Thursday, April 18, 2019

The Value of Puerto Rico

By on August 5, 2017

Editor’s note: The following article originally appeared in the August 3 print edition of Caribbean Business.

By Michael Athanason, Ariel Ramírez and Ben Nolan

Infrastructure costs in the United States (and around the world) are on the rise. As population grows, so too does the need for increased and well-maintained infrastructure. The vast majority of money for infrastructure comes from federal, state and local taxes, special taxes and municipal bonds.

A public-private partnership (P3) is a public infrastructure project done in partnership with a private entity. Financing, constructing and/or managing the project are handled by the private entity in return for a promised stream of payments from the government or public users for a specified period. A P3 is not a sale of public land; it is more like a lease. The land or public service is still owned by the public, with full rights and operational responsibility reverted to the public at the end of the specified term.

(File Photo)

The U.S. is the largest potential market in the world for P3 projects. About $416 billion was spent in infrastructure in 2014. The Trump administration has expressed a desire to increase the use of P3s with an ambitious $1 trillion plan to overhaul the U.S. infrastructure.

P3 decisions are currently made at the state level, meaning policy can vary from state to state. This can make it difficult for companies to get involved in a P3 project. However, one part of the U.S. has had a P3 policy framework in place for nearly a decade: the Commonwealth of Puerto Rico.

P3 Act of 2009

The P3 Act of 2009 created the Puerto Rico Public-Private Partnerships Authority (PPPA) as a public corporation affiliated with the Government Development Bank of P.R. The act detailed a robust legal framework for the implementation of P3s. Any public entity that proposes to enter into a P3 contract with a private entity submits the plan to the

PPPA, which determines whether a P3 is the best method for that specific project. Once a contract is entered into, it goes to the governor for final approval. The act promotes P3s as public policy and authorizes departments, agencies, public corporation and municipalities to use the establishment of P3s.

This could make sense for the Commonwealth, as Puerto Rico is mired in a $73 billion debt crisis. The timing of the act, three years after the U.S. Congress finished unwinding various favorable tax laws in 2006, shows foresight by the Puerto Rican government regarding the challenges it would face involving infrastructure. The only way Puerto Rico could continue to build infrastructure—and the basis for any economy—was through P3s.

This was emphasized by Gov. Ricardo Rosselló, whose first act when he assumed office was to expand the P3 Act to include more options to both submit proposals and participate in P3s.

P3 projects in P.R.

The two main projects since enactment of the P3 Act of 2009 have been the Luis Muñoz Marín International Airport and the PR22 and PR5 toll roads. These were “brownfield” projects, meaning existing infrastructure was being modified or improved, versus “greenfield” projects, which take place on unused land.

Luis Muñoz Marín International Airport

This was structured as a 40-year lease agreement between the P.R. Ports Authority and Aerostar Airport Holdings LLC to operate the airport.

Aerostar entered into a P3 contract with the Ports Authority by making an initial payment of $615 million. Other Aerostar commitments include investments to upgrade airport facilities and annual payments to the Ports Authority equal to a percentage of airport revenues. All other revenues related to the airport belong to Aerostar for the duration of the lease.

Toll roads

This was structured as a 40-year concession agreement between Autopistas Metropolitanas de Puerto Rico LLC and the P.R. Highways & Transportation Authority (HTA) for the maintenance and operation of PR22 and PR5.

Autopistas Metropolitanas de Puerto Rico made an upfront payment of $1.08 billion and committed to investing in certain upgrades to the toll roads. All remaining revenues generated by the toll roads belong to Autopistas Metropolitanas de P.R.

A public-private project built before the P3 Act of 2009 was Teodoro Moscoso Bridge. The success of this project for both the private and public sectors led to the advancement of the P3 Act.

Teodoro Moscoso Bridge

Considered the first modern highway P3 project in the U.S., the 1.4-mile-long Teodoro Moscoso Bridge opened in 1994, linking Río Piedras in San Juan to Isla Verde in Carolina. The toll bridge connects roadways on both sides of the San José Lagoon to Luis Muñoz Marin International Airport.

Autopistas de P.R. entered into a 35-year concession agreement with the HTA. The HTA issued Special Facility Revenue Bonds to facilitate the bridge’s financing. The total cost of the project was $126.8 million.

The concession agreement was extended in 2009 until 2044, a full 50 years after the initial opening of service.

Other ongoing projects include the Caguas-San Juan Commuter Rail and Maritime Transportation Services projects. Future needs include healthcare, schools, ports, energy, water, social infrastructure and agriculture.

Future P3s

As the concept of P3s grows and takes hold, each successful P3 project will help garner interest for future partnerships.

Companies that have successfully planned, built and operated P3 projects will have the competitive advantage in this emerging field. Those with experience will be counted on to make proper calculations of cost, value, long-term potential and risks.

Given the relative lack of a uniform policy framework on the U.S. mainland, Puerto Rico’s value is high. Puerto Rico is actively seeking and developing P3s and has adopted a world-class legal framework to move projects forward.

The recent debt crisis has only increased the need for public-private partnerships. “Given Puerto Rico’s economic and fiscal challenges, P3 projects could be a tremendous tool to improve its residents’ quality of life and strengthen its economic situation,” said Luis G. Fortuño, a senior partner at Steptoe & Johnson LLP and former governor of Puerto Rico.

By inviting private companies to take on the responsibility and risk of needed infrastructure projects, the Puerto Rican government could redirect funds to other much-needed expenditures to help the Commonwealth rebuild a stronger economic foundation.

For private companies, successfully developing and executing P3 projects in Puerto Rico now will be invaluable experience in bidding for potential future projects on the U.S. mainland.

Michael Athanason is the managing director of New York of Berkeley Research Group LLC; Ariel Ramírez is the managing director for Brazil and Puerto Rico of BRG Brasil Consultoria Ltda.; and Ben Nolan is the managing director of the Pensacola, Fla., Berkeley Research Group LLC.

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