Trump and his followers. Its contract was for $453,000, according to several US media.

Fifth on the list of the top 20 companies is Rising Phoenix Holdings Corporation conglomerate, which owns Adjusters International Inc. This was the company that landed the contract to manage the Housing Department’s “Tu Hogar Renace” program. After landing an initial contract of $132 million, an amendment approved by the FOMB increased the amount to $207 million.

Project managers to manage CDBG-DR funds

In July, the Housing Department announced the names of the four companies hired as managers of the Repair, Reconstruction or Relocation (R3) program financed with CDBG-DR funds. In addition to ICF with a $25 million contract, Innovative Emergency Management, AECOM Technical Services and Alliance for the Recovery of Puerto Rico were selected. All three received contracts totaling $22 million each. With the exception of ICF, which occupies the first position in the list of 20 because of its other contract with COR3, the other three companies are positioned between the 14th and the 16th place in the list of 20.

AECOM lobbyist is Elías Sánchez, former representative of the Government of Puerto Rico before the FOMB, and who is being investigated by the federal government for allegedly selling influences. After combining the federal government contracts and the $22 million as program manager from R3, AECOM and its subsidiaries and consortia have obtained contracts totaling more than $365 million, according to information from the Federal Procurement Data System.

Alliance for the Recovery of Puerto Rico was registered in the Puerto Rico State Department in July 2018, a few months before the publication of the Department of Housing’s Request for Proposals (RFPs), as part of a consortium between Atkins Caribe, LLP and Tidal Basin Caribe, LLP.

Both companies are known for recovery work in Puerto Rico. Tidal Basin is part of the Rising Phoenix Holdings Corporation conglomerate, the company that won the contract to manage “Tu Hogar Renace”. Atkins Caribe leads the work of updating the mitigation plans of the 78 municipalities for which it was hired by the Planning Board for $1.7 million.

Alliance and Atkins Caribe appeared with the same street address in the Puerto Rico State Department certificate authorizing Alliance to do business in the island.

When approached by the CPI, the director of Atkins Caribe, Ray Martínez, justify Alliance’s expertise to perform the recovery work as R3 program manager.

“JVs are allowed to utilize the combined experience of the partner firms to propose on and deliver projects. This is one of the fundamental reasons that JVs are formed, to bring the combined expertise of two or more companies to bear on a project. The combined experience from the companies that form the Alliance JV amounts to over 20 years of history on the island,” Martínez said in written statements.

Alliance does not have its own employees, but rather integrates people from the associated firms, as well as hefty subcontracting. Martínez praised Atkins’ work on previous recovery projects in Puerto Rico.

“One specific example of our experience working in Puerto Rico is our collaboration on the inspections and program management aspects of the Tu Hogar Renace program,” he said in reference to Atkins’ role in the program that was denounced in March 218 by the Puerto Rico Plumbers Association, for an alleged overbilling scheme on the prices of materials and services.

Gil-Enseñat also stood by the contract stating that experience or time in the business is not a requirement when selecting the bidders.

“The requirement was that they be duly registered or organized on the date they were to submit their Statement of Qualifications (SOQ). In this case, the Alliance for the Recovery of Puerto Rico joint venture was created on July 12, 2018, and presented its SOQ on August 9, 2018,” Gil-Enseñat told the CPI.

Like Martinez, Gil-Enseñat defended the contract by citing the joint experience that Tidal Basin and Atkins Caribe have. He also said that both companies have worked on “similar projects” to those that Alliance for the Recovery of Puerto Rico will carry out, although he did not specify which.

Revolving doors among contracted companies

Deloitte & Touche LLC holds the 13th position on the list of 20. It is a legal and financial advisory firm that has a $31 million contract with COR3. The current Treasury Secretary Francisco Parés worked there as well as the former head of Treasury, Raúl Maldonado. Furthermore, former FEMA coordinator for the recovery of Puerto Rico, Michael Byrne, began working for Deloitte last May, a month after leaving his post in the federal government.

In the 18th position is Link Active, LLC, a call center belonging to the Ferré Rangel Group, parent company of GFR Media, a media conglomerate which includes El Nuevo Día, Primera Hora newspapers, as well as several digital marketing and communication platforms. Its contract with the Department of Housing amounts $20 million. It is in charge of call centers related to the management of CDBG-DR funds.

COR3 Transparency Portal is a fiasco

Several of the companies hired for “Tu Hogar Renace” received increases in their contracts approved most of them in June 2018, by the FOMB, but none of these amendments are shown in the Comptroller’s database.

COR3 contracts are registered under the Public-Private Partnerships Authority (AAPP in Spanish), the umbrella agency for COR3. This classification makes it impossible to distinguish which contracts correspond to recovery money, under the AAPP and which are under COR3.

The Comptroller’s press officer, Lisandra Rivera, said it is each agency’s responsibility to inform the contracts or their amendments. The Office of the Comptroller’s Contract Registry Act establishes that government and municipal entities have 15 days to provide copies of the contracts or their amendments.

Meanwhile, COR3 press officer Karixia Ortiz said the contracts related to the recovery work will be made available on the office’s transparency website but did not say when.

The COR3 Transparency Portal is managed by CGI Technologies and Solutions, which occupies the 11th position among the top 20 companies most favoured by the Government of Puerto Rico with contracts financed with federal recovery funds. The contract is for $88 million and extends from June 2018 to June 2021.

In February 2019, the Open Spaces (EA in Spanish) organization reported that the website did not meet the requirements of accessibility and updating of information, in addition to lacking a clear transparency policy. During a second look at the website in August 2019, EA found that six months later the deficiencies remained the same and that there was a long way to go before the portal met the transparency criteria of similar pages in other U.S. jurisdictions that have experienced hurricanes such as Louisiana, Texas, New Jersey and New York.

Among the findings of the last EA evaluation is the absence of formats that allow people with disabilities to access the data. Also, as the CPI found, there is only information and contracts related to COR3, but nothing for other Puerto Rico’s government agencies or municipalities. There is also no information on the funds that have been allocated and disbursed, nor a breakdown by municipality or region of that data.

“One would expect more from a company that is getting $88 million,” said EA public policy analyst María M. Rodríguez-Rivera, in an interview with the CPI.

According to the organization that advocates for transparency and access to information, the government must disclose how CGI entered the bidding process and it´s experience in other jurisdictions. They also question why the addendums to the $88 million CGI contract are not published on the COR3 Transparency Portal.

To address citizen complaints regarding the management of the recovery work, the portal provides the Ethics Global telephone number. However, when choosing the Spanish option, the system refers users to a call center in Mexico.

“It’s not very easy to know what type of information to provide at the beginning (of the call) since it is a company that receives data from many other organizations that have this service,” Rodríguez-Rivera explained via a document shared with the CPI.

The EA officer also explained that when she called the number, the person who took her call did not understand what she meant when she mentioned COR3. They only helped her when she said “Puerto Rico transparency.”

Likewise, the portal does not have information on the status of complaints made by citizens, the CPI confirmed. The section called “Report Information” is empty.

In addition to the absence in the COR3 Transparency Portal, the contracts for recovery work granted by the Government of Puerto Rico do not appear in the Office of the Comptroller’s Contract Registry. For example, the Department of Housing contract to Foundation for Puerto Rico in early 2019 for $37 million does not appear in that database.

Foundation occupies the 12th position in the list of the 20 companies most favoured with contracts by the Government of Puerto Rico. Its contract appears on the Housing and FOMB pages. This contract was approved despite the fact that Foundation did not present a proposalexplaining its expertise or interest in running a community program financed with CDBG-DR funds.

Rafael René Díaz-Torres is a member of Report for America.

–The Center for Investigative Journalism (CPI by its Spanish initials) is a nonprofit organization that trains journalists and has a legal program to help it in its objective of “working for freedom of information in Puerto Rico.”

—Views expressed in this section do not necessarily represent the opinion of Caribbean Business.

THINK STRATEGICALLY: Scaramouche and the Magic Carpet

Trump Continues Trade War with China, Rocks Stock Markets


Scaramouche comes from the Italian word scaramuccia, which is a clown character of the 16th-century featured in “Commedia dell’arte,” one of the earliest forms of professional theater. Scaramouche was usually fitted with black garb and imitated a noble, important man, while Harlequin often beat him for his boasting and cowardness. It seems a fitting comparison to President Trump.

As last week was ending and the president was due to leave on Air Force One for the G-7 Meeting in Biarritz, France—Scaramouche and his magic carpet were forced to arrive in a less spectacular fashion because the Biarritz airport could not accommodate Air Force One.

The president announced he would increase tariffs on China even further. The duties, at a rate of 30 percent, would be implemented Oct. 1 on about $250 billion worth of Chinese goods. Another $300 billion in Chinese goods will be taxed at a 15 percent rate starting Sept. 1. These new tariffs raise the taxes 20 percent to 50 percent, and that price increase has a direct effect on U.S. consumers.

This latest move by President Trump follows China’s response to impose tariffs on another $75 billion of U.S. products, including crude oil, cotton, pork and soybeans.

Some political analysts have pointed out that the most recent Chinese tariffs are markedly pointed toward President Trump’s political base, which includes farmers and factory workers across the Midwest and South.

The financial markets, which had recovered during the week from a previous loss of 623.24 points, closed with so much political interplay that it is becoming quite challenging to avoid the current volatility.

Scaramouche and the magic carpet may be taking us to a Trumpsession and, meanwhile, are creating new all-time image lows for the United States, which was once the beacon of hope, democracy and leadership in the world.

Week in markets: U.S.-China trade war impacts Dow

The U.S. stock market was on track to finish higher last week until both the U.S. and China announced a new round of increased tariffs. The Federal Reserve Bank was hosting its annual meeting in Jackson Hole, Wyo., where Fed Chair Jerome H. Powell left the door open for another rate cut when the Federal Open Market Committee meets next month. He recognized the increased risks to global and U.S. economic growth from the trade uncertainty created by President Trump.

The Dow Jones Industrial Average closed the week at 25,628.90, for a loss of 257.11 points, or minus-0.99 percent, and a year-to-date (YTD) return of 9.90 percent. In addition, the S&P 500 closed the week at 2,847.11, for a loss of 41.67, or minus-1.44 percent, and a YTD return of 13.60 percent. The Nasdaq closed the week at 7,751.77, for a loss of 144.22, or minus-1.83 percent, and a YTD return of 16.80 percent. Meanwhile, the U.S. Treasury’s 10-year note lost during the week, closing at 1.533 percent, or a drop of minus-1.29 percent, with a YTD return of minus-1.15 percent, and the U.S. Treasury 2-year note rose to 1.531 percent, a gain of 3.45 percent for the week, and a YTD return of minus-1.05 percent.

Trump holds stock market hostage

With President Trump’s trade war with China, what is an investor to do and look for?

•U.S. economic growth: The U.S. economy should continue growing steadily over the next few years, outpacing many other western countries with a growth forecast for Q3 2019 of 1.81 percent as of Aug. 23, using now-cast.

•Key economic releases: Last week, PMI Manufacturing slowed to minus-1.17 and the PMI Services Business Activity Index also slowed to minus-0.13, and the Kansas City Fed Manufacturing Survey even contracted by minus-1.81.

•Key economic releases for week of Aug. 26-30

Aug. 26 Manufacturers’ New Orders: Durable Goods

Aug. 27 Consumer Confidence Index

Aug. 27 Manufacturers’ Inventories: Durable Goods

Strong jobs growth, low unemployment rate: Robust jobs market has slowed but increased by 164,000 jobs in July, and the unemployment rate stood at 3.7 percent.

The solution to U.S.-China trade saga: Even though exports only represent 13 percent of the U.S. gross domestic product (GDP) and trade disruptions have a small effect, they do have an impact on the overall business sentiment and may curtail investments across the board in the U.S.

•Inverted-yield curve continues to show up, signaling a recession: The inverted-yield curve occurs when 10-year treasuries are yielding less than 2-year treasuries, and usually is indicative of an imminent recession.

Investors should also monitor consumer spending because it comprises more than two-thirds of U.S. GDP. Another critical element is corporate earnings because they are usually the source of power for any stock-market growth. This past earnings season was a testament that the economy is still stable and U.S. corporations may continue to support economic expansion. We continue to predict that the Federal Reserve will lower interest rates further. Investors need to have predetermined goals, a balanced, diversified portfolio that allows one to navigate periods of volatility, downturns and uncertainty.

Final word: G-7 meeting update on Biarritz 2019

The G-7 is composed of France, Canada, Germany, Italy, Japan, the United Kingdom and the United States. The G-7 rotates its presidency, with French President Emanuel Macron currently holding the top position since Jan. 1, 2019.

Moreover, the United States will hold the presidency starting Jan. 1, 2020.

The G-7 goal is to combat inequality, and its work has focused on:

•Responding to the worsening bias within countries, through coordination of tax issues, social protection, labor norms, trade policy and corporate social responsibility.

•Combating global inequality by forging a new partnership with Africa.

•Eliminating gender inequality by generating international momentum to amend legislation and act tangibly to combat violence and foster economic empowerment.

One of the issues surrounding President Trump before leaving for the G-7 summit was news reports that relations between the G-7 nations were very tense and divisive and allegedly President Trump thought the meetings were a waste of time.

Once at the gathering, the president tweeted, “Well, we are having excellent meetings, the leaders are getting along very well, and our country, economically, is doing great—the talk of the world!”

President Trump, who proclaimed himself “The Chosen One,” has created the basis for a global economic downturn of epic proportions, which was very much on the minds of the heads of state at the G-7 meeting. As the meeting ended, they all saw Scaramouche climb and leave on his magic carpet.

—Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

—Views expressed in this section do not necessarily represent the opinion of Caribbean Business.